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

All right. We're going to kick off the next session. My name is Will Nance. I cover the payments in fintech. The first fireside chat of remember to introduce myself. And I am really delighted to have FIS CEO, Stephanie Ferris as well as CFO, James Kehoe with us today. Really excited to have you guys with the conversation yet again here at the conference.

Yes. Thanks for having us.

All right. Stephanie, thanks for being here. I wanted to start big picture. The stock has had a tough couple of years. When we look at the numbers, yes, there's puts and takes. We talked about capital markets and earnings. So banking has been growing sort of high end of the range. Margins are expanding. Year-to-date, free cash flow is up a lot year-over-year. As you sit here today, how do you assess the health of the franchise in the end market. And when you think about what the market might be missing, what are you most focused on delivering from an execution perspective to help sort of turn that around?

Yes. I think the health of the franchise is good, it's strong. We're focused on what we can control, which is really to the point you made, how do we ensure that the banking business returned to the growth trajectory we expected. As you said, it's performing at the high end. We've been focused on margin expansion. That's been a very big focus for us. We're really pleased with the first half of the year and feel good about the rest of the year, all the way into free cash flow. And as you know, in the last quarter, we raised our free cash flow guide. In addition to that, we've been focused on quality of earnings. We're really looking at our acquisition and integration costs and bringing those down, which obviously shows up in the free cash flow. So for us, it is about execution, and being focused every day on how do we get up and deliver revenue, margin expansion, free cash flow and high quality of earnings. In terms of what the market doesn't understand, it's a tough one, right, in terms of the industry and the sector that we're in with respect to AI. I think we've been really pleased. Banking is definitely in -- has a growth agenda. And we're seeing banks take advantage of M&A, whether they want to be buyers or sellers. We're seeing them focused on building out their digital currency stack. We're focused on them. In general, talking about how do we modernize the bank from a technology standpoint. And then we're all focused on cyber, Mythos Project Glass wing as a general category and really focused on closing any holes that any of us have there. So really highly focused on execution.

Yes. So let's continue that. You've talked about this as sort of a generational moment in banking, deregulation, record M&A and now the intense focus on AI. What are you hearing from clients today in terms of technology budgets? And when you -- if you could characterize the spending that people have on technology, is it broad-based? Are you seeing prioritization within the budget towards AI-specific dollars? And overall, how does the environment feel for FIS?

Yes. I think in terms of technology spend, in general, it continues to grow at 7% to 8% overall. That's been a trajectory that we've seen, well, I think, for the last 10 or 15 years, where banks are spending continues to evolve. Obviously, CISO's budgets are pretty big. We can participate there in terms of product capabilities with our fraud products, but we don't typically serve in the [indiscernible] world, but we're very linked with [indiscernible] in terms of making sure that our products and services are all closed from a vulnerability standpoint. So we do take advantage of some of that spend with them. They aren't reallocating, I would say, from bank modernization or technology modernization into cyber because generally, they're doing really well. And so they're in an environment where they have an ability to grow. They have an ability to buy or sell. They're really focused on how do they generate net new deposits. So when I think about where our bank CEOs spending their time and how are they talking to us in terms of where they want to grow, they know they want to be and continue to be very competitive around deposit gathering. And when they think about deposit gathering, they think about, do I have the right digital assets to be able to gather deposits? Do I have digital account opening capabilities to gather deposits? Do I have in terms of -- do I have digital currency capabilities if you're a commercial bank and you want to gather deposits from commercial customers or make commercial loans, you have to have capabilities out for those treasurers be able to take advantage of digital currencies like circle. We have products like money movement Hub, where you can plug in any of those capabilities. So banks are really focused on making sure they have the deposits they need to fund their balance sheet. And then they're looking at spend inside the banks in terms of AI, where can they really get after with the regulatory costs of being a bank. And so when you think about things like that, you think about suspicious activity reports, AI, money laundering and fraud are very big places and cost pools that banks spend a lot of human capital on. And so we have been in partnership with Anthropic, building out our first agent that's focused on AML and SAAR filing. And you're seeing -- we're seeing a very large interest in that because it's just trapped costs. that banks have been never able to get after. Now when you talk to banks about that, they're not usually looking to take out those costs and drive margin expansion. They're looking to reallocate those costs again back to how do we grow the franchise. So they're very much focused on how do we take advantage of this point in time where we have a nice balance sheet, and we have nice margins and start to really reinvest in the bank in the capabilities that they need, depending upon where they are. And I think from an FIS standpoint, we feel good about all those categories. We feel good about having a conversation with the CISO on cyber we feel good about having conversations around how to prevent fraud, which is a huge lot cost. We feel good about having an agentic agent going after fraud and money laundering and then we'll go after credit card and debit card disputes. So we feel good about that. And then bank modernization, we have all kinds of stuff. So we feel really good where the spend moves and occurs, but that is something we keep our eye on every year in terms of where our bank's spending.

Let's talk a little bit about the anthropic partnership. That was one of the bigger announcements this year. You said the financial crimes agent will land in the back half with BMO and amalgamated nothing in the 2026 guide for that. Where does product development stand today? And how quickly can the revenue road map broaden beyond just financial crime?

Yes. So it's going really well, right on target in terms of having our first agent up and running inside [indiscernible] made at end of the year. So we will be off to the races in terms of selling this capability out to the rest of our financial institutions in 2027. We're having a lot of conversations to figure out how to price it correctly in terms of making sure we get the biggest and fastest adoption we can. It obviously creates a huge amount of value for the bank because it does unlock a bunch of locked costs for them. . We are talking about how do we really launch. One of the reasons we partnered with [indiscernible] we have a very big distribution channel out to financial institutions. So we are working on our go-to-market and our pricing and our product capabilities to launch in 2027, a very material way and start to generate revenue on that agent. Right on the back of that is we are starting to build and work with our next set of banks on credit card and debit card disputes. Another really big capability that is locked inside banks. When you think about calling and you dispute on your credit card or your debit card, there's a lot of manual labor you calling the bank, the bank then has to call the merchant. The merchant has to do something in Visa and Mastercard. A lot of locked costs in there. We think -- and a lot of it is coming off of our systems that we deploy in the banks. We think there's a big opportunity there. So the flywheel on agents should continue to get faster and allow us to really deliver real incremental value to our banks and unlock a different bag for us.

Great. James, I want to get you involved here. Any notable callouts this quarter as it relates to the outlook or anything that you'd flag to investors about the way you're thinking about the second half of the year.

No, I'd just reiterate what we said before. We reaffirm our guide for Q3 and the full year. And then as we look at the shape of the second half, we mentioned this before, in banking, we had an M&A contribution in the first half of 100 bps. There's no M&A contribution to any great extent in the second half. And then -- so the overall growth rate will moderate slightly in banking. In capital markets, there's only 1 real call out. It is in the third quarter of last year. was exceptionally strong on -- in capital markets at 9%. So that will be a tough comp in the third quarter, but we'll see a strong acceleration from that level in the fourth quarter. I do want to reemphasize one thing. Both businesses will deliver mid-single-digit recurring growth for the year. We're pretty happy about where we are exiting the year on that basis.

Let's stick with that theme about recurring revenue growth. You've been citing this metric around recurring ACV. I think you were up 20% in the fourth quarter, 24% in the first quarter. Maybe if you could help us understand what has fundamentally changed on the sales side to drive that? And how you think about the durability of reoccurring revenue growth in banking as that backlog converts to revenue?

Yes. So as we came into 2023, we really refocused the commercial engine on making sure that we were selling the products that had the right margin to deliver the revenue expectations, but also the margin expansion. And so it's really, really important that we continue to focus on that recurring revenue and the recurring sales because if we get too focused on [indiscernible] we get too focused on license, you don't have a highly recurring, high-margin profitable business that you can bet on that will deliver our expectations. . So we -- I aligned on a Chief Commercial Officer and really focused him on selling the right recurring product with the right level of margins. So -- sorry, the right level of margins so we can deliver the ultimate margin commitment we made. Bringing the [ TSYS ] acquisition on obviously helps that. It is almost all recurring revenue with very high margin, so it gives us a lot of confidence in recurring as we go forward. But that's we've really had our Chief Commercial Officer and all our product leads focused on that versus on every dollar of revenue accrues the same value to the firm because it doesn't. And so we've been really -- that's been really important for us.

Got it. And then just on the nonrecurring side, I think selling higher quality, higher margin recurring business has really been central focus since you took over as CEO. You have seen a meaningful uplift on the nonrecurring side in the first half in banking. I think license activity in the first quarter termination fee, which I think most people understand in a second. But maybe just unpack on the license side, like what drives the net new license activity in the business how you just think about that about the contribution of licenses going forward?

Yes. So one of the benefits of the franchise is that we have a lot of partners in our ecosystem that become vendors of ours. And so -- and they're also [indiscernible] on the other side selling to our banks. So as we look across our ecosystem, we end up paying a lot of our vendors and partners and also see them on the other side of the ecosystem with us. So our Chief Commercial Officer, and I have been really focused on how can we turn these costs cost partners and to revenue partners for us. So we started this year in the first quarter with a couple of big SIs that we thought we could partner with that we have partnered with in our back office capabilities, and they came to us and said, "Hey, we think we could also be a partner with you in terms of distributing your products." So big licenses to sell those, we ultimately think they deliver recurring revenue over time. And we think this is a really interesting opportunity for us. We took our first shot of it with a couple of partners. So that was the first quarter. Do we think that's -- it won't happen every quarter, and we're trying out a model to see if our -- we have our own distribution, can we enable other distributions of our product? Can that create more revenue for us. TBD as you look -- as we look at the opportunities out there. So that's kind of the genesis of that big license in the first quarter. And then to your point, a bit of a termination fee in the second quarter around Huntington Cadence, which kind of is episodic with bank consolidation.

Yes, that makes sense. Okay. I wanted to talk about the LFI focus of the business. I think it's something that you guys have been emphasizing more recently. It's always been a hallmark of FIS' business. 72 out of the top 100 clients are now consuming across banking, payments and capital markets. They have significantly higher ARPU. I think on paper, when you look across the big 3 providers in this space, it looks like everyone has sort of the same products. And as somewhat indistinguishable. Can you talk about what is genuinely different about serving the large FIs versus what it's like in a community bank or credit union?

Yes. I mean, first of all, I would say we serve community banks -- and that is as important of a channel as our large financial institutions. But they are different channels and how you serve them and how they want to consume products is very different. So starting from large financial institutions, they're very sophisticated technology consumers. They're typically looking for best of breed. -- they may or may not want your products to be integrated and you have to have high levels of scale, resiliency in cybersecurity. -- the way they want to be serviced is different than the way community banks. If you think about community banks, their model, they want to make sure that everything is fully integrated. They obviously want best-of-breed if they don't think we're giving it to them, but they would prefer to have a one-stop shop in terms of a provider. The way we provide service to them is very important. They serve their communities. It's a higher touch model than the large financial institutions have. So I think they're very different channels, and we serve them very differently. Also, in the large financial institution part of the market, typically, if you're a large bank, you are serving commercial banking customers, so do the community banks. But if you think about serving commercial banking customers, these are sophisticated corporates. They typically require a pretty sophisticated money movement capabilities and including having digital currency capabilities. We make these capabilities available to all banks regardless of large financial institutions or community banks -- but if you're a larger size or your focus in the community bank market, we have the best-in-class products and services for that commercial bank segment. So whether you're a large or a community bank, we just do hands down. It's been a marquee segment for FIS. And so that's where I'd say we're very differentiated. We also -- so maybe I'll pause there.

Yes. No, I think that's great. One of the other topics that's come up a lot, and it's probably come up more in the context of larger banks has been the idea of core modernization. The idea large banks following out the core. You recently did an aqua hire in the orchestration space. And so I'm just wondering what you're hearing from the largest banks on the modernization road map and where you see the biggest opportunity for FIS to facilitate versus maybe the opposing view that we've heard in the market about this maybe being a disintermediation risk for some of the incumbent providers.

Yes. we actually call it bank modernization because it's really -- banks are no longer focused on big bang core migrations at the very large. It's just -- it's too big, it's too risky. And so as they look to modernize their bank, and this is of the largest size, a fairly sophisticated, they're looking to hollow out their core typically, which means they want to pull out the customer master. They want to pull out the project -- product master. They want to have an orchestration layer that goes across not just their deposit core, but also their commercial core, their mortgage, core in their consumer core. Remember, there's a lot of cores inside of a bank. And so banks have been moving in a hollow out journey. It's an expensive way to go. It is definitely an evolution we've been seeing in the market. And we did do an aqua hire to your point where we brought a team on with a set of capabilities that is very, very fantastic in this space. And what we think is differentiating is completely AI built, dual-cloud hot, hot, never had that before, and that is also starting to become a requirement in the market. as resiliency continues to become a very big deal, you can also be in the cloud, and you could be in your own data center. So these are cutting-edge capabilities that we're seeing the largest banks want to have and have an orchestration layer to be able to do that. So we brought that team in. They have a fantastic set of assets, and we're looking forward to some pretty exciting announcements in the future.

Very good. Maybe we'll turn to TSYS or total issuing, I think as we're now calling it, the business is growing in the mid-single digits. You've owned it now for a couple of quarters. How do you feel about visibility to the mid-single-digit growth algorithm that we've laid out? How is the cross-sell conversation going? And I think it's growing 6% right now. What would you attribute some of the above trend growth that you're seeing in the business?

Yes. So I think -- it's been a fantastic acquisition for us. It fits exactly into our existing customer set with a product that we did not have. it brings in highly recurring revenue with high margins and a very, very easy view in terms of a mid-single-digit grower there. That being said, it is going very, very well. We're tracking towards our cost synergies. I think we shared that in the last quarter. we're continuing to feel really good about our revenue synergies. We think those take longer, just given these are really big banks with long time frame. So we feel good about it. It is tracking above expectations when we originally bought it. I feel really good about it. I would say it's better management, but to be fair, it's probably from the prior management in terms of why it's tracking better. But we do feel really good about it, and it continues to execute in a really strong way for us.

I think you called out a large account conversion with an existing client this path order, contributing to -- I think you called out one of the largest customer migration in the history of the industry. how impactful is that migration to overall growth? And how do you think about kind of the persistence of that 6% growth in the business?

Yes. so with our -- this is evidence of one of the standout value propositions of total issuing solutions. So if you're a large bank having and migrating a large card portfolio from your existing provider, to total issuing, they are best-in-class. I've never seen so many accounts migrated in my entire life with literally not one issue. That is a core competency of total issuing solutions. So when you think about if you're a large bank anywhere, and you're going to move an entire consumer card portfolio. Remember, that's a revenue to you. That's not core banking, which is a cost structure to you. You want to have a lot of confidence in a team that's been able to do it and proving it at scale over time. So honestly, I've never seen anything that big. I've been in and around the industry and hats off to the total issuing team. They did a fantastic job. That's likely a little bit of why we're accruing at a higher-than-expected number for us. And so we feel really good about it. The client was very happy with it. A little bit more to go, but really great outcome.