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

We are pleased to welcome Erik Hoag, CFO of FIS with us today. Erik, thanks so much for being here. Appreciate it.

Ramsey. Good morning. Thank you for having me.

Give us a little bit kick it off here, give us a little view of sort of what you're seeing in terms of transaction trends most recently in your book? Or and even maybe what that be it in some commentary about the overall macro environment. What are you seeing out there?

Yes, sure. So maybe if I were to even take a step back to the start of the year. So on the acquiring side, we saw strong growth in January and February. It moderated a little bit during the month of March, April, very consistent with March and year-to-date [indiscernible] very consistent to the month of April. On the FIS side, global volume was 9% in the first quarter as well. So a really strong start to the year.

Fantastic. And I wanted to drill down a little bit into that 9% volume growth in [indiscernible] merchant in the quarter, which was an impressive result. I just aggregate that a little bit in terms of the drivers. What's working in merchant, where is there -- what isn't -- help us think through how you kind of achieve that solid result?

Yes. So what's working in merchant? Great question. So in the first quarter, our merchant business grew roughly 2%. And if you break it down, the real bright spot in merchant during the first quarter for FIS was our e-commerce business. We had 15% organic revenue growth in the first quarter, 18% growth if you exclude the impact of Russian-Ukraine. Our global e-commerce business is performing well. It's grown double digits for the last several years. We guided 2023 to double digits as well. Underlying drivers to growth in e-commerce, we've got differentiated authorization rates. So we help enable our customers to drive their own P&Ls. I'd say, first and foremost. Number two, global reach, our global e-com business truly is global. And the one thing that FIS really did bring to the table associated with the FIS Worldpay acquisition was the global scale that FIS was able to help enable where we -- the banking business, the capital markets business, they operated in so many different geographies that we are able to quickly stand up and integrate our global e-commerce business into some additional geographies. So incremental geographies, differentiated authorization rates. And then in December of 2021, our e-commerce business, we acquired a company called Payrix, performed very well in '22, performing very well in 2023 as well. The e-commerce book, which is roughly [ 30% ] of the merchant portfolio at FIS, we've got an enterprise book, which is roughly 45% of the revenue within the segment. I think big box retail, grocery, pharmacy. This business in a steady-state environment should bump around at GDP. We're priced per transaction in the enterprise book. The business is performing well. Obviously, there's some macro factors here. The U.K. sits in our enterprise book as well. And then the SMB book, which is roughly 25% of the portfolio, e-com 30%, enterprise 45%, SMB 25%. We've got some structural challenges here. When we guided 2023 for the SMB book, we included roughly 300 basis points of headwind associated with some product gaps. We had a good first quarter. We outperformed that a bit. But one of the underlying catalysts for the spin of the Worldpay business was to help enable getting incremental product into the SMB book through organic investment and strategic M&A.

In the SMB book or in the SMB business, what are the -- what is -- what parts of the value proposition are you lacking like? What is sort of more precise to say that the SMBs might be looking for now that you -- what's that gap you need to fill in order to...

Good question. So probably no surprise to anybody here, but COVID changed the acquiring landscape rather dramatically. The SMB book has historically been a card-present channel. So as COVID came through and then there was more curbside pickups or more order ahead needs. It was -- it really disenfranchised the SMB book that we had. So what we have done, the Payrix acquisition in December of '19 provides card-not-present capabilities down into the SMB subsegment, which is helping to address some of those gaps.

And you already answered a significant part of this question, but maybe not fully in terms of e-com, the value proposition there that's allowing you to win, you mentioned authorization rates. What is it there that -- how do you differentiate yourself kind of from a competitive standpoint and in global e-com and couple of big high profile competitors. What's allowing you to win there? Is it just pure performance on the transaction? Or is there a technology overlay or tell me more about that business how...

I would really say, I would really come back and talk about just those 2 things I mentioned before, the global reach that it provides that we can follow customers as customers want to expand their own geographies were enabled in many of those geographies that they want to expand into. And then the second piece really is the authorization rates. So I mean, it's really all about enabling our customers, trying to drive more throughput for our customers and ensuring that they're capturing as many transactions as they can.

The one thing that investors focus on for [ better for worse ] is the spread between volumes and revenue. Speak to the drivers of that delta and whether we should expect that to sort of widen before it tightens or how we should think about that as we move forward?

Sure. So the merchant business for FIS had a yield of minus 7% in the first quarter. Organic revenue growth of 2%, global volume growth of 9%, so a yield of minus 7%. I'd say maybe a couple of things about yield in the first quarter. Number one, the consumer was strong. We saw a lot of revenue that came through -- a lot of volume that came through, excuse me, a lot of volume that came through our enterprise channel. So think about -- I mentioned nondiscretionary spend. Nondiscretionary spend where we're priced per transaction. So volume, less revenue. We also have a headwind associated with Russia-Ukraine, a very rich -- the e-com book, very rich yields, a headwind in the first quarter associated with Russia and Ukraine. As we move through the cadence of the year, I would expect our yields to -- our yields to narrow.

Just as those factors sort of Anniversary of Russia that...

Anniversary of Russia, we've got the U.K. as well as we start to normalize off the U.K. from last year as well. I think those are 2 predominant drivers associated with yields.

And one last question on merchant. U.K. is another place where you guys are doing business is obviously a lot of macro headwinds there. Give us just a little bit of an update on the U.K. merchant business.

Not a whole lot of change associated with the U.K. merchant business quarter-over-quarter, fourth quarter to the first quarter as we head into the second quarter. The good thing, as I just mentioned, is the yields will moderate a little bit that provide us a little bit more comfort associated with revenue and volume.

Are you seeing a little more macro stability in the U.K.? Or is it hard to pin down?

I would say that moving into the second quarter from the first quarter, there hasn't been much change...

No much change, okay. On the banking and capital markets, I've been covering this company for quite some time. And I remember the old days on the earnings calls, you would often hear a lot of questions about the bank IT spending environment. On the other hand, there's a kind of an understanding that some of these businesses are pretty defensive and resilient when it comes to the cycle -- the economic cycle. So I guess the question is, with that preface bank IT spending environment. First, that's a kind of a technical question. What are you seeing out there? And second is, how important is that? Do you guys really see that those budgets tighten and loosen, does that have a big impact on the kind of keep your lights on type services that you guys are providing, too many questions that.

No, good questions. So the bank IT spend, I would say that there hasn't been any change quarter-over-quarter, particularly coming out of -- I'd hate to call it a bank crisis in the month of March, but sort of the volatility with regional banks in the month of March. From a sales perspective, I might even step all the way back and say, in the middle of 2022, we've changed our sales contract to be a little bit more quality focused as opposed to quantity focus from a sales perspective. So we're focusing back on core IT spend, mission-critical software associated with the core, ledgering systems associated with the banking side, ledgering systems associated with the capital market side. And what that has done is -- what that will do is driving higher incremental contribution margins, a refocus back to what you're probably familiar with over the years, which is core sales, the ancillaries that come surrounding the core sales, higher contribution margins. And -- to your specific question associated with IT spend, we haven't seen much change.

Interesting. I'd like to drill down a little bit on the shift in strategy in terms of the sales strategy, I think you called out sort of pursuing more sort of high-profit deals, unpack that a little bit for us. You just mentioned emphasizing kind of core products. Is there -- does this mean more profitable products? Is it -- are the contracts structured differently? Like what exactly is shifting in terms of what you were presenting, where you're going after then versus now?

Yes. So over the last several years, Ramsey, so if we go back to 2019, so one of -- on the backside of the Worldpay acquisition, we had talked about a pivot growth, and we've been rewarded for growth. And between '20 and 2021, there was really a shift towards the quantum of sales transactions, volume of TCV driving growth. What we found is that some of those solutions that we were selling were just had lower contribution margins. So lower contribution margins, which forces us to do other things in the operating -- other parts of the organization to drive -- try to drive enterprise-wide operating margins. So what we've done in the back half of 2022, and what we've done here in the first part of 2023 is recalibrate the sales organization, recalibrate our commissioning structure, recalibrating our quota allocation processes to focus more on longer-term SaaS-driven product sales. So the longer-term SaaS-driven long contracts, wide competitive moats where we can drive higher incremental contribution margins, helping drive total company operating margins. As opposed to what we had been doing, which was -- and you're seeing in our financials today, which is there had been growth, but also dilutive in nature as well. So we're trying to get back to the roots of what FIS was, which was software led sales, high incremental contribution margins, high levels of cash generation, which all ultimately drives shareholder return.

And how difficult is the process to make that transition, which I guess is another way of asking, is there sort of an air pocket as you pivot to these new deals start new sales cycles, get those to fruition. There's a little bit of a gap there. How should we think about -- or maybe that's not the case, how should we think about that in terms of magnitude and duration.

Yes. So as I think about the banking business from a -- almost if I were to step back and talk about the growth algorithm itself, right? There's an organic element of the banking business where we've got same-store sales growth, a number of the deposit accounts that are out of financial institutions, a number of transactions that are running across our nice network. We have got net new sales. So we've got the sales element that you're talking about. There is a conversion underway to move from lower contribution margin to higher contribution margin. But there's also energy being put associated with the attrition stack, right? So if you think about same-store sales, organic growth. Net sales, which is new sales minus customer attrition and then net pricing. There's an opportunity for us to ensure that we're getting the most out of our price, offsetting with compression as well. So there's a couple of ingredients to the growth algorithm that sales is one of them, but it's not the only one.

Interesting. Capital markets, from my perspective, is always probably the least well understood segment in terms of investors. Do this -- I just confused sort of what the growth algorithm is in capital markets. What should we be thinking about as driving growth there?

Yes. So the banking and capital markets businesses are becoming more and more similar every day. So when we acquired the SunGard business in 2015, this was a license-based organization. Today, it is a SaaS-driven organization. And it's not product sales, it's solution bundles as well, long-term -- longer-term contracts, price escalators, very sticky product sales. Over the last several years, we've held license revenue flat. So the growth that we're seeing in capital markets is all recurring in nature. So it's high incremental contribution margins. This is a business with very rich operating margins. They're leaning heavily into a focus around high incremental contribution margin sales and the predominant growth algorithm is just that. It's more recurring, less onetime revenue, and we'll continue to wean off that license dependency over the next several years. Recurring revenue in capital markets is roughly 72% or 73%; in banking, it's 83% or 84%. So we've got a little bit of runway until the business catches up with the banking business, but we feel great about what's going on in the capital markets business, performance has been very strong over the last several years, and I'm excited about what it can continue to become.

Are there any external exogenous factors that drive that business, if we see periods of extreme market volatility or have increased any type of external activity, is there any correlation in terms of where there could be a tailwind or headwind for the business? Or is it sort of more -- again, like the rest of your business kind of keep the lights on a steady state, license per seat type of thing.