Soon after Stripe’s announcement of mass layoffs, FIS used its Q3 results to warn investors that future revenue and profits would be lower than expected. Gary Norcross, in his last call before stepping up from CEO to Chairman, said “We are not pleased with the profitability performance of the business.”
Stefanie Ferris, the incoming CEO, will respond by taking $500m out of the company’s cost base in an “enterprise transformation” programme that will include job cuts, organisational restructuring and lower capital spending. Harris promised “the outsourcing of non-value-added activities and reviewing and rightsizing the current workforce.” Meanwhile, FIS booked a further $60m expense related to company’s never ending platform modernisation project.
Total revenue was up just 3% in Q3 at $3.6bn with low growth in all three divisions – capital markets, banking solutions and merchant solutions. Management said it was seeing “early signs of US consumer shifting spend from discretionary to non- discretionary verticals pressuring yield.”
Despite clear indications of inflationary pressures, especially in wages, “due to competitive job markets for the skilled employees who support our businesses,” FIS has costs under control. SG&A was down 1% at $977m.
Total adjusted EBITDA, the company’s preferred measure of profitability, was up 1% at $1.575bn. Net income was flattered by a $225m gain on the sale of its remaining stake in Capco Consulting to Wipro.
The merchant solutions division most interests us at Business of Payments. Merchant payment volume was up 3% to $544bn as weak performance in the UK was aggravated by the strong dollar. International volume was down 4% to $132bn. US volume was up 5% to $412bn, a little healthier but still lagging FIS’s competitors. FIS lost one large Payfac client which knocked 1ppt off global volume (c. $20bn annualised)
Merchant solutions revenue was up just 2% at $1.18bn. Management said growth would have been 6% excluding impacts of the Ukraine War and Sterling’s weakness.
Within Merchant Solutions, Global eCommerce continues to perform well, delivering 22% revenue growth at constant currencies, and signing new customers including Asian airline carriers. FIS is happy with the initial success of its guaranteed payment product in which merchants pay extra to have FIS cover any fraud losses. FIS continues to invest in Global eCommerce as “we expect e-commerce to ultimately account for 50% plus of total segment revenue.”
In contrast, FIS recognises systemic problems in SMB (revenues down 1%) and UK enterprise, the former Worldpay UK, which saw sales fall 15% at constant currencies. Both divisions are heavily dependent on POS payments at old economy merchants in “big box retail, grocery and pharmacy.”
These are non-discretionary consumer spend categories and should be recession resistant but FIS says its UK business is “continuing to see macro softness impacting revenue growth.” Ferris believes the UK is already in recession “and then they changed Prime Ministers at least once, maybe twice. And so the economic conditions in the UK are pretty challenging. And as we look out even over the next 60 days, it’s tough to call it. They are in a recession, their consumers are struggling, and we are tied to consumer spend.”
Recession or not, with consumer inflation at 10%, merchant acquiring revenues should not be falling 15%. The UK performance indicates FIS is losing significant market share.
SMB “has been adversely impacted by changing market dynamics,” said Harris. FIS is still selling POS acceptance through ISOs but merchant buying behaviour is moving to omni-channel payment solutions sourced from ISVs. Ferris, the new CEO, said “we’re strategically deprioritizing [SMB] and moving all of those partners that we’ve historically had there over to our embedded payment strategy with Worldpay for Platforms.” The latter is a new product based on the Payrix acquisition which allows Worldpay to compete with Adyen and Stripe for business with complex ISVs such as marketplaces.
Merchant solutions EBITDA was down 7% at $555m with margins falling 4ppt to 47% “primarily due to inflationary cost pressures and accelerated investment in e-commerce and Payrix sales channels to capitalize on developing secular growth trends.”
Banking solutions revenue was up 4% at $1.68bn in Q3. FIS blamed longer sales cycles for this lacklustre performance. The much smaller Capital Markets unit grew revenue 3% to $671m.