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

Good morning, everyone. This is Tien-Tsin Huang. I'm the payments and IT services analyst at JPMorgan, and welcome to the FIS session. So really excited to have the FIS team with us, Woody Woodall, CFO; and of course, Nate Rozof, EVP Head of Corporate Finance. We're going to do a fireside chat. We'll take questions from the ask a question portal, if you have any. I'll be tracking that as we go along. But otherwise, we'll get right back into it. But Nate, Woody, great to see you guys. Hope everyone is well.

You, too, Tien-Tsin. Thank you for having us this morning. It's good to see you as well.

No, it's been a while. It's always something I look forward to in terms of catching up with you.

And I know you're getting a lot of questions, Woody and Nate, around macro and volume. But I actually want to start a little bit differently, if you don't mind, and start with your broader tech stack. And the light's just cut off. Let me move. I see Nate laughing because that happened to us last time. So yes, the broader tech stack, just catch us up. How much time and money has FIS spent here to modernize some of your tech platforms? How much more is there to do? What kind of ROI do you expect, Woody? Because I know there's been a lot of effort here over the last few years to get to this point. So why don't you start with that?

Yes. I think it's a great spot to start. It's something we've been focused on for quite a while. When Gary became CEO in 2015, he and I sat down and had a discussion around -- we're going to need to invest and modernize to remain competitive for the next decade. And since that time, I think we've spent a little over $5 billion on technology and development since 2015, really recognizing the changing dynamics in the marketplace that we were going to have to pivot and upscale our technology to be able to compete on a go forward basis. We think we are positioned very well at this point because of those investments that we've been making for a number of years, starting with the data center consolidation that we completed, moving to some of the more modern application stacks between modern banking platform, Payments One, Digital One, all the things that we've been producing in the marketplace and getting in market over the last few years and that have had significant adoption, if you will, a lot of access to it, a lot of activity around it, a lot of sales and backlog being driven as we've signed on clients. And now you're seeing that generate and turn into revenues, we're seeing banking accelerate our growth. So a bit of a journey for us to try to get there, but we're seeing it pay off in revenue growth. You've been seeing it flow through our financials at about 8% to 9% of revenue in terms of CapEx and development. We're going to continue to spend that as long as we're continuing to see accelerated revenue growth, and that's really kind of the FIS story there. At the same time, Worldpay was also investing in next-generation technology between the new acquiring platform and Access Worldpay, which we've completed the NAP platform at this point and Access Worldpay is up and running and processing a lot of transactions at this point. So we feel really good about the decisions that we made years and years ago and how we're positioned now with what we believe are leading capabilities in market, at scale that we can push through our global distribution channel and drive very good returns. If you think about sort of ROIs or returns on these, we're thinking a little bit more about it in terms of what can help us sustain mid-teens earnings growth for a long period to come. And that's really what we're trying to look at from a return or hurdle rate, Tien-Tsin.

Okay. No, it's very clear. So before we get into some of those products and updates, let's just get it out the way and just give us a quick update on the macro recovery. Where do you see? Where are you optimistic? Where do you feel a little more cautious in terms of where we are in the recovery, Woody?

Yes. I would tell you, we are seeing a solid recovery as we anticipated. And we talked about back in early May when we outlined the first quarter results, we saw 40% growth in merchant in April. We continue to see those trends flowing into May and believe they will continue through the second, third and fourth quarter from a recovery perspective. There are certain areas that are better than others. Certain geos, obviously, have seen a turn for the worse like India, for example. But we have seen pubs in some of the U.K. begin to reopen, which is positive. So there's some different verticals that are better than others. Obviously, we've seen travel a little slower, U.S. domestic travel has come back pretty well. But cross-border international travel is still very muted compared to where we were before. E-commerce tends to be very strong still. I think that's going to continue to drive growth for us. We've seen very good volume and sales activity as well as revenue activity in the e-commerce arena for us. So we think about that is how we think about it. We look at a lot of the different economic projections that are out there, including your firms, and trying to benchmark against that. But I would tell you, we're generally in line, if not slightly above our expectation of macro return.

Okay. No, that's great. So let's dig into merchant a little bit. You mentioned the 40-plus percent growth. So talk us through the second quarter guide on merchant with regards to the volume, of course, yield and tax shift. I think you've really helped educate us on how yields really got impacted by the pandemic. So what about now? It feels like it's starting to reverse. So can you just kind of just like...

Yes. I think that's right. As we talked about it last year, while that was impacting us and being a bit of a headwind, we highlighted that on the first quarter call and continue to highlight that in discussions that yield will be a tailwind for the remainder of the year. We've guided to 30% to 35% revenue growth for Q2. The easiest way to kind of break that down or think about it is a volume assumption of, call it, 20% to 25%, a yield benefit of roughly 10 points, and that is inclusive of the tax benefit or tax shift of, call it, 3% to 4%. So that's kind of how we landed on the 30% to 35% in the second quarter. April volumes, as we discussed, were about 40%, consistent with our full year guide for the quarter. We continue to see strong volume growth in May as well, but it's roughly in line with the guidance that we've put out a few weeks ago. The yield improvement is really driven by increased small business activity, restaurants, small business, small retailers, as COVID restrictions are lifted and we roll back and those businesses continue to reopen. Travel and airlines continues to be a headwind, as we've talked about before. Really thinking that acceleration of growth won't be until later in the year and even flowing further into 2022.

Yes. It feels like yields -- again, this was the big learning for all of us. It feels like yields could have some positive tailwind for some time beyond '21. If this -- we're seeing SMBs and reopenings happening now, which, of course, has a higher yield, but if travel then comes back thereafter, I think that could be a lift as well. Is that a fair way to think about it, Woody?

I think that's exactly right. And that was kind of the point on the 2022 in travel. Some of our cross-border travel is on some of our higher-yielding e-comm activity. And as it comes back, we do believe that, that yield benefit will continue to flow into 2022.

Yes. Because I think Nate's been telling us, right, that a lot of that travel is cross-border. So that is naturally yielding. So let's get into the merchant tech platform, if you don't mind. Why is the SNAP migration, which you called out as being complete, why is that a big deal? How is that going to change your go-to-market and your performance?

Yes. It's a big deal for a few reasons. We've got the newest payment platform in the market today. It's built on current edge architecture, leading technology. It allows us to be more nimble and innovate for our clients at speed. It leverages real-time transaction processing architecture to move sort of at the speed of the market today, where the needs are versus the old batch. It also allows our clients to support more modern customer experiences in real time. Those are all helpful in and of itself. It's a truly global platform, supporting clients' geo expansion and ambitions as they want to maximize their competitive positions in the international markets. And it allows us to be more nimble and quick in terms of us to offer new innovation, new capabilities. Think about, as an example, FX-as-a-service or other ideas that we can drive into the market where the demand is and doing in a much faster basis for our clients on the new platform. And then lastly, I think it helps from reduced costs, right? It allows them to enhance their fraud capabilities. Security and regulatory compliance is easier and better through better controls and more robust integration. So across the board, it's just a better answer in terms of cutting-edge technology, best in market and will continue to let us differentiate in the market and compete. So we're really excited about it. It's been a long slug. Worldpay has been working on it for a while. Then Vantiv combined with Worldpay continued to work on it. And then we completed the migration of the final customer on the legacy platform in the first quarter. So really pleased with the progress around the integration work there. And again, I think it positions us very well in the marketplace for the future.

Yes. No, that's a heavy lift to get there with the processing side, but you're also launching Access Worldpay, a modern gateway, if you will. So how does that change your competitiveness? I know this e-comm space is very focused on right now by investors.

Yes. Providing more seamless integration and easier onboarding has certainly been a point of [ contingent ] in the market. We introduced Access Worldpay, I think, in the fourth quarter, correct me if I'm wrong, Nate. And it certainly enhances our competitive position. It provides a single, simple point of integration, and it really allows for clients to onboard in a faster, easier, less friction-based way. It also helps our clients get their revenue faster with higher authorization rates. We highlighted last couple of quarters, it was recognized as having the best authorization rates by the industry from Strawhecker Group, which we thought was important to highlight for the market. As you know, in the market, differentiating with higher authorization rates is a critical component of winning, winning share and getting those deals over the line. We believe it also allows us to highlight that we can innovate at scale, seeing more and more value and volume moving across Access Worldpay and growing in an exponential basis. We moved, I think, processing a little over 1 point -- a little over 4 billion -- 4 million transactions a day at the end of the quarter, which was larger than all other -- everybody else except 2 other e-comm providers in and of itself. So really pleased with where we're seeing volumes flow there, the ability to continue to differentiate in the market and sell through a combination of Access Worldpay and the new acquiring platform. We think it just positions us very well to continue to drive market share gains and expand TAM down into some of those non-enterprise customers, but into some of the mid-tier and even smaller tier merchants over time.

Right. So ability to move down market is what Access Worldpay allows you to do. I know you've also done really well in serving really complex markets like gaming, crypto. I did want to ask about crypto. I think on the call, you called out 5x revenue growth on the crypto side. What's the -- what are you doing exactly there? Why do you get this question a lot? And what's the revenue model for FIS and crypto?

On the crypto side, from a merchant perspective, we get paid as consumers fund their crypto accounts or withdraw funds from the exchanges using a card. So to the extent they're putting funds in or pulling them out on a card, that's where we would get paid in the transaction. We're clearly the leading provider in crypto on the merchant side, serving 5 of the top 10 exchanges. We've been in crypto from the beginning and think the complexity of these transactions really help us differentiate and set ourselves apart between AML, know your customer, cross-border, fraud, all the things that go along with it. And then the extreme activity in the crypto market has been very advantageous for us as we've seen volume flowing through to revenue and driving some growth there in the first quarter and in the second quarter as we continue to see a lot of activity in the crypto market.

Yes. No, I bet that's the case. So just to wrap it up on merchant, I know the bookings, the sales, the new sales numbers have been big. I think I wrote down, what, 76% growth in TCV in the first quarter. You added 300 salespeople as well. So it does feel like you're leaning hard against some of these new products. What's the impact to the P&L here, both from an investment standpoint and sort of back to return [indiscernible]?

We really started the investment cycle last year when we outlined pre-pandemic that we were investing in the business to drive incremental growth. The salespeople are part of that continued investment that we made throughout 2020. We believe it's going to continue to drive growth in omni. In e-comm, we're continuing to see significant demand for e-comm in the market. We believe we're winning share there, and it's driving revenue growth for us. The NAP, the Access Worldpay platforms are really driving demand, and we believe introducing these incremental sales efforts can help us ultimately drive faster revenue growth and continue to gain enterprise e-commerce share while it's launching hot demand right now. So feeling really good about the investments that we've made. We're seeing the growth come back on a consolidated basis and within merchant, obviously, seeing it come back from a rebound perspective. I think that will help us continue to pace revenue growth in excess of just general volumes for the next several years.

Okay. Good. I think that's a good summary of merchant. So let's switch to banking, which is an important part of our investment thesis behind FIS. What drove the revenue acceleration in Q1? Can we expect 6% or better growth from here for the rest of the year within banking?

Yes. Banking started out the year really strong with accelerated 6% organic, coming off of 5% in the fourth quarter last year. We've been highlighting this and leaning into it, as you know, highlighting sales growth, highlighting backlog growth, highlighting some of our large MBP wins and Payment One wins driving this growth. We believe that banking will continue to be very strong over the course of the year with 6% being the low watermark for the year. So we anticipate it to continue to accelerate, supported by backlog, by continued sales and by ramping and converting those sales into actual revenue streams for us as we've done over the course of the year. We've been highlighting some of the conversions, too. So yes, we feel really good about banking and where it's at right now. I think your thesis is sound. The investments that we've made in cloud and data center consolidation, in the applications around modern banking platform, Payments One, continue to expect mid- to high single digits in terms of revenue growth for the remainder of the year and beyond. And I've been very excited about and very pleased with the banking growth over the course of the last few quarters.

Good, good. So I think TCV was up 17% in Q1 against a pretty big backlog already in the prior year. So who are you winning against? What are you replacing? Can you just give us a sense of what's going on, on the ground with your clients?

Yes. We believe we're the only person positioned well as the cloud-native provider in these markets. We believe our history and our reputation of serving the larger end of the financial institution market is going to allow us to take advantage and be best positioned through what we believe is a longer upgrade cycle that's beginning across the banking space. Our product offering, the nimbleness, the cloud-native architecture, the new technology architecture that's out there is winning in the marketplace. And then that, along with an established track record and the innovation within the product sets, is allowing us to win. You've seen very strong wins there. That's really been on the deposit side that we're driving revenues on. The lending and other capabilities will come online over time. And we're winning against really large in-house development or in-house deployments, as we've talked about before, where -- that's our largest competition in this space, and we feel really good about it. The implementations have gone well. And probably, with the new architecture going faster than probably legacy conversions have gone in the past, and we think it's just a really solid proof point to drive higher growth within the banking segment for a number of years on a go-forward basis.

Okay. Good. So just digging in then on the modern banking platform, Woody and Nate. Is there a sweet spot or a specific size of client that, that's well suited for? I get this question a lot. Can you serve the entire spectrum of small, mid and large? And also, can you serve some of the fintechs and neobanks?

Yes. We certainly started where our sweet spot was, right, in some of the larger, more complex, but it obviously serves some of the neo banks as well. We serve Marcus from Goldman. We serve Acorns on the platform. We continue to win these larger banks. They help us move the needle faster, but we'll be able to scale MBP downmarket as well to serve regional and smaller community banks over time. And in the long term, we'll end up with one platform in market, MBP, over time. But obviously, it should be able to service all ends of the spectrum. We started with deposits. We started with our sweet spot, which are the larger institutions. But yes, it can serve neobanks, fintechs as well as some of the smaller regional banks and believe we'll continue to gain share there over time.

Okay. And then on the Payments One front with card processing, same sort of question. And is that more of a new logo sort of focus in terms of wins? Or do you go into your back book and try and convert existing?

It's a combo. I would say, we started out with our back book and kind of converted them. We've converted over 1,000 of our existing issuer clients. If you think about it, it's really the newest and most modern card issuing platform in market, been a lot of discussion around our ability to compete in market on the issuing space. I think this is an absolute proof point, delivering a very agile, frictionless experience across all card types, whether it be debit, credit, prepaid portfolios. It also integrates our fraud, our loyalty capabilities. And we've seen very strong demand in the conversion of the back book. We've also installed roughly 300 new institutions since the launch of the solution. It's been very well received. It is moving the needle. It's what drove our issuing business or the primary driver of our issuing business to grow 10% organically in the first quarter. So it certainly allows us to be competitive in market. And we feel very good because we're a scale player in this area and can continue to drive long-term growth here. But very pleased with our issuing business growing at 10% given kind of the -- some of the dialogue that's been in the market.

Yes. Well, like I said, it seems like some of these investments that we started with are P&L. So it's good to hear that. How about -- I know there's a lot of other products. I'm sure we spend a lot of time on this, but anything else that sort of excites you or you'd call out that we should focus on? I wrote down RealNet and of course, crypto for banks I know we talked about on the merchant side. What excites you the most and why?

Yes. I think both of those are interesting and pretty exciting. From a crypto perspective, it's really allowing us to demonstrate innovation in the market, where demand is. If our bank customers want to ultimately allow their end users to access crypto, we want to be able to drive that through and into their capabilities at speed. So pleased with that. It's an offering that's in the market. Certainly, I think it could continue to grow if we see continued demand and activity in the crypto space. RealNet is also pretty interesting, Tien-Tsin, in my opinion. We talked about real-time payments a number of years ago. We really started winning share in individual geos outside the U.S. and had our platform in the U.S. RealNet really sits on top of that and more of a network of network, allowing real-time account-to-account movement across the globe, and we think this is a real opportunity for us long term. I think both are just proof points in our ability to continue to innovate and continue to compete in a pretty fast-moving market where our scale and our distribution really help us compete and feel comfortable about driving our ability to compete for the long term.

Yes. I have a question here from the audience. A couple of questions around crypto on this side of the business. Who is your -- a basically question around who's the target audience here. Is there a sweet spot on the client size wise?

Yes. This would probably be super regionals and some of the larger institutions out of the chute here for us where they're a little more open to offering crypto as a capability there. We haven't seen as much of it in the very small community banks at this point. But who knows where it will go. It's certainly been in higher demand over the last couple of quarters for sure, Tien-Tsin.

Good. And to be clear, you're not taking directional views on any of these cryptos, right, from a revenue model standpoint?

That's correct. Whatever the customer wants to offer.

Capital markets. The old SunGard business that I'm always sort of -- I'm dating myself, but just to see how well it's gone and how you've converted a lot of that to SaaS. What inning are you in that journey of -- or that game of converting the business to more of a SaaS model?

Yes. I'd say we're really pleased with what we've done with the old SunGard business in terms of really transforming it into a more recurring model. I would say at this point, we're probably in the mid-innings and we've talked about, on the earnings call, moving that to SaaS-based revenue. Our SaaS-based sales were very solid, about 60% for the quarter. There's more room to grow here. We're currently just a touch over 70%. I think it'll continue to improve from there. We think longer term, it'll look similar to the banking business where there's very little license revenue in the banking business. We think there'll be very little license revenue in this business in 3 to 5 years. It can continue to drive our visibility into that revenue stream where we can highlight what we think revenue growth can be. We've seen that move from low single digits to now we're in the low to mid-single digits. Over time, if we can continue to stitch assets together and drive growth there, we think we can drive that into mid-single digits over time and feel very good about what we've done in transforming that SunGard business, and driving capital markets is a key component of the overall growth strategy.

To get to mid-single digits or better, does it require a lot of new product enhancement or go into maybe some new tangential areas within securities processing? What's the thinking there?

I think a lot of it's around more solution selling where we've got a number of the assets that are leading in market today. It's not nearly -- our offering is not nearly as fragmented as the capital markets' competitors in the marketplace. And what we've been doing is trying to stitch together those solutions and sell them in more of a bundled fashion, and that is resonating well, allowing some benefit to the end user client, but also driving wins for us and share gains for us in the market.

Okay. No, great. So we talked about all 3 segments here. Didn't ask about margins yet. So I'll ask it sort of holistically. What does this all mean for margin? I know I get this question a lot, I'm sure you do. What are the underlying margins doing, excluding synergies? But just holistically, what does this all mean for your thinking on margin?

Yes. We've talked about that a number of times over the years when we have synergies and don't have synergies. Clearly, 2021, we've guided to margins of about 45%. That's about 250 to 300 basis points of expansion. That is driven a lot by bounce back in volumes of the higher-yielding revenues that went away in 2020. It also has some synergy benefit flowing through this year. It is offset somewhat by the unwinding of some of the short-term cost actions that we took in 2020 associated with the pandemic, primarily bonus reductions. If you get the noise out of the way, Tien-Tsin, and you think about 2022, 2023 and beyond, we think there's still operating leverage within the business and our ability to be more efficient in the back office and really believe we can drive 50 to 100 basis points in a post-synergistic world for the foreseeable future, really, again, driven by disciplined cost management and operating leverage within the business. As you know, a number of these product sets continue to come on high incremental margins or higher incremental margins driving that operating leverage to the business.

Yes. No, the operating leverage is there. So -- which is why I asked the question, and of course, just bridging that to free cash and what you're going to do with the capital. I think I wrote down here, you bought back $400 million worth the stock. I know there's a $13 billion authorization out there. What's baked in guidance for future share repurchase? How big a priority is it to buy back stock and delever?

Yes. The only thing baked in the guidance right now is the $400 million that we already executed on in Q1. We continue to look towards delevering the balance sheet below 3 turns by the end of the year but believe this would allow us some incremental free cash flow to potentially drive back through additional share repurchase or M&A. I would tell you that at these levels, we believe our shares are optimal in terms of where we would spend excess capital right now. And that robust free cash flow will continue to allow us to buy back shares if we don't see other opportunities in the marketplace from an M&A perspective or if we continue to believe our shares are intrinsically undervalued in the market right now, which is where our position is for the moment. So we think we can do all those. We can pay our dividend, get our -- keep our balance sheet very strong and continue to buy back some shares over time. So feel very good about what we can deliver on that front.

Okay. No, that's encouraging. But from a -- and I got this question, I'm sure you have, too. Just on the M&A side, getting back to M&A. And is there an appetite for doing transformational deals once you get to your target leverage? What's the thinking here? It feels like you've done a lot organically. So I don't know if that's a change in philosophy or not.

Broadly, I'd say, it's not a change in philosophy. Broadly, I would say M&A activity has been a fundamental piece of our strategy for the long term. I think we've done a decent job of being disciplined about it and not buying when things are really, really high and trying to buy things that are very good, strategic and financial fits for us, which we've done over time. Are we looking in the market? We're always looking in the market as to where activity is going on and what might help us enhance capability to push through our distribution channel. Your point is also valid. We're growing very good on an organic basis right now. We've still got some work to do on the Worldpay integration, less on the cost side as we're really getting closer on that front. Still have some revenue synergies that we're still trying to integrate and obtain. You've seen us continue to increase our revenue synergies over the course of the year. So we feel good about that. But I think M&A is always going to be a part of our overall strategy. I don't think that's changed one bit in the 14 years I've been here.

Have a question here from the audience, if you don't mind, Woody, just asking about India and your exposure to India. I know you have some processing contracts, for example, there. And I guess it's a broader question if your exposure to some of these international markets give you some pause given COVID cases being different there than here.

Yes. India for us probably is more on development and delivery, trying to see where our offshoring capabilities can continue to drive through it. Obviously, they're experiencing a really, really challenging time right now. We have not seen anything that's going to slow development or delivery right now, but they are certainly working through it, Tien-Tsin, as they deal with very difficult situations over there. From a company perspective, it's been very focused on trying to maintain employee safety and trying to help them where they can. We've sent some incremental dollars to our employee base over there to try to help them with some of the challenges that they're working through. But to date, we haven't seen anything that's going to slow any of our underlying guidance for [indiscernible].

One final question, just asking about all these new different platforms, I guess, all these different solutions you're rolling out [ in there ], labeling Payments One, et cetera. Does that change your appetite to do tuck-in acquisitions to fill in, in certain areas? I think that's the question. Talk through us...

No, I don't think so. I mean I think we've always looked at both large M&A as well as tuck-ins as part of the strategy. Capabilities that we can push through our distribution channel have been very valuable in the past to go to market faster. You're thinking a bill-versus-buy type scenario. That said, asset prices are pretty high in some of the smaller [indiscernible] fintech type companies. So again, back to that discipline. It's got to work strategically, but it also has to work financially for our shareholders. So I think it'll continue to be a part of the strategy as well. We've done a little bit of both. You've seen a few of the smaller early-stage investments that we've talked about from [ Signify ] to Flutterwave moving to Africa. So there's still some tuck-in activity going on, but it's pretty small right now. Again, very focused on driving the integration of Worldpay and getting that large acquisition right and making sure we're positioned as the rebound comes on board to drive accelerated and outsized market growth on that front. But both tuck-in and larger strategic M&A will continue to be part of our long-term strategy.

Yes. No, thanks for reminding me. I know you've done some interesting strategic investments as well, right, into some important areas. So didn't want to forget that. I'm sure it's nice to get a good look at some of these new technologies in an early stage. Last question, just for me, and we'll let you guys go. Just the classic question of just what do you think is underappreciated? I mean we talked a lot about a lot of the investments you've made from a tech standpoint to modernize -- the sales performance seems to be quite good. You're interested in buying back the stock, it sounds like, at these levels. So what do you think is maybe underappreciated?

Yes. Broadly, I think how we've repositioned capital markets for accelerating growth and sustained highly visible revenue growth for the long term, I think, is underappreciated. How we've repositioned banking to outpace the competitive set and drive accelerating growth there as we see really a longer-term cycle around some of the larger institutions. Upgrading their technology, I think, is still underappreciated, even though it's a key component of your thesis. And then our ability to continue to compete. I think people have positioned us or potentially put us in some categories that I don't believe are there. I think we're innovative. We continue to invest in new technology. We're putting new product capabilities in market, and we're doing it at scale on a global basis. And I think those things probably are a little underappreciated and our ability to compete for the long term and not just through a really heavy cycle of narrative in the marketplace but really through a cycle of pluses and minuses looking out 5 years, 10 years in your horizon and driving long-term growth at scale, with margin, generating cash flow. And I think it's one of the reasons -- historically, we've always outpaced the S&P 500. And I think that's a little underappreciated right now, at least from my perspective. And to the extent we're there, I'll continue to buy back shares when I think they're undervalued.

Well said. No, it's -- this is great. It's a fun stock to cover. And I really value having this time with you to go through the story. I think it's really efficient. So thanks for going through all of this. And hopefully, we'll see you in person very, very soon.

Great, Tien-Tsin. Thanks so much for the time. Appreciate it. And you take care and be safe.

All right. Thank you, Woody. Thank you, Nate.

Thank you.

All right. Be well, guys.