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

Good afternoon, everybody. My name is Bob Napoli. I'm the analyst that covers FIS for -- in the fintech space for William Blair. Welcome to the 41st Annual Growth Stock Conference, the third day in the afternoon. For a complete list of disclosures, please go to williamblair.com. Very excited to have with us today the Chairman and CEO of -- President and CEO of FIS, Gary Norcross. Gary has been with FIS for 30 years. I think you started as a programmer. And obviously, he's had a tremendous run. He became CEO in 2015. We also have Nate Rozof from Investor Relations. And know Nate a long time back to Worldpay and now at FIS. But thank you so much for joining us today. Really [indiscernible].

Thanks, Bob. Thanks for having us. And so we're looking forward to the discussion.

Great. Well, maybe, Gary, just to open up, given that we're coming out of a pandemic and kind of unusual times, I was hoping maybe you could give us an update on what you're seeing out of the business as it can change from week to week these days.

Yes. No, I can. We continue to see strength in our businesses. We highlighted it with a lot of detail on the Q1 call. Obviously, we saw the flip of our volumes and yields transpiring in the merchant business in the last 2 weeks in March. That's continued into Q2. As people are lifting the -- and opening up the various markets, we're seeing strong return, almost pent-up demand. We laughed and said it was clear the pubs were full when the U.K. opened. Everybody was anxious to get into them. We've also seen some slowdown, obviously, what's going on in India the last several weeks or a little over a month now. But all in all, the business is doing very well on the merchant front. We continue to see strong demand in our banking and our capital markets business, Bob. You've seen that, frankly, performed very well throughout last year. We had a couple of our transaction businesses that got hit, but -- due to the global pandemic, but demand has been strong, onboarding has been strong. So really feel good about how 2021 is shaping up.

Thank you. We've been talking a lot about technology at this conference over the last couple of days. Maybe some thoughts on FIS and how you think about your technology. Things are changing very rapidly. I think the pace of innovation, I don't think, has ever been higher in the fintech space. And you have a number of up-and-comers like Stripe and Adyen, Square and nCino, Alchemy, Marqeta, et cetera. But how do you view your tech stack and your capabilities versus the innovators, if you would?

I honestly can't feel better about where we are today, Bob. Honestly, we would argue we're the innovator and everybody is trying to catch up with us. If you look at greater than $14 billion in revenue growing 7% to 9% organically and where we've guided to and 45-plus percent EBITDA margins, I mean, we're really aspiring to be one of 7 or 8 companies that can pull that off. And a lot of it's driven all through -- our sales success is driven all through our innovation. You mentioned, I've actually been with the company 33 years, and it all goes back to when I took over as CEO in 2015. I knew we're going to have to lead the company on one of the largest single technology transformations in the history of FIS. And you're seeing the successful outcomes of that. We've leaned in heavily in cloud-based computing. We've got over 80% of our global compute at our scale. That's massive in the cloud today. If you look at the leader on cloud-native technologies, technologies built specifically for the cloud, whether you look at the new acquiring platform, Access Worldpay on the merchant side. And we've actually highlighted the last several quarters just significant competitive wins against some of the competitors you just mentioned. Wanting to make the point that when you're dealing with really a technology, it's not a deficit for us. It's actually an advantage. And we're actually taking share. But then you look at what's been going on in the banking business and how that's performed against our traditional competitors in that front, we've just seen phenomenal growth, not only around Modern Banking Platform, Code Connect and Digital One, but look at what's going on in PaymentsOne. You mentioned another issuer that just came out and formed a recent IPO. I was actually kind of surprised with some of the things that was disclosed there. It gave you good insight into where the growth is really coming from. We've actually onboarded more than 250 new clients that we've taken away from competitors since PaymentsOne's launched, and that's continuing to accelerate. And you've seen that trend in our numbers where we've seen really strong growth in our payments business within our banking segment. And then capital markets has just been doing a great job for us. We really transformed that whole business in a really solution around front metal back office, all cloud-native deploying in a SaaS model, huge demand for that. You saw a massive increase in our sales channel just last quarter alone with reoccurring or SaaS-based sales there. Obviously, we've got a headwind with license fees and grow over because more and more people want to push to the SaaS model. But even with that, you're seeing that business has moved from -- think about when we bought SunGard a negative position to now actually, it will be a mid-single-digit grower and accelerating and really fast following where the banking business has led. So that's a long-winded answer. But all of that is really a multiyear investment in technology and innovation that we've driven over the last 5 years and really seeing the outcomes of that in our sales success and revenue growth rates.

Thank you. And so it sounds like -- I mean, so the PaymentsOne, maybe Modern Banking Platform built from the ground up. And one of the questions I get, I mean, this is, I think, maybe a misconception out there is that, well, FIS and Fiserv, Jack Henry have -- they have to build on top -- new technology on top of older tech stacks, and that's a competitive disadvantage. But what you've done is really build those from the ground up. Is that right? Or is that...

Yes. No, that's exactly right. I mean, we took a totally different approach. We've been building on top of our traditional tech stacks for 50 years. We've been in business now for more than 50 years. And this isn't the first significant technology transformation we've seen. We saw it. I remember years ago when everything moved to client server. And -- but it was clear when we started looking at cloud-based computing. It was clear that we were going to have to go to a much more componentized architecture, a much more micro services-type deployment, speed to market, digital native from the ground up. And that's going to require a total rebuild. So our opportunity with these products or now that we're bringing to the market is we've got this tremendous back book that will cross-sell and upsell our existing customers, too, over time. But look at something as simple as -- and not simple, significant of the announcement in the BMO Harris announcement that they're moving to the Modern Banking Platform. You have to understand, they're -- BMO Harris is running one of our existing legacy core banking systems, one of the leaders in the industry, very proud of it. It's done exceptionally well. They also have an in-house built system in Canada. When they look at launching the Google product that they wanted to launch, neither 1 of those 2 products couldn't meet the needs, couldn't meet speed to market, couldn't meet the digital-native framework that -- in order to drive micro services. So they were looking for what is truly a cloud-native technology that we can use as a stepping stone to over the next 10 years move all of their future core banking needs to that platform. And we competed very hard against a lot of start-ups. And at the end of the day, we're real proud of the fact we were selected not only as the best capabilities in market today, but also just given the scale, we have the kind of scale as a company that we can drive and actually transform BMO. So as you think about that simple announcement, that's one product being launched on Modern Banking Platform. We will continue to upsell that customer over the next 10 to 15 years as we upgrade their whole platforms, and they'll move their entire deposit offering, then they'll move their lending offering, then they'll move Canada because it doesn't make sense for them to end up in a scenario where they're running multiple platforms for their future transformation. And so that's what gets us so excited about really landing some of these really big clients because give BMO credit, they're out in front of almost every major institution in North America today making a decision to go with cloud-native technologies and a true digital-first approach. And so that really tees us up very nicely as we continue to announce these larger and larger wins each quarter.

What is the major difference between the Modern Banking Platform and your other core products?

Well, I mean, the thing about it is when you really embrace the cloud, you're really going to embrace a whole different architecture when you embrace the cloud computing. As you think about components and how those components get leveraged into features, and then how you extend that in an open way on the cloud into microservices, now I've had a lot of people ask, well, Gary, if you continue to open up your core banking system, aren't you going to lose revenue? The reality is the nice thing we've been able to do is monetize our Code Connect platform, which is really that micro services platform that sits on top of modern banking. So if for some reason one of our clients wants us to choose a solution other than D1, for example, which is our leading omnichannel deployment, they're going to still come in through Code Connect, pay a toll in order to get to those micro services and consume it. And welcome to do that because Code Connect has the full dev ops environments, the sandboxes necessary to extend into the programming community to be able to embrace that. And that's what people are looking for in these capabilities. So you really just can't -- even though we've got industry-leading capabilities in market, we've got a lot of our customers still going on those capabilities. If you're looking to leapfrog and really get to the cloud, you really need to move to this because we're not going to take an IBS for an example and actually put that into cloud because it's just not architected in a way that supports that kind of technology infrastructure.

And so it's making it easier for others -- like if there's a solution out there like a Q2 or an Alchemy or an nCino, they actually become friend versus foe and...

Yes. Yes. Actually, Q2 does a really nice job on the digital front, and they're really down market from where we are. You would argue they might compete with D1 as D1 starts pushing down in market. But right now, we've really got Digital One focused much more on large regionals and large national banks around the world. We are starting to push D1 down into the community bank market. We're actually having a big rollout this quarter as we speak, and that's going to push into Q3. But definitely, Q2 as an example or the others you listed, they would embrace Code Connect. So then -- and then the financial institution would pay that toll in order for them to gain access to the system of record.

Great. Thank you. You had a very strong sales quarter. I guess it says Banking Solutions' up 17%; Capital Markets' up 44%; and Merchant Solutions' up 76%. Where is -- what's driving that level of growth? And then when does that -- how long does that take to flow into the revenue growth of the company?

Well, I think that -- let's just start with the merchant, I'll do them in any order, but you mentioned merchant. Merchant had a really big quarter, and a lot of people want to say, well, that was over an easy grow over because Q1 last year and given the announcement by the World Health Organization of a global pandemic. But there's actually -- if you really peel that back, there's a lot of growth in there that really is just some things we invested in. One, we announced last quarter, we have fully wrapped up the new acquiring platform deployment. And not only have we've completely rolled it out, we've migrated 100% of the back book to that, right? So it's a -- and that back book migration, I would argue, is the largest single payments transformation in the industry's history, given how much we migrated. The very last migration was Apple. You then lean into what we did on the Access Worldpay, and even on a stand-alone basis, that gateway, which we wrapped up since the acquisition, and now all of our new customers are going on to that, you look at that technology on a stand-alone basis, it'd be the fourth largest gateway in the industry. So our technology is really making a difference in that sales channel now. So now we've got the historical issues behind us and really focused and you're seeing just large, large global eComm wins we keep announcing every quarter. You're also seeing large enterprise wins that we're announcing. But now we've reinvigorated our ISV channel. We've had, over the last few quarters, record ISV sales. Frankly, we didn't think Worldpay took advantage of their presence and integrated enough. We actually took those capabilities, and we've now launched it in the U.K., tremendous early success. We've already got huge market share in the U.K. Our ability to increase that TAM is really now going into those integrated channels and helping drive that way. So seeing a lot of growth there. And then now we're pushing -- we've also seen our bank referral channels. We've highlighted that. Kind of a surprise for us. We knew the banking business would be a big business given our relationships. We just didn't realize how big it is. It's really exceeded our expectations. So bank referral's gone exceptionally well. And then we're starting to go direct now into certain channels within our -- our segments within SMB. So all of that is really a refocus of our sales efforts, but also wrapping up a lot of the technology investments that Worldpay has done. If you look at banking, it did have a very strong quarter. But that's now 3 years plus of banking, driving really, really strong sales. That sales team has done just a great job of cross-selling and up-selling capabilities in the market and taking share. And you've seen that in the acceleration of growth rate. You've also seen that in the backlog growth over the last year plus. And obviously, that backlog is sold business that has yet been onboarded to convert to revenue. So really excited about what we're seeing in banking. And based on the pipeline and based on the throughput, you're going to continue to see that strength for the rest of 2021 and well into 2022 as the pipeline continues to grow. Capital markets as well. I think we were early in capital markets. We saw the pivot coming. Traditionally, capital markets is sold as a bespoke product. The whole industry sold it that way, and they sold to the front or the middle or the back office. We were well ahead of SaaS-based deployments and solution across all 3 of the desk, and so front, middle and back office. So at the end of the day, that's really been a great catalyst to that sales engine as well. So coming into 2021, obviously, we need to continue to see reopening occur. Traveling airlines in our merchant business is going to be a great tailwind back half of 2021, 2022 and 2023. But in the meantime, we're continuing to take share across all 3 of our verticals in onboarding, but really strong. We were very pleased with the start of the year, for sure.

And how does -- did Worldpay -- had Worldpay underinvested in Mercury after they acquired it? Does that...

I don't think they underinvested, and I don't want to say it that way. I think they just really started focusing on really global e-commerce. And one of the things our scale drives is our ability, at our size, to focus on multiple things. They got very focused on getting NAP across the line, getting Access Worldpay launched. And nothing critical at all. We bought the best asset in the industry by far. We've been able to absolutely drive -- you look at our revenue synergies that we've driven, and we just increased our guide again on revenue synergies. And we way exceeded our expectation on the operating side. So it just -- it's really turned out to be a great integration. And given our size, not only are we driving all those revenue cross-sells and those cost takeouts, but it's been able for us to do that and focus on bank referral, focus on integrated, focus on pushing down market in SMB. And so I think you're just really seeing the combination of our scale really coming together. And as I said, you saw it in the Q1 sales success.

So Worldpay, global eComm, and I know you've announced wins, but how do you compare that to the Stripe -- say, a Stripe or an Adyen or Checkout.com?

Well, when you really start talking about Stripe, they're really way down market from where we play. When you really talk about global e-commerce, I would say you really -- we really see Adyen and we see Chase Paymentech or some -- oftentimes other providers that are just trying to come up market. When you really are talking about global e-commerce, I mean, we still have hands bound the best technology, best asset in the industry. And over the last couple of quarters, we've highlighted some key wins coming off Adyen, coming off Chase. Trying to make sure everybody understands we're not only losing -- not only are we not losing share, we're taking share in this industry. So early on in the eComm base, there was a tremendous amount of greenfield and there still is. As you think about our global expansion, that's all about just greenfield, capturing share in global eComm. But our solution set, especially as customers get more and more complex with their demands, I highlighted Apple a minute ago, as you start dealing with that kind of complexity, you're going to end up moving to an FIS and the capabilities we have, multi-country, currency, et cetera, the list goes on and on and on through our single stack.

Great. And what is the growth rate of the eComm -- I mean, eComm has exploded, I mean, through COVID [indiscernible] and...

Yes. We saw tremendous growth in Q1. We've highlighted that for you in the quarter after we got out of the -- if you back out the travel and airlines business. But even with the travel and airlines business, we saw upper-teens growth and greater than almost 40% growth on a stand-alone basis minus it. So really strong performance out of the eComm group team. And that's obviously -- our customers are now continuing to grow faster as we're coming out of the pandemic. What we're seeing is still a strong demand for online purchasing, but we're also just seeing a lot of new customers that we're onboarding and seeing that share contribute there as well.

How about -- what is -- can you remind me and maybe -- on the travel. What is the -- what was travel before? How meaningful is travel in FIS?