Mark Odendahl
Hi everyone and welcome back to the industries in motion podcast from RBC Capital Markets, where we'll be exploring what's new and what's next in today's fast moving markets and industries to help you stay ahead of the curve. Please listen to the end of this podcast for important disclaimers. Again, my name is Mark Odendahl, and I am head of US Capital Markets research. And let's get into today's speaker. I'm really happy to have Dan Perlin on the line today, Dan runs RBCs us FinTech research franchise. And Dan, along with many partners in capital markets, just hosted our eighth annual FinTech conference. This year's conference was one of the largest and most successful that we've ever had and we had close to 40 companies presenting. Dan, congrats on a great event and welcome to the podcast.
Dan Perlin
Mark. It's great to be here. Always a pleasure.
Mark Odendahl
So Dan, let's dig into a few questions of what you heard at our FinTech conference. You know, the environment for all financials and fintech that works with Financials has been volatile in 2023. You know, we've had a couple of banks fail. How are the fintechs navigating this volatility, Dan?
Dan Perlin
The thing that surprised us, I think, at a high level is that the consumer and the S&P I think, are just better than feared. So when we look at, when we look at all the data that came out during the conference, it felt more like the macro environment was a little bit more stable than I think the headlines, were suggesting. Consumer spending trends in May, roughly similar to April, on a quarter date basis, that definitely decelerated. Relative, the first quarter of the first quarter also had some easy comparisons because of omicron in the prior year. But if you look at the aggregate numbers, they did decelerate about 500 basis points, but they're actually holding up pretty well. You know, the S&B side, here, again, the narrative was actually pretty positive. And the question that we keep coming back to is, are they are they holding a better because of the investments that they made in technology during the pandemic? Or are they just, you know, in a better macro position? No, lots of questions around bank failures, and what that did the bank tech spending, but I'll tell you, we had several companies there that are specialized in that area and financial services firms continue to spend. It's kind of nonnegotiable at these levels. And at the end of the day, multiple these multiple companies were talking about, you know, record sales pipelines. So again, counterintuitive to the narrative that I think was in the market. I do think some discretionary spending has slowed. And we've seen that despite the fact that travel and hospitality I think continues to hold up well in the data. And where we have seen some elongations in the sales cycle, it does tend to be in the larger enterprise area, and probably spills over more into our services coverage as opposed to kind of the fintech space.
Mark Odendahl
So why do you think the consumer or SMB is resilient in this environment?
Dan Perlin
Well, I mean, everything underpins the employment situation. So that's clearly been strong and remain strong. I also think that if you look at the data, from a spending perspective, you know, as we read it from payments companies, inflation has, is a positive, you know, for most of my names. So they are business models that are priced on the percentage of the face value of a ticket. So to the extent that prices are rising, it flows through as a net positive. But we've seen that as inflation is coming down, they're getting closer to kind of parity with the actual transaction levels. And so it could be one of these situations where it's just, you know, it has had some severe, you know, pressure on the consumer, I think early on, but as it's abating, it's, you know, we're starting to transaction growth actually make up the difference there. So it is kind of this weird interplay. But I would say, net-net, it's been, it's been positive for the payment space. And here again, I'm, you know, underpinning all this as a strong employment backdrop. But inflation is coming out of the system. And so transactions we're starting to see actually tick back up. So it's pretty good shock absorber.
Mark Odendahl
And then let's dig in on something else you just said. You know, the fintech’s are obviously customers of the banks, in many cases, customers of large, you know, enterprise. Talk to us about that spending environment, in the face of macro uncertainty.
Dan Perlin
So from a, from a bank tech perspective, it's, it's been really interesting, because during, during the pandemic, banks had the pivot really quickly to do very simple things, which is just get people out of branches and do everything mobile, or digital. And what happened during that period of time is I think, they realized the significant importance of this customer acquisition model that they had, I think they realized that there's a huge amount of efficiency to be gained in the back office. And I think there's a lot more going down this path of modularity in bank tech. It's not in you know, it's not fully in the cloud yet, but it's moving in that direction. And so, I think it's an extension of what they learned during the pandemic, that there's just so many things to win. And so we look at the companies across our space, which there are many, they're all seeing and kind of saying something similar, which is, especially in the community bank, and credit union space, there's this huge demand for technology. A lot of that's because they've been behind the curve for years, and they're catching up to the big banks, but it also allows them to be more competitive with them. So I think the catalyst for why it continues to be a huge area of focus is that there's just tangible benefits. And technology is now caught up to help these smaller institutions be a lot more competitive with bigger ones.
Mark Odendahl
So how's the innovation fit in that kind of narrowing of the customer focus for a lot of these fintechs?
Dan Perlin
You know, if so, if I move myself away a little bit from bank tech, and I just think more broadly about kind of fintech? Well, I think we're seeing is just so much more software that is being pulled into all aspects of fintech. It started with integrated payments. That has been around for a number of years. But the reality is what businesses are looking for today, is more often than not a platform or single provider. So it's not as it's not as fragmented as once was. But they're looking for, they're looking for more integration to actually drive a better business outcome, not just some efficiencies. And so that's things like adding payments with working capital, with intelligent inventory management, with increased consumer engagement tools and loyalty, obviously, data insights with data analytics, obviously AI plays into this and will be a bigger part of that theme. But I think the key kind of high level message I would send is simply that software integration within all things fintech is kind of what's going to happen over the next five years. We're already seeing it and the end markets already demanding it. And I think they're realizing that the businesses that are actually again driving better outcomes, not just some back office efficiencies are the ones who are going to win
Mark Odendahl
All right, let's shift gears and think like an investor that was sitting in the crowd at the conference, what did they hear? What are some of the strategies that the corporates were discussing, to make their their companies more investable?
Dan Perlin
You know, I would say there's been a lot of strategic reviews in the space. That includes spends. I think the lack of access to capital here as of late or the cost of capital going up, has caused businesses to refocus. And again, coming out of the pandemic, I think people are just more streamlined. So, what we heard was a real focus from management teams to ultimately try to figure out what are the right, are the right KPIs are we going to separate these businesses into two so that we can have the appropriate shareholder base and the appropriate amount of capital to invest in those businesses. I mean, that was a really big trend, I count I think 1234567 companies that are in some sort of kind of strategic process, and that is doesn't even really include the heavy M&A lift that I think it's going to be ensuing over the coming, you know, several months and quarters. So I think that's a big area, the other thing I would just say, is, in an environment where you have a lot of IPOs, a couple of years ago, they're kind of in the year two of the IPO cycle. And that's where, you know, they say the rubber meets the road, like, that's when you really realize what kind of businesses you have. And here, again, the focus on profitability, because the cost of capital and lack of capital is not there, has really narrowed the product roadmap, product roadmaps for so many companies. I think it's a good thing, quite frankly, for the incumbents, because they're not having to compete with kind of free money IPO companies. But I also think it's good for those companies that did go public, because I think they had way too broad of aspirational goals. And so they're becoming better businesses for it. So it's interesting, because there is this notion of kind of simplicity and transparency, that I think is starting to come out of this group. And I think investors are starting to, you know, hear that, I think starting to resonate with them.
Mark Odendahl
So Dan, let's drill down on something you just mentioned. The focus out there for many corporates and many of the customers of fintech. Are you worried about the narrowing of the product portfolios impacting inflation longer term?
Dan Perlin
Not really, I think its better innovation is the way I would probably describe it. There's a lot of companies that were, I think, focused on too many things and they were stretched. You know, the ability to find engineering talent is obviously always a challenge and has been for a number of years. So when we looked around our universe of companies, I would say we're seeing, you know, better more focused innovation, as opposed to everybody just kind of dropping another product that feels kind of okay, but not that not that focused. And I think that's probably going to prove to be a positive. But I also think it very much will play into the theme we were just talking about, which is, you know, you can create a software product that creates some efficiencies, and that's fine. And that has been wildly successful. But the products that get engineered today are actually this goes to the SNPs kind of, you know, holding in there, they're figuring out ways to run their businesses so much better. How do they get an individual in to the store? How do they have less shopping, cart abandonment? You know, how do you have a net-new sales, or you underwriting company, our customers and our companies to come in to expand their businesses or for customers to actually be able to shop? I mean, it's a, it's a completely different mindset. And I think that it requires a lot more focus. So it's, I think, better innovation Mark, just better.
Mark Odendahl
Staying on this theme of focus. So on your note that you were talking about free cash flow, and companies talking about the importance of free cash flow coming out of the conference, do you want to dig in there a little bit?
Dan Perlin
You know, the reality is, free cash flow is always, you know, a major focus for these companies. But here, again, the operating environment that that the company's or have been in, you know, just requires them to focus on that. And so what we heard, I think, across the board was, yes, we're working on better working capital, that's for sure. There are absolute cost containment efforts that are in there. But you got to remember, a lot of the supply chain costs that were embedded in a lot of these companies were really, really high. And so they've gotten a lot better. So you've got inflation and supply chains that are starting to improve, that's creating, I think, better comparisons. And so the balance between that investment cycle that we were just talking about, but also some cost inflation supply chain issues that are getting better, is actually likely to generate better free cash flows in the couple in the coming quarters. And we heard that not just from like one company, but we heard it like universally. The big boys always seem to be able to throw off a ton of free cash flow, but the smaller companies are the ones that have struggled. And that's just not you know, that's changing pretty dramatically now.
Mark Odendahl
And then you touched on this a second ago, but M&A. How do you feel about you know, financial sponsor M&A, or strategic M&A in the sector?
Dan Perlin
I think both are going to be very active. So, from a from a sponsor perspective, you know, a lot of these are going to be public companies that came public are down 60 70% from IPO, you know, I mean, they're, they're down huge. So it's possible that you're going to see kind of a retread almost, you know, companies come public than they get bought back in the same time, some of these innovative companies that came out, which were a little disruptive to other maybe larger incumbents are now a lot cheaper as well. And so the strategics, who have that free cash flow and balance sheets potentially to use, I think they're going to start to go after him. You know, there's lots of lots of against spins that are occurring in the space and part of those party, those are designed really to free up capital for businesses to go out and make M&A. So I think it's going to be an incredibly busy year, next 12-18 months for M&A. And I think it's both sponsors and strategics. I don't think I don't think I would delineate between the two right now. I think there's, there's plenty to go around.
Mark Odendahl
So you've played a significant role in this conference for the last eight years, along with many partners around RBC Capital Markets. How is how is this conference changed over the years?
Dan Perlin
You know, I would say a couple of things, the clearly the breadth of the, of the companies that we're getting, are just much, much larger and better suited for, for technology, as opposed to just one narrow vein of payments. You know, fintech is a, it's not a homogeneous group, it's really, really a wide cast of things. Technology, I feel like I'm more of a software analyst than I used to be, because of how much that's evolved. And we've seen that I think, in the conference as well. Whereas if we go back to the first one, I felt more services oriented, or payments, focused, like that would have been the power rally. Now the power rallies, like, how do we implement software in this kind of financial construct? And that's a that's just a very, very wide net. So it's, it's a bigger conference, the companies are bigger and better. The technology, I think, is way better. And I think it feels, you know, a little more software centric.
Mark Odendahl
And then we had a very interesting MasterCard, Keynote presentation. And Dan, you hosted the president of data and services at MasterCard for this keynote. What did you learn thematically that MasterCard is communicating to investors?
Dan Perlin
The point there is that there's, there's so much more to be wrapped around a payment, ultimately. And that's a global statement. So you need as all these new consumer facing applications continue to build out. And you think about how much that's increasingly on a digital capacity, there's a lot of cybersecurity that needs to be put around it. And that needs to be put in the context of global cross border at scale. And that is a hard, hard thing to do. So that's a big theme. Another big theme is what they would call their services business, which is, how do we derive again, incremental value for the user of our product in this case? Can you drive more transactions into the merchant through their insights? So these are companies that used to facilitate payment. Now, they're facilitating and creating opportunities for consumers to want to be spending outside of just the traditional loyalty programs that you would have had in the past. So the theme is, payments core remains; security, a bigger concern than it ever has been. And you need to do that at scale in in cross border capabilities. And then you know, what other products and services are you able to basically wrap around the payment that ultimately drives growth for their end users? In most instances, that's the merchant.
Mark Odendahl
Well, Dan, thank you for this conversation. It's always great to hear you opine on your industry. And I know our top investor, clients enjoy it as well. So it's great to be able to provide that on this podcast and congratulations to you and all our partners around Capital Markets to host one of our most successful Fintech conferences, and it remains a very important part of RBC Capital Markets. In general, thank you very much for coming on today.
Dan Perlin
Thank you so much, Mark. And thanks for being such a fantastic partner for these years.
Mark Odendahl
What else lies ahead in today's ever evolving markets and industries? We'll be keeping track right here on industries in motion. Until then, thank you for joining us today on this episode recorded June 26 2023. Make sure you subscribe to Industries in Motion wherever you listen to your podcasts. If you'd like to continue this conversation, or you're interested in more information, please contact your RBC representative directly or visit our website www.rbccm.com/industiresinmotion for further insights. We really appreciate your time today. Thank you very much