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The 52nd J.P. Morgan Annual Global Technology, Media & Communications Conference

May 20, 2024

Tien-Tsin Huang
Analyst, JPMorgan

Okay, let's get going. Thank you, everyone, for sticking with us throughout the day. My name is Tien-tsin Huang. I follow the payments and IT services sector. We got FIS up to bat here. With us from FIS, we have James Kehoe, CFO. Just came back from the Investor Day, obviously not too long ago, so I have some questions that I've put together to go through that I've collected from the group, and hopefully we'll have some time for the audience to ask questions as well. But James, thank you for the time.

James Kehoe
CFO, FIS

Yeah, thank you, Tien-tsin.

Tien-Tsin Huang
Analyst, JPMorgan

Looking forward to speaking with you. So I thought I'd start out, if that's okay? I know what, nine months on the job, something like that?

James Kehoe
CFO, FIS

Yep, yep.

Tien-Tsin Huang
Analyst, JPMorgan

The Analyst Day is behind you. You're coming in from the outside. I'm curious, you went through revenues, cost, margin, capital returns. What are you most excited about coming in from the outside to execute against and to underline for us, investors here?

James Kehoe
CFO, FIS

You know, I don't want to be obvious. I will say all of the above.

Tien-Tsin Huang
Analyst, JPMorgan

Sure.

James Kehoe
CFO, FIS

But actually, I think the thing I'm more excited about is the greater appreciation I've built. What's the unique proposition of the company? Number one, we're, we are the skilled technology leader in the banking and capital market sector. Two is, we've got global distribution and marquee clients, and then we have probably the broadest range of suite of products on offer, and most of them are best in breed. So the reason I'm most excited about that is that's the reason we have to win. And then, as I came into the company and looked at the revenue goals, the margin goals, we wanted to set a series of goals in Investor Day, that the market wouldn't look at it and say, "These, these guys are crazy.

This is too aggressive." We set eminently achievable goals for revenue and EBITDA margin, and we've made some pretty bold statements on capital allocation since I joined. You know, when Stephanie first presented the Worldpay acquisition to investors, sorry, she's committed to $2.5 billion of return of capital to shareholders. That equivalent number now is $4.5 billion.

Tien-Tsin Huang
Analyst, JPMorgan

Right.

James Kehoe
CFO, FIS

So a lot of work done on scraping the deal, looking at long-term commitments on free cash flow conversion. How do we return sufficient capital to shareholders? You know, we made a lot of changes. The dividend policy went to 35%. So I think we've lined up all the ducks now, and this is now an execution story against a strong set of goals. You know, I want to express this: we are really confident that we will hit the 9-12 on EPS, and we pay a dividend that's above the peer set. So our total return, we believe, is in the 11%-14%, and we presented it with confidence, and we feel very confident about the ability to deliver.

Tien-Tsin Huang
Analyst, JPMorgan

Yeah, and I commend you for it. I thought that came out very, very clearly. And I remember we had Stephanie here last year, and she talked about, you know, the recurring nature of the business-

James Kehoe
CFO, FIS

Mm

Tien-Tsin Huang
Analyst, JPMorgan

... and the high visibility, and that you'd come with us at, with more information on what the right total return profile.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

You just went through it a little bit, but maybe just on the visibility part-

James Kehoe
CFO, FIS

Yeah

Tien-Tsin Huang
Analyst, JPMorgan

... James, for the benefit of everyone here, speak to that. 80% of the business is recurring, 20% is non-recurring. How do you assess the visibility?

James Kehoe
CFO, FIS

Yeah, the visibility is good. You know, I think the more shocking thing since I joined, for me, is the resilience of the recurring.

Tien-Tsin Huang
Analyst, JPMorgan

Yeah.

James Kehoe
CFO, FIS

And it gets back to this excitement thing. First question is, you take a look at it, the recurring in banking, 83%, 82%, 73% in capital markets. But if you look at the core transactions across both businesses, take banking, just the growth in accounts and transactions in banking gives you a natural 3% volume growth in the business. That's what it is. That's your starting point.

Tien-Tsin Huang
Analyst, JPMorgan

Mm-hmm.

James Kehoe
CFO, FIS

So everything on top, any, you know, gains you make across on clients, comes on top of that. M&A comes on top. So the beauty is the 3%, and in the first quarter, to build investors' confidence with this, we showed the recurring growth rate over the last four years, and the average is 4%. The lowest in the last four years is 2020 at 2%.

Tien-Tsin Huang
Analyst, JPMorgan

Right.

James Kehoe
CFO, FIS

Right? And that's in the midst of COVID, when transactions had really fallen off. So I want to emphasize, you know, it's 83% recurring, and it's remarkably resilient over a longer period. You do the same on the capital markets business, and probably the easiest number there is the total addressable market is growing at 6%.

Tien-Tsin Huang
Analyst, JPMorgan

Right.

James Kehoe
CFO, FIS

Right? And, you know, yes, we have more aggressive goals, but yes, we're also putting in place a comprehensive M&A program and faster growth in call it non-traditional verticals. And I always like a data point in the past. You know, the business, similarly, over the last 3 years, has grown at 6%-7% on recurring, and last year was actually higher than the trend. It was 9%. So you could argue we're setting revenue goals that the business is more than capable of delivering. So essentially, that's why I say it's kind of like it's an execution story. So it's the quality of this 80% that is great, and then two is we're slowly working ourselves out of non-recurring.

Tien-Tsin Huang
Analyst, JPMorgan

Yeah.

James Kehoe
CFO, FIS

Not because it's bad, but we want the market to focus on the durability and the terminal value of our revenue. That 80% will creep up over time. It's not going to be dramatic. I would guess in 3 years, the 83 goes to... Sorry, the 80 goes to 82, 83.

Tien-Tsin Huang
Analyst, JPMorgan

Mm-hmm.

James Kehoe
CFO, FIS

You know, probably with capital markets expanding faster on non-recurring. And, you know, within the... Sorry, on recurring. In the non-recurring, you got basically two big pieces. You got licenses and these are basically upfront licenses for a longer duration, and, you know, they're at close to 100% margin, right? So, you know, and a lot of particularly international clients want an upfront license, right? Two is then you've got professional services, which is a large business for us. That is effectively using our staff to implement software and services within the banks or capital markets. That's a much lower margin. It's about 35%. Now, prior management did chase a lot of outsourcing deals and professional services at this lower margin, and it drove revenue in the short term, and it plateaued in the most recent past-

Tien-Tsin Huang
Analyst, JPMorgan

Sure

James Kehoe
CFO, FIS

... and led to a decline in margins. We're not getting back into chasing revenue. We want to demonstrate to the investors the resilience of the recurring revenue and the terminal value of the company.

Tien-Tsin Huang
Analyst, JPMorgan

The incremental margins... Thank you for going through that.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

On the recurring side, I would imagine the incremental margins are quite high-

James Kehoe
CFO, FIS

Yeah

Tien-Tsin Huang
Analyst, JPMorgan

Given that it's a utility in a lot of ways. Can you comment on that?

James Kehoe
CFO, FIS

Yeah. We're not going to give specific numbers, but we've a broad mix of businesses, and, you know, the margins could range from 95% down to a lower number. We do have businesses that do credit card production.

Tien-Tsin Huang
Analyst, JPMorgan

Yep.

James Kehoe
CFO, FIS

Right? So we have some very stable, profitable business, but they're at a lower margin. But you're right, you know, core banking platforms, digital platforms, payment platforms, they're all at very high incremental margins.

Tien-Tsin Huang
Analyst, JPMorgan

You just mentioned that, you know, general baseline growth is very tight.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

Small standard deviation. Perception is that there is some cyclicality, James.

James Kehoe
CFO, FIS

Yeah

Tien-Tsin Huang
Analyst, JPMorgan

around the business and exposure to bank IT spending. How are you exposed there, especially when people are thinking, "Oh, maintenance spend is fine, but we're going to open up and spend a little bit more on bank IT"? Does that drive incremental business for you?

James Kehoe
CFO, FIS

Yeah, it does. What we're seeing currently in the market, though, we're not seeing dramatic shifts in spending, so maybe the spending is similar. There could be less spending on modernization, of course, because that's more discretionary at times. There is a large shift to digital and payments spending.

Tien-Tsin Huang
Analyst, JPMorgan

Sure.

James Kehoe
CFO, FIS

Banks want to get more deposit accounts. Digital capabilities are much more important. That's growing like gangbusters. So the overall impact on us is neutral to slightly positive. You know, the other trend you could talk about in the market is consolidation.

Tien-Tsin Huang
Analyst, JPMorgan

Sure.

James Kehoe
CFO, FIS

I think George always gives me a statistic that 250 banks some years will get absorbed in the system. They're mostly absorbed by the bigger banks. So we have a 58% share of large financial institutions. As consolidation happens, that roughly gives us a tailwind of 50-100 basis points, depending on the year or so.

Tien-Tsin Huang
Analyst, JPMorgan

Right.

James Kehoe
CFO, FIS

We have, you know, on the offsetting many of the other pressures, we have this natural tailwind coming from our products. You know, if you think about our product set, you got IBS, and you got Digital One, and for large banks, we really don't have a significant competitor. Jack Henry's not in the market, and because what does our product give? It gives large banks significant commercial banking capabilities, and none of the competitors offer the same range of capabilities. So that's why our share is very deep in LFIs. It's because the product is very, very good, right? So it's. That's that got me excited as well. It's a defendable moat, and the product is good, and the switching costs are high, so you're pretty much protected in the, in the, the biggest part of your business.

Tien-Tsin Huang
Analyst, JPMorgan

Got it. So back to the... And staying within banking, back to the underlying growth of the 3% and building into that, I know it's very stable and resilient.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

Those accounts that you're describing, that's basically a bank account, right? A DDA-

James Kehoe
CFO, FIS

Yeah

Tien-Tsin Huang
Analyst, JPMorgan

... a savings account-

James Kehoe
CFO, FIS

Yeah

Tien-Tsin Huang
Analyst, JPMorgan

... which is pretty steady growth in up or down markets, so then you have transactions that are transacting against those accounts, which you said, I think, is growing 5%.

James Kehoe
CFO, FIS

Well, no, the-

Tien-Tsin Huang
Analyst, JPMorgan

Right

James Kehoe
CFO, FIS

... the accounts are growing at somewhere between 2.5%-3%.

Tien-Tsin Huang
Analyst, JPMorgan

Okay.

James Kehoe
CFO, FIS

It's been pretty consistent over the last three years.

Tien-Tsin Huang
Analyst, JPMorgan

Okay.

James Kehoe
CFO, FIS

That's a volume number.

Tien-Tsin Huang
Analyst, JPMorgan

Okay.

James Kehoe
CFO, FIS

Then, two is transactions, for example, in debit networks and credit networks, they're up about 4.5-5%, what we see. So that gives us a weighted average on transactions of roughly 3%.

Tien-Tsin Huang
Analyst, JPMorgan

Got it.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

So-

James Kehoe
CFO, FIS

And then, you could look at the TAMs we're in as well. If you take it from a TAM perspective, it's roughly 4%.

Tien-Tsin Huang
Analyst, JPMorgan

Right.

James Kehoe
CFO, FIS

Right? That's on a value basis. So we look at multiple cuts to figure out what's the sustainability of the revenue over time.

Tien-Tsin Huang
Analyst, JPMorgan

Got it.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

So how does pricing work into that algorithm, that equation, James?

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

When you're adding all those things up in terms of recurring revenue growth, what's the pricing impact on that?

James Kehoe
CFO, FIS

Yeah, it's very different when you look at banking versus capital markets. Very, very different. Banking, you know... You look back over maybe 3-4 years, the contribution from gross pricing is probably 100 basis points, maybe 150.

Tien-Tsin Huang
Analyst, JPMorgan

Okay.

James Kehoe
CFO, FIS

But it's naturally offset by compression. So we do find that every time you renegotiate a new contract, there is a competitive bidding process. That's just good business. It's good when we do it, it's good when banks do it, but that causes compression. So the net contribution of pricing in banking is close to zero.

Tien-Tsin Huang
Analyst, JPMorgan

Okay.

James Kehoe
CFO, FIS

Right? So we don't rely on pricing. I don't think our customers would accept it either. I think anything we get on top on pricing is coming from, you're bringing more value to the banks and your clients. Capital Markets is a little bit different. It's got way more customers, less revenue per customer. So they've got roughly 6,000 clients spread over 150 countries. So as you can imagine, you've typically got one product per customer. It's a best-in-breed product. It could be in derivatives, it could be in hedge funds, it could be in insurance, right? The products are much more specific. There's typically one, and the pricing power is quite good.

Tien-Tsin Huang
Analyst, JPMorgan

Mm-hmm.

James Kehoe
CFO, FIS

An interesting stat is only 30% of the customers have more than one product. That also gives us big white space opportunity, but it also shows that we got a lot of smaller clients where you got more pricing power. The net benefit in the revenue line is about two percentage points a year.

Tien-Tsin Huang
Analyst, JPMorgan

Got it.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

Okay. No, thanks for going through that.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

Yeah, 'cause we're, as we're thinking about the growth algorithm, the pricing, of course, is a big, big focus for investors. But, you know-

James Kehoe
CFO, FIS

Yeah

Tien-Tsin Huang
Analyst, JPMorgan

... we have a lot of newer players, disruptors within the fintech that are-

James Kehoe
CFO, FIS

Yeah

Tien-Tsin Huang
Analyst, JPMorgan

... at the conference as well. I think, by my math, you're looking within banking to add about 1.5-2.5 points of annual growth from high-growth products, right? So call it $135 million in revenue or so, which would-

James Kehoe
CFO, FIS

Yeah

Tien-Tsin Huang
Analyst, JPMorgan

... you know, put you in a Class D or so conversation with the fintech. What are these products? Can you give us some examples, and how do these sales typically build to get to that 1.5-2.5 points of growth?

James Kehoe
CFO, FIS

Yeah. Now, the two places we're most focused on is faster-growing TAMs, which typically digital, and then the other one is payments. You know, digital and what kind of assets do we have? We got Payments One already in place that can take both debit and credit. We have and offers a complete suite of products within that. You've also got Digital One for the bigger banks, very well developed, and a NYCE network. So we've done a lot of investment over the past years, and we're well-positioned. And I don't know if you listened in to Investor Day, one of the what Stephanie said up front, and it's 100% right, is the company lost focus on the core business-

Tien-Tsin Huang
Analyst, JPMorgan

Sure

James Kehoe
CFO, FIS

... and shifted a lot of people from banking into Managed Worldpay, didn't pay sufficient attention to the core, and especially didn't focus on the FIS payments business and digital business. So now the investments have been put in place again, and a large focus... So think about it: You got the core banking at 3, the digital and payments will grow at high single digit, and that gives you this incremental growth, supplemented by probably half a point to 100 basis points from acquisitions. We will selectively acquire. A good example in payments is the whole business of accounts payable, accounts receivable, call it B2B.

Tien-Tsin Huang
Analyst, JPMorgan

Yep.

James Kehoe
CFO, FIS

We already have some pretty good assets there. Could we build them out more and get incremental growth? The answer is yes. So we're looking at digital and payments also on the M&A side.

Tien-Tsin Huang
Analyst, JPMorgan

Okay. So to be clear, on the M&A side, these are more product-

James Kehoe
CFO, FIS

Product

Tien-Tsin Huang
Analyst, JPMorgan

... type of companies.

James Kehoe
CFO, FIS

Yeah, yeah. They're all product companies.

Tien-Tsin Huang
Analyst, JPMorgan

Okay.

James Kehoe
CFO, FIS

Yeah. You know, we have, we have some investments in organic we're making in digital. We're our strength is in the LFIs. Our digital product is really well, and our weakness is in community banks, and we have a lot of gaps to close. And we, we've said this publicly, we've allocated $65 million to new investments in our community. Call it our one-to-many digital product. We became uncompetitive in some of the the offerings to their core consumers. If we don't close it with internal investments, we will make a digital acquisition.

Tien-Tsin Huang
Analyst, JPMorgan

Okay.

James Kehoe
CFO, FIS

But it won't be a big one.

Tien-Tsin Huang
Analyst, JPMorgan

Okay.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

It won't be a big one?

James Kehoe
CFO, FIS

It won't be a big one, no.

Tien-Tsin Huang
Analyst, JPMorgan

Yeah, 'cause that, that's the question I get, right?

James Kehoe
CFO, FIS

We don't need to acquire a big asset to be successful. We really don't. We've got to fill in, we've got to fill in select gaps in existing products, and we don't need to do a $1 billion-$2 billion acquisition in digital. There are some good, good assets out there at $100 million to... No, maybe not $100 million, $200 million-$300 million range, to fill out the gaps we need to fill out. It's, it's different.

Tien-Tsin Huang
Analyst, JPMorgan

Okay. No, 'cause we get that.

James Kehoe
CFO, FIS

And this will make us a lot more competitive in community banking because our digital asset is weaker than what the competitive set have right now.

Tien-Tsin Huang
Analyst, JPMorgan

Yeah.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

We didn't, we didn't talk about it, but before we transition to capital markets a little bit more, just the cross-sell opportunity-

James Kehoe
CFO, FIS

Yeah

Tien-Tsin Huang
Analyst, JPMorgan

... I wanted to ask that earlier. I do get that question quite a bit. How real is that in terms of cross-selling between the two?

James Kehoe
CFO, FIS

Well, it's, it's pervasive in the company, and it's been underexploited, and Stephanie is all over it right now. The interesting thing, we got cross-sell within the business segments, and we got cross-sell between the two segments, and we quantified at Investor Day. We have. There's a 70% overlap between clients, between capital markets and banking.

Tien-Tsin Huang
Analyst, JPMorgan

Right.

James Kehoe
CFO, FIS

And if we start, we've had it, we've gone in and looked at it segment by segment and quantified a $400 million opportunity. Now, you won't get that in a year. You're gonna get it maybe over a 3-year period. There's also a cross-sell within each of the segments. So think about it: 70% of our core banking customers also take the debit product. They're highly integrated. So the question is, can you get the 70% up to 80%, up to 90%, right? And then, within capital markets, the more, the bigger asset management companies typically would take 6 or 7 products as opposed to 1 product. So there's continual cross-sell and upsell of offerings to the more sophisticated institutions, and that's what we call all white space.

One of the main reasons is that it was a little traumatic at the beginning of last year, but the sales forces were combined within, between Capital Markets and Banking, which means that the go-to-market now is one individual-

Tien-Tsin Huang
Analyst, JPMorgan

Mm-hmm.

James Kehoe
CFO, FIS

—who serves both divisions. Now, you could say that's really complex because of the breadth of your offering, but the specialization is under the client relationship manager. So our sales force of 1,600 people and client relationship managers, that's combined banking and capital markets. So that's how we intend to drive the cross-sell.

Tien-Tsin Huang
Analyst, JPMorgan

So a lot of it sounds like the sales compensation motivation is there to do the cross-sell across the two, but also, as you mentioned, selling Payments One into the core banking unit or doing a better-

James Kehoe
CFO, FIS

Exactly.

Tien-Tsin Huang
Analyst, JPMorgan

-job selling NYCE.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

That's the network-

James Kehoe
CFO, FIS

Better job on NYCE.

Tien-Tsin Huang
Analyst, JPMorgan

-into the core.

James Kehoe
CFO, FIS

Yeah, yeah.

Tien-Tsin Huang
Analyst, JPMorgan

Those are all in place to drive.

James Kehoe
CFO, FIS

They're in place, but they're the opportunity going forward.

Tien-Tsin Huang
Analyst, JPMorgan

Right.

James Kehoe
CFO, FIS

You know, we've laid out a set of goals that some... You know, we get some comments that our sales goals look actually not aggressive enough. What we did when we were, just before Investor Day, we were determining the targets, and we said, "What's critical for us is to set a set of sales goals and margin goals that are eminently achievable." Because if you take all the drivers of the opportunities, whether it's M&A, the core transaction growth, you add on the cross-sell opportunity, you got the faster-growing categories, you can get to a higher number in some of our businesses.

Tien-Tsin Huang
Analyst, JPMorgan

Okay.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

Let's do capital markets quickly, then we'll open it up. Just so capital markets, same thing, I get this question a lot. You mentioned 6%-7% TAM. How does that build? When I think of the old SunGard, I used to think about seats or stock orders of record that would drive growth. How do you build up to that?

James Kehoe
CFO, FIS

No, it's more of the way we look at the, it's more a 6% TAM growth over time.

Tien-Tsin Huang
Analyst, JPMorgan

Okay.

James Kehoe
CFO, FIS

The complexity of our capital markets business is the pricing models vary on this sector we're in.

Tien-Tsin Huang
Analyst, JPMorgan

Mm-hmm.

James Kehoe
CFO, FIS

You know, we're selling... You know, this varies from we have a 70% share in all the top 100 insurance companies.

Tien-Tsin Huang
Analyst, JPMorgan

Right.

James Kehoe
CFO, FIS

So, like, it's an incredible number. Why? Our risk management products are incredibly strong. Step number two, though, it's less important the pricing for us, it's what's the next product that goes into the insurance company, and they didn't need it necessarily for regulatory reasons, but the ESG product is selling heavily with insurance companies. So we're focused less on pricing and then expanding into new verticals. So the way we look at the business is traditional asset management companies and, portfolio management companies. The TAM is maybe growing at 5%, whereas the TAM in treasury and risk is growing at 7%-8%.

Tien-Tsin Huang
Analyst, JPMorgan

I see.

James Kehoe
CFO, FIS

And then, lending management, we see as a huge lending software is a huge opportunity. That's growing at 12%-13%. So we're shifting a lot of resources. The M&A dollars in capital markets are more likely to be in, call it lending and treasury and risk. How do you build out in those faster-growing terms? So we have a different logic. We're not necessarily looking at the pricing models, we're looking at the... We have 30% of our client base is non-traditional verticals, and that's the idea we're continued to push. And then capital markets, incredible, 50% is international.

Tien-Tsin Huang
Analyst, JPMorgan

Right.

James Kehoe
CFO, FIS

Very strong positions in Asia and in Europe. Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

Yeah.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

Last one on capital markets then for me, I think I, you had written down here, "2.5-3.5 points of growth are gonna come from newer verticals and products.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

So can you elaborate on that? Maybe give us some examples of, of what that might look like.

James Kehoe
CFO, FIS

Yeah, that's just what we just went through.

Tien-Tsin Huang
Analyst, JPMorgan

So just-

James Kehoe
CFO, FIS

It is, effectively, it is the lending management is 12%-13% TAM growth. We have a strong position and track record on growth there. We have good products. We might selectively acquire in that area, but it's an expansion into many of the big core companies use our-

Tien-Tsin Huang
Analyst, JPMorgan

Auto

James Kehoe
CFO, FIS

... our leasing software, just to give you an example.

Tien-Tsin Huang
Analyst, JPMorgan

Mm-hmm.

James Kehoe
CFO, FIS

So, you know, it's an expansion into territories that we weren't in 5 years ago. Treasury and risk is where we have a large advantage as well. Our treasury systems are very sophisticated—they're high-end. We're 1,200 applications globally and expanding it aggressively. And typically, if you go into treasury with a corporate, you'll probably sell them Forex management, commodity management. There's many add-ons to the core product that increase the value per relationship.

Tien-Tsin Huang
Analyst, JPMorgan

Good.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

Questions from the audience for James? Happy to take them. I've got a few more to get through, but I want to open it up. Anyone? So let's do the, let's do the cost savings that you've raised again. I can give the numbers: $190 million in 2025, $165 million in 2026. Where are these savings coming from, and, you know, how much more is there to go? The same question-

James Kehoe
CFO, FIS

Yeah, yeah.

Tien-Tsin Huang
Analyst, JPMorgan

When you... The muscle question.

James Kehoe
CFO, FIS

Well, we get a lot of questions on the EBITDA margin. Is there more-

Tien-Tsin Huang
Analyst, JPMorgan

Yeah

James Kehoe
CFO, FIS

... coming in the future?

Tien-Tsin Huang
Analyst, JPMorgan

Yeah.

James Kehoe
CFO, FIS

So maybe I'll answer a different question. We've put in place thoughtful cost reduction goals. I do come from tighter margin industries-

Tien-Tsin Huang
Analyst, JPMorgan

Yeah.

James Kehoe
CFO, FIS

And there's a fair amount of runway beyond 2026. So we would be committing to higher margin expansion if it wasn't for the exit from the transition service agreements with Worldpay. That's a 160 headwind-

Tien-Tsin Huang
Analyst, JPMorgan

Right.

James Kehoe
CFO, FIS

We're cycling through. So the question we get quite a bit is, well, what happens after 2026? And I think we were quite explicit in the investor day. We said 2025 will be at the low end of the 40-60 basis points, 2026 will be at the high end, and beyond 2026 it will be greater than 60 basis points. Because our simplistic way of looking at it is we will use cost reduction to offset inflation, and then the operating leverage, which is 80-90 basis points, most of that, we should fall to the bottom line. So we're not giving explicit guidance, but it's definitely above 60 basis points. So we see it becomes a machine.

The more the recurring revenue increases, and you know, when we shift into a higher growth category, the part I maybe didn't mention is, we're typically shifting into a higher growth, higher margin category. So you will know. You know better than I do, the digital category is incredibly profitable, and especially payments. So we're shifting and that will help drive positive revenue mix over time. So that's why we express so much confidence in the margin story as we look forward.

Tien-Tsin Huang
Analyst, JPMorgan

Yeah. No, that stood out, the greater than 60 basis points beyond 2026. It felt like a lot of it was just from high incremental margins plus-

James Kehoe
CFO, FIS

Yeah

Tien-Tsin Huang
Analyst, JPMorgan

... commitment to efficiency. But it's also-

James Kehoe
CFO, FIS

But it's also the incredible leverage in the company because I think it's what I see of companies with 40% EBITDA margins, they're not as focused on gross profit. We are introducing new financial rigor as well. What's the gross profit margin, the incremental revenue—sorry, profit per dollar of revenue, to a company that traditionally just looked at the EBITDA margin and the recurring sales?

Tien-Tsin Huang
Analyst, JPMorgan

Yeah.

James Kehoe
CFO, FIS

We're getting into lower levels of detail and more rigorous cost management, and Stephanie has driven a very hard agenda on this, and I'm a cost guy at heart as well.

Tien-Tsin Huang
Analyst, JPMorgan

Yep.

James Kehoe
CFO, FIS

So, I shouldn't say I get turned on by cost reduction, but, you know.

Tien-Tsin Huang
Analyst, JPMorgan

That's why I asked if-

James Kehoe
CFO, FIS

Sorry.

Tien-Tsin Huang
Analyst, JPMorgan

That's why I asked what excited you in the beginning here, James.

James Kehoe
CFO, FIS

Thanks for the question.

Tien-Tsin Huang
Analyst, JPMorgan

That's why I asked you that.

James Kehoe
CFO, FIS

That's one I really liked.

Tien-Tsin Huang
Analyst, JPMorgan

No, we've heard that, and I'm glad to hear that it's coming through with some of the targets that you're going to be held accountable for, which is great. I know the capital intensity question is important as well. Some of those-

James Kehoe
CFO, FIS

Mm

Tien-Tsin Huang
Analyst, JPMorgan

... restructurings that you're going through will generate cash savings, and improvement in capital intensity, too. So can you remind us of the goals there to get to that 90% free cash flow conversion?

James Kehoe
CFO, FIS

Yeah, it's pretty simple. You know, before I came in, so before Stephanie came in, I think the capital was running at a 10%-11%.

Tien-Tsin Huang
Analyst, JPMorgan

Yeah.

James Kehoe
CFO, FIS

She rapidly took it down to 7-8, basically on the premise that the company needs to focus more on execution and less on developing. The products are decent, they were-- but they were taking too long to get to market, and there's a much sharper execution. We've confirmed that it's a 7%-8% CapEx rate looking forward.

Tien-Tsin Huang
Analyst, JPMorgan

Mm-hmm.

James Kehoe
CFO, FIS

You know, I think it's imminently doable, especially if you're spending $1 billion a year on acquisitions. That, in theory, should improve the quality of your product going forward.

Tien-Tsin Huang
Analyst, JPMorgan

I have to ask one Gen AI question, just 'cause they tell me to. I'll ask it here. I know you mentioned it a little bit, Investor Day.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

How, how transformational could it be for FIS to embrace that, as a technology? It feels like there's a lot of room for productivity-

James Kehoe
CFO, FIS

Yeah

Tien-Tsin Huang
Analyst, JPMorgan

... within FIS. You tell me.

James Kehoe
CFO, FIS

Well, there is, but we've set up an AI council internally. Banks don't like rapid change, and some of them are actually concerned about AI.

Tien-Tsin Huang
Analyst, JPMorgan

Right.

James Kehoe
CFO, FIS

You know, there's a lot of data privacy, regulatory involved. That being said, we have 120 pilots. We have three groupings, and the leader of the AI council is one of the segment leaders, Nasser Khodri.

Tien-Tsin Huang
Analyst, JPMorgan

Yep, sure.

James Kehoe
CFO, FIS

So we want it to be a business-led and business-driven. Why? We think it's more important. We're going to drive revenue, customer experience, and cost. So myself and the head of Future Forward, we'll probably drive the cost part of it, and the company is inefficient. There's 52,000 people, and for the revenue, we probably can operate with sufficiently less-

Tien-Tsin Huang
Analyst, JPMorgan

Okay

James Kehoe
CFO, FIS

... and transfer it to higher quality resources. The second part is customer experience. You know, I, I don't have to tell you, most people in the audience will know it. We have 13,000 people in call centers and client support. How can you make it more effective for the... This is what we're trying to solve. It typically can take multiple calls before a bank can get the person who can answer the question.

Tien-Tsin Huang
Analyst, JPMorgan

Right.

James Kehoe
CFO, FIS

Right? Because the software is intensely complex, and the question is probably complicated. Gen AI will help solve the amount of interfaces and time it takes for a bank to get a question asked. It's, it's as simple as that, and a happy customer is one that's going to stay with you. And then finally, you know, what we're finding is Gen AI within products, we've deliberately taken all of our fraud development teams out of the businesses and put them into the platforms and innovation group. Why? Because we think we will have a much better product, and we have done pilots that suggest the quality of fraud detection is much higher using Gen AI... and that was done in the space of a 60-day pilot. So the company is moving really fast here.

You know, I think you have to try quickly, because if you start setting up a big master plan over 3 years, most of the externals will tell you the game will have changed in a year's time. So this is a case of doing things very, very quickly and with agility.

Tien-Tsin Huang
Analyst, JPMorgan

Yeah.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

I think I talked to Nasser about it, but just you mentioned-

James Kehoe
CFO, FIS

Yeah, he's leading it. Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

You. Yeah, I remember talking to him at Investor Day. You also mentioned up front there's a big BPO and professional services component. Is there an opportunity to automate some of that?

James Kehoe
CFO, FIS

Yeah

Tien-Tsin Huang
Analyst, JPMorgan

as you do implementations?

James Kehoe
CFO, FIS

We're looking at all of those, yeah. I think probably initially, most companies will defer and say it's easier to do it on the cost side.

Tien-Tsin Huang
Analyst, JPMorgan

Sure.

James Kehoe
CFO, FIS

We're trying to make sure the teams are split so that they're focused on the revenue side and not just the cost side. Let the cost people worry about the cost piece. The leadership team of Gen AI in general is businesspeople, not finance people, and I think that's a healthy thing at the start. The one thing we're finding, though, you probably have to take an enterprise point of view. You don't, really don't want 120 programs. You want control at the enterprise level to select and invest in the ones that, which make more, most sense.

Tien-Tsin Huang
Analyst, JPMorgan

Yeah.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

Good. So let's close out. I have to ask a Worldpay question or two, if that's all right.

James Kehoe
CFO, FIS

Sure.

Tien-Tsin Huang
Analyst, JPMorgan

It was NYCE to see the Worldpay team at the Investor Day.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

So you guided to 7.5%-9.5% growth in EMI. I know that short term, there was a little, some good performance there. Can you just give us a little bit of insight on what we might expect in the short term, and what drives that 7.5%-9.5% view?

James Kehoe
CFO, FIS

We struggle because, we're not allowed to say much about them in public forums-

Tien-Tsin Huang
Analyst, JPMorgan

Okay

James Kehoe
CFO, FIS

... that hasn't been cleared by them. Sufficient to say 7.5-9.5 is agreed with them.

Tien-Tsin Huang
Analyst, JPMorgan

Yeah.

James Kehoe
CFO, FIS

They share monthly forecasts, budgets, three-year plans with us. Roughly, and we've said this publicly, about 50% is EBITDA-driven, and 50% is coming from,

Tien-Tsin Huang
Analyst, JPMorgan

Pay down

James Kehoe
CFO, FIS

... pay down of debt. You know, this is a machine. My personal view is they'll over-deliver, but they had a strong start to the year. Let's see how they do in the second quarter. If they don't call up the full-year forecast, I can't call it up. That's the deal we have with them. So, I think they'll do very, very well. Charles Drucker is a great operator in the segment. I think it's also symptomatic of we didn't just divest the company. We've put in place a series of commercial arrangements.

Tien-Tsin Huang
Analyst, JPMorgan

Correct, that's what I was gonna ask you.

James Kehoe
CFO, FIS

The fact that Charles and his CFO turned up to our Investor Day is symptomatic of the relationship that will exist going forward. You know, we want them... An example here is our Premium Payback-

Tien-Tsin Huang
Analyst, JPMorgan

Yeah

James Kehoe
CFO, FIS

... product. We kind of need them as a distribution channel to get us customers, and they will get a revenue share. So there's a series of bilateral relationships. We will actually develop their embedded finance product that they're gonna offer in the short term. So there's a lot of arrangements, and there's a reason why he turned up, because there's a strong position between the two companies.

Tien-Tsin Huang
Analyst, JPMorgan

So the commercial agreement is in place. The commitment then to maintain the ownership, what can you say publicly for those that are less familiar?

James Kehoe
CFO, FIS

Oh, I think that's, that's way out there. I don't think we can do anything for four years.

Tien-Tsin Huang
Analyst, JPMorgan

Yeah.

James Kehoe
CFO, FIS

Like, we can't just wake up and sell it to a strategic. Either way, it needs their, their approval, and it's unlikely to happen in the short term. The only one that is potentially earlier is an IPO, but that's—we would see it as a, as their investment, investor deciding this. And I think it's far too early to say. You know, if I was them, I'd wait until my revenue was, was growing faster and more in line with the market before I'd get into anything. But... So we, we have no plans. What, what we will do is we will monetize our stake when GTCR decides to monetize their stake. That's the general agreement.

Tien-Tsin Huang
Analyst, JPMorgan

Understood.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

Okay. No, good. Thanks for going through that. So we're, I think we're out of time.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

Ten seconds left. Stock's done well this year. You got the Investor Day behind you, James.

James Kehoe
CFO, FIS

Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

So what are your priorities from here? What more-

James Kehoe
CFO, FIS

Yeah

Tien-Tsin Huang
Analyst, JPMorgan

... can we expect that might be a little bit different?

James Kehoe
CFO, FIS

A little different is probably more engagement with investors, I would say. Last week we were in London and Frankfurt. In a week or two, we're here.

Tien-Tsin Huang
Analyst, JPMorgan

Thank you for being here.

James Kehoe
CFO, FIS

We're gonna do a tour with you guys back in the UK later this year. And then we will go to Canada and potentially Asia. I think we're underrepresented in international, and it's a large opportunity for multiple expansion. And the second thing is we wanna hone our story a little bit on the composition, the strength of the recurring. You know, a lot more is softer than you might think, and the resilience and competitive moat we have. So we see nothing but upside. Yeah.

Tien-Tsin Huang
Analyst, JPMorgan

Terrific.

James Kehoe
CFO, FIS

Okay.

Tien-Tsin Huang
Analyst, JPMorgan

Thank you for the update. It's great having you, James.

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