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

Good afternoon, everyone. I'm Vasu Govil, and I'm one of the analysts covering the payments and core processing space here at KBW. For our next fireside chat, I'd like to welcome the set of speakers from Fidelity National Information Services. Joining us today, we have the company's CEO, Gary Norcross; CFO, Woody Woodall; and EVP of Corporate Finance and IR, Nate Rozof. Thank you all for joining us. And I know this is the first time you're participating in our conference, but I certainly hope that this will be the start of a tradition.

Thank you. Thank you for having us.

Yes, absolutely. So I guess just digging right in, 2020 was obviously an unprecedented year that drove so many changes in the industry, think about e-commerce penetration, just take -- electronic payments taking share from cash, there's been a shift in commerce generally towards larger merchants, away from smaller merchants. So net-net, as we come out of the pandemic, do you think that the market dynamics have shifted favorably or unfavorably? Or are they net neutral to your long-term growth prospects?

Yes. Look, I think actually, the trends are very favorable to our long-term growth prospects. If you look not only -- you mentioned the movement from cash to electronic, obviously that's going to be a very nice tailwind for us. We do not think that cash recovers to its traditional pre-pandemic levels. But where we get more excited is just a push to e-commerce, the push to omnichannel, the push to card-not-present. And all of that plays significantly to our strength. We have the leading cloud-native solution in the industry. You've seen us consistently take share in large, complex e-commerce. And so all of that, I think, will be fundamentally a great tailwind for FIS, not only as we recover from the pandemic but in years to come down the road.

Woody or Nate, you guys have any additional comments there?

Yes. I think the answer would be, to follow on Gary's, everything digital right now is in high demand, and so whether that be in the merchant business, in the omnichannel capability, e-commerce capability across the globe, but also in the banking business, in capital markets, right, where the digital demand and the need to utilize technology to improve customer experience across all 3 of our segments is going to continue to be a growth tailwind. I think the pandemic did nothing but accelerate that into 2020.

Yes. I think, to add on to that, Woody, I agree. You see that coming through in our backlog, continuing to grow and accelerate rate. And our pipeline in banking is, for example, up 40% year-over-year, really driven by the mega deals as large financial institutions are entering an upgrade cycle to react to this change in consumer environment. And as Gary mentioned, having the only cloud-native solution in the market really plays to our strengths.

Yes. I mean -- look, I mean, all of these are great points. If you think about it, Vasu, where we started our transformation almost 5 years ago, when we talked about this movement to cloud, we talked about investing in cloud-native applications, all of those things are playing to -- are providing real strengths to FIS across all 3 of our segments. And what's interesting is COVID, to Woody and Nate's point, has accelerated the demand for that because what they realized, when you're on older legacy technology: one, you can't be as nimble; but two, just think about how everybody had to transform and move remotely, think about how you now have to, on a remote basis, run systems. All of that's made people evaluate just their legacy engagement. And that's played to the strengths of FIS. And you've seen it in our sales success. You've seen it in the backlog that Nate talked about and other things Woody mentioned.

So we'll dig into some of these things in a bit. But I guess, first, sticking with the merchant business to begin with, roughly 50% of your businesses is high-growth channels, sort of exposed to e-commerce and integrated payments. And the volume headwinds are what they are today. But what's your sense of how the market share dynamics are shifting in these channels overall in the market? And then as we start coming into a more normalized environment, how should we think about what that could mean for your growth rate in these channels maybe beyond 2021? 2021, it's sort of an easy comp and there are a lot of different factors going on, but once we get into a more normalized setup in 2020, how do you think that your growth rates would look like in these channels?

I think at the end of the day, when you back up and as we entered into the merchant business through the Worldpay acquisition, we fundamentally felt and still believe and know that we bought the best asset in the industry. I mean Worldpay was the leading e-commerce provider around the world. If you look at the trend, to Woody's point, of everything pushing to a digital enablement and you look at people pushing towards card-not-present, whether it's across our integrated channels, whether it's across our enterprise channels, whether it's across our traditional just pure-play e-commerce channels, everybody is pushing for new and different ways to take payments through a card-not-present deployment. So you'll hear people talking about pushing into omnichannel. You'll hear people -- and no matter what segment we're talking about, that's going to be a nice tailwind for FIS, and really, to my opening comments, plays to the strength of where we're positioned. So like you said -- I mean if the growth rates are going to be big this year, you've got -- you're coming off some obviously very, very tough comps in 2020 or very, very low comps in 2020. But what's interesting is if you look at the sales success we had during 2020, the number of our partners that we expanded, 5x, the number of our banking referral partners that we expanded, 4x, you look at our key wins in our direct channels, all of those, Vasu, will play really strong strengths to our digital enablement and our e-commerce capabilities in the space. So I think we're in a great position coming into this year and the back half as we see the recovery coming out of the pandemic. But that's going to play real dividends in 2022 and beyond.

Absolutely good color. And I guess just talking about the remaining 50% of your business, which is more traditional relationship-led, maybe you could give us some context on what the mix of that business looks like, small versus large merchants, any specific vertical exposure. And then maybe some more context on where it was growing prior to the pandemic, what it did last year. And then again, as we come out of this cycle, where do you think it will land?

We actually saw that as a real opportunity. When we looked at it, when we did the Worldpay acquisition, one of the things that we saw that we thought was interesting is Worldpay was spending a tremendous amount of time on e-com as it was defined in that current concept prior to the pandemic. What you've seen since the pandemic is traditional SMBs are now moving into card-not-present, right? They're now pushing into the need for e-commerce. They're pushing into the needs of being able to buy online, pick up at the store or buy in the store and all these various combinations. And so what's happening for us is there's a real opportunity for us to actually double down on some of our partner channels that frankly were becoming probably less strategic coming into the COVID pandemic. But what we were able to see is an opportunity. And so we've actually increased our focus there. And you've seen big results in our sales channels. As I mentioned just a minute ago, we've seen our partner channel come up, what, 4 or 5x, our banking channel come up 4 or 5x over the previous 2019, so good strong results and -- from a sales focus and once again will be one of the tailwinds that I just talked about.

And maybe anything to add, Woody or Nate, on just what the mix of that business looks like in terms of large versus small merchants where the [ flow context is in the U.S. ]?

Yes. I mean there's certainly some verticals that have had more impact in the COVID environment than others. We talked about travel and airlines, which is about 6% of merchant revenue in 2019. We've seen some come back in that now and think that we'll continue to see that over the course of '21 and into 2022. Our market share in the U.K. is sizable. We certainly see some impact from SMBs and retailers and restaurants in the U.K. I think you saw a couple of days ago, they're starting to open up the U.K. a little more, seeing a phased approach that by mid-summer, probably everything back to normal. So certainly seeing some incremental impact on the positive side as we're seeing these channels begin to open back up and drive growth opportunities into 2021 in a rebound approach, where we already had strength. These customers are still there. We're just looking to see the volumes come back as the verticals open back up.

Got it. Yes, revenue synergies were a key part of the double-digit growth expectation for the merchant segment. And so far, whatever you reported and announced, you seemed to have outperformed what you originally set out as a target. Maybe update us on what sources of synergies have been fully accomplished at this point. Where do you see most of the potential coming through in 2021? And is there perhaps incremental areas that you've been feeling good about, which are not part of the target that you've made out there but would be potential opportunities to sort of look for the next 2 years?

Well, I would say, yes, the revenue synergies have performed very well. I mean we exited last year a little over $200 million in run rate. We talked about that. I'll remind everybody, when we did the acquisition of Worldpay, we thought by the end of last year, we would have $100 million in run rate. We -- the quick answer is none of those categories that we've seen success in to date are completely behind us. So what I mean by that, even if you look at one of the very earliest ones we did with debit routing, as Woody just mentioned, as SMBs start reopening, as some of our customers start reopening and return to more normal levels, you'll see further acceleration of that revenue just based on volume, et cetera. Plus as we bring new customers on and take share, our ability then to use our intelligent routing across our networks will continue to increase as well. We've seen huge success in our Premium Payback offering. I'll remind everybody, that's where we're taking our pent-up loyalty points, which our issuers have issued in converting that currency. It's a very -- it's an outstanding product for the issuer because you're taking the contingent liability off your books, let's say, for $1 and giving $0.90 of value. The consumer loves it because they view it as seems something that doesn't have a lot of value and they're converting it to value at the point-of-sale. And the merchant likes it because that portion of the transaction is interchange-free. So it's really a win-win-win. We've signed a number of large merchants early on. We've got a very full pipeline on that, a very full installed pipeline. So you'll continue to see that to grow. The third area that we talked about was geographic expansion. And we've done a really nice job with geographic expansion. We just moved into another country, in fact, just last week. So as we're pushing forward and able to capture, I think we even described it at the time we did the acquisition is there's really a land grab going on in e-com. And so our ability to expand geographically into new countries, leveraging the capabilities that FIS has there and then being able to capture that e-com volume is going to be very important. So we couldn't be more pleased on the cross-sell and the revenue side, and we have a lot of potential here as we continue to go through 2021. And I should have said that revenue, by the way, you're seeing it flow not only into merchant, but you're also seeing some of that revenue flowing into banking. I mean -- and even into capital markets. So we highlighted last quarter where we did -- to Amazon, we sold a treasury solution as an example. So as you think about that -- and that all flows into capital markets. There's really no other company like ours that can leverage that kind of distribution with the capabilities that we have.

Yes. I know that's a great point. And I guess just to follow up on sort of the international expansion, what geographies sort of are on the top of your priority list? I know there were 2 regions you called out when the deal was done. How have you [indiscernible] nice set of regions are you looking at?

Yes. We're actually focusing on the countries where FIS brings a real strategic differentiation, whether it's licensing capability, whether it's people on the ground. So early on, we pushed hard in Australia and we pushed hard into Brazil. We've pushed into India. And we'll continue to have that philosophy as we continue to expand. But we're really looking across the globe. We've done some things in Central America. We're bringing on some other countries in Asia, so just a lot of really good combinations coming out of that. And what's interesting, it's not about just opening up the market. It really is can we then drive sales into that environment? Are we -- is the sales team teeing up the kind of e-com solutions or acquirers that we're looking for to come and bring that volume through our systems? And we're seeing that play out, which is one of the reasons why we've accelerated as much as we had over the original $100 million. I mean given the backdrop of a global pandemic, to think that we achieved $200 million in run rate synergies during that time is pretty amazing. So as that recovers, obviously, you'll see natural acceleration in the $200 million and then continue to bring in the cross-sell. So we're very, very confident that we'll hit our synergy targets for sure from a revenue standpoint.

Yes. That's where I want to pile on a little bit. We talked about exiting 2021 at $400 million. We still have got our exit at 2022 at $550 million. But I could see that drifting up as we see the rebound and the volumes coming back over the course of 2021.

No doubt.

Certainly, well ahead from a timing perspective on the original revenue synergies, so very pleased with all this, particularly in light of the pandemic backdrop we've been working in.

Absolutely. [Operator Instructions] And we actually already have one question from the audience. I guess the question is that as we see this uptake from digital wallets taking place, people are transacting in more and more to digital wallets, how does that impact you? Are they taking share from you? Or do you still play in that value chain?

No, we absolutely still play in that value chain. As the largest merchant acquirer, whether that transaction is handled through a wallet at one of our merchant locations or not, we actually capture that payment. And interestingly now, we capture it at the point of acquisition. As you think about it, we're really one of the only firms that can transition from an acquisition point all the way back to the issuing point and settle. And we take and make revenue and value throughout that entire process. So our job is to make sure, and we challenge our team with that every day, is to make sure no matter where the payment is generated in the ecosystem, are we in a position to capture that along that process of authorization and settlement? We also are doing some things in the digital wallet space as well. So we've done some stuff there. We also play very heavily on the issuer side with financial institutions through the whole digital ecosystem. We enable payments through that. So we have a tremendous opportunity in the wallet space.

Got it. Just switching gears, I guess, to the banking segment next. Large banks historically have been pleased to move to outsourcing their core. But you guys have seen pretty good success over the last 1.5 years with your Modern Banking Platform. Maybe could you refresh us on where do large banks tend to be -- and by large banks, I'm sort of hinting towards banks that are larger than $10 billion in assets. Where do they stand today overall in terms of outsourcing their core? And what do you think is driving them to finally take action in sort of startups?

Well, I think we're just getting started. I mean we've always talked about, we're really just embarking on a true 10-year journey here. And what you're going to see is the single biggest transformation in financial institutions around the world. Just in general, given your greater than $10 billion line, very few have outsourced their core bank processing. And if they have outsourced their core bank processing, even on legacy solutions, they've outsourced it typically to FIS. I mean we're just the leader in that space. You've seen -- what we're really seeing though, Vasu, is not only a movement to outsourcing, but you're now finally seeing a transformation of legacy technology to more modern cloud-native technology. And that's where Modern Banking Platform, Code Connect, Digital One, that's where all of these capabilities come to bear. And as you look at those solutions, they're really only going to be offered in what you're calling an outsourcing nature, what we would say is a SaaS model, but fully deployed on our application through -- on our technology stack. And so it's a real interesting time. And that's why we've also, Woody and myself both have leaned in, not only have we seen accelerated growth in the banking segment, we think that sustainable growth is -- we think that elevated growth is sustainable for many years to come based on this trend. You've got a lot of financial institutions, believe it or not. Some are -- in some that we've signed on Modern Banking Platform, literally the last time they installed core banking was back in the 1970s, right? So when you think about that level of LEAP program, you're now moving -- you're moving well beyond just moving from mainframe to cloud. You're moving from first- and second-generation programming languages to cloud, right? I mean everything about that is massively transformed. You're moving to components. You're moving to micro services. You just are in a way transforming the entire way the bank is going to run. And so not only are we just getting started, people have to understand, we're just even getting started in the banks we've already signed. So in many of these modern banking wins, which we talk about, the Modern Banking Platform this year will generate a little over $100 million in revenue and that's going to continue to accelerate, but those are the components within the bank. Those might be just the entire deposit application or just a single deposit product, where we haven't even migrated the back book yet. We've got the whole lending modules, components that we'll be rolling out. We dropped our first code drop on the lending side at the end of the year. We'll continue to build on that. So that's up-sell opportunities. And then we're seeing tremendous demand for the current capabilities that we have in MBP. So the backlog is way up. You've seen our closure rates. So that's a long-winded answer to we're just getting started in banking. And it's got a very bright future for it.