Fidelity National Information Services Reports Weak Q4, Will Spin Off Acquiring Operations

Fidelity National Information Services reported a disappointing end to a disappointing year. As result of the company’s difficulties, management has decided to spin off the WorldPay business. The short- and long-term outlooks for WorldPay appear to be much weaker than we had anticipated, but we question whether current management is mistaking poor execution for a poor strategy and throwing out the baby with the bathwater. With the fundamental picture now dramatically changed, we expect to reduce our fair value estimate to $83 from $128. We will maintain our narrow moat rating.

For the quarter, FIS reported year-over-year organic growth of 4%, with the capital markets business being the strongest performer and the merchant business being the weakest. Adjusted EBITDA margins declined to 43.2% from 46.4%. The ongoing issues within the merchant segment are troubling, given that this business was intended to be the main growth engine for the company longer term.

We appreciate incoming management’s frustration with the company’s performance and the desire to correct previous mistakes. However, we question whether the spinoff of WorldPay is the correct move. FIS’ peers, Fiserv and Global Payments, completed very similar deals in 2019 and 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 space) and that the strategy behind the combination was not necessarily flawed from a long-term perspective. As a result of this decision, the company took a $17.6 billion goodwill impairment charge.

On the positive side, following the spinoff, FIS will return to being primarily a bank tech provider. This business, while lower growth, is relatively predictable and stable, and we believe this segment has the strongest moat among FIS’ businesses. Management noted that it expects to make capital return a priority.