Fidelity National Information Services, Inc. Q1 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to the FIS First Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker, Mr. Nathan Rozof, Head of Investor Relations. Please go ahead, sir.

Thanks, Siri. Good morning and thank you for joining us for the FIS first quarter 2022 earnings conference call. The call is being webcasted. Today’s news release, corresponding presentation and webcast are all available on our website at fisglobal.com. Gary Norcross, our Chairman and CEO, will provide a business and strategy update, Stephanie Ferris, our President, will discuss our operating performance, Woody Woodall, our Chief Financial Officer, will then review our financial results and provide forward guidance. And finally, Erik Hoag, our Deputy CFO will also be joining the call for the Q&A portion. Turning to Slide 3, today’s remarks will contain forward-looking statements. These statements are subject to risks and uncertainties as described in the press release and other filings with the SEC. The company undertakes no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Please refer to the Safe Harbor language. Also, throughout this conference call, we will be presenting non-GAAP information, including adjusted EBITDA, adjusted net earnings, adjusted net earnings per share, and free cash flow. These are important financial performance measures for the company but are not financial measures as defined by GAAP. Reconciliation of our non-GAAP information to GAAP financial information are presented in our earnings release. With that, I’ll turn the call over to Gary.

Thanks, Nate. And thank you for joining us today. Starting on Slide 5, we had a strong start to the year significantly exceeding our revenue expectations and achieving the high end of our EPS guidance. Revenue increased 9% organically to $3.5 billion and adjusted EPS increased 13% to $1.47 per share. All of our segments beat our organic growth expectations in the quarter. Banking grew 7%, exceeding our 6% expectation, merchant grew 15% versus our low-double digit expectation and capital markets grew 6% with 8% growth in recurring revenue. New sales increased our backlog 8% organically to $22.5 billion. This consistent strengthened backlog aligns with our midterm outlook for 7% to 9% organic growth, and our sales pipelines remain strong. I'd like to thank the team for their sharp focus on serving our clients and for their continued execution. Turning to Slide 6, the pace of change in our industry is very exciting. We've invested ahead of this change and throughout the pandemic to position FIS for success. We moved our technology infrastructure and application architecture to the cloud. And we continue to bring new or significantly upgraded solution suites to market. In banking, our multiyear investment strategy has positioned us with the best-in-class capabilities across core and digital banking, issuer processing, and wealth management. We further expanded the modern banking platform geographic reach this quarter by enabling public cloud deployments with Microsoft Azure. This will expand our reach into key markets like the UK, Thailand, and New Zealand. Our team has also successfully launched our new Banking-as-a-Service hub. This platform offers an all-in-one finance experience for our clients, and enables them to rapidly create and deploy new embedded finance offerings for their customers. We’ve recently formed a partnership with Circle to enable our merchants to receive settlement in USD coin, and Crypto.com will be our first pilot customer. In addition to our ability to quickly deploy advanced technologies, international reach is also a true differentiator for us. Our merchant business added seven new countries in 2021, and plans to add 15 more by the end of 2023. In keeping with the crypto theme, capital markets recently announced a new partnership with Fireblocks to enable our clients to store and issue digital assets, as well as to gain access to decentralized finance. Across multiple verticals, industries, and client types, we continue to develop mission critical systems at global scale that empower our clients to innovate and grow. The power of FIS doesn't stop with our ability to deliver unique solutions. The true value unlock is leapfrogging from leading solutions for individual client types to offering expansive embedded finance experiences that can bring all of our capabilities to bear for every client. We have technology platform initiatives underway to simplify the consumption of our cloud-native capabilities, either as end-to-end solutions or as individual components. More and more clients are asking for access to solutions from all three of our operating segments to enable robust transformations across their enterprise. These initiatives will speed access for them and open up rich new revenue streams for us. We are also evolving our go-to-market strategy by aligning our sales organizations to directly target these new opportunities. Despite market fears about disruption, at FIS, we think we are the disrupter. And we will help our clients win now and into the future. With that, I'll turn the call over to Stephanie to describe how this vision is translating to our operating segments and to review their first quarter performance.

Thanks, Gary. And good morning, everyone. This was an exciting quarter with momentum building for our new solutions as Gary discussed. Starting with banking on Slide 8, we continue to see elevated organic growth, posting our sixth consecutive 5% plus revenue growth quarter, which is well above the historical trend. Clearly, our multiyear investment strategy is paying dividends. To bring our vision to life, I'd like to highlight a few strategic new wins, which are a direct result of our technology investments. Payments One is the most advanced scaled issuer processing platform in the market. We've migrated approximately 1,500 of our existing clients to this platform, and we continue to leverage its unique end-to-end capabilities to win new clients. In the quarter, a top-20 U.S. financial institution selected Payments One for debit processing and card production. We remain differentiated with our issuer processing capabilities and believe we have significant total addressable market to capture with this innovative platform. In addition, we're making significant investments in our wealth management platform, gaining a second landmark win with Mutual of America following our T Rowe Price win last year. And then a third example, our premium payback loyalty network is a truly unique solution that combines our strengths in issuing and acquiring to enable consumers to pay with points in-store at the point of sale. This quarter, AT&T decided to join our loyalty network, and consumers will be able to use points from participating issuers to pay in AT&T stores. As retailers and issuers continue to join, we expect a powerful network effect. Capital markets grew revenue 6% organically as shown on Slide 9. Our team continues to transition the business to SaaS-based revenue models, which drove recurring revenue up 8% in the quarter. Transitioning to SaaS not only increases the predictability and resiliency of growth, but also allows for incremental cross-sell opportunities as clients look to transition to the cloud. We've made significant investments in our transfer agency solution to create an as-a-service offering that drives efficiency and automation. Similar to banking, we had a second landmark win this quarter with a leading financial institution with more than $1 trillion in assets under management, continuing the momentum from our Franklin Templeton win last year. This win builds on a longstanding core processing relationship and we were thrilled to enhance our value proposition by bringing them even more breadth of capabilities. We also saw strength with privately held investment firms. Our investment operations suite drove capital markets’ largest-ever private markets deal with a premier high net worth multifamily office that will leverage our technology suite to transform their operations. Finally, we expanded our relationship with Robinhood in the quarter to empower their new stock loan income program. This expanded relationship helps cement our long-term vendor of choice partnership with Robinhood, where we continue to expand our value proposition across traditional and digital assets for this client. Overall, our end-to-end SaaS solutions are differentiated in the market and will continue to drive strong growth for capital markets. On Slide 10, our merchant segment generated 15% organic growth this quarter. And our Payrix acquisition is already paying off by signing several SaaS-based platforms in the quarter. Payrix more than doubled their client count compared to last year, and we highlight a few recent wins with platforms spanning the education, commercial, and marketplace verticals on the slide. We also continued our success as a leading acquirer for crypto. Currency.com signed with us this quarter after witnessing our capabilities and client service for another crypto exchange. They were further attracted to our expansive global reach, which will help them expand their own business. Lastly, The Nielsen Report recently published their 2021 U.S. merchant acquirer ranking, which highlighted the strength of our e-commerce and software-led strategy. Our share of total U.S. volume increased by approximately 200 basis points to 20% in 2021 from 18% the year before. I couldn't be prouder of our team; the pandemic put them to the test, and they continue to put our clients first and execute at the highest levels. I'll wrap up by sharing the performance of our sub-segments on Slide 11. Global e-commerce continues to be our fastest growing business with 23% growth on a constant currency basis. As anticipated, travel rebounded strongly in the quarter exceeding 2019 levels. Our large enterprise business grew 14% organically and continues to be a differentiated source of scale. Lastly, software-led small and medium-sized business grew 13% organically with restaurant and retail both growing double digits. With that, I'll now turn the call over to Woody to discuss our financial results.

Thanks, Stephanie. Thank you all for joining us today. I will begin with our financial results on Slide 13. And I'll touch on our balance sheet and cash flow before taking you through our guidance. We're very pleased with our 9% organic revenue performance and the strong results achieved across all of our operating segments. We maintained consistent margins year-over-year, as we were able to successfully offset wage inflation and difficult comparisons including last year's stimulus-related revenue. This translated to 13% adjusted EPS growth, which is consistent with the high-end of our full year guidance range. Turning to our segments, banking revenue grew 7% on an organic basis, primarily due to continued client demand. Adjusted EBITDA margins contracted 90 basis points to 42%. The banking segment is where we experienced the majority of our margin headwind as it directly benefited from the Paycheck Protection Program or PPP revenue in the prior year and was impacted by higher labor costs. Merchant revenue grew 15% on an organic basis, reflecting strong results across all three sub-segments. As Stephanie mentioned, Merchant adjusted EBITDA margin expanded 30 basis points to 47%, primarily due to high contribution margins on new revenue growth. Capital markets revenue grew 6% on an organic basis primarily due to continued strong new sales and the transition to SaaS driving higher recurring revenue. Capital markets’ adjusted EBIT margin expanded 60 basis points, to 47%, primarily due to its continued operating leverage. Turning to Slide 14, we generated $786 million of free cash flow during the first quarter. Free cash flow increased by 41% year-over-year. We have invested heavily in innovation over the past five years, bending over $5 billion in CapEx over that time. We believe that this investment has peaked as a percentage of revenue and expected to come down gradually over the next several years to approximately 6% to 7% of revenue. As a result, we expect free cash flow conversion to expand in subsequent quarters, and we remain on track to expand our free cash flow conversion toward 95% of adjusted net earnings for the full year. We increased our quarterly dividend by 21% to $0.47 per share, and we returned a total of $287 million in dividends to shareholders this quarter. As a reminder, we plan to increase our dividend by approximately 20% per year in order to gradually grow our dividend payout ratio over the next several years to approximately 35% of adjusted net income. In addition, we reduced debt by $1.2 billion, including repayment and foreign exchange benefit ending the first quarter at three times leverage, which was a full 90 days ahead of schedule. We expect to maintain our leverage below three times and we'll resume share repurchase in the second quarter. At current valuation levels, we believe share repurchases are the best use of excess free cash flow. We expect to buyback approximately $3 billion in shares during 2022. We also anticipate utilizing excess free cash flow in 2023 to buy back shares. At current course and speed, this will be approximately $6 billion in share repurchases during 2023. Combined, this represents approximately 15% of our current market cap. Turning to Slide 15 to review our guidance. There is no change to our full year outlook. We achieved a strong start to the year and remain on track to deliver 7% to 9% organic revenue growth, 50 to 100 basis points of adjusted EBITDA margin expansion, and 11% to 13% adjusted EPS growth for a range of $7.25 to $7.37 per share. The primary risks and opportunities to our forward guidance include the impact of foreign exchange rates, geopolitical risk, and the pace of pandemic recovery. Combined with the upside we delivered in the first quarter, we believe that this supports maintaining our outlook for the full year. For the second quarter, we expect organic revenue growth of 6% to 7%, consistent with revenue of $3.65 billion to $3.685 billion. We expect adjusted EBITDA margins of approximately 44% resulting in adjusted EPS of $1.72 to $1.75 per share. Given the unusual puts and takes that are affecting organic growth rates from banking and merchant, I would like to provide you with some more color on our segment assumptions for the second quarter. In banking, we currently expect organic revenue growth to be in the mid-single-digit range for the second quarter. This is primarily due to difficult compares created by the termination fees and pandemic-related revenue that we generated last year. We anticipate a similar growth profile of mid-single digits for our capital markets segment in the second quarter. For merchant, we currently expect organic revenue growth of approximately 9% to 10% in the second quarter. This equates to strong sequential growth of approximately 15% for merchant. In addition, we expect adjusted EBITDA margins to step up each quarter throughout the year. Lastly, we include assumptions for foreign exchange, corporate, and other and several below the line items within the Appendix section of our presentation. In conclusion, I would like to thank our colleagues for their continued efforts and perseverance during the pandemic. You continue to execute at a high level and generate strong financial results.

Thank you. Good morning, everyone. I appreciate the opportunity to ask a question and congratulations on the results. To begin with, on the merchant side, the yield was robust and better than we anticipated. Is there any reason to believe that this trend won't persist throughout the year or that sectors like travel may not recover? Additionally, Stephanie, you mentioned crypto and your significant exposure in that area. How is that performing, and what are your thoughts on it for the rest of the year?

Stephanie, I'll take the yield question, and you can work on the crypto.

Yep.

George, we do anticipate yields to be a positive benefit to revenue over the course of the year. As we highlighted, really over the past 18 to 24 months, as certain verticals came off, the yields came off heavily. We saw yield benefit as those verticals are coming back online. Travel and airlines is a perfect example that we've been highlighting. Again, we do anticipate travel and airline to be a tailwind over the course of the year.

Yes, regarding crypto, George, we've been discussing this for quite some time. We process transactions for four of the five largest crypto exchanges. They choose us for our level of authorization and low fraud rates, as well as because we are a large-scale provider. We are continuing to gain market share in the crypto sector. We are very enthusiastic about this area. This quarter, we signed a partnership with Circle, making us the first provider of USDC crypto capabilities. This sector is a very exciting part of our global e-commerce business. It showcases the strength and uniqueness of our e-commerce operations, and we are eager about its future.

Appreciate the color. And just as a quick follow-up. Obviously, there's a lot of attention on e-commerce nowadays with some of your peers reporting on what might be happening with the growth in that market. How, Stephanie, are you thinking about the opportunity for e-commerce, both for 2022 and longer term? Do you feel any differently about the growth trajectory within that sub-vertical?

No. This is clearly a very unique asset for us within the company. Given the size and growth of the total addressable market in e-commerce, it has been a significant priority for us and will continue to be. We view this business as one that will keep expanding geographically and offer alternative payment methods. We are one of the two largest providers in this area, and it is growing rapidly. We are capturing a larger market share. We are very optimistic about the developments in the global e-commerce sector. We acquired the Payrix asset to tap into the small and medium business market since we have primarily focused on a global scale. You will see us making substantial investments and focusing more in this area going forward. We remain very excited about it.

I would like to add that we expanded into seven additional countries and have another 11 countries targeted for expansion through 2023. If this trend continues, it will accelerate our growth. We are optimistic about our overall guidance for merchants, and e-commerce will continue to be the fastest-growing segment.

Hey, guys. Thanks and nice job. I want to touch on the banking segment just because, again, I see it as still the largest category of your business. When we look at the sustainability of growth, obviously, it's been strong. It came in a little better than our estimate this quarter. If you could remind us on the confidence level and why the conviction is there for that elevated growth rate, and maybe it's the pipeline you're seeing or the backlog to sustain itself for the next couple of years. Gary, I know we've touched on this, but more color on that now would be great. And then if you could also remind us on breaking down that. It's not just core banking or even bank. There's also issuer processing in there. The other pieces would be helpful to understand also.

We appreciate your non-merchant question, Darrin. We're very optimistic about the banking business and its performance over the years. The sales pipeline has shown consistently strong execution, and we've seen robust growth in the pipeline to replace signings throughout the quarter, which has been strong for more than four years. The backlog increased by about 8% this year, which should instill confidence in future opportunities within banking and capital markets, as these are the main contributors to that backlog. We are seeing strength across all categories. Our issuer business has performed exceptionally well, thanks to our leader there who has done a fantastic job. We're continuing to gain market share. Stephanie pointed out a significant win in our issuer segment, particularly with our Payments One category, which we launched nearly three years ago, and it has become the most advanced issuer platform available. Additionally, there's been a noticeable acceleration in our Digital One offering, representing the next generation of digital experiences. It features a true omnichannel deployment that we're now fully rolling out in the market, with substantial growth over the last 18 months. This all began with our Code Connect offering, which serves as the most open microservices API layer in the industry. When we look at our modern banking platform, we've secured strong wins with new banking partners; several of those customers are now live in production, and the pipeline remains very strong. As we mentioned, we have now enabled this on Microsoft Azure, which enhances our scalability outside the U.S. This transformation within banking, which previously grew only modestly, is now positioned for strong future performance, supported by backlog signings and a solid pipeline. Overall, we feel very positive about the business.

All right. Thanks, Gary. It's great to see the transition. Just a very quick follow-up, Woody, on margins. I mean we had thought you guys would be looking at more like a 43% margin for Q2. It looks a little better. Maybe just if we could touch on the components of the confidence on margins from here through the rest of the year. And thanks again, guys.

Yeah, thanks. It's a good question. We do anticipate it will be about 44% in the second quarter. I think you are seeing some difficult comps in banking as we highlighted, between term fees as well as some of the stimulus-related revenue from the prior year. That said, we are seeing good yields across merchant in the first quarter. And we anticipate that to continue to go forward and feel good about ramping margin over the entire course of the year as we lap those difficult comps in the first half of the year in banking primarily.

Good morning. Thanks for taking my question. Just starting with the bank technology business. Are you seeing any change in the competitive environment there, having any international players trying to enter the U.S.? And secondly, could you just help us understand the pricing trends for some of your largest financial institution clients over the next six to 12 months?

That's a great question, Rayna. I'll begin, and Stephanie can add if she wants. Banking has always been a competitive market for us, with many non-U.S. companies attempting to enter the U.S. market for years. The complexities around regulatory requirements have always created a significant barrier to entry. Additionally, we actively target larger financial institutions, which allows us to differentiate ourselves significantly through scale. Our capacity to compete with some of the largest banks in the country, especially considering the complexity of the solutions we offer, goes beyond just core banking. We need to provide robust issuer processing, openness, and a strong professional services team. Therefore, we feel confident in our competitive position. Are we experiencing more competition than in the past? No, it has always been competitive, and we have consistently performed well against that competition. Regarding pricing, our contracts are primarily long-term, with many including consumer price index adjustments. As CPI rises with inflation, we will see this reflected in our pricing models per account and per transaction, so we have that covered as well. However, we're not noticing an uptick in price competition; it's been competitive as usual, with no significant changes. That said, demand continues to rise. I've mentioned this in previous calls; we're at a pivotal moment where many financial institutions have clung to their legacy technology for too long. Now, they are facing deadlines to make some critical decisions. They need to adopt cloud computing, omnichannel strategies, and openness. This aligns with the substantial investments we've made over the past five years, which Woody mentioned in his prepared remarks. All of this combines to make us feel very positive about our position in the banking sector.

Yeah. I think I might add, we just had our client conference a couple of weeks ago. And the two points that I think are really relevant here. One is the financial institutions, at least within the United States, are very strong coming out of the pandemic. I also think, to Gary's point, the pandemic has driven home from them the need to be digital and omnichannel because folks are struggling to come back into the banking centers. And so that is really contributing to Gary's point around demand. Demand is very high in terms of needing to be omnichannel, digital, and driving the next-gen technology. That's absolutely being recognized out there, given the post-pandemic situation.

That's very helpful. And then just a quick one on merchants. Given the recent reduction by Visa on the U.S. interchange for SMEs, do you expect a benefit to your Merchant margin going forward?

Yeah. I mean we always get a slight benefit there. We don't think it's going to be material, but there is a benefit. Whenever there's pricing changes, obviously, we look and make sure we pass those along and then take an opportunity if we can, but we don't believe it to be material.

Good morning, guys. Thanks. I just wanted to start on U.S. merchant volumes. I think they were up 10% year-over-year and down 10% quarter-over-quarter, if I'm not mistaken. So somewhat below the industry, I suppose. I'm just wondering if crypto is perhaps a callout there? Or is it just kind of a function of your debit mix has always been pretty high, and I know industry comps were just tougher on debit relative to credit; would just love some perspective there.

Yeah, I'll start, and then Stephanie can add on. Our volumes grew 10%, which, at the end of the day, really reflects the underlying mix in our business. We are under-indexed in SMB. We've got a heavy enterprise-based business. If you look at that compared to the fourth quarter, you have holiday spending in those big box. You have holiday spending in grocery, which we saw in the fourth quarter, that's coming down a little bit. Obviously, we saw travel as a benefit in the first quarter. So there are puts and takes in there. At the end of the day, we always get the question around, are you losing share? We tried to highlight it very specifically. The Nilson Report showed that we gained two points of market share by volume for full year 2021, which is probably the best objective evidence or piece of evidence we can have that we're not losing share here. This is just seasonal movements, where we see the first quarter always a little lower than the fourth quarter. And at the end of the day, it's resulting in positive yields as well, where we saw double-digit growth in every segment and 5 points of yield during the first quarter.

Jason, if you operate in the enterprise sector, your strongest quarter will typically be Q4 due to the holiday season. Therefore, it’s expected to observe a decline in transactions and volumes heading into Q1. To echo Woody's observation, this is simply the typical transition we see from Q4 to Q1.

Yeah. I mean I think as the veteran merchant in the space, seasonality from Q4 to Q1; that's what this is.

That's right.

If you consider it to be 17% in the fourth quarter, it's truly 11% in constant currency. There is a natural slowdown from retail and grocery, which accounts for about 6 percentage points. This is typical for this portfolio and is not related to losing market share. We also gained a point from travel, among other factors. Therefore, this is a seasonal occurrence. While we often discuss disruption, our portfolio also experiences seasonality, which is evident if you look at data from before 2019. Additionally, from a Nielsen perspective, we are not losing market share; in fact, we have gained some. I know this is a topic of interest for many, and I hope this clarification helps explain the current numbers.

Yeah. No, that helps a lot. I know you've got the snapback in Q2. I think you said about 15% quarter-over-quarter growth in merchant.

That's right.

Thank you very much. I appreciate all the details on the business. My questions are primarily around CapEx and capital allocation. First, did I hear you correctly, you say you expect to buyback $6 billion in 2023? Or is that across 2022 and 2023?

No. We anticipate buying $3 billion in 2022 stand-alone and utilizing all free cash flow in 2023. Excess free cash flow would be buying $6 billion in 2023. The combination of those two will be about $9 billion or about 15% of our current market cap.

Yeah. I mean, look, we've been in business for a very long time, right? So as you think about it, a lot of technologies in financial services are based on historical legacy platforms. We pivoted the company back in 2015 to really start focusing on the next-generation capabilities that we're going to need to compete for the next 20-25 years. And so as you start looking at whether it was in the merchant platform where we invested heavily in the new acquiring platform and access Worldpay, we've got that fully online now; whether you look in the banking sector and you look at what we've done around the modern banking platform, which is the most leading technology for cloud-native core banking system in the market. You've seen that with our wins, but look at what we did on Payments One, which is a cloud-native issuer platform for both debit, credit, and prepaid. You then move into our Digital One, our omnichannel experience that wraps around those capabilities, once again coming fully online in market and then our CodeConnect platform for our microservices layer. You then move into what we did in Capital Markets, where we really leaned in our solutioning about bringing our capabilities and launching that in the cloud to leverage both buy-side and sell-side type capital markets capabilities on SaaS deployment, that all boils down to we're wrapping up those programs. And so we increased our capital starting back in 2015. We were running at about 5%. And we ramped that up to, I think, as high as 11% of total revenues. And as those platforms have now come to conclusion, you would expect those investments to come down. Now what we've all talked about, we'll maintain that around 6% to 7%. We think there's an opportunity to continue to lean in and add functionality and continue to grow and expand our revenue growth and our share. But all programs come to a natural conclusion. And we're just on the back side of the modernization of our solution stack. Now we do have a historical back book that, at some point in time, we'll start migrating. Stephanie highlighted some of the stuff we're already doing in banking. We've migrated more than 1,500 of our clients to Payments One as an example. But more to come on that as we upsell and migrate our existing customers to those capabilities. But we feel very good about our competitive position. You see all of our segments growing and taking share by various metrics. And so at this point in time, we're just wrapping up a lot of these platform transformations.

Yeah. No, that's got to feel great to get past seven-plus years of extra investment. Thanks for that.

Yeah. No, exactly. Exactly. We feel great about it. Well, look, I want to thank you for joining us this morning, and thank you to our dedicated colleagues for another strong quarter. Before we conclude, I wanted to give a special thanks to our team for hosting a very successful Annual Client event. We had over 4,000 participants. This live event was a remarkable showcase of our solution suites to industry leaders. We are grateful to be interacting in person where our client-centric culture truly shines. Feedback from the event has been exceptional, as clients and prospects learn how our innovative capabilities can solve their most pressing business needs. We remain committed to providing world-class technology solutions to our clients so that we can stay ahead of the curve. This commitment will lay the foundation for our growth in 2022 and beyond. If you had any further questions that were not addressed on this call, please reach out to our Investor Relations team. Thank you, and I hope you enjoy the rest of your day. Goodbye.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.