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

Well, good morning, everyone, and welcome back. My name is Dan Perlin. I head up the payments processing and IT services practice here at RBC. And I am delighted to have the team of FIS here joining me today. They came out swinging last quarter. And so we're hoping to explore a lot of the things that they brought to bear during the last quarter. From the company, we have Gary Norcross. Gary is the Chairman and Chief Executive Officer. We also have Woody Woodall, who's the Chief Financial Officer. And we also have Nate Rozof, who's the EVP, Corporate Finance and Head of Investor Relations. So thank you, gentlemen, for being here. I very much appreciate it. I know these things can be tedious, but hopefully, we'll be doing these in the near future in person. But thanks again.

Thank you, Dan. We're [indiscernible] to spend time with you.

Great. So what I thought I would do, Gary, if we could just start off at a very high level and then we'll kind of funnel our way down to some more details. As you look across the organization from a macro perspective and where we are in this recovery process, can you just bring us up to speed a little bit, as you look across the 3 businesses, both domestically and internationally, and maybe just give us an update as to what you're seeing in the current market and maybe what we should be expecting a little bit more in the near term?

Well, look, Dan, as I said, I really appreciate you taking the time and letting us speak with you this morning. I mean at a macro level across all 3 of our segments, I don't think we can be more excited about where the business is today, where each business is, how it's performing in market. As you said, we came out swinging in Q3 and really brought, I think, a level of transparency to help mitigate this bare narrative around our merchant business. If you look across all 3 of the segments, they're all at record sales through Q3. We've already eclipsed our entire year of last year with a quarter to go. We're leaning into strong sales execution in the quarter. So what's the macro thing going on? You're saying strong recovery coming out of the global pandemic. We got more work to do there. Frankly, when you look at some of our -- a lot of the questions end up getting around mix in our merchant business, you've got certain of our clients coming back at different rates than what they were coming back -- than where they were pre-COVID. We still got some work to do in travel and airlines. Frankly, we still got some opening to do around restaurants and getting restaurants full and full capacity. You're really starting to run into even some supply chain issues there. But when you look holistically across merchant, just record sales across our ISV software channel, across our channel through our banking, through our direct, our global e-com, minus traveling airlines, grew 35%. So taking a lot of share there in a very important high-growth market. So hopefully, we've dispelled the bare narrative there that this business can't grow greater than double digits. You move into banking, once again, record sales through Q3. Some really significant wins around modern banking platform, but not just modern banking platform. Honestly, that's a really big segment. You just look at everything we've done around our technology modernization, around our application stack modernization. The team has just done an excellent job executing there. And then you look at capital markets, which is probably one of the more misunderstood segments, people still think of that as a low single-digit grower. You saw it put up 10% Q3 high-quality earnings. The sales team has done phenomenally well. And all this just translates to FIS' time the industry very well. We're at a massive inflection point of everything needs to get modernized across financial services. Everybody likes to talk about digital, but it's much broader than that. And we timed that market inflection very well. So we're very confident in the company and its execution and where it's going in the future.

Yes. It's nice to just hear that you can be kind of forward planning as opposed to kind of reactionary in an environment that we've been living in for what feels like a couple of years now.

Exactly.

I wanted to start a little bit down the path of capital allocation because you did recently update it. And so what I wanted to explore with you there -- and it was a pretty meaningful change. I mean you're taking the dividend growth rate up to 20%. You want to get this payout ratio to 35%. But what I want to understand is, what was the catalyst that really drove this decision? And why is now the right time for that to occur at your organization?

Well, why don't I start? And Woody, feel free to chime in. I'm not sure that it's as much of an inflection point other than, frankly, it's a realization. If you go back to 2012, we really invested heavily and really made our dividend meaningful. And we said, look, we just don't want to have a token [ dividend in ]. And in fairness, we want to outperform the S&P, and we really want to return cash to shareholders through this meaningful way. If you look at what's happened over the last several years is, look, we've had significant growth as a company. We've maintained our dividend at 10%. And frankly, our earnings have just outstripped that. And so it's really just a reflection of us saying let's get back to redeploying some capital. Let's target -- how do we get back to roughly 1/3 of our cash flow going back to our shareholders through dividend over time. And so it's going to become very predictable. And so it just felt like when you look at where we are on the Worldpay integration, we've got really Worldpay predominantly behind us now. We've got all of our segments really hitting on all cylinders, really have a competitive stack across the board. We're generating significant free cash flow. We're able to -- we've got plenty of cash flow to not only maintain our investment, to maintain our growth, but continue to lean in on growth ideas. I'm sure we'll talk about the super user concept at some point in the meeting. And so just an opportunity for us to raise the dividend and say, look, let's get back to where that originally was and really start leaning in on our income guys as well that are looking for that and just one more way to really return value to our shareholders. So we'll continue to raise that. You'll see us over time move that back to where we're getting it back to about 1/3 payout.

Yes. Dan, I'll kind of follow on there. A couple of things. One, the earnings growth that we've had really showed us actually declining the payout ratio, but we wanted to increase it back up. If you look at our expectations of EPS growth over the next several years compared to this 20% dividend growth, you're going to get to that annual payout ratio in the latter half of this decade. So it's going to take some time to get there. The other thought that we wanted to make sure we were highlighting for investors, it's not impeding our ability to grow or invest for both organic or inorganic growth. I've gotten some questions from investors, why not just buy more shares in 2022 versus raise the dividend? And the reality is the incremental dividend is about $100 million of our roughly $4 billion of free cash flow. So it's just not going to be meaningful in our ability to buy shares or to invest inorganically or organically into 2022 or beyond. So we feel really good about being able to balance that capital allocation and potentially attract some new shareholders. We've got an above-market dividend ratio -- or payout ratio from the S&P 500 at this point in time -- or yield -- excuse me, from the S&P 500. Some of the other players that don't have as good a financial profile as that but also have that sort of above S&P 500 yield trade at significantly higher multiples. So we think we can also attract a new class of investors into the market.

Yes. We know of some of those.

Yes.

You do, too. Let me -- Woody, since you brought up M&A, I just figured out to go ahead and interject there for a second. And this is, I guess, the bigger picture question that we get all the time. When you're thinking about the long-term M&A strategy for this type of organization, which has as much heft and scale, do you have to focus on the bigger strategic deals? Or do you feel like at this point in the game, you've got most of the products that you need, you've built a lot of the stuff you're going to invest internally? Can you continue to do maybe some tuck-ins, and that is a fine strategy to be additive to growth rates?

Why don't I start, and Woody, you can chime in. I mean, look, when you really think about M&A, Dan, I mean, I think Woody and I have always shown that we have a very long-term view of those kind of market dynamics. We're always looking for things that bring us a new capability or new service to an existing market, break us into adjacency, looking for things that can accelerate our growth rate from here. We're not doing -- we're not looking to do turnarounds or buying problems. That doesn't make sense to us. Because we take a long-term view, the real -- and because we take a really strategic view, valuations obviously really matter, right? So I mean if you look, I mean, certain valuations are really high right now. Are we okay being out of the market in M&A for the next couple of years? Sure, if that's what it takes, because we take a long-term view. Are there some tuck-in deals that might make more sense in the short term? Yes. There's a -- while I just talked about the strength of our portfolio, you always have opportunities to fill in certain gaps, right? Markets you're not in today, where you see an opportunity where the TAM might be growing very high. And we talked about on the call card-not-present in the SMB space. We don't really play there today, I mean, just frankly. Now that we've gotten some of the Worldpay integration behind us, there's an opportunity to push into that market. Do you do some -- are there some tuck-ins there that might make some sense to accelerate that? Maybe. You also look -- there are certain areas in all of our verticals where we just don't participate. So we'll take -- M&A will -- and I know people get frustrated by it, but M&A is always going to be a part of our strategy. But for us, it's going to be -- it's got to make strategic sense. It's got to make financial sense. It's got to make sense for our clients. And so with that lens, timing will just play out the way it plays out. But we will be in the M&A business in the future at FIS.

Yes. Dan, I'll add on a little bit there. I think people think of us as a large transformative deal shop, and we have done some really large deals over the last 15 years or so. That said, people don't talk about the other couple of dozen of tuck-ins that we've done along the way, too. So we think we've got good expertise in doing both. And then I just reiterate Gary's point, it's going to be a part of our long-term strategy. And I think you'll see combinations over the next several years of tuck-in M&A and some potentially large deals just like we have. The only real tweak in our strategy that we think has driven a lot of shareholder value creation over the past decade is really just tweaking the dividend, and it's really around trying to catch up for where we've gotten an out-compounded EPS growth.

I can't agree more. And something we don't talk about, Dan, but we'll just add on here, I mean, we get a question from time to time, does the sum of the parts make sense? And we continue to look at that and say, some of the parts doesn't make sense to us. I mean if you look at our margins at 45%, there's a reason why we outstrip all of our competitors from a margin standpoint. The level of integration and dissynergies around that are just tremendous because we really have fully integrated these companies. But the thing we don't talk much about, you'll see us from time to time do small divesture or do divestitures, right, of things that don't fit the strategy. And so we really look at all of this area kind of holistically. What are the things that are good businesses, but don't belong in the overall portfolio for some reason? Let's look at divesting that. Woody and I have signaled that with the other segment and what we've done there. But then where are the tuck-ins, we'll look for the big transformational stuff over the long term.

Yes. No, that makes sense. I mean you've spent a long time building this platform.

Yes.

The idea of tearing it apart is, I think, it's easy to say and incredibly hard to really think about why that would make sense, so which leads me to my next question, really, which is really the durability of this business model. We are going to get to merchant in a minute, but I wanted to just set a couple of stages here. So 65% of your business is really in banking and capital markets. And as you alluded to earlier, I mean, these are setting records. I think you said for the first 3 quarters of this year, your sales pipeline, in particular, is already outpacing all of that of 2020, and you've got this huge backlog. So the question really is, how do we think about this in the context of visibility as we jump off into 2022? And how consistent can that be when you look out over the next 5 years for those 2 businesses, in particular?

Well, there's a couple of things. I'll start and see if Woody wants to add on. I mean one of the things that I think people have lost sight of, especially around banking and capital markets, is the durability of the revenue. I mean you're talking about contract links that are 3, 5, 10 years in duration. And you also -- when you think about these contracts, what people don't really understand is 99 plus percent of the time, they're exclusive in nature, right? So there's not where someone is splitting volume or doing this. So it's just a really high durable moat to entry. It's also a very long sales cycle. And then also, while we are shortening it, it's still fairly linked the implementation cycle. And we're doing a lot of stuff through automation to accelerate that time to revenue, and we talked about that on Q3. So our visibility into that business is significant. When you look -- when we start talking about sales and we start talking about backlog and we start talking about the growth of that, that should give our investors high, high confidence of continuing revenue organic growth in those businesses based on that backlog. Now what are the things that could impact it, you can have -- you can lose and have increased competitive loss. We're not seeing that. You could have more accelerated consolidation. Frankly, that's been fairly consistent for years now. But we're just very confident of our timing of the business. And if you look at what's going on in the industry, it's back to my opening comments, everything in those 2 segments, people are transforming off their legacy technologies to the future. And that future is going to embrace cloud. That future is going to embrace componentization. That future is going to embrace openness and flexibility. And that's really what's standing apart of what we've done around capital markets and banking over the last 5 years.

Well, let me dovetail that into Modern Banking Platform, right? This is something that is a huge part of the story that you guys have been building, this journey you've been on, I think, for the better part of 5-plus years in investing into this. I wanted to give you the opportunity just again to talk about how this platform, in particular, stacks up relative to peers. And [Audio Gap]

And so really, that scale really does matter. So we've got a really good timing on this. I will continue to come back. We've signed 16 deals. I mean don't get me wrong, it's great. We're just getting started. I mean we're in the very first inning of what you're about to see is a decade-long transformation in retail banking. And certainly, Modern Banking Platform is best positioned to win a tremendous amount of share and compete in a very dramatic way in this movement that's going to happen. People are going to have to move off mainframes. They're going to have to move off mid-range systems. They're going to have to move off historical programming languages to a much more flexible, much more nimble, much more open capability. And as we think about super users, really, what's exciting to us -- you saw us announce PayPal this quarter. I mean that's kind of financial institution, but that's someone wanting to offer a really unique high yield savings product to their customers. And where do they choose? They choose the components of MVP to do that. And so our ability to continue to upsell those customers and drive that out, expand into new fintechs with this -- couldn't be more excited about the future of this solution.

Well, you brought up super user twice now, so I'm going to have to just stay with that topic. I had it later in the question queue, but sometimes they just -- you got to be fluid here. So this was a new topic, kind of that was sort of our concept. I think that was introduced. [Audio Gap]

[ Audio Gap ] based on features and assemble those features in the way you want. So over the next 3 years, we're going to be bringing that to bear, and you're going to really see the platform enablement of all of the assets coming together at scale. And that's what we're really excited about. And so that's really the next phase of evolution of the company. We've already taken advantage of the cross-sales. We've already taken care -- advantage of, within industry verticals, the ability to lead on the sales engine and take share there. Now we're going to lead on truly embedded commerce or embedded finance and really allow people to source and create their own capabilities, which will really allow us to tap into fintechs and emerging users. We highlighted a number in the quarter of just getting started. You look at some of the stuff that we've done around Amazon, that relationship started with our debit routing network probably a decade ago. And now ability to add on to that over time, you've seen us now where they're consuming capabilities across all 3 of our segments. The next phase, though, will be much more leveraging all the work that we've done around investment in technology for next generation and be able to allow people to self-serve and drive next-generation capabilities.

Yes. And it's awesome. I mean I think conceptually, it's going to just continue to extend your lead within this space across a lot of those verticals. But -- so that brings me to the competitive narrative and merchant, which is why I think most people dialed in, right? Everyone wants to hear about this. So you gave a real deep dive during the last earnings call. It brought a lot of new insights, I think, for a lot of investors, myself included. But I wanted to give you opportunity to say like, what are the talking points? What are the takeaways from that information that you decided to be more transparent with to tell to the investment community about this competitive narrative around merchant? So...

Well, I'll start and let Woody add on. I hope what we eliminated through that transparency is this bare narrative that we're losing share and getting -- and being disrupted. I hope what people are seeing is just the exact opposite. I think people want to gravitate to certain companies that might have a higher growth rate. Hopefully, we can convey to them and they understand now the industry is really giant. There's a lot of growth in the industry, and a lot of people are getting their growth in different verticals. In certain verticals, we're not even participating in. If you really look at the underlying detail, you saw what is truly one of the most significant leaders in global e-com in the industry today, growing 35% organically, taking share with companies like Microsoft, which we started out in one region of the world and now globally, executing Microsoft's acquiring. You look at what we're doing in digital streaming. You look at what we're doing in crypto, which now the vast majority of all crypto exchange is running through our e-com capabilities, and that's going to continue to grow. So people are looking on -- Worldpay used to grow 8% prior to the acquisition. Why do you think it's going to grow double digits? Our e-com business is growing north of 30%, and it's becoming a bigger and bigger part of the overall revenue stream each and every year. You also saw very transparently we're the leader in enterprise in the U.S. and continue to extend that lead in the enterprise function. I hope that we saw -- transparently, we proved that our go-to-market strategy by leveraging our ISV channel and our software partners, let them build the software, let us do what we do best, which is payments. And if you see that a lot of our competitors are buying software, but then the challenge is now you've got technology debt on that software. That has nothing to do with payments. And how do you keep that current? Our job has always been how do we lean into those partners and be Switzerland and capture those payments in the most economical way. And then transparently, we showed there's opportunity. There are certain markets, certain segments within the market that are growing very fast. I mean if you think about card not present in SMB, that's a market we're not in where a strike plays today, but it's a great opportunity for us to come into that market. And so why do we do that now? Well, because we've been focused on rolling out the new acquiring platform globally. We now have 100% of all of our e-com clients running through [ now ]. We have them all running through Access Worldpay. We had a lot of heavy lifting that we did through this integration, all while not taking our foot off the gas to grow the business segments we're in. And so now we've got the opportunity with those large programs behind us to now double down and actually move into segments we don't participate in that actually further expands our TAM. And so I think what people see when they look and really dig through all of that, no way you can say that FIS is losing share, just the exact opposite. No way to think that we can -- when you look, we're actually a leader in the disruption, not going to be disruptive, and that's hopefully the narrative that people are going to start realizing as they do their work.

Yes, yes. I want to drill down on a couple of those concepts. One is global scale, right? And you've talked about that, and we've had -- we've written a lot about this kind of question of scale versus innovation, right, and how do you battle that and what does that look like. But my question is -- you clearly are the at-scale provider on so many levels, and you -- the concern is not so much really on the enterprise environment. But there are some players that are starting to gain a little bit of scale and trying to move into that arena. And so I'm wondering, what is it about your scale that is enabling you to be not only protecting of your own landscape, but also very competitive in winning of new opportunities aside from just unit cost, so to speak?

Well, it's far more than that. I mean when you really think about where our scale is and the benefits, and I assume, Dan, that's still coming from the merchant lens and why scale matters. I mean if you really look at that business, you look at the number of countries we're in, which is well over 150 countries, if you look at the number of payment methods we take, which is well over 300 today, if you look at the level of authorization rates because of our data access that we have, if you look at what we can do from a fraud narrative because, once again, all of this matters. And what you're finding is historically, large enterprise global clients used large banks within the various countries they're in, right? If they were in the U.K., they were with Barclays. If they were in the U.S., they were with BofA or Chase. And what you're seeing now is they're realizing the benefits of the scale that we can provide. I mean we highlighted, for example, a competitive takeaway in the early stage of crypto. And we literally saw authorization rates in the quarter in a matter of days go from the low 60s go well into the 70s within a matter of days. That's real value that other people about that scale can't provide, right? And so as you think about our ability to cover the number of countries we do -- and we're continuing to grow that. We're continuing to push into new countries because it really is a land grab. That resonates with the Disneys of the world. That resonates with the Microsofts of the world because they need that overall holistic experience for their businesses to continue to grow. The complexity around FX, the complexity around cross-border, all of that's very real, and that's where scale really starts playing a difference in the overall merchant business going forward.

Yes. So in the last 30 seconds we have here, what I hear from that scale argument is that the connected tissue that you bring across the entirety of whether it's multiple countries or currencies or relationships, in order to have all of those for a large enterprise, or otherwise, in order to have those authorization rates be at those peak levels, you need those connected tissues, not just unit cost to drive these prices down. So...

Correct. [indiscernible]

Awesome. Awesome. Well, look, I can't tell you how much I appreciate your time today. I know you all are very busy, and I very much appreciate this competitive narrative argument and the details you guys are putting out. So keep fighting the good fight. It will work, and we're fans. So thank you all again very much, Gary, Woody, Nate. Be well, and hopefully, we'll see you soon in person.

Thanks, Dan. Appreciate it.

All righty.