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

Okay. Well, thank you, everyone, for joining us, it's getting into the early afternoon here on the East Coast. So we're really appreciative of your time, and we're incredibly happy to have Gary and Woody join us from FIS. Obviously, they're quite busy managing a global organization from their homes. So we're really appreciative that they're taking the time here. If you do have questions, please send them. There should be a Zoom box there, where we can do Q&A or if you'd like to do the old school way, you can just e-mail me at jbeck@key.com. But I will basically run through a set of questions here and work in those investor questions at the end to the extent time is permitting. Otherwise, we'll reference you to Nate and his team if we're not able to get to all of those.

So yes, we're really happy that you all joined us. So I just want to start off just very high level, looking at the industry level. So there's been a lot of M&A going back to the beginning of 2019, over $100 billion, which is a lot for really any industry. And to me, what's happening is there's a structural rewiring of commerce and financial services and wealth. And that's really what's behind it. I think some outsiders just say, "Oh, well, it's consolidating and it's simplifying." And I think it's probably the opposite. But just would love to get your view on really the high level trends that are taking shape in the industry and where you see FIS fitting into this future of commerce and fintech?

Yes. No, Josh, I think it's a great observation. One, thank you for having us here today. But when you look at what's going on in the industry, clearly, what you're seeing is the industry has historically been built in stovepipes -- a very, very distinct silos around certain areas and functions. What we're seeing is with the digital enablement in self-service society that we're all pushing towards that really, that stovepipe has now been moved to a horizontal structure. And so you see a real key theme of digital enablement woven all the way through the ecosystem. So for us, it was clear that being able to grab a payment at the point of present and take that all the way back to the funding source, wrap that all the way back into the investment count, there's clear innovation that could occur there in disruption. And so as we think about it, scales always matter. So our ability to do the Worldpay combination and bring that scale together, they would then be able to drive the investments necessary to innovate and frankly, disrupt the way we do commerce going forward is a very important piece. So we're really excited about the combination. I mean not only scale matter, but global scale matters. Because as we think about commerce, the world is certainly going to move -- continue to move more globally, how we think about moving money cross-border, how we think about people interacting with their accounts, all of that's going to change very dramatically over the next 5 to 10 years. And certainly, we think our combination allows us to take advantage of that. And you see us investing heavily in the technology to accomplish that vision.

Really helpful. I really like your tagline of your effectively advancing the way the world pays, banks and invests. Obviously, that's a tagline, but it captures a lot. So maybe just help us understand, what do you see as the distinctive elements of your story and really realizing that broad mandate?

Well, I mean, if you think about it, look, we're one of the leaders. Obviously, the largest global acquirer of payments with the large global processor of core banking systems. And we're the largest contributor in processor across the capital markets deal. So what all does that have in common? That has in common, consumers, SMBs and large corporates, and how we take advantage of that and interweave that scale to drive benefits. So what would be examples of that? We issue more than 800 million cards around the globe. How do we take that data, that knowledge and literally improve off in fraud rates, not by 50, not by 100 basis points? How do we guarantee the transaction, get it to that level of accomplishment? How do we remove friction through the ecosystem? A lot of the ecosystem still today has batch deployments, batch settlements. How do we weave in this theme of real-time through that and inevitably serve those consumers, serve those SMBs, serve those large corporates in very dramatic and different ways? And so I think given the position where we're in and given the investments we've made on technology, whether it's through our data center consolidation initiative, which is really our tagline for how do we embrace the cloud. And we've talked a lot about this. We're well over 70% of our global computes now in our private cloud. By first quarter of next year, over 80% of the compute will be in our global cloud. How do we take advantage of the investments Worldpay was making around the Worldpay gateway and NAP? How do we take advantage of the modern banking platform, Digital One, Payments One, all of these things coming together, which will weave through this theme of reducing friction and the flow of commerce around the globe.

Really helpful. So I wanted to -- one of the things you mentioned there around the combination with Worldpay. So I think initially, you had outlined $500 million of revenue synergies and $400 million of cost synergies, and you're tracking well ahead, I think, almost a full 2 years ahead, and you've done really well with acquisitions in the past, both Vantiv team as well as your team with SunGard and others. So maybe just as you've gone along in the integration process, I mean, what has been maybe the most surprising? Obviously, things are coming in better than you had expected. Just would love some context there.

Yes. I think what was interesting is the 2 companies were very like minded in how they approach markets and how they approach technology and how they serve customers. And that like-mindedness also complemented from a cultural standpoint that made our cultures aligned very well. And so then it allowed the ease of being able to put this company together. Frankly, this is the -- I don't want to ever make anyone to ever think this is easy. But this has been the easiest integration we've done to date. So the teams gave -- tether so well, it just allowed us to really accelerate our synergies. You commented by the end of this year, we'll be over $400 million of operating savings, well ahead of where we thought. But if you even take our below-the-line savings with what the job Woody and team have done, with regards of our debt restructuring, some of those things are going to be well over $700 million of cost out of the infrastructure. So now you go after the revenue side, once again, we thought exiting this year, we'd be at $100 million in run rate. This year, we're now already forecasting that we'll be over $200 million in run rate, and that run rate has been impacted by COVID, no different than some of our other businesses. So if you really adjust that business, it would be much higher than that. The synergies on the revenue side have really flowed exactly where we thought they would flow, but with some really nice surprises. Demand has, for example, been stronger in our premium payback product than we thought. We knew that there would be demand for it because we had already signed a significant large merchant. But what we've seen is we -- now the demand has been so strong, we literally have an implementation backlog of been installing that product. So that's where we've talked about it on our prior calls where we've taken our royalty point bank for the issuer and actually converting that to a currency. The consumer loves it. They're getting value for something that they didn't really assign value to. The issuer loves it because they're taking a contingent liability off their books at a profit, $0.90 on the dollar. The merchant loves it because that portion of the transaction is interchange-free. So that's really done very, very well. And then the banking referral business really moving some of our large FIs into our bank referral program. That's one that's been a real pleasant surprise as well. We didn't expect to really see that much demand. And what we've seen is some really significant signings we highlighted one just this past quarter, at well over 500 branches. And so when you start looking at those kind of customers moving over and bringing that kind of branch count, obviously, we see that business really taking off for us in the future. Now we're not only going to continue to execute on the things we're already doing, the debit routing, the premium paybacks, the new products, some of the fraud tools that Worldpay brought to bear to sell into our base and vice versa, some of our tools that we sell on our issuer platform to sell in that Worldpay base. But now we're really starting to look at how does the data analytics work, where we really can move those fraud, reduce fraud, really move those authorization rates. We're starting to get some real traction on our geographic expansion, which is exactly what we thought we would do, some really early wins in the Brazil marketplace, India marketplace moving into Australia, all driving e-commerce as a first step. So really excited about how the integration is going and the synergies are coming together.

Yes. That's great to hear. Probably, like you said, easy is probably never the right word, but that's really encouraging to hear.

Yes, it's never easy. The team has done a great job.

Yes, a lot of hard work behind that easy.

Absolutely.

But one of the things you mentioned was cloud enablement. And I really feel like you were early in making that investment and realizing that was going to be a big shift. And I think it was over probably 4 years ago that you started to go down that path, and you've had some really great wins with your modern banking platform. So I'm just kind of curious, what was the catalyst years ago that made you feel like this was the right investment to make. And it feels like -- and I don't know if this is the right statement, but it feels like we're in a little bit of an inflection point in adoption. You've had some great wins, obviously, among the top 30 banks and such. So I just would love to hear a little bit of context about that opportunity and the momentum that you see there.

Well, Josh, I'm working on my 32nd here with the company, and a lot of people might not realize this, but actually started out with this company as a programmer. So for me, I've got a really strong technical background. And as I was moving through the company and as I took over the CEO role in January of 2015, I felt that the company was at an inflection point. And it was interesting because I've been president of the company for the last 5 years, we have done very well. We were taking a lot of share in our businesses. But when I look forward where the market was moving, it was just hard for me to believe that people are going to continue to buy bespoke products. And it was also hard for me to believe that people are going to continue to buy legacy type architectures and legacy type solutions. Some of the systems that are in -- most of the systems in market today, while are modern, are written in very old languages. Some of those languages are 30-plus-years old. So my -- our Board really took the leap of faith to say, look, we need to pivot the company and actually focus on where truly next-gen is heading and what are going to be those next-generation architectures, technologies and languages that are going to propel the company forward for another 50 years. And so we made that pivot. And in the short term, we actually impacted our growth rates. You actually saw our growth rates pull back while our customers and while our prospects took kind of a wait-and-see attitude. Because in order for us to fund that, we had to pull down our investment in legacy technologies and actually move those to the future. And you saw us announce data center consolidation, where we brought 55 data centers down to 6, all while embracing cloud technology. We then started building our application layer out to take advantage of that. And so now we're seeing the results of that. You saw us go live with our Code Connect platform about 3 years ago, all cloud native, really to embrace GDPR out of Europe. You then saw us come online with our Digital One platforms for the regional bank market. And then Q4, announcing our modern banking platform. So we do think we're at the starting point of an entire industry that's going to have to move off legacy languages, legacy architectures and move to a much more modern type deployment, all based on cloud. We're going to have to move to a nimbleness where we can put in software releases every day. We're going to have to move to a level of componentization that allows people to plug-and-play components to push openness, so people can iterate on top the development environment. And obviously, we're thrilled that we've arrived at this point. You've seen some significant signings. And I'll tell you, demand has been very, very strong. But I would also say we're just getting started on what I would easily account to be a 10-year journey of future growth for the banking business. So very excited about where all these technologies are ending up and where the market is heading. But what's pushing people there is, I think, if anything, COVID has been an accelerator. They've realized I've taken as much cost out of the infrastructure as I can. I've done the offshore thing. I've even done the outsourcing thing. I now need a step function. I need something that allows me to plug-and-play with various fintechs that I can gain access to various new markets. And I can bring a speed and agility that just doesn't exist, and that's going to require a change to something like modern banking platform and the other solutions I mentioned.

I'll tell you, too, I'll pile on a little bit there. The investments that we've made have really differentiated us in the market at this point in time. I think we're well ahead of the competition by embracing where the future was headed 4 and 5 years ago, building out open APIs, building cloud-native infrastructure and now building out cloud-native applications. And you're seeing it in the win rates, and you're seeing it in the revenue acceleration now. So I think we are really well positioned from a differentiated standpoint based on the work we've done over the past 4 or 5 years.

Yes. That's the sense that I get. And you're -- kind of purview as a developer, I think, yes, probably it's pretty interesting to help you maybe identify some of these trends that maybe investors are starting to focus on now. I wanted to go back to another point that you brought up around Worldpay and their new acquiring platform and some of the gateway work. So I remember back to the 2015 IPO, that was something that fill up at the time it talked to and was a major initiative for the company. So just help us understand, where are we with that? And what are some of the benefits that you expect to realize as you roll out those products?