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

Okay. Let's keep going. Thank you, everyone, for sticking with us throughout the day. My name is Tien-Tsin Huang. I follow the payments and IT services sector. We got FIS up to bat here. With us from FIS, we have James Kehoe, CFO. Just came back from the Investor Day, obviously, not too long ago, so I had some questions that I've put together to go through that, that I've collected from the group. And hopefully, we'll have some time for the audience to ask questions as well. But James, thank you for the time.

Yes. Thank you, Tien-Tsin.

Looking forward to speaking with you. So I thought I'd start out, if that's okay. I know, what, 9 months on the job, something like that.

Yes. Yes.

The Analyst Day is behind you. You're coming in from the outside. I'm curious, you went through revenues, cost, margin, capital returns. What are you most excited about coming in from the outside to execute against and to underline for us investors here?

I don't want to be obvious. I would say all of the above. But actually, I think the thing I'm more excited about is the greater appreciation I've built. What's the unique proposition of the company? Number one, we are the scaled technology leader in the banking and capital markets sector. Two is we've got global distribution and marquee clients. And then we have probably the broadest range of suite of products on offer, and most of them are best in breed. So the reason I'm most excited about that is that's the reason we have to win. And then as I came into the company and looked at the revenue goals, the margin goals, we wanted to set a series of goals in Investor Day that the market wouldn't look at it and say, "These guys are crazy. This is too aggressive." We set eminently achievable goals for revenue and EBITDA margin, and we've made some pretty bold statements on capital allocation since I joined. When Stephanie first presented the Worldpay acquisition -- divestiture, sorry, she's committed to $2.5 billion of return of capital to shareholders. That equivalent number now is $4.5 billion. So a lot of work done on scraping the deal, looking at long-term commitments on free cash flow conversion, how do we return sufficient capital to shareholders. We made a lot of changes. The dividend policy went to 35%. So I think we've lined up all the ducks now, and this is now an execution story against a strong set of goals. I want to express this, we are really confident that we will hit the 9% to 12% on EPS. And we pay a dividend that's above the peer set. So our total return, we believe, is in the 11% to 14%. And we presented it with confidence, and we feel very confident about the ability to deliver.

Yes. And I commend you for it. I thought that came out very, very clearly. And I remember we had Stephanie here last year, and she talked about the recurring nature of the business and the high visibility and that you've come with us with more information on what the right total return profile. You just went through it a little bit. But maybe just on the visibility part, James, for the benefit of everyone here, speak to that. 80% of the business is recurring, 20% is nonrecurring. How do you assess the visibility?

Yes. The visibility is good. I think the more shocking thing since I joined for me is the resilience of the recurring, and it gets back to this excitement thing, first question is you take a look at it, the recurring and Banking, 83%, 82%, 73% in Capital Markets. But if you look at the core transactions across both businesses, take Banking, just the growth in accounts and transactions in Banking gives you a natural 3% volume growth in the business. That's what it gets. That's your starting point. So everything on top, I think gains you make across on clients comes on top of that, M&A comes on top. So the beauty is the 3%. And in the first quarter, to build investors' confidence with this, we showed the recurring growth rate over the last 4 years, and the average is 4%. The lowest in the last 4 years is 2020 at 2%, right?

Right.

And that's in the midst of COVID when transactions have really fallen off. So I want to emphasize, it's 83% recurring, and it's remarkably resilient over a longer period. You do the same on the Capital Markets business. And probably the easiest number there is the total addressable market is growing at 6%, right? Yes, we have more aggressive goals, but yes, we're also putting in place a comprehensive M&A program and faster growth in, call it, nontraditional verticals. And I always like a data point in the past. The business similarly over the last 3 years has grown at 6% to 7% on recurring. And last year was actually higher than the trend, that was 9%. So you could argue, we're setting revenue goals that the business is more than capable of delivering. So essentially, that's why I say it's kind of like it's an execution story. So it's the quality of this 80% that is great. And then two is we're slowly working ourselves out of nonrecurring not because it's bad, but we want the market to focus on the durability and the terminal value of our revenue. That 80% will creep up over time. It's not going to be dramatic. I would guess, in 3 years, the 83% goes to -- sorry, the 80% goes to 82%, 83%, probably with Capital Markets expanding faster on nonrecurring. And within the -- sorry, on recurring. In the nonrecurring, you got basically two big pieces. You got licenses, and these are basically upfront licenses for a longer duration. And they're at a close to 100% margin, right? So -- and a lot of particularly international clients want an upfront license, right? Two is then you've got professional services, which is a large business for us. That is effectively using our staff to implement software and services within the banks or capital markets. That's a much lower margin. It's about 35%. Now prior management did change -- chase a lot of outsourcing deals and professional services at this lower margin. And it drove revenue in the short term, and it plateaued in the most recent past and led to a decline in margins. We're not getting back into chasing revenue. We want to demonstrate to the investors the resilience of the recurring revenue and the terminal value of the company.

The incremental margins -- thank you for going through that. On the recurring side, I would imagine the incremental margins are quite high in that it's a utility in a lot of ways. Can you comment on that?

Yes. We're not going to give specific numbers, but we have a broad mix of businesses. And the margins could range from 95% down to a lower number. We do have businesses that do credit card production, right? So we have some very stable, profitable business, but they're at a lower margin. But you're right, core banking platforms, digital platforms, payment platforms, they're all at very high incremental margins.

You just mentioned that general baseline growth is very tight, small standard deviation. But the perception is that there is some cyclicality, James, around the business and exposure to bank IT spending. How are you exposed there, especially when people are thinking, oh, maintenance spend is fine, but we're going to open up and spend a little bit more on bank IT? Does that drive incremental business for you?

Yes, it does. What we're seeing currently in the market, and we're not seeing dramatic shifts in spending. So maybe the spending is similar. There could be less spending on modernization of cores because that's more discretionary at times. There is a large shift to digital and payments spending. Banks want to get more deposit accounts. Digital capabilities are much more important. That's growing like gangbusters. So the overall impact on us is neutral to slightly positive. The other trend you could talk about in the market is consolidation. I think George always gives me a statistic that 250 banks some years will get absorbed in the system. They're mostly absorbed by the bigger banks. So in the -- we have a 58% share of large financial institutions. As consolidation happens, that roughly gives us a tailwind of 50 to 100 basis points depending on the year. So we have -- on offsetting many of the other pressures, we have this natural tailwind coming from our products. If you think about our product set, you got IBS, and you got Digital One. And for large banks, we really don't have a significant competitor. Jack Henry is not in the market. And because what does our product give? It gives large banks significant commercial banking capabilities, and none of the competitors offer the same range of capabilities. So that's why our share is very deep in LFI. It's because the product is very, very good, right? So it's -- that got me excited as well. It's a defendable moat, and the product is good and the switching costs are high. So you're pretty much protected in the biggest part of your business.

Got it. So back to the -- staying within Banking, back to the underlying growth of the 3% and building into that, I know it's very stable and resilient. Those accounts that you're describing, that's basically a bank account, right, a DBA, a savings account, which is pretty steady growth in up or down markets. So then you have transactions that are transacting against those accounts, which you said, I think, is growing 5%, correct?

Well, no, the accounts are growing somewhere between 2.5%, 3%, and it's been pretty consistent over the last 3 years. And that's a volume number. And then two is transactions, for example, in debit networks and credit networks, they're up about 4.5%, 5%, what we see. So that gives us a weighted average on transactions of roughly 3%.

Got it.

Yes. And then you could look at the TAMs wherein as well, if you take it from a TAM perspective, it's roughly 4%, right? That's on a value basis. So we look at multiple cuts to figure out what's the sustainability of the revenue over time.

Got it. How does pricing work into that algorithm, that equation, James? When you're adding all those things up in terms of recurring revenue growth, what's the pricing impact on that?

Yes. It's very different when you look at Banking versus Capital Markets, very, very different. Banking, you look back over maybe 3 to 4 years, the contribution from gross pricing is probably 100 basis points, maybe 150. But it's naturally offset by compression. So we do find that every time you renegotiate a new contract, there is a competitive bidding process. That's just good business. It's good when we do it, it's good when banks do it, but that causes compression. So the net contribution of pricing in Banking is close to 0, right? So we don't rely on pricing. I don't think our customers would accept it either. I think anything we get on top on pricing is coming from you're bringing more value to the banks and your clients. Capital Markets is a little bit different. It's got way more customers, less revenue per customer. So they've got roughly 6,000 clients spread over 150 countries. So as you can imagine, the -- you've typically got one product per customer. It's a best-in-breed product. It could be in derivatives. It could be in hedge funds. It could be in insurance, right? The products are much more specific. There's typically one, and the pricing power is quite good. An interesting stat is only 30% of the customers have more than one product. That also gives us big white space opportunity, but it also shows that we got a lot of smaller clients where you got more pricing power. The net benefit in the revenue line is about 2 percentage points a year.

Got it. Okay. No, thanks for going through that.

Yes.

Yes, because as we think about the growth algorithm, the pricing, of course, is a big focus for investors, but we have a lot of newer players, disruptors within the fintech that are at the conference as well. I think by my math, you're looking within Banking to add about 1.5 to 2.5 points of annual growth from high-growth products, right? So call it $135 million in revenue or so, which would put you in a Class D-or-so conversation with the fintech. How -- what are these products? Can you give us some examples? And how do these sales typically build to get to that 1.5 to 2.5 points of growth?

Yes. Now the two places we're most focused on is faster-growing TAMs, which typically digital, and then the other one is payments. Digital and what kind of assets do we have? We got Payments One already in place that can take both debit and credit. We have -- and offers a complete suite of products within that. You've also got Digital One for the bigger banks, very well developed and nice network. So we've done a lot of investment over the past years, and we're well positioned. And I don't know if you listened in to Investor Day. One of the -- what Stephanie said upfront, and it's 100% right is the company lost focus on the core business, shifted a lot of people from Banking into managed Worldpay, didn't pay sufficient attention to the core and especially didn't focus on the FIS payments business and digital business. So now the investments have been put in place again and a large focus. So think about it, you got the core banking at 3, the digital and payments will grow at high single digit. And that gives you this incremental growth, supplemented by probably 0.5 point to 100 basis points from acquisitions. We will selectively acquire. A good example in payments is the whole business of accounts payable, accounts receivable, call it B2B. We already have some pretty good assets there. Could we build them out more, get incremental growth? The answer is yes. So we're looking at digital and payments also on the M&A side.

Okay. So to be clear, on the M&A side, these are more product type of companies.

Product, yes, yes. They're all product companies, yes. We have some investments in organic we're making in digital. Our strength is in the LFI, so our digital product is really well. And our weakness is in community banks, and we have a lot of gaps to close. And we've said this publicly, we've allocated $65 million to new investments in our community, call it our one-to-many digital product. We became uncompetitive in some of the offerings to their core consumers. If we don't close it with internal investments, we will make a digital acquisition. But it won't be a big one.

Okay. It won't be a big one.

It won't be a big one.

Yes, because that's the question I get, right?

We don't need to acquire a big asset to be successful. We really don't. We got to fill in select gaps in existing products, and we don't need to do $1 billion, $2 billion acquisition in digital. There are some good assets out there $100 million to -- maybe not $100 million, $200 million to $300 million range to fill out the gaps we need to fill out. It's different.

Okay. No, because we get that.

And this will make us a lot more competitive in community banking because our digital asset is weaker than what the competitive set have right now.

We didn't talk about it. But before we transition to Capital Markets a little bit more, just the cross-sell opportunity. I wanted to ask that earlier. I do get that question quite a bit. How real is that in terms of cross-selling between the two?

Well, it's pervasive in the company, and it's been underexploited, and Stephanie is all over it right now. We got -- the interesting thing, we got cross-sell within the business segments, I mean, got cross-sell between the two segments, and we quantified at Investor Day. We have -- there's a 70% overlap between clients between Capital Markets and Banking. And if we start -- we've gone in and looked at it segment by segment and quantified a $400 million opportunity. Now you won't get that in a year. You're going to get them maybe over a 3-year period. There's also cross-sell within each of the segments. So think about it, 70% of our core banking customers also take the debit product. They're highly integrated. So the question is, can you get the 70% up to 80% up to 90%, right? And then within Capital Markets, the more -- the bigger asset management companies typically would take 6 or 7 products as opposed to 1 product. So there's continual cross-sell and upsell of offerings to the more sophisticated institutions. And that's what we call all white space. So one of the main reasons -- ways we got at this is the -- it was a little traumatic at the beginning of last year, but the sales forces were combined within -- between Capital Markets and Banking, which means that the go-to-market now is one individual who serves both divisions. Now you could say that's really complex because of the breadth of your offering, but the specialization is under the client relationship managers. So our sales force of 1,600 people and client relationship managers, that's combined Banking and Capital Markets. So that's how we intend to drive the cross-sell.

So a lot of it sounds like the sales compensation, motivation is there to do the cross-sell across the two but also, as you mentioned, selling Payments One into the core banking unit or doing a better job selling NICE, that's the network into the core.