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

Right. Welcome back, everybody. We're very, very pleased today to have Woody Woodall and Nate Rozof, CEO and EVP of Corporate Finance and IR, respectively, from FIS. Gentlemen, thank you so much for being here today. Greatly appreciate it.

Certainly, Ramsey. Great to see you.

Thanks for having us.

I wanted to start with a big picture question, and the question is what are the long-term trends that are benefiting FIS' business and will support growth over the long term over the next several years? And I ask the question because given what's going on in the sector, it feels like investors may have sort of lost the thread of the secular story here as we move on.

Yes, sure. Thanks for having us. I appreciate you taking time with us today. I think a couple of things for banking and capital markets, you continue to see our solution set resonating in the market. This has really been driven by investment over the past several years. As we've upgraded applications, we've updated our underlying infrastructure, and that's really built out what we believe is demand into a significant multiyear upgrade cycle that financial institutions are going through. We've got a high level of visibility into banking and cap markets. It's also given us some color around our backlog and the sales that we've had to build that backlog. That gives us a lot of visibility, and we really see those financial institutions continuing to upgrade their positions, upgrade their infrastructure, upgrade their applications to remain competitive to their markets and to improve their end user customer experiences. If you go to merchant, which is where a lot of the dialogue has been for us over the last few years, we still believe that our e-commerce capabilities and our significant enterprise capabilities have resonated well in the market. They're positioned well, continue to grow well and then we'll continue to invest to bring some of those e-commerce capabilities down market into the SMB market. So a combination of these factors, we felt really good about absorbing some of the macro that we've seen and some of the geopolitical events that we've seen. And we're able to reiterate our full year guidance and feel good about really the long-term prospects that FIS has to be able to grow that sort of high single-digit top line growth, drive margin expansion and drive very solid earnings per share growth.

All right. And you touched on macro. There does seem to be, understandably, quite a bit of macro fear out there regarding kind of the sustainability of consumer spending levels. Inflation, obviously, is a headwind. On the other hand, you've got a tight labor market. You got pretty clean consumer balance sheets coming out of the pandemic. So what's your latest thinking, your latest view on the sustainability of the consumer spending environment? What are you seeing across your business?

Yes. A couple of thoughts: one, the consumer spending doesn't impact banking and capital markets nearly as much. Just to give you color on that, those contracts have CPI escalators within them that flow through on the anniversary dates. The net interest margin, based on rate increases, are typically, given our banking customers, a propensity to buy more or at least an ability to buy more, given their net interest margin position. If you think about merchant, we have seen a rebound, obviously, in some of the verticals that were coming back after Omicron and after the pandemic, travel and air being the primary ones. But we've also seen some of the big-box stores in our enterprise business reopen and obviously see consumers flowing back into those areas. So far, I think what we've seen is continued strong spending environment from those consumers. We saw travel and air above 2019 levels in the March time frame. We don't anticipate that to be at full 2019 levels for the whole year, but we continue to believe it's going to be a tailwind over the course of 2022. And so far, we feel really good about what we've seen in sustainability of consumer spending. Inflation itself is actually a slight tailwind to the merchant business. Merchants can be priced on volumes or transactions. Probably 55% of our business is priced on vols so as you get a higher price item, we're getting a flow through on that and about 45% based on transactions. If you end up with lower average ticket size or you go into the grocery store more often in the week, we'll pick up those incremental transactions. So we feel like the business is positioned well regardless of how the spending environment flows. But to date, we've seen a pretty robust consumer spending environment.

Okay. And I'm going to walk through some of the segments and maybe starting with Merchant, although as you pointed out, not the majority of your business but performed better than our model, at least in the quarter. And I think with the help of some higher yields and you ended up, to your point, while you maintain guidance despite some macro headwinds. I guess can you just go back and talk about your confidence levels there in terms of implicitly raising guidance, meaning you didn't lower it despite some of these new tailwinds? And any additional color on quarter-to-date volumes, April, May? If you could just comment on those 2 items, that would be great.

Yes, a little more than a week ago, I guess, or right about a week ago, we had our earnings. Very pleased with the start to the year as we outlined. I think it did sort of positively reinforce some of the trends that we have been talking about in terms of recovery and reopening and driving that benefit. We have seen some of the verticals that we anticipated to drive tailwinds this year absolutely driving tailwinds and offsetting some of the macro headwinds that you just mentioned. This obviously would include travel and air. There are some other verticals that are maybe reverting to trend lines or pre-pandemic trend lines, like streaming or gaming. Crypto can have some volatility. But all in all, sort of the reopening and recovery that we've seen has offset some of the potential headwinds, being the geopolitical headwinds that we've seen in Eastern Europe being the most prominent for us specifically. But very pleased with it. If you think about April and May, we continue to see strong results in April, as we highlighted last week. Don't have a lot of color on May yet. Obviously, very early in May but haven't seen anything or any volume data that we see on a pretty regular basis that would show anything different than a continued performance of volume and transactions that we saw through March and into April. So we feel really good about the start of the year. And so far, feel really great about where things are headed. To your point, really allowing us to reiterate the full year guide, 15% growth was very solid for us. We felt very good about it. The yields were positive, about 5 points of positive yield, which is what we've been talking about and anticipating as we see some of our very concentrated and high-yield [ inverts ] come back. So again, very happy with the start of the year.

Great. And I wanted to ask about yields in that context. How should we think about yields? I guess, how would they trend for the remainder of the year? And then longer term, how should we think about yields in terms of how the mix of your business is evolving?

Yes. We anticipate yields to be a positive benefit over the course of the entire year through 2022. They were about 5 points positive in Q1, again anticipating each quarter to have positive yield impact, really driven by recovery in the higher-yielding areas that we saw. Travel was negatively impacted for us and obviously has a higher yield for us. SMB declined earlier in the pandemic. And as those verticals are recovering, those areas are recovering, we're seeing yields come back just as we expected, and we've been highlighting, as you guys note, for probably 12 to 18 months. Longer term, we do anticipate to generate positive yield after you sort of normalize, whatever that means, post COVID, but we anticipate positive yields, really driven off of a couple of things, positive mix as we continue to see eCom outpacing growth from enterprise and then SMB obviously outpacing enterprise overall in terms of growth. Both of those, eCommerce and SMB having higher yields than the enterprise business, as you might imagine. So we continue to feel like we're going to get some positive yield. That has been the historic practice, a combination of higher yields growing faster, coupled with value-added services that we want to continue to drive more share of wallet from the merchant. Those combinations have historically driven yields positive and we anticipate them to continue to drive yields positive. Maybe not at the same levels that we're seeing in 2022 but positive overall to volumes.

And Woody, on the travel side, I mean, you've already commented that you're seeing some nice recovery there. No speed bumps or ripples or hiccups based on any type of new virus rates of infection or an increase in infection rates? That seems to be just returning back to where it came from.

Yes, I think that's right. We certainly have seen strong travel and air rebound. March, particularly, I guess, really, we think about it in terms of sort of pent-up demand post Omicron drove volumes above 2019 levels, both consumer and commercial travel. We don't anticipate the full year to be in excess of '19 levels. We've talked about that coming back to full sort of pre-pandemic levels by 2023. But we do anticipate it to be a tailwind over the entire course of the year, and we'll just see how things are going. To your point, that's no new variant, no new anything like that. But in the current backdrop, that's what we're seeing and seeing it drive incremental growth. So yes, I'd say we're pleased with that bounce back.

Great. I wanted to ask you about Payrix and your overall SMB, eCom and kind of embedded payment strategy too. What did Payrix solve for you, guys? And I guess the question is, with Payrix, do you now have kind of the tools that you need to compete in the SMB space? Or are there other gaps that might need to be filled?

Yes. We're pleased with Payrix and how it's doing so far. I would say, it doubled its client count over Q1 last year, which was in line with our -- how we had modeled it from an acquisition model perspective. We do anticipate it being able to enable us to drive some of our eCommerce capabilities into the SMB space, where we think that is a lot of where we placed our bets is trying to drive eCommerce across everything and all things, and driving it in the SMB space is something we really needed some of the Payrix capabilities to do that. It brings on automated onboarding, automated underwriting, which are very helpful in that case in trying to drive that in the SMB space. Very difficult, in our minds, without a direct sales force to really drive it, so we needed some automated tools. We needed some automated capabilities to drive it into the SMB space. About 90% of our Payrix wins are coming from Stripe right now, so we certainly think it's very competitive. And we have the tools we need to compete in that space. I think it really wins on 3 primary reasons: payment flows, where they've embedded their payment flows to the platform. This keeps it feeling like a very white-labeled experience for the end user consumer and the platforms. I think this is a little different than how the competitors have theirs set up where you actually get redirected to a different page. So it feels a little different for the platforms themselves and for the customers. It has some customization capabilities that we think are pretty important in terms of making sure we can underwrite and onboard as we were describing. And then the pricing component, we think, is good. There hasn't been as much competition for eCommerce in the SMB space, and we think leveraging our scale, Payrix can price pretty competitive. So we're pretty pleased about it. Pretty excited about what it can bring to bear. Our goal has always been to continue to press and double down in eCommerce, and we think this is a way for us to do it and attract some incremental customers in the SMB space.

That's great. I want to talk about the Banking segment a little bit now. One question I had was from a competitive standpoint, are you seeing -- you guys seem to be in a bit of the catbird seat, as it were, having made the investments that you've made. What about the competitive situation when it comes to these larger-size asset -- institution with larger asset sizes? Who do you see around the table or are you guys kind of running the table?

Yes, it's a great question. I think we would like to toot our horn a little bit. We feel great about the investments that we've made, particularly utilizing MBP as a crown jewel example there. We were first in market with the Modern Banking Platform, fully cloud-native capabilities from the ground up. It had very, very strong success, as you've seen, with wins particularly in the larger institution space, which is where we really wanted to go after hard and thought had a lot of demand opportunity there. I would tell you, we do believe we're the only ones in market with a competitive offering for those guys at this point in time. When we work through the sales process for an MBP opportunity, it's really us versus in-house development. Can you convince the institution that your capability and the other, call it, 15, 16 wins that we've had is a better answer than trying to build something yourself internally? And we've had a lot of success doing that. But we feel really good about how we're positioned in the market there. We think we're, obviously, years ahead of others that are just starting to increase their investment cycle, where we feel like we're actually peaking and getting over our investment cycle and are taking advantage of an opportunity in the market to take a lot of share. We feel really good about MBP and what it's done. Right now, it's got deposits as well as some of the lending capabilities, but we'll continue to build out incremental capabilities there, but feel great about being able to jump-start our position in the market on this capability and this product.

Great. On Banking, you called out a few kind of tactical headwinds in the first half, including stimulus and term fees. And I think you mentioned sort of mid-single-digit growth in the second quarter as opposed to the 6% organic growth for the full year. Now there's not a great space between those 2 numbers, but help us think through the cadence of that business in the back half of the year and sort of what the key performance drivers might be?

Yes. We tried to highlight that Banking would grow at least 6% for the full year. As we start breaking it down into the quarter, we knew we had some term fee and some of the pandemic-related stimulus from 2021. That would be headwinds for 2022. I call it primarily in the first half of the year but really partially through the first 3 quarters of the year but more impactful in the first half of the year. The second quarter, which we highlighted in the mid-single-digit growth, has the greatest impact through a combination of term fees, and it was the biggest quarter that we saw PPP rolled out. So we expect Banking to decelerate a touch in the mid-single digits. And then in the back half of the year, we expect to see these headwinds lapse and modestly see Banking accelerate in the third and fourth quarters, which really gives us that confidence in 6-plus percent for the full year. So no real change there in sort of the overall outlook for Banking. Backlog continues to be solid, onboarding continues to be solid. So -- and the conversions continue to be solid. So this is really around just giving you a little bit of a color and cadence so nobody has any surprises along the way. When you think about margins, those thought processes flow through to Banking margins as well in Q1 and Q2 where in the second quarter, we again think Banking margins could contract just a touch based on term fees and some of that high-margin pandemic-related or stimulus-related revenue that we saw in the last year. And as we lapse these banking margins, we'll continue to expand in a more traditional way where you see the operating leverage in the business flowing through.

Got it. And you mentioned earlier, Woody, some CPI escalators or inflation escalators in some of the contracts. How do those work in terms of timing, the magnitude of potential offset? Explain to us technically how those basically will hit your...

Yes. Think about having a CPI-type escalator within a contract. We have contracts that renew every week over the course of the year with our clients. They're probably a little more muted in terms of renewal timing into the fourth quarter just based on history of how people have purchased and flushed out capital budgets over the years. Those CPI escalators at renewal date, when the customer renews or annualizes, we reset what the CPI would be in that contract based on the current index as indicated in the contract. Our contracts typically have floors in there of about 2%, with ceilings of generally around 6%. So we're obviously getting some level of benefit here this year. Over the past several years, when we were close to the floor based on inflation, it really kind of offset price compression. And this year, it should help us a little bit on the revenue side. As the year flows along, you'll see it continuing to flow up. We started seeing some level of incremental benefit last year at renewal. And obviously, we anticipate seeing some more benefit this year at renewal. But it's obviously -- it helps in terms of resiliency in a more difficult environment or more inflationary environment.

And I want to make sure I understood you correctly. The timing of these things is staggered. It's based on the different -- it's not like come January 1, everybody looks at the contract. It's a very staggered cadence?

That's right. So assuming that Ramsey, you signed a contract today, your contract will be coming up for renewal right now, we would up the increase in CPI to the current index. If Nate, on the other hand, had signed a contract in November, when we roll around through November, his contract will be indexed to the current CPI indicator at that point in time. So yes, very, very staggered. I would tell you they historically have been a little weighted towards the end of the year just based on historical buying cycles, but they're all over the course of the [ 4Q ].

And so should we think of the impact as one that basically just kind of hits sort of linearly -- not linearly, but it just hits as it hits sort of from now into next year? Or would you think of this more -- so it's not like you're thinking, this is more of a '23 thing than a '22 thing? It's just an ongoing...

It's just an ongoing incremental sort of offset to overall inflation and cost to help protect margins. It should help revenue a touch, but it really just helps the business model and helps the operating leverage in the business model.

And moving over to the Capital Market segment. Is there -- help us think through the macro and/or the macro impact on that segment. How does -- is there a part of that market that has benefited from -- that benefit from higher rates or market volatility? Or what is the macro overlay on that side of things?

Yes. A couple of thoughts on that. One, we do have some of our contracts in Capital Markets, many of our contracts in Capital Markets, not to the same level of Banking, but many of our Capital Markets contracts have a similar model around price escalators and CPI-type escalators within there that again would flow through in normal course upon renewal. There are also a couple of areas in Capital Markets that have benefited, I think, probably roughly, I don't know, 3% to 5% of Capital Markets revenue would be associated with really a combination of rates. An increasing rate environment will be beneficial, trading volumes and/or assets under management, but are relatively small compared to the balance of the business. What we will continue to do is try to push that segment more towards our SaaS model, where we can continue to get more visibility and more recurring revenue out of the segment. That segment was about 60% when we bought SunGard back in '15. It's in the low 70s now. It will continue to push up, so it gives us a lot more visibility, a lot more ability to sort of grab share of wallet as we continue to cross-sell and it makes it a very sticky product set versus that traditional license model that's ongoing.

And just changing channels on you here. I wanted to ask about your view on the regulatory environment. A little bit unexpectedly, there was some commentary out of the CFPB calling out core processors having a hold on -- allegedly having a hold on smaller players in financial services. What do you make of that? Are you expecting any type of intensification of environment here? Or what do you make of that?

Yes. I would tell you, we've always been in a regulated environment. That doesn't surprise me to hear some things like that coming out of the regulatory groups. What we're focused on is empowering our clients, helping them drive their business, improve their end user consumer experiences, lower their total cost of operations compared to the -- to trying to do something in-house and make them competitive in the banking sector. Our pricing has always been, or for decades, has been pay as you grow. So as more transactions happen, we'll get paid. If you have more accounts, more deposits as the bank grows, we'll get paid more. And we've done it on a very consistent basis that drives their total cost of ownership down. And really, as you know, our goal has always been to make our institutions more competitive and better prepared to compete into the future. So we feel really good about our business model and what it does to these banks. We've invested very heavily to continue and try to give them more capabilities, driving solution sets and lowering their total cost of ownership. So I feel good about what we've done and where we're positioned in the space, but we've always been regulated. I don't see this as an incremental upping of the annual incremental significant change.

Fair enough. And this is a question that is a little bit out of order because it's about your Merchant business, which we spoke about a few minutes ago. But it is a question that I get from investors fairly frequently, which is folks out of the pandemic have become very accustomed to kind of benchmarking your volumes relative to Mastercard and Visa's volumes. And I just want -- I was wondering if you could help us think through sort of your payment mix and what FIS-specific differences are there that might cause you guys to either diverge maybe to the upside or the downside relative to network volumes.

Yes, we're trying to highlight that we're generally correlated to Visa and Mastercard, where it's become a dialogue now that it needs to be exactly the same now or there's some change. So shame on us, we're not giving you more color around that. Our volume mix is tied to enterprise and eCommerce primarily. Our SMB business is smaller relative to others. So while we do benefit from their recovery, we don't see the same benefit that the networks might. Also, our point-of-sale business is driven primarily in the U.S. and U.K. The networks have global exposure far beyond the U.S. and U.K., and they would benefit from regions like Latin America, which I think they called out in the first quarter, where we really don't have much exposure at all. Asia Pac and EMEA, we wouldn't see necessarily the same volumes. Net-net, we continue to expect our volumes to grow really kind of the high single digits with incremental yield benefit. General correlation to the networks has been exactly what we've been trying to highlight. We also highlighted the Nielsen report that really show we're not losing share. So we feel good about our position in the marketplace. But mix really matters here. We've been talking about that a lot, but mix really matters, and we're seeing obviously the benefit coming back with yields because of that mix impact that we have specifically.

Okay. Another question that I get somewhat frequently from investors has to do with M&A. And there's this thought that broader fintech multiples, having contracted in the space, that players like you guys who have real healthy cash flows and a clean balance sheet might be able to pick up some kind of bargains. What are you seeing out there in the marketplace? Is there more availability of assets than there was recently or maybe the owners of some of these assets are not quite there yet? But what do you think of that thought of a wave of consolidation coming out of these retrenchment in valuations?

Yes. I think it's a great way you framed the question because values have come down a lot. Multiples have come down a lot. The second portion of your question was, are those owners or are those leadership teams ready? And have they absorbed that change in multiple and change in valuation at this point? Or does that need to soak in a little more before they really become available? I think we're in the latter right now. Will there be opportunities in the space at lower multiples than we've seen before? Certainly, I believe that to be the case. In the short run, I think we've highlighted, we think probably the lowest risk and highest return. We can get us to buy our own shares back. But as you also know, in saying that, M&A has always been a significant pillar for us over the 14 years I've been here. So yes, I think we continue to look out there, Ramsey. But in the short term and I call the short term maybe the next 18 months, I think we're going to look primarily at share repurchase as the primary utilization of excess free cash flow now that we've got our balance sheet positioned well, and we'll continue to pay and grow the dividend. But that's how we use -- would anticipate utilizing the excess free cash flow. Not to say that at some point over the next 18 months, you might see an asset or 2 flowing through, but I don't think it will be a significant component of that capital allocation.

I see. And maybe -- we are just about out of time here, maybe a minute or 2 left. Maybe you could comment on the broader expense environment. And I think wage inflation was something that had impacted you and everybody else in the space prior. What do you think in terms of the broader expense environment, how do you see that trending over the next stretch?

Yes. I think we've always been really transparent. We actually called out wage and labor costs in the third quarter, call it last year, back in the November time frame, which was a little earlier than most in the space. We are certainly continuing to see labor costs and wage inflation negatively impacting us right now. We've guided to about 100 basis of headwind due to wage inflation, a little more heavily weighted in Banking where more of the people are aligned but feel good about what we guided. We haven't changed any point of view around that but it certainly continues to be a headwind. The war for talent in the marketplace continues to be forefront where we're trying to continue to drive new talent and existing talent into the business to help drive that growth curve that we've outlined. But I would say it hasn't changed a lot. It still seems to be there. We've also priced in our guide a number of rate hikes really in line with the current Fed commentary and continue to watch that closely on the interest expense line. But those will be the 2 big items that I'd really call out on the expense side right now.

Terrific. Well, unfortunately, we are out of time but it was a pleasure speaking with you both. And have a great day, and thanks again for being here.

Thank you, Ramsey. Great to talk with you. I appreciate it.