Fidelity National Information Services (FIS)
Diworsification reversed..back to high qaulity compounder
QUICK PITCH
FIS is a classic case of diworsification. The WorldPay acquisition was not only expensive but the business was on the turn. After activist pressure, FIS are re-focusing on their core business and have partially sold WorldPay to private equity. The historic business was a classic high quality compounder, selling mission critical systems that were recurring in nature (>80%) and with high renewal rates (99%). The remainco trades for ~11x ‘24 EPS and ~8x EV/EBITDA for a capital light business with high ROIC. Prior to WorldPay, the stock traded ~19x earnings.
THE DETAIL
FIS is a leading global provider of software & risk management solutions to large banks.
In 2019, FIS acquired Worldpay for $43bn. It has been a disaster for the stock. From a ‘20 peak of $157, the stock has declined into the $50 range.
Worldpay allowed merchants to accept digital payments at the point of sale and online, with revenue tied to payment volume. Their customers ranged from global enterprises right down to SMBs.
What went wrong? What made FIS take a $17.6bn write down on Worldpay in Q422?
Competition - SMBs have multiple options for enabling electronic payments including Stripe, Square, Adyen etc. If they decide to work w. e-commerce platforms such as ETSY, SHOP, EBAY or AMZN, payments is already integrated.
Collapse in margins - from 10-14% pre-Worldpay to under 3%
Macro sensitive - Worldpay was levered to transaction processing fees. These fees were impacted by rising interest rates, inflation, and slowing economic growth.
Enter the activists. In Dec ‘22, two activists (DE Shaw and Jana Partners) drove a change in strategy w. a “focus on identifying and optimising incremental revenue generation, margin improvement and cost reduction opportunities”. Management was also changed w. Stephanie Ferris becoming the new CEO of FIS w. a mandate to return FIS to its roots to FIS pre-Worldpay. A compounder w. “steady recurring revenue growth, consistent margin expansion and disciplined capital return to shareholders.”
The new management team initially announced that they would spin Worldpay before agreeing to sell a majority stake (55%) to private equity firm GTCR. The deal valued Worldpay at ~$18.5bn and at 9.8x FY23 EBITDA. The proceeds allowed FIS to delever the balance sheet to ~2.5x (delever by $10bn) and to maintain an investment grade rating.
We are now left with two main divisions. The advantages these divisions have are as follows:
BANKING SOLUTIONS - outsourced central-account processing and back-office technology to larger financial institutions.
Scale - estimated to have 80% mkt share among medium/large banks for core bank processing
Switching costs - FIS is embedded into their clients offerings. To rip and replace would be extremely difficult leading to client retention of 99%
Deep client relationships and long term contracts
High renewal rates and 80% recurring revenue
Driving software/services mix to improve margins
No exposure to credit. Highly defensive
CAPITAL MARKET SOLUTIONS - provides regulatory, risk management and trading software to buy-side and sell-side firms. This division was formed post the acquisition of Sungard Data Systems.
Move to SaaS model has driven recurring revenue growth to 10% and led to less volatility
Scale is driving margins higher by 1% p.a. to over 50%
Recent results have been strong w. organic growth of 4% and FCF conversion 94% YTD. They have also restarted the buyback with an aim to buy >$3.5bn (up from $2.5bn guidance before) in stock by y/e ‘24. Capex as a %age of revenue is also improving.
In conclusion, the multiple contraction seen at FIS has been due to the mis-firing WorldPay acquisition. With this now removed, FIS can start to see multiple expansion back towards their historical multiple as the core characteristics of the business shine through.
As an aside, Seth Klarman was buying shares in 3Q22, 4Q22 and 1Q23.