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

All right. Thanks, everyone. My name is Tien-Tsin Huang, payments and IT services analyst here at JPMorgan. So this is the FIS session. With us from FIS, we have James Kehoe, the CFO. I always enjoy talking to James. He brings a wealth of experience. And I know he was the CFO at Walgreens Boots Alliance back in the day, and I've heard a lot of good stories from James. And I think -- excited to be working with him now that he's at FIS. So thank you for being here, sir.

Sure.

So let's -- before I get into the details and the asset swap, there's a lot of news and stuff to cover. But maybe just to kick it off with the quarter, and there are a lot of sticking points, I'm sure you're getting a lot of questions about that. Should we just address that upfront, James, just an open-ended question around that and how you've been answering it?

Yes. We were actually pretty pleased. We think we had a pretty strong start on revenue, especially on the Banking business, but across both businesses. And then the second one, the standout was free cash flow. And then on the call, we didn't get a great reaction because the margins were a little weak and we guided to a weaker margin in the second quarter. It was probably something we could have given better indications to when we gave the original guide at the beginning of the year. The key message for us is all systems go. I would say we were pleasantly surprised by the revenue. And let me just -- I just want to reemphasize, the Banking midpoint of our guide for the quarter was 1%. We came in north of 2%. And it was all driven by a recurring revenue at 3%. And then we -- I don't think we could have been any more bullish about the second quarter. We said you're at a 3.7% to 4.4%, which is the full year of guide. And I think there's no clearer way to say it. The visibility we have to it now is way better than the visibility we had when we said it 3 months ago. And I would say we're ever more convinced about being solidly in that range right now. And the recurring revenue will be strong, very strong in the second quarter. So this is -- we're heading for a high-quality second quarter. And I think we should have emphasized it more on the call. Still you have to hit all the metrics. The first quarter was weak in Banking on margin. Not Capital Markets. Capital Markets was up 90 basis points. We were lapping a heavy quarter last year in licenses, which were at 100% margin. And then we had some timing on overheads, more [indiscernible], but it was literally 120 points of timing and that will wash itself out of the system. And I think I just want to be super clear on this. We thought we were clear on the call. We're not in any way nervous about the full year guide on margins, on EBITDA. We have a large cost program in the year. It's incredibly well managed. We did it last year. We'll do it this year. The difference is last year, most of the cost reduction came in the first half of the year. So margins were up 160 bps. And the second half of last year, margins were actually down 25 bps. We have an easy comp going forward. We will have an improved product mix. And then the cost programs are, in general, skewed to the second half. So the sticking point for investors right now is the margin. And the guide specifically for the second quarter, it made them nervous. We have incredibly strong muscle on taking out costs in the business, and we will take out the cost and we will hit the margin targets. So sticking point is that one. I do want to emphasize though, we think the revenue on Banking was a strong data point on this business is back on track, and we couldn't have been more positive on the second quarter guide on Banking.

Good. No, thanks for going through that, the sticking points. Just maybe -- you're also very confident, James and team, on the timeliness of implementations. And I know that's a question that's come up a lot in the tech conference. To hit that acceleration on the revenue, not a margin question, to hit the acceleration in Banking for recurring, is it as simple as just getting those timely implementations done?

Well, actually, it's kind of 2 questions. I don't want to say the recurring is in the bag, but that would be arrogant. But you're going to have a significant acceleration in recurring as we go through the year. And it's driven by 2 things. And then I'll get back to the nonrecurring. There's 2 things that drive it. One is you sold more ACV and you've got to convert it. Most of that ACV was sold last year. So line of sight, ticked the box pretty high. And then the other thing is, and we said it on prior conference calls, the other key thing for success is retention. And our retention rates exiting last year were in the high 90s, which is considerably better than it was 24 months -- sorry, 12 months earlier. So those 2 items alone drive about 150 bps of growth, and it's all on recurring. So you're going to see, we did a 3 on recurring in the first quarter. There will be a significant step up in the second. And recurring will continue at a hard pace in the second half as well. And the line of sight is good because the retention has already been delivered because we held on to the client and the new sales last year were sold, right? So it's conversion. The 3, call it, implementations that were delayed at the end of last year, all of those are now live, and all 3 of them had revenue in the first quarter. And we get the question a lot, if you could ask it, it's another sticking point is, well, what's the likelihood of this happening again? This was like 3 things at the same time. The likelihood of that reoccurring is very low. So bear in mind, 83% of Banking is recurring. You're talking about 17% where you're going to get volatility. And then of that, split it in half, licenses are fairly predictable and manageable. Look, you got to sign them in the quarter. But if you've got a high-quality pipeline going into the quarter, 2x what your target is, you can easily trade off licenses in the quarter on your license target. So there's many -- I guess the way to put it is, there's many levers you can pull. It's not just accepting a delay and you can pull forward some professional services implementations. You have a bigger license portfolio going into the quarter. It's all down to quality of license. One interesting thing, we have made changes in sales force. It's been elevated to the leadership table. It's now -- the title is now commercial. It's not sales. And what that is, is we will have more focus on a couple of things, building pipeline. The new leader in there, we had our highest pipeline month in April in 24 months. So contrary to what you hear out in the market of slowdown, I think if you focus on pipeline and you focus on your customer, and you're really out there, the pipeline build is really, really -- was really strong in April. And this is a leadership thing. It's not how you run the sales force. It's your focus on commercial excellence. It's your -- you have a good product, you're going to get good retention. And if you have a good pipeline, you're going to get ACV, right? So that's what -- there's a hell of a lot of focus right now in the company on commercial excellence with new leadership.

Yes. No, loud and clear on the leadership change and the ACV and the sales. But bringing it back maybe up another level, I think 80% of the business you call recurring. There is a nonrecurring piece, we can talk about that too. But just the cyclicality of the business, we get that question quite a bit. How much visibility do you have there? And does -- is it CapEx? Is it business spending on the IT side from the bank? What are you looking at for clues on that?

Well, I think we kind of laid it out at Investor Day. We said -- we gave, you could say, a fairly moderate long-term forecast for Banking. We said 3.5% to 4.5%. And the transactions in the Banking business, the core transactions run at around 3%. So if you look back -- now these numbers are a little bit dated, if you look back over time, accounts on file were up 2.7%. And some of our business on accounts on file, transactions were up a little over 5%, right? So that's what drives the core business. And if you look back over time, the recurring revenue, you look back over time, that's what's consistently driving the business. And it's fairly resilient to recession because we, unfortunately, and now it will get addressed, we're skewed to debit. That's 90% of our payments business, issuing business, is debit. And that is generally positive in bad economic times. There's more transactions, and we're paid on a transaction basis. So you look at capital markets, there's been a push over time. We have a higher percentage of license -- onetime license. But there's been a push over time to SaaS-based unit, not associated with Assets Under Management. So a surprisingly small amount of our revenue is driven by assets under management. It's mostly software-as-a-service. So we've deliberately made our model less exposed to economic ups and downs, right? So call it -- and it's fairly -- you can see it in the market now, we're generally viewed as a safe haven.

So to be clear on the capital markets side, because I know that is getting a lot of attention, James, it's not AUM based, it's more SaaS or seat-driven from a...

Just in general. Yes, general. There's a couple of small businesses where they vary sometimes based on interest rate volatility in the market. They're so small, they don't move the needle. You're not going to get a 200% upside -- 200 basis point upside or downside in Capital Markets. It's very muted just to the size of these businesses.

Yes. So let's just stay on capital markets and then get back into Banking, and of course, the TSYS, the Global Payments transaction. The strong start to the year in capital markets, what would you attribute that to? I think nonrecurring was quite strong. I would imagine that brings with it higher margin. It does imply some decel later in the second half. What work is left to do to hit the target?

Yes. I think it was -- well, actually, we saw it in Q4 and we saw it in Q1, we had exceptionally strong onetime license quarters in both quarters. We weren't necessarily pushing for those level of numbers. Because bear in mind, I think we guided to 7% to 8% in the first quarter for capital markets. It came in at 9%, which is stronger than any kind of trend in this business. And it was a 47% increase in licenses. It's just a much higher proportion of licenses came due in the first quarter and more and more -- more than we expected were signed in the first quarter. We also saw it in the fourth quarter, a big interest in our products in general, mostly in international. So it kind of both quarters came in better than we expected. I wouldn't look at it any kind of a deceleration. We kind of look at it and say, if you take the first quarter and then the second quarter guide, add them together, we're tracking ahead of the full year. So we would say business as usual or full speed ahead, we're very comfortable with the full year guide. There will be a bit of a change in composition. So the second half recurring revenue is more likely to accelerate versus the first half, and there'll be less dependence on episodic licenses. So the composition will strengthen in the favor of recurring.

So that will have implications then, right, James, for our first half, second half margins, as you move away from the high-margin license sales more towards the recurring? You do have some easy comps. You sounded like you're going to hit the cost side as well. So can you just walk us through one more time that margin first half, second half?

Yes. I think most of the revenue mix issue came in, in Banking. And that's where it will flip in the second half. We were lapping all of these onetime licenses in the first quarter of '24. So we'll literally get better due to comps, less professional services relative to the rest of the business. And then we have less grow-overs on 100% margin licenses. So we'll just see -- and it will be fairly immediate. The revenue mix impact, I'll get this slightly wrong in the first quarter, was close to 200 basis points. So it's a big number. That basically will track, will almost dissipate completely in the second quarter, and turn slightly positive in the latter part of the year. Because Banking, for its essential composition of the business, is not a negative mix business. It's a positive mix business.

Yes, in terms of contribution margin.

In terms of contribution margin.

Yes. Okay. Good. All right. So sounds very confident. I just wanted to go through that really quickly. That was popular feedback in terms of me asking you that. So I hope I did an okay job with that. So let's talk about Global Payments and the issuing business, the TSYS business, as we think about it, highly complementary. You talked about how you -- FIS historically has been over-indexed towards debit. TSYS is known for being on credit. So how does this complete your issuer processing capability? And remind us of the exposures that you have now between credit/debit, commercial versus consumer and geographies once it closes, of course.

Yes. We're incredibly excited. I get more excited for a different reason, which is I'm swapping out Worldpay, which was not valued by the investors. It was noncash contributing. And I'm replacing it with an equivalent amount of EPS, but it generates $700 million of cash. So on a DCF basis, we will get more fairly valued, I think. So that's the part that excites me. But I'm a finance guy, I don't count. And then when you get to the complementarity, it was -- we went -- if you go back to Investor Day, we said, "Oh, we got all the tools. We can sell credit, we can sell debit." The reality is that 90% of our issuing business is debit, and we really couldn't sell credit only to smaller banks that were less sophisticated. Our products were just not up to the level -- like TSYS is the gold standard in the market, let's face it. They've invested consistently over many, many years. Their service levels, their NPS scores are off the charts. And then two is they have a transformation journey to modernize that puts them well ahead of their competition. So you're buying an asset that we could never get to. And their sweet spot is in serving the biggest, most complex banks. And frankly, that's where all the cards are, all the credit cards are concentrated in the biggest banks. So we had a credit processing platform, but we literally had a single-digit market share, like at 1%, right? So we had literally very little in the market. So in theory, we could address a $12 billion TAM; in reality, we couldn't, because all the TAM was with highly sophisticated banks with different requirements. So the complementarity is you're putting together, we know how a credit business works, we just couldn't address the TAM. And you're buying an asset with an incredible 17 of the top 20 customers. That's the asset. You're buying an asset that is highly viewed positively. The average tenure of their clients is 25 years. So you're -- it's just an incredible asset. Imagine the cross-sell, and it plays in our sweet spot of large financial institutions. So the cross-sell opportunities of our premium payback into their credit issuing customers, just that alone is tremendous. And two is they're 70% U.S., 30% international. It beefs up our international business and opens up international synergies. So the actual strategic case is unbeatable. The valuation case is unbeatable. And then you could almost say, and look at the synergies, they will come over a longer period on revenue that are probably quite conservative. And then as we built out the models and looked at DCF values and the accretion, we were quite conservative on the revenue. We basically said 4% going forward, which is effectively what they're able to do now. And then finally, I'll close out, it's quite similar. It's a fairly resilient business as well. 60% of their business is driven by transactions, not by value. So again, it's not exposed to the amount of dollar spend. It's exposed to the number of -- I think like it's 3 dimensions: the number of accounts, transactions and authorizations and they're all on a unit compensation measure.

Right. It's -- yes, not driven by volumes but more based on tap or swipe, which is important. So a follow-on I had to that, we've been thinking about this a lot, James. TSYS, you mentioned it, they're going through a modernization journey, shifting to the cloud. They're standing up TSYS cloud. FIS also has its own platforms. I think Payments One is one you talked about at Investor Day. So there are some platform decisions to be made. What's going to happen there? With them converting, you bringing on the asset, you've also stood up some of your own. Are there some difficult decisions to be made or is that already planned out?

No. I think this will be managed smartly. They've got the principal technology assets here. And I think the assets will be complementary. I don't think we're going to go in and shut down assets on every -- on either side. I think our asset plays well in a smaller bank, and there is -- it's the only asset you can have, for the bigger ones. So I think they will coexist. International, I think we both have platforms that work quite well. We may take a choice on the international business. But this is -- none of the synergies are predicated on slamming platforms together. That would be stupid. The last thing we want, we need to preserve their commercial excellence, their customer experience and their actual technology.

Can you elaborate a little bit more on the revenue retention risk? They do have very long tenured clients, as you said. I get a lot of questions on Cap One, Discover, and them coming together. I know Cap One leverages TSYS. So how did you get comfortable with the revenue retention post deal?

Yes, we obviously went -- they don't have a very long list. We went through -- we did our diligence, we got incredibly comfortable with it. Everyone brings up Capital One. We've got a relationship with -- FIS already has a relationship with Cap One and Discover. Now the issuer business has one with Capital One. Our job is to make the bank successful, and we've obviously assessed the overall risk profile of the business. You look at their 25-year tenure, they're not sitting idle and sitting back and saying, okay, I got all these clients, so I'm going to just sit back. They're investing really heavily in the platform. It's the cloud-enabled, more features coming out. It will place them ahead of the market. The best form of retention you can get to is to have the best product in the market, and we're convinced on that. And we spent probably disproportionate amount of the due diligence on the platform. Because a platform transformation is always somewhat scary, right? But we got in there, got comfortable, the value that's being driven. Where we think they were more optimistic than us is, we believe the migrations of clients will take a longer period. And that's the only difference of opinion. The quality of the platform -- we had a swarm of people look at the platform. That was the #1 diligence item. And very comfortable. I'd add on as well, is we didn't build in revenue upside from the new platform, and they were insistent that they expect significant upside. It was obviously a value discussion. But we stick to our 4% going forward. There's probably opportunity longer term, but you're looking at 3% to 5% where you say, as we migrate each customer to the new platform, they're theoretically getting much better benefits and the stickiness will increase, right? But that will be managed over a long period of time.

Discover also owns a debit network. FIS owns one as well, which is a valuable asset. I would imagine there could be some -- maybe some swapping that's happening there. But can you assess the risk there, if any?

No. We've assessed that as pretty low. We think it's to some extent -- not just Discover, I think we've underplayed our hand on a NICE network. You could -- because I don't want to get into any competitive stuff. I think you could say -- I'd say it differently that our focus on NICE has been and our debit capabilities has not been brilliant over the last couple of years, and we're doubling -- we will double down on debit. It's not just TSYS. We will double down on our debit capabilities and our NICE network over the coming, I would even say it, in months.

I think there's some hidden opportunity there that maybe the market is underappreciated.

Yes, a little bit. I think we've undermanaged the business. That's the best way to do it. It's under a new leadership now, scrappier leadership and more competitive leadership. So it's a big focus area going forward, not just, but also debit.

So since we have you, I want to stay on this. So you're targeting $125 million in cost synergies on the TSYS side. We talked about their cloud modernization. I even asked it personally, I think, that's why I remember it. At their Investor Day, they talked about guiding midterm stable margins for TSYS because they're going to run duplicative platforms, it's going to take some time to convert to the cloud. You just said that you're going to take a more careful approach. I think that's prudent. But is it then harder to capture some of the cost savings and synergies or margin expansion given TSYS, it already enjoys very high margin.

We're actually very consistent with their response. We basically planned -- we actually think that, in theory, they should have operating leverage. But we did, similar to their public comments, we planned the core margins flat and the synergies on top. Me personally stepping back from it, they have such an incredible set of assets. They should be driving positive operating leverage. But we didn't want to lean in too much on the core model. We wanted this to be a conservative set of numbers both on revenue and on margin. So we're entirely consistent with what they said. And we've probably built in more transformation costs to modernize the platform in the out years. Yes.

Okay. So that's embedded in there.

It's embedded in there.

Okay. And then last one, just on the $45 million in the shorter or midterm revenue synergies, you mentioned premium payback into issuer. You also have international then, of course, the credit processing cross-sell into the core base. Like how quickly can that come? Have you thought about time line a little bit more?

I think the premium payback type examples are much quicker because it's an add-on. I think if you get into a -- to try to competitively win something, it depends on when the contract comes up for renewal, then you got 12 months of implementation after that. So I think the, call it, competitive wins are longer. International is a big opportunity, and we haven't built a lot into the synergies. That's just more complex to get done.

Any consideration with Worldpay coming out? I heard you loud and clear on it frees up the cash and you're trading off the earnings -- comparable earnings. But I know there's a commercial relationship that's there with Worldpay. Anything on dissynergies to remind people of?

No, let me be clear, there's no dissynergies on this. That's the beauty. We've had enough dissynergies with Worldpay. I'm tired of it. But we have these commercial arrangements already. And contractually, when the deal was signed, the 3-way deal, the Worldpay existing commercial arrangements passed to Global. And I would say it's probably we have an opportunity as opposed to a dissynergy because the specific agreement is Worldpay and us, but the transfer is to Global. Global and us are both highly interested in working closer together on longer-term collaboration agreements. And they've laid that out as well. So you could imagine a broader relationship over time, because they have a massive business that is effectively a sales channel for us, and vice versa. We can do a lot together. So I would say more to follow on this. We need to get closer to the deal. But we will be working way closer with Global than even we did with Worldpay.

Okay. Good. So on -- at Investor Day, you were very specific in detailing your M&A ambitions and contributions in the midterm to growth and building out the strategy. Does this deal change that in any way?

No, not really. I think it will be -- I think we won't let issuer kind of distract us from the long-term view, which is we're going to hold the leverage at 2.8x. Tuck-on acquisitions are probably the long-term name of the game, filling out with highly synergistic, driving incremental revenue. And bear in mind, as the EBITDA goes up, we'll be giving more and more back to shareholders. So we will take a pause for 12, 18 months, call it. Once we get the EBITDA -- debt-to-EBITDA to 2.8x, we'll be back buying back shares. And obviously, it's a much bigger entity with much more free cash flow, so we'll be buying back proportionally more shares post-deal than we were pre-deal. Because right now, it's at 1.2x. But if you work through 2 or 3 years from now, it's considerably higher potential for buybacks. And we're very committed to dividend. We will -- and I want to be dogmatic on that, we will increase dividends in line with our EPS growth. And I actually got the question this morning, if your EPS went down, would you cut your dividend? And I was emphatic. No, we definitely won't. So just to be crystal clear on that.

Free cash flow conversion, you did mention that as a positive. I know Q1 is seasonally low. Two quarters before this, we had some surprises, right, with CapEx being higher and some of the working capital drag. I think you put some changes in there. A lot more work left to do, James, in getting back to that target around 80%, 85%, I think, on the conversion front with free cash flow?

No, I think you never want to say it's in the bag. I'm really encouraged that we came in -- historically, the first quarter is 40% to 50% range, and we came in at 71%. We've put better people on this. There's no easy way to say it and enhanced focus. We're targeting fairly sizable improvements, delayed terms for suppliers. We've already moved a bunch of them. We're 56% of the way in terms of -- already in terms of what do I want to achieve by the end of the year. And bear in mind, anything you do on extending terms with suppliers right now also benefits next year because the carryover impact will benefit next year. So what we're trying to -- I think there's a lot more work to do to make sure this is sustainable longer term, and the conversion goes up above 90%.

Right So there is a goal to get to even go above and beyond what we've talked about.

Yes. But I think the safe assumption for now is a 90% cash conversion longer term. And then the issuer business is roughly coming in at 90%. And that's post leverage, right? So it's -- because we've got to pay down all the debt as well.

Yes. At Investor Day, you also talked about, beyond the midterm, the opportunity to expand margin above the midterm targets is there, whether it be from cost or just executing what you want to do or addressing your delivery, those kinds of things. Same question, does bringing on TSYS change that?

No, I don't think it does. The one thing you did say, what's short term versus medium term? We did say that we assume TSYS will come on with flat margins. Synergies comes on top. We had a broad commitment out there on 40 to 60 basis points. And we said '26, I think we implied would be at the high end of that guide. So you can kind of do the math yourself on what the weighted average comes out at. Obviously, we think there should be -- my view is the bigger you get, the more operating leverage you should be driving, right? So I think we're very safe on the margin assumptions.

And is there anything -- you've -- I've heard you talk about it publicly and in meetings with you around sort of the self-help work that you can still do to execute on the cost side. So same question, are you leveraging more technology to get there, James? Is it really just a focus question? Do you have to invest to save? What -- how do you see it?

No, I think it varies by function actually. Most of our focus right now is on the back office. I outsourced over 1,000 people to Accenture. They're already gone. And two is, by the time we get to the fourth quarter of this year, we hope to be using machine learning and AI-generated forecasting. So we're actually pushing the envelope to not necessarily take out resources, but it's to stop people doing manual work and get the machines to do it. Our HR group is looking at virtual agents, right, with one of the big software companies, which is basically -- that's basically answering questions with AI as opposed to having people in the company doing that. So it's being pushed very aggressively across the company. Different in every function. And it's a case of if you don't do it something, something is going to get done to you. So we have to get fit. We have to deliver on our margin goals across the company. And I think the tighter you manage your margins, you're just going to see the operating leverage fall through. Grow the company at the long-term margin goal -- or sorry, revenue growth of 4.5% to 5%, you got to manage your costs well below that level and drive operating leverage. That's the business we're in.

Okay. And so in this last minute or so, we talked about a lot, I mean you're going to -- you have a little bit of time here before the deal closes, but how have your priorities changed on your side, whether it be from an execution standpoint or a delivery standpoint?

I think it's -- I would emphasize it's business as usual. We'll return the capital to shareholders. As we said, we would do -- we will continue to do tuck-on M&A. It's business as usual. We have to give a guide sometime in February. The deal may not be closed by then, right? So we got to run a business and we got to do it quickly. I think internally, our focus is we have elevated sales to the leadership -- commercial to the leadership table, a lot more finance folks working on, call it, sales as a function. But I think internally, when in the company, it's this incessant focus on 3 big levers: end-to-end product excellence, so do you have the right product; customer experience, are your clients happy and delighted with the service they're getting, service, right; and then the final one is commercial excellence, how do you sell into the customers and drive improved revenue realization. They're the 3 big priorities within the company. All the rest will follow.

Good. It will be fun to track. James, thank you for spending time with us.

Thank you.

Thank you. Thank you, George.