FIS is banking on embedded finance and loyalty programs to re-ignite growth in its merchant business.
Earnings for the payments giant came two days earlier than expected, and the data show slowing growth rates across key business lines, but a plan to “invest more aggressively” to bolster its growth trajectory is taking shape.
As reported over the weekend, the company had been planning to spin off the Worldpay operations and now it’s official. And the move comes after the company had been pressured to restructure by the hedge funds D.E. Shaw and JANA Partners. The spinoff will create two entities. One, Worldpay, will be focused on Merchant Solutions, eCommerce and providing ISV vendors with embedded finance capabilities.
FIS, the other entity, will remain a provider of financial technology solutions for financial institutions, capital markets firms, clients and corporates globally, the company said.
The details show that, within the merchant segment, overall organic revenue growth was 2%, driven in part by eCommerce, while enterprise and small and medium-side business (SMB) growth was a respective negative 4% and 3%.
And management’s guidance for organic revenue growth of -1% to 1% for the current quarter and for 2023 — with baseline expectations of a recession ahead — garnered a negative investor reaction on Monday (Feb. 13), sending the shares down 15% in intraday trading.
The company’s earnings supplementals reveal that overall organic revenue growth was 4% in the most recent quarter, where there was some “softness” in the merchant category was outpaced by “overperformance” in banking/capital markets operations (up 10%).
During the conference call with analysts, and in her first call with the investment community as CEO, Stephanie Ferris said while the company met its fourth-quarter targets, “we recognize that we have a lot of work to do, to meet our expectations going forward.”
Part of that work is the company’s restructuring to create two separate entities, FIS and Worldpay. As for the rationale behind the revamp, per the CEO:
“The pace of disruption and payments is rapidly accelerating, requiring increased investment for growth and a different capital allocation strategy for our merchant business.”
And though the two entities will be separate, she maintained that there will be a “a close commercial partnership to deliver critical capabilities like embedded finance and loyalty through premium payback,” which is the company’s POS system that also features loyalty programs.
“Both companies will be market leaders in their own right and by forging a commercial relationship together we can affect a superior outcome as compared to keeping them together,” said Ferris, who noted that “Worldpay operates in a more dynamic and disruptive end market relative to heritage FIS with more of a growth focus.”
But for now, at least — and as the spinoff is slated to close within the next 12 months — challenges are in the mix. Ferris noted that that the company is facing elongated sales cycles in the banking segment for large transactions, though the pipeline remains “robust.” Over the longer term, she said, the normalized growth rate for banking and other segments remains at around 3% to 5%.
CFO Eric Hoag said that the company’s “transition to durable SaaS deployments continues to resonate in the market.” And eCommerce revenue growth, he said, remains “strong,” with 16% growth year on year as measured in constant currency.
He did note, however, that the card-present channels and SMB channels experienced softness, tied in part to economic weakness in the U.K., which is likely to deteriorate further this year. Overall, the merchant segment, management said (with negative organic growth of 2% to 4%), will be pressured as end-market consumer spending shifts from goods to services. The latest filings reveal that in the latest quarter, global volumes were up 6% on a constant currency basis, and U.S. transactions were up 3% from a year ago.
During the question-and-answer session with analysts, management noted that there will be cross-selling opportunities between the two firms, even after the spinoff is completed.
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