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

Okay, everybody. Thanks for joining us. We really appreciate you taking the time attending Inaugural Guggenheim FinTech & Software Conference. We are delighted to have Fidelity. Woody Woodall and Bruce Lowthers. Thanks so much, gentlemen, for being here with us.

Thank you for having us. Appreciate it.

Yes, it's great to be here.

Great. Great. So why don't we dive right in? What's top of mind right now? What's your read of the operating environment? Can you maybe just talk about how the year has done thus far and what stood out to you about FIS in terms of execution?

Look, Woody, if you don't mind, I'll just jump in and then why don't you just add on? But for this year, it's been a great year for us. I think we're really executing at a very high level. I talked a little bit about that at the earnings call. I think the team has performed really well right across the board. And when you look at our banking segment, really nice growth there in Q2, continue to really have success with some of our products and our new products, the merchant space, probably the best quarter we ever had in the merchant segment. So continuing to really accelerate and do well there and seeing our strategy start to really come to fruition. So we feel very good about that. And the capital markets, I think that's been a little bit of a surprise for some people that have followed us for a while. But the capital markets is kind of really starting to evolve into a little bit of growth acceleration, which has been really great. So overall, it's been really -- operationally, it's been really a good half of the year for us. Obviously, we're going to do our best to finish out strong. Well, we see a lot of positives in the sales cycles as well. I think as we reported, we have really great backlog, sales numbers, all-time highs. So continuing on the momentum we started building off in the back half of last year. So we feel pretty good about how things are going, how we're operating and how things are coming together as a collective group.

Yes. I'll just add to that. We're operating well ahead of our budget and our operating plan for the year. We originally had guidance of 8% to 9% organic revenue growth. We've increased that to 10% to 11% with 2 guidance increases over the course of the year. Margins for the second quarter expanded 460 basis points as we saw a bump back from volumes in the merchant business as well as continuing OpEx synergies flowing through to the business. This year, we'll deliver 220 to 240 basis points of margin expansion and continue to expect margin expansion in the future as we always have been able to deliver. Sales were good, as Bruce talked about. Organic backlog growing 8% in the quarter. We continue to build good backlog that gives us visibility out beyond this year but into 2022 and 2023 and beyond. So again, execution has been really good over the first half of the year. And our outlook around execution for the remainder of the year continues to remain strong.

And nice acceleration in synergy from Worldpay. I guess I've missed that, but it's -- the team has really performed very well, exceeding what we came to the Street with a couple of years ago, I guess, Woody now. But the team is really executing at a very high level.

Understood. That's great. And so maybe we could talk a little bit about how you guys are thinking about the back half of this year. What are some of those tailwinds that you're seeing right now? I guess, Bruce, you talked about yield dynamics on the earnings call. Maybe can you just give us your thinking about what might happen as Europe reopens and how that could be beneficial and so forth?

Yes. Bruce, well, I'll touch on the yield dynamics and you can give some color around the other. We talked about specifically a yield benefit in the second quarter of about 10 points of volume versus actual revenue growth. We continue to anticipate yield benefit in the back half of the year as we continue to see volumes increasing over the course of the year and things that were shut down or at reduced levels in 2020 come further back in 2021 as we continue to see recovery there. So the yield dynamic will continue throughout 2021. Traditionally, the yield dynamic has been, I don't know, probably 3 points, 4 points, something like that, over sort of total market growth. We would anticipate that to normalize again at some point later in 2022 and into 2023 as sort of things normalize back to whatever new normal is, but certainly continue to see yield benefit for the remainder of the year. And then, Bruce, I don't know if you'd like to give some color just on overall what you're seeing in the market.

Yes. We -- as we look to the back half of the year, we have a very robust pipeline. So we feel very good about that. I think the other thing that we've kind of brought to light a little bit in the earnings call was really the success of our new products and how well they're being adopted. And obviously, we've talked a lot about MBP. We've talked a lot about Access Worldpay. There's a handful of products that we keep bringing up in the calls. But the adoption of those has really been exceptional and continues to be really well received. So it gives us a lot of optimism as we're driving into the back half of the year.

Yes. Yes. Okay, great. On that note, one of the big topics in fintech as an outsider, right, is innovation. And you have to continue to innovate to stay ahead of the competition. And so I thought it was very interesting on this earnings call. You spent -- a big focus area for you guys was on new solutions. And so we saw that from the -- from the way you guys were talking about, you expect that to be greater than 4% '21 revenue. That would be up a couple of hundred basis points to what it was the previous year. So maybe can we focus on that a little bit? How are you innovating and serving your customers better, especially for certain segments like SMBs during this pandemic? Can you give us some detail there?

Yes, I'd love to, and I'll let Woody jump in, too. But the -- for me, it's always been a strength of the company is having this huge distribution and then going back to my start-up days, what I loved about having so many clients is being able to go out and talk to them and see what problems and opportunities they're facing and having the opportunity to kind of take that feedback and really start pulling together solutions that they need. And there's really 2 things that we hear consistently from our clients. One is help us with the modernization of the infrastructure that we have; and then two, help us meet the new challenges with new product. And so we were very fortunate, we talked about that as a team. Gary really kind of supported us moving forward with driving product as a primary focus for us, and you're starting to see that come to bear. And so we've really invested heavily in our product organization, brought in world-class talent to drive it and we feel very good about the number of products that are coming to market. And what's nice about what's happening is while there are some sections that are probably a little bit further -- or segments that are a little bit further along such as our issuing business, our banking business as a whole, the merchant business is now kind of getting in there with NAP coming to market and Access Worldpay coming to market and some others and now the capital market. So each of the 3 segments are really starting to embrace this driving product to market and so feel very good about that. And I think that's really been a game changer for us as far as growth acceleration, and I feel good about kind of where we're going with that.

Yes. To come back full circle, Jeff, to your original question, we believe, as you do, innovation is absolutely key to continuing to be able to grow long term. We put a lot of effort, a lot of capital behind it at our scale. We continue to drive new capabilities in the market, and we have a distribution channel that we believe is second to none to be able to push those out. One of the questions I get on a regular basis is, how are you going to sustain this higher 7% to 9% growth in the midterm? And a big part of that answer, and we tried to highlight in the call, is that we anticipate somewhere between 1 and 3 points of that incremental growth is from this new innovation and our ability to continue to innovate, push those new capabilities through the distribution channel and drive those capabilities into our existing installed base to drive outsized revenue growth over market growth. And I think it's working. I think you've seen the acceleration of the business over time, sort of us saying it's COVID. But you're seeing the acceleration in capital markets, you're seeing it in banking, and you'll see it in merchant as we continue to normalize back to sort of pre-COVID levels. And I believe the growth rate of that merchant business will continue to outpace what it traditionally did before.

Yes. Just to go back to -- we talked about it a lot over the first half of the year. But when you look at the modernization and innovation, it really started several years ago. Gary had the forethought to really change our data center infrastructure and go to move to a private cloud infrastructure. That really was the groundwork that allowed us to start driving our applications to the cloud and having cloud-native applications in market. And that's allowed us to kind of accelerate and drive new product to market kind of as we move into Phase III and focus on the business processes and accelerating our business processes. So this has been kind of a long-term journey for us. And it put us in a position, we believe, to be really competitive as we're moving forward. And I don't think that's a story -- part of the story gets out there enough of how much of a transformation we've made over the last several years. And as I said, it has us pretty excited that we can compete with anybody as we go forward.

For sure. It's interesting. I'd like to stay on this topic because it's interesting. You're talking about transformation over time. And I can go back to your Investor Day, I believe it was in 2018.

Yes.

It was in New York?

Yes. Yes. That's my first one that I did.

You went in great detail about FIS' outlook through the old IFS, and I believe the growth outlook there was 3% to 4%.

Yes.

And it's fascinating to watch over time how the banking business stands out in my own head because that's now a 6% plus grower and that's 2x the old IFS. So let me just stay on this topic a little bit. As you guys think back to 2018, what were those changes that you've seen there on -- internally on the product side, but also externally on the demand side. Just curious what your thoughts are.

Yes. And so it was funny because thinking back on that, it's one of those things where I could see the change internally, right, and it hasn't really materialized yet. So it was difficult when I was talking about accelerating the growth back then. I'm sure there was a lot of people sitting in the audience that day -- I think it was at St. Regis. But saying, "Well, they haven't grown that quickly before. How is this going to really come to bear?" And for us, it was very programmatic about how we looked at it. We had the modernization of our infrastructure that had already started there. We had started small. We really had started our product innovation in the issuing business and we're starting to expand that out across the organization. So we knew that the banking business was going to continue to accelerate because we had some really cool things that were coming to market. And so we're pretty excited about that. We had very much a focus back then, too, of talking about the acquiring business and how do we move into the acquiring business. And so there was a lot of discussions internally about that at the time, and we wanted to reinvigorate our sales engine. So we kind of deconstructed the whole sales organization and kind of rebuilt it in a different way, mapping off to the change in the environment that was happening. So we had a lot of kind of inside visibility that gave us optimism much like we do today as we kind of look forward, and we see ourselves continuing to have the opportunity to accelerate. I think the market has played, as Gary has talked about, what he's talked about a number of times, is playing to our strength. It's the large institutions, the fintech organizations are all trying to find ways to accelerate and create better client experiences. And through that, they need help with modernizing their infrastructure and they need people that are willing to kind of invest and help them with products. We've invested heavily in Code Connect. And so that's really resonated very well in the marketplace, allowing more things to kind of be accessed through our open APIs. And during this 5-year stretch here, as you look back, there was kind of the emergence of this developer experience and why the experiential APIs became more and more important. And we have the largest catalog in the fintech vertical we feel very well positioned to continue to accelerate. And we look at the emergence of the fintech group as really just TAM expansion for us. Many times, it's probably the wrong way to phrase it, but I look at it as this is the de novos of the past for us. These are people that are playing in -- delivering financial services, and that's what we do. We help people deliver financial services and help them deliver great experiences. So for us, I think we had great visibility back then when I was standing up there, kind of going through that. And while it may not have been the most eloquent speech, we really were passionate about what we're going to go do, and we feel that same way today. We see a lot of great TAM expansion opportunities for us, and we feel that we've got a good inside track to compete in those spaces.

That's great. Along those lines, right now, almost every investor we speak with is focusing on buy now pay later in terms of like innovation and just things that are in the market. Can you discuss BNPL from FIS' perspective? What are the implications of what you're seeing in the space? What are the opportunities? Are there any partnerships that you think are worth there? And if you try to unpack whether there's some opportunities for FIS on this front given all the banks and FIS works with and your ownership of the EFT networks and data and risk management that come with the space.

Yes. So it is funny. I guess it was, what was it, maybe a day before our earnings call or something like that, buy now pay later kind of exploded onto the scene from a discussion perspective. And for us, we view it as kind of just another opportunity. It's a payment type, just like every other payment type that we do on the acquiring side. And so it's another opportunity for us to execute a transaction and get paid for delivering that transaction. The other part of that is -- and why I think it's a little bit of TAM expansion. So Afterpay, for example, is a client of ours. We'll get paid on that transaction that occurs. And then as their clients go to pay down their installment loan, typically, they'll pay with a debit card, which we get paid again on that same transaction. So we'll get multiple payments on the same one transaction that we would have had at the point of sale. So we've partnered with a number of buy now pay later organizations. We provide acquiring for them as well. And so for us, it's been a great way for us to pick up some more business, more transaction, more volume for us. I think on a larger scale discussion, buy now pay later kind of extends the opportunity for people to execute a transaction. And somehow -- and I'm not sure of the mental science behind it, but somehow people feel better buying things in installments, and this creates a great vehicle for unsecured credit to consumers. I think where we sit in this is we've partnered with a number, as I said. I think we'll also look at, is it something that we offer? I think one of the things that you saw that was really exciting to me as the Worldpay transaction came together, we're having these 2 great verticals with the merchant vertical and the banking solutions vertical. And you saw the opportunity starting to emerge with Premium Payback and some of our other solutions where we're connecting those 2 verticals. And I love kind of being in the middle of that ecosystem. And I think, obviously, buy now pay later creates the opportunity for us to bring really new volume for consumer lending to our banks. And so we'll see how that plays out. But it's certainly another great opportunity for us to connect our 2 halves of the ecosystem.

That's great. That's great. And I'd love to ask you a few questions about the current environment. And I just want to make a quick sign out to everyone who's listening, we're going to come off -- about 10 more minutes, we'll come up about the 30-minute mark with the fireside chat portion. If you have any questions you want to ask, please feel free to email them over to me at jeffrey.cantwell@guggenheimpartners.com. We'll get all of your questions asked to Bruce and Woody. So let's focus a little bit on the environment right now. I thought it was interesting that your number of merchants increased year-over-year. It was up 5% sequentially in the second quarter. So what are the biggest drivers of that increase right now? And specifically, can you maybe talk a little bit about the trends you're seeing emerging with SMBs? It sounds like there's some nice momentum there.

Yes. Look, I think for us, as we brought Worldpay online, you would -- the focus for Worldpay historically was really around the enterprise, the large clients. We didn't really have a lot of initiatives around the SMB space. And when we did, it was always going through kind of a channel partner strategy. So where we were super effective and very, very competitive was in e-comm and the enterprise, the large merchants that needed our service. So we still see a tremendous amount of growth there. I think in our earnings call, we had over 30% growth in our e-comm business. We still see great acceleration there. We kind of did the same thing we did in the banking space. We kind of deconstructed our sales organization, realigned how we wanted to go to market, and we're seeing great throughput from those changes. Jim Johnson has done a phenomenal job leading that organization and really driving it forward and accelerating. So we look -- candidly, we look at the SMB space as a place where the things that we've done -- like with Access Worldpay, the things we've done at our enterprise clients, we think we can bring that downstream, and we feel we can be very aggressive in a market that we didn't play heavily in historically. So again, much like years ago, this is a space where I think we've got the assets to really compete. I think we're lining up appropriately. We're seeing big expansion in our partner channels and we feel that we can extend not only have -- continue to have great success in the enterprise category, but we think we can extend down and compete very well in the SMB space. And so I would look for that to continue to grow.

So let's focus on that a little bit. I'd like to break this down, if we could. Can you maybe just take a step back and talk about more about what your strategy is with SMBs and merchant? And then help us kind of unpack what differentiates FIS' platform from other platforms. Any kind of detail would be great.

Yes. So let me start with the platforms, right? We talked a little bit about the modernization journey that we've been on, and the Worldpay business is no exception to that. We -- obviously, we call it NAP, but the -- our new acquiring platform, we brought to market in the second quarter of this year, beginning of the second quarter of this year. And so it's the most modern application in the acquiring marketplace today. So we're very excited about that. It continues to do exceptionally well. We've also brought Access Worldpay to market and really creating that single-in, single-out gateway for us. And I think as we talked before, that's already -- the volume we've been able to move to Access Worldpay, if it was a standalone, would be the fourth largest acquiring gateway in the world. And so we're doing a lot of great things around bringing products and bringing innovation to that. I think what we're looking at in our Code Connect catalog is expanding a lot of the access to NAP and access and a lot of the other products that we have in the acquiring space, bringing those in so that we can really go in and aggressively get after some of these other subverticals, if you will. So we feel very good about the innovation that we have, the technology stack that we have. And now we're doing the things to line up around these verticals and get after them. So feel very good about that. I think a lot of the fundamentals, the things that we really have excelled at, right, when you look at e-comm, the things that we excel at are complex e-comm transactions that are multi-country, multi-currency. We play exceptionally well there, probably the best in the world at that. And so a lot of the e-comm that we see downstream is a simplified version of what we've done with our enterprise business. And so as we continue to move downstream, it's a little easier for us because we built these complex engines. And so now as we move down, it should translate very well into the SMB space as we build around that core functionality. So we feel like we've got a good core tech stack to compete downstream. Woody, do you want to add anything to that?

I think you sum it up well. I mean, Bruce, I think we've continued to invest in this area. We think it's absolutely an opportunity for us. We're 2 years into the Worldpay transaction. We always knew the asset was fantastic, and we continue to reposition. Certainly, COVID had an impact on us, but we think we're positioned well to continue to compete in that space and win in that space. So we feel good about how things are going.

Very interesting. So let's -- can we talk a little bit about the opportunities you're calling out, opportunities that you're seeing right now? So much is happening because of the pandemic and so much is changing if we look back over the past 12 to 18 months. So as we look more broadly at the merchant segment, what are those growth opportunities that you're seeing to expand?

Yes. So I think the whole omnichannel construct is really evolved, right? You go back a couple of years, it was kind of taking -- there was a growth rate, but it was in certain subverticals. Travel, certainly kind of e-comm, it exploded early on there. Now everybody talks about e-comm and cardless transactions. And so COVID, in many ways, while it was extremely difficult, has really become a catalyst. And us as consumers, we've changed in our willingness to accelerate how we transact. And so I think for us, that bodes very well because we had this great engine for e-commerce and now that should play right into our strength. I think the other dynamic that we're seeing is as this e-commerce adoption has expanded, what you're seeing is even in the enterprise side, the enterprise clients want to consolidate their vendors. They used to kind of go all over the place. And now they're looking for someone that can holistically execute and deliver across the board from an acquiring perspective. And then when you take in additional things like our Premium Payback or our treasury functions, those things are just value adds that there's very few other people that can deliver those. And so you're seeing a lot of success there with those products, bringing in those financial service products, tying it into acquiring. And it's a very compelling value proposition for the marketplace when you can kind of go to one place, get everything you need, has global expansion, has the ability to take you to markets that you weren't in before and execute the most complex transaction all the way down to the easiest transaction. And so I think we've given some great examples of our expansion at Walmart and what we've been able to do there from a card-present transaction to our e-comm transaction to now our Premium Payback coming into market there. So it's just one example of many, but it shows that, that model is kind of evolving. I do believe that COVID is a catalyst for that kind of evolved thought, and I think that plays to our strength.

Of course, great. This is great. This is a ton of color. So we're coming right up on the 30-minute mark. And I have a few questions that have come in to my inbox. So gentlemen, if it's okay with you, I'd love to ask the questions that I've gotten from investors.

Sure.

Okay. So the first question, at the time of the call, you were expecting mid- to high teens merchant revenue growth in the second half of '21. Some of that was contingent upon improving airline and travel spend. So the question is, can you talk about the puts and takes of that given the recent Delta surge? Sort of what are the puts and takes in terms of your ability to achieve that guide?