Shift4 Payments, Inc. (FOUR) Earnings Call Transcript & Summary

All right. Good morning. I think we're going to get ahead and get started here. My name is John Davis. I'm the payments and fintech analyst here at Ray J. We're excited to have Shift4 CEO and Founder, Jared Isaacman, with us this morning to tell us a little bit more about the story. He's going to run through the presentation, and then we'll open up for Q&A. So with that, I'll kick it off to Jared.

Okay. Thank you. Welcome to another exciting day in fintech. I was running last night next to an alligator pond thinking that would be a better way to go. So I think, at least my understanding is many of you are a little bit newer to the Shift4 story. So we actually have our investor letter here, but what I'll do is just give you a little background on the business, and then we can kind of go into some of the specifics from the quarter, and then trying again, leave a little bit of time. So I started the company more than 22 years ago now, actually, in my parent's basement, so I was 16 at the time, on a very cool journey. We are an integrated payments company. So what does that mean? We connect our payment platform into software to drive a commerce experience. So better than like 99.5% of the 200 million plus -- 200 billion plus, I'm sorry, volume that runs across our rail every year is connected into software. This is actually what makes us special. So if you think about the commerce spectrum, right, you have like, on this end, like super simplicity, like a single application that you can download on a phone and power an entire business experience, that this is like Square and PayPal land. And then you have the other end of the commerce spectrum where you require multiple different types of software, all made by different software companies, all in different versions, but still have to talk to each other, so through common encryption for security, tokenization for analytics, and then actually authorization and settlement services. This is the most demanding end of the commerce spectrum. This is where Shift4 lives as an integrated payments company. So to give you an idea of who some of our customers are, about 1 in 3 restaurants in this country use some form of Shift4 payment technology. About 40% of hotels use some form of Shift4 payment technology. Specialty retailers like UPS stores, would be stadiums, theme parks. And then we've since expanded into mobile wagering travel, leisure, e-commerce and such. We'll get into that in a second. But generally, you'll find that our customers are using lots of different types of software made from a lot of different vendors. And that requires an integration library of over 425 different software integrations and products that we have within the Shift4 universe in order to power these transactions. Now 22 years, we've grown revenue every single year, year-over-year without miss, including during the pandemic. We actually grew payment volume double-digits during the pandemic, and we'll talk about some of our more recent results. Now I will say that over the last 5 months, when the sector, I guess, tech in general has been going through turmoil, one of the most like common questions we're getting from various investors is trying to figure out who is winning and losing right now, because there's a lot of names in fintech, a lot mergers, especially over the last 2 years, and the landscape gets a little bit cloudy. What I'll tell you is if you are reporting payment volume as a KPI and you were growing payment volume, you were winning. And -- whether any time in the last like 10 years, especially though in the last couple of years, if a merchant or business is leaving one payments company to another, they are not doing it to get an inferior solution. They're not making switches to different providers over basis points anymore, they're doing it to migrate to a better technology platform and that can deliver a better commerce experience for their customers. So if you're adding customers today, you are winning, and if you are -- and you are -- which is bringing volume. If you're not growing volume right now, you're probably losing. And you're probably not reporting volume anymore as a KPI, which would be very unusual for a payments company to do. So we'll go into a little bit more into the specifics. So this fourth quarter, on the note of if you're adding volume, you're probably winning, we grew payment volume 97% for the quarter year-over-year. It's entirely organic. And you might say, well, maybe the previous year was just an easy comp. We grew payment volume double-digit in 2020, coming off of 2019, which was also a really strong year. Now how do you grow payment volume during a pandemic double-digits when the majority of your customers are concentrated in hotels and restaurants? Well, one, you could find like the luckiest restaurants and hotels that were somehow not impacted by the pandemic. That didn't exist. Or you're just adding a lot of customers. And they're migrating away from generally a handful of payment companies that require 4 or 5 different vendors in order to deliver a commerce experience. Now that's cost. That's a lot of people on a conference call pointing fingers at each other when you're trying to roll out things like QR code payments, mobile payments, contactless payments, things that are pretty important during a pandemic, and then moving to a single vendor solution where we own more links in the value chain than anyone else. That's how you grow payment volume during a pandemic. That's how you grow payment volume 97% in the fourth quarter. And I think throughout the year, we grew volume like 95% approximately. So even despite that performance, we were impacted by Omicron during the fourth quarter, as you would expect, given who our customers are. We actually set new payment volume daily and weekly records in the first part of December. And then Omicron showed up, and pretty much everybody got it if you went to like a holiday party or a New Year's party. And once you do that, then you don't go out and stay in hotels or go out for a drink and such. So you can see kind of a pretty significant drop we had there. It was right about the same time that we also were investing in our new verticals. So our Investor Day just about I guess, 5 or 6 months ago, we told everybody, look, at the time of the IPO, we were super lucky to pull it off in June of 2020. We were pretty focused on just our high-growth core, which is restaurants, hotels and specialty retailers. We said if we were going to pull off an IPO during a pandemic, it's a payment -- integrated payments company to focus on these verticals. We're going to come out of a better, stronger organization that diversifies across new verticals. So we've entered about 7 new verticals since the IPO, all supported by signature customer wins. So I'll give you an example. We moved into stadiums and theme parks through our acquisition of VenueNext about a year ago. We're now the category leader in that space. We have about 100 different stadiums that are powered by Shift4. We moved into e-commerce with Shift4Shop. We moved into travel and leisure, anchored on the win of Allegiant Air lines. We moved into nonprofits in health care with St. Jude Children's Research Hospital. We moved into what I generally call sexy tech, which was SpaceX, Starlink, powering their transactions all over the world, and then mobile wagering off the wind of BetMGM. So the point is like substantial diversification, huge TAM expansion coming off of the IPO. We elected to make some of those investments in the fourth quarter to build off these new verticals right about the same time as Omicron gave us a less-than-stellar end to the quarter. Despite all that, grew at 97% volume, grew 65% plus in revenue. EBITDA was still up 65%, probably would have been up considerably more had Omicron and some of those new vertical investments weren't timed at a -- not the best time. So executing our strategic objectives, continue to be a share taker. We are in a very unique position relative to almost any other payments company in that we have the ability to win a very large addressable market of just pure net new customers, and that's about 50% of our production time. So think of this as hotels that were never on our platform, restaurants that were never on our platform, specialty retailers like UPS Store originally was not on our platform. Those are all the examples of net new wins. BetMGM was never on our platform. Allegiant never was and such. The other 50% of our production comes from approximately 175 billion or so of volume that's on our gateway. This is where we're powering the transactions. It's our platform connecting to the software. We're tokenizing it. We're encrypting it. We're sending it along to another acquirer for authorization settlement services. Very dated model. Nobody does gateways anymore. We acquire them because it gives us an opportunity to cross-sell that volume over to our end-to-end platform. And when we do that, it's about a 4x to 5x uplift in annual gross profit contribution. We've been executing on that strategy for 5 years, and that's where the other 50% of our production comes from. So unlike almost any other payments company out there, at least half of our production, we know where we're going to get at any time because it's already on our rails. And then simply kind of changing a merchant number in our system and turning off the faucet moves the lion's share of the payment economics over to our universe. So continue to gain share through just winning the addressable market and steady gateway conversions, which we have a very long way to go on that, drives 97% year-over-year volume growth, maintain good spreads. Very common question we always get is, hey, if spreads are going down, does that mean there's immense competitive pressures? I say it again, like if a Pebble Beach moves over to us, they're not doing it over 2 basis points. Customers today that are migrating are trying to deliver a better experience for their customers. I think you see this across a number of technology platforms that are uniquely serving certain verticals today. They're migrating because they're getting again a better technology solution. If you're actually delivering on that, then you should be able to maintain spreads. We've been able to do that despite the fact that our average volume per merchant has been moving up at a 30% CAGR. So 22-year history. For 17 years, we serve the Irish pub on the corner that has a typical annual payment volume profile. We've moved up market from there, like our customers range the gamut from the Irish pub on the corner to Hilton Hyatt. We have Bloomin' Brands using our software. We have airlines. We have BetMGM. We have half the Las Vegas strip. So as we continue to leverage our 425 unique software integrations and add additional ones, we're able to continuously move upmarket, which we've been doing in a 30% CAGR without sacrificing on spreads, which you can see has been relatively stable at 74 basis points. And we've been growing really fast across a number of interesting verticals. Invest in new products. So I mentioned before at the time of the IPO, which was not even 2 years ago, we're pretty concentrated: restaurants, hotels, specialty retail. We've moved into 7 new verticals since that point in time. We do that by partnering with various software companies, some of our partners like Microsoft, Oracle, again, 425. Sometimes, we buy products. If we think we can be a winner in a vertical. Last year, we acquired VenueNext, moved into stadiums and theme parks, we're now a category leader in that space. And sometimes, we build our own products. And SkyTab POS is a great example of it because if you have 1/3 of the restaurant market in the country using some form of your payment technology, you have a natural conversation to sell them a new generation product, which contributes SaaS revenue on top of the spreads you're already getting within the vertical. And then go global. Probably the most commonly asked question we've received since the time of our IPO is, you have all these customers, especially your hotels, 40% of them, why wouldn't you consider expanding outside the U.S.? So just to be clear, 22 years of history, almost all our revenues, like 99.99 are like domestic U.S.A. Almost all our volumes, domestic U.S.A. So at some point or another, you have to expand the reach of your software integrations and your products into new markets. And we finally delivered on that this past quarter by announcing 2 acquisitions. One of which extends our reach into Europe and other parts in Asia Pacific. So I'm going to talk on that. I'll sail through this a little bit quicker. This just a general update on how we've progressed in the verticals that we expanded into since our IPO. So we weren't in any of these spaces less than 2 years ago. So global communications, we started -- we completed our integration with SpaceX Starlink. SpaceX Starlink, by the way, I'm a huge fan. They're expanding all over the world. They're our like beacon of light, our yellow-brick road. We're falling into every new market. And when we do get there, we're not just doing it for the sake of processing subscription payments in Central or South America or in Europe, we're bringing all of our products and integrations. So when we process transactions for StarLink in Europe, believe me, we're going to have our stadiums lit up in Europe. We're going to have restaurants and hotels using our software integrations and products in Europe. So that win was super strategic, 5-year agreement, takes us all over the world. We did complete our integration. First test transactions are done. Volumes cut over this month, at least for domestic U.S. Sports and entertainment, weren't in it at all 2 years ago. Actually, it's not true. We had Allegiant Stadium, was our first stadium, time of the IPO. We're now in 100-plus stadiums and theme parks, including the biggest theme park in the world using our mobile technology. Again, all in the U.S., you can believe it as part of our international expansion. Like football clubs across Europe are going to use our software, especially now that I've gotten current on Ted Lasso. Gaming, so we process half of Las Vegas Strip. That's in-venue commerce, that's the hotels, that's the restaurants, night clubs, retailers, into any gaming applications. We won BetMGM. We now have licenses in 10 states. We've expanded into a number of additional customers. BetMGM cut over their volume in the first state in March. So nonprofits, we were never in the space. It's a $500 billion addressable market. It has many of the same characteristics as hospitality and our other verticals and that they use lots of different donor management software. It's not really integrated super well. St. Jude Children's Research Hospital became our anchor customer in the vertical. We've since announced an acquisition of The Giving Block. It's going to allow us to expand pretty dramatically and pursue that market. E-commerce, weren't in it at all other than reservations at hotels at the time of our IPO. We acquired 3dcart, became Shift4Shop. We also created a number of risk tools and software integrations to things like Magento. Now we have a number of signature wins there, including, I would call SpaceX StarLink is kind of e-commerce as well. And then travel, we weren't in that space at all. We were certainly in hotels and restaurants, resorts, but we weren't in airlines. We added Allegiant Air line, not that long ago. So lots of progress. High-growth core, that's what we refer to as what we've done for 22 years. That's our 400-some odd integrations, restaurants, retail and hotels. That's where we have substantial share. We're not stopping there. We're continuing to grow quite quickly. In the last quarter, Palms to [ Senior Resort ], Halekulani, nice resort in Hawaii, a lot of Concessions International spanning into supporting airlines, specialty retailers like StorageMart, and then kind of a unique one is Space Camp, which I was a big fan of. SkyTab POS, new product that we started building. Again, we touch 1 in 3 restaurants in this country. Most of them are using prior generation restaurant point-of-sale software. So like future POSitouch restaurant manager, Harbortouch, Oracle, Agilisys. They're all integration SaaS. Some of them are products we own, some of them we're partnered with. At some point or another, you need the next-generation solution. SkyTab POS, hybrid cloud architecture, Android base. It's still in beta. We have 3,000 locations using it because it's been in a select release for about 1.5 years. But it will go full release in just a couple of months in National Restaurant Association where we've got a bunch of new like space-age hardware. And you can see some of the locations using it. It's in Starbase Texas, your SpaceX brand. It's in Crypto.com Arena, United Center Arena. So for a product that's in beta, it's doing pretty well with some signature locations. Again, sports entertainment, theme parks, we weren't in at all. We are the category leader in that space. Why? Because every stadium, you're going to want to be able to order a burger and beer in your seat and have it delivered to you and never wait on a concession line. If you can do that, then you can also wager in your seat. You can also order merchandise in your seat and pick it up without ever waiting in a line. That's what our VenueNext acquisition gave us a year ago. It's no surprise, every stadium is moving in that direction for [indiscernible]. Two acquisitions we announced, and not eating too much of the clock here, The Giving Block and Finaro. The Giving Block, we acquired because we were moving into the nonprofit space with St. Jude Children's Research Hospital. It's a $500 billion addressable market. How do you continue to have a foot in the door, expand across the vertical? We look at The Giving Block as the technology value add that gives you a right to win in the space. So what do they do? They connect crypto donors with nonprofits. This makes tons of sense. Regardless of where you are in the crypto belief system here, nonprofits will always take crypto. So if they take broken down cars, they will definitely take crypto. And The Giving Block built the marketplace and the technology that connects the 2 worlds. So there's 1,300 nonprofits on there. They're all the names you would expect to see. So like St. Jude's is a customer, Save the Children is a customer. And then they connect it to huge market of crypto donors. Some of them just want to do the right thing and help. Some of them are very tax efficient, some want to do both. But this world is super energized right now with the conflict we're seeing in Ukraine and the humanitarian crisis. People are donating lots of crypto to help out. The economics in their own right are really attractive because they provide a unique service that nonprofits wouldn't be able to navigate on their own. So we like just letting it do its thing. We're going to kick off the biggest crypto fundraising effort in history with a big match that I'm going to personally do to get people energized. So that's like Point 1. Point 2, the existing 1,300 customers take $50 billion in traditional card-based donations every year, 5-0 billion. We already have a relationship with them, a very natural cross-sell. That's what we do all day with our gateway conversion, so it definitely works here. And then 3, it gives us the right to win both crypto donations and card-based donations across $500 billion addressable market. So super excited about this deal. And then Finaro, delivering on the promise that I think I made to our employees like 12 years ago, that we were going to go international at some point. We finally did. Finaro is a European e-commerce cross-border payment platform, with an actual financial institution in Malta. Plus, they have licenses in Japan and in Hong Kong. So what does this allow us to do? Well, one, you're buying an amazing technology platform that's growing really fast. I mean this is a 30% net revenue grower, 50% EBITDA grower in its own right, has a lot of signature customers. I was just in Europe this past weekend. Vault, it's like -- it's owned by DoorDash. It's like their DoorDash to one of their customers. Give you an example. But we have a ton of revenue synergies here. Starlink, for example, like they're going to take payments all over the world. Right now, we can only satisfy their U.S. demand. I mean this is the path that makes us an Adyen with even better card-present capabilities. We can take our stadium software there, our wagering software, we can take our hotel integrations, restaurant software. So tons of synergies there. And it's [ online ], pre any of those synergies, which we're working on right now because we're allowed to during the 6- to 9-month regulatory period. Just stand-alone, it's a $30 million EBITDA contributor for next year. So this gives you a little bit of a sense of scale, 200 billion-plus total volume, 200,000-plus global customers, massive distribution, tons of software integrations, APMs, currencies, payment devices and the #1 crypto donation marketplace. Also profitable. EBITDA positive since 2004 and growing really fast. We gave some guidance out. You can read it, but I don't want to take away any more from question time, so...

All right. Thanks, Jared. We'll open it up for questions. Just raise your hand if you have one. I'll kick off to get it started, Jared. So during the IPO, obviously, really tough time to go public given your vertical exposure. You guys talked about normalized revenue growth of, call it, 12% to 15% on an organic basis. Obviously, you've done significantly better than that, put out 30% revenue targets over the medium term. Just talk about the building blocks and maybe what the organic component of that is or how you guys think about getting to that 30% number.

Yes. I mean it's relatively consistent with what we did prior to the IPO. We just set out very conservative guidance at the time of -- or just prior to the IPO during our Analyst Day. But in the 5 years preceding that, we were going into payment volume, nearly 50% year-over-year for several years, 30% at revenue growth for several, several years. So it's been -- it's really just been a return to that, that I think you'd see if you -- especially if you normalize 2021 for the months that were like severely impacted by COVID, March, April. So that's when we actually grew volume year-over-year every month in 2020, with the exception of March, April and I think December, which had the secondary lockdown. So I guess what we're saying is like it's all consistent really with the past. And then if you were to look to our midterm outlook where we're saying, look, we're going to get back to 30% net revenue growth, 50% plus end-to-end volume growth, looking at histories, you'd say, wow, it's relatively consistent. Then you take -- but they've also entered into 7 new verticals. They've expanded their TAM dramatically. They were entirely contained in the U.S. before. Now they have global reach by virtue of these acquisitions. There's actually a lot of room to outperform what I think is some of the most attractive mid-term outlook that was given. Any acquisitions, I mean, we do have $1 billion of cash. We have done acquisitions throughout history, either accelerate growth in current verticals or add new capabilities or now, of course, expanding geographically. That's just bonus time. That's not what's baked into the midterm outlook.

Okay. Sure.

[indiscernible]

Yes. So, I mean, it comes back to -- we are an integrated payments company. And we have lots of integrations, and we're constantly adding more integrations. And those integrations are what gives you a unique right to win in certain verticals. Because software companies like making their software better, they don't like certifying their software to lots of different payments companies. So once they get to a good place, they're in a good place. In the case of Allegiant, we have all the hotel and restaurants integrations that their customers are using. So for example, like Allegiant does own now hotel properties and restaurant properties. So the fact that we could already integrate into them gave you a start. And it was, well, what we at least can give you something you haven't seen before, which is combining the analytics, because just the way we tokenize our transactions between your restaurants, hotels and your airlines. And it gave us a -- it was a conversation. The airline industry is like almost entirely served by a single provider, which is Elavon, lives inside U.S. Bank, which would also be probably the same company that's donated the most share to us within the hotel space. So I think that probably gives you an example on Allegiant. But generally speaking, like our right to win will always come down to software integrations within particular verticals. So, give you an example, like if Pebble Beach ever were to leave us, which would be disappointing because we host a lot of conferences there, and -- they would have to -- that RFP would go to 3 companies. It would go to us, it would go to Elavon and FreedomPay, and that's it. It doesn't matter like how big anyone else is whether -- like an Adyen or a JPMorgan or something, you will never be able to get all of the integrations for the 3 hotels, the 3 salons, the 3 golf courses, the 15 restaurants, the 10 retailers. They're all made by different companies on all different versions, that instantly work with us and generally, instantly work with the FreedomPay or Elavon in order to compete in that space. So the RFP would never go to them. You'll find that is very consistent across all the verticals. Wagering, since -- like fantasy sports and mobile wagering was just illegal up until 1.5 years ago or so -- or 2 years ago in the country. Nobody else -- nobody had any integrations out of the gate. Nobody had any licenses. Once 2 or 3 companies sprinted at it, that's all the industry needs. You're now like in a unique right to win within that space, all you have to do is be better than the other 2. And with us, it would be, hey, 40% of the casinos in the country use us for their in-venue payments. Don't you think it makes sense to bring the worlds together so you have analytics and now you can see mobile wagering and in-venue wagering? But this would be the same story across almost any of the verticals we described. We possess some unique integrations or some technology solution that solves a pain point that gives you a right to win within that vertical that others don't possess.

Jared, maybe we'll hit on the gateway conversions. I think on the fourth quarter call, you guys were a little bit more aggressive talking about pushing some of those customers to convert end-to-end. So maybe talk about, you still have, I think, $180 billion opportunity there. I think you called for about $6 billion of volume from those this year in your bridge, which given your history of 50%, it seems a little bit conservative. So maybe just touch on what you're doing to incent those customers to move over. And what it would look like kind of in a bull case if you were to continue to get that 50%?

Yes. I think actually that $6 billion is a combination of both gateway conversions and net new wins. Yes. That $8 billion, $8 billion. Yes. So it's actually even more conservative because the other 50% is still winning the market. Yes. So we acquired 2 gateways that possessed a lot of the integrations, that give us the right to win across a lot of these verticals. It was a dated model where gateways were doing all the work and then passing on the lion's share of the economics to what would be considered today the legacy merchant acquirers who didn't develop the integrations themselves. We saw it as opportunity, acquired both, then started gradually redirecting that what is essentially a captive volume of about 180 billion that can't really go anywhere else. And we've just been using for the last 5 years a very carrot-first approach, just showering everybody with incentives to migrate over to our end-to-end platform. They're saving money. We're solving pain points for them. And it's, again, a 4x to 5x lift in gross profit for us. It's a really good deal. I just don't want to be doing it over the next 20 years. We maintain a lot of pipes and a lot of connections to a lot of essentially competitors. And every time there's a new EMV update, every time there's a new device that needs to be certified, we have to do it for ourselves and we have to do it for them. And at this point, when those acquisitions close, we have some 2,000 employees, I'd say 50% are probably spent maintaining the past versus focusing on winning the next Starlink and the next the next Allegiant or closing geographic gaps and maybe Central and South America and such. So the idea is we're going to take out some of those parts. It will be plenty of notice, but over time, we're going to say like, we're no longer supporting like a Bank of Hawaii connection or an old Vena connection or an old Mercury connection or an old NDC connection. And it's basically just kind of creating a forcing function where maybe they would have switched our end-to-end platform 3 years from now or 4 years from now or like maybe I would have upgraded from Windows XP in 10 years if Microsoft hadn't kind of said, "Look, we're going to stop supporting it. You got to make a move." We're going to do the same. And what we think essentially is going to happen, that 180 billion of volume that we -- that maybe would have migrated 75% or 80% over a 10-year period of time, we think like 65%, 70% will pull over in like a 3-year period of time.

Okay. And then maybe just talk a little bit about supply chain. You guys obviously do provide your merchants with a good amount of hardware, a good part of why you win new business. So any disruptions? Any kind of issues in the first half of this year?

No. We're pretty good about that. So to be clear, just there's like no hardware revenue in any of this. We actually give them a way to sell pain points for our customers and just enable commerce. So yes, just being pretty smart about carrying a lot of inventory going into 2021, anticipating there would be some challenges. So never [indiscernible]. Some wins every now and then like with [ seat paper ]. You can't find for a couple of weeks, but solve for it.

I'll just add that, but we did do a little bit of a [indiscernible] by Q3, positions us really well in '22.

Yes.

Okay. All right. With that, I think we're out of time. The breakout's in Cordova 4 for those who are interested.