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

Great. Thanks, everybody, for joining us today. Really appreciate it. I'm here with -- virtually, with FIS CEO, Gary Norcross; CFO, Woody Woodall; as well as EVP of Corporate Finance and Investor Relations, Nate Rozof. Thank you. Thank you, gentlemen, for making the time today. Really appreciate it.

Maybe we can jump right in -- maybe we'll jump right in here with a couple of questions. So I just wanted to start with kind of -- get your view in terms of -- it's been about a year since you -- over a year since you closed the acquisition of Worldpay. I know it's been a busy time. Walk us through sort of your broad assessment of the integration thus far. What surprised you in terms of is it easier or more difficult than you imagine? And what are the priorities for '21?

Well, honestly, the good news is, I think, we've had more pleasant surprises than negative. You'll always run into some of those things, especially in a transaction this size. I look back on where we thought we were or where we were going to achieve, what we were going to achieve on synergies. We talked about achieving $500 million in revenue synergies over 3 years. We talked about more than $400 million in cost takeout over 3 years. And you just look, we're just way ahead on every mark. So when we look going into -- we'll wrap up the year with over $400 million in OpEx savings on run rate by the end of this year. You look at below the line savings, you're going to see $300 million plus there. So on a combined basis of just overall cost, we've really hit the cover off the ball. Even on the revenue synergies, when I look at it and look at where our cross-sells were coming from, we thought we would have cross-sells of about $100 million in run rate exiting this year. This year, we'll be over $200 million. So but then you back away from that and say, well, that's all great. Your synergies are coming in where you thought. And by the way, I should have said our revenue synergies, we feel very comfortable in achieving our $550 million now that we have target and run rate. But what I'm really proud of is how the teams have come together, the cultural alignment of where the teams have come together have been just phenomenal. We really were able to put what I like to call the [ Class Pogo ] together very quickly. That all came together. Our engagement scores across our colleagues -- we picked up 8,000-plus new colleagues to this combination. Engagement scores have been through the roof. The ability to coalesce around a common brand, a common vision, focusing on our strategy and culture elements have all been very, very high. And that's translated -- I think that's really what's allowed us to be so successful on the synergy side. If you can't get that to pull together, then obviously getting the synergy stuff is very difficult. So I couldn't be more pleased. We have had a couple of challenges. I don't want to ever think people will think this is perfect. When we entered into the agreement, we actually thought we would have all the NAP migrations done within the first 6 months. You've seen that elongate. Frankly, we're down to 2 migrations left. 100% now, the delays were related to COVID. But we'll get those wrapped up in first quarter of 2021. And then all of the new acquiring platform, all of the back book will be migrated and completely finished. So that's taken a little longer than we thought. But we're very excited about some of the stuff that we're bringing to market today from new technology, new innovations, but also just how the teams have come together.

Great. And what about for -- so for 2021 in terms of prioritization -- prioritizing sort of what's left here on the synergies, maybe you could comment a little bit on your sort of road map here going forward.

Well, I think a couple of things. I mean we've got a couple of the things on, what I would say, the operating side to still wrap up. I just mentioned the new acquiring platform. We have 2 migrations left. And through the back half of this year, we were averaging a migration about every 30 to 45 days. And now we're just in the freeze period. And so we've got 2 more left, and we'll get that wrapped up, as an example. But really, we're just continuing to focus to drive our sales engine. Been very pleased with some of the results that we've seen in taking share in our ISV. We're bringing the integrated business into Europe and the U.K. But really from a cross-sales standpoint, the sales engine has performed very, very well. So now we have a full backlog of signed new business from cross-sells that we have to onboard, but we got to continue to execute to drive that $550 million in revenue synergies we're now targeting by the end of 2023. And based on the pipeline, frankly, based on our closings and our backlog to implement, we feel very confident in that.

Great. So I wanted to shift over to talking about margins. And I wanted to frame a question and, hopefully, in kind of a creative way. When you look at the business in 2019 in terms of the expense base of the business, and you also look at it on a more normalized basis in the future maybe -- are there any kind of changes in terms of call-outs there, in terms of business investment, headcount, sales, staff? What has evolved in the business over that period of time?

I'll take a stab at it, Gary. And then if you can add on, that would be great. If you think about kind of in a pre-COVID world, when we announced our outlook for 2020, we had talked about 150 basis points of investment back into the business. A couple of things. That was around increasing our sales force to meet the demand that we saw in the marketplace. I think you're seeing that with MBP wins, for example. I think you're seeing that in terms of SaaS sales in cap markets, and we're talking about accelerating the growth profile there. I think you're seeing it across the merchant business as well, trying to take advantage of demand in integrated opportunities, particularly in Europe, and omnichannel opportunities as well as e-commerce opportunities and try to take that share while the market is really hot there. I think the other thing that we talked about was delivery, right? Once you get these sales, we have to stand these customers up and get them ready to start generating that revenue and turning those bookings into revenue. So we've talked about that. And then the third leg that we've talked some about, and you've heard Gary talk some about, is our Chief Growth Officer and standing up that organization to try to drive incremental innovation. We've talked a lot about margins this year. I think the key is we've taken actions to drive synergies on an accelerated basis. We've taken short-term actions of roughly $300 million. A majority of that will return next year. Think about short-term bonus as the prime example. But we did not pull back investment that will help us drive future growth into 2021 and beyond. I think that's been a critical maybe difference in how we've approached the pandemic versus others. I think the strength of our balance sheet, strength of our cash flows have allowed us to continue to invest. And I think that's an important piece for thinking about this being a temporary opportunity to be able to position ourselves better than others coming out the other side of it. When we announced the transaction, Worldpay transaction, almost 2 years ago now, we said we got to about $400 million of OpEx synergies. Our margin profile will be about 45%. When we exit 2020, the fourth quarter we think is going to be about 45%, and we're comfortable with that 45% target for 2021 as we go forward. Once you completely annualize through the synergies and get that behind you, we still think we'll be able to generate 50 to 100 basis points a year in annual margin expansion. So kind of a long-winded answer on your expense-based question, but I think that encompasses all the moving parts that are there right now.

That's super helpful.

I think that's important, Woody. I mean, as you think about it, we're actually going to exit this year exactly where we committed but without -- we're continuing to invest to accelerate that growth. And our investors, rightfully, so, 2 years ago, when we said we were going to grow 7% to 9%, everybody was like how? I mean how are you going to get merchant to grow 18%? Well, the reality is, our plans to get merchant was to move it from 10 to 11 or 12, but it was really about moving our banking capital markets business up. So our ability to continue to invest through this down cycle has been a strong testament, still exiting with our margins but now accelerating that growth into the future. And when you look, Ramsey, at just the sheer volume of platform consolidation that we have going forward, right, as we modernize these platforms and as we move to them, and I'm sure we'll talk more about that, 50 to 100 basis points, is really going to -- everybody needs to keep in mind, not only is that a given, we're going to continue to accelerate our investment through that curve. So we're not going to get to 50 to 100 by pulling investment down on innovation, we'll be able to continue to focus and accelerate our innovation investment, all while driving an additional 50 to 100 basis points for years to come.

That makes a lot of sense. And obviously, your success in the banking segment is testament to maybe -- biting the bullet and investing at the right time really yields future dividend. So I think that's a good -- that's a reasonable plan. So a good segue over to the banking side of things. I wanted to talk about the large bank processing wins. I think investors are excited about that justifiably. Can you talk about the drivers of the demand environment, which is to say, was it -- that you guys feel that the right solution that basically convinced those folks that it was time to outsource? Or was this sort of a trend that was already happening in the large market in terms of outsourcing that they then started looking around, and you guys were the ones who had the right solution set? I know it's a bit of a nuanced question, but -- a chicken and the egg a little bit, but what do you think about that?

Well, I think we really saw this coming. I mean I don't think you just -- all of a sudden, there's demand and you create one of the arguably most complex applications that exists in the industry, which is core banking system. So we had to see this coming in order to be able to have a solution to sell because it takes years to build these things. I think the reality is -- when you back up to when I took over as CEO in 2015, the single biggest thing that we saw in our strategy was: one, the need to drive more scale to be able to increase innovation investment because we felt like we needed to increase innovation investment because not only the industry was going to accelerate and move much, much faster, and we're seeing it in other industries other than financial services, the reality is all of financial services was built on legacy technologies. And you can pick whatever technology you want on that whether it's mainframes or even if it's distributed computing, it was all legacy-based. It was written in legacy languages, on legacy architectures, on legacy platforms. And in order to really reap the full benefit of speed, it was going to take a major rearchitecture and change. I mean certain languages have been around for 50 years, programming languages. They just have to go away. So we embarked in 2015 and really started embracing a brand-new technology that almost no one had ever heard about was cloud-based computing. I'm never -- it's not meant to be a joke. I literally have to go to Washington with our regulators and explain to them what the cloud was, and no one had ever heard of it. And so we really, over the next 5 years, have now consolidated all of our data centers to cloud-based computing. And by the end of next quarter, Q1 of next year, we'll have well over 80% of our global compute on the cloud. Well, that's a great first step. And we've done a lot of industry-firsts with that. We self-imposed SLAs. We lowered availability times from 24 hours down to guaranteed 10 minutes. And just massive step functions with that shift, and we're seeing that in the benefit of our sales. But you can't stop there. You have to start modernizing now your application stack to really maximize the advantage and build things from a cloud-native standpoint. So we started that with Code Connect, which was the -- we were the first to market with a true open API micro services framework. That's been very, very successful. We launched that 3 years ago. We fast followed with the next very first true omnichannel digital experience sitting on top of retail banking, followed on now by the modern banking platform that you'd started seeing success. So all of these things -- and it's just not there. I mean we're doing that with our Payments One solution, which is truly next-generation cloud-native issuer system, right, which brings together all of -- all fraud, all management, seamless digital experience across all card types, credit or debit. And so as we're starting to bring all of this to market, you're really seeing that's what's fueling our growth. But we did start all of this -- cloud was 5 years ago, a lot of this application work was 3 and 4 years ago because it takes time to build that out and bring it online. And now you're just seeing the success in the sales engine as more and more of our customers are moving to that kind of technology. They get a massive step function in cost savings. Obviously, we're only deploying it in a SaaS deployment pretty much universally across all those solutions I just mentioned. So they get a step function, total cost of ownership, but we get a significant revenue lift in the processing business. Obviously, our margins come on very high because it's a one-to-many model and deployment. But that's a long-winded answer, too. I think we had the foresight to look at where the industry was moving and knowing that it was going to have to change. And you just weren't going to be able to upgrade on that change, Ramsey, it was really going to take new systems built from the ground up, new platforms that were built from the ground up, and that's where we find FIS today.

Okay, a prescient call. So what's the latest view in terms of when we could see the revenue impact of some of these large new deals you've spent over the last stretch?

Well, I think you're starting to see some of it already. I mean I want to back up and remind everybody, 3 years ago, banking was growing at, what, 2%, 2.5%. You've seen it accelerate every year from that point. In a non-COVID environment, I think we would have easily seen banking probably approach even 6% this year at the rate of prior sales. I mean the indicator of that is really looking at the backlog every quarter that Woody talked about. It's been up fairly consistently, about 7% every quarter. I think last quarter, it closed at about $21 billion off the top of my head. And so -- but -- and if you look at it, it's a lot of the things I talked about, it's Digital One. It's Code Connect. It's some of the Payments One capabilities. And now you see Modern Banking Platform. So what you'll see is it just continues to build in increment. And so that's why we're so positive that the banking trend will continue to accelerate from where it is. And as we release 2021 guide here in a few weeks, as we get into January and start releasing some of that through our earnings call, you're going to see a real clear further acceleration of that. But on the -- specifically, on the modern banking wins, what you've already seen is a little contribution through the PS line, right, professional services, where we're driving implementations, we're driving some uniqueness around that. But you'll really see in 2021, you'll start seeing processing roll on to Modern Banking Platform, and you'll see it accelerate from there. You'll really see 2 different times. A couple of our customers are really doing a big bang where they're actually converting their historical back book to the future solution. In some instances, they're launching with new capabilities on the future solution. They'll migrate the back book later. And so in that situation, it will all be about share that the customers take using the product. But a long-winded answer that you'll start seeing revenue accelerate in banking throughout 2021 as we onboard that backlog of signings, both Modern Banking but also Digital One, also Payments One, also Code Connect and all the other solutions we're selling.

I see. So rather than just kind of a step function up at some point, it's sort of more of a build in '21 and over '22?

Yes. I think you'll continue to see that very consistent growth in organic growth in the banking business. The great thing about that business, it's so highly predictable, with over 80% of the revenues reoccurring, it increases at a fairly steady rate. And then even when you see economic shock like the '08, '09, it's very resilient to that. You've seen it very resilient to COVID. We've had a couple of hundred bps of headwinds due to the issuer side this year, but you've also seen it perform very well even throughout COVID. So it rises and slows very predictably.

Okay. That's super helpful. Maybe we'll move over to merchant a little bit. Maybe it'd be helpful if you kind of gave us your updated view about what's happening in your portfolio, what you're seeing out there more recently.

Well, like most people, that portfolio is going to get impacted with anything COVID, right? So if you see California close, right, we're going to see our volumes drop, just like everybody else in the business will see. So we all have tended to perform kind of right on top of where Mastercard and Visa's volumes are. Little subtle differences in the book, so we do so well in global e-com, for example, especially when you remove travel on airlines. We're seeing massive growth in our e-com book. Last quarter, it was over 30%, which outgrew a lot of names. People like to talk about our digital streaming business, it grew north of 50%. So we're seeing great growth in certain book areas. But given the magnitude of the overall book, we kind of -- most people are all locked in, in a very similar way during COVID, but what we're starting to see and what we're excited about is really all of the sales success and engine that we're having on really taking share during this time. So we really have started investing heavily with some of our ISVs in the U.S., and you're starting to see a lot of that back book migrate, which will really launch us into 2021. We've moved, integrated into the U.K. and Europe. I think we've now taken 30 ISVs onto that platform, starting to see growth. We're also seeing our referral channels accelerate. And then you've got the global e-com business that we continue to do very well in. So anywhere you start seeing very complex e-commerce decisions, I would tell you, we still show as the absolute preeminent leader in that space. If Disney is going to launch Disney+, obviously, then they lean to an FIS to take them into all those countries, as an example. And we're just seeing more and more of that. So then you layer on the cross-sell business and you look at what we're doing, whether it's Premium Payback, which is our loyalty product that we convert to currency, and we can talk more about that; we look at our debit routing issues; we look at some of the stuff we're doing on data analytics; you look at the things we're now starting to do around authorization and fraud rates and accelerating that, 2021 is going to be a good year for that business. Obviously, it'll have low grow-overs, but it's going to be -- it's going to show really well given all the success we've had in some of the other areas as well.

So going back to your description of your e-commerce business, and this is one of these questions that'd probably be easier if you had a crystal ball in front of you, but I'm going to give it a shot anyway. Do you think that the kind of COVID-driven mix shift -- this is in merchant, the COVID-driven sort of mix shift to digital that we've seen, do you think that will prove kind of lasting and sustainable? Or should we expect kind of the pendulum to swing back to kind of the way things were a bit, creating kind of a headwind for the digital on a year-over-year kind of sense?

I don't think you'll see the pendulum swing back, but I want to clarify that comment as the way I think about it. I think a new digital experience is all going to revolve around card not present. And what we're seeing is a demand on omnichannel as people move from the physical to the virtual, right? And so what we're seeing is those -- I think those trends are going to maintain. So even as people move into the stores, people move back into the restaurant, you'll see a much higher adoption of card-not-present volume which a lot of people -- we have historically not done that, but a lot of people lump that into their e-com volumes. Where we've been much more purists about how we define e-commerce. So the need for the physical card is going to go away. But I do think people are going to move back into the physical locations over time, and you'll start seeing that increase in volume. But what the big thing that I think we'll all see that won't come back, it might come back slightly, is cash, right? Any type of currency. I mean we've seen just a massive step function from physical currency to electronic. And whether that comes back with card present or card not present is really -- I don't see it coming back materially with cash. And so that's going to be a natural tailwind for this industry as we get behind COVID and the vaccine starts to be employed, and we start getting back to this new normal. But definitely, e-commerce and the way people shop and the way people think about it, I don't see that materially coming back in a post-COVID world.

That's great. That's helpful. Well, you mentioned Premium Payback. And obviously, in-store has been -- has had challenges because of the pandemic. But as that starts to normalize in '21 that, to me, would present an opportunity for Premium Payback. Maybe you can just give us an update on your -- on the product, on the rollout, on your expectations for it?

Yes. I -- it's been one of those pleasant surprises, I mentioned to you, on integration. As we started backing up revenue cross-synergies, we tried to be very clear on how we thought were easy things, existing capabilities that exist today, and we just need to access and leverage the go-to-market engines. And we talked about things like Premium Payback. We talked about things like debit routing. We've talked about some of the things that Worldpay was doing with data analytics. And so then you think about, we were moving to medium and more hard things. And that's the way we were going to accelerate the $550 million. The reason why we've been able to accelerate our revenue cross-sell so much is, frankly, the things that we identified early that existed have actually way outperformed our expectations, and Premium Payback has been one of those. You've seen huge demand for the solution. I think every quarter, we've announced another very large retailer signing on with that. You've got PayPal that's going to use that capabilities. You've got Walgreens. You've got others that are taking on those capabilities. So now not only do we have a full pipeline but we also have a full implementation pipeline. And what I would tell you is the ones that we've launched, the early customers that have launched on that product even in a COVID world, we've really seen significant adoption at the point-of-sale. So while point-of-sale is way off, adoption is very high when presented with the opportunity to use your loyalty points at the point of checkout. So what I'd remind everybody is this year, at the end of this year, we'll exit the year with well over $200 million in revenue cross-sales. That's COVID impacted. So as COVID returns, you'll see that already existing book accelerate from there and then follow on with the implementation queue that's already been signed and the onboarding of those customers and acceleration and then further pipeline sales. That's why we're so confident in our targets on our revenue wins and acceleration. But Premium Payback has been a fantastic capability and something that we innovated at FIS, even before the combination. We were actually just looking for how to get to market through partners with that, but then once you do the Worldpay combination, given their scale, we didn't need partners. We were just able to go direct.

That's great. And I only have a couple of minutes that's left here. Maybe I'll close with a question on M&A. There's the sense that as all of the stocks, including yourselves, that have had some big, large-scale, transformative M&A delever that they might present M&A opportunities. Just give us your latest view on where you stand there, what your plans are.

Well, I think from our viewpoint, I'll let Woody add on as well, I think when I look at where we are, we think large transformational M&A is a huge component of our strategy. We've created a lot of shareholder value from it. We've been able to accelerate our growth through it. So we think scale is going to continue to make a real difference in this industry going forward. And so would we do something to transform in the future? The answer is yes. When I look at all the attributes around the Worldpay integration, I would say from an internal focus of culture alignment, team alignment, execution on our operating synergies, viewpoint into where we are on revenue, I think we feel very, very good. In fact, in many ways, I would tell you the integration is pretty well behind us at this point in time. It's been a much faster process than our other wins, but some of our other acquisitions were more of a turnaround. Some of our other acquisitions needed to be fixed, and this was not a situation. It was a real high-quality company and be able to bring that in. I will say anything we do transformational in the future is going to have to accelerate our growth further. I mean it's important. We're not going to do a turnaround in the future. We're not going to do anything that would bring a natural headwind to our growth rate. We're not going to do anything that's not going to be able to accelerate margins from where we are. And obviously, it's got to be within the financial services ecosystem and bring us scale in a way that allows us to further innovate with many of the things we've talked about on this call. But I think in the future, we'll certainly do something. We've got some work on our balance sheet. We've got some debt we still want to pay down, get our balance sheet reloaded. I think we've always talked about that 2.7x, 2.8x kind of leverage ratio. And so -- but as we look at that, certainly, we'd prefer to invest in things that are going to accelerate growth. Obviously, we had always thought of share buybacks.

Got it. Okay. Well, I think we're about out of time. It was a great pleasure. Gentlemen, thanks so much for joining today.

Thanks, Ramsey.

Thanks a lot. Great.

Thank you.

Thank you.

You too. Bye-bye.

Goodbye.