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

Good afternoon, everybody, and thanks again for joining us on day 2 of the Wolfe FinTech Forum here in New York City. Really happy to have FIS with us and the CFO, James Kehoe. We also have George Mihalos from Investor Relations here. Guys, thanks for being here. James, thanks for being here.

Thanks, Darrin.

I remember last year, it was a great, great conversation we had. And I think it was actually one of the earlier ones you did after switching to the role in terms of fireside chats and conferences, right? But it's great to have you back. So thanks.

Maybe we'll just start off just to look back at '24. Maybe just touch on what are some of the things you're most proud of in terms of the accomplishments of the company from last year. Obviously, it was a year after a big transition was going on, right, with Worldpay and with material capital return, but also realigning the business under new leadership. And so maybe just give us a recap a little bit of the year and how you exited the year, and we'll go into going -- looking forward.

Okay. How would I characterize it? Rollercoaster. Yes, joking aside, Worldpay, end of January, that's when the real work starts. It looks like on paper, it's done. It's not done. TSAs are in place. You got to do the accounting for them. Two is a big change. We're proud of the pivot that we made to returning capital to shareholders. The full year of $4.8 billion. This year, we're committing to $2 billion, of which a buyback $1.2 billion. It's above what we said at Investor Day. And that brings me to another theme, Investor Day. I think it's a useful exercise. It was the first time in 6 years. It's useful to go through it when you try to carve out and explain what the business is. We broadly achieved our goals. But even as you step back now, I'm still not sure the market fully appreciates the value of the Capital Markets business. And then I think the bigger breakthrough was on operational excellence. I think you started to see the fruits of this. And I'll just give you a couple of numbers. The ACV was up 9%, of which banking was up low teens. That's a big success, okay, recovering from a weaker prior year, but it's a good stake in the ground that the sales force is focused on the right stuff. Within that, digital was up 70%; lending, up double digit. So I think we -- particularly, we exited the year in a position of strength in the sales force with a reinvigorated sales force. Horizon, our, call it, lower to mid-market core platform had regained its momentum in the market. And that's why we had a record year of core wins. The NPS scores started improving. Implementation times are better. The product quality was better. So it really has got our position back in the market, and we're going to continue to win in core.

Maybe just going back for a moment to fourth quarter. If you could just revisit it and make sure investors understood whatever you wanted them to really take away from the quarter, it would be a good place to start.

I was avoiding your question. Okay. That didn't work. What do you want to take away from the quarter? One is we were unhappy about it. We got hit late in the quarter with stuff I would describe as purely onetime. And it created almost a perfect storm, a termination that got reversed in the quarter and you have a true-up of some other small stuff. And really it was small stuff relating to prior years. And it just showed how much the market has focused on one number in banking. And I think what was a bit lost on the market was the strength of the delivery in the overall year was pretty good. If you carve out the onetime stuff headwinds we had and you take out M&A, you take out Worldpay revenue, all the rest, the core revenue in banking was up around 3%, which was still a decent year. And then the recurring revenue was up about 3.5%, again, a decent year. And I think it serves to, we should have highlighted more, if you look back over 4 or 5 years, this is a business that consistently grows at 3% to 4%, right? And it has all the potential to accelerate from there, okay? I think that was missing. Margins were good in the fourth quarter across both businesses. Capital Markets had a spectacular year, exited very strongly as well, beat the full year guide convincingly. And I think we're remembered for the miss as opposed to the consistency of delivery over 2 years, which -- that's the way the markets work. But we were surprised by the reaction to it because the underlying core of the business was actually decently strong.

Right. So look, I mean, I guess when we take into account some of these items that did affect the quarter, and it kind of brings me to the next question, I mean you guided for overall company-wide revenue growth of 4.6% to 5.2% for the year. As you said, it should be a recurring stable revenue story, right? And we saw some fits and starts with onetime items. But looking at the year ahead of us, you also guided EPS growth of 9% to 11%, which is pretty similar to your Investor Day targets. If you could just talk about the puts and takes in the year ahead, the reason for the conviction in the acceleration from first quarter guide of around 3% to that midpoint closer to 5% and really, especially in the banking segment, what informs that acceleration and the conviction in it? Do you still have as much conviction now as you did when you gave it? And then just what informs the bottom end of the range versus the top-end outcomes?

Yes. I'll start with the easy one, which is Capital Markets. in all of the individual meetings, we continue to get the question, is it a conservative forecast? What happened in Capital Markets is they came in very strong in Q4, particularly on licenses. We didn't change the license forecast for '25. So is there some opportunity in Capital Markets in '25? Probably. If you look at the banking business, there isn't an acceleration. We have in first quarter, we have some shift of business between -- about 100 basis points between Q1 and Q2. So that explains some of the step-up. The biggest single driver in the step-up year-on-year is the impact of net new sales, 150 basis points, and it comes from 2 things, roughly split 50-50, one is better retention and the other one is new sales that you sell -- that you sold last year or you will sell in the current year. So let me take both of those. So retention,, in general, was in the high 90s in the second half. So this is of every contract negotiation we're in. You're basically retaining all of your customers. So what happens is that means that if you're retaining a higher number, the level of attrition in the future year goes down. And it is a positive driver on the year-on-year growth, right? The biggest single driver, though, is new sales. And what we said was in banking, it's 80 bps, 20% of that is unsigned and 80% already signed. So if you think about our risk profile, the maximum risk in the guide for banking is 20% of 80 bps. That's the way I would try and simplify the calculation. So that is it's effectively sales that you will sell -- ACV you will sell in 2025 that will convert to revenue in 2025. That's the risk. I would say retention is probably an opportunity versus when we put the budget together. And then you asked about conviction. We actually -- after we put the budget together, the fourth quarter, particularly in both businesses, but particularly in banking, came in better on ACV in the fourth quarter. And ACV in the fourth quarter is -- will convert in 2025, probably in the latter part of 2025. So what you have, if you can think about it, the net new sales in Q1 is X, Q2 is X plus 50 bps, Q2 (sic) [ Q3 ] is X plus 100 bps. Q4 is X plus 150 bps. It continues to accelerate during the year as the 2024 sales, in particular, convert in 2025.

Okay. So your conviction is high. I mean, we're in March now.

I would say the conviction is probably even higher.

Okay. Because where we are in March now and seeing what we saw in ACV.

There's a bit of madness in the markets right now, but we're in a very resilient sector, if you think about it. We're not impacted by tariffs. As a company, we're not exposed to consumers, particularly. We have a fairly small credit exposure and a much bigger debit business. And debit generally does better. In uncertainty, it's less discretionary. So we're feeling in an okay place. We don't see a slowdown in bank spending. So we're kind of steady as she goes. Strong rigor around commercial excellence and a lot of focus on it.

So the step function in your embedded guide from Q1, especially in the banking segment, right, it probably has a lot to do with some of these nature -- some of these onetime item events happening, whether it's comping term fees and license fees, run over dis-synergies of the Worldpay transition and whatnot. But help us understand again, I mean, you're going to -- you're guiding to, I think it's 1% growth in banking overall in Q1, and then you have it accelerating as the year progresses because for the full year, your guide is 3% to 4% or so for the banking segment, right?

Yes. Well, I think we had -- we called out 2 items on the call. And I hate to do this excluding, excluding because you kind of end up being defensive. But if you take the guide, you said it's 1%. We're lapping about 200 basis points of licenses in the prior quarter. We only called those out. It was too massive. One was a term fee and the other one was a really large license, like in the 20s...

Q1 '24.

Q1 of '24, we called that out. And then we said there's some delays from Q1 to Q2. That's about 100 bps. If you do that math, you kind of get to a 4% normalized. But I think the market doesn't want to hear all the normalization because it comes across as defensive. We actually -- once you carve out those specific items we're lapping, the actual core is, call it, close to a 4%, and that's ex M&A. So that's kind of where we look at it. You try to get -- we tried to give comfort to the market on our visibility. And we took the unusual step of giving a form of guide for the second quarter on banking, basically saying we'll be well within the full year guide. And you can be assured that our methodology, I think I said it last year, is the high end of our guide is the -- it's not the banking forecast or the banking budget. It's the banking budget risk-adjusted. We do a risk adjustment of that corporate and say we think banking can do this. That's the high end of the guide. The low end, there's no science. We basically say you just want some range on revenue. You want some cushion. But it's not scientific. You could actually -- so I'll give you a good example. Let's say, the banking plan was 4%. As a matter of policy, we can't range from 3.5% to 4.5%. That's just a company policy. You have to have a plan that substantiates the high end of the range. So it kind of ties our hands a little bit and makes us work with a narrow range.

So when we consider those items, the 200 bps that you're going to basically anniversary, right, through 1 quarter, combined with some of the other nuances we just talked about, you end up with that alone being -- assuming implementations go effective, right, being back to 3%, 4% for second quarter, and it sounds like you're still seeing conviction in that. I think that brings me to the question of your visibility on the implementations, right? I mean, again, you said yourself, it was about 100 basis point impact last quarter, right? And so -- what are you seeing? I mean there's been delays. I mean, what are your -- what's causing those delays first? What happened? Was it the customer that was taking longer? Was it you guys? And where are we on those implementations now?

Yes, 2 out of the 3 were client requests. They basically said, we're too close to Thanksgiving. We're coming up to Christmas period. We don't want to implement over year-end. It's a peak transaction time. The good news is one of the two has already went live last week, I believe. And the other one is going live next week. So we're kind of later than planned. We're doing what we said we would do because both of them are going live. The first one is slightly ahead of when we expected. The other one is a large merger. And it's -- my understanding is it's slated for the second quarter, and that should be reasonably certain. But this is a contract dating back to 2023 that was signed in 2023 that the client delayed pending the outcome of their merger. But even if the merger doesn't come true, the contract is still a valid contract. It's just the timing difference.

That's great to hear, James. Let's just shift for a little bit to the community banking side of things. I mean you've noted, obviously, a refocusing on core operations. You've seen some tangible gains on that front. I know you've talked about digital sales having nearly doubled and the number of core banking deals signed on track above '23 levels and other prior levels for that matter. So just how are you guys thinking of leveraging this momentum to drive future growth? It's an area that I know you've had fits and starts on over the last few years, right? So it seems like we're really investing back into it again. And what's helping you win share in that community and regional bank segment again?

Yes. I think I would crystallize. The Phase 1 was client-centricity. This year is all about and the go forward is all about -- we've got 3 pillars in the company. One is end-to-end product excellence. And I think the Horizon shows once you have a core product that's actually working, you can sell it, right? And our sales force can sell it. We have a product excellence case study in Horizon, and I'll come back to it. The second part of the journey is, I would call it, commercial excellence, ACV and selling into the client. Again, I'll come back to that in a minute. And the third one is client experience. So we see these 3 vectors driving our performance going forward. Let me -- I'll go through one by one. So product, first of all. With Horizon, the product had defects, the execution in market was slower than planned. Clients were dissatisfied. Stephanie came in, fixed the execution. The product is way, way better. And we're winning traction in the market, record year of new cores, mostly driven by traction on Horizon. So we're in a position where the company is focused on if we have products, they will be working, they won't have defects, they will be -- it's called product excellence. Number two is the experience that the client receives is not necessarily the product they get. You got to implement it. You'll have questions when you're running the product. You'll have tickets that open up. We're marshaling teams around the client experience with goals around NPS scores at the client level, plus implementation time lines that you referred to before. We're holding one organization accountable for the implementation of sales already sold in prior periods. The final one is customer -- sorry, call it, commercial excellence, taking it up a level, whereas before we looked at the function as this is a sales function. Now we've improved the specialization. We've changed sales incentives, and we're focused much more on enterprise-level pricing. So we're going to be relying on those 3 vectors going forward. The organization is very much focused on this in the current year. New teams have been set up against each one of these. So call it a doubling down on client centricity. This is Stage 2. And I have really high hopes for performance in -- especially into -- exiting '25 and into 2026.

Great. That's really helpful. From a demand and from a -- it sounds like you said before, demand for banking in terms of technology upgrades and probably digitization is still as high as or any changes or what you're seeing out there?

No, I think it's more of a validation of our existing strategy. We said at Investor Day, core banking will go along at its normal low single-digit growth, and we don't expect major change versus that over a long-term horizon. But we see tremendous growth in digital, up 70% last year. We have ambitious goals for this year. It does require investment. We're investing -- we have strength in the bigger institutions, and we did a Dragonfly acquisition. We're investing. Most of our capital investment is on D1 Flex, call it, the mid- to lower market digital product. We still have some catching up to do. So I would say you're going to see continued gains in our digital ACV sales going forward. The other big one that we're highly focused on is office of the CFO, which is how do we bring to bear the big suite of best-in-breed products for CFOs that have different necessarily things that they want to solve for leading treasury systems, risk products, accounts payable, receiving billing systems. And we're going to bring a suite of products to -- we are bringing a suite of products to market. We've already assembled a sales force -- dedicated sales force of 100 people focused on this with a dedicated VP of Sales. So we're taking, I think -- and it's the other part of the change that underpins future growth, which is Stage 1 was capture cross-sell across the business. Stage 2 where we implemented in Q4, which is pushing more specialization down into the sales force.

Very good. All right. When we go to the Capital Markets segment, you mentioned it earlier, you were getting some questions. But again, I mean, it had another strong year last year and probably begets some of the questions you're getting of the kind of growth you've been already seeing in sustainability around that. So again, you delivered 7% revenue growth with adjusted EBITDA margins also expanding, right, over 70 basis points. Segment was strong. It had license sales. It had cost savings, operating leverage. It was really -- it just seemed like a big success overall, even relative to your own Investor Day expectations. So just maybe revisit that again. What are the biggest opportunities for the segment? Heading into '25, your guidance calls for the segment to be, I think you said 6.5% to 7%, right? So let's just talk about what gives you the confidence in maintaining this relatively healthy pace for what could be considered often a natural recurring revenue story, but not necessarily always the fastest growing. But for you guys, it's been showing some really good traction.

Yes. I think it's -- this is a case study on the end-to-end product excellence over a long period of time. This is a business that was investing heavily 2 and 3 years ago to get products cloud-enabled and have a best-in-breed product across most of the sectors it's in, and it pays off. And what's remarkable about the business is there's 3 big businesses. Trading and asset management, which is probably close on 50% of the business. That you would say, as a TAM, that's growing at 4% to 5%. It considerably outpaced TAM last year. So even the theoretically slower growth business in the portfolio is outpacing the TAM in the market. Why? Because the products are better. The other part that as a sector, a small business, a little over 10% is what we call lending. We grew that at almost 20% last year. ACV was strong as well, stronger than 20%, which means we're probably going to have another really strong year in lending this year. Think about even asset leasing. And I think what characterizes Capital Markets, very few direct competitors. And when you're in there, you're in there with a best-of-breed product. You're not at a disadvantage, right? So -- and you're dealing with highly sophisticated buyers of highly sophisticated products. These are -- and I would say what gives me comfort with it, it's an average TAM growth of 5%, which you -- if you include the nontraditional verticals, corporates, insurance companies and the rest, this raises the TAM up to closer to 6%. So you've got a natural tailwind in this business. Good products, natural tailwind, decent execution, you get to 6.5% to 7%. It includes 140 bps from acquisitions already executed. That's Demica. Again, a double down on, call it, the type of office of the CFO that the contribution from acquisitions is similar to 2024. A little bit behind Investor Day, the contribution from acquisitions, but we don't build in acquisitions that are on site. So we're -- this business is just a jewel. As you said it, it's not just the margin increase year-on-year, it's the absolute margin. The absolute margin is 50% plus, right? On a business that's growing consistently 6%, 7%, 8%, depending on the year with remarkable consistency. That's a jewel, and I think it's not fully appreciated in the market.

Yes, I don't disagree. All right. So it sounds like from a growth standpoint, things are going in the right direction, and we'll have to see some of the evidence as some of these onetime items kind of go behind us and you'll see the real growth. But the other question we had a lot about was really free cash flow, right? I mean you ended up at 77% conversion in '24. And I know you're guiding now to, let's call it, a midpoint of 83.5% for this year. So it's an improvement. But I guess we could just touch on, number one, the key drivers of that improvement. Any risks to achieving those targets? Maybe just a follow-up on FIS. You also increased your CapEx level to 9%. So what's really driving that? And obviously, supplier costs are a piece of it and vendor costs. But just help us understand the dynamic there and the conviction of the improvement in free cash conversion.

How many questions did you ask at the same time? CapEx, I'll take the last one first. Yes, we've raised it to 9%, some of it coming from suppliers, maybe $40 million a year, concentrated in 2 suppliers. We are developing contingency plans that it won't happen with -- and we will teach a lesson over a period of time. We will develop alternatives over but it takes time, 2 to 3 years, to build out a plan B. The other part is the revenue is growing, and we're building infrastructure and capacity in the system. It's just a timing thing that most of it is hitting 2025. We do expect to get back closer to the 8% in 2026.

Just from a leverage on revenue standpoint.

Yes. And Free cash flow, I would say, disappointed with the execution. We didn't see some changes coming where we had governance that needs to be strengthened. Wasn't a payables problem, wasn't really the capital problem, it was all done on receivables. There were 2 changes. A couple of contracts were signed with terms we expect it would be much shorter. And that cost approximately $80 million. There was another $80 million coming from a higher mix of longer-term contracts as opposed to shorter-term recurring. Our forecasting system should have picked it up. It didn't pick it up. We didn't intervene quickly enough. I think a good way to think about '25 versus '24, '25 will be the absence of the negatives that happened in '24. In particular, the extended terms will all be collected in 2025. And we're putting in place new governance much earlier in the process, so these terms can't get extended again. So you're going to collect what you didn't collect in '24 and you're putting in place governance to stop the leakage that happened.

Right. So it should continue to get better. I know you said in '26, it keeps getting better. I think I even asked the question on your last earnings call.

Yes. And then -- yes, you're right. Thanks for reminding me. Our goal remains 90% plus. We also have gotten pushback from some investors on the level of onetime expense and the cash onetime expense is about $480 million last year, and we said it will drop closer to $420 million this year. I do want to remind the audience, we're in heavy restructuring mode because we're still divesting Worldpay. People think it's finished. It's not. We have TSAs that are being exited. We're downsizing all the corporate functions to resize the structure. We have people working on passing over the systems to Worldpay. You do have our commitment. We're dramatically going to reduce onetime expense. Absent M&A activity, we will dramatically reduce onetime expense post getting rid of the Worldpay TSAs. We have to do this. And I do want to finish on one thing. We might have come in at 77%. We still gave back the $4.8 billion we committed to at the beginning of the year. With the benefit of hindsight, I spent probably too much time on capital allocation and freeing up trapped cash and not enough time on free cash flow. We've dramatically changed the governance internally. We've moved the oversight out of treasury into strategic finance. There's a SWAT team ongoing. We will fix this quickly, and we will put in place mechanisms to ensure this won't repeat. You have my commitment on that.

That's great to hear. You mentioned Worldpay and the restructuring still. So maybe just touch on that for a moment. I mean, you obviously -- you're still going through some adjustment to it, but your goal is to obviously have relationships on the revenue side between the 2 of you still going forward. So maybe just touch on how that's been playing out versus your initial expectation in terms of revenue share models, areas you work together still. And if you could start with that, that would be helpful.

Yes. Yes. We've said on prior occasions, there will always be an important partner, Worldpay. Think of them like an alternative sales channel. There's great relationships between the 2 companies. It's all contractual as well, and it's a long-term relationship. The revenue contribution in '24, yes, I think it was $140 million, which was coming off at $30 million in the prior year. A lot of this is on nice premium payback. There's relationships in place that are durable over time. In '25, I wouldn't expect Worldpay to be a contributor to faster revenue growth. I think as we discussed on prior occasions, we said probably the related parties revenue will be below $140 million or at least not accretive in 2025. Important platform for us. It's sustainable in the future, but it's not going to be a massive growth, right?

So the revenue doesn't go away. It just...

It doesn't go away. It just will be a more moderate growth on a go-forward basis.

And what about the TSAs? I mean that's something that was a benefit from a margin [ expansion ] standpoint. And so where does that shake out now over the next couple of years? And what are your plans if there's any need to offset the implications of that as it runs off?

Yes. So as -- it was -- at Investor Day, we said roughly 95 bps a year, so call it $100 million each year. That's lost income in '25 of $100 million, lost income in '26 of $100 million. It's been accelerated a little bit. They're exiting some of the systems quicker. So it's maybe running $20 million higher than we thought. The cost reduction is running higher as well. So there's no impact on margins. I think -- I actually prefer if they would exit our system sooner, just personally. It allows us -- what we're doing is we're significantly downsizing corporate functions, finance, HR, legal, all of those spans and layers, taking out levels of the organization, resizing for the new reality that we sold Worldpay, and we're a smaller company. And the cost plans are very well identified. And so that's what you mentioned.

So that's all embedded in your margin targets.

It's all embedded in the margin target. Yes.

Can we visit -- revisit your capital allocation strategy at the moment? I mean, you obviously still have a decent level for this year. I think you said, what, $1.2 billion, if I remember correctly, from a buyback standpoint.

Yes, of buybacks.

And then you also still anticipate some M&A ahead, right? You've done a couple of deals, but still not as much as maybe we thought you would have done so far. But help us understand where you are in that journey on a capital allocation standpoint between both.

Yes. Last year, we underspent the M&A. I think we did $600 million instead of $1 billion. And that's why we -- from a messaging point of view, we said, okay, we're giving that $400 million back to shareholders. And we basically said the $800 million we thought we would do as buyback in 2025, we're taking it up to $1.2 billion. It's a clear message to shareholders that if we don't do the acquisitions we said we will do, the shareholders will get the money, right? So we're very consistent and the same will happen this year. We spend less, we'll give it back to shareholders. Really, really clear. The $1 billion was intended to be kind of a cap to basically say we're not going to go off and do crazy acquisitions because we need to rebuild confidence in the market on our ability to execute against acquisitions. I would say we've -- we talked about free cash flow. I'm very confident that we'll be significantly increasing over time, the buyback capacity. As EBITDA grows, our strategy is that we continue to borrow at 2.8x and all of the incremental leverage goes into share repurchase. Dividends will grow with EPS. And you saw what we did earlier this year, we increased dividend 11%. It's basically the midpoint of our guidance range. And we will continue to do that on a go-forward basis. M&A fixed and all the rest goes to buyback.

We're going to turn it to the audience in a minute for questions. But we've gotten questions recently about the competitive landscape and pricing and whether or not you guys have been aggressive on pricing in cases to be able to cross-sell or other companies are trying to go after different markets, up -- more upmarket or even vice versa, you having success down market. Just give a quick comment on what you're seeing out there relative to what you've seen maybe a year ago.

I would say banking -- relative to a year ago, I would say banking has been slightly more positive on pricing. We had a net 50 bps in '24 and we're roughly planning on the same in '25. And the prior year was kind of flat, and '23 was flat. So I would say...

In terms of pricing contribution to your growth is what you are saying?

Net pricing contribution, which means on a gross basis, think of it, it's almost like 120 to 150 basis point gross pricing, offset by compression of maybe 80 to 100 bps. We are fairly competitive in the market, but we have good products. We're out there to win in core and defend our territory. We're not finding any rising competitivity in the market. We still meet the same people in the same RFP processes. It's not any more competitive than before.

Great. Where do you -- I mean, just where do you want this year to end for you to say that you've succeeded on your goals and this was the year you wanted to achieve?

Well, I think we've got to just deliver all the goals we set out in the last earnings call. And on top of that, exit the year with a decent result in terms of ACV sales, particularly on recurring. And if you have to hold us accountable for something, can we grow recurring ACV exiting the year? I think the business is in a really healthy position. We're intensely focused. And I want to emphasize that product excellence, commercial excellence and then the client experience. And I think we're going to knock those 3 out of the park. We're almost doubling down. This is Stage 2 of the journey, and it makes me highly optimistic about the -- first of all, we have to hit the numbers. We will hit the numbers this year. And then even more optimistic about the acceleration in 2026. We're doing some really good stuff on, call it, reenergizing the company and really getting into the, call it, hyper-improvement phase. So it's kind of exciting. It's an exciting moment.

Great. All right, guys, questions? Any questions, guys?

Your questions were too good.

Yes. No, I think we're about out of time anyway. So James, thank you so much for joining us and for your presentation.

Thanks, Darrin.