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

All right. Well, welcome back, and thank you to everyone who's joining us out there virtually today. My name is Dan Perlin. I head up the payments processing and IT services practice here at RBC, and we are delighted to have the management team of FIS joining us today. From the company, we have Nate Rozof, whom we've known for a very long time. Nate is the Executive Vice President, Head of Corporate Finance and also Head of Investor Relations. So Nate, it's good to see you, sir. I wish we could do this in the real world. But I'm hoping next go around, that will be the case for us. So thanks for being here.

Dan, thanks so much for having us. We're delighted to have an opportunity to come meet with you and speak today, so thank you.

That's great. So what I thought we would do is maybe start kind of at the high level of the funnel and then work our way down to some incremental details. And one of the things we're asking all the companies today is just what they're seeing in terms of the current demand environment. The macro situation does seem to be improving. This is kind of a big period and a big quarter for a lot of companies in the payment space, yourselves included. So maybe if you could just frame that for investors a little bit that would be a great starting point.

Yes. All right. Happy to. So we're seeing demand rebound very strongly. And really, we're seeing the breadth of that rebound continue to expand across sectors and geographies. So for example, the U.K. is -- it's reopening, is rebounding, I think. And we're pleased to conversations like those that are happening or happened between the U.S. and U.K. to reopen travel corridors between those companies because, obviously, that will be another big tailwind for us. So demand is very strong. I think it's been interesting to see that some of the trends we saw through the pandemic. The acceleration of consumer spending online in e-commerce, those trends have just continued even as the reopening happens. The consumer has moved online wholeheartedly, and that's been a big tailwind and source of growth for us during the pandemic and now we can clearly see it the -- that outside the pandemic as well. So 2Q shaping up I think, knock on wood, to the extent that we don't have some sort of unusual macro activity to be somewhat better than we expected. So let's hope that continues.

Yes. Let's do that. To put a finer point on it, Visa did put out some updated statistics and their operating metrics recently. And we got a lot of questions as I'm sure you do about how maybe all the companies are tracking to those metrics. So if you wouldn't mind, how are you guys tracking in relation to some of the statistics that they've shared?

Yes. We continue to track in line with -- whether it's the Mastercard data from a while back or the Visa data more recently, we continue to track right in line with the networks. Given our scale, I think you'd expect that. We -- one thing to point out is Visa only shared U.S.-only data. I think on our call, we had talked about volume growth for April, and we were referring to global data as opposed to just U.S. only. Clearly, the U.S. led -- so far has been leading the recovery in terms of spend. So as I mentioned, seeing sharp rebound in volumes, seeing expansion in yield, that turning from a headwind to a tailwind and progressing into a -- shaping up to be a hopefully solid Q2.

Okay. Good. Well, look, the backdrop seems like it's potentially going to be in your favor. Clearly, the comparisons are moving in the right direction. And so that's good to hear that you're tracking those numbers and with a little clarification, global versus U.S. So that's a good point. One of the big themes around your company over the past -- for a little while now, actually, has been this modernization of the tech stack. And there's always a debate as to whether certain companies are more legacy tech or these new tech companies. So what I wanted to do is maybe spin kind of a speed round with you on all the new things you've been bringing out because we've gotten a fair amount of questions on it, but I don't think everyone maybe fully appreciate what you've done. So it's going to start in and around banking, and then we can move into acquiring as well. But the one that's been around for the longest is really this Modern Banking Platform, your cloud-native platform. So can you just talk a little bit about the strategic importance of that, where that stands, the demand environment around it, types of banks you're serving, in particular, around that would be great?

Yes, happy to. And let me set the stage a little bit, leading into that question. I think FIS started talking about data center consolidation 5 years ago, and I think we really undersold the strategic importance of that. I think it was built -- at the time we announced it, it's really a cost-saving initiative. It was much more than that. In fact, what we have done over the past 5 years is move our architecture entirely into the cloud so that we could then develop capabilities like the Modern Banking Platform, which we started developing from scratch on a blank sheet of paper about 3 years ago. It is entirely cloud-native, modular design, access through, easy-to-use APIs in a rich micro services layer. So it's the newest, most advanced, SaaS-based core software solution in market. Today, we're selling that solution principally upmarket to the largest financial institutions because, quite frankly, we're seeing such strong demand for those financial institutions to really modernize their technology capability in order to respond to, again, changing consumer preferences, moving to digital banking, whether that's on a PC or a mobile or a tablet or what have you. And a lot of the in-house solutions that those large banks run, oftentimes, they've built themselves or based on a piece of software they bought in the 1970s, and they just don't have the flexibility and capability to support real-time processing and the current demands of the consumer. Modern Banking Platform provides that for them. The BMO announcement is a great example. Their legacy capabilities couldn't support the kind of neobank offering that they wanted to create, so they turn that by us as Modern Banking Platform to do that for them. And we fully expect to, over time, help them move their U.S. BMO Harris and eventually Canadian technology to Modern Banking Platform as well. So long story short, Dan, it's been a very positive story for us. We're continuing to see strong signings with large financial institutions for Modern Banking Platform continue to see a robust pipe, and it was architected in such a way that we're going to be able to continue to expand the TAM that it serves. It was designed to be a global solution. We can sell it to international banks and have done so in some cases already. And as we build out feature functionality, we can go back and cross-sell those additional capabilities like lending, for example, you've heard us talk about and then ultimately start to move technology downstream as well to expand the TAM that way also. So it will be the future of FIS, but it's live in the market and winning share today.

That's great. Can you just remind us maybe the time line from kind of the implementation process to when we actually start to see that into the financial models. We do get that question fairly frequently even still.

Yes. Generally speaking, from signing to revenue is about 12 months as we're implementing, which is significantly faster than the legacy system but, obviously, still some room to go there in terms of accelerating and automating the implementation process to bring revenue in even quicker.

Okay. So let's move on for a second to PaymentsOne. Now we're moving away from, so to speak, the modern banking. We're going in a little bit on the card issuing side. So what makes this unique? I know you've moved a lot of issues already, and I think you've boarded a lot of new financial institutions in a relatively short period of time. So maybe if you could outline that for us, that would be great.

Yes, happy to. So we're very proud of PaymentsOne. Cloud-native solution really enables the issuer to access credit, debit, prepaid, EBT, just a comprehensive issuing solution, consumable through the cloud. We've migrated our back book or our existing clients to PaymentsOne and have started selling it in the market. I think we've sold somewhere between 250 and 300 additional banks. It just gives us a real breadth of capability and the ability to do innovative things, such as just-in-time, card issuing or SKU-level authorizations. It's the newest and most modern issuing platform in the market.

Yes, yes. No. It's exciting to see, especially as you dovetail that with Modern Banking and some of these other solutions. So that leads me to RealNet. And here, we move into the world of account-to-account transactions, and you guys have been talking about that for a long time. You've had some assets embedded in there, I think, quietly for years. So it's great to see you kind of bring those to the market. But what is that doing? And here again, like how do we think about that when we look at the competitive dynamics that are in the market today?

Yes. We're really excited about RealNet. We think it highlights and, in some ways, exemplifies our strategy of having a breadth of leading capabilities and cloud-native financial technology solutions that span the gamut of the industry, really, at a global scale. RealNet is based on our leading capability around enabling real-time payments in countries around the world. I think we're the single largest provider of real-time payments schemes in different countries. And RealNet really takes that from a country level to a global level, integrating across all those different real-time payments capabilities and enabling global cross-border account-to-account payments. The number of use cases for that technology is obviously very large, right? We can -- we'll start with more simple account-to-accounts payments, but you can do B2B, B2C, C2C. And we're really just getting started there. But it is a unique capability and market, really, a network of networks, and we literally are just rolling it out. So I think more to come on that.

Yes. You've got a lot of new stuff rolling out these days, I tell you. Crypto banking is another one of these attributes that you guys have been talking a bit about. And clearly, the prominence of crypto has gone up materially over the past, really, year, I would say, but in particular, past couple of years. So what are your views here? Are you tying it directly to a bank account? How do financial institutions feel about that? What are your expectations there?

Yes. Crypto is a fascinating market and one that we're playing in from multiple angles, this banking angle as well as on the merchant side. We're the largest provider of crypto, acquiring capabilities to exchanges. I think we serve 5 of the top 10 cryptocurrency exchanges and many more beyond that. But specific to the crypto banking solution, really, it's enabling the financial institutions that participate in that market. One of the challenges we see for investors who are looking to acquire cryptocurrency is they need to create a new account with a new financial institution that's separate from their traditional DDA account with the -- and the relationship they've had for years. So what our crypto banking solution does is it enables the consumer to open a cryptocurrency account with their primary financial institution. It leverages our Digital One omnichannel digital banking solution so that they can transact trade, buy, sell, hold cryptocurrencies right from their same banking app and see their assets in a converged way, whether they're traditional fiat currency or cryptocurrency. It solves a need for consumers, and it creates an additional opportunity for financial institutions to make money in what is a rapidly growing market.

Yes. No. I mean it's a great on-ramp for a lot of financial institutions that just really didn't have a good way in which to participate. We've talked a little bit about a pretty good drop-down menu of a lot of new initiatives and technologies that you're bringing to bear. Many of them are still early days. And so what's interesting to me is that the banking segment, even despite a lot of these new opportunities, is showing signs of real acceleration of growth. I think some of these other ones that we're talking about are only going to continue to either elongate that or foster even more growth. But what's driving this reacceleration right now? Is it a compression cycle that's happened in the market? Or what's driving it?

Really, it's an upgrade cycle that we're seeing in the market, Dan. The financial institutions are deliberate in their choices and their movements, and we've seen demand for new technology only accelerate through the pandemic. Given the need for financial institutions to move to the cloud and leverage technology, like Modern Banking Platform PaymentsOne, RealNet, et cetera, we really see that as a multiyear, even decade or more than decade long, upgrade cycle that will enable our banking segment to continue to drive significantly above-trend growth relative to certainly what we've delivered in the past. So we're highly bullish on our banking business. We see our strength with large financial institutions, global financial institutions as a significant competitive moat. And we think that the early lead we've created for ourselves in terms of moving our technology to cloud, building new cloud-native capabilities from scratch has given us a significant opportunity to continue to win share and differentiate ourselves from competitors, whether they're new or old, in terms of the breadth and depth of capabilities we can offer in an easy-to-consume way.

Yes. So it sounds like the budgets have finally loosened up for a lot of these financial institutions, and the duration of this kind of upgrade cycle is probably measured in multiple years for you guys. So that's great to hear. If we shift gears a little bit on the merchant side, clearly, that's rebounding. And this is -- I think I spent 85% of my time, if not more, talking about the merchant side of the business as opposed to the other 2 business segments. But one of the things you did call out in process of this reacceleration in the last quarter was revamping the kind of the go-to-market strategy and what that was doing in terms of new sales opportunities. So maybe you could walk us through what that kind of new cycle feels like. And what are some of the successful opportunities and demands that are in front of you?

Yes. It's a great question, Dan. So if you look at merchant behavior through the pandemic, we've seen 2 trends emerge very clearly. One is the need for omnichannel capability is obvious. But then secondly, in order to offset, in some cases, lower foot traffic in store, we're seeing our merchants look to expand into new geographies or new countries around the world so that they can access a broader TAM with their leading brands. And in order to -- that created significant demand for our eCommerce business and our technology solutions. And thankfully, we've now completed our new acquiring platform, which is our new global back-end settlement system. We're now in market with Access Worldpay, which is our single, easy-to-use point of integration, which is perfect timing in terms of the type of demand we're seeing. So the go-to-market strategy, we're also changing to respond to that strong level of demand. We've added 300 salespeople aimed at really global enterprise. In order to take advantage of both of those aspects, the omnichannel and the expansion aspect, our ability to go and sign walmart.com and expand that relationship from in-store to online is a great example. We've had similar success in terms of adding additional online offerings at Target additionally, so we're seeing more and more of those opportunities as well as helping our clients to move into those new markets. We've added, I think, 9 new countries since FIS bought Worldpay, which was already a leading list of global reach. And so quite frankly, we feel very well positioned. I think if we move downstream into the SMB space, right, this has always been an enterprise-first merchant-acquiring business. I think we serve 6 of the top 10 merchants in the U.S., about 40% of the top 100. And we've moved downstream to win share, really using a partner-led distribution strategy. We've never run a heartland-style direct sales force down market. And we've done that principally with integrated payments and bank referral channels in terms of net new growth and share gain for us. Integrated payments, we continue to sign and grow what's already the leading network of technology providers, which just continues to expand the TAM that we can go after in the SMB space through their distribution channels. We've now taken integrated payments to the U.K., continuing to add -- it's been about 20 or 30 new partners per quarter since we've entered that market a few quarters ago. And last but not least, and particularly one of the things that's driving our strength of revenue synergies between FIS and Worldpay is the value of the FIS relationship with those financial institutions is significant. And strategically, we see large financial institutions as being the most valuable partner for a merchant acquirer like ourselves because large financial institutions typically have large clients. And large clients, as we all know, are very sticky and very profitable, and that's where our key strength is. So those have really been the 3 key pillars of the go-to-market, expanding enterprise sales, expansion of integrated payments to U.K. and then ultimately globally and then really continuing to sign new banks based on the strength of the FIS brand like CIT recently.

Yes. That was one of the questions that I was going to -- wanted to talk about. That relationship seems like it's got some real legs to it. So maybe you could talk a little bit about what are maybe some of the expectation setting around that relationship as we look at you guys from the outside? And what were some of the key attributes that ultimately won that, which is a very key client, obviously?

Yes, absolutely. So what financial institutions are most focused on when it comes to their ability to offer merchant-acquiring services is 2 things. One is it is a nonregulated or less regulated revenue stream, fee income stream, very important to them. Secondly, their ability to provide merchant-acquiring services to their clients prevents another financial institution from coming in and getting a toehold in the relationship. And where we've continued to see strong successes, many of the acquirers that serve banks today are principally small or SMB-focused, and they struggle to help the financial institutions to serve their largest clients. The ability to come take advantage of Worldpay's enterprise capability, scale, service model helps those financial institutions see how they can be competitive from their largest client to their smallest client, and that's very attractive for them. And as a provider of financial technology, one, we're agnostic to many of the large banks out there that those clients tend to compete with; and two, they understand that if we're also providing them technology, such as core software, the value of the relationship is extremely high to both of us. So they don't have to be concerned about FIS mistreating them or using them or abusing them because they only have -- we only have skin in the game as it pertains to merchant, having the breadth of that relationship. They understand the value of the fact that we don't want to burn bridges on our banking software because we mishandle or drop the ball on our merchant referral relationships. So those aspects are very helpful for us. And really, the share gain for us is winning net new banks, obviously, which we continue to do.

Yes. I do want to spend a minute on the new modern acquiring platform in conjunction with kind of the e-commerce gateway launch. The dynamic in the market has always been these new entrants. You've got companies like Adyen that always gets mentioned in this discussion, right? Like this is -- I'm not bringing up anything new here. And so you've now kind of brought these 2 new platforms in a lot of ways into the market. And so what I think people want to know is what is it enabling you to do that you weren't really able to do before? How does it impact things like acceptance rates and onboarding and speed to market and just all the -- and agility like just in aggregate in a market where everything is moving so quickly? So if you could you can tease some of that out, that would be, I think, fantastic for investors to hear.

Yes. Well, let's start with Access Worldpay because it's the front door, right, and critical to the big piece of the questions that you asked. We've, for a long time, had the broadest and deepest set of capabilities. But historically, for a merchant to be able to take advantage of those capabilities, the integration into Worldpay was complex. Our APIs ran several hundred pages because there was so much you could do with them. And you've heard competitors talk about ease of integration of that being a key selling point that they offer in the market. Access Worldpay is our answer to that. It is a brand-new, dynamic API, very easy to consume, and SMB can utilize it to get the base capability they need. Or through that same API, a global enterprise can access the full breadth of our solutions. It makes integration, speed to market, time to revenue with Worldpay from FIS exceptionally much easier and much faster, and you see the clients ramping on it at an exponential rate. I think we've provided that information in our recent earnings call deck. Whereas the pace of uptake on Access Worldpay would now be -- that gateway by itself would be the fourth largest e-com acquirer in the world with Worldpay being 1 of the 3 above it, so really larger than all but 2 of our competitors. So we're pretty excited about that. And then on the back end, as you, Dan, are well aware, right, the Worldpay U.K. team started building their new acquiring platform before Vantiv bought Worldpay. Historically, they run on a legacy platform provided by and maintained by RBS. This gets us off of that legacy mainframe-based batch capability that Worldpay was running onto newly designed, again, from a blank sheet of paper and built system that can enable real-time processing, which creates all sorts of opportunities around consumer experiences, settlement, pay in, pay out and then accessed easily through Access Worldpay. The last thing I should mention is the combination of those 2 things now allow us to significantly speed our ability to deploy and roll out new product. Because with a modular design and architecture and a robust API layer, the ability to tie those pieces and integrate those pieces together is significantly easier for us.

Yes. No. It sounds like it's a huge advancement for you guys, something I know you've been thinking about for a long time, so this didn't just happen overnight. So it's great to see it in the market. I did want to just -- one last thing on merchant was talk about the dynamics that are happening as we go into the quarter, so we're all in kind of the same page. You do have this very positive spread dynamic around the yields that are finally kind of returning to where we had hoped they would be, and so maybe you should talk to that just for a second. And also in the context of the tax shift issue from the prior year, just making sure we're all on the same page as to what's going on.

Yes. Great set of questions. So we guided to revenue growth for merchant in the second quarter of 30% to 35%. And that guidance assumed 20% to 25% volume growth and about 10 points of positive yield contribution from discretionary merchants getting back to business, right, SMB and other. Inclusive in that yield spread is about 300 to 400 basis points of tax revenue that will come in that had moved to the third quarter in the year before. So that's embedded in that positive yield dynamic. As I indicated at the onset of the call, as we were constructing that guidance, we were very mindful of the winter weather that hit the country in the U.S. in February, for example. Texas was shut down by -- as is much of the country. So we wanted to make sure we were prepared in the event something else unexpected occurred. And so far, we haven't seen that. I mean, obviously, there's been a tragedy in India, and -- but it hasn't spread to the point where it would affect our acquiring business. So as we've mentioned, the business is actually tracking a little bit ahead of our expectations from what we guided to initially.

That's great. That's great. We got a little bit of time left, not much. So I just wanted to ask you one quick question on capital markets, kind of this capital markets mix shift. It's been a journey. I think you're at 70% or so of that today. Where do you think that ultimately can land? Or is this kind of a number that we need to be mindful of? Because there's also an accelerating growth story there. So we've got maybe, I don't know, 15 seconds for you to wrap that one up.

We're running our banking playbook in capital markets, so we would expect to get to 80% plus recurring revenue, converting that business into a solid low- to mid-single-digit growth business.

Okay. All right. Well, we'll save that segment for next time. Nate, it's great to see you. You're looking good, buddy, and thanks again for taking the time out of your schedule to be with us today. We really appreciate it. So be well.

Thanks. Thank you. Look forward to seeing you again soon.

Yes. Thank you.