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

All right. Hey, everyone. Well, good morning, good morning -- no, good afternoon. I'm Dan Dolev, and I'm the payments analyst here at Mizuho. I have the pleasure to be joined by Taylor Lauber, president and Chief Strategy Officer at Shift4. And everyone knows Taylor is Shift4 basically. So this is basically a one-man show, and he's responsible for all aspects of growth, including overseeing product development, strategic partnerships, corporate development, investments. Prior to Shift4 with Blackstone where we met briefly at a drink event a few years ago with a common friend in a variety of strategy roles, most recently, COO, Lead Portfolio Manager at Blackstone Total Alternative Solutions Fund. So Taylor, thank you so much for joining this afternoon here at Mizuho.

Thank you.

Some questions that I prepared. And then at the end, we'll open it up for Q&A. So for those in the audience that are not as familiar with Shift4, maybe, Taylor, can you give us a little bit of background and some of the history of the company and pre-IPO, IPO and where we are today.

Yes, sure. So -- maybe just a little bit on my background because I think it gives a bit of a unique vantage point. So you mentioned I spent the bulk of my career in financial services, but long before that, my first job in between high school and college was in our founder's parents basement when he started the business. So I was the idiot that went to college, even though he told me not to. And I declined job offers at Shift4 for 15-plus years and yet got to watch it grow throughout that evolution. And I'd say there are a handful of characteristics that as we look at them now, really defined how the business would behave very differently from the competition over the course of the 25 years that we've been operating. Number one was back in the late 1990s, it was very easy to get disillusioned about the product offering of the day. It was effectively a countertop terminal, helping merchants accept credit cards for the first time. And anyone who did it was pretty successful because it was all about just enabling merchants. And as 16, 17-year olds, they're sending us credit cards in the mail. So like just being able to catch these credit card payments with something that a lot of companies were very successful at doing. But Jared recognized very early on that if we don't introduce technology, we are going to command no right to this revenue stream. Approval or a decline or a refund, while novel for a merchant that's never done it before, isn't differentiated in any way, shape or form. And it's begun this 25-year journey of constantly seeking out the technology solutions that really attract a merchant and bundling that with the payment processing that they kind of need to pay for it anyway. We have focused predominantly on what we would define as card-present verticals, physical places where you're going to be. We've steered clear of e-commerce in our early days with the idea that we can differentiate in service verticals that are going to be around for a very long time regardless of the direction the Internet takes. Today, what that means is we're in roughly 1/3 of the table service restaurants in the United States. We are in 40% of the hotels in the United States. And we're in 75% of the stadiums in every sports league in the United States, and I'm particularly proud of that because we weren't in a single stadium 4 years ago. We weren't in a single hotel 8 years ago. What's attracted us to these environments is complexity. It is a merchant that isn't just the bar and grill in Boise, Idaho, but what if that restaurant needs to live inside of a hotel alongside of lots and lots of other software suites, who's going to stitch all those together and deliver that hotel operator, a common commerce experience for all their consumers that secure and great analytics, but also a single deposit at the end of the night. And increasingly on this journey, we found that the competitive air gets really thin in the more and more complex environments. And it's, quite frankly, what attracted us to stadium is they look a heck of a lot like a hotel. There are just dozens of different places to pay. That's lots of software that needs to be integrated together. And no one of those software suites gets to say, hey, all your payments are going to come this way, and I'm going to give you a different deposit from everyone else. So quite strong ability to differentiate, and just taking a playbook that's been run quite successfully for 20 years across larger merchant categories, new verticals and increasingly new geographies. I just want to emphasize that this idea of software and payments being tightly bundled together that we all know full well in the U.S. really hasn't evolved that way in the rest of the world. So we're immensely excited to go to markets that are otherwise very highly developed, whether that's London, whether it's Munich, and there's always a bank terminal next to a piece of software. We help -- we think we can help that convergence just like we did in the United States.

Yes. No, I agree. I mean the opportunity is huge, especially outside the U.S., and you're addressing it with some of those recent acquisitions. And so given -- going back to the growth, I mean, the growth has been really impressive. I think you're 50% CAGR since 2019 versus about almost 5x more than the networks, which is very, very strong. Can you maybe lay out some of the competitive advantages that allow you to get this very, very fast growth trajectory?

Yes, sure. And I always want to sort of demystify the growth because you've got awesome players across our industry, the likes of an Adyen or a Stripe that are growing exceptionally well, but they're also benefiting from industry cross currents that are helping them tremendously. Said differently, many of their customers are growing for them like a Netflix, like a Facebook. In our case, we're serving merchant categories that for better or worse, don't grow a lot. There's not like a large growth in the restaurant spending. Hotels are pretty static. If one shows up, it's generally replacing one that disappeared, and similarly with stadium. So I want you to sort of think about our 50% volume growth in the context of the only way we're going to get it is by adding lots and lots and lots of customers. We under no disillusions that if we want to grow next year, it means a heck of a lot more customers. But there's two ways that's being manifested. Number one, it is adding a lot of customers. It's obsessing over the technologies that will attract them. It's also recognizing that there are lots of merchants who have been served in a piecemeal way that don't have to. We've found lots of software assets that play a critical role in the payments infrastructure and have yet never bundled it and monetized it. And why should that work that way? If the merchant is loyal to the software and they use it every single day, it should bundle the payment processing in a simple and seamless way. So we enable to add a lot of customers that way. And then separately, the average customer we serve has grown tremendously on a volume basis. And what I mean by that is, we were the bar and grill in Boise, Idaho, back in 2017. And then suddenly, we were a hotel and then suddenly we're a stadium. All of these are just much larger volume merchants. So that's helped compel our growth as well. And it's -- we don't have to add quite as many customers to achieve levels like that, which is nice.

And I think your M&A approach from what Nick and I have been seeing is a little bit different than your competitors. You're taking over -- you find really good deals, you're taking over volumes and you basically use your software on top of those volumes. And maybe can you tell us a little bit about that specific strategy and how that's different from, say, some of your competitors in the space?

Yes, of course. Number one, I would say, it was 20 years ago when we started to learn how to make what had been at the time three different industries work well as a single product offering. So again, 20 years ago, merchants bought software. They bought hardware and they bought payment processing, all independent of one another. And that knowledge of what it takes to be a provider of all of these services in a cohesive way. What are the phone calls you get from the merchant? What is the factor you need to look like that's deploying these products? What are the demands of those customers going to be? We started learning that 20 years ago. And so it's given us a distinct advantage to look at businesses that haven't quite made that evolution and say, we can help you with this trajectory. In the case of recently announced transaction, we bought a restaurant point-of-sale company called Revel. They have 18,000 customers. It's great software, but they overlooked this payments opportunity reasonably significantly throughout their history. We can acquire that business and instantly integrate a new revenue stream that they've overlooked. And by the way, their customers are paying for it in anyway, and it doesn't work terribly well when it's two different vendors. So we can acquire that business. We can introduce a new revenue stream immediately that they've overlooked. And the customers get a better experience and generally, they can save money by bundling all these things together as well. So that allows us a vantage point to look at an asset in a fundamentally different way than what are the revenue streams going to look like if we buy it, what is the expense base going to look like. We know we can embolden it in a way that others can't. And we've done this incredibly successfully. At the end of the day, all it leads itself to is dramatically lower customer acquisition costs than our competitors. If you look at our great competitors in maybe just the restaurant vertical, they spend 5x what we do to acquire a customer and they largely haven't been profitable at any point in their history. One thing I neglected to mention is that Jared didn't take outside capital for the first 15 years he ran the business. That's a very different mindset, looking at the checking account every day and saying, how am I going to spend my money, and what is going to generate the best return on capital. So I think it's categorized as M&A, but what you'll find is a highly, highly efficient customer acquisition mechanism. And the thing we have to be mindful of is this idea that you have to remove the parts when you have an M&A strategy. You can't let any one of these things sit individually. You have to constantly repurpose the business, you don't end up with a ton of appendages. And I think that's what some competitors have done that have led to bad outcomes is they've kind of bought the asset, left it alone, maybe given one slight differentiator but really never managed that population in an efficient way. I'll give you just one example. We bought a restaurant point of sale brand a year ago. The General Manager of that business oversaw the migration of payments into its customer base, educating his resellers on how it should all work. He is right now in Germany on the next asset we're looking at there, sitting with the local team doing it. That's just one example of repurposing constantly in pursuit of kind of what the objective is of the day and not letting early success and complacency create a margin problem or just like an inefficiency problem over time.

And then speaking of M&A, I think most recent quarter, you discussed some of your capital allocation opportunities, whether it's product, customer acquisition, share repurchases, M&A? Can you maybe explain again what is the best -- where do you see the best use of capital over the next few years?

We're conflicted in this because we're 7x more profitable than we were at our IPO 4 years ago, and yet our share price is nowhere near 7x higher. And in fact, the multiple on our equity is compressed over that time frame. And so we view our equity as like one of the surest things we can invest in. And we believe that we should be buying back healthy portions of that. And that is competing with really, really interesting customer acquisition cost to M&A with lots of efficiencies that we can drive from it. So what do you do when you have this, quite frankly, awesome problem to have, you do both. We are buying back our stock. And we are not letting that dissuade us from M&A transactions that we think will make us a fundamentally better business and quite frankly, grow at incredibly efficient cost of capital.

And then I have a few more questions, then we'll open it up for a question or two from the audience. I mean, maybe we can get a little bit more deeper into your end markets. Obviously, big success in sports entertainment, you own the hotels, resorts vertical like everywhere I go, I check and Shift4 is always there, which is great. What we tell investors is one of the reasons we like Shift4 is like you still -- even in like AI, e-commerce, cyber-world, you still want to go on vacation. So it's like -- it's always going to be there. It's like a [ restaurant ], you're not going to vacation on that in a metaverse. But can you -- I think you acquired Appetize last year.

We did.

And can you maybe give us some background on how you got into this end market? And like what's so exciting about Appetize in that acquisition specifically?

Yes. It's a fun story. It's accidental, but it also gives you some insight on how we think about opportunity. We were actually asked to buy a box at a new football stadium being built in Las Vegas several years ago. And in touring the facility, it was just immediately apparent how closely that mimics the hotel environments we serve. And this is the Raider stadium in Las Vegas. It's got nightclubs. It's got table service restaurants. It's got software for parking. It's got suites. It's got point of sale. You get the picture. And we said, wow, we can serve this market exceptionally well. And we started to study the software providers who are winning and who were losing and there are effectively two companies back then, this is 2019 that we're winning in the market. One was called Appetize. It was by far the dominant player. I don't want to cite the revenue statistics specifically, but it owned a really healthy share of the market. And our issue with it at the time was that it was losing meaningful dollars, tens of millions of dollars a year running their business. And we said if you already own the bulk of the market and you're still losing this money, what's the end game, and we just couldn't get our heads around that as an acquisition. Contrast that to this awesome scrappy business ceded by the San Francisco 49ers that was doing $12 million a year in revenue and breakeven. And they had actually won one of the largest stadiums in the country by bundling our payment processing services. They actually took our value prop without telling us and introduced it to the customer and used payments to subsidize making their product cheaper. And we said this is just a match made in heaven. They know exactly how we go to market and they're doing it. So we bought that business for, I want to say, $75 million, and it became very quick that we were winning basically every stadium that came up. And we educated them don't just focus on your technology, don't just focus on mobile ordering, don't just focus on concession sales, focus on all commerce that's going on. And they took it like way further than we expected. So yes, they integrated to the Fanatics retail store. They integrated to the parking software. They went so far as to integrate to Ticketmaster, who's actually selling the ticket to the game and suddenly that payment volume is flowing through Shift4. So basically, the majority of all the revenue that the team is collecting is flowing through Shift4, and we're giving them a common analytics platform to understand all this, and really, really differentiating in the space. Fast forward to last summer and the owner of the Appetize business called us and asked us if we'd take it off their hands. So again, a vertical we weren't in. We weren't in it 4 years ago and suddenly our number one competitor is calling us and saying, will you buy the business. And so we looked at that as a perfect embodiment of our M&A strategy. Can we accelerate what we've been doing anyway. We have been winning a ton of the market. Can we accelerate that if we own our number one competitor as opposed to just wait for the customers to come to us. And so we closed on that transaction in September, and we are now installing more stadiums with our VenueNext technology in a month than we have ever in our busiest quarter. It's pretty damn cool to have the likes of Yankee Stadium on a dime installing our VenueNext technology and giving us a ticketing business by way of example, across -- we're seeing this across many teams. So it's a vertical we've got a lot of opportunity to gain wallet share. We've already got a foot in the door with the majority of the customers. And we've also got a TAM opportunity that we never saw at the beginning, which is suddenly -- we always underwrote the payment volume associated with the venues themselves. But now the ticketing is 3 to 4 to 5x that.

Interesting. Yes. And then maybe sticking with two more acquisitions, Finaro, I think Israeli founded and operates in Europe, like maybe can you give us a little bit of the strategic rationale about getting into -- this is mostly online, right? So e-commerce, maybe that has probably ties into your European strategy as well, but maybe shed some light about that.

Well, so international for us has always been a challenge. We have kind of 2 of the 3 ingredients for success. We had customers, global hotel chains, for example, working with us in the United States and saying, I want this solution in the rest of the world. I want a single vendor solution that you deliver me so well in the United States and I want it in Europe, and I want it in Latin America and everywhere else. Interestingly, the software that's integrated to Shift4, the front desk software, the lobby bar, the gift shop, it's all installed all over the world. The Hilton in Madrid doesn't run on different software than the Hilton in Times Square. So we had this -- we had the customers, and we had the software integration. So what we didn't have were the local financial capabilities. So we didn't have the ability to accept cards locally, deposit local funds, et cetera. And that's a prerequisite, right, to operate in a local environment. So we went and searched across a bunch of different payment platforms. And the Finaro business was kind of the polar opposite of Shift4. It was cross-border e-commerce, and we said this is a means to an end for us. So we're going to structure the transaction in that a healthy portion of the consideration will be tied to technical milestones. If you can achieve a working restaurant, a working hotel and a working stadium, we will pay you meaningfully more for the transaction. Now annoyingly, it was a European bank. So the regulatory review took a heck of a lot of time and they achieved all those technical milestones before we even own the business, which gives us that much more confidence to close on it when it came through. So to contrast it, Finaro was like virtually 0 card-present transactions when we signed it back in March of '22. Now, it's over 15%. So we're basically taking that as a platform. They can still do what they always did. However, what makes us special, it's restaurants, hotels, stadiums and a handful of other things. And so -- we've already won a decent chunk of restaurants. We announced our first multi-hundred-location hotel win in Europe. All of this will be the Finaro pipes and our software integrations and our go-to-market.

Very cool. Maybe I'll open it up for questions. Does anyone have a question for Taylor? If not, I do have another question, which -- actually, I wanted to ask you before, but we didn't mention SkyTab. And SkyTab is very successful. A lot of people are very excited about it. You guys are very excited about it. It's a very competitive space. Got Toast and some private guys like what makes SkyTab special in competing in such a hypercompetitive restaurant U.S. industry?

So we don't view it as competitive as I think investors do. And maybe it's just because we segment it differently. We are in table service restaurants in the United States and hopefully the rest of the world pretty soon. In that environment, it's ourselves and Toast that are generally if you're picking. If you're winning a new location for that new restaurants coming online, it's using one of the two of us. When you get into things like coffee shops and bakeries, you're suddenly in Square and Global territory. And I would say there's not a lot of competition between us and them because the software that makes it really easy for an owner operator to download on an iPad and run their business is not the same as the software required to run a table service restaurant. So it's really in that vertical, it's ourselves and Toast. And I think we differentiate in pretty specific ways. You'll find we don't generally do things like capital offerings or payroll or these kind of run your business suites of software because we want the kind of merchant that would never pick our payroll. We want the kind of merchant that would never take a 30% APR loan from us. And so we try to skew higher market. Again, we found the areas thinner in the competitive -- sorry, in the enterprise space. And then lastly, what I'd say is we've been doing it for 20 years. And that is a competitive differentiator. We've seen lots of different economic cycles, and we've grown revenue and we've grown free cash flow through all of them back to dot-com or the travel associated anxiety of 9/11, to the financial crisis in 2008 to the great pandemic. We actually grew payment volume 20% year-over-year in the third quarter of 2020. I can't emphasize how hard that is when 99% of your business is restaurants and hotels. And so we think we've just got the right combination of expertise, flexibility in how capital gets deployed to solve the problem. And one good competitor, and we love that.

Maybe one last question from my end unless there's anything from the audience. Free cash flow has been great. Maybe can you give us a sense of what allows you to sustain strong free cash flow and sort of -- some sort of like a long-term margin vision for the business that you have?

Yes, sure. We don't explicitly have a margin target, except to say, again, we believe wholeheartedly in this philosophy that live within the means of your own checking account whenever possible ends. Every dollar really needs to be paid back within 18 months, whether that's to hire an employee, whether it's to invest in R&D, whether that's to buy a company. We can't play the game or just drag the model far enough to the right of the screen, and there'll be profitability at some point later, no. 18 months, period, full stop, which creates a really good discipline. And it also forces actions that might otherwise be uncomfortable, meaning that you do need to repurpose personnel as your business evolves. It doesn't mean that you part ways with people aggressively, but it does mean you are maniacal about saying, hey, you used to install Micros point-of-sale systems in high-end restaurants in New York City. Now you're installing in stadiums. And so that's been, again, I think just -- it shouldn't be as unique as it is. Any owner-operated business without a series A, B, C, D, E thinks this way. But it is rare in the technology space. Most of our good competitors have never made a profit. We can't fathom how that works. We would love investors don't demand profit. But our largest employees own 42% of the company and we demand like a good return on capital.

Good. I think we're out of time. So thank you so much.

Thank you all.

Thank you for coming.