All right, thanks everyone. My name is Tien-tsin Huang, Payments and IT Services Analyst here at JPMorgan. This is the FIS session. With us from FIS, we have James Kehoe, the CFO. I always enjoy talking to James. He brings a wealth of experience. I know he was CFO at Walgreens Boots Alliance back in the day. I have heard a lot of good stories from James. I think I am excited to be working with him now that he is at FIS. Thank you for being here, sir.
Cheers.
Before I get into the details and the asset swap, there's a lot of news and stuff to cover. Maybe just to kick it off with the quarter. There are a lot of sticking points. I'm sure you're getting a lot of questions about that. Should we just address that up front, James, just an open-ended question around that and how you've been answering it?
Yeah. We were actually pretty pleased. We think we had a pretty strong start on revenue, especially on the banking business, but across both businesses. The second one, the standout was free cash flow. On the call, we did not get a great reaction because the margins were a little weak. We guided to a weaker margin in the second quarter. It was probably something we could have given better indications to when we gave the original guide at the beginning of the year. The key message for us is that it is all systems go. I would say we were pleasantly surprised by the revenue. Let me just, I just want to reemphasize the banking midpoint of our guide for the quarter was 1%. We came in north of 2%. It was all driven by recurring revenue at 3%.
We, I don't think we could have been any more bullish about the second quarter. We said, you know, you're at a 3.7-4.4, which is the full year guide. I think there's no clearer way to say it. The visibility we have to it now is way better than the visibility we had when we said it three months ago. I would say we're ever more convinced about being solidly in that range right now. The recurring revenue will be strong, very strong in the second quarter. This is a, we're heading for a high-quality second quarter. I think we should have emphasized it more on the call. Still, you have to hit all the metrics. The first quarter was weak in banking on margin, not capital markets. Capital markets was up 90 basis points.
We were lapping a heavy quarter last year in licenses, which are at 100% margin. Then we had some timing on overheads, more full-less. It was literally 120 basis points of timing. That will wash itself out of the system. I think I just want to be super clear on this. We thought we were clear on the call. We are not in any way nervous about the full year guide on margins on EBITDA. We have a large cost program in the year. It is incredibly well managed. We did it last year. We will do it this year. The difference is, last year, most of the cost reduction came in the first half of the year. Margins were up 160 basis points. In the second half of last year, margins were actually down 25 basis points. We have an easy comp going forward. We will have an improved product mix.
The cost programs are, in general, skewed to the second half. The sticking point for investors right now is the margin. The guide specifically for the second quarter made them nervous. We have incredibly strong muscle on taking out cost in the business. We will take out the cost. We will hit the margin targets. Sticking point is that one. I do want to emphasize, though, we think the revenue on banking was a strong data point on this business is back on track. We could not have been more positive on the second quarter guide on banking.
Good. No, thanks for going through the sticking points. Just maybe you're also very confident, James and team, on the timeliness of implementations. I know that's a question that's come up a lot in the tech conference. To hit that acceleration on the revenue, not a margin question, to hit the acceleration in banking for recurring, is it as simple as just getting those timely implementations done?
Actually, it's kind of two questions. I don't want to say the recurring is in the bag, but that would be arrogant.
Sure.
You're going to have a significant acceleration in recurring as we go through the year. It's driven by two things. Then I'll get back to the non-recurring.
Please.
Two things that drive it. One is you sold more ACV, and you have to convert it. Most of that ACV was sold last year, so line of sight ticked the box pretty high. The other thing is, and we said it on prior conference calls, the other key thing to success is retention. Our retention rates exiting last year were in the high 90%, which is considerably better than it was 24 months or 12 months earlier. Those two items alone drive about 150 basis points of growth, and it is all on recurring. You are going to see we did a 3% on recurring in the first quarter. There will be a significant step up in the second, and recurring will continue at a hard pace in the second half as well.
The line of sight is good because the retention has already been delivered because you held on to the client. The new sales last year were sold, right? It is conversion. The three, call it, implementations that were delayed at the end of last year, all of those are now live. All three of them had revenue in the first quarter.
OK.
We get the question a lot. You could ask it. Another sticking point is, what's the likelihood of this happening again? This was like three things at the same time. The likelihood of that reoccurring is very low. Bear in mind, 83% of banking is recurring. You're talking about 17% where you're going to get volatility. Of that, split it in half, licenses are fairly predictable and manageable. OK, you got to sign them in the quarter. If you've got a high-quality pipeline going into the quarter, 2x what your target is, you can easily trade off licenses in the quarter on your license target. The way to put it is, there are many levers you can pull. It's not just accepting a delay. You can pull forward some professional services implementations.
You have a bigger license portfolio going into the quarter. It's all down to quality of license. One interesting, we have made changes in Salesforce. It's been elevated to the leadership table. It's now the title is now commercial. It's not sales. What that is, is we will have more focus on a couple of things, building pipeline. The new leader in there, we had our highest pipeline month in April in 24 months. Contrary to what you hear out in the market of slow down, I think if you focus on pipeline and you focus on your customer and you're really out there, the pipeline build was really strong in April. This is a leadership thing. It's down to how you run the Salesforce. It's your focus on commercial excellence. If you have a good product, you're going to get good retention.
If you have good pipeline, you're going to get ACV, right? That's what there's a hell of a lot of focus right now in the company on, on commercial excellence with new leadership. Yeah.
OK. No, loud and clear on the leadership change and the ACV and the sales. Bringing it back maybe up another level, I think 80% of the business you call recurring. There is a non-recurring piece. We can talk about that too. Just the cyclicality of the business, we get that question quite a bit. How much visibility do you have there? Is it CapEx? Is it business spending on the IT side from the bank? What are you looking at for clues on that?
I think we kind of laid it out on investor day. We said, you know, we gave a, you could say, a fairly moderate long-term forecast for banking. We said 3.5%-4.5%. The transactions in the banking business, the core transactions run at around 3%. If you look back, now these numbers are a little bit dated. If you look back over time, accounts on file were up 2.7%. Some of our business on accounts on file transactions were up a little over 5%, right? That's what drives the core business. If you look back over time, the recurring revenue, you look back over time, that's what's consistently driving the business. It's fairly resilient to recession because we, unfortunately, and now it'll get addressed, we're skewed to debit. That's 90% of our payments business, issuing business is debit.
That is generally positive in bad economic times. There's more transactions. We're paid on a transaction basis. You look at capital markets, there's been a push over time. We have a higher percentage of license, one-time license. There's been a push over time to SaaS-based unit, not associated with assets under management. A surprisingly small amount of our revenue is driven by assets under management. It's mostly software as a service. We've deliberately made our model less exposed to economic ups and downs, right? We call it, and it's fairly, you can see it in the market now, we're generally viewed as a safe haven.
To be clear on the capital market side, because I know that is getting a lot of attention, James, it's not AUM-based. It's more SaaS or seat-driven.
Just in general.
From a brokerage.
Yeah, generally. There's a couple of small businesses where they vary sometimes based on interest rate, volatility in the market. They're so small, they don't move the needle. You're not going to get a 200% upside, 200 basis point upside or downside in capital markets. It's very muted just due to the size of these businesses.
Yeah. Let's just stay on capital markets and then get back into banking. And then, of course, the Thesis, the Global Payments transaction. The strong start to the year in capital markets, what would you attribute that to? I think non-recurring was quite strong. I would imagine that brings with it higher margin. It does imply some decel later in the second half. What work is left to do to hit the target?
Yeah, I think it was, actually, we saw it in Q4. And we saw it in Q1. We had exceptionally strong one-time license quarters in both quarters. We were not necessarily pushing for those level of numbers because bear in mind, I think we guided to 7%-8% in the first quarter for capital markets. It came in at 9%, which is stronger than any kind of trend in this business. And it was a 47% increase in license. It is just a much higher proportion of licenses came due in the first quarter. And more and more of the, more than we expected, were signed in the first quarter. We also saw it in the fourth quarter, a big interest in our products in general, mostly in international. It kind of both quarters came in better than we expected.
I wouldn't look at it on any kind of a deceleration. We kind of look at it and say, if you take the first quarter and then the second quarter guide, add them together, we're tracking ahead of the full year. We would say business as usual, all full speed ahead. We're very comfortable with the full year guide. There will be a bit of a change in composition. The second half, recurring revenue is more likely to accelerate versus the first half. There will be less dependence on episodic licenses. The composition will strengthen in the favor of recurring.
That will have implications then, right, James, for first half, second half margins as you move away from the high margin, license sales, more towards the recurring. You do have some easy comps. You sounded like you're going to hit the cost side as well. Can you just walk us through one more time that margin, first half, second half?
I think most of the revenue mix issue came in banking. That is where it will flip in the second half. We were lapping all of these one-time licenses in the first quarter of 2024. We will literally get better due to comps, less professional services relative to the rest of the business. We have less grow-overs on 100% margin licenses. We will just see, and it will be fairly immediate. The revenue mix impact, I will get this slightly wrong in the first quarter, was close to 200 basis points. It is a big number. That basically will track, will almost dissipate completely in the second quarter and turn slightly positive in the latter part of the year. Because banking, for its essential composition of the business, is not a negative mix business. It is a positive mix business.
Right, in terms of contribution margin.
In terms of contribution margin.
Yeah. OK, good. All right, it sounds very confident. I just wanted to go through that really quickly. That was popular feedback in terms of me asking you that. I hope I did an OK job with that. Let's talk about Global Payments and the issuing business, the Thesis business, as we think about it. Highly complementary. You talked about how you, FIS, historically has been over-indexed towards debit. Thesis is known for being on credit. How does this complete your issuer processing capability and remind us of the exposures that you have now between credit-debit, commercial versus consumer, and geographies once it closes, of course?
Yeah. You know, we're incredibly excited. I get more excited for a different reason, which is I'm swapping out Worldpay, which was not valued by the investors. It was non-cash contributing. I'm replacing it with an equivalent amount of EPS, but it generates $700 million of cash. On a DCF basis, we'll get more fairly valued, I think. That's the part that excites me. I'm a finance guy. I don't count. When you get to the complementarity, it was, you know, we went, if you go back to investor day, we said, oh, we got all the tools. We can sell credit. We can sell debit. The reality is 90% of our issuing business is debit. We really couldn't sell credit, only the smaller banks that were less sophisticated. Our products were just not up to the level.
Like Thesis is the gold standard in the market. Let's face it. They've invested consistently over many, many years. Their service levels, their NPS scores are off the charts. Two is they have a transformation journey to modernize that puts them well ahead of their competition. You're buying an asset that we could never get to. Their sweet spot is in serving the biggest, most complex banks. Frankly, that's where all the cards are. All the credit cards are concentrated in the biggest banks. We had a credit processing platform, but we literally had a single-digit market share, like at 1%, right? We had literally very little in the market. In theory, we could address a $12 billion TAM. In reality, we couldn't because all the TAM was with highly sophisticated banks with different requirements.
The complementarity is you're putting together, we know how a credit business works. We just couldn't address the TAM. You're buying an asset with an incredible 17 of the top 20 customers. That's the asset. You're buying an asset that is highly viewed positively. The average tenure of their clients is 25 years. It's just an incredible asset. Imagine the cross-sell. It plays in our sweet spot of large financial institutions. The cross-sell opportunities of our Premium Payback into their credit issuing customers, just that alone is tremendous. Two is they're 70% U.S., 30% international. It beefs up our international business and opens up international synergies. The actual strategic case is unbeatable. The valuation case is unbeatable. You could almost say, and look at the synergies, they'll come over a longer period on revenue. They're probably quite conservative.
As we built out the models and looked at DCF values and the accretion, we were quite conservative on the revenue. We basically said 4% going forward, which is effectively what they're able to do now. Finally, I'll close out. It's quite similar. It's fairly resilient business as well. 60% of their business is driven by transactions, not by value. Again, it's not exposed to the amount of dollars spent. It's exposed to the number of, I think it's three dimensions, the number of accounts, transactions, and authorizations. They're all on a unit compensation measure.
Right. Yeah, not driven by volumes, but more based on taps or swipes, which is important. A follow-on I had to that, we've been thinking about this a lot, James. Thesis, you mentioned it. They're going through a modernization journey, shifting to the cloud. They're standing up Thesis Cloud. FIS also has its own platforms. I think Payments One is one you talked about at investor day. There are some platform decisions to be made. What's going to happen there with them converting, you bringing on the asset? You've also stood up some of your own. Are there some difficult decisions to make, or is that already planned out?
No, I think this will be managed smartly. They've got the principal technology asset here. I think the assets will be complementary. I don't think we're going to go in and shut down assets on either side. I think our asset plays well in a smaller bank, and theirs plays much. It's the only asset you can have in the bigger ones. I think they'll coexist. International, I think we both have platforms that work quite well. We may take a choice on the international business. None of the synergies are predicated on slamming platforms together. That would be stupid. The last thing we want, we need to preserve their commercial excellence, their customer experience, and their actual technology.
Can you elaborate a little bit more on the revenue retention risk? They do have very long-tenured clients, as you said. I get a lot of questions on Cap One, Discover, and them coming together. I know Cap One leverages Thesis. How did you get comfortable with the revenue retention post-deal?
Yeah, we obviously went, they do not have a very long list. We went through, we did our diligence. We got incredibly comfortable with it. Everyone brings up Capital One. We have got a relationship with FIS already has a relationship with Capital One and Discover. Now the issuer business has one with Capital One. Our job is to make the bank successful. We have obviously assessed the overall risk profile of the business. You look at their 25-year tenure. They are not sitting as well and sitting back and saying, OK, I got all these clients. I am going to just sit back. They are investing really heavily in their platform. It is the cloud-enabled, more features coming out. It will place them ahead of the market. The best form of retention you can get to is to have the best product in the market. We are convinced on that.
We spent probably a disproportionate amount of the due diligence on the platform because platform transformation is always somewhat scary, right? We got in there, got comfortable. The value that's being driven, where we think they were optimists, more optimistic than us, is we believe the migrations of clients will take a longer period. That's the only difference of opinion, the quality of the platform. We had a swarm of people look at the platform, swarm. That was the number one diligence item and very comfortable. I'd add on as well as we didn't build in revenue upside from the new platform. They were insistent that they expect significant upside. It was obviously a value discussion. We stuck to our 4% going forward.
There's probably opportunity longer term, but you're looking at three to five where you say, as I migrate each customer to the new platform, they're theoretically getting much better benefits. The stickiness will increase, right? That'll be managed over a long period of time.
Discover also owns a debit network. FIS owns one as well, which is a valuable asset. I would imagine there could be maybe some swapping that's happening there. Can you assess the risk there, if any?
No, we've assessed it as pretty low. We think it's, to some extent, not just Discover. I think we've underplayed our hand on our NICE network. Because I don't want to get into any competitive stuff. I think you could say, I'd say it differently, that our focus on NICE has been, and our debit capabilities have not been brilliant over the last couple of years. We will double down on debit. It's not just Thesis. We will double down on our debit capabilities and our NICE network over the coming, I would even say, months.
OK. No, I think there's some hidden opportunity there that maybe the market's not going to see.
Yeah, a little bit. I think we've undermanaged the business. That's the best way to do it. It's under new leadership now, scrappier leadership and more competitive leadership. It's a big focus area going forward, not just credit, also debit.
Since we have you, I want to stay on this. You're targeting $125 million in cost synergies on the Thesis side. We talked about their cloud modernization. I even asked it personally, I think, that's why I remember it. At their investor day, they talked about guiding midterm stable margins for Thesis because they're going to run duplicative platforms. It's going to take some time to convert to the cloud. You just said that you're going to take a more careful approach. I think that's prudent. Is it then harder to capture some of the cost savings and synergies or margin expansion given Thesis? It already enjoys very high margin.
We're actually very consistent with their response. We basically planned, we actually think that in theory, they should have operating leverage. We did, similar to their public comments, we planned the core margins flat and the synergies on top. Me personally, stepping back from it, they have such an incredible set of assets. They should be driving positive operating leverage. We did not want to lean in too much on the core model. We wanted this to be a conservative set of numbers both on revenue and on margin. We are entirely consistent with what they said. We have probably built in more transformation costs to modernize the platform in the out years.
OK. OK, so that's embedded in there.
That's embedded in there.
OK. And then last one, just on the $45 million in the shorter and midterm revenue synergies, you mentioned Premium Payback into issuer. You also have international, then, of course, the credit processing cross-sell into the core base. How quickly can that come? Have you thought about timeline a little bit more?
I think the Premium Payback type examples are much quicker because it's an add-on. I think if you get into to try to competitively win something, it depends on when the contract comes up for renewal. Then you've got 12 months of implementation after that. I think the, call it competitive wins are longer. International is a big opportunity. We haven't built a lot into the synergies. That's just more complex to get done.
Any consideration with Worldpay coming out? I heard you loud and clear on it frees up the cash and you're trading off the earnings, comparable earnings. I know there's a commercial relationship that's there with Worldpay. Anything on the synergies to remind people of?
Oh, no. Let me be clear. There's no synergies on this. That's the beauty. We've had enough synergies with Worldpay. I'm tired of it. We have these commercial arrangements already. Contractually, when the deal was signed, the three-way deal, the Worldpay existing commercial arrangements passed to Global. I would say we have an opportunity as opposed to a synergy because the specific agreement is Worldpay and us, but it transfers to Global. Global and us are both highly interested in working closer together on longer-term collaboration agreements. They have laid that out as well. You could imagine a broader relationship over time because they have a massive business that is effectively a sales channel for us and vice versa. We can do a lot together. I would say more to follow on this. We need to get closer to the deal.
We will be working way closer with Global Payments than even we did with Worldpay.
OK. Good. At investor day, you were very specific in detailing your M&A ambitions and contributions in the midterm to growth and building out the strategy. Does this deal change that in any way?
No, not really. I think it'll be, I think we won't let issuer kind of distract us from the long-term view, which is we're going to hold the leverage at 2.8 times. Tack-on acquisitions are probably the long-term name of the game, filling out with highly synergistic driving incremental revenue. Bear in mind, as the EBITDA goes up, we'll be giving more and more back to shareholders. We will take a pause for 12-18 months, call it. Once we get the EBITDA, get the EBITDA to 2.8, we'll be back buying back shares. Obviously, it's a much bigger entity with much more free cash flow. We'll be buying back proportionally more shares post-deal than we were pre-deal. Right now it's at 1.2. If you work through two or three years from now, it's considerably higher potential for buybacks.
OK. Makes sense.
We are very committed to dividend. We will, and I want to be dogmatic on that, we will increase dividends in line with our EPS growth. I actually got the question this morning. If your EPS went down, would you cut your dividend? I was emphatic, no, we definitely will not. Just to be crystal clear on that.
Free cash flow conversion, you did mention that as a positive. I know Q1 is seasonally low. Two quarters before this, we had some surprises, right, with CapEx being higher and some of the working capital drag. I think you've put some changes in there. A lot more work left to do, James, in getting back to that target around, what, 80%-85%, I think, on the conversion front with free cash flow?
No, I think you never want to say it's in the bag. I'm really encouraged that we came in. Historically, the first quarter is 40%-50% range. We came in at 71%. We've put better people on this. There's no easy way to say it and enhanced focus. We're targeting fairly sizable improvements, delayed terms for suppliers. We've already moved a bunch of them. We're 56% of the way in terms of already in terms of what do I want to achieve by the end of the year. Bear in mind, anything you do on extending terms with suppliers right now also benefits next year because the carryover impact will benefit next year. What we're trying to, I think there's a lot more work to do to make sure this is sustainable longer term and the conversion goes up above 90%.
Right. So there is a goal to get to even go above and beyond what we've talked about.
Yeah, but I think the safe assumption for now is a 90% cash conversion longer term. And then the issuer business is roughly coming in at 90%. And that's post-leverage, right? Because we've got to pay down all the debt as well.
Yeah. At investor day, you also talked about beyond the midterm, the opportunity to expand margin above the midterm targets is there, whether it be from a cost or just executing what you want to do or addressing your delivery, those kinds of things. Same question. Does bringing on Thesis change that?
No, I don't think it does. The one thing you did say, what short-term versus medium-term? We did say that we assume Thesis will come on with flat margins. Synergies comes on top. We had a broad commitment out there on 40%-60% basis points. And we said 26%, I think we implied, would be at the high end of that guide. You can kind of do the math yourself on what the weighted average comes out at. Obviously, we think there should be, my view is the bigger you get, the more operating leverage you should be driving, right? I think we're very safe on the margin assumptions.
Is there anything, I've heard you talk about it publicly and in meetings with you, around sort of the self-help work that you can still do to execute on the cost side? Same question, are you leveraging more technology to get there, James? Is it really just a focus question? Do you have to invest to save? How do you see it?
No, I think it varies by function, actually. Most of our focus right now is on the back office. I outsourced over 1,000 people to Accenture. They're already gone. Two is, by the time we get to the fourth quarter of this year, we hope to be using machine learning and AI-generated forecasting. We're actually pushing the envelope to not necessarily take out resources, but it's to stop people doing manual work and get the machines to do it. Our HR group is looking at virtual agents, right, with one of the big software companies, which is basically answering questions with AI as opposed to having people in the company doing it. It is being pushed very aggressively across the company, different in every function. It's a case of if you do not do something, something's going to get done to you.
We have to get fit. We have to deliver on our margin goals across the company. I think the tighter you manage your margins, you're just going to see the operating leverage fall through. Grow the company at the long-term margin goal or, sorry, revenue growth, 4.5%-5%, you've got to manage your costs well below that level and drive operating leverage. That's the business we're in.
OK. In this last minute or so, we talked about a lot. I mean, you have a little bit of time here before the deal closes. How have your priorities changed on your side, whether it be from an execution standpoint or delivery standpoint?
I think I would emphasize it's business as usual. We'll return the capital to shareholders, as we said we would do. We will continue to do tack-on M&A. It's business as usual. We have to give a guide sometime in February. The deal may not be closed by then, right? We have to run a business, and we have to do it quickly. I think internally, our focus is we have elevated sales to the leadership, commercial to the leadership table, a lot more finance folks working on, call it, sales as a function. I think internally, within the company, it's this incessant focus on three big levers: end-to-end product excellence. Do you have the right product? Customer experience. Are your clients happy and delighted with the service they're getting? Service, right? The final one is commercial excellence.
How do you sell into the customers and drive improved revenue realization? They're the three big priorities within the company. All the rest will follow.
Good. We'll be fine to track. James, thank you for spending time with us.
Thank you. Thank you.
Thank you.