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

All right. Good morning, everyone. Why don't we get started? My name is Dave Koning. I'm a senior research analyst at Baird and very pleased to be able to introduce FIS this morning. We have CEO, Gary Norcross. We have CFO, Woody Woodall. We have Head of IR, Nate Rozof, with us today. And FIS, I think, many of you know extremely well, bastion of stability, runs bank software for many of the banks around the world and runs merchant processing for many of the big merchants and down to small merchants all across the world as well.

With that, maybe what I'll do is just kick off and just ask a little bit about recent trends. I know Visa recently put up April and May trends. I think 50% growth or so in April, 30-some percent in May. And maybe you can just kind of give a little update how you've been doing through the pandemic and more recently in Q2, if you're kind of tracking along with what some of the Visa numbers there.

Yes, Gary, I'll grab that one, if you don't mind.

Okay. Go ahead, Woody.

Yes. We outlined trends in the April time frame when we did the first quarter results. Certainly, we continue to see trends aligning with Visa's trends and the large network trends. Visa's trends, I think they put out were only U.S. only, where we put out some global trends. So if you look at it on an apples-to-apples basis, we continue to trend in line with the large network volumes. Overall, I would tell you, through May and through the first week of June, volumes are a little ahead of our expectations right now. And we continue to see that positive revenue yield as we outlined in the first quarter call, Dave. So most everything we've talked about is aligning with the networks, with the exception that we're probably trending a little favorably on volumes right now.

All right. And maybe, Gary, we could talk a little bit about just the investment community right now has worried a lot about new -- the rise in fintechs. You, if anything, seem like your business has acted even better in the last 12 months or so. It seems like your banking business has just proliferated and growing stronger. Maybe you can talk a little bit, is there a threat of fintechs? And how are you operating in the current environment? Maybe that's actually a catalyst for you.

Yes. Look, we really don't -- we don't really see the fintechs as a competitive threat at all. In fact, we are continuing to do very well. I mean, Dave, one, thank you for having us today. But as you think about it, really, I think people underestimate the strength of our technology and really our competitive boat. I mean we have the newest cloud-native software solutions in the industry. If you think about everything we've launched just in the last 18 months, you've got Modern Banking platform. You've got PaymentsOne. You got the new acquiring platform. You got Access Worldpay. You got RealNet. You got everything we're doing in crypto banking. And as you look, a lot of fintechs will claim they've got technical superiority. But if you look at what FIS has accomplished at scale, everything I just mentioned is the most modern platforms in the industry today. They're the newest products in the industry today. And even when we start seeing certain fintechs compete at the very low end, they quickly run out of sophisticated functionality. I mean a great example of that would be just how we can do SKU-level authorizations as an issuer that can improve and deny transactions based on rules within the card. If you look and start getting into the global enterprise business and solving much more complex needs, our solutions handle that complexity and scale much, much better. So we feel very good about it. You highlighted the banking business and the growth we've seen there. We are materially in a different spot with our banking business, and you'll see that grow as an upper single-digit grower for the next 5 years. And we can see that based on our pipeline, based on our sales closures, based on our backlog and based on the success of these new systems coming to market.

Great. And maybe talk a little bit about the pandemic and how you've operated through that. It seems like you're back full steam ahead right now.

Yes. Look, I mean, I think we made the decision early on that we felt like that we wanted to continue to invest through the pandemic. I mean that was very important for us. So a lot of our competitors, frankly, retrenched. They cut large programs. They cut investment. We invested all the way through the cycle. We leaned in on our synergies with the Worldpay combination. We leaned in on getting success successful products launched like MBP; like the new acquiring platform; and others that I just mentioned, PaymentsOne, Digital One, et cetera. And so because of that, we really are coming off the biggest sales year in the history of the company when you look at 2020. And that really provides us a lot of optimism as we come through 2021. You just heard Woody talk about our 2021 -- our Q2. And frankly, we're ahead of schedule where we thought we would be. We anticipated perhaps some pullback in certain areas as things started to reopen, but we've actually been very pleased all through the quarter. Our onboarding of our Modern Banking platform sales have gone very well. We talked about in the quarter of successful PaymentsOne. So there's just a lot of things to be excited about here at FIS.

Yes. Great. And If we move to one of the other just big events of the last couple of years, the Worldpay acquisition. I often think of your legacy business, your historical advice business about 2/3 the banking business and then 1/3 now is Worldpay. How has that gone? Where are the things that went better or worse than expected? And where are you today as a merger?

We couldn't be more pleased with it. I hate to say it this way, but we really haven't had negative surprises with Worldpay. We typically do -- as you go through due diligence, especially as you're starting to dig in on your revenue synergies and where you're going to see opportunities come with cross-sell and upsells to our base. But frankly, everything is not only hit as we expected, and many reasons and many examples have exceeded our expectations. And frankly, that's why you saw Woody and I both raise our overall revenue synergy guidance coming out of last quarter. If you look, and you look at our debit routing business, it exceeded our expectations. If you look at premium payback, which is really our loyalty as a service, exceeded our expectations. Our bank referral channels are way up. If you look at what we've done with data around auth and fraud, we've really just established ourselves as the highest auth rates in the industry, and there's a lot of third parties that have verified that. So even if you look at things that we got hiccup on, look at what we did with Amazon last quarter when we announced selling of the Treasury solution that's coming out of capital markets. So we're just seeing a really nice blend of the client base, and Worldpay allowed us to accelerate access to very -- expand our total addressable market in a significant way, and that's really played dividends for us. So you also look on the cost side, we always talk about that. But frankly, I think everybody's seen those numbers, and those numbers have really exceeded what we originally thought on a time frame. But once again, we really stayed focused all through 2020. We just did not want to slow down on any of our integration initiatives. And largely, I would tell you that flywheel now is really turning. And frankly, internally, we would say the Worldpay combination is really behind us. I mean we've got some execution that we've got to continue to do, but all of the big levers have really been executed on now. And now it's just -- now it's a matter of continuing to onboard new sales and continue to drive those new sales in those expanded markets.

Yes. And one of the big positives and drivers of your business over time has been M&A between Metavante and SunGard, and now Worldpay. I think everyone went probably well better even than you expected over time, right? Is that something now that we're 2 years into Worldpay, are you starting to think about again?

We -- you've known me for a long time, Dave. I mean transformational M&A has always been an important lever in our strategy. And it really has not changed. I think what people misunderstand is just how disciplined Woody and the broader executive team and our Board of Directors truly are with large-scale M&A. So you've really got to bring in an opportunity that brings us a new capability to an existing market we serve, break us into an adjacent market or ideally both. But then it goes way beyond that. The strategies have to align. A lot -- there's been a lot of history where large M&A has failed between the companies. And the reality is when I look back on those, the strategy might have been there, but the culture was not to do the integration. And the reason why we have so much success around integration is we focus on strategy. We focus on culture. We focus on the financials. I mean, early on, it's got to make financial sense for both parties. And then the big one is timing has got to work. As you mentioned, we're really coming out of the Worldpay combination. Timing would work for us. But frankly, now you look in the market, a lot of things are very pricy. And financials don't make sense to us at this point in time. And so therefore -- or you won't see something that really fits perfectly in the strategy. It doesn't accelerate our growth from here. And you're talking about a $14 billion -- approximately a $14 billion company this year that's going to grow upper single digits on an organic basis. I mean we're looking for things that accelerate us from here. So we've got to really look at all of that in a very cohesive way. But will we do something in M&A in the future? Yes. In the near term, highly unlikely, just at these valuations don't make a lot of sense.

Yes. No, that makes sense. Yes, even small acquisitions are super expensive right now, so it's hard.

Exactly. Exactly. And look, given where we are now and you look at what we've done on our capital spend, and the reason why we're rolling out so much product, I mean, you look at the banking business that's growing so well, 9% of that overall growth was generated by new products. So our ability to bring new product to market and cross-sell through our channel is phenomenal. And so as we elevate our capital investment, and you've seen that slowly increase over the years to keep ahead of where we think the market is going and where the competition is going, even small tuck-in deals, you now start evaluating, well, given our investment capability and the fact that we have 14,000 engineers in a centralized pool, we can build capability very quickly with high success. So now you've got to really -- we always look at the build-versus-buy math. But now given where we are on an efficiency standpoint and how much we've driven in the company on integration, this year, we'll approach a mid-45% EBITDA margin, I mean we're an extremely efficiently run company now with a lot of scale. And so that really -- that analysis has to come in as well.

Yes. Yes. And I guess last high-level question. Just when we think about the EPS growth model over the next 3 to 5 years, it seems pretty simple, high single-digit revenue, margin expansion and then buybacks or M&A or whatever to kind of get your mid-teens. I mean is that kind of what you're thinking?

I think that's right. Go ahead. Go ahead, Woody.

I think that's exactly right, Dave. I mean we've got a proven track record of being able to grow in the mid-teens area. We do it with 3 levers. We do it with organic revenue growth. We do it with consistent margin expansion, and then we utilize the cash generation to increment EBITDA growth with EPS growth, whether that be through accretive M&A or whether that be through share buyback or debt reduction, right? So we've done that consistently for a number of years, over a decade now. And we believe the next decade, we can continue to drive solid top line growth. You've seen us accelerate that top line growth into the higher single digits now. We'll continue to get margin expansion in a post-synergy world, call it, 50 to 100 basis points at least. And then we'll utilize cash to drive mid-teens EPS growth and feel very good about being able to do that for a number of years. It's a very consistent compounder that we believe we can do that for a long time, and we believe we've got a proven track record of doing it already.

Yes. Great. And then if we turn to banking, your banking segment is about half of revenue and probably what you've been known for, for so many years. Why is it going to grow to the upper single-digit range? For a long time, it was kind of low to mid. Is it an industry-getting-better thing? Is it an FIS-just-more-product thing? Is it a little cyclical benefit? I know there was less license fees for a little while, maybe we're getting better there. Maybe just review kind of the different trends.

Well, I definitely think the market is a tailwind. I mean if you look -- but I would also tell you, given the rapid investment we've made in new capabilities over the last 3 to 4 years, our embracement of cloud computing, our ability to launch modern banking platform. If you look at what Digital One, which is truly the only omnichannel digital experience, user experience in the market today in banking, if you look at what we're doing in Code Connect on open banking. Look at PaymentsOne, I mean it grew upper single digits last quarter alone just by taking share. So I think we timed the market very well. What people didn't realize about banking is banking was approaching really a cliff where they were going to have to make a decision to really convert off historical technologies. Even though those technologies were very functionally rich, they needed to move to a different technology platform and be able to take advantage of the digital enablement that's going on or what I like to talk about is the self-service or embedded finance that we're seeing coming. And because we anticipated that, we started building capabilities several years ago when we started embracing the cloud. We've started embracing cloud back in 2016. And now we're 80% of our computes in the cloud. So -- and if you look at it, there's just materially different type scenarios that FIS can do. One, our cost structure is the lowest in the industry. So no one can beat us on price. Our investment in technology is superior to anybody in the industry. So no one can beat us on the technology footprint where we're guaranteeing 10 minutes availability in the event of a disaster. Others are 24 hours. If you look at the cloud-native nature of our new capabilities we're bringing online, there's not a more modern application stack in the industry than that. And so all of that's been perfectly timed for an industry inflection where now, you're starting to see the largest banks in the world have to make a transformation. And we've made several announcements on that over the last several quarters where we're very consistently winning very significant core deals. And honestly, every one of those core deals, they're taking Digital One, they're taking Code Connect. In some instances, they're using a channel out of Digital One. In some instances, they're building the channel and coming through the Digital One platform to get the omnichannel experience. Some instances, they're pressing opening banking through Code Connect. They're taking PaymentsOne where we're seeing, I think, 250 new institutions have been added to that platform since launch. So there's just a lot of really good timing, and we're well positioned. But the market is moving. We're in the very start of -- every financial institution I talk to in the world today is really looking at how they're going to transform to the next generation of technology and have another 10- or 20-year run on that. And so some of -- so we're really excited of what the banking business is doing and really its opportunity. And I think you'll -- as I said earlier, it's going to be a really strong mid- to upper single-digit grower for the next 5 years.

And if we think of that, say, 6% to 9% growth or whatever, and you talked about core processing seems to be definitely contributing, what are the other units, right? Because you do so many things, online banking, online bill pay, credit, debit issuer. What are some of the products really contributing right now?

Yes, I think there's a lot of them. I mean, I highlighted several, but we'll come back to PaymentsOne. I mean, PaymentsOne is truly cloud-native technology driving an end-to-end complete payment ecosystem through one system. So you get leverage out of fraud routines. You get leverage out of auth routines. You get your leverage out of card management routines. So whether you're credit or debit or prepaid, it doesn't matter. It's all running through PaymentsOne. So as I said last quarter, that was up upper single digits. If you look at Digital One and what we've accomplished there and you look at people like First Hawaiian that's coming online and they're taking the whole Digital One experience, augmented by our back-end, all leveraging through Code Connect, so we've seen a lot of growth through that digital experience. We've talked a lot about modern banking platform. We're just getting started there. That's contributing. You'll see that go from roughly 0 last year to over $100 million in revenue this year alone given its rapid acceleration, and it's going to accelerate from there. So there's a lot of components and new capabilities in that banking business. Last year, we brought the market over 50 products in banking, and that's now contributing over 9% of that growth into the banking business. So even new product capabilities is coming on given the scale we have when we either mass-enable those or we put them through our sales channel, uptake is very, very high. And so our ability to continue to grow that business is really strong for the foreseeable future.

Yes. And it seems like -- I guess, well, what do you say when we have some newer entrants and -- like Marqeta or nCino or Q2. There's all sorts of these other ones that are growing super fast. Are you growing just as fast in certain pockets? And maybe kind of a corollary, who's losing share? Because it seems like you're gaining and then some of these little ones are gaining, but they're kind of small. But how do you think all that?

Yes. Look, I think when you look at some of the startups like Marqeta, I mean, it was interesting. We all had an opportunity to look at them when they went public. And obviously, they did very well yesterday. But when you really look at the underlying, I mean, they've got a very limited application stack. I mean it's very limited what they would do. I mean they've got 1 customer that provides 70% of their revenue, and it's been growing very rapidly. So huge client risk. It's interesting. We just don't run into them. And so -- but the reality is when you look at PaymentsOne, why would you go on a platform like that? Well, if you want your debit-issuing business to be done, check. You want your credit issuing business to be done, check. You want to single-use prepaid, check. Reloadable prepaid, check. All through common fraud, all through common auth, all globally. You just start checking off those boxes. So at scale, we compete very well. When we're in like-for-like industry segments, we absolutely perform as well or even better than what a lot of these startups perform. So who's losing share? I mean you are seeing -- there's still a lot of small boutique solution providers that have been around a long time, regional providers that are losing share. Some of the other larger providers are losing share in certain markets. But interesting, we look at our loss rates very closely. And across all 3 of our segments, we've had no acceleration in loss rate whatsoever. And in fact, we've had improvement. Our loss rate has actually gone down over 2020. So we really feel great about where we are in all of our segments and our ability to compete. And you're actually even seeing a lot of the startups. We've announced several takeaways over the last several quarters to kind of dispel this rumor. And what's happening is they're going with a quick startup. And look, it's nice technology. It's simple functionality, but then all of a sudden, the business grows. Then all of a sudden, you need to go national across the U.S. or you need to go into an alternative country or then you need to start offering a level of complexity even in banking. You need to start moving from simple lending into syndicated lending or high-end commercial lending because you realize your retail franchise is not where you're making money. You're making it on the commercial side. All of that then starts moving to FIS because we build complex systems with complex functionality in brand-new technologies at scale, and that's our biggest differentiator in market.

Yes. No, that's great. And then if we turn to merchant, what happened through the pandemic, right, people started to buy -- to go more to the grocery store, less restaurants. They weren't buying coffee every day. So it was a lot of less SMBs in -- there was this misperception that you were losing share because revenue was weak, but volumes, maybe you can talk about how volumes actually maintained share. And now are you seeing the flip? Is revenue actually above volume? And did that even accelerate maybe in April and May?

Yes. I mean, actually, what you saw there, Dave, is all yields aren't equal, right? I mean -- so just like in our banking business, you're going to have a higher yield as you push down in community banks or as people -- as you get a higher wallet share than say, a #7 bank in the world, for example. So yields are different, and you saw that. So our volumes have always consistently kind of maintained with the large brands. And kind of right on top of what everybody is seeing, we're all seeing that. And frankly, all providers are seeing that. If you've got a grocery store and I've got a grocery store, the only way my grocery store grows faster than your grocery store is I've got to have the better grocery store. I mean it's just got to do more people coming through the front door. I mean the reality is -- and the yields on that are going to be about the same. So what we saw during the pandemic is we saw that yield difference based on the type of volume. And so in certain volumes, like travel and airlines, we take more risk. We're the best in underwriting that risk. And so therefore, our yield is higher because we'll take more risk in travel and airlines as an example. And so therefore, as that volume comes down, you're seeing this yield flip. What Woody and I wanted to make sure everybody saw, because everybody thought, "Well, they're just -- everybody is losing share." And nobody -- I don't know. We weren't losing any share at all. We were actually gaining share. If you look, our volume was actually higher from January to December of last year. And actually, our number of mids was higher. So we actually took share throughout 2020. You've now seen that yield revert back to normal in that final week of March. Has that continued through Q2? Absolutely. It's actually continued to improve. And as Woody said, when we went into Q2, we were bullish on Q2, but we've seen our merchant activity exceed our expectations on our original guide even in Q2. So we're going to have a real strong Q2 as you think about it holistically with regards to where we are. And it's just because that yields continue to improve. Our volumes continue to improve. We haven't seen pull back. Last year, last quarter, we had a big impact with the winter hit through the South. And so we saw an impact in volumes due to a winter storm. Obviously, those things aren't happening. You've got pent-up demand. So we feel really good about where we are in the recovery and how well FIS is going to perform.

Yes. No, that's great. And I just remember when you guided -- first, when we thought about Q1, I think you were running 103% of the 2-year-ago number.

Yes.

And then you guided to just under that for Q2. And the only 2 things I can think of it is either a little conservatism just because you always are starting the quarter kind of early. And then secondly, there was a little bit of tax timing 2 years ago in Q2 relative to today. Is that just kind of the components?

Yes. It really was more on conservatism. I mean, honestly, if you really think about it, we just didn't know how -- what the U.K. was going to do and how it was going to open. And we were kind of -- we were looking at it. We felt great about it, but you just don't know. I mean, had the U.K. really started to reopen and have a major flare up, we knew they were going to re-lockdown. So we wanted to make sure that we lean forward on our guide, but we also had some cautiousness in there. And as we've seen it trend through the quarter, I mean, the U.K.'s -- there was a lot of pent-up demand. Everybody wanted to run to the pub, and we've seen that. And so those trends have continued.

I think that's right, Dave. To pile on there, we came out this year and reestablished guidance basically for the first time post pandemic. We wanted to make sure we put out guidance that we can meet or exceed and kind enough flexibility for some uncertainty, and we feel like we've done that. So there's just some conservatism in there.

Yes. Yes, that's great. And one thing, kind of like the question I asked in banking before. In merchant processing, we have Stripe and Adyen and some of those fast pure plays. Are you growing just as fast where you compete with them? And then secondly, some people would say, "Well, if they grow this fast, everybody else must lose share," which, again, doesn't actually seem true, but can you kind of just dispel that a little bit?

Yes. Honestly, we don't see Stripe. Stripe tends to be down in the startup realm. And I mean if you ask me for a gap in our capabilities, we're not down in the very low end and then the startups on merchants or in the really small SMBs. That's actually an opportunity for us when you look at some of the stuff that we've now done with NAP and Access Worldpay. So we'll start pushing down in market, and I'm sure we'll see them more. On global eComm, we really just run into Chase and we run into Adyen. We've made several announcements over the last several quarters of actually taking market share from Adyen and Chase. And so we feel good about where we're positioned. Our business grows just as fast or faster, depending on the market industry segments we're in. Once again, we've got -- travel and airlines has been a significant headwind for us in 2020. But as that recovers, it's going to be a very nice tailwind for us in 2021. Frankly, into 2022, that will continue to accelerate that growth. Fundamentally, the Worldpay business is different since the combination. And if you look at the cross revenue synergies, you look at the investment we've made in product, you look at the investment we've made in go-to-market, you're going to see it perform better than what it did historically. Historically, it was typically upper single digits. We're going to be performing definitely in the low double digits going forward on a consistent basis. And you can just see that in the share we've taken and the investments we've made. Q4 was one of the largest sales quarter we had. Q1 was even bigger. So that market is starting to reopen to our direct sales model. On the enterprise side, we just continue to do exceptionally well in winning business on the enterprise-wide. And you're seeing the response as we roll out these new capabilities. I think we highlighted last quarter, just on a stand-alone basis, we hadn't even migrated any of the back book. If you look at Access Worldpay on a stand-alone basis, it would already be the fourth largest gateway in the industry, and it's got the highest auth rates in the industry. And so we still got -- we've got a lot of other historical gateways Worldpay had that we need to migrate into that. Hands down, it will be the single largest gateway in industry, and that will continue to allow us speed of onboarding Access. And as we go forward, we'll be taking advantage of all that.

Yes. And maybe in the last minute, I mean, I think half of the Worldpay business is absolute gold standard, right, your global eComm with your ISV, and the other half is very good.

Yes.

And so is global eComm, is that something -- is there enough greenfield throughout the world still like in pockets that you can just -- you're just starting to scratch the surface. Could this be double the size in 3 to 5 years?

It's tremendous. I mean you're going to see card-not-present activity, which is what a lot of people traditionally define as eComm. We do not. But you're going to see eComm card-not-present activity just expand dramatically from here. We've seen a huge step function during pandemic with the reduction of paper currency. A little bit of that might come back, but we're never coming back anywhere close to where we were today pre pandemic. So that's going to be a huge tailwind for the industry. Our global expansion, I talked about it at the start. I mean when you look at revenue synergies, we thought we would be able to accelerate the global expansion that what Worldpay was experienced, giving our presence. Not only have we expanded that, the minute we hit our existing customers who are already in those countries, they'd light us up and turn us on. So now they can start running through our environment because it's just -- it's superior. So we're really seeing nice benefits from that will continue. There's a lot of greenfield to be had here. But we also have really invested heavily. When you think about ISV, we were the gold standard in ISV. But honestly, Worldpay had not pushed ISV into the U.K. We had a record year as we brought ISV into the U.K. and going through that channel. We've opened up a whole another -- expanded our TAM for an addressable market. And so we're really -- as you know, over the years, we've always been very aggressive on sales. We've always been a sales-led company and a product-led company. And that's just paying dividends for us over the last year.

Yes. Well, you sound as optimistic as probably any time in the last 15 years that you've been at our conference.

Yes. Absolutely.

So -- yes. Well, we always appreciate it. We're running at the end of our time, but thanks so much, Gary, Woody and Nate. That was a pleasure.

Thanks, Dave. Appreciate it.

Thanks, Dave. Thank you again for hosting us today. This has been great. Thank you.

Have a great day.