Wednesday , September 30, 2020

E-Commerce Helps Buoy FIS as Merchant Volumes Post Positive Growth Rates Again

FIS Inc. had only begun to digest the massive processor Worldpay, which it acquired in July last year, when the global Covid-19 virus broke out, leaving the company on Tuesday to report a challenging second quarter marked by a significant hit to its newly integrated merchant-processing business. Still, given the pandemic’s deep impact on consumer and business spending, the quarter’s results “exceeded our expectations across the board,” said chief financial officer Woody Woodall during a Tuesday morning earnings call.

Overall, the results companywide could have been worse for Jacksonville, Fla.-based FIS but for “the benefits of automation,” including the company’s move to a cloud-based strategy, chief executive Gary Norcross told equity analysts during the call. He predicted FIS, which provides core processing for financial institutions and capital-markets software as well as merchant processing, will have more than 80% of its computational power in a cloud configuration “by the middle of next year.”

Norcross: E-commerce “was the crown jewel that came out of the Worldpay acquisition.”

The merchant business produced $812 million in second-quarter revenue, up from $97 million in the pre-Worldpay second quarter of 2019. That accounted for fully 27% of FIS’s revenue, But the pandemic’s hit to merchant acquiring was such that the company reported a 25% drop in organic revenue for the unit, referring to change year-over-year when current revenue sources are included on a constant-currency basis in last year’s result. The drop was 19%, though, with the exclusion of a “$60-million headwind” that resulted from the delay in federal tax-filing deadlines, Woodall told the analysts.

Still, “merchant volumes returned to growth by the end of June,” Woodall added, with dollar volume for the month up 4% and transaction count down by just 1%. The corresponding figures for May, by contrast, were negative 7% and negative 11%. And the drops in April were even deeper, at 18% and 21%. A big bright spot was an approximate 30% rise in e-commerce transactions for the quarter, excluding travel and airlines, as stuck-at-home consumers turned to the Internet for shopping needs.

Indeed, e-commerce processing capability “was the crown jewel that came out of the Worldpay acquisition,” said Norcross. “We’re leaning in to next-generation capabilities there. Post-Covid, this is a good, solid double-digit grower for FIS.” Added Woodall: “On the e-commerce side, demand continues to be robust across the board.”

FIS executives said the integration of Worldpay is proceeding “ahead of schedule,” having already produced $115 million in second-quarter revenue “synergies,” or incremental revenue compared to the same time last year. “Our original estimate was $100 million for this year,” Norcross said. “We feel great about where we are.”

In the banking solutions unit, which at $1.48 billion in second-quarter revenue is the largest of FIS’s trio of divisions, the company reported progress toward mobile and digital technology after long delays caused by outmoded supporting technology. “We’re now seeing [banks] leaning into next-generation digital,” said Norcross. “Most of our customers have just held on [to older technology] too long and now realize they’ll have to spend their way out of it.”

The company as a whole generated $2.96 billion in revenue for the quarter, down 7% from $3.21 billion a year ago when adjusted to include Worldpay.

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