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

Welcome back to Evercore ISI's Payments and Fintech Innovators Forum. I'm David Togut, a research, payments and processor stocks for Evercore ISI. Delighted to introduce FIS. Woody Woodall, Chief Financial Officer; and Nate Rozof, Head of Investor Relations. Welcome, and thanks so much for being with us here today, Woody and Nate.

Absolutely. Thank you, David, for having us. Really appreciate it.

I hear you have some good news to share today, Woody.

Yes, I'm taking a lap for Mr. Norcross today, who is a new grandfather today. So wishing he and his new baby granddaughter congratulations today.

Well, yes, please pass along my congratulations as well to Gary. That's terrific news.

Certainly. Certainly, I will.

So you're more than 2 years ahead of schedule on the Worldpay synergy attainment, and you've recently guided to 2021 exit rates on Worldpay revenue run rate synergies of $400 million and $500 million on operating expense savings run rate. What are the biggest drivers of incremental revenue and operating expense synergies this year? What could potentially drive outperformance versus your targets?

Yes, David, thank you. We're really pleased with where we are on the integration process so far. We exited 2020 at $200 million of run rate revenue synergies. That was about $100 million of the original plan. We anticipate exiting 2021 at $200 million on the revenue synergies, significantly ahead of plan on the time line. I would tell you, driven by a number of things that we've been talking about, including Premium Payback, continued geographic expansion and cross-sell wins. If you think about Premium Payback, we had 7 large merchant Premium Payback deals that we've won. That would include names like Shell, PayPal, Walgreens, CVS, Giant Eagle, Dollar General, a number of big wins on that front. We've also had 2 large issuer Premium Payback cross-sell wins, including Citibank and co-op and continue to be very excited about opportunities to generate further revenue synergies as well. We've also got our bank partner wins, and our geographic expansion has been driving revenue synergies. And we continue to see authorization rates go up within e-commerce, and that's been evidenced by the highest authorization rate win under The Strawhecker Group just announced a few weeks ago. So feeling really good about where we are on the revenue synergies and our ability to outpace there. On the cost synergies, yes, we did increase it from $400 million of OpEx to $500 million of OpEx run rate savings by the end of 2021, very ahead of pace overall on the OpEx synergies. Those continue to be things like facilities consolidation and some either heavier lifting on the operating side, some of the back-office integration and some of the operating layer integration that we continue to work on. There'll continue to be some synergies that trickle in, but we're getting closer on the cost side. But again, very pleased on where we're at with the revenue side and anticipate continuing to be able to drive that number up.

Since we're on the cost savings side, you recently announced a very large refinancing. Can you quantify for us what the annual cost savings might be from the refinancing of your debt?

Yes. We did just finish a refinancing and are in the process of a tender offer right now. It won't be completed until a little later this week or this month. Ultimately, there's a good bit of savings there, David. But I don't want to give you the exact dollar amount until we complete the tender offer. And then we could come back on the first quarter call and talk about those savings. The new debt was issued at about 1.5%. We issued a number of different maturities from 2 to 20. I feel really good about the extension of the maturity profile as well, about a year. All at the same time being a leverage-neutral transaction, still getting back to our overall leverage targets that we've been talking about of sub-3x by the end of 2021. But we'll come back on the first quarter call and give you some of the specific dollar savings, but there's certainly dollar savings in there. And then the second item around that is within the $6.20 to $6.40 of earnings per share guidance that we gave back in February, these cost savings were not in that guide. They'll be incremental.

Got it. You closed 2020 with 7% backlog growth of $22 billion, and that included 8% backlog growth in bank solutions. Based on that, you've guided to 2021 organic revenue growth of 8% to 9%, which is the high end of the preliminary outlook that you gave on the third quarter call last year. How good is your line of sight to 8% to 9% organic revenue growth for this year? And what factors could drive variance, either up or down, from your expectations?

Yes. Thanks, David. I think you're right. When -- we're trying to reestablish guidance this year after going back through COVID in 2020 and pulling guidance. We wanted to provide guidance that we had a high degree of confidence in achieving. When you think about things that could help you along that, incremental sales opportunities, obviously, continue to help you in the current year. Conversions themselves and making sure the conversions of that backlog, the conversions of those customers to live where we can start billing and collecting the revenue, are clearly important there. If you think about the 3 different segments, obviously, banking has the highest degree of visibility based on the amount of recurring revenue growth and the history we have with banking and really around the conversion process, which is the biggest component of in-year revenue growth is the conversion of the backlog. Capital markets would be behind that with roughly 70% recurring revenue. And an increasing amount of SaaS-based revenue and backlog revenue, where about 26% of the new sales in 2020 were associated with SaaS-based sales and gives us higher visibility into that growth. So very high visibility into both banking and cap markets. Merchant, probably a little less visibility, just given we're in a rebound here and a reopening. We're seeing some improvement, obviously, into the first quarter compared to the fourth quarter. We're seeing some lapping impact already over travel and airlines, where we saw some of that impact really starting in January and February of 2020 so actually lapping that. So we're getting some benefit from a growth perspective on that front. And continue to see the vaccine rollouts going positively. Continue to see reopening announcements almost every day at this point. So feeling pretty optimistic about where we are. But that one has probably the lowest level of visibility really generated around COVID uncertainty out there.

Many years ago, we started to discuss the potential for top 20 U.S. banks to outsource their core processing. And just in the past 5 quarters, 5 top 30 banks have done that, including a top 10 bank. Do you see more top 10 or top 20 banks outsourcing core processing this year? And how have structural changes brought about by COVID affected your Bank Solutions pipeline?

Yes. It's a great question. I think the answer is yes. We continue to see very strong demand even throughout the pandemic as banks continue to look for ways to improve their operations, their efficiency and to drive their cost down long term. As you know, the banking backlog is actually up 8% compared to the consolidated backlog growth of 7%. Our banking pipeline is up 40% and really driven by a pipeline of what we call mega deals, up about 70%. So yes, the demand is there. Yes, we would anticipate, in pretty short order, announcing another large win, another top 25-type win in the near term here on the modern banking platform. The consumers are expecting a seamless mobile and digital experience. They continue to need more and more technology to have that experience be smoother and friction -- reduced from a friction perspective as well as trying to keep up competitively with some of the largest institutions around. Banks, particularly the banks from #5 to #125, are going to continue to need to upgrade their technology and replace their existing in-house software over time, utilizing cloud-based and cloud-native technology, digital-first thinking and moving towards faster payments, real-time, all those things that you've been hearing in the market for a number of years, making it more and more difficult for them to lean on their old legacy technology, and we're reaping the benefits of that right now.

In Evercore ISI's 2021 bank tech outlook, we surveyed 74 bank and credit union CEOs, CFOs and Chief Technology Officers, including 21 FIS customers. On the whole, these bank executives expect their IT budget growth to accelerate to 5% this year from 4.4% in 2020. What's your longer-term outlook for bank IT budget growth 2022, 2023? And how do you see banking solutions performing relative to longer-term bank IT budget growth?

Yes. It's a great question, David. I would tell you, we are seeing the same information, and it aligns with our views on bank spend. We believe that higher level of spending will continue. It will be necessary for them to continue to improve that end-user customer experience and that digital-first experience we've been talking about. We think it's really the beginning of a decade-long upgrade cycle here. When you think about that 5%, you really peel it back, that 5% encompasses their entire spend. If you peel it back and look at where they're spending the dollars on digital and new technology, it's a much larger percentage of the total dollars than what they're spending on legacy and all, call it, keep the lights on spend in that front. So just like FIS, we're getting an incrementally larger share of the bank IT spend because they're spending it on new tech. They're spending it on digital. They're spending it on modern banking platform. They're spending it on digital one, payments one. They're obviously driving that dollar towards the new and cutting-edge type experience and driving dollars away from the legacy spend. And we're taking advantage of that. And that's one of the reasons we feel great about the investments we've made over the last 5 years in both infrastructure and applications. It's what gives us confidence into continuing to see sales growth, sales execution that's driving into accelerating revenue growth. So if you say bank spend is going to be 5% for the next few years, we're going to be 2, 3 points ahead of that over the next several years as we're going to be able to outpace overall spend by taking incremental share of their spend and providing these new digital capabilities, these new more modern platforms that we've been working on for a number of years. And you're seeing that in our backlog growth, and you've seen it in our revenue growth. So feeling really good about watching that survey tick up a little bit. Again, peeling it back, you probably get more color around where they're spending it is where we've been investing for a number of years now.

Just as a related question, we've seen interest rates increase pretty substantially in the last few months from, call it, 70 basis points on the 10-year treasury to just over 150 today. Does this higher yield curve, expanding net interest margin for banks perhaps lead to a greater appetite for spending on IT transformation?

We've gotten this question a lot, David. Really, we got this question a lot over the years as you saw rates continuing to come down, but banks not cutting their spend significantly. So while you might see some level of increased spend, I think it's going to be a marked difference. Based on the level of rate moves that we've seen so far, I don't believe it would be a marked difference at this point. If you were to continue to see rates rise up over the next year, 2 years, 3 years, et cetera, you could potentially see them spend some more. But just conversely, as we saw rates come down for a number of years, we didn't see a significant shift in bank tech spend. But you could be seeing a portion of this increase, the 60-basis-point increase in your survey, for example, could be a point of view around where they see rates going. I would tell you, at this point, we haven't seen our bank customers really driving up their capital budgets as it relates to rates at this point. But that could change over time. The increase in the rates has been relatively recent, as you know.

Understood. The #1 investor question in payments right now is whether the best positioned omnichannel payment companies, with origins at the physical point-of-sale, can generate attractive growth if the secular shift toward e-commerce continues to accelerate as we exit the COVID environment. Does FIS Merchant Solutions have enough e-commerce assets, or do you need to expand your e-commerce presence through acquisitions?

Yes. I think we feel really good about the strength of not only our global e-commerce business, but also our integrated payments and our omnichannel capabilities, all where we believe we've got significant advantage in the marketplace. The market is pretty fragmented right now and consolidating. And as the -- our ability to continue to invest at scale in this is really important. We compete with a large number of domestic and global providers. And most of them can't match our global reach, our innovation and the amount of money we're investing in these tailored solutions for our customers. We think we're best positioned for the digital economy. E-commerce continues to drive outsized growth rates in our volume when you pull travel and airlines back, which is about a 32% increase year-over-year sans travel and airlines. But again, we think we're very well positioned in e-comm based on that continued growth that we're seeing in volumes, the global reach, the amount of scale that we have as well as those auth rates we talked about earlier. Having the best auth rates in the industry is a leading item when you make your pitch to the potential customer as to whether it's -- which way you want to go with regard to e-comm. And obviously, that's been validated through that strong intergroup survey that we talked about a little earlier. So we feel very good about our ability to continue to drive e-commerce growth being a long-term, high-growth asset for us. Again, it was one of the -- it was the crown jewel in the Worldpay transaction that we looked at. And you think about what our line of sight is to around this mid- to high-teens growth, we feel pretty good about it in terms of volume growth around the networks, we think are going to be kind of high single digit. And then we're going to get some rebound effect as we see reopenings come over the course of the year.

Do you think you can outgrow the networks in terms of payment volume growth as travel comes back?

I would tell you, because of the broad nature and the number of verticals that we have, typically, as we saw over the course of 2020 and even before, our overall volume growth has generally been in line with the networks. Obviously, the revenue mix has been an impact for us in 2020, where we saw volume growth generally at the network level, but the revenue growth was below. Conversely, while we anticipate kind of high single-digit volume growth in 2021, we're looking at significantly higher revenue opportunity as we see those yields coming back as businesses reopens, travel starts again and restaurants reopen, et cetera.

Great. We have some questions coming in from investors. I just want to ask you a capital allocation question first because you recently increased your share repurchase authorization by 100 million shares, which is 16% of your outstanding stock, and you committed to 10% to 15% dividend growth. Given the large authorization, how aggressive do you want to be on the buyback at current prices? And how does this share repurchase authorization and the share repurchase opportunity that you have today compare to others that you've had in the past?

Yes. Taking the second part of that question first, over my 10 years or so here, we bought back about 40 million shares at an average price of about $72 a share. So we think we've done a decent job of allocating capital in the right way in terms of mixing M&A and share buyback in certain instances and certain situations in the market. Our previous share repurchase authorization expired as of the end of 2020. So I went to the Board in the January time frame and asked them to up the share repurchase authorization. I wanted to have a good bit of flexibility over the next few years. As we are getting our leverage back to the zone we talked about, we should end up at sub-3x leverage by the end of 2021. That gives us a lot of firepower over the next few years to buy some shares back to the extent we don't see M&A opportunities in the market that are reasonable from a price perspective or fit our needs from a strategic perspective. So we thought that was important. Obviously, we also mentioned it in the press release of the share repurchase authorization and in my prepared remarks during the fourth quarter conference call, we believe our shares are currently trading significantly below intrinsic value and obviously gives us an opportunity to repurchase at what we believe are good prices.

Got it. But your guidance for this year doesn't include material share repurchase, correct?

The $6.20 to $6.40 did not include share repurchase nor the interest rate savings we've been talking about, neither one.

Great. Let me just move on to some questions because we have a few coming in. Yes. So another question on capital allocation, which is, what was the rationale behind the 100 million share repurchase as opposed to another number? In other words, is there signaling intended there? Or is that more just a view that the stock is deeply undervalued? And then if you could kind of compare your preference for buybacks versus M&A at current prices?

Yes, it's a good question. Over the past 10 years, we probably did 3 different share repurchase authorizations. We put them out there. We bought some shares back. They expired. We put a new one out there. We bought some shares back. They expired. What we thought about at this point in time is a couple of things. One, we're going to generate a significant amount of free cash flow. 25% to 27% of revenue from a free cash flow perspective is $3.5 billion or more in free cash flow. That would give us a lot of firepower once our leverage is where it needs to be to potentially provide M&A activity or buy back shares. So we certainly wanted to have the ability to do without having to go back every couple of years to the Board to re-up the authorization. It's certainly trying to be somewhat of a signal that we want to be in market at these prices to buy shares back, given where they're at and where our internal modeling looks like. So those 2 components together, David, were the primary reason for the size and really the absence of an expiration date on the share repurchase authorization.

Just as a related question, what are your thoughts on potential M&A opportunities? And more broadly, are there certain areas of your business where you want to add capability?

Yes. It's another good question. We try to be disciplined purchasers. I think we've done a decent job of that over the years. Most people remember the large strategic deals that we've done, thinking Metavante, SunGard, Worldpay. We don't talk as much about the other 2 dozen that we did over the last decade as well, doing some tuck-ins in the interim time frame. That said, in the marketplace right now, we think asset prices are pretty high. Also, we believe our stock is well below its intrinsic value. So a combination of those 2 really sort of pushes me to share buyback in the short term as probably the best use of excess free cash flow that I can see right now. So that's why we're in the market.

Got it. Question on the conversion of backlog to revenue in 2021. Is there any reason why that would be significantly different from what we saw in 2020?

Yes. I don't think so. What we've talked about before, particularly on some of these MBP wins that we've seen, it took about a year to get the transaction signed up. It's taken about a year to get them converted. A number of the transactions that we signed up in the fourth quarter of '19, we anticipated getting them live early in 2021. We've got 3 live right now. We've got others that will come live over the course of the year. We've talked about $100 million of incremental revenue just from the MBP deposits from the customers that we're converting this year and getting online. So no, I don't think we're looking at a significant difference in the cadence around that. Execution on the conversions is key, as we've talked about. Feeling really good about being able to get 3 live and actually get them into billing and collection at this point in time. And then we'll continue to add on capabilities as we've talked about, cross-sell into those relationships as we've talked about, and then get some of the other wins that we've talked about on live as well.

Got it. Question on the merchant solutions business. If merchant revenue was flat in the first quarter, looking at your full year merchant guide of mid- to high-teens, even if merchant grows 25% in the second quarter, that implies second half is mid- to high-teens revenue growth. Is that the right way to think about it?

Yes. I think he's thinking about it. He's just running a quarterly model. So you're exactly right. You're going to see outsized growth in Q2, as that was our most difficult quarter last year and be our easiest comp this year. But you also saw third and fourth quarter that, from a comp perspective, will be relatively easy this year. But you're right. You're looking at, let's call it, flattish to slight growth in the first quarter, outsized growth in Q2. And then the balance of Q3 and Q4 to gets you to that mid- to high teens we've been talking about.

Earlier, Woody, you indicated that you were seeing some pickup in some of your verticals already this quarter. Is that largely in line with your expectations?

Yes. So far, so good. We're through February right now and are on line with plan. So feeling pretty good about where we're at so far. Obviously, early in the year, David, as you know, but certainly feeling good about where we're at right now in terms of how we modeled 2021 from a planning perspective. We just need to continue to see vaccines roll out and continue to see, generally, retail, small business, restaurant, travel, some of these other things start to return over the course of '21.

Could you characterize the total revenue opportunity at scale of MBP? When you look at $100 million that you've got -- $100 million incremental revenue that you're guiding for from MBP this year, how should we think about what this product might ultimately generate over the next few years?

Yes, that's a great question. We're not going to size the specific dollars on it because we think it can grow and be a significant component of our overall revenue over the next several years. Think about it from a couple of points of color. First, the thing that's in market today is deposits only. As you know, we tend to provide every capability with our core banking systems that an institution would need, whether that be the deposit side of the house; whether that be the lending side of the house, which we talked a little bit about; or whether it be the various touch points or channels that a bank might utilize to interact with their end-user consumers. Right now, MBP is only deposits. So what we've got in that $100 million of revenue is really connected to some friends and family on deposits that are live as well as some additional rollouts of conversions that will happen over the course of the year. Then you're going to annualize that to a number significantly larger than $100 million. And then obviously, we believe we're selling MBP not just on the deposit side, but on the deposits, the long-term architecture, the lending capabilities that will continue to roll out. We dropped our first code on lending in the fourth quarter of 2020. That code will continue to be developed and be generally available later this year, and we anticipate cross-selling that into the customer base as well. As you remember, our business model a lot is to get that incremental first product in there and then cross-sell and up-sell other capabilities over time. And MBP has got probably 3 to 4 years of incremental functionality build-out and we believe has probably a decade of growth for us as we continue to see more and more of the larger institutions take it on as part of their transition program.

FIS is selling bullets to the war, essentially helping banks compete more effectively against a number of companies that want to disrupt them. How do you think about new product rollout to help some of your banks compete against some of these fintechs? For example, when you look at PayPal, PayPal with Venmo and the PayPal wallet, which they want to build into a super app, Square with Cash App, is there a road map with MBP such that you're going to give these banks a lot more product functionality to kind of succeed and gain customers versus some of these fintechs?

Yes. It's been a big part of our model for a long time, David, as you know, is where the demand is for the institutions, that's where we build and try to help them compete in the marketplace. To the extent they are feeling that as a significant risk from a long-term competitive position or if they feel like that's an offering they feel like they need to make -- to get differentiated in their own customer bases today, that's where we're going to spend our innovation dollars as well. A lot of our development is connected into surveys, discussions, interviews, interactions with our existing client base, thousands of institutions in the U.S. and around the world that we talk to on a daily basis about where they're headed, where their minds are, where they think things are going and what kind of things they need from us that we can tailor our development to meet their demand. So yes, I think is the short answer with the color around it. We're happy to provide any of those war chest needs that those banks want and we'll continue to develop where that demand curve is.

Great. A couple more questions coming in. One related to MBP. Are there any cores that you need to wind down to make way for MBP? In other words, is there any technology that you're internally sunsetting? And/or the related question is probably, who are you taking business from? Is this all taking it from an internal IT department at the bank? Or are you displacing other competitors?

Yes. I think you got 2 different flavors of a similar question. We will see a number of our cores, over time, move away. We'll migrate those customers. We're behind the scenes. It will feel like a very seamless transaction. Obviously, not willing to put any of those customers in play from a sunsetting perspective, but we will migrate those customers long term to what I believe is probably down to 2, maybe 3 quarters long term. Gary would say 2, I'd probably say 3, just being a little bit of a cynic on it. But we'll probably reduce our cores from where we are today significantly over the next 5 years. I also believe that the cloud-native architecture of MBP will move down market as well. We've seen really, really strong success in really the larger FI market, but believe we can move down market with it as well over time. But we to continue to feast on the market momentum that we have in the large bank space right now. But yes, it will reduce our overall cost of operation and certainly reduce capital long term in terms of some of the older technologies and platforms that we have in market today.

You called out 8% of revenue on CapEx recently. And I know -- and this is obviously pre-Worldpay, your -- I think your goal a few years back when you obviously were growing revenue slower at 4%, was to bring capital intensity down. What's the road map for capital intensity over the next couple 3 years? Can you get that down to 7% or 6% of revenue?

Yes. I think it depends on where we're seeing revenue growth, right? David, when we were talking about reducing CapEx a few years ago as we got over to the data center consolidation, for example, our revenue growth rate was a little lower. We're in kind of a low single-digit in banking, for example. If we can continue to drive banking in mid- to high single digits, I'm going to continue to invest in that demand and in that market opportunity. So probably going to continue to see it at higher levels or at these existing levels for the next few years. And then we'll see how things go, call it, 3 years from now and kind of look at where we're at in our development stack and our development cycle. Are we able to consolidate some of the older platforms down and reduce capital from that perspective. But to the extent the market still demands new and innovative technology, I'm going to continue to invest in it if I can keep consolidated growth of, call it, 7% to 9% for the next 3 to 4 years.

Got it. When does D&A start to come down following new banking wins converting to revenue?

Yes. I think a combination of the Worldpay transaction, where we wrote off a lot of the assets; seeing D&A kind of rise up. It should align with CapEx spending over time. Probably takes a couple of years. We saw a step-up in 2021, probably looking at another smaller step-up in 2022. And then you start to see it to flatten out and then level off -- or flatten out and then start to reduce from there.

How should investors get comfortable with the spread of revenue versus volume growth in the merchant solutions business in the last quarter? And beyond short-term areas of pressure, are there any secular drivers of that spread between payment volume growth and revenue growth?

Yes. It's really around the mix, and it was certainly driven by shutdowns and lockdowns. You saw the widest spread in Q2 when lockdowns were the heaviest. You saw that narrow a decent amount in the third quarter as we started to see some reopenings. As we saw lockdowns get heavier again in fourth quarter, you saw the spread increase again. We're certainly starting to see things reopening right now and lockdowns getting reduced. So we're anticipating that to subside a decent amount in the first quarter and are seeing that already. And then obviously looking for Q2, 3 and 4, and actually to invert and be the other direction outsized or in excess of our volume growth.

As the U.K. reopens, and clearly, heritage Worldpay, pre the Vantiv merger was mostly U.K. Is there any callout in terms of revenue yields in the U.K.? As U.K. reopens, should we expect a significant change in revenue yields in merchant solutions?

Absolutely. I mean, it's aligned with shutdowns in other areas, right, where people -- if they're moving away from going to the grocery store, which has some of the lowest yields for us, and are moving back into restaurants or pubs, which have some of the highest yields for us, as well as small business and retail, with very high yields, as well as some travel, right? Travel is probably some of our higher yields and are certainly our highest yields within e-comm. Obviously, we believe reductions in restrictions and reductions in lockdowns will improve yield significantly. That's how we've modeled 2021.

On travel, are there any specific call-outs in terms of are you overweight domestic versus cross-border when you look at the profile of Worldpay?

Yes. I wouldn't say it's a heavy overweight one way or another. I think the long-haul, cross-border yields are a little better. No doubt about that. We're already starting to see some of the lapping effect in terms of comps getting easier. January of 2020, we started to see some impact on travel as we called out on the call last year. We saw it further in February. So the comps are getting a little easier as we go along. We don't see travel coming back 100% in 2021. We've got that modeled at a lower rate than 100% of pre-COVID levels. We do anticipate at some point in 2022, you're getting back to more normalized travel and/or at least your comps are pretty similar at that point.

Understood. Well, Woody, thanks so much for being with us here today. Greatly appreciate your time and insights as always. Nate, thanks so much again to you, and please convey our congratulations to Gary on becoming grandfather.

We certainly will. Thanks, David, for the time, and appreciate the time from everybody. Have a good day.

Thanks. You, too.