Worldpay has lost its crown as the world’s number one merchant acquirer, although only by a very narrow margin. In each of the last four quarters, JP Morgan has processed a greater volume of payments.
Worldpay has been hobbled by having, in FIS, a cash-strapped parent unwilling or unable to invest. The challenges were spelled out earlier this year when FIS took an $18bn write down on its acquisition of Worldpay. We covered this in detail at the time. Now, Worldpay is to be spun-out of FIS as a joint-venture with GTCR, a Chicago private equity firm.
Meanwhile, Q2 results demonstrate the extent of Worldpay’s problems. Global payment volume grew 6% in Q2 to €591bn, once again lower than JPM which recorded an increase of 10% to $600bn. At Worldpay, another weak US performance (+4%) was offset by a healthier 11% increase in international volume but, over the last twelve months, JPM has processed $2287bn against $2266bn for Worldpay.
Underlining the reason for divesting its merchant solutions business, FIS reported Worldpay revenue rose just 1% in Q2 to $1.312bn “with similar sub-segment trends as seen in the first quarter”’ This likely means double digit growth in global eCommerce but continued revenue declines in the domestically focused US and UK businesses which are most badly in need of investment. Take rate fell 1bps to 22bps. ATV rose 2% to $46.17.
Worldpay adjusted EBITDA did rise but only by 3% to $634m. Margins expanded 120bps to 48.3% “as we grew our high-margin revenue streams across the operating segment and delivered on cost management.”
FIS management had first proposed a stock market flotation for Worldpay but now say that the partial trade sale is the best option as it can realise value faster and get a cash injection more quickly. It will sell 55% of Worldpay to GTCR, a private equity business with one successful payment investment under its belt. GTCR bought Sage Pay US in 2017 for $260m, floated it as Paya and sold it to Nuvei earlier this year for $1.3bn. Worldpay’s new valuation of $18.5bn is rather less than the $43bn FIS paid for the company in 2019. However, the price does represent 10x EBITDA, which is in excess of the 8x valuation of FIS as a whole prior to the announcement. To financial analysts, this represents value creation.
Looking ahead, management says that Worldpay “will remain an important partner and distribution channel for FIS” and that Worldpay will continue to benefit from access to FIS banking technology services and solutions. Backing from GTCR will “also ensure that Worldpay will have ample access to capital to pursue near-term inorganic growth opportunities.” Now is a good time to be shopping for payment capabilities. Valuations are lower than they have been for some time and we can expect Worldpay’s new owners to move fast to make up for its wilderness years with FIS.
New management at FIS is moving quickly to repair the damage done by the company’s botched takeover of Worldpay in 2019. Stephanie Ferris, the incoming CEO, announced that Worldpay would be demerged this year with a separate listing on the stock market. She also booked an associated $17.7bn write down of the $43bn purchase.
Although the FIS board has been under pressure from activist investors, Ferris was Worldpay’s CFO prior to its acquisition by FIS and then worked as COO at FIS overseeing the merger integration. She probably came to her own realisation that Gary Norcross, her predecessor as CEO, had got the strategy badly wrong.
So, why is FIS demerging a business it only acquired three years ago? Well, the strategic rationale slide from the last week’s results deck won’t enlighten you much. I’m baffled investors put up with such flimsy written material.
The investor call itself supplied a little more detail. Stephanie Ferris said that capital allocation is driving the decision. Worldpay is stagnating and needs access to investment dollars to make the acquisitions it needs to keep up with Stripe, Adyen and JP Morgan. Ferris believes the current ownership, with its conservative balance sheet, cannot provide the capital needed to generate growth. She explained “specifically, the separation will enable FIS to target a strong investment grade credit rating, while allowing Worldpay to invest more aggressively for growth.”
Ferris was clear that Worldpay’s recent poor performance has been, in part, due to key product gaps and that FIS’s cautious capital structure had stymied its ability to buy-in or build capability. As an independent business, Worldpay will be able to raise the money it needs. In contrast, once free of its troublesome merchant acquirer, the rump FIS promises to be an investment grade stock paying steady dividends once more.
Shareholders did not welcome the move. Shares fell sharply on the news but no analyst on the investor call asked about the write down. Why $17.7bn? What went wrong? How is Fiserv, FIS’s arch-rival, seemingly make the exact same strategy work? FIS shares trade at less than half their value before Worldpay joined its family. Nobody apologised to shareholders for this value destruction.
It’s worth looking at why FIS bought Worldpay in the first place but before examining the deal rationale, let’s look at the history. Fifth Third Bank Corp span out its merchant processing division in 2009 with the help of Advent. This business was renamed Vantiv and bought London-based Worldpay for $10.4bn in 2017 bringing “together global scale, integrated technology, and diverse distribution to create a market leader in payment technology to power omni-commerce.”
Worldpay itself had been spun out of Royal Bank of Scotland with investment from Advent and Bain. Although Vantiv was the bigger partner and the HQ was to be in the US, the combined company chose to call itself Worldpay, which is a fine name for a payment brand. The combined business was valued at $28.8bn.
Less than two years later, FIS made its move and paid $43bn (including $8bn debt) for new Worldpay. As a rather staid provider of software and services to banks, FIS was feeling left out of the Fintech boom. Many commentators felt the Worldpay acquisition gave FIS a growth story. “The global payments industry is moving at an accelerated speed, and it is vital that large providers such as FIS stay ahead,” said Rivka Gewirtz Little of IDC Financial Insights.
The 2019 deal rationale was based mainly on revenue synergies from cross-selling merchant acquiring to FIS’s bank customers although management also believed that FIS products would be interesting to Worldpay’s merchants. The four main revenue drivers were expected to be:
Helping Worldpay to expand into emerging markets where FIS has a large footprint such as Brazil and India
Faster growth in eCommerce “through Worldpay’s expertise and ability to accept hundreds of payment types and currencies and FIS’ reach.”
Leveraging FIS’ leadership in the issuing market to offer loyalty programmes to Worldpay’s merchant customers
Using FIS’ expertise in open banking APIs to extend Worldpay’s acceptance offer beyond cards and wallets
None of these worked out. Cross-selling is always hard. Cross-selling anything to banks is even harder. Despite its heritage, Worldpay was never set up to partner with banks, the way that Global Payments, Worldline or First Data is organised. FIS didn’t pick up any new bank partnerships for Worldpay. In fact, it contrived to lose its main UK bank relationship when Natwest launched Tyl.
Integrating the two businesses, overseen by Stephanie Ferris in her role as FIS COO, took longer and was more expensive than hoped. Three years after the merger, the costs are still racking up. FIS charged $950m in 2022 “primarily to acquisition and integration costs primarily related to the Worldpay acquisition.”
Fast forward to 2022 and FIS management is now excited to say that the spin-off will create two market leaders – FIS as supplier of technology to banks and other financial institutions and Worldpay as the world’s largest global acquirer. At least for the moment. Worldpay’s FY 2022 volume was $2.2 trillion. JP Morgan, which grew 14% in 2022, is snapping at its heals and will likely be number one in 2023.
Management says the priorities for the newly independent Worldpay will be expanding in eCommerce (new geographies and “’payment optimisation”), strengthening its enterprise offerings including omni-channel and transforming SMB towards providing embedded finance working with ISVs. The latter is a recognition that its legacy ISO and direct SMB customers on both sides of the Atlantic are under sustained attack.
Charles Drucker, Worldpay’s CEO in 2019, returns to lead the business. He will need to quickly stabilise the poor financial performance which triggered the demerger. Although Worldpay was supposed to be the growth engine that transformed FIS’s fortunes, sales actually fell in Q4 2022, by 1% to $1.178b. Within Worldpay, a positive Q4 result from Global eCommerce, about 30% of revenue, was offset by continued sales declines in Enterprise (which includes the UK) and SMB. Erik Hoag, CFO, spelled out the problem: “These trends in SMB reflect a lack of new product investment, which we believe the [demerger] will best enable us to remedy. And in Enterprise, we saw economic weakness in the UK and anticipate further deterioration this year.”
Worldpay revenues are expected to decline a further 2%-4% in 2023 although I expect new management is assertively managing expectations. These numbers are likely to be very much a worst case scenario but it’s going to be hard for strong growth in Global eCommerce to overcome continued weakness in Enterprise (notably in the UK) and SMB.
FIS will soon be publishing more detail on Worldpay’s financial situation and market positions. It’s going to be fascinating to see how, as an independent business, it plans to invest to win in what is becoming a very competitive market.
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.
FIS reported moderate growth in its merchant solutions business in Q2 2022. Revenue was up 11% but margins contracted by 280bps. Woody Woodal, CFO, said “We continue to see wage inflation as an ongoing challenge” but he was relaxed about wider price increases as “we’ve been able to offset rising costs.”
Sales were boosted by a strong performance by the Global eCommerce division which was up 28%. Airline and travel clients have bounced back after the pandemic. The enterprise and SMB sectors saw revenue growth at under 10%.
Margins were hit by the impact of disinvestment in Russia (100bps), extra investment to support Global eCommerce and in beefing up domestic sales channels to support online merchants following the Payrix acquisition earlier this year.
Payrix is a payment-as-a-service offering that allows eCommerce ISVs to integrate payment processing with their software, either as a payment facilitator or simply white labelling the standard merchant acquiring offer. Payrix gives FIS access to a large and growing market segment but also the opportunity to upsell eCommerce payments to its in-store ISV partners.
Gary Norcross, CEO, is particularly excited about the new partnership with Signifyd which allows FIS to offer guaranteed payments to its merchant customers. Many online merchants are at significant risk from fraud and miss out on business by setting their parameters too strictly and rejecting good customers. With Worldpay Guaranteed Payments, FIS decides which customers are honest and shoulders the risk of fraud or chargebacks if the transaction goes bad. Merchants are assured that they will get paid and, says FIS, are prepared to pay handsomely for this. According to Norcross “we’re able to increase our revenue… doubling what we’re earning over processing revenue.”
FIS is a huge company which means some quite large numbers can be lost in the small print. Constructing the new HQ is not a cheap exercise with a total of $156m spent in the past twelve months. And FIS booked a further $160m “associated with the company’s platform modernisation.”