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

Thanks. Good afternoon, everybody. This is Tim Willi with Wells Fargo Securities. Thrilled to have with us this afternoon Woody Woodall, CFO of FIS; Gary Norcross, CEO; and then, Nate Rozof, IR extraordinaire, also with us today to keep the other 2 out of trouble if he needs to. So thank you all for your time. Very much appreciate it. Lots to talk about, lots going on. Try to stay numbers questions and more about the business.

So maybe, Gary, I think one of the things that we've seen that's been a surprise to people throughout this pandemic and the economic fallout has been really the resiliency of the banking industry. And I think your sales progress, the productivity, the bookings that FIS has put up, particularly amongst large banks, I think, is nobody would have predicted that would be a guestimate 15 months ago. So maybe you can sort of talk through what's gotten us to where we're at. You've been pretty clear that you think we're just at the beginning of this upgrade cycle, particularly around the larger banks.

Yes, Tim. Well, first, I appreciate you having us here today and look forward to spend the time with you. I think you're exactly right. I think if you -- you really have to back up. Everybody was surprised of what the strength we've seen through COVID. But we always have to remind ourselves, I mean, this is a health care crisis, not a financial crisis. So the banks are actually in very strong shape coming into this. What we saw almost -- now it goes back to when I really took over as CEO back in 2015, we felt like, eventually, the banking was going to come up to an inflection point where they're going to have to move all legacy technologies to some future generation of technology. And so we actually started investing in cloud-based computing almost 5 years ago. Now we're the leader in cloud-based computing. We started investing in the application layers. And what you've seen now over the last several years is us bring more and more product to bear that's really cloud native in its design. And if anything, in the large bank market, COVID's accelerated it because what you had was literally in a couple week period of time, everybody had to go home, just like yourself, Wells Fargo. Everybody shut down. You had to go home. And so then you turn back around and say, "My technology doesn't allow me to work remotely, doesn't allow me to enable those capabilities because I'm so dedicated to these legacy technologies. They're not open enough. They're not digitally designed." And so I think we really are just starting to see the tipping point here. We had a couple of very early adopters. We've had some really nice, strong signings that go back in late Q4 last year. We've been implementing those through this year. We've had a number of key signings through the quarters of this year. And a lot of people were also sitting back, waiting to see, okay, as these banks go through that transformation, do I jump on and become a fast follower or do I hold back a little bit? But I think we're very early in the process, and you're going to see more and more people. It's not a debate of if, it's just really now a debate of when. People are going to have to move off mainframes, old architectures, and they're going to have to embrace cloud-native capabilities to compete.

When you think about bank technology, right, I think prior to this environment, we've had lots of CEOs of big banks, and I would say they're the U.S. ones because that's what we see most often. I'll assume internationally, there are some, they talk about their scale and their development capabilities. And they're fintechs and billions of dollars. And I'm sure there's truth to it. And -- but when you think about what you can deliver into the market to a bank that's a top 30, you're aware of what the people that develop in-house do. And you're aware of what you've developed and deliver to banks that choose to hand it off to you. Compare and contrast if you can, I get you got to be political and professional. But I mean, I think, are you delivering something to a top 30 bank that is on par with somebody talking about their homegrown system and their billions of dollars a year development, there's no gap, nobody is giving up anything to come with FIS versus the biggest banks that say they're technology companies?

Yes. Look, I'm not -- I think our systems are superior. I don't think there's an issue of whether it being on par. I think they're further ahead. I think the only reason why really large banks build their own systems is they believe it's going to give them some kind of differentiation. It's -- they believe it's going to give them more flexibility. When we build our systems, we have to build them from the ground up for multiple clients to be able to leverage them. It has to be multi-tenancy. It has to have high, high recoverability. We have to be able to launch in very different ways because we're thinking about the commercial viability of that solution, right? How do you roll it off not at one institution, but how do you roll it across a thousand institutions. And because of that, the amount of flexibility we built in from the ground up actually enables customers to be more flexible. And I think that's one of the reasons why we're seeing the shift. I mean one of the customers that we signed up was one of the very first adopters. They had over 450 developers. Now compared to us, that's nothing, right? We have thousands of engineers building software today. But for a very, very large regional, that is a very large pool of engineers. The problem is you start working on little nuance things. You start working on that matter requiring attention that you maybe have gotten from the regulator or you start working on some regulatory nuance change, where -- when you come with FIS, we absorb all that, not the MRAs. Hopefully, you don't get an MRA when you're running our systems. But the reality is we're handling the regulatory for you. We're handling the functionality. And it's not just internally what they're hearing, we're hearing it from thousands of clients that are informing our road maps. And so it allows them to be much more competitive because the amount of feature that we're bringing to market compared to what they can do internally is just exponentially greater. And so why have people held on for so long, it's because we really haven't seen a step function in technology until today. There really hasn't been a lot of advancement in and around the actual hardware data centers until the cloud came out. And what we're seeing with cloud-based computing is a much -- just a significant step function in cost reduction but also a significant step function up in availability and flexibility and nimbleness. And so because of that significant generation shift now to really take advantage of it, it's going to take a new application stack to really reap the full benefits.

One of the things, and I want to stay away from numbers and modeling and all that kind of stuff, but you have a great backlog, probably one of the strongest I can remember. There's obviously resources to come with getting ready to deliver that on time at a level you want. That obviously is part of the growth algorithm in the next 24 months. Could you just talk, I think, structurally if nothing else as we think about what's being put behind getting ready to bring this backlog on in terms of people and expenses? You've got merger synergies. You've got data center consolidations. But obviously, there's a piece of this backlog that you need to invest in to make sure you deliver. Any way to just sort of think through how that's running through the P&L will run and how that curve looks as you install?

Yes. Well, we've done a nice job, Tim. I'm really pleased with how the company's responded. Keep in mind, we started investing in these systems 3 and 4 years ago, and we're bringing them online today. So in order to do that, we actually pulled down investment in our legacy applications so we can redeploy that investment to the future. But you're right, as backlog has built in Digital One, as backlog built in Code Connect, which was our first next-generation capability in the market. As it's built in modern banking platform, we've had to make sure that we either retrain our implementation professional services group or we've had to redeploy that spend and hire people that can deliver on these type of capabilities. But just like you're doing, we look at our pipelines. We look at our closing rates. We anticipate what those closings are. And we also invest ahead of that so that we're ready when it comes into the implementation cycle. Now modern banking platform has really had some strong demand. So obviously, we've had to ramp up even heavier than what we originally predicted through 2020. But I can honestly tell you, I'm involved in those implementations. And given the size and scope of those implementations, they're going very well. A lot of work still to be done. We're going to start seeing us bring on customers and friends and family here in the next couple of months on a number of our deals, and then we'll launch in full production, but very pleased with where we are in handling that balance as you described.

Yes. Those are high-class problems to have. I mean the last one sort of on the bank side before getting into payments and to capital markets. But obviously, when you have large entities and doing the kinds of conversions you are, you guys could have all your ducks in a row, and you've worked hard to do that. To what degree do you feel like the risk associated with a customer and finding out, oh, shoot, they're not ready. We thought they had the resources. We have to delay this by another couple of quarters for them to get things in order. And especially with everything that has gone on with the pandemic and taxing IT departments, so how should we think about that? Or how do you feel about it?

Well, the reality is we kind of bake that into all of our models. I don't want to be flippant about it. I mean something that moves 1 or 2 months is not an issue for us. We've actually had set pull forward. We've had things that push back. It can push for the very reasons you're describing, right, under-resourced on the client side or things can go bump. What I would tell you, historically, most of our implementations go in on time without incident. But we do, every year as we're building our plans, consciously realize that there could be some shift on a minor basis of install dates, and that's just part of working with the client. Keep in mind, our contracts are all long term in nature. And that clock on that contract doesn't really start ticking until they go live. And so if it slides 2 months, it's not like we lose 2 months of revenue. That 2 months of that book, that back book just pushes out 2 months, but it still runs for the full 60. And even during that time, if there is some flex, keep in mind, in most instances, especially in the large end of the market, we're being paid for our professional services. So you'll still have a revenue stream that comes in with that if there is an inevitable delay. What we watch for is something that really could push it long term, something that can push it 6 months. And those are the things that can really start causing a problem, not at the individual level. It has a domino effect of all the other implementations that are in that back book that we really have to care about. But fortunately, that rarely ever happens. I mean it's just real rare for -- to see that occur.

Yes. Yes. No, and I can't recall it ever happening in the past, just given the size of the backlog. That's why I sort of wanted to bring it up. We turn to capital markets. I mean, obviously, with banking and the merger, I feel like capital markets is sort of like, on the conference calls, like towards the end, somebody is looking for a question to ask and they realize, oh, nobody asked about capital markets yet, so I'll jump in there and ask about that one. You did a big acquisition to really build out the scale in the space. And you've got big global financial institutions that clear joint customers, if you will, I mean, big banks with big asset management. How do you think about capital markets strategically, especially as we shine a little bit more light on it as the merger moves farther down the road, and we're not as, I guess, obsessed with that?

Well, look, we -- as you know, we entered into that space in 2015 with the SunGard acquisition. And obviously, when we made that SunGard acquisition, let's be honest, it was a bit of a turnaround. And so now you fast forward 5 years later or more, what you're really seeing is a very structurally different organization and one that is performing very, very well. The only -- we talk a lot about banking. We talk a lot about the sales success there, but we've had equal sales success in the capital markets side with really strong growth year-over-year in sales. The thing that we're experiencing in capital markets is really just a headwind as people move from in-house on-premise type deployments to SaaS models. But we feel great about the changes we've made there, the investments we've made in product, the ability for us to pull together our products and actually build solutions, and now we're selling large solutions. And we see a lot of opportunity, and that business is accelerating quite nicely. But as we continue to watch where the company goes from here, I tell people all the time that we're always going to look if we think we've got shareholder value that's trapped and we need to unlock, we'll make sure that we take advantage of that. But right now, the relationship between capital markets and banking is very strong. A lot of our customers are common. We leverage that through the sales cycle in that relationship, and we feel really good about where capital markets is as part of our strategy.

Is there an opportunity within capital markets to further build out through, call it, medium- to large-size M&A? I mean there's been a fair amount of consolidation when you think about like what SS&C has done, and we see you guys with SunGard. Is that something that's a possibility down the road that there's actually another leg of acquisition-driven scale for that business? Or is it more a little bit bolt-on and organic?

Well, what I love about the seat that I'm in and what I love about M&A as a key component of our strategy, we're able to have a very wide aperture, right, when we look for things. And when we're looking for any kind of large M&A transaction, obviously, we want something that's complementary to space we're in or break us into an adjacent market or both. But we really are looking for things that can accelerate our growth from here. Right? So we're not really looking for any kind of turnaround. We're not really looking for anything that -- we're definitely not looking for anything that would slow our growth from where we are today. But we do have a wide aperture. And so if we could find something that's either in payments or in banking or capital markets that fit those descriptions, we'd certainly take a strong look at it. But I think we're well positioned in all 3 markets we have. I think also when you look at FIS, we're very well positioned from an enterprise viewpoint. Obviously, scale is going to continue to matter, and we'll continue to evaluate our M&A opportunities with those lenses.

On the topic of M&A, and again, trying to stay away from specific numbers. But Woody, maybe if we could just talk a little bit about the balance sheets, obviously. You continue to work on the deleveraging and finding that right balance. And the company has always done a great job there. And maybe just sort of refresh us and give us sort of updated thoughts about what the rate environment, where it's at, valuations where they're at on M&A, and just sort of how you're thinking through the capital and the cash flow allocation.

Yes. I think it's very consistent, Tim, with how we thought about capital allocation for a long time, at least all the way back to 2012 or '13 when I came into this role. We're going to continue to invest in the business. I think that is, first and foremost, where we can drive long-term organic growth and capabilities that we can push through our distribution channel to our customers. So we're going to continue to invest in the business. I think we're going to continue to pay and grow our dividend over time. We've done that over the past. We've taken a pause when we hit higher leverage to let us deleverage a little faster. And then we've started to grow that dividend again once we hit our deleveraging targets and areas from a credit rating standpoint. We anticipate continuing to repay our debt. COVID certainly put us back a little bit this year in terms of our time horizon for deleveraging back to where we were. But we anticipate getting back below 3 turns and back towards that 2.7x that we targeted originally when we announced the Worldpay transaction. So we'll continue to pay down debt. At that point in time, as Gary mentioned, I think we'd rather do M&A in terms of trying to allocate capital to drive incremental shareholder returns, but we'd certainly look at share buyback at that point as well. But we want to maintain our credit rating. We think it's important in the sales cycle. We think it's been important in keeping a strong balance sheet, which has allowed us to do some of the M&A activity at the low rates that we've been able to do it. So we want to maintain that strength in -- strength of balance sheet and credit rating as we go forward. So short term, continue to pay down debt. Long term, continue to grow the dividend, look at M&A activities and buyback shares.

Yes. A quick question on dividend. And again, it's probably a little -- I don't want to say esoteric, but probably one that I don't think I've heard people ask on a regular basis. When you think about the payout ratio, and again, I think all companies go through a variety of phases, high growth and then GARP, and then it's just sort of evolution, right? We've seen it happen with lots of companies and industries. Where do you think the payout ratio over time at FIS, yourself and the Board are like, this is the goal? You don't have to articulate a time frame, obviously here, but where do you think it could comfortably settle in on a payout and still satisfy the opportunities for M&A and the buyback and things of that nature?

Yes. If you look at where we're at right now, I think it's roughly a mid-20s kind of percent payout ratio. If you look at how we're positioned from a cash flow generation perspective, I think we're uniquely positioned, right? We can do a number of things. One, we can continue to invest in the company at higher levels than our competitors to drive higher organic growth; two, we can continue to grow that dividend over time; and three, we still have incremental excess cash and/or leverage within the balance sheet that we could go do M&A activity or buyback. And I think it uniquely positions us to utilize that cash flow to drive a number of different growth and return dynamics in the company.

Yes, for sure. So payments. Obviously, the merger has gone well. You've updated the comments around the revenue synergies and the expense savings, and no need to beat that dead horse, so to speak. But maybe at a business level, the way I think about the merger was Vantiv/Worldpay have their own sort of merger plan revenue synergies where they're going to execute on the strength of that combination, which I think everybody believed in. And then here comes another set of sort of combined strengths with FIS around the global footprint and the authorization enhancements and the bank relationships. So I guess I just would love to hear thoughts about sort of those 2 different game plans, sort of the Vantiv/Worldpay game plan about what they were going to do and then how you sort of evolved and brought that into leveraging the global touch points of FIS with all these banks and retailers around the world.

Yes. As we looked at the combination when we got involved in due diligence, what we saw in the Vantiv/Worldpay deal specifically, we felt like most of their revenue synergies were really pretty well behind them. They had touted a number they were going to achieve, and we really saw that they had achieved that number. What we saw in the Vantiv/Worldpay was more really around what I would say some of the cost things that still need to get done or the wrapping up of large programs like map deployment, it was technology-based. They have been working on the new acquiring platform for a number of years and getting all of their customers moved over or getting the Access Worldpay launched in market with really a level of sophistication. So we focus there and then allowed us to really turn our attention to where you described as where is the revenue synergies between now, FIS and Worldpay, and that's been just an outstanding story for us. At the end of this year, we were actually highlighting $100 million run rate. When we originally did the deal, we highlighted $500 million revenue synergies over 3 years or $100 million run rate at the end of this year. This year, we're going to well exceed $200 million run rate, even with COVID as a backdrop. And so what that would tell you is in our opportunities that we identified in due diligence not only have they come to fruition, they actually exceeded our expectations in many engagements. And we've talked about that a lot over the last year. But when we see these 2 companies coming together, and that's what these large M&A transactions drive, is that at scale, people often talk about scale as in processing scale, but a lot of scale comes in clients in reach, in product, in go to market, in geography. And that's really what we're seeing with the Worldpay/FIS combination. We had a large debit network, they didn't. Our ability to route debit transactions has worked very well. We have large financial institutions, they didn't. Our ability to be able to go through branch referral programs and take a lot of shares worked very well. Our Premium Payback solution, because we were one of the oldest loyalty programs in the industry, our ability to deploy that across large merchants Worldpay had that we didn't have access has been a real home run for us. And now we're getting into data intelligence around fraud and data intelligence around auth rates. And so that process has worked very well. But when we looked at it, we really felt the revenue side had actually performed exceptionally well in Vantiv and Worldpay. It was really just wrapping up a couple of programs on the back side, which we've successfully executed against. But now it's been really focused on how do we take our capabilities and their capabilities and win in a scaled market like we have today.

Can I add? The Premium Payback is an interesting product, and I know, Nate, you and I talked about it post call. Conceptually, there are -- the numbers got to be huge in terms of the value of loyalty points that are sitting out there across all those loyalty programs. And could you maybe do a quick walk-through of like how this resonates with a retailer? What the sort of economic advantage that you have of being able to do this, how it positions you versus others? Because it really -- I mean it's a massive, I think, opportunity and concept that I know nothing's next quarter, all of a sudden, you're blowing numbers out because of premium payback, but it does feel like there's something there that...

It's an extremely large revenue stream for us and growing very rapidly, and our pipeline is very full, and our implementation backlog is very full. It really is a winning solution if you think about in the world of disruptive payments. So you really got a solution here that benefits all 3 parties. You've got the consumer that's got a huge loyalty point base but really assigns very little value to it. And Tim, we've got a lot of examples now where when we launch this, we're seeing 30% and 40% acceptance rate when you walk in to a merchant, and you're presented with an opportunity to use points as a currency. And when you look at that kind of adoption rate of anything, that's significant. The merchant loves it because that portion of the transaction is interchange free. It looks like cash to them. The issuer loves it, the person who holds the points, because, frankly, they're able to take it off their books. They've got $1 of liability on their books or giving $0.90 of value. So you got the issuer, the points loves it. The consumer loves it because they haven't been using their points for anything. The merchant loves it. And then it's really been a really strong success story. Our access to the Worldpay merchants is what's really been exciting for us because we have this capability, but we really just didn't have -- we didn't have the seat at the table in large merchants to really get an audience on how they could utilize this capability. But overnight, when we acquired Worldpay, we bring immediate credibility. And now we've announced last quarter, we're getting more and more customers signed up. We even now have issuers that run other points banks, they're now signing up with us to contribute their points bank to our Premium Payback. So they can get their points bank into this as well. So not only ours but other issuers that are in this. So it really turned out to be a really good story, and it's been a big contributor early on to our growth. And as I said, we've got a lot of really large merchants that we're in the implementation phase of that we'll be rolling out in the coming months and a very full pipeline on additional sales. So it's a great disruptive or innovative payment solution.

I mean, from your perspective, because you're delivering effectively an interchange-free payment, I mean, is it -- and maybe you said this on the call, I apologize. But I mean, is it a little bit more lucrative for you as a transaction because the merchant is not paying an interchange rate, so the revenue yield theoretically on those transactions is a little bit better than just your average plain vanilla transaction on a same retailer basis?

Well, yes, it's just not even a revenue on the transaction. I mean, keep in mind, we actually do processing. We process the loyalty point itself. So we own the loyalty bank itself. So we actually gain revenue from the issuer because we're doing a redemption. We're actually gaining a higher profit margin on that portion of transaction to the merchant, et cetera. So really, we catch it on both ends of that transaction, given the fact that we're also the holder of the points. And any kind of redemption on our loyalty business actually generates revenue for us. So now we've actually extended that revenue stream, but we're now we're getting also the transaction on the acquiring side and a higher margin on the interchange-free portion. So yes, it's a very nice transaction for us.

Yes. Interesting. We got about 2 minutes left here. The last question I wanted to put out there is, obviously, FIS has grown dramatically in the last 5 years, and it had grown a lot before that as well. One question, 2 perspectives. Number one is, culturally, how do you feel right now? You always do a lot of work around sales force realignment. I think that's all of the strengths. There's a lot of operational support and other people. But how do you think about the culture? And then if there is anything that you're just like, we've still got a couple of internal areas we just need to work on. We're working on them culturally, structurally. We just love your thoughts because it's obviously a big job. You're a big company with a big geographic reach. That's an important part of long-term value.

Well, it's easy for me to say. But I would say I feel great about where we are culturally. Had you asked me that question 5 years ago when I took over the seat, even though I've been in the company for a very long time, I felt like we had a lot of work around culture. I felt like we were cost-cutting and really didn't have a growth mindset, didn't have a growth culture 5 years ago. Today, when I look at the amount of innovation we're driving, the amount of investment that we're making, the way we functionally have transformed the organization, we're just, once again, a very different company than we were 5 years ago. And I couldn't feel better about where the company sits today. We have a really growth entrepreneurial mindset. Everything we're focusing on is all about growth. We've broken down our silos. We really collapsed those groups in a much more functional alignment. All of our engineers are in a common developer pool. All of our IT through our data center consolidation where we got more than $250 million of run rate cost out. But what's bigger important is we took 55 data centers down to 6 and 80% of it to converged infrastructure or cloud-based computing. Those point to just how dramatically different this culture is today. And what's great about us is we really have a lot of opportunity ahead of us. So as we think about growth and as we think about margin expansion, we think about platform consolidation with the investments we're making. We've got a really bright future of not only accelerating growth, but very, very nice margin expansion coming over the next 3 to 5 years. So I couldn't feel better about where we are today.

Great. Well, with that, we've used our 30 minutes. But Gary, Woody, Nate, thanks so much for the time. Appreciate the participation in the conference as well, and have a great rest of the week. Thanks very much.

Thank you, Tim.

Thank you, Tim.