Fidelity National Information Services (FIS)
Director of Equity Research
A Financial Tech Innovator
Fidelity National Information Services, known as FIS, is a global provider of software and payments services to commercial and investment banks, asset managers and merchants. The company has a long history of serving financial institutions, and its legacy products include one of the first core processing systems for banks. Even as competition in the financial technology space has increased over the years, a combination of acquisitions and organic innovation has allowed FIS to grow into a share leader in core banking and capital markets technology software. The 2019 acquisition of Worldpay which, to date, is the company’s largest transaction, provided FIS with significant scale in the payments business. FIS is organized into three segments: banking, capital markets and merchant payments. We are attracted to FIS’s sticky customer base, recurring revenue profile and tailwinds which enhance its long-term growth prospects.
FIS serves small to large global banks with core banking and
ancillary software services. These services are used for tracking deposits,
loans, and customer activity which form the systems of record for a financial
institution. Contracts for processing and banking software typically have terms
of 3 to 5 years, thus representing recurring and predictable revenue for FIS. Banks,
especially the larger ones which represent the company's target market, are
reluctant to replace or even upgrade these systems due to the costs and
complexity involved. Many large banks run multiple systems inherited through
years of acquisitions and, in many cases, still run home-grown software
designed in the '70s that have “green screen” interfaces. This is the consumer
equivalent of watching Netflix on a black and white television.
Over the past five years, FIS has invested a significant sum
of money to build, from a clean slate, a comprehensive and modern product
lineup that is based upon application programming interface (API) and
micro-services. These features make deployment easier and faster, enable more
frequent upgrades and allow for modular implementations if desired. Competition
from newer banking entrants utilizing modern technology (supplied by FIS and
others) are now forcing banks to finally modernize their core and related systems
to better serve their customers at a lower cost. We believe FIS, which
anticipated this trend and invested accordingly, will see accelerating growth
in its banking segment over the next several years as banks spend to catch up
on their technology debt.
FIS's capital markets business provides software used for running
the operations of global investment banks and asset managers. This aspect of
FIS's business has benefited from long-term, recurring revenue contracts. FIS
invested to create a suite of software as a service (SaaS) products and is on a
journey to move its customers from on-premises software licenses (and related
maintenance revenue streams) to a subscription model. We have seen similar
transitions successfully executed by other software businesses that we follow,
and we are confident that a successful transition will stabilize the segment's
growth and reinforce the recurring revenue profile of FIS overall.
FIS's payments business services e-commerce providers, traditional
merchants, and software vendors with a comprehensive set of tools, software and
processes to accept credit cards and, increasingly, other digital forms of
payments such as PayPal. While COVID-19 impacted volumes for several of FIS's
customer segments, the company saw growth in other areas as its roster of
global e-commerce customers benefited from the switch in consumer payments
behavior. The company recently introduced a “full-stack” API-enabled e-commerce
gateway that makes onboarding for customers easier and cheaper. The technology
is omnichannel enabled, which means that brick-and-mortar customers, as well as
e-commerce operations, don't have to run multiple card acceptance systems.
FIS is also the leading provider of integrated payments
technology to software vendors who are increasingly bundling payment capability
directly into their products to differentiate their offerings and increase the
lifetime value of their customers. FIS benefits from these arrangements through
increased volumes, leverage of its existing sales teams, and longer-term
Our ownership of Mastercard and Visa and coverage of the
payments sector in general have provided us with a view that the transition to
digital payments from cash/checks still has a long runway of growth ahead. Scale
is becoming increasingly important as customers demand the ability to accept
and process multiple payment types whether in person or through e-commerce,
domestic or cross-border, and with higher authorization rates so payments are
not refused. The technology and reach required to meet these demands are significant
which is why merchant processing has experienced consolidation over the past
few years and why FIS has benefited as one of the consolidators. We believe FIS
will be a prime beneficiary of the shift to digital payments over the long
term. Recent news that FIS may be interested in acquiring competitor Global
Payments does not surprise us. While the price paid is a key factor, we see
many benefits from such a combination, and FIS has a strong track record of
exceeding the cost and revenue synergy targets of previous acquisitions,
including the Worldpay transaction.
While the buzzword “FinTech” has become ubiquitous and there
have been several public offerings of companies who could be viewed as a
competitor to FIS in some form, we believe this wave of innovation has expanded
the overall market and is healthy for the industry, FIS, and, most importantly,
customers. New products and technologies
are forcing incumbents into upgrading their systems, which helps FIS, while new
entrants in payments often find that they need a partner with scale and global
We believe FIS benefits from an expanding overall market for
its technology and the continued transition to digital payments which drives attractive
reinvestment opportunities. These characteristics, along with a strong
management team that has demonstrated good capital allocation behavior,
translates into a Weitz Quality Score of 2 (on a scale from 1 to 7, with 1 being
the highest). FIS is positioned to grow while expanding margins. This feeds our
estimate of business value in the range of $170. At current prices, the company
is an excellent example of our Quality at a Discount framework in action.
Past performance is not a guarantee of future results. All investments involve risks, including possible loss of principal.
As of 12/31/2020, each of the following portfolio companies constituted a portion of the net assets of Balanced Fund, Hickory Fund, Partners III Opportunity Fund, Partners Value Fund, and Value Fund as follows: Fidelity National Information Services, Inc. (FIS) 1.4%, 0.0%, 2.2%, 0.0%, and 3.3%. Global Payments (GPN) 0.0%, 0.0%, 0.0%, 0.0%, and 0.0%. Mastercard, Inc. — Class A (MA) 1.7%, 0.0%, 4.9%, 3.7%, and 4.1%. PayPal Holdings, Inc. (PYPL) 0.0%, 0.0%, 0.0%, 0.0%, and 0.0%. Visa, Inc. — Class A (V) 1.7%, 0.0%, 5.1%, 4.2%, and 4.3%.
Holdings are subject to change and may not be representative of the Fund's current or future investments.
The opinions expressed are those of Weitz Investment Management and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through the publication date, they are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor's specific objectives, financial needs, risk tolerance and time horizon.