Fidelity National Information Services, Inc. ($FIS)

Okay. We are back from lunch. I think more people are making their way back into the room. But in the meantime, we're going to kick off the afternoon here, and we're very happy to have the management team of FIS. We have James Kehoe, CFO. We have Georgios Mihalos, who runs Investor Relations. And thank you guys both for being here. We appreciate it.

A lot of ground to cover. Some pretty interesting stuff happening at the company right now. I actually wanted to start on the banking segment. Obviously, it's 75% of your revenue and where most of the focus tends to be. The past 2 quarters, I mean, the performance there has unequivocally been better than you guided to, better than the Street expected and pretty strong in a historical context. And I'm really talking on an underlying organic basis. So what, I guess, would you call out have been like the sources of upside?

Yes. I think it's two things we're really excited about. One is the state of the industry, so the end market, it's really buoyant. Banks are doing well. They're spending and the regulatory environment is much more beneficial to their investment profile. So we're seeing -- they're spending more on M&A and spending a lot more on technology, especially on AI. And they're embracing AI at a pace that was unheard of in the past. So we're very excited by the position of the industry. Then our position because, as you said, last year, especially in the second half of the year, the banking business, you can see over the last number of years, the fundamentals have dramatically improved. So you're looking at a solid -- the organic, you mentioned organic, it's 4.5% last year with the total results about 5.5%. That's well ahead of Investor Day guide, like well ahead. So well, we're above the high end of the guide. And the question is why? It's the biggest #1 is commercial focus. I think there's 2 pieces. Actually, I think the building blocks put in place before was on improving the product and improving the interface with the client. And at the beginning of last year, we transformed the model to a functional model. So we have, for the first time in history, Chief Client Officer, who's held accountable for building the relationship with clients, not selling, building the relationship, what products do they want.

When did that start?

Beginning of 2025. And so that was one key step. So it is, are we serving our clients better and do they feel like we're serving them better. The other one is commercial excellence. Again, new leadership was put in end of the first quarter of 2025, the previous leader of the Capital Markets business took over as Chief Commercial Officer. And it's not -- the change don't underestimate it. There's been a big shift away from selling to building quality pipeline, and that has been the big change in banking. So last year, we actually changed the commissions to focus the sales away from professional services and to pivot to recurring. And during the course of the year, salespeople do exactly what you pay them to do. PS went down in terms of ACV and recurring went up significantly. You saw that in our prepared materials on the last call. Our recurring revenue ACV growth in Q4 was 20%. The full year is pretty similar to that number. And the standout was the quality of the recurring ACV. So we're selling way more payments. So the payments business in the entire year grew ACV 70%. Digital was up 60%. And in the capital markets business, the lending business, I think, was up 70%. Why is that important? Those 3 categories have margins well in excess of the company average. They're our most profitable segments. So think of this as the commercial excellence. One is a shift to recurring. And the secondary shift is away for, call it, away from commercial and BPaaS and to the payment sector to the digital sector. And these ACV numbers that have been delivered last year, they flow into the P&L into 2026 and especially in 2027. And the strategy, we even fine-tuned the commercial commission rates at the beginning of this year as well. So we're continually to fine-tune the focus, the sales on what's strategically important for the company. Previously, they could sell PS and recurring and get compensated the same way. Now the compensation is completely different. They got far less for selling professional services and far more for a new recurring sale. And they follow the dollars. That's how it works. So it will be more of the same. This is why we're incredibly confident on the banking guide for 2026. So we went out and said 5% to 5.5%. If you take the midpoint, the organic is -- I think it's a 4.7%. So even the organic is accelerating. And within that, the TSYS business is like we're expecting more of what they did last year, like a 4.5% growth rate. So there's -- the standout in terms of ACV will continue to be quite similar. It's not that we're deemphasizing core, it's that we're super emphasizing the payments business. And that is the jewel of the crown in terms of potential that wasn't tapped. Back at Investor Day, we talked about hundreds of millions of cross-sell opportunity. Most of that cross-sell was debit that we didn't have the debit, but we had the core or we had the debit, but we didn't have something else. So this cross-selling is now where we're massively focused. It's on building our position with the growing banks. And I really want to go back to that for a minute, is we are only focused on financial institutions. And this is what banks like. We're not focused on merchant acquiring. We're focused on making banks successful. We're not focused on numerical banks. I think Fiserv serves far more banks than we do. Why? Because they go down market and we stay up market. Our share, we're we are the #1 share in banks above $10 billion of assets. And that's where we play, and that's what we're very good at. So why? Because our products are generally best in breed. They do facilitate commercial banks. That's much more complex than serving a retail bank. And then finally is everything we do, we can do at scale. There's many people who can process a core ledger for a small bank. The more you go up and the complexities increase, the more you get into commercial banking, the more you get into large credit card portfolios, running a client with 100 million credit cards is far different than running a client with 2 million credit cards. So our advantage is scale and consistency, and that's why we have a #1 position with large financial institutions.

So it sounds like -- I mean, these changes that you've made are -- they're durable. They're structural, right? It wasn't like, oh, we got a onetime bump from this or that. I mean this commercial excellence is permeating the organization. You've changed the sales force incentive comp model. So it sounds like this trend of kind of outperforming calling at your medium-term guide where we're kind of coming to the end of that period already, right? Like that sounds like it's.

No, no, it's very deliberate, and I'll give you an example again on the sales commissions. The stereo for sales commissions is led by the Chief Commercial Officer, but I sit on it and so does Stephanie. The final decision doesn't get approved without her coming to the final meetings. And I'm in all of the [indiscernible] meetings on deciding the changes. Finance is there and the BP, the business presidents, the product presidents are there, but it's predominantly a company decision on the commissions. So it's completely linked to strategy. It's not linked to selling. It's linked to strategy.

Yes. So that's the big change.

That's the big change.

Okay. We're asking all the companies that have come today, just any comments about how the quarter is going? Obviously, we've had the war broke out a couple of weeks ago. I mean I don't think you have much direct exposure or operations on the ground in the Middle East, but if you can just address that and any other color.

We do have some locations, but I think we're in the numerics of 30 people. Our primary concern was protecting individuals. Our business exposure is minimal. In general as well, oil prices are going up. In a recession, we are inclined to do slightly better because our debit business, that's a little different now. We have a credit and debit processing scale. Debit is inclined to grow faster in a recession. So I'm not saying we're recession-proof in any way, but we're seeing no impacts. We have no business exposure. And in general, our revenue is not exposed to customer -- consumer dynamics, just in general. On the quarter, we can't say anything about the quarter. It's literally full speed ahead. We've seen nothing in the first 2 months that would change any perspective on the full year. We gave out a guide, and it's an eminently achievable guide.

Okay. Okay. Good to hear. And just -- I guess, you're not seeing any slowdown in bank decision-making or anything like that just as the macro has arguably become a little bit more uncertain?

No, we would see -- I would say, in general, the one thing I would comment on the build of pipeline is as strong as we would need it. That's the best way to put it. Banking is incredibly strong in pipeline generation. We've kind of moved into a different era now on building pipeline. A lot of our pipeline mining is much stronger than it was 12 months ago. It's AI generated. So much of the lead generation and the identification is being facilitated by AI. The pipelines are substantially higher than they were entering the prior year, which is always a good sign, because then you have to convert that pipeline into ACV and then the ACV gets converted into recurring. So we're intensely focused on building quality pipeline and then converting the pipeline to ACV this year.

Right. Right. Okay. Okay. Yes, we're definitely going to come back to AI because here, it's going to be big. That's what everyone says. We'll get your perspective on that in a little bit. But let's -- just one more kind of on -- well, now kind of the true kind of core banking part of the banking segment. Just talk to us about -- you touched on this a little bit in terms of like how you're differentiated in terms of your positioning. But as you look at what's happened with some other players in the space, like do you see opportunity to move further down market to take more share? What are some of those dynamics that we should be monitoring?

Dynamics, there's -- everyone knows decisions on consolidation of platforms do open up opportunities for the competitors. We are inclined to look at -- one is -- I don't think we obviously will try and take advantage of it, but that's not the biggest driver in our business. We're not counting on significant wins from competitors. Why? I kind of said it earlier, we're focused on maximizing our growth, which means the number of products we sell to the biggest banks. We're not going down market to sub $10 million banks. Will we still compete in that area? Yes. Is it strategic? It's not as strategic, right? So then we want to sell our debit and credit into banks where we have the core. We do want to get big core wins. And if you look at our most recent quarter, we had an impressive set of banner wins, including takeaways from some of the key competitors. Synovus was a large win, which adds a really large number of accounts. So our focus is on the number of accounts in core, number of accounts in debit, number of accounts in credit. And at some stage, we will think about should we give KPIs on these. But we're driving the number of accounts. And why is that important? The number of banks with assets more than $10 billion over the last 10 years increased by 50%. So it's a pretty elite group. It's not a large number. It's not thousands of banks. It's like 150 banks. That's where we're focused. Why? They are growing their accounts because they are the net acquirers. And when a bank is acquired, we're typically -- if we're 1 of the 2 banks, we typically win the business, especially if 1 of the 2 banks is a commercial bank. And this has not been argument. It's just factual. It is we are the #1 in large banks. And typically, we will win more when there's merger activity.

Yes. I would just add there, just very quickly, again, to Jim's point, we don't focus on stick count. We focus on the account growth. And if you kind of think about, in many instances, one of these deals alone is 10, 15 bank deals rolled up in one. That's kind of the focus for us. So just the other point I'd just make is, have we seen success sub-$10 billion? Yes, we have. And we talked about that at length in 2024. That's not a market where we're treating from in any capacity. We've done a lot better there with the Horizon product. But obviously, we see a lot more opportunity as these banks get bigger and bigger given the M&A that we're seeing in the space.

Okay. So it's just a matter of relative focus, right, because you see that opportunity up.

Yes. And we've got products oriented for each of the groupings. We do have a product that works in credit unions. But as I said, our strategic focus is on the larger banks and midsized banks.

So I wanted to come back to TSYS and now you have massive credit processing capabilities and basically 2 primary players, you're one of them now. What does the kind of cross-sell motion look like? I mean on paper, that seems like a great opportunity because presumably a lot of these $10 billion-plus asset sized banks, they have credit card programs, right? And so how often are they in-sourcing? Do you have to get competitive takeaways? Is that something that you could start seeing some cross-sell traction with this year? Or does it take longer?

Yes. So the guide we had for revenue synergies, which is a good proxy for if you like, was in the P&L, $45 million by 2028. But we did say the goal was $125 million midterm. And this was just to express the fact that contracts don't come up for renewal. Some of them can be locked for 5 years. So there is clear potential on the $125 million, and you should presume we have a list of ideas that add up to a number that is higher than $125 million. But within that, there are big blocks of opportunity. One is loyalty, so cross-sell of loyalty between the two. Two is obviously where we have a core and we don't have credit processing, we now have incredibly stronger assets to win in processing. One of the biggest opportunities is international. They added about $1 billion of sales to our international business. And now I think international is about a $4 billion business for us. And it's given us a stronger right to win in Europe and Latin America. Why? They have this platform called Prime, which is their international credit processing platform. It's $200 million business growing at 15%. They have a massive pipeline. So the interesting thing we found out is that they were underinvesting in international because global was a little bit using them as a cash cow. So they couldn't invest in sales, implementation teams in international. So some of this is -- I'm not saying it's super easy, it's easier to unlock. We're probably going to add sales resources and add implementation resources to their international business, and that will drive considerable opportunity in international. And we've already taken an action here. We took our -- we've taken their sales quotas for 2026 and added them to our sales quotas. So our sales force internationally isn't far, far bigger than TSYS's was, far, far bigger because of our capital markets footprint. So they're carrying a dual quota already, including the credit issuing business. So they've -- our sales force has already started selling their products using -- leveraging the existing pipeline, which is incredibly strong. So we're very bullish on the cross-sell.

Just coming back to the synergies. I mean, you laid them out on the revenue and the cost side over the next 3 years. But just as you draw on your experience like when FIS bought Worldpay, are there certain kind of risk mitigation strategies to make sure that you do achieve or perhaps even can overachieve both the revenue and the cost synergies?

That's a good question. Yes, we got that when we did announce the deal, and there's 2 fundamental differences. One is the Worldpay acquisition was quite different than this one for -- 2 reasons. One is Worldpay was not the sweet spot of FIS. It was merchant acquiring, and it wasn't core financial core financials. So the management team was extended. They didn't have as much experience. Second thing they did was they exited most of the Worldpay team. What are we doing differently this time? The credit issuing acquisition is a business we already operate in, right? And it's very close to core banking. It's all LFI business, which is what we are very focused on. So it's a sweet spot we already operate in, and we're retaining the entire management team. And you can assume they're all on incentives for an extended duration to retain them in the business. So it's a double risk protection, if you like.

I wanted to go back to that 20% growth in the recurring ACV because I almost feel like that got a little overlooked in the print, but that was a pretty strong number. I mean, is that sustainable in 2026? And I guess beyond what you've already talked about, is there -- are there any other drivers that really supported that number for 2025?

I'm not going to start guiding to ACV recurring because put us in another cycle guide. But I think what -- we mentioned it before, will the vectors be the same vectors? The answer is yes, right? So you're going to see probably high growth rates on digital payments business. And bear in mind, they grew by this -- digital grew 100% last year. And the number of accounts on file on digital, they grew massively. So the vectors are the same, and we're selling into our existing base into the [ TSYS ] base, and we're -- we've made our -- why is it sustainable? We're continually making our products core agnostic, which means that our digital products, we can sell it to not just our core but also into a Fiserv core. More and more on payments, we're displacing competition even when we don't have the core. So we are getting more, call it, agnostic, and we don't want to have to sell also the core. We're going in and targeting specifically our competition on the payments business. Bear in mind that the payments business is now our biggest business. If you look at the financials we filed, the banking business is about $4 billion. Payments is $5.5 billion and capital markets $3-ish billion, right? So payments is the biggest, and I'll touch on that for a minute, why it's important and why we're focusing the sales force on it. The recurring growth rate in the payments business by the virtue of the products itself is a faster growth rate than core banking, right? So it's going to grow recurring faster with a higher margin profile because businesses like network are incredibly profitable. Adding on an incremental transaction is at a very high gross margin. So the margins in our payments business are higher and the recurring growth rate is higher. It doesn't mean that banking is a bad business. It still has really attractive margins, and it's growing mid-single digit. The difference is it does have a processing business in there. So this commercial and BPaaS business, card -- it can be debit card production, it can be statement printing, that kind of thing. That has got a lower overall margin. But generally, our core banking business has high margins as well and digital has high margin.

Okay. Understood. So let's come back to AI. I mean I think on the earnings call, you guys did an excellent job of kind of framing why AI should actually be a tailwind to your business, not a headwind. But maybe just take a minute and talk to us about that through the lens of both the banking segment as well as the Capital Markets segment and then also just from like a revenue and a cost perspective in the P&L of FIS.

Yes. We could go on for days.

Yes, I know. I know.

So we had a couple of statements. One is why do we think we have a competitive moat? And then we've said because of that moat and our investments, we believe that AI is a strategic accelerant, not an issue for the company. And I think that was the essential communication. So why do we have a moat? We have systems of record and systems of record are deterministic. They're not probabilistic. So you can't use AI to do a guess at what the interest could be at a probabilistic calculation. It's actually deterministic. The systems are highly, highly regulated and the reporting is extremely detailed. So one is it's a system of record. Two is the data we've accumulated over decades is essentially the secret sauce of the company. So we've got core accounts, debit. Now we've credit. So over 1 billion accounts, 73 billion transactions a year. This data has intense value for anybody who wants to apply AI to it. That includes our banks. It can include third parties who want to partner with us. So we have systems of record, which are the structure of the data that everybody needs to use, decades of data. But I would also go and say decades of operating bank infrastructure and software at enterprise grade levels of security, cyber, resiliency. A small company coming in can't do this. really can't. So it's -- and there is a bit of an analog to this. And the analog is an interesting one. Go back 5 years when Temenos and all of the modern banking platforms were coming in, and you were probably writing reports saying that this is a big threat for FIS. We're now 5 to 7 years later, and we never see them in the U.S. in a competitive bidding and nor have they won considerable business. Why? Because they can't scale. They have great products, but they can't scale, and they can't scale the same way we can. And the complexity of the products when you go up to a bigger bank is much, much more complex.

Stickiness is...

And the stickiness is high. And why is it high? Commercial banking is not the same as retail. People generalize. But the proof point is it's an entirely defendable against, call it, innovative players who come in, AI-enabled or not. And then two is we're not standing still. We have -- I think it's like 17,000 people in technology. And you can assume that a large proportion of those people know how to use AI. We've rolled out Copilot across all 45,000 people in the company at cost. Everybody -- we're actually tracking our people using AI every day. And we're actually ensuring that people are forced to use AI to drive -- this is in finance, everybody. We're tracking everybody in the company. So we've invested heavily, and we want to see a return. Personal productivity, back-office productivity. But more importantly, our AI -- our engineering teams are using GitHub. Not only are they making -- Stage 1 is make your process and coding simpler. And then Stage 2 is now we're embedding AI within our products. So you will see over the course of the coming months, an increasing drumbeat of, call it, agentic AI enablement in our core banking platforms over the course of the coming months, probably culminating in some announcements around our Emerald conference. Why? Because we are -- you asked what's the upside on AI. We have clear revenue opportunity. One is you got to do defensive measures. We have TreasuryGPT because Kyriba will compete with us, and they have AI enablement. Some of it is to defend your turf in treasury. The next step is build AI and agents into your software to make banks more efficient, right? The big banks like JPMorgan, they do it themselves. The medium banks and maybe regionals, they're more than happy to take -- if we can develop agents that reduce their back office sizing, it's a benefit for them. And then the other piece is we are using -- we're now working with some banks on pilots on the -- our data sets. So we're building...

You plan to size that or...

Yes, that's what we're actually actively doing now. So the first step has been we're investing about $100 million of capital in the current year. And probably there's another $20 million or $30 million of OpEx on top of that. So what are we doing? We're enabling AI within our, call it, systems of record. We're building out a huge, what we call EDAI. It's basically an enterprise data and AI engine. So what -- think of it as that all of the data we have on every client and every consumer within that client, whether it be the core banking, debit, credit, wealth. We have wealth data because we have retirement data, capital markets data. All that data is in one data set. So there's a pilot ongoing at the moment with a large regional, and they were doing their credit assessments using just credit card data. We've put all the data in one bucket, and they have a 360 view. So the bank can now take a decision. They can see the paycheck coming into the bank account. They can see their debit credit movements. They can see if they have a wealth position. So they've actually raised the credit limits to many of their customers generating higher transaction fees and income for the bank. So there's -- what I mean is -- now the revenue models are all being developed, right? Some of it is defensive. Some is helping the bank be more efficient in the back office and a lot of it -- the future of this is a data and AI enablement business, call it a platform business that drives revenue value for the banks. That's the job. And it is an immense amount of data, and we're one of the few companies in the U.S. who has that amount of data.

So I wanted to talk about your EPS guidance for this year...

We better let George talk at some stage because he gets upside if we don't...

Yes. Well, exactly. So like I said, I'm going to save the hard ones for him. 8% to 10% growth in EPS this year is the guide. I mean, just as you think on a normalized basis beyond this year, I mean, is that a decent proxy for ongoing EPS growth? Or can it actually be a little higher once the buybacks resume? Or how should we look at that?

Yes. I think -- I kind of confirm what you say. Once you get back to significant buybacks in '28 and '29, there is -- obviously, there's going to be more contribution from buybacks than there is in the current year. We're not buying back any shares. But I'm not confirming any long-term guidance here. All I would say is look at our 2026 guide and the components of it. And many of those are better than what we said at Investor Day. Revenue -- high confidence in revenue being at the high end of the total company guide led by banking. Two, margins -- it's 100 bps on a pro forma basis. We kind of insinuated long-term 60 to 80 bps. We're already saying 100. There's no reason for a slowdown in that 100 momentum. So call it revenue tick, margins tick. And I think where we've made a much different pivot is on cash flow. So on cash flow, we're saying -- actually, it's not 8% to 10%, it's 30% in 2026. And over the 3 years, it's going to be 25%. So we're saying we will grow cash flow per share, even though you're not allowed to quote that. What I mean is it's not an SEC measure. But we would have liked to have emphasized cash flow per share because it's going to grow at 2x the amount of the adjusted earnings. And that's an all-in GAAP measure.

So I wanted -- yes, I wanted to spend a second on cash flow because you're talking about a little bit over $2 billion this year, right? And I think the only item that excludes is the tax bill, right, cash taxes on the Worldpay sale. How big is that piece?

That's $700 million. And when we did the deal originally, we thought it would be $900 million, yes.

Okay. Okay. So it will be $700 million versus the $2 billion that excludes that. Okay. And then if we look at the 2028 guide for real GAAP free cash flow, you're talking about, I think, $3 billion plus, correct?

Yes.

And obviously, a lot of like the integration and acquisition costs related to TSYS will be leading off. So I guess is that -- you kind of hinted at this a little bit, but that's the year when buybacks in theory, kick back in and size? Is that...

Well, I think what you're going to be we got to add -- I'm trying to simplify these things. We're going to add $1 billion of cash flow in '27 and '28. And where is it going to come from? We've got plenty of opportunity on working capital, but that's not one of the biggest drivers. The biggest one is you're going to grow your EBITDA, right? And you just tax affect EBITDA and you'll get to a very sizable number. The other one is onetime transformation and integration expenses. In the current year, they're estimated at $800 million. The number will decrease by at least 50% by 2028. And we're not waiting all the way until 2028. There will be a step down, $800 million down to a smaller number in '27 and probably below $400 million when you get to 2028. So -- and then you'll say, well, how do you reduce it so much? Well, the current spend in the current year estimated to integrate the credit issuer business is roughly $250 million. By the time you get to 2028, it's probably below $50 million, right? So $200 million alone comes from life cycle through the M&A. And then right now and somewhat into 2027, we're at a very high level of onetime transformation on the base business. A lot of it is severance costs and a lot of it is coming from AI. Like the -- this is one thing we hadn't contemplated at Investor Day, the level of opportunity coming from really embracing AI and driving it across the company in terms of headcount efficiency. And you can see it play out in 2 ways. We do have fairly high onetime expense because it's severance driven. But then again, the margins are higher than the expectations we set at Investor Day. The game has changed a bit in terms of the composition of how we get the margins.

So are you seeing material headcount reductions because of AI? Or is it just enabling you to kind of flatline your employee base while you continue to grow revenue?

Yes. The 10-K is out there. We had 51,000 people at the end of '24. At the end of '25, we had 44,000, 7,000 reduction up 12%, 13%.

Right. And obviously that's before you closed TSYS...

I'm not saying that -- it's not a projection. What I'm saying is there are multiple actions we took in that. You should assume a large piece came out of AI. We were very advanced in engineering on driving GitHub in the engineering group. Did headcount come down? Yes. Is our engineering function smaller than it was 12 months ago? Yes. And will there continue to be productivity and efficiency going forward? The answer is yes. But across every function. We have 20,000 people in the client office. That's a lot of people managing the interface with our customers. It doesn't need to be that large.

All right. Well, we are out of time. This was great. Always appreciate the discussion. Thank you for being here.

Thank you, Jason. Thanks a lot.

Thank you.