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

My name is Dan Perlin. I'm head of the fintech practice here at RBC. And I'm delighted to have Shift4 with us today. And from the company, we have Taylor Lauber, who's the company's President and Chief Strategy Officer. So thank you so much for being here. It's been a fun journey. Maybe taken private, maybe not taken private, and now we're back to living on our own again.

So what I thought maybe we would do just to kind of level set is just talk about maybe some of the top priorities. We'll funnel into a lot more of the detail in a second. But like what are some of the top priorities you're starting with as you sit here today and start to progress throughout the year?

Yes. It's much simpler than it sounds or it seems from the outside, which is we have a massive base of customers to cross-sell in the United States and the verticals that we've been immensely successful in. So whether that's restaurants using a software brand we acquired that we can migrate to payments or onto SkyTab, which is our next-gen product, whether it's hotels on our gateway that we can migrate over to end-to-end processing or whether it's a stadium that quite frankly, we're running a ton in the open market, but also our #1 competitor sold us their business. So you've got an awesome embedded cross-sell opportunity in that. Between the cross-sell and our ability to win share in those markets, there's really no slowing down. And we've also seen opportunities to accelerate this convergence from payments and software together and legacy software into next-gen software through acquisitions. And we've done a handful of those, Appetize being another great example that Revel, which is a transaction we announced recently. All of these represent exceptionally low customer acquisition cost and a playbook that we can execute quite well. And so we're very excited about that. Now that is doing what we've done for 25 years in the United States, and doing it constantly. And on the occasion, like we did with stadiums or with hotels finding a new vertical that can benefit from everything that we won from. You have to separate that from what I think is a much more interesting longer-term strategic opportunity, which is that this can be convergence of payments and software that we take for granted in the United States because it's been connected for 10 years or more, has not happened in the rest of the world. So if you believe in the growth potential inside of an Adyen, if you believe in the growth potential inside of a Stripe, it's all the theme that the markets of commerce and software are converging. And in the rest of the world, that convergence has happened slower than in the United States. Despite all the potential we see for [ adhere ], you can go to an incredibly developed payments market or just economy like London and there's still a bank terminal maybe sitting next to a piece of software, and that is an incredibly inefficient way to running business. The industries of software, hardware and payments still all live on kind of opposite corners of the Street. So we have an immense focus on saying, how do we deliver an awesome integrated payments experience and all the efficiencies driven from that? How do we consolidate from these 3 industries and vendors down to one for the benefit of the merchant in the rest of the world?

Yes. There's a lot to unpack there. So let's start with a high-level your capital allocation philosophy in terms of these things because we want to talk about these deals, including kind of Vectron, just so we know where that sits. But you said in the past like the incremental dollar almost doesn't matter as long as the returns are what you need them to be. And then you go around and you kind of tear down these businesses that you buy. And so that causes a lot of, I think, heartburn for investors. So we're not familiar with what that kind of somewhat unorthodox manner in which you buy these assets, but you're doing it, as you say, incredibly low customer acquisition and they have very high returns. It's just -- it's a little bit unorthodox. So maybe talk about that at a high level, and then we'll talk about some of these deals specifically.

Yes. You made the comment, it doesn't matter. I want to be pretty specific about the return on capital for us matters immensely. And quite frankly, it's the most important metric for us. Whether that dollar is invested in buying a company, hiring an employee or investing in R&D is somewhat indifferent if we think it's going to generate the right results. And it's almost exclusively focused on customer acquisition costs. So all we say it's a payback on the dollar that we hope to be 18 months or less. It's generally focused on how is that dollar deployed going to add to our customer count. And again, I mentioned a couple of really awesome high-growth payments companies who have generally benefited from serving markets that grow really nicely for them. We are in restaurants, hotels and stadiums. They are phenomenal places to go. The industries don't grow much. So for us to grow, we've got to add lots and lots of customers. And I would say, philosophically, and I'll take the Vectron transaction as an example of that. You have a software asset that is on its own phenomenal. It is a massive share of the restaurant point-of-sale market inside of Germany. They have roughly 65 down locations that have adopted their software. They're everywhere, if you happened to be there. And yet they've never monetized payments in a substantial way. And that might look like an overlooked opportunity for the software asset, but it's also a tremendous inefficiency for that restaurant. There is a bank terminal that has a totally separate agreement, the point-of-sale reports and the deposits from the bank may or may not ever match each other, and there's still good way to reconcile those things. We, having had a 20-year head start on the convergence of software and payment look at that and say, there is no good reason that it should exist the way it has except for a little bit of inertia and complacency in the business in the markets that they serve. And we say, okay, what is a reasonable customer acquisition cost? And how do we drive incentives through that business to change the behavior that's existed in the way that it has. So we believe through the purchase price of the business, operating the business, we get access to the [ 6,000 and 5,000 ] customers. We can really drive decision-making across that base. We know what the inefficiency is. And it's not -- we're not selling extra widgets, we're selling them a service that they have to buy any way and they would much prefer it to be tightly integrated to the payments experience. And then we say, when we do our math, are there other incentives that need to exist? Do you need to pay a local installer a few hundred dollars to make the installation work? Maybe stepping back from the Vectron transaction specifically and saying, if you look at the growth of our business by any measure, whether it's volume, whether it's revenue or whether it's free cash flow, and you compare it to who we would consider incredible kind of competitors or just industry benchmarks, you could call it Square, you could call it Toast, you could call it others, you'll find that for the same amount of growth, we've spent a very, very, very small fraction of the capital to get there. And we would argue we did it in like a less risky way than finding new customers.

Yes, totally. Well, let's pivot a little bit towards the Revel acquisition, right? This was something that if it closes, I guess, hopefully, very beginning of July, you put out some numbers around that. Maybe just talk about the strategic benefits for this asset, in particular, where that's heading? And then maybe how you might adjust that business model as well in order to make it fit the strategy that you guys are going to employ?

Sure. So let's start with it's a business we believe we understand very well. It had been private equity backed. It'd been owned for a lot of time. And I say this with all the right sensitivities we've been private equity backed that means you're kind of always for sale. It means that you get the opportunity to look at these businesses over the course of multiple years. And again, this is the byproduct of being very rigid and disciplined in how we think about customer acquisition costs, how we think about the return on a dollar invested. We had a pretty rigid price expectation for that asset that we would pay. And we were light years apart in early years of their attempts to sell the business and we stayed firm but also in touch for a long period of time and then one day, our price seemed to work for them. And so why did we sit at it for so many years? We understood the product. We understood the niche within the restaurant vertical it served. Interestingly enough, they had done a round of layoffs 8 years ago at their tech center and building us Lithuania, which is what compelled us to put our tech center there because there is this excess of talent that needed a home, and we said we admire the product and we admire the team, and we'll take advantage of that. So we now -- our largest office is there. They have a very large presence there as well. There's tons of text synergy in that regard. We know exactly where our technology dollars were going to be spent, and this kind of helps solve that for us. And again, a large, embedded base of customers that payments was largely overlooked on. So we will cross-sell those customers on to payments. We have a natural product for them to land on, which is SkyTab. And I think we can increasingly look at a transaction like that and say, customers would probably have ended up with ourselves or with our nearest competitor, if you just left things alone. But if you own it and you solve a bunch of your future growth needs with respect to personnel and technologies and also can you give those customers a much more stable path than kind of getting fed up with the product over time.

Yes. So you got Vectron. Revel, I think has, to your point, some European presence. So the question there that we get all the time is European distribution, right? Like you're strong in stadiums and so they're kind of natural extensions. You're strong in hotels. That's kind of a multi country natural extension. But the restaurant one, I think, leaves people kind of scratching their heads like, how do you do it, especially country by country. So is this an early kind of indication of where you're heading? Is this a jumping off point? Or is it just 2 good assets you saw?

So both the Revel business and to a much greater extent, the Vectron business had a reseller model in Europe and in the rest of the world that we admired. So Vectron has 300-plus distribution partners. These are the people that take the software and the hardware, they install it in a local location, they help configure menus and things like that. And quite frankly, they take the phone call when something is not working. . And so we are -- that was a critical criteria for us in how we thought about our European strategy. I don't think you can be too cautious about what local customs, local language and all these things can be in terms of a barrier to entry and what better way to bridge that than 300 local resellers who speak the language and have known these customers for a decade or more in many cases. So that's a huge benefit. I think there's good philosophical debates about direct versus indirect and when to go, but entering a new geography, having a loyal set of resources that are going to vouch for the product that are going to advocate for you, but also standing between you and the customer and bridge all those divides that can be created in the early days of a strategy has immensely helped.

Yes. So that's a good jumping off point for them. Let's pivot a little bit to Appetize, like this one is a fantastic asset. Here again, the strategy is you buy this thing and then you start to reshape it into your own form. So maybe just remind people what you're doing there kind of the expectation hurdles that need to be set so that we don't get ahead of ourselves or miscalibrate in certain categories when we think about how that business is going to grow.

Yes, sure. Appetize was the category killer in sports and entertainment 4 years ago, meaning point-of-sale software, mobile software, et cetera, for a stadium. The problem is they were generating a decent amount of revenue through this penetration of a new market and losing $30 million, $40 million a year doing it. It's -- that business was for sale and we couldn't get our heads around that math. We ended up choosing a business called VenueNext, which was just a bit more nimble in [ average ], much smaller, but also running as a breakeven business, and we just kind of agreed with philosophically the direction they were taking things. We were very pleasantly surprised that last summer, the owners of the Appetize business called us and asked if we wanted to buy it. It's not contrary to healthy investor skepticism. You don't get to will your #1 competitor to call you and sell you a business at a significant discount to what they paid for it. So we were thrilled to take that phone call. What were the challenges? We knew that there couldn't be 2 products. It just wouldn't be viable. I mean they, as experts running the business couldn't run that product profitably at any point. And so we knew we had to have confidence that the VenueNext product would win. Thankfully, that confidence was instilled on us by the fact that we were winning most new stadiums anyway. We had one healthy amount of customers away from them. And then it came a question of, okay, you're accelerating an event here if you buy Appetize and you push the customers towards your product. And what is the benefit of that acceleration? And what should you pay for it? Well, not dissimilar from what we found in Europe. We needed a lot of technology talent in our sports and entertainment space. We needed installers. So it's a very easy decision to say anyone focused on support and installation, you've got to come over. But really, the people focused on the product are not going to fit well in this ecosystem. And it's worked phenomenally well. We've installed some of the more challenging customers within 2 months of the acquisition, meaning fully migrating them off of Appetize and on to VenueNext, Yankee Stadium being a perfect example of a customer that generally is best-in-class and not going to move quickly but saw the value prop immediately. And right now, we're installing more stadiums with VenueNext in a month than we have in our busiest quarter at any point in the past. Now important for those of you that focus on the financial modeling, what does this mean? It generally means you're kind of shutting off the Appetize revenue stream. You shut off all the onetime hardware and software that they used to charge for. And you say, we'll give you the whole solution. We want to monetize this primarily through payment processing and you install the stadium and then when the sports season starts you get a lot of revenue from that. So we have had to educate investors on the consequence of this turning off what we viewed as less attractive in onetime revenue for the benefit of longer-term revenue. And in sports and entertainment, it's -- you got to follow the season. But we haven't found a single environment that hasn't benefited tremendously from this transition.

So in your opening kind of comments, you talked about all this incremental business that you have. You started to introduce kind of last quarter, this idea of a backlog. I mean as an outsider looking in, it's hard to model 151 stadium is being implemented and then be add on ticketing. And then how do you add on -- it's just -- it's a little bit of a disconnect relative to, I think, the opportunity set that you want the Street to underwrite. So how do you help us do that in terms of thinking about the duration and durability of the model given that you have all of this demand, but it doesn't -- it's not always as clear as how it falls in the financial numbers.

So it's a great question. I think in our SMB business, it's not as prevalent, right? We've got a long history of selling into the Bar and Grill in Boise, Idaho and a really good track record of plotting our efficiency. And quite frankly, the installation time lines are not very long. And the second you install it, you're generally getting revenue the next day. . It's most exacerbated in large hospitality rollouts which, for better or worse, are somewhat finite. On the occasional new property that's being built, we've learned from our mistakes about trusting the developer when they say the property is going to be done. But it's mostly exacerbated in sports and entertainment. And I would say it's for the reasons I mentioned, which is that you're going to do all the work. And quite frankly, you're going to spend all the capital. You're going to give a stadium all their hardware in the offseason. And you're going to do all this installation, then you're going to wait for the first event. And in some cases, the rush to put you in for something that doesn't at all correlate to what a year's worth of revenue is going to look like. We installed at MetLife Stadium, which powers the Jets and the Giants games recently just for the draft. They wanted the technology in place for that events. Saratoga Springs, we installed last week for the benefit of the Belmont Stakes. And then you just kind of have to wait for the busy season to start up. So yes, it's challenging. And ticketing is immensely challenging because it's very binary as to whether you win it or not. And then most of the sales happen in a very finite time frame when they're selling season tickets. What I would encourage investors to do is look at the expectations for the business 4 years ago when we IPO-ed and our results. And the fact that sports and entertainment wasn't even a contemplated vertical at that moment of time. So do bear with us when we find these new opportunities and learn what the sales cadence looks like. And for better or worse, if sports and entertainment as a guide, it's been 4 years and we went from none to 75% of the stadiums in every league in the United States. For better or worse, we're growing to scale quite quickly.

Yes. I mean it's an amazing upgrade cycle, but the question ultimately becomes how do we measure it? And so are you -- is it your intention do you think as an organization to start to help us dole that out a little bit because like for right now, I mean, you're just doing a bunch of stadiums like you have 75% actually rolled out? Do you have 25% rolled out like that's the complaint.

Yes. And Jared mentioned this, I do think a backlog insight is helpful. I think it's most helpful in sports and entertainment. .

Yes, just for that.

I don't think it would be radically different in sort of restaurants where we've got a very regular cadence on occasion hotels. Europe will be quite interesting, for example, where we know our sales strategy, we will have really good insights into receptivity and installation time lines might be a little bit longer than in the United States. So we're not at all opposed to it. Quite frankly, Jared offered it up. But I do think sports and entertainment is where it's mostly exacerbated. And I think that's temporary, to be fair. I think it's, quite frankly, the Appetize transaction and the base of customers that provided us with that is exacerbating the problem.

Yes. I'm probably leading the witness here a little bit, but like you do have a second half ramp that's built and implicit into that. So what are the -- if we had a drop-down menu of categories that you'd want us to focus on to get comfortable with that second half ramp, what would that look like?

So it's predominantly that sports and entertainment phenomenon I mentioned and Europe, which is that we knew that the [ Panera ] business for us would give us the technical right to compete in Europe, it would not give us the sales resources we needed to go in. So we expected to need something to fulfill our production goals in the back half of the year. And then the Appetize example, I think, is where it's most strained because you're giving up short-term revenue in exchange for much better long-term revenue, but the time line might be 6 months if you're looking at the extreme end of forgoing a hardware sale, installing a stadium and then waiting for the revenue to start up. So that's a really important thing to keep in mind. And I think investors struggle with it because when we announce an acquisition, they immediately dived down to like what's the revenue of that acquisition.

100%.

We modeled most of that will disappear as a result of the actions we're going to take. And then what we also model is how long does it take to get above breakeven and then how high does it go after that. And so when we're buying an acquisition, it does kind of -- there are calories we have to burn off associated with their revenues, and that creates kind of this imbalance in the year as well.

Yes. Any commentary around just kind of the recent trends environment. I think one of the things you said around the quarter was that it was reasonably favorable on the original 1Q. But like what does that mean? You're right like...

We're talking in the other room about how you can look at just the 3 large networks and get a very different story of what's going on. We see, for example, significant strength in the hotel space, surprising level of strength in terms of kind of room rates and same-store sales. I don't want to be hyperbolic there, but we -- any same-store sales growth over what was a phenomenal summer last summer is kind of depressing to us. Sports and entertainment is the same. Venues do not seem to have a problem filling up and there seems to be no dearth of appetite to go to these things. Restaurants is a bit more nuanced. And I think you could find this evidenced by all of the different restaurant data we get exposed to. We look at, by the way, whether it's competitors' data points or whether it's network data points. So we always raise an eyebrow in one direction or the other because we never quite see exactly what they're seeing. And I think that's because you have destination resort cities quite frankly, just caliber of restaurants that are doing well-ish, are doing quite fine selling $30 cocktails. And then you've got this other set of the population that is struggling with same-store sales compression at a modest rate. All of that manifests itself to be somewhere between kind of flat and down 1% on a given month. Fortunately for us, I think I was at this conference 2 years ago, saying this guy is following the restaurant vertical. So we run our business with the anticipation that our customers won't grow for us. I think that's a good posture to have. But I would manifest this all to say, our caution has been prudent in terms of how we run the business. It has never manifested itself in any vertical. And for those kind of worried about like the restaurant health or the consumer health, like -- we had a global pandemic 4 years ago, and we're 99% restaurants and hotels, and we did pretty darn well through that. So some of our posturing is we grew payment volume 20% year-over-year in the third quarter of that pandemic. So a little bit of same-store sales compression isn't going to change our view that we've got to find a hell of a lot more customers every year to continue to grow.

Yes. All that said, organic growth for the full year is still plus or minus, right, in that 25% range, no deviations from that. Let's pivot to SkyTab. The rollout here, 9,400 installations, you're clearly ahead of your goal to get to 30,000 and you've also got another 10,000 you're talking about within the international markets. So like just talk through some of the successes, but also some of the challenges that you might be having in that market, with that product, I should say.

Yes, sure. I would start by saying like it's always fun to hear investors like look at our SkyTab success and have a pleasant surprise. But it's not a surprise to us. We've been in the restaurant vertical for 20 years. A lot of the success you see used to just be manifested across the 4 or 5 brands that we went to market with. We've now said SkyTab is the product, stop selling legacy products and start focusing on SkyTab. So our sales penetration is while we're never completely content with it, it's not at all a surprise to us. It's not straining our internal systems to be able to install the number of restaurants we are. I do think -- the focus has helped us tremendously on this product because you get to take resources that we're perpetuating the past and you get to allocate them to this. Virtually every CTO of a business we acquired still works at Shift4, and they are now dedicated to specific tasks within our ecosystem. So Peter Lipman, who is the CTO of POSitouch and a founder of that business, is focused on enterprise capabilities inside of SkyTab. So in terms of opportunity and challenge, the challenge is making sure that when you acquire an asset that nobody is focused on making that asset better that they are all supporting a common goal in a product like SkyTab. We're very happy with the pace of progress.

Yes. What -- when you look at the type of client that you're getting in the international market as you roll out SkyTab there, like what do they look like, relative to maybe what you would have here.

Yes. So generally, a little smaller in volume with a higher mix of debit, so your spreads are lower. But there's revenue streams they've been accustomed to paying for like software like hardware, et cetera. So I don't want to paint too bleak of a picture. The other thing is substantial portion of the business is in cash that will not stay that way. . So if you look at a market like Germany and it's 40% cash, that won't be that way a decade from now. And so how do you balance kind of the lower [ TPV ] near-term opportunity in Europe and the higher debit mix, will you balance it with the idea that integrated payments will command a premium to buying the 3 products individually. It absolutely will because you get far more efficiencies from it. And then cash to credit will not stay this way in the rest of the world. It will continue like in the U.S. It might not be exactly in the form of a Visa card, it might come in the form of a Girocard in Germany or something else, but you will get a natural tailwind in these assets that we really haven't benefited from the United States, which is great.

Yes. No, that's awesome. Maybe update us on this -- I guess you're now just referring to them as your strategic e-commerce client.

Yes. Interesting day.

So like where do you guys stand in that relationship? How is that rollout going?

I think it's going really well. Like it's everything that Jared said it would be 3 years ago, when none of us could quite believe it, which is the product is suddenly all over the world. .

It's far off places, too. I mean, like [indiscernible].

Yes, exactly. And when they enter these challenging markets, they ask us for help in enabling the payments. So I would say, we believe that, that customer can be the largest of their kind in their industry. We admire the hell out of the product. And quite frankly, we admire the driver of the business and the customer to force perfection and force fast growth. So they're giving us reasons to be in countries that we otherwise would have never put on the list. And then we've got a reason to go back and look at that and say, what about the restaurants, what about the hotels, et cetera. And I also have to believe that the incredible demands that customer puts on their vendors for outcomes will lend itself to a product that has a lot of applicability for other like merchants. So it's going exceptionally well.

I did want to just touch on gateway for a second. Like historically, I don't know, plus or minus has been around 50% of the end-to-end volume growth opportunity. How do you see that playing out as you go forward with all these other new opportunities that you're rolling on top of?

Yes. So -- it's a significant contributor to the sites that join our end-to-end platform every single one. And I say that somewhat deliberately because the gateway conversion is very easy logistically to do. There's still a ton of them left which is super encouraging, and it has become a well-oiled machine inside the company to compel these conversations. So like what we assumed when we acquired it, these things fuel growth for a long period of time. We've also had lots of visibility into our pricing strategy. We've had a few at bats, if you will, at driving more phone calls. So the pricing strategy -- it's really all designed to get the merchant to call in because if you're operating a place like this, your payments provider is not on your top 50 like making the guest experience better is usually 1 through 50 in that list. So anything you can do to compel the phone call, and I would say we've gotten increasingly smart around what things drive that. There's always technology upgrade cycles that we benefit from when the payment devices get too old or when suddenly it's embarrassing to not take Apple Pay or Tap or something like that, and it can compel the conversation. That's been the blessing and the curse is compelling the conversation.

Cool. So we've got a few minutes left. I want to make sure the audience has an opportunity to have a voice here. If there's any questions back there, and I'll repeat it. If you have a mic, right, if not, I can repeat it.

[indiscernible]

Yes, sure. So just to repeat it for those who didn't hear, the question is really how -- what's the ecosystem and how do things like Uber Eats and DoorDash [ Halpert ], et cetera. For better or worse, they're here. In most regards, restaurants believe that to some measure, they have to take them and they're sick of the iPad hanging on the wall. So they want a really tightly integrated experience. They don't want it to mess with their workflow. They don't want a diner who's buying a bottle of wine inside the restaurant to have a bad experience because 30 Uber Eats orders just came in and put their appetizers to the bottom of the list. So there's a really strong demand for a tightly integrated experience. In some cases, we benefit from the payment volume. In other cases, we don't. But there's like an increasing demand to make sure that software plays nicely with everything going on, which is what compels people to adopt something like SkyTab. Like if you're a restaurant -- again, much like a hotel, your technology and software isn't on your top 20 list, but getting the iPad off the wall and creating a more seamless guest experience, and better throttling orders when you get too busy is something that they're all increasingly focused on. I would also say price sensitivity is here. Restaurants were quite content to raise the price of the cocktail from $10 to $20 to $30. And now that they struggle to raise it to $40, the cost of third-party solutions like that is a significant focus. Our online ordering is free. I think at one point, we were paying $1 for every online order that flowed through our platforms just for fun. So merchants and maybe just take Uber Eats and DoorDash to the side, merchants are increasingly focused on how to -- on fixed costs and how to make these things work better and how to get every order in as cheap as a way as possible. And our solutions naturally kind of are top of mind in that regard. Our nearest competitor in the restaurant vertical on a fixed cost basis is 3x more expensive. So on the margin, like yes, cost matters more. And I'd say an integrated experience matters a heck of a lot more.

Cool. Any other questions in the room? We have just a little bit of time left. Anybody? All right. Well, I think we're out of time. So that's great. Thank you very much.

Thank you all very much.