Dive Brief:

• Fidelity National Information Services, the payments processor known as FIS, said in its earnings report Monday that it will spin off its merchant services business to create two separate publicly-traded companies with the new entity reclaiming its former name, Worldpay. FIS also noted it’s taking a $17.6 billion non-cash goodwill charge related to the decreased value of the Worldpay business.
• The company also increased to $1.25 billion the amount of money it’s seeking from a cost-savings program begun last year, FIS said in the fourth-quarter earnings release. It plans to meet the $500 million savings goal by the end of this year, and the higher amount by the end of next year.
• The Jacksonville, Florida-based company also disclosed that the merchant business performed worse than expected during the fourth quarter due to “slightly more pressure than anticipated as a result of increasing recessionary impacts in the UK and a shifting of consumer spend from goods to services in the US,” FIS CEO Stephanie Ferris said in the news release.

Dive Insight:

FIS is making the major moves to break apart the company and squeeze savings out of the operations after two activist shareholders, D.E. Shaw and Jana Partners, made investments in the company last year. The investors have pressed other companies in the past for similar major changes to boost stock value.

The company has also come under new leadership in recent months with the ascent of Ferris as CEO. During the Monday earnings call with analysts, Ferris underscored the new start for the company. 

“Today I will present to you the next chapter,” Ferris told analysts during the call. “We recognize that we have a lot of work to do to meet our expectations going forward.”

She named Charles Drucker, the former CEO of Worldpay, as a strategic adviser to guide the spin-off transaction and reclaim his title as CEO of the business after the spin-off. 

The company noted that Worldpay will be more likely to pursue acquisitions as a result of the plan to spin off the company. As part of FIS, Worldpay hasn’t had the right capital structure for acquisitions, Ferris said on the call. “With a different capital allocation strategy, Worldpay will be able to pursue more aggressive investment opportunities, including M&A,” the company said in in a separate spin-off press release.

The company rescheduled its earnings call at the last minute on Sunday to take place earlier in the week. That change came after Reuters reported that FIS was preparing to spin off the Worldpay business, which it purchased for $43 billion in 2019. FIS will also still consider acquisition offers for the unit, Reuters reported, citing unnamed sources.

FIS financial forecast falls short

FIS on Monday reported a net loss of $17.36 billion for the fourth quarter, reflecting the write-down for the 2019 Worldpay acquisition, on a revenue increase of 1% to $3.71 billion, compared to net earnings of $291 million on revenue of $3.67 billion for the quarter in 2021. For the full year of 2022, the company reported a net loss of $16.7 billion on a revenue increase of 4.7% to $14.5 billion, according to the release.

While fourth-quarter results were essentially what Wall Street analysts who cover the company anticipated, the outlook for 2023 didn’t live up to expectations. Analysts were estimating the company would pull down about $15 billion in revenue this year, according to a report from Baird Equity Research, but FIS said that it would log revenue of between $14.2 billion and $14.45 billion.

The reduced expectations are due to the anticipated impact of a recession on the merchant business, plus a lack of new products in that division, the Baird analysts wrote. Whereas on the banking and capital markets side, it’s due to “elongated sales cycles” and a “reduction in term fees,” they said.

The forecast suggests FIS may fall behind the competition, another analyst said. “FIS/Merchant going forward likely each have less investment capacity to keep up with either” Fiserv or Global Payments, Oppenheimer analyst Dominick Gabriele said in a note to investment clients Sunday.

Overall, FIS doesn’t necessarily expect its organic revenue to rise this year, saying it could be down 1% or up 1%. For the merchant business, organic revenue is expected to decline between 2% and 4%, while it’s expected to rise as much as 2% for the banking business and increase as much as 6% for the capital markets unit, according to a slideshow accompanying the earnings results.

FIS said that $9.5 billion of last year’s revenue derived from the banking and capital markets businesses while the merchant business accounted for about $4.8 billion.

Worldplay is slowest-growing unit

A more granular breakdown from last year showed the merchant business was the company’s second-biggest for the first nine months of last year, based on revenue, with the largest being its banking services unit, according to a quarterly filing FIS made with the Securities and Exchange Commission last November. Revenue for the merchant business was $3.6 billion for that period, compared to nearly $5 billion for the banking unit and about $2 billion for the capital markets business.

The company’s fourth-quarter results showed the merchant services unit as the slowest growing, with just 1% organic revenue growth, while the banking business logged 4% and the capital markets business charted 10%, according to the slide presentation.

The Worldpay unit last year derived 43% of its revenue from large enterprise companies, 30% from e-commerce activity and 27% from small and mid-sized businesses, according to the slideshow.

The $1.25 billion cost savings plan will include $600 million in operating expense savings, $300 million from capital expense reductions and $350 million “from the reduction or elimination of acquisition, integration and transformation-related expenses,” all prior to the spin-off, the company said.