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

All right. We're good to go. Thanks, everybody, for joining us. This is -- my name is Tien-Tsin Huang. I cover the payments and the IT services sector at JPMorgan. And super happy to have Stephanie Ferris, who's the President and CEO at FIS. I've known Stephanie for quite some time dating back to the Vantiv days. And she may or may not remember, but I know you bit from the Fifth Third Processing days because that was a great contact that we had until things changed, and it became public. So Stephanie, welcome. Glad to have you.

Thank you. Thanks. It's good to be back here. I appreciate it.

I know you've been super busy. There's a lot going on. There's a lot to talk about. So I've taken a lot of the questions from the audience over the last several weeks to come up with this list. So I'll run through it. If we have time, we'll take questions, but hopefully, we can get through all of this. Should we get ready to it?

Yes, I'm ready. Let's do it.

All right, Stephanie. Thanks again for the time. So I was hoping you would just set the table for us. So thinking about your vision of the identity of FIS as well as heritage Worldpay. How would you describe each side?

Yes, it's a great question. So maybe start with a little bit of a story. So I just came off last week our client conference for our Banking business. We had 4,000 bankers in -- at the happiest place on Earth, Disney World last week. And I went into it with some trepidation. Now think about these bankers range from CEO, CIO, CTO, Heads of Commercial Bank, Heads of Retail Bank, up and down the spectrum of regional bank, community bank, credit union because we really serve all of them. And I went into it with some trepidation given what we as FIS have been doing broadly around the company and broadly because of the banking industry, trying to figure out how sentiment was going to feel. And I'm here to tell you on a positive note regardless of what you hear in -- on Bloomberg every day, which is crisis and stress, I would say all of these bankers are feeling very positive. So I think that's really positive and an important message to get across to everyone here because there is no feeling of crisis across the financial services and banking sector. And I'll add in terms of what are they focused on. So they are focused on making sure that they have a partner -- now remember, it's really important around reliability of their technology, especially given that deposit crisis can occur on them at any time. So reliability of their infrastructure, making sure that it's up every day is really important. But I would say even more important to them is really thinking about how do they drive efficiency within the bank. And that means more technology typically and outsourcing more operational capabilities. But probably more interesting than that is the focus they're going back to the basics from a banking standpoint in terms of, their loan officers are now talking about gathering deposits with loans. And so they're talking to us a lot about how do we -- we love your technology. We love the infrastructure. How do we use your products now to digitally interact with our customers? So in terms of consumer, making sure the consumer apps are as good as JPMorgan's consumer apps because, as you all know, less and less people are coming in the branches. They're also -- their commercial businesses are focused on treasury management products, integrated payables, receivables. How do they think about gathering commercial deposits and making those treasury -- those corporate treasury companies bring more deposits into the banks. I walked away with a really positive sentiment coming from all of those financial institutions. And I think it's important as one of the largest providers of financial technology across the spectrum to start to try and share this message. And I'm sorry if I'm hijacking your questions. But one of the best things about FIS is I serve the majority of financial institutions across the country and certainly the largest, everywhere from regional banks down to credit union. And I sit in an enviable spot where I can see deposit activity and transaction activity across all of the financial institutions. And what I would tell you is while there's a lot going on in the banking world, the majority of the banks actually are seeing net deposit increases. And they're also seeing deposit account increases. They're seeing higher loan activity. I think credit is definitely going to tighten up on them, as you've seen from the loan commercial officers. But broadly, these banks are not panicked like you would hear in the press. And I think it's really important as a provider to these financial institutions that I get to see the broad gambit to make sure that I share that with you as well as their sentiment being very positive. Now that being said, they are focused on profitability, as you would expect, and especially the regional banks. And so I think they're spending a lot of time talking to their teams about not only the cost of deposits, but how do they continue to drive efficiency, which I think accrues to FIS. So with that, what is the vision for FIS? We are the financial infrastructure provider to financial institutions and a global money market mover. And we understand that our place in the ecosystem is really important. We provide the infrastructure that drives financial services. And we've all seen what happens when financial services maybe go into a little bit of a crisis or there's a crisis of confidence. So we've spent a lot of money and time building our cloud computing technology. And we will continue to do that from a vision standpoint, but our focus now is building innovative product on top of that to deliver out to our banks as we think about heritage FIS. That's probably our vision going back to the basics with respect to what is heritage FIS. We're an infrastructure provider to banks. We're focused on helping them drive efficiencies and making sure that their products are best-in-class. And on top of that, making it easier to do business with us because we know that historically, as core processing and providers, we've been a little challenged to do business with. So we're really focusing and doubling down as well on customer service, customer experience and making it easier broadly to do business with us. So then Worldpay, which is the payments piece, as Tien-Tsin mentioned, that I historically was a part of and sold to FIS in 2019. It is in a little bit of a different spot in terms of being the largest payment processor in the world inside FIS. And I think for us, it's been a challenge because we've gotten into a tough spot with our balance sheet, whereby we don't have the M&A capital to continue to commit and help grow that business. If you think about payments businesses broadly, they are globally scaled platforms with global distribution. And so the way we grow business in the large-scale platform providers is buying product and distribution, putting on the platform and then distributing growing revenue and EBITDA. So I think we've been challenged to do that since 2019 since we bought the company. We've only done one acquisition. And if you compare that to a couple of our peers, that's a lot less than they've done. So as I look at my balance sheet and making sure that we can allocate capital and grow correctly to each piece of the business, we've agreed to spin off the Worldpay business. And I think they are the largest global acquirer in the world. They'll continue to play that position of strength. But as evidenced by our most recent Payrix acquisition, which we bought in 2021, I think at this point, and are growing at threefold. I think M&A capital and allocating capital there where you accrete more revenue and EBITDA is the right answer for them. So I would expect when Charles Drucker gets up here and it becomes its own public company, he'll talk to you a lot about how to grow the business through M&A capital, which is a little bit different than I think you're going to hear us talk about in heritage FIS. That was a very long answer, so I apologize.

No, important stuff to cover. I'm glad you went through it. So Stephanie, you and I have had a lot of great conversations around payments and a lot of nerdy stuff and I have the highest respect, right? Because you always looked at the chessboard, and you talked about things openly with us, and I always enjoyed those, but running FIS is different, right? You just mentioned that you're dealing with bank executives, whereas on the merchant side, you're dealing with merchants and the intricacies of payments. So my question is this, what have you learned from that Worldpay experience that's what you're going to bring to FIS, right? How are you going to run it differently than your predecessors?

I would say -- it's a great question. In the payments business end market moves at a different speed than the banking business. I would say maybe capitalizing on my predecessor in FIS. So we have this fantastic technology that's in the cloud. It's extraordinarily stable, predictable, delivers a great line of service for everyone. I think for us, we're really focused on going back to the basics. So you kind of heard me just talk about it, building on the technology, investing in the products that our banks need to be successful in growing their business. I think it was all -- it was hard on all of us over the last couple of years. COVID was definitely challenging, especially if you were running a payments business built on consumer spend. And when consumer spend literally stops, it's a pretty scary place to be. So I think that was tough on us over the last couple of years. But really focused from an FIS standpoint on back to the basics, investing in the technology, investing in the products, making sure we're going to deliver customer service. And then I would say, for the investment community, being maniacally focused on return on invested capital. I think that's what you saw us do on the payment side of the business is we were always really focused on where is the industry going? Where can we play strategically and making sure that every dollar we invest has the right return versus a peanut butter or capital allocation methodology or falling in love with something that might be happening in the space that at the end of the day, we don't have a competitive position for. And I'll give you an example. I mean, we -- on the payment side, we never made a big investment to compete with Clover or Square because for us, that we couldn't compete there. We didn't have the direct digital distribution. We didn't have feet on the street. We knew that was too far gone of a market for us. So we put our money in e-commerce. So as I think about running FIS, it's more about to being a compounder, going back to basics and really focusing on our end markets and making sure that we deliver, and we get the right returns for the investments we're making.

Good. So looking back to FIS and even some of the acquisitions that FIS made back in the day with Certegy and eFunds, you pick it, we identified it as being defensive, right? Because you're running the core system for a bank, accounts grow in up and down cycles. But I know there's a lot of nuance. You just said you came back from your meetings, and the bank system seems healthy. But talk to us about the defensiveness of the business, number one, and then the relevance of the technology and how do you see it as a compounder, is it as simple as it's going to grow with bank population? Do we need to be tracking new sales and bookings? What are some of the KPIs that we should be monitoring here, Stephanie?

Yes. So I think, look, the business is extraordinarily defensible. So it's long-term technology contracts to financial institutions over multi-years. And so it's very defensible, but you have -- we're really focused on every component of revenue. And what do I mean by that? It's not just about new sales. It's making sure that we book enough new sales with the right level of profitability, but also make sure we deliver best-in-class customer service so we don't attrite because in this big defensible moat, there's just not a lot of core churning at the end of the day. So the only reason someone would leave you is because you've given them bad client service or because you don't have the product set. And so we're really focused on making sure that not only do we sell new and focus on the pipeline there, but also making sure we deliver the right level of client service to reduce our attrition. And then we're also very specifically focused on pricing and thinking about pricing around how do we capture price and offset compression. So as we -- as I come into the chair, we are focused on every single lever in making sure that we maximize each lever. It is a great business. It's got a fantastic set of clients. It's got an enviable position. It's got long-term contracts, but we do need to make sure that we manage every lever. And I think some of my competitors, just to give them some props, have done a better job at that than we have over the last couple of years. The other thing I would say in the business that broadly you may or may not be aware of with respect to the banking business is there is a really nice set of payments assets within that business. So we have the nice network. We have an issuing business. We have a credit business. And then we have this great set of treasury assets, integrated payables and receivables. So what we're doing with those, again, is making sure that they're focused on delivering out to customers and helping them grow. But the guys that run core is different than the guys who would run B2B. So there's really an interesting set of assets in this banking business that I think we can maximize, whether it's making sure we lose as little as possible on the core, but also take as much value out of places in the market that are growing like B2B, for example.

Yes. So I know we're going to always focus on bookings and backlog. And I know you're making some sales changes as well. So can you remind the audience what to -- what we might expect in the short term versus the midterm with respect to the backlog?

Sure. So in the third quarter of last year, I made the difficult decision to change my Chief Revenue Officer, which is always -- I'm always hesitant to do because any time you do that and you disrupt the sales channel, you're going to have a good 4 to 6 quarters of a little bit of churn in the sales force. They have to learn their new comp plans. So what do we do there? We changed the Chief Revenue Officer. And as we came into the 2023 sales cycle, we changed comp plans, really focused on singles, doubles and triples versus only big, large strategic deals, making sure that we were focused on profitability of what we were selling. Every dollar is not created equal in the sales cycle, and then really reorientating our sales folks from being product sellers to really focus on the end vertical and having vertical expertise. That's a lot of change for a sales channel. So we are absorbing that. In fact, that's why as I gave guidance for banking for 2023, we had a lowered expectation around guidance. I expect backlog to mitigate. It might go negative here on us over the next couple of quarters and then come back out as we reposition ourselves and really focus on the selling. So you should expect to see that. That's not a surprise for me. We feel really good about 2023 and then even the midterm 2024 as we make that transition. But we're watching it really closely.

Okay. No, good. Thanks for going through that. So you mentioned a lot of the nuance around banking, capital markets, right? So you've owned capital markets, the old SunGard business. And it's actually done very, very well as you transition away from license more to service. What's the fitness and what's the synergy with banking and the importance of keeping it together?

Yes. I get this question all the time. So it's a great question. I think, first of all, look, it serves, in capital markets, a couple of things to know about it. One, it serves the large Tier 1 banks. So we serve financial institutions. There is a know-how around serving financial institutions. Regulatory compliance, the ability to be audited, all of that stuff, which is underestimated, I suspect, by everybody here, but not underestimated by banks that use our services. It's really important that their vendors can withstand those types of audits. And so when we are audited by every regulator that a bank is audited by. And that brings them a lot of comfort as they think about outsourcing activities to us. So with respect to banking and capital markets, I think serving banks, whether it's Tier 1 or regionals or community banks, there is an important overlap in terms of doing that because you have to have a level of expertise as well as the platform investment you have to make and making sure that every single one of your technology platforms are up and running. There's a huge amount of scale associated with keeping this size of transactions and technologies running. In fact, interesting little data point. Capital markets during the March high level of activity and April, they saw trading volume going across all of their platforms at 2.5x rates they've ever seen. And so when you think about -- we're just a really large infrastructure provider, and we have technology where you can burst into the cloud for those levels of surges, and those are huge surges. And so when you -- so you have to be a scaled technology provider. So I think, first, in terms of serving banks across the spectrum. And then secondly, serving at this level of technology and scale is really important. The other thing I'd say about capital markets, and huge hats off to my predecessors in terms of really making investments and turning -- it was a turnaround when they bought it. And it's certainly not now. It's firing on all cylinders. There are other pieces of the Capital Markets business that we probably don't share. It's not worth -- it's worth is due. They serve every large insurance company. They serve every large corporate with treasury management system. So there's a lot of corporate activity in there as well. Risk and regulatory, RegTech is a really big product for them across think about Tier 1 global banks in terms of whatever next regulatory compliance activity they have to comply with. We're going to pick up that product set and bring it down into the regional banks now that once that regulatory starts to roll downhill. So I think there's a lot of overlap, but the business is firing on all cylinders, and it's doing great.

So is there more incremental growth ahead as you make those changes, you go down the regional bank side? And investors do ask me all the time, the margins are very high, right, in that business. So the incremental margins are high. You don't need to grow high single digit, but it feels like there's potential there, no?

I feel like it is growing high single digits.

Sustainably. I'm sorry.

Yes. I think, look, have you talked to my President of capital markets? That's what he tells me all the time. These margins are too high.

High margins. 48% is whenever we're down.

I think it's a little high, transparently. I think we -- I pulled their lever pretty hard in terms of thinking about delivering on Future Forward this year. I don't think there's a ton more margin expansion there. There is always a trade-off in terms of making sure we're investing enough. I think they're already at upper single digits. I'm not sure we -- it's always a trade-off. I wouldn't expect to see major margin expansion out of them going forward because we do want to continue to invest in that business and grow it. I'd rather see the revenue at the top line than the incremental market.

Okay. No, look, hats off to the team to take it from where it was to grow high single digits. And if it's sustainable, even at a stable margin, that's a win.