FIS Now Has Only Modest Long-Term Growth Prospects

Senior Equity Analyst

Brett Horn

Fidelity National Information Services' acquisition of Worldpay in 2019 was one of three similar transformational deals that took place in short order. But FIS has since decided to undo the Worldpay deal as it struggled with operational issues within the Worldpay business. 

Following a period of weak performance, management changed at FIS at the end of 2022. The new team, frustrated with the performance of the Worldpay business, originally decided that FIS would spin off Worldpay. We questioned whether the spinoff was the correct move. FIS’ peers, Fiserv and Global Payments, have not faced the issues that have plagued FIS. To us, this suggests FIS’ recent issues stem more from operational missteps (specifically underinvestment in the SMB, or small and medium-sized business, space) and that the strategy behind the combination was not necessarily flawed.

Management later decided to sell a 55% stake in Worldpay to the private firm GTCR instead. The deal values Worldpay at $17.5 billion, or 9.8 times expected 2023 EBITDA, including corporate and additional stand-alone costs, with potentially another $1 billion in the future based on GTCR’s returns. We like that this deal allows FIS to maintain a stake in Worldpay. We also believe Worldpay might be better off as a private company, given that we think the business needs significant investment to restore growth. To this end, we like that GTCR has committed an additional investment of up to $1.25 billion for acquisitions. On the other hand, we think FIS is selling a significant stake at a somewhat depressed level. Additionally, the two companies will remain intertwined and Worldpay will become a private company, which will potentially reduce transparency into its turnaround efforts. Overall, we would have preferred a clean break.

On the positive side, following the sale, FIS will return to being primarily a bank tech provider. This business, while lower growth, is very predictable and stable, and we believe this segment has the strongest moat among FIS’ businesses. But investors will likely have very limited insight into the performance of Worldpay, which will still account for a meaningful portion of the overall value.

Business Strategy & Outlook

While we believe certain segments of FIS’ business benefit from a wide moat, we believe a narrow Morningstar Economic Moat Rating is appropriate for the business as a whole.

FIS’ roots lie in core processing systems, the most basic and mission-critical system for banks, and this business is contained in the company’s banking segment, which makes up almost half of revenue. Core processing is the nuts-and-bolts system that banks need to maintain their deposit and loan accounts and to post daily transactions. Given the integral nature of core processing to their operations, banks very rarely switch systems. Besides the potential for interruptions, converting systems would require the banks to retrain employees. Customers typically sign multiyear contracts, and customer retention approaches 99% annually, excluding customers lost because of acquisitions by another bank. Its leading market share also gives FIS an edge in this scalable business. We think a wide moat surrounds core processing. 

But the bank technology industry has expanded significantly over time, with providers now providing services in areas such as loan origination, electronic bill payments, debit card processing, and online banking. While we believe many of these products enjoy switching costs, and areas such as payment processing have built economies of scale that lead to a cost advantage, switching costs for these services are not as immense as for core processing. Further, compared with peers, FIS’ customer base skews toward larger banks, which have more leverage. Overall, we believe only a narrow moat surrounds this segment of the business.

The capital markets segment offers services to investment firms and enjoys some similar dynamics to the banking segment. Its services center around largely back-office, day-to-day activities, and customers typically sign three- to five-year contracts. We believe this business benefits from meaningful switching costs, but that the magnitude of the switching costs is significantly lower than for core processing for banks. We believe this segment merits a narrow moat rating.

With its merger with Worldpay in 2019, FIS expanded into merchant acquiring. Payment processing of any type is highly scalable, as once a payment platform is established, there is little incremental cost to additional transactions. As a result, a handful of acquirers have come to dominate the industry. Recent mergers and acquisitions have further consolidated the space, and Worldpay had been at the front of this trend, with the early 2018 merger of Vantiv and Worldpay creating the largest stand-alone acquirer in the US, with a little over 20% market share. Worldpay serves merchants across the size spectrum, but we believe it and other leading acquirers are the only ones with the scale to effectively serve large merchants. As a result of its scale and the resulting cost advantage, we believe a narrow moat surrounds the merchant segment. While FIS now only holds a minority interest in Worldpay, that stake is still a meaningful portion of the company's overall value.

Narrow

Economic Moat

Fidelity National Information

SunGard was an American multinational company based in Wayne, Pennsylvania, which provided software and services to education, financial services, and public sector organizations. It was formed in 1983, as a spin-off of the computer services division of Sun Oil Company. The name of the company originally was an acronym which stood for Sun Guaranteed Access to Recovered Data, a reference to the disaster recovery business it helped pioneer. SunGard was ranked at 480th in the U.S. Fortune 500 list in the year 2012.

SunGard

Fidelity National Information Services, Inc. engages in the provision of technology solutions for financial institutions and businesses. It operates through the following segments: Banking, Capital Markets, and Corporate and Other. The Banking segment focuses on serving financial institutions with core processing software, transaction processing software, and complementary applications and services. The Capital Markets segment provides global financial services with buy- and sell-side solutions. The Corporate and Other segment includes corporate overhead expense, leveraged functions, and miscellaneous expenses. The company was founded in 1968 and is headquartered in Jacksonville, FL.

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