Fidelity National Information Services, Inc. (FIS) Earnings Call Transcript & Summary

Great. Okay. Welcome, everyone, to the afternoon session here of the second day of our 4-day 24th Annual Crédit Suisse Technology Conference. This is -- apologies. We're hosting here Nathan Rozof. Nate is the EVP and the Head of Corporate Finance and HR at FIS. Nate's been with the company since 2012, beginning with Vantiv and later helping lead the combination with Worldpay. And of course, now with FIS. So prior to joining what has now become FIS, Nate spent time also at Accenture, Citi and Morgan Stanley. So with that, we'd like to welcome Nate and say thank you very much for being with us here this afternoon, Nate?

Thanks, Tim. I appreciate it. It's good to be here.

All right. Great. We'll get right into a topic that you've discussed before, but maybe we can dig into some of the granularity around it. A lot of the investor question is always around the sort of medium-term growth outlook, and breaking down some of those components of the 7% to 9% organic revenue growth target that you've been talking about for some time now.

Sure. I'd be happy to. I think the easiest way to think about the 7% to 9% growth algorithm that we put forward over the medium-term and expect to apply to 2021 as well is really on a segment-by-segment basis. And I'll begin with banking, which is obviously our largest segment at 50% of the revenue mix and then go through capital markets at 20% of revenue and wrap up with merchant at 30% of revenue given that merchant is where there's the most COVID impact and potential volatility depending on the pace of the vaccines and the outcome of the shape of the pandemic. But for the banking segment, we have been very successful at selling our cloud-based solutions into the leading global financial institutions. Beginning in about the fourth quarter of last year, we have had a series of really impressive top 10, top 20, top 30 and even top 50 large financial institution wins, selling things like our modern banking platform, Digital One and Code Connect. And as we've done that, we have obviously been able to continue to sell through the pandemic. And as we moved into the pandemic, then had to convert to remote delivery in order to implement those solutions and get them delivered on time. It's about a 12-month implementation cycle. So really, we should start to see the first revenues from the first 3 wins we announced in the fourth quarter of last year, starting to come online this quarter as those implementations wrap up. And that will drive accelerating revenue growth in the fourth quarter from about 3% in 3Q to mid-single digits in the fourth quarter. And then to continue accelerating through 2021 as the success of wins come online, driving us up into the mid- to upper single-digit range for next year. Similarly, capital markets, we've had a ton of success integrating together a number of really exceptionally strong point products into end-to-end solutions. They're also cloud-based, and they're really resonating in the market because as the buy side and the sell side have continued to experience challenges around the market dynamics, there's been a push towards outsourced end-to-end solutions from custom integrating point products, which has been really helpful for us in terms of winning share. In addition, while we've been making that transition to the end-to-end cloud-based solutions, we are migrating to a SaaS-based revenue stream from a historically license-based revenue model. And that, too, is enabling a multiyear, albeit gradual acceleration in new growth as the transition from SaaS to -- or from license to SaaS becomes less of a headwind. So as we look from the third quarter, which was down 1, we'll continue to see significant headwinds in terms of license renewals in the fourth quarter, but would expect some acceleration into the flat or low single digits in the fourth quarter. And then for growth to continue to accelerate in 2021 into the low to mid-single digits. Those 2 segments, we think, are going to be relatively predictable and resilient as much as we've seen through the pandemic, where there's probably the most opportunity for volatility, as I mentioned, is the merchant segment. Looking into the fourth quarter, I think it's really going to be predicated upon what happens with the holiday spending season. And we've seen some incremental shutdowns in the U.K., states like Michigan, in California, New York, which have created some headwinds for us to grow through as we move through the fourth quarter. But looking into next year, I think we feel highly confident in the resiliency and the strength of our segment. We'll be rebounding COVID by the second quarter and would really expect strong double-digit growth in that segment. So as we were thinking through 7% and 9% top line growth, we think we can support that with 10% growth, which we would really see as a low end for merchant at the bottom of the range and 20% growth towards the high end. And clearly, if these pandemics come out quicker, we'd see some potential for opportunities for upside there. So Tim, I appreciate your patience on a relatively long-winded answer, but I think those are the puts and takes across the entirety of the business and how we're thinking about growth over the next 5 quarters.

Please, no, that was an excellent answer. We really appreciate all the context there, and you certainly anticipated many of the follow-ups. So I think we're in good shape there. One follow-up I did want to touch on, and we can certainly get more to the -- some of the dynamics around Q4, but more focused on this, let's call it, the medium-term outlook. When we think about the merchant acquiring business, really, there's 3 components. There's the e-commerce business, there's the integrated payments business and then there's the traditional or relationship-led type of business. Maybe you could just step through briefly each of those 3 components and talk about what we should expect in terms of growth of those businesses in a more normalized, call it, post-COVID environment?

Yes. It's a good question. I mean, starting with e-com, pre COVID, our e-com business, which is about 25% of the merchant segment revenue mix was growing high teens, low 20s, really representing strong consumer adoption of online spending as well as consistent market share gains based on our superior outcomes around authorization and fraud rates, our global reach and ability to help merchants to expand their businesses around the world and our ability to drive tailored solutions for these leading multinational companies and global brands who wanted solutions that were tailored to fit their individual needs versus a simplistic off-the-shelf solution. As we've moved into COVID, we've seen the e-com business really demonstrated a bit of a dichotomy. Travel and airlines is now purchased almost entirely online. And as you might imagine, Tim, there's very little travel happening during the pandemic. Of the 25%, about 6 points of the 25% is travel and airlines. Volumes there are down. They were down 90% at their peak. They continue to be down 70% to 80%. So significant impact in the travel and airlines. The other 19 points is driven by online retail, digital channels. So those could be streaming services, whether it's music or video, as well as other forms of entertainment and other verticals. That 19% has seen a significant acceleration in growth. It's consistently grown at 30% plus for the past several quarters since the pandemic has set in, driven by exceptionally strong growth in digital, as well as acceleration in online and other channel -- online retail and other channels. We would expect, frankly, that, that consumer adoption of e-com continues. So we would feel highly bullish about the ability to see consistent above-trend growth post pandemic driven by that. And we have invested through the pandemic in global expansion. We're due to add 20 countries by the end of 2022, which is clearly a differentiator for us. We've invested in our Access Worldpay gateway, which provides a single, simple point of integration for multinationals to reach the full breadth and depth of our solution. And we've invested heavily in omnichannel, which I'll touch on again here in a minute. So we think that positions us to continue to win significant share in what is clearly an advantaged segment of the merchant business. As far as integrated is concerned, we are by far the leader in terms of our partner ecosystem. We partner with software developers, which I'll reference as ISVs, provide our code into their solutions. And then as they sell their software, which they do at an accelerating pace, given merchants looking to adopt technology versus using a cash register, we leverage that as a distribution channel. We have used the COVID or the pandemic period to invest in further expanding our leading distribution network. Number of new ISVs that we've signed this year are up 5x on a year-to-date basis what we signed last year in the U.S., and we've expanded our integrated payments business to Europe, where we've now signed 30 ISVs and have a similar number that we hope to sign in the relatively near future. So we will continue to win share in the point-of-sale business, particularly among SMBs with integrated. It has been a source of consistent market share gains for us, 50 to 100 basis points of share gain per year over the past 5 years and expect it to continue to be so. In terms of traditional point of sale, and I'll keep this relatively brief. I think the story here, Tim, is all about omni. Merchants are having to adapt very quickly to buy online, return or pick up in store, curbside and delivery. And our merchants are looking to us to help them. We clearly have leading omnichannel capabilities here and in Europe and Asia Pacific, where we are enabling merchants to make the transition from fully in-store to omnichannel. And while doing that, helping them to expand into new markets globally because clearly, they need to make up for some lost foot traffic by expanding into new markets, which we are uniquely positioned to help them do. So I think you'll see convergence of the physical point-of-sale and the e-commerce business into a truly omnichannel solution, where we will be the clear leader amongst the leading multinational brands where we today already serve the largest -- many of the largest retailers and many of the largest e-com merchants in the world and continue to win share there.

Okay. Great. Excellent. I think you hit on a couple of key points there around the relatively nascent integrated payments opportunity in Europe. It sounds like that's gaining some traction. Still very early days for the industry, really, not really for Worldpay specifically, it's an opportunity for many players. And then also, in terms of the global nature of the e-commerce business, I think you recently added Argentina, just something we've been talking about in terms of Worldpay really is in a small group of companies that has global local merchant acquiring capabilities. It's really a short list that you can count on a hand or 2 though. So if we have that correct, I believe you guys are in the high 50s in terms of number of markets, which is essentially industry-leading. Okay. Great. Let's move on just briefly, and I don't want to spend too much time on this. But let's just touch briefly on Q4. I just want to jump back to -- I don't know that there's much to say on merchant for Q4. You touched on it earlier in terms of the holiday season. If there's any comment that you did want to make, either in terms of the gap between revenue and volumes and how that was trending last quarter into earlier parts of Q4, more than welcome.

Sure. I'd be happy to. I think the fourth quarter is dominated by the holiday spending season. And obviously, that's just getting underway here with Black Friday and Cyber Monday in just the past few days. We are watching very closely the shutdowns that we're seeing feather out across the globe. Clearly, we have a leading franchise in the U.K., which has been in a pretty hard lockdown here for about the past month. And we're seeing shutdowns across the U.S., as I mentioned, in Michigan, California, it's individual states. But I think it bears watching. I would encourage everyone to keep an eye on those and how those trends affect forward expectations. In terms of quarter-to-date, I know that one of the leading networks put out a set of data, I believe it was last week. And our trends, similar to the past 3 quarters have been closely mirroring what that network put out. I think we were a little stronger in the U.S. and a little bit weaker internationally, given our strong U.K. footprint. But in total, very much in line, and would expect that to continue to be the case. As we're thinking about yields, I mean, we saw the merchant yield go from negative 12% in the second quarter to negative 9% in the third quarter, principally driven by improvement in SMB volumes as retail and restaurants reopened to the extent that those things close again, it could have a negative impact on yield, but we'll be watching that closely. I think to the extent that we see acceleration in volumes, we'll see improvement in yields. And if there's further lockdowns then the converse could be true. But regardless, I think as we get to the second quarter of next year, we will be lapping the onset of the pandemic and what has been a yield headwind will turn into a dramatic yield tailwind beginning in 2Q and extending through the rest of the year. Because fundamentally, there's been no change in the underlying drivers. Traditionally, revenue has grown like transactions or volume. And excluding the mix shift, that continues to be the case. So as we lap the SMB mix, we'll see a yield tailwind. And as travel and airlines comes back, which is principally cross-border e-com, there'll be a further extenuation of that yield benefit. So unfortunately, where the pandemic take it away, it will give us back on the tail end.

Thanks a lot, Nate. Yes. And that's definitely a topic that comes up in investors discussions around, essentially, just to paraphrase, I think you're saying that there's the potential that at some point or the likelihood at some point, we see revenue grows faster than volumes. In other words, the reversal of the trend we've seen more recently.

That's exactly right.

All right. Perfect. Okay. I want to get to margins, and I'm being conscious of time here as I see the clock ticking away. But real quickly, just on Q4 banking, we can hit it on it. Just on it with the segment needing to get back into the mid-single digits. You touched on it earlier. Part of that is some initial impact and benefit from some of the large contracts signed about a year ago. But maybe you could just talk through some of the COVID-related headwinds that are still impacting the business, how they trended in 2Q and 3Q? And how we should think about those for Q4?

Yes, sure. So we're expecting -- or what we've seen so far from a COVID impact is principally been related to our transactional revenue, which is -- reflects our issuer business as well as some other products that are tied to new account openings, such as our fraud tools, et cetera. Since the onset of the pandemic, and I think the first, second and third quarter, that's been about 1 point of headwind to growth. At this point, we're expecting something similar in the fourth quarter, but we'll obviously wait and see exactly how that shakes out. In the third quarter, we additionally had 2 points of headwind from license renewals. Half of it was due to a single license that was very large anomalous that we signed in the prior year period, and the other was just due to the natural timing of our renewal cycle. There could be some impact of renewal cycle in the fourth quarter, but we would expect to be less so than what we saw in Q3 and certainly not sufficient to prevent the business from accelerating that mid-single-digit range that we called out for the fourth quarter. So based on where we sit today, we feel highly confident in our ability to achieve that outcome in Q4.

Okay. That's great. That was perfect. And I think we spent the right amount of time on covering that briefly. Let's move on to EBITDA margins. Obviously, another big question that we talk about often with investors. Q3 came in at about 42.5% or so. And I believe you pointed to investors to call it 45% or so for Q4. Some of this involves a little bit of underlying reinvestment in the business for longer-term and future growth. Maybe you could talk through some of these puts and takes? And then just to save time, I'll get to the follow-up now. You also talked about maybe some of the building blocks for 2021, and maybe we could just step through those, clearly, without putting numbers to them, but maybe just those pieces that were mentioned on the earnings call.

Yes, I'd be happy to, Tim. So I think one of the biggest points of clarification that we've been out trying to make in the market is we've talked quite a bit about how we did at $300 million in short-term cost actions this year, which was principally driven by eliminating short-term incentive compensation. And we also said that we were going to continue to invest in the business through the pandemic because we view that as the strategically viable option given that we think the pandemic is inherently temporary, knock on wood. And given the strong trend we're seeing across all 3 of our segments, both in terms of market share as well as client adoption, we wanted to continue to invest in new product development, which has been driving stronger sales and pipelines. We wanted to continue to invest in our sales force in order to convert those pipelines to wins. And then we've had necessitated an investment in additional technology delivery staff to convert these multiple large wins to revenue. So we continued our investment path through 2020. Other than the $300 million of short-term cost savings, we did not reduce our operating expense budget nor our CapEx budgets at all. So as you look at revenue, let's say, flat, and some people would say, well, why isn't OpEx flat? Well, the reason is because the OpEx budget was built pre pandemic, assuming a 10%-plus merchant growth, 6% plus banking growth, et cetera. And we've kept with that. Now similarly, as the pandemic played through, we've seen very high contribution margins, 80% to 90%. And Tim, as you look at the growth in revenue from the second quarter to the third quarter, it converted at about 85% to EBITDA. We're expecting a similar 80% to 90% contribution margin as we move from the third quarter to the fourth quarter. So as of the second quarter -- I'm sorry, the third quarter earnings call, we called out a 45% margin. Looking ahead to next year, those very high contribution margins are going to continue, and they're going to drive significant margin expansion. And I think the way to think about margins for next year, when we initially had guided to 2020, we guided to 44% margins pre pandemic. That's probably a little bit low. Similarly, when we announced the Worldpay transaction in March of last year, we said that it would accelerate FIS to 7% to 9% top line growth and about 45% adjusted EBITDA margins when we reached full run rate revenue and cost synergies. Now on a revenue perspective, we're about halfway there. From a cost synergy perspective, on a like-for-like basis, we're going to end this year in line with the initial $400 million we laid out. So I like that March of '19 deck because it doesn't assume COVID. It doesn't assume short-term cost savings. But fundamentally, we're thinking about the profitability of the business in much the same way. So those are the 2 goalposts that I've been highlighting for investors. I think the upside and downside is going to be driven on revenue and principally what happens in the merchant segment. In terms of the puts and takes, very quickly, obviously, the $300 million of short-term cost savings will principally come back into the model. We will get incremental cost synergies over and above what we delivered this year. We'll continue to see operating leverage. We'll get the 80% to 90% contribution margins, which is what will enable us to drive several hundred basis points of margin expansion from 2020 to 2021.

Excellent. Those goalposts are extremely helpful. I'm sure many investors will appreciate that context and also the March 2019 deck reference. So thanks a lot, Nate.

You're welcome.

In the time we have left here, I wanted to see if we can dig a little bit deeper on the top 100 banks opportunity. So a bunch of questions here. But let's start with -- so a key topic for investors and clearly for FIS, in general, is not just getting the banking segment to that attractive 7% growth but -- or 7% plus growth, but maintaining it over the next few years. And really, we think about the 2 key ingredients there being, number one, signing more top 100 banks and clearly, you've demonstrated a nice track record of doing so over the last year, straight 4 quarters in a row. But then the second piece is circling back to those existing wins and cross-selling some of the lending modules. So maybe you could just put some context around both of those drivers and perhaps size a little bit, just roughly speaking, how big is that cross-sell when we think about going from accounts and deposits when we circle back and sell the lending modules?

Yes, I'd be happy to. On the first point, in terms of continued new wins, we believe that the multiple wins we've had over the past year are the beginning of a multiyear upgrade cycle. The wins will clearly be lumpy. So I can't promise that there'll be any charter going forward, but we would expect to continue to drive new wins based on what is the need for banks to react to rising consumer expectations while simultaneously lowering costs through cloud-based outsourced solutions from FIS. In terms of the opportunity set from a product perspective, the modern banking platform is the industry's first cloud-native, fully modularly architectural componentized core. And what we have in market today is the deposit system. The next major component to hit will be our first lending module. And as you think about the size of the lending opportunity relative to the deposit opportunity, we think of them as being relatively similar in size. And we would expect the attach rates to be very high. So in our view, a bank that bought deposits is going to be looking to upgrade their entire technology stack and are very likely candidates to buy -- or lending another module as we push forward. So between the 2, we feel exceptionally confident in our ability to drive sustained mid- to upper single-digit revenue growth in banking on a multiyear basis.

That's great, Nate. I'm sure people will appreciate that context on the lending business. I want to take one more question right here in terms of the top 100 banks. Just to recap, and maybe I should have started with this one. But let's just talk about the status of the top 100 banks. From what we can tell, roughly 2/3 or so are still using either something that was licensed and developed a little bit internally, maybe quasi in-house, quasi licensed, and then the other 1/3 have made a decision to outsource. And the vast majority of those that have made that decision have opted to go with FIS. Maybe you could talk a little bit about the status quo at the other, call it, 2/3 or so of the top 100?

Yes. I'd be happy to. So I mean, I think from a competitive position at the high end of the market, we have highly differentiated products and services. And we are principally competing with in-house solutions. We feel like we're a cut above other solutions that may be in the market. In terms of the trend of the other 2/3 that you asked about, Tim, I think in a pandemic or post pandemic world, the banks are being forced to compete with or to respond to 2 competing priorities. One is consumer expectations around real time, access to data, digital channels, online banking, mobile banking, digital banking are just accelerating. Meanwhile, the banks are feeling significant pressure to control costs. And when you have the intersection of increased functionality and lower cost, it's right for an outsourcing discussion. And particularly for a cloud-native solution like we can provide at FIS, that can be continuously upgraded to meet those rising consumer expectations while pulling significant costs out of the base for the financial institutions. So our expectation is that we continue to see more and more of that 2/3 flip and move towards an outsourced solution like those that we offer.

Excellent, Nate. All right. In the last minute that we have or so, let's just get a quick thought or 2 on the Premium Payback, which is a unique product for you guys, a big part of the revenue synergies that you realized -- been realized thus far. Maybe you could just give us a brief update on the status of that effort?

Premium Payback is going better than we frankly had even hoped. It is a truly innovative product at market. Large merchants love it because it enables their customers to spend more with rewards points, which they wouldn't have been able to use otherwise. It lowers cost of acceptance for that portion of the transaction. And the issuing banks love it because it enables them to lower their points balances on their balance sheet, which is beneficial in terms of their ratios. And consumers obviously love it. And we see evidence that the ability to use and leverage rewards points drives consumer spending decisions in terms of where they shop. So we have added significant new merchants, including Walgreens. We've added significant new issuers, including one of the largest issuers in the globe and continue to drive that forward. So we're very excited about Premium Payback as a way to continue to remove friction from the payments ecosystem while really driving value across the full financial ecosystem from the point-of-sale to the funding source, whether that's loyalty points or a card account.

Nate, thank you so much. I mean, excellent. I mean we covered a lot in 30 minutes. It was well done. So I just want to thank you on behalf of everyone at Crédit Suisse for being here with us today and taking time out of your schedule to join our conference. It was a pleasure, and I hope you had a great day of meetings.

Thanks, Tim. I appreciate it. It was a great day, and we're here to help. So to the extent we can be helpful, please reach out.

Have a great rest of the day.

Thank you. You too.