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Morgan Stanley US Financials, Payments & CRE Conference 2024

Jun 11, 2024

James Faucette
Senior Fintech Analyst, Morgan Stanley

We'll go ahead and get started here. Thank you very much to all of you for joining us today at the Morgan Stanley Fintech Conference. Before I get started with James Kehoe, CFO of what we call FIS or Fidelity National Information Services. As a quick introduction, I'm James Faucette, Senior Fintech Analyst at Morgan Stanley. I have to read a quick disclosure. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So James, thanks very much for joining us. We appreciate it.

James Kehoe
CFO, FIS

Thank you.

James Faucette
Senior Fintech Analyst, Morgan Stanley

So maybe just start with a basic progress update. You've spent nearly a year in the seat, and your team and the rest of the management team put together a great investor day last month with, you know, really pretty clear priorities and targets. Can you remind us the key actions that you and Stephanie have taken within the company so far to really improve the growth profile and margins? You know, kind of what did you do? What was the intention? And then what are the results you're seeing so far?

James Kehoe
CFO, FIS

Yeah. Okay. How long do you have?

James Faucette
Senior Fintech Analyst, Morgan Stanley

Thirty-three minutes.

James Kehoe
CFO, FIS

But okay. A good question. I think more of the credit goes to, Stephanie, honestly. When she came in, I think she found a company that had its problems.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Okay.

James Kehoe
CFO, FIS

It had spread its talent and its capital far too thinly across the company. It was incapable of managing the combination of Worldpay plus traditional FIS, and it stretched the management team too, too much. So her number one priority was focus, and secondly, simplification of the company. And there were activists with some suggestions, but, you know, ultimately, the biggest single decision that was taken, and it was a tough one, was the sale of Worldpay.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm-hmm.

James Kehoe
CFO, FIS

First announcing the IPO, but then going to sell to a private equity. It was a double benefit, and it kind of leads into where I spent a bunch of time. Double benefit, focus on what you're good at, and then the second part is it simplified and made the capital allocation process much clearer.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

You know, the company couldn't afford to do acquisitions in the past. Now, it could set up a more balanced capital allocation framework. So I would have spent a fair amount of time on dividend policy, you know, confirming the 35%, thinking through investor perception on that. How much M&A would the market allow us to do-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Allow, yep

James Kehoe
CFO, FIS

Allow us to do without punishing the company? And how much did we need to reinvigorate and accelerate revenue growth? So a lot of head scratching around that. Consulting with some investors on it as well, and then the conviction that the rest of this goes back to shareholders, full stop.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right. Right, right, right.

James Kehoe
CFO, FIS

No ambiguity. When Stephanie first announced the Worldpay deal, I think the share repurchase was $2.5 billion. By the time we exit this year, the share repurchase will be $4.5 billion. So I spent a bunch of time on free cash flow conversion.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm-hmm.

James Kehoe
CFO, FIS

How comfortable are we with repatriating cash from international?

James Faucette
Senior Fintech Analyst, Morgan Stanley

Sure.

James Kehoe
CFO, FIS

And obviously, the closing out of the deal. At the second big thing, Stephanie, first of all, had started was operational excellence.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

The company had executed spotlessly for against client needs.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

You know, number of tickets had gone up, implementation times of software had slowed, and she spent a bunch of time on actually getting back to basics. How do you run a business? I think that's the big success that she pulled off, and that's going back more than six... It's like 12+ months now, where now we're in a situation where we've exceeded the goals that were set five quarters in a row, trying to rebuild or rebuilding investor confidence-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Sure

James Kehoe
CFO, FIS

Which was important. The previous management team was not loved by the market. Stephanie was pretty new, her first CEO role, and I think she's done a spectacular job on executing against goals and getting the company back to basic operating excellence.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

Yeah.

James Faucette
Senior Fintech Analyst, Morgan Stanley

James, there are a few times you've mentioned, you know, operations. You said that the talent had been maybe spread too thinly-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

Across the organization, and so you wanted to get it kind of back into the core operations. But then, like I said, as you said, a couple times, is focus on running the business, running the business the way it should be done, et cetera. What are some of the things that, you know, you felt were probably missing previously that have been improved? Like, any-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

Any examples you can give?

James Kehoe
CFO, FIS

Well, I think, I think what was most effective was the prior team was very focused on taking out cost-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah

James Kehoe
CFO, FIS

At any cost, and a little bit forced a series of migrations of customers onto newer platforms that weren't exactly essential for the clients.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm.

James Kehoe
CFO, FIS

Client satisfaction went down.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Oh, okay. Interesting.

James Kehoe
CFO, FIS

Implementation time slowed. The company had pursued too much. Stephanie came back in, and basically, the number one goal was customer centricity.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

I think she was resetting the company on everything we do has to satisfy the customer. She slowed the—I don't wanna call it forced migration-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right, right, right

James Kehoe
CFO, FIS

Migration-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right, right

James Kehoe
CFO, FIS

From old to new platforms and focused on implementing what we had. So an example is Modern Banking Platform.... So instead of signing a bunch of new deals, she said, "Focus on implementing what we have with the customers where we have them.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

So, it's, it's getting back to this on placing the customer at the center.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

And then you gotta simplify, and you gotta take out costs, and you gotta grow revenue and all the rest. But you can take out costs and grow revenue, and fundamentally, you mightn't even have a satisfied customer.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

I think she reset the focus of the company very, very quickly on what's important.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah, I-

James Kehoe
CFO, FIS

Yeah.

James Faucette
Senior Fintech Analyst, Morgan Stanley

I think that characterization is interesting because it certainly fits with kind of our, what has been our thesis around-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

FIS, which... And that is, a lot of times we engage with investors, and there's a lot of conversation about, well, FIS doesn't have the most advanced platforms, and so on and so forth.

James Kehoe
CFO, FIS

No.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Which, true or not, like, I like, I think that's easy to dispute, but I think that that customer centricity is actually what matters most-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

Is that a lot of your customers aren't hungry or grasping at, like, the newest and greatest thing. They have-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

Other, things that matter to them as businesses and where they're focused.

James Kehoe
CFO, FIS

Yeah.

James Faucette
Senior Fintech Analyst, Morgan Stanley

And so they don't need and don't want, like, the most advanced thing. They, they deliver value elsewhere.

James Kehoe
CFO, FIS

No, I'll push back a little bit.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Please do. That's why-

James Kehoe
CFO, FIS

If you take-

James Faucette
Senior Fintech Analyst, Morgan Stanley

That's why I put it out there.

James Kehoe
CFO, FIS

If you take, I'll take capital markets, and then I'll go on to banking.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah.

James Kehoe
CFO, FIS

You take capital markets, we offer a suite of products.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Sure.

James Kehoe
CFO, FIS

First of all, it's just unbeatable by its, how much we offer into asset managers, hedge funds, alternatives, corporates, insurance companies, and mo- in general-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm-hmm

James Kehoe
CFO, FIS

The products are best in breed, and most of them are SaaS-enabled.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yep, yep.

James Kehoe
CFO, FIS

I would've said capital markets was not the issue. It's been growing at 6%+ over a multi-year period.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yep.

James Kehoe
CFO, FIS

Why? Because it was left alone, right? What happened was the Worldpay business was merged with banking-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm

James Kehoe
CFO, FIS

And both of them did worse because the management was spread over, and the, the investments were spread over a bigger universe. So in the end, though, if you look at where we're positioned in the market, we have a 58% share of large financial institutions. Our IBS software is far superior, too, and I don't want to talk badly about com- competitors. We offer the only fully complete commercial banking suite that's in the market. So I would argue, our high-end products are differentiated in the market-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it

James Kehoe
CFO, FIS

Including the digital platform at the high end. Where the company slipped was on the digital offering at the lower, let's call it smaller banks-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Okay

James Kehoe
CFO, FIS

Community banks, that kind of thing, what we call One- to-M any, our digital platform there. We're investing, we've said it publicly, about $90 million of capital investments to get this back up to market competitiveness. That's where I think, you know, some of the comments you hear, you know, our products may not be the best. I think at the highest end, they are the best. In that middle market, we lost, we lost the battle on digital, and we're going to regain it very quickly.

James Faucette
Senior Fintech Analyst, Morgan Stanley

I-

James Kehoe
CFO, FIS

You know, these investments will start rolling out in the coming months, and we will make potentially selective small acquisitions as tack-ons. We will regain the ground on digital very, very quickly, just to be clear.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Like it.

James Kehoe
CFO, FIS

Yeah.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Thanks, thanks for that, that nuance and color, because I think that's really important. So, let's talk about demand environment. How would you characterize the pipeline and demand strength for FIS solutions right now across both the banking and capital markets? I think the secular growth you've identified for both is around 3% and 5%, respectively. So what's driving the demand in your view, and how can FIS best take advantage of the opportunity set?

James Kehoe
CFO, FIS

Yeah. And you know, when we go to meetings internally, we don't see any slowdown in demand, particularly.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Okay.

James Kehoe
CFO, FIS

We can see clients shifting their investments maybe into digital, digital as opposed to core, but investments are pretty consistent over time. That's what we tried to do at Investor Day. We tried to set a low watermark for investors. Where does the core growth come from? Capital markets is kind of easy. It is the TAM that we operate in is growing at 5%. It's actually six, when you include all the new verticals. So you wake up in the morning, and you have a market that you're operating in that's growing at 5%-6%.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm-hmm.

James Kehoe
CFO, FIS

That's what you call the secular growth trend.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yep, yep.

James Kehoe
CFO, FIS

And we can come back to that in a minute. But in banking, we called out what we call more like a transaction growth measure. We said 40% of our business is in core banking, and generally, we track in line with the number of accounts under management.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm-hmm.

James Kehoe
CFO, FIS

That's growing remarkably similarly over the last three years, 2.5%-3%. So that's core banking. And leave aside digital. The digital business, our digital business, is probably growing at 10%, right? But core banking generally grows in line with accounts. Then on the rest of the payments business, you know, what they call Money in Motion, the number one measure that we took was transactions.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yep.

James Kehoe
CFO, FIS

Over a three-year period, growing 4.5%-5%. That's how we came to the weighted average of 3%. We kind of aligned it and said, it's kind of like a same store metric. As long as the clients, the banks, are growing consistently over time and the transactions are growing at this, the, our business will be growing at 3%. We were trying to set this core growth measure. If you actually look at the banking TAM overall-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yep

James Kehoe
CFO, FIS

... it's about 4%.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

So we triangulated transactions to TAM growth levels, and we tried to come up with measures that are not too sophisticated and are fairly easy to communicate.

James Faucette
Senior Fintech Analyst, Morgan Stanley

So, once again, for historical purposes and backward-looking, if that was kind of the TAM growth, there was a period that particularly the banking business slipped below that-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

in previous years. And that was a big concern, and I think part of what's happened is that people have gone from hoping that you get back to 3% growth to now increased confidence-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

that number makes sense on a go-forward basis. But maybe for context, what happened in that period? Was it just simply that the company, back to what you were saying before, was trying to press too hard in the wrong directions and wasn't quite meeting the market where it needed to be or what do you think?

James Kehoe
CFO, FIS

Well, I think a little bit. There was a period where the company was doing in banking, 6%-7%.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah, yeah, yeah, previously.

James Kehoe
CFO, FIS

They did large deals with T. Rowe Price and others, which were $hundreds of millions of deals. It boosted revenue for a period of time.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yep.

James Kehoe
CFO, FIS

And then they were lapping these.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it.

James Kehoe
CFO, FIS

Those contracts, the growth on them was pretty moderate.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yep, yep.

James Kehoe
CFO, FIS

The company went into a cycle of lapping these mega contracts that were signed.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm-hmm, mm-hmm.

James Kehoe
CFO, FIS

The strategy now has changed quite a bit. We're not focused on mega BPO-type contracts that are lower margin in general.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah, yeah.

James Kehoe
CFO, FIS

The company was in an era of large contracts, lower margin.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Lower margin, yeah.

James Kehoe
CFO, FIS

And we stepped back from that, and we're more focused on recurring software-type contracts with inherently much higher margins, because what we want to get to is a higher terminal value-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right

James Kehoe
CFO, FIS

... for the company on the revenue.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right, right, right.

James Kehoe
CFO, FIS

So it did go through this phase, and there was a change in management in between here, but the company was on a route to slower revenue growth with lower margin structure.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it.

James Kehoe
CFO, FIS

Yeah.

James Faucette
Senior Fintech Analyst, Morgan Stanley

I wanted to make that clear-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

Because I think that, teasing that out or making sure that investors are clear about that is, is really important, especially as we-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

Go on to the next part of our conversation, which is, you know, okay, so we've kind of identified the market growth, but you're targeting several points of additional growth above market rates.

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

For both segments. So which products and services is the team seeing the most traction, and what do you think would be the key incremental drivers of growth? And are there new areas of the market that you're targeting that FIS historically has not addressed?

James Kehoe
CFO, FIS

Oof. I think the story, it's very different in capital markets-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Okay

James Kehoe
CFO, FIS

Versus banking. Banking, the simple version is if the transactions are at 3, we're looking for another 150 basis points on top-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yep

James Kehoe
CFO, FIS

At the high end of the range.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yep, that's right.

James Kehoe
CFO, FIS

We actually feel the guide could be, it's. I'm not saying it's conservative-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm

James Kehoe
CFO, FIS

But it's achievable. We actually called out M&A as 50-100 basis points in that.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm.

James Kehoe
CFO, FIS

The remaining organic lift is actually quite moderate.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yep, yep.

James Kehoe
CFO, FIS

And I hate to give this as the explanation, but it is the company did not focus on the payments business-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm

James Kehoe
CFO, FIS

In the past. Right? So there's the core banking, which is, and digital, 40% of revenue. There's retirement-type business, which is 10%. 50% of the revenue in banking is, is on what we call payments and money management. We have an incredible suite of assets. So we've got debit and credit, mostly debit processing. We have a nice network. We have accounts payable, receivable businesses. We have loyalty businesses. And we can offer a full suite of payments to everybody, like all banks. And our Payments One platform is very, comprehensive and flexible. The issue was, in the past, people were focused on driving Worldpay, and nobody was looking at the heritage-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm

James Kehoe
CFO, FIS

Payments business in FIS. Management attention has completely shifted back over to payments, and we see it as a huge growth opportunity going forward. The second one is digital. We underinvested in the One- to-M any, the one I mentioned before, and we're currently growing digital at 10%. So you've got kind of the core banking, call it 3. Payments business is a much faster-growing business because it's... Remember I mentioned before, it's growing 5+, and then you got digital coming on top at 10%. So you can very quickly, with some incremental synergistic acquisitions, get up to the targeted growth rates. I think what surprised the market was the growth target for capital markets.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah.

James Kehoe
CFO, FIS

I would point out, though, the business has grown six-ish% over a multi-year period. The step up a little bit is coming from M&A, 150-200 basis points.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Okay.

James Kehoe
CFO, FIS

But if you look at the TAM, if the TAM is growing at 5, it's all coming from the alternative channels, what we call insurance companies, financing, leasing companies. What's the other one? Leasing. We got the insurance company and corporates.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it.

James Kehoe
CFO, FIS

Right now, they account for 30% of the capital markets business, and it's growing extremely quickly. As we look at capital markets, the core business, which is, call it asset management and trading, the TAM is growing at 5. Treasury and risk is growing at mid- to high-single-digit.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm.

James Kehoe
CFO, FIS

Lending is growing at low double-digit.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right, right.

James Kehoe
CFO, FIS

So we're shifting the M&A focus into lending and treasury risk and regulatory.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it.

James Kehoe
CFO, FIS

So, we're becoming much more targeted on the faster-growing sectors of the market.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it. So you've mentioned a couple of times, like, kind of moving more of the revenue, especially revenue growth, to more SaaS-type implementations and agreements. And so that leads us to a line of questioning around recurring versus non-recurring-

James Kehoe
CFO, FIS

Right

James Faucette
Senior Fintech Analyst, Morgan Stanley

Revenue. You know, the banking segment is, I think, at last statistic, around 83% recurring-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

And capital markets is around 76%. Where can those rates of recurring revenue mix get to over time, and how do you get there? And then in the nonrecurring piece, you know, how much variance should we be prepared for?

James Kehoe
CFO, FIS

Yeah. Okay, it's a long question. The first thing I'd say on banking is, if we put an exhibit in the first quarter earnings, that showed that over the last four years, the recurring revenue in banking has grown 4% on average.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yep, yep.

James Kehoe
CFO, FIS

So it's actually very resilient, and a lot of the noise comes from this non-recurring. It's like these big contracts that were put in place in the past, episodic, sales that you're cycling through. So I want to emphasize, the recurring business in banking is very solid and consistent over time, call it the 4%. The 83% is pretty high. I think it's going to go up 20-50 basis points a year-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm

James Kehoe
CFO, FIS

On an ongoing basis, as we de-emphasize the non-recurring. And it's not as if we've got bad sales. We're incenting the sales force differently.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yep.

James Kehoe
CFO, FIS

First of all, last year, we combined the banking and capital market sales forces to generate more cross-sell.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Okay.

James Kehoe
CFO, FIS

Second thing we did, we're incenting them to sell more recurring and license revenue as opposed to professional services-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right

James Kehoe
CFO, FIS

or non-recurring. Once you change incentives for a sales force, they very quickly shift their attention.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm-hmm.

James Kehoe
CFO, FIS

So that's, that's kind of the banking story. So a gradual increase, but not dramatic. So it could be from 83%, maybe it goes to 84% or 84.5% in three years. Capital markets, the actual starting point is 72%.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yep, okay.

James Kehoe
CFO, FIS

It'll probably go up a point a year.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Ah.

James Kehoe
CFO, FIS

You could think about by 2026, you're at 75%.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Okay, got it. Got it. Got it.

James Kehoe
CFO, FIS

And it's probably the target is to more closely approximate to banking over time.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it.

James Kehoe
CFO, FIS

Maybe get to an 80%.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it.

James Kehoe
CFO, FIS

Yeah.

James Faucette
Senior Fintech Analyst, Morgan Stanley

This is a good time for me to take a quick breath. If anybody has any questions from the audience, please raise your hand and we'll get you a microphone. I'll continue on. You mentioned capital markets cross-sell. You identified, I think, you were quoted as identifying about $300 million in cross-sell opportunity into the capital markets business. How do you expect to realize more of that, and which services would FIS be selling? Like, kind of what are you-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

What are you promoting, or what's that cross-sell motion look like?

James Kehoe
CFO, FIS

Well, I think the opportunity is actually larger. I think cross-sell between the two businesses, we said, was about 400.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Okay.

James Kehoe
CFO, FIS

About 300 would fall into banking and 100 in capital markets.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it. Okay.

James Kehoe
CFO, FIS

We didn't give any specificity on it, but I would actually go a step further and say there's actually a cross-sell within banking and within capital markets that isn't even included in the 400 number. So I'll give you a good example. 70% of our core banking customers take the payments products.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right. Okay.

James Kehoe
CFO, FIS

Right? Can we get that 70 up to 90? And that's where a lot of our focus is gonna be. Within capital markets, only 30% of the customers take more than one product.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

So it has an amazing, there's, it'll never get as high as banking because, you get, we sell a lot of products. You could sell a hedge fund back office product just to a hedge fund.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it.

James Kehoe
CFO, FIS

They'll never take two products.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right, right, right.

James Kehoe
CFO, FIS

But there's still a huge opportunity within capital markets to cross-sell, within banking to cross-sell, and then to cross-sell to uncommon customers between the two.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it. Got it. Got it. And then let's talk about pricing. How, how has pricing trended historically for FIS? And, and I guess I'm wondering how much of a, you talked about, like, the market, you talked about the inorganic contribution. What about the pricing contribution to the growth algorithm? What does that look like historically versus now? I know-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

At least Stephanie last year and made some comments, like, she felt like there was some opportunity there.

James Kehoe
CFO, FIS

Yeah.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Give us an update of what's happened.

James Kehoe
CFO, FIS

We get the question, as well. Probably the number one question when in individual meetings, it's on pricing. Looking back, the contribution in banking is effectively zero-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Okay

James Kehoe
CFO, FIS

For pricing. So you get gross pricing or CPI escalators that are maybe worth a point, a point and a half-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right, right

James Kehoe
CFO, FIS

Depending on the year, and it ends up being almost fully offset by compression. Whether we like it or not, when a big contract comes up for renewal, the consultants are involved, there's an RFP process, there's a bidding process, and there is some compression.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Okay.

James Kehoe
CFO, FIS

We've projected forward zero contribution from pricing.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Pricing, got it.

James Kehoe
CFO, FIS

Okay, so there's no risk in the plan. Many of us think there's an opportunity here.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Okay.

James Kehoe
CFO, FIS

If you take a case study, like, if we believe that we have the best commercial banking offering in the market, in theory, we should have more pricing power.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yep.

James Kehoe
CFO, FIS

Stephanie's point, I think, was a little bit more she thinks we could manage it better internally, and I think she's right. Last year, we moved pricing from the subdivisions up to the segment level, and we're only half I'd say we're halfway through this. We are actually thinking, should it even be at the corporate level?

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it.

James Kehoe
CFO, FIS

That's how do we introduce a different way of pricing, particularly in the banking business? Because in theory, we should have more pricing power-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah

James Kehoe
CFO, FIS

Than we're actually able to realize. So the first step of what she did was take it up the segment level, and now we're talking about, is that enough, and are we seeing the desired results or not?

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah, 'cause I mean, certainly, you know, if you're delivering great solution, the customer, and you're servicing the customer, and you're customer-centric, that-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

You know, at least the opportunity would seem to be there to...

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

you know, at least not have to give so much on the renewals, et cetera.

James Kehoe
CFO, FIS

Yeah.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right?

James Kehoe
CFO, FIS

You know, bear in mind, we're coming out of a period maybe 12 months ago when customers were not that happy.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right, right.

James Kehoe
CFO, FIS

You know, because, you know, there was operational excellence was not at the forefront.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm.

James Kehoe
CFO, FIS

Now, Stephanie is, and the team have fixed a bunch of that. I think our image in the market is slowly changing, and maybe we can come back to that. But capital market's very different. 6,000 clients across 150 markets. We sell a lot of best-of-breed products to one, one product, one company. Way more pricing power because of the, the products are all modernized. They're generally very, very good. And we end up with about two hundred-- history, two hundred basis points of pricing, projecting forward two hundred basis points.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it.

James Kehoe
CFO, FIS

We didn't assume any improvement. In theory, we should. The better our product set becomes, the more we're distancing ourselves from the competition in the biddings.

James Faucette
Senior Fintech Analyst, Morgan Stanley

For sure.

James Kehoe
CFO, FIS

Yeah.

James Faucette
Senior Fintech Analyst, Morgan Stanley

For sure.

James Kehoe
CFO, FIS

So capital markets very different than banking, much less price pressure.

James Faucette
Senior Fintech Analyst, Morgan Stanley

So I appreciate that. So I wanna go back to the thing that you promised to, to circle back on just now, which is, impression in the market-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

from your customers. Like, how are you measuring that? What are you seeing from that perspective, and, and how should we think about that flowing through the P&L?

James Kehoe
CFO, FIS

We've seen, as I said, once you reset and you focus on customer centricity-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right

James Kehoe
CFO, FIS

We have seen a significant improvement on NPS scores over an extended period now, and especially in banking. Capital markets has always been very strong on NPS. I personally went to. We had our big Emerald conference, where we had 3,000 customers there.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm.

James Kehoe
CFO, FIS

3,000 people from 800 customers. There's a right, different vibe, and Stephanie would say it herself. Last year, it felt like you're almost on the defensive when you-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Okay

James Kehoe
CFO, FIS

Were there. And now they, I participated in a meeting with the consultants, and it was... Yeah, we're hearing different things in the market now.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Okay.

James Kehoe
CFO, FIS

Your customers are saying there is change, the speed of reactivity, tickets getting closed. And I do believe a lot of the investors have said as well, after Investor Day, there's a different vibe on innovation. You know, we've hired a new CTO, who is not focused on cost or optimization of the infrastructure. He's focused on the client.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

And then we hired Tarun, the leader of platforms, and we've launched this embedded finance platform. So the kind of feedback we got on Emerald was there's a big change ongoing, and we had a lot more interest in signing up for new stuff this year than there was last year.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it.

James Kehoe
CFO, FIS

That's all I could say. But very, very productive, and we hope to really build on that even next year.

James Faucette
Senior Fintech Analyst, Morgan Stanley

No, it sounds encouraging. So a few things I wanna hit on in the last few minutes here. So Worldpay, you know, obviously, you sold the stake in Worldpay, turned over operations and control to-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

Private equity, GTCR there. But it's still an important part of your, your EPS growth algorithm-

James Kehoe
CFO, FIS

Yeah

James Faucette
Senior Fintech Analyst, Morgan Stanley

On a go-forward basis. So, where are you, you know, staking your confidence in, or how are you finding the confidence to guide to kind of that 7.5%-9.5% earnings growth on the part of Worldpay? I think there's a lot of, you know, and you mentioned it yourself, question about the market, but also just, like, the need for investment and improved operations over on that side.

James Kehoe
CFO, FIS

Yeah. No, we have relatively little concern.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Okay.

James Kehoe
CFO, FIS

There's almost complete information sharing.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it.

James Kehoe
CFO, FIS

We get monthly forecasts from Worldpay.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm-hmm.

James Kehoe
CFO, FIS

They share. They're required by contract to share budgets and three-year plans.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it.

James Kehoe
CFO, FIS

The first thing is, it's complete transparency. Stephanie's on the board. What they've said about investments is that GTCR has said they will commit additional $1+ billion to select acquisitions to build, build out capability.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm-hmm.

James Kehoe
CFO, FIS

In payments in general, you probably need to do that.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah, yeah, that's right.

James Kehoe
CFO, FIS

The second one is they have incredible free cash flow generation.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah.

James Kehoe
CFO, FIS

Incredible, right? So I don't think, I think they can adequately.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Fund the investment

James Kehoe
CFO, FIS

nd whatever investments. I would also say is they had a great start to the year.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Oh, yeah.

James Kehoe
CFO, FIS

I think if you think through private equity mentality, they're probably gonna make select investments, probably this year.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm

James Kehoe
CFO, FIS

To set them up really well for the future. So they care less about the first year of the stub because you're not doing much with it. So we see that, well, there could actually be... My view is there could be even some opportunity to the, to guide on.... on Worldpay.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it.

James Kehoe
CFO, FIS

I think they've put in place an excellent management team. Charles Drucker is back.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah, yeah.

James Kehoe
CFO, FIS

He's an operator. They have the funds available. They set a fairly decent set of goals that should be eminently achievable.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it. Got it. So let's talk about tax rate. Part of your EPS growth target includes an assumption for a step down in the tax rate going forward.

James Kehoe
CFO, FIS

Yeah.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Just, can you, in just a quick moment or so here, can you help us clarify how that's coming about and, and what the tax optimization efforts look like that are driving it?

James Kehoe
CFO, FIS

I've never seen so many questions about taxes from investors in my whole life, but-

James Faucette
Senior Fintech Analyst, Morgan Stanley

We're trying to model it closely.

James Kehoe
CFO, FIS

I almost regret, I almost regret giving the lower guidance. Yeah, but the context was before Worldpay, this was a 14% tax rate, large international presence-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm-hmm, mm-hmm.

James Kehoe
CFO, FIS

Then the ability to optimize tax structures. We lost the TRAs, a portion of them, with the deal. Tax rate goes up to 17.5.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Okay, got it.

James Kehoe
CFO, FIS

I brought in a new tax leader, who's very focused on strategic tax planning, and we have three initiatives being run that will create a sustainable, tax rate of 12%-13%.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

You know, one part is how do we structure the Worldpay transaction? Another part is our treasuries, international treasury structures. Third one is where we place, acquisitions or intellectual property, longer term. They're all programs that have been done by multiple companies. They're low risk. They're very advanced. If they weren't, we wouldn't have called 14.5 from a 17, and then a further step down, 12-13. I think that's the kind of like, but bear in mind, it's not that crazy, because the company was at 14% in the past, but it takes work to get it done.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah, yeah.

James Kehoe
CFO, FIS

Yeah.

James Faucette
Senior Fintech Analyst, Morgan Stanley

For sure.

James Kehoe
CFO, FIS

We're very comfortable on the position. Just one final thing: That's cash. It's real money.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yep. No, that-

James Kehoe
CFO, FIS

Yeah, it's real money.

James Faucette
Senior Fintech Analyst, Morgan Stanley

That's what, that's what we care about, for sure.

James Kehoe
CFO, FIS

Yeah.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Speaking of real money and using that real money, just in the last couple minutes here, James, we started the conversation talking about capital allocation-

James Kehoe
CFO, FIS

Sure.

James Faucette
Senior Fintech Analyst, Morgan Stanley

and some of the things that you've been able to drive, and then how some of that, including M&A, factors into your top line. But, you know, when you think about the capital return targets that you've set in terms of both buybacks and dividend payouts, how are you thinking about the need to develop and grow product capabilities via M&A and investment versus that commitment for capital return? And really, what I care and focus on is, should we expect there to be any variance to the expected $1 billion in capital going towards M&A, or is that a pretty tight target that you think you can deliver on?

James Kehoe
CFO, FIS

Oh, realistically, there can always be variance against a target like that. What we tried to back into was what kind of ongoing investment do you need over a multi-year period? Our message to the market was, we want to balance capital allocation.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

Some investors were saying, "Give it all back to investors." Our answer was no. To sustainably generate the right terminal value for investors, we're targeting accelerating revenue growth coming from M&A.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah.

James Kehoe
CFO, FIS

We are dogmatic, though. We're not going to go out and do a big deal.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm-hmm.

James Kehoe
CFO, FIS

Well, you know, we had the chance with Worldpay.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

We want to rebuild confidence with investors and do small, highly synergistic acquisitions. I do want to emphasize that we bought one in Europe recently, and I was visiting, and they said, "Oh, we love being part of FIS." And I said, "Why?" And they said, "We basically can double the revenue overnight.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Mm.

James Kehoe
CFO, FIS

When we were called," and I don't want to give the name of the company-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right

James Kehoe
CFO, FIS

This, nobody would answer our calls in the U.S. or in Asia because we were unknown.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

Now we've rebranded the company FIS, the sales leads have skyrocketed. It's one example that these acquisitions will be highly synergistic. Internal rates of return will be incredibly high. If we don't spend it in a year, we will give it back to investors.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Got it, got it.

James Kehoe
CFO, FIS

You know, our commitment is our 35% dividend payout is equivalent to a 2% yield.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah.

James Kehoe
CFO, FIS

Our peers are not paying a 2% dividend yield-

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right, right

James Kehoe
CFO, FIS

Full stop. And then, two is, what we said was, the buyback is $800 million-$1.2 billion, but that will continue to increase.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right.

James Kehoe
CFO, FIS

Because if you hold your

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah

James Kehoe
CFO, FIS

M&A-

James Faucette
Senior Fintech Analyst, Morgan Stanley

M&A

James Kehoe
CFO, FIS

Flat.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Right, okay.

James Kehoe
CFO, FIS

Right? You're actually gonna get, your EBITDA grows, you're gonna get more leverage, and you're gonna give it back to shareholders. So you could- you can just presume that the share repurchase program continues to increase over time as we return capital to shareholders.

James Faucette
Senior Fintech Analyst, Morgan Stanley

That's great. That's a great place to end it.

James Kehoe
CFO, FIS

Yeah.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Punctuation mark. Thank you very much, James. Appreciate you being here today.

James Kehoe
CFO, FIS

Yeah, thanks for your time.

James Faucette
Senior Fintech Analyst, Morgan Stanley

Yeah.

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