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

Good morning. I'm Rayna Kumar, and I lead fintech equity research at Oppenheimer. Today, I am joined by Shift4 CEO and Founder, Jared Isaacman. Jared, thanks for joining us today.

No, thanks for having me, Rayna. It's good to see you.

Great. So just to start out with, what are your top priorities for the remainder of the year?

Well, I think overall organization, like our #1 priority is SkyTab. I mean that is like we have our [ SkyTab-er dyed ] T-shirts going around the company. And I think that's just meant to focus everyone and all our resources on our single flagship offering for restaurants. But I think a very important component of it is getting our restaurant offering available and scaled up in Canada, Europe, U.K., Ireland and maybe even a couple of other markets as well. So everything is really kind of weaves together. As our payment rails extend into new markets and they're certified for card-present and then support local payment methods, well, then you can go for restaurants, hotels, stadiums. And often, the first move is actually following our strategic e-commerce customers into those markets. So the good news is we're pretty well on our way. We have Sky Tabs in U.K. and Ireland, and we really -- all of our payment methods for card-present processing in Europe work great. We have a solid workflow. What we really needed to do is just scale up distribution, and that's what we did with -- alongside our Vectron transaction. So I think the table is really set well, but SkyTab plus our entry into Canada, Europe, U.K., Ireland are all like -- are all very high priorities.

Got it. This morning, I saw that you have a $1.1 billion debt offering. Is that largely for refi? Are you going to use it for any other -- are you going to use the proceeds for anything else? And are there any other opportunities for refinancing here?

I think just being opportunistic. I mean we've said in our earnings script for the last 2 quarters that for everyone asking about our December 2025 maturities, which I don't know, December 2025 seems far away to me still anyway. Expect us to solve it in a way that's not punitive to the equity. Our leverage ratio at the end of this quarter was 2.7x. So I don't think anyone should be too surprised that we were able to kind of jump in the market. And the $1.1 billion, we'll put in interest-yielding accounts. So the delta between the cost of the money and what we're yielding should be pretty minimal, which is a nice way to kind of sit and wait for the most opportune time to satisfy those 2025 maturities. And then we have extra firepower, which is always good, whether that's buying back cheap stock or any of the other inorganic or organic opportunities in front of us.

Makes sense. That's very helpful. We're starting to see some signs of the softening U.S. economy. Can you discuss the parts of your business that are more prone to an economic downturn? And which parts of your business do you think are more defensive?

Well, I'd say like most of it. So if we have a recession, I mean, we serve restaurants, hotels, stadiums. We -- I don't know if you recall, when we IPO-ed, I mean, we were about to kick off our road show in March of 2020, serving almost all restaurants at that time period. And then obviously, the world fell apart. And we said if we were ever going to pull off an IPO, we would ensure that we are more diversified and stronger business. So we were the first during the bell of New York Stock Exchange in June 5. And what did we do? We diversified in a bunch of pandemic-susceptible verticals like hotels and stadiums. But I think the good news is we've been growing at very high rates for a very, very long time, 50% volume growth this past quarter. I mean our 4-year CAGR is I think damn close to 50%. So clearly, we are able to differentiate and win even in challenging economic times. We grew payment volume double digits in 2020. What's another way to say that? I think even like the biggest Toast bearers would agree that the path to the next 65,000 payment customers in Europe is a lot more clear for us than it is for Toast or the next 20,000 customers that will cross-sell from Revel and eventually move over to SkyTab. So it's not to say that we don't care about same-store sales growth, we do. It's just that 200 or 300 basis points against 50%, we shouldn't be overly that sensitive to. And if we are, it means we're doing something wrong. So if you have a full-blown recession, I think all bets are off for everybody. But we -- our strategy to grow, our capital allocation strategy should insulate us this from -- insulate us in a large way to economic softening. Now all that said, in terms of what we've been seeing, I think we reported -- we didn't notice anything that was unexpected in Q2. In July, for sure, restaurants had softened a little bit in line with others' commentary. But hotels, stadiums, the other verticals actually seem to be doing the same as they were in Q2. So we're not overly concerned.

Great. International expansion remains a key part of your growth strategy. Can you talk about what is driving your success in Europe? Are you planning to expand in Africa? What attracts you to that market? And how clearly do you think you can ramp up in Africa?

Yes. So I mean just some background. I mean we obviously -- we had ambitions to expand internationally for a very long time. I mean we support a lot of hotel operators that have locations all over the world, and we actually do a lot of the reservations all over the world. We just don't do their kind of in-venue payments, which is what we're all about. So why not? I think it's just the fear of the unknown, that just because you've had a successful model in the U.S. doesn't necessarily mean you can replicate it in other parts of the world. So we were very hesitant. It wasn't until our large strategic e-commerce customer, which I think that's actually one of the -- probably to answer your question, the most resilient of our customers in even worsening economic times because I think people always pay their satellite Internet bill. But in any case, once we sign that customer, that to me was kind of the final bit of rationale needed to kind of take that leap across the pond and start expanding. And we did that by signing the Finaro transaction. And through that 18-month process, we integrated all our card-present integrations and integrated SkyTab. And we've been out -- even in late 2023, getting restaurants processing in Europe, U.K., Ireland on SkyTab, hotels using the same integrations that make us special here in the U.S. We've been doing it in Canada and Europe now. And there's a lot of demand. Why is there a lot of demand? Like why is Europe so much far there behind the U.S. in terms of integrated payments? And it's because they were so much farther ahead with EMV and chip and PIN, like the obsession over greater cardholder security with chip and PIN is actually what delayed the European entry into integrated payments because actually chip and PIN with encryption made it hard earlier on to connect payments and software. After now, I guess, close to 8, 9 years in the U.S. with integrated payments and EMV, that capability exists. And it's no surprise that Toast is looking to go after the European market for an integrated offering for restaurants, Shift4 is looking to do it. I think the difference is we'll be able to go after and pursue restaurants, hotels, stadiums like FC Exeter and FC Barcelona are Shift4 customers. But we'll be able to do it like a much more, in my opinion, efficient way, which is transactions like Vectron that get you 65,000 restaurants with a full payment monetization opportunity in front of it and hundreds of distribution partners to really scale up production very quickly. So yes, that's kind of our -- that's the importance of Europe. And then in terms of like Africa and such, processing payments all over the world is incredibly hard, especially so card-present. E-commerce is a lot easier, but even then, still very hard. So companies like Adyen and dLocal actually benefited in both cases by like Facebook. I mean they both follow Facebook all over the world. It's so important, these big customers are who opens the door for you. Oftentimes, when there's only 1 or 2 banks that are serving that market to agree to do the integration, to provide some sort of a revenue share to make it worth it. So we are following our big strategic e-commerce customer all over the world, and they wanted to be in Mongolia, in the Maldives, in Fiji, in Sierra Leone and there's -- we have a list of, I think, 12 more countries we need to turn online before the end of the year. And we do so profitably. And along the way, we make our product better because certainly, we had years of catch-up work to do with Adyen. And that now creates options for us with global e-comm, where customers like Wolt, owned by DoorDash, are using those rails with us now in Europe, which is cool. But that doesn't mean every country that we go live with for that customer, we're going to go after restaurants and hotels. I think like Australia and New Zealand, which happens to be like the third largest market for that customer, we will absolutely go after restaurants and hotels, like fully expect us to scale up to go after SkyTab in those markets. But maybe Sierra Leone is not one of the best markets for that. But there is a lot of demand in Africa for that big customer, and we will go wherever they tell us to go. So...

Are there any capabilities you think that Shift4 is missing so that you can be at par with Adyen? Or are you already there?

No. There's definitely areas. I mean this is -- a product like Adyen has or Stripe has evolved over a lot of big blue-chip enterprise customers over many years. For example, we don't do anything with card issuing. We do, do push payments, so pay-ins and payouts through OCT and other account-to-account rails. But like Stripe and Adyen built out like massive like treasury management-type capabilities for customers like Uber that have a lot of payouts in a lot of different parts of the world. So we are not trying to be the next Adyen. I mean our strength is in-venue, which is not their strength. By the way, if you read their earnings reports, they talk a lot about delays getting into venues. So like we will be the master of card-present payments all over the world, but we will have e-commerce capabilities that will be heavily shaped by one customer that's awesome, and we'll go into a lot of parts of the world following them profitably. And I do expect that other customers that have chosen Adyen will use us in a lot of markets over the world. But that doesn't mean we'll sign up Amazon tomorrow. But I don't know, we're closer to having that possibility. It's a nonzero chance versus where we were 2 years ago.

Very helpful. Is issuer processing an area that you're interested in? Is that part of Shift4's future?

Issuing?

Yes. Yes, your future strategy there.

I don't know. We'd have to take like a really big customer. It just seems like a lot of people do it. And I mean certainly attracted to be on the other side of interchange, but yes. I mean it would take like a pretty big customer that would insist on it, and we would have to determine whether or not it was worthwhile for the investment. I'm sure we would just partner with a Marqeta or something if it really came down to it. But issuing is not a focus for us right now or Banking as a Service or treasury-type functions.

Makes sense. Okay. Moving on to sports and entertainment. You've announced some very big wins recently, including Miami Heat and Indianapolis Colts, and we're starting to see more ticketing wins. Can you talk about what's driving more of the ticketing wins and what are the key factors that determine whether Shift4 gets just the concessions and retails versus getting the ticketing as well?

Yes. Don't forget the Bears.

Oh, yes.

That was my -- yes, I mean, there is a ton of demand within sports, entertainment and theme parks. The additional ticketing wins are just because we defaulted it in the contract. Like it's not a contentious discussion. It's not a heavily negotiated point. So I think we shared that probably like 18 months ago that we defaulted ticketing and all the agreements, which is great because it's like 5x the volume of the in-venue payments, whether that's concessions, mobile ordering, merchandise. I mean well, we all know what tickets cost to these events, and it's a lot more than you typically spend in the arena. So that's why you're seeing so many deals in our earnings material that just had ticketing right from the get-go. I would say it's more of an anomaly not to get ticketing. And if we don't get it, it's probably because they're writing out some PayPal sponsorship or JPM was pretty big in ticketing as well. So yes, it's going really well. And I think it's also a good point to just -- good opportunity to just put some that in this new world of payments we're on right now, where you are bringing software and payments together deliver a broader commerce experience, that if you have the right software solution, the right commerce solution for a customer, the actual costs associated with the payments is less of a conversation. I know like at times, everybody wants to jump on the -- it's all commoditized bandwagon. And Adyen had a very specific situation in the U.S. -- I mean, outside of the U.S., like they are an amazing -- and they're an amazing payments company in the U.S., too. But like there is no way we're going to lose a stadium that needs mobile ordering and ticketing and concessions and cashless checkout on the VIP suites to somebody else that doesn't have any of that over 3 basis points. It doesn't exist. Just like I mean, we would never wake up tomorrow and say we can't wait to win a bunch of Shopify customers. But even if we did wake up and want to do that, there is literally no price, like we could offer to do something for free and you probably won't win the customer. Just like Square can't go into a Las Vegas hotel and say, "Look, throw away your whole hotel property management system integration, we're going to put Square terminals everywhere, but I'm going to do it for free." It would still be no. And that is very much our story in sports and entertainment. Our product there is definitely category leading.

Understood. Very helpful. I just want to go back to SkyTab. You've made strong progress and you're on track to exceed your 30,000 install targets this year. What are you seeing in terms of the competitive environment for restaurants? And what do you think is driving SkyTab to have these market share wins?

Yes. Well, let's just start with like kind of the restaurant vertical because I know everyone paints it as like this really big TAM, but there's actually 3 very distinct lanes in it. There's table service, and that is just us and Toast. That's it. There is your kind of cash and carry, your bakeries, coffee shops, and that is Square and Clover. And then there's like really fast-food, quick service, and that's PAR and Xenial. And the products are built differently for these verticals. And they have different sizzle features associated with it. So like the kind of cash and carry, your coffee shops and bakeries, so many of them go out of business so quickly. And their average volume per customer is so low that it's hardly worth the customer acquisition cost, unless you have payroll offerings and insta funding at 100 basis point take rate. It's like you need to build those products out and you have to keep it simple because you can't afford to put somebody on-site for 2 days to train them how to use it. That is what Square and Clover have totally optimized for. Table service, every restaurant, especially you get up into the enterprise ones, wants to do things differently. You have to have so many different features and functionality in it that it requires someone to be on-site for 2 days. It's a totally different customer acquisition cost. It's the opposite is simple, and you build out different sizzle features to meet that vertical. So that's just to set -- to give you a little bit of a sense of the landscape right now. And then in terms of why are we having a lot of growth, because it's just us and Toast. I mean look, the third-place player was SpotOn and they sold us Appetize in a fire sale for 19 cents on the dollar. So it's just us and Toast, and we're both solving the same pain points with a cloud-based product. We think we have a lower cost of ownership than they do, so that helps us. But in the end, it's really just is it a product that's solving pain points and who's got good distribution? They certainly have more distribution than we do. So they sell more of them than us. But that's where the story ends. I'm not trying to sell short the tech or whatnot, but I've said it many times, Toast doesn't make the food taste better. And if you're walking down the street, you're not going to go into one restaurant over the other because, oh, they have Toast, so that's a sign of quality. It doesn't. It would both ring up cheeseburgers the same. We both do steak and mashed potatoes the same. We solve the pain points of on-prem solutions really well. And if you're fleeing some of the legacy acquirers that have the rate machine on overdrive with just -- because they can't do anything else but [ feed ] these customers to death, then you're probably going to go in the arms of either Toast or SkyTab. And that's working well for us in the U.S. But obviously, we both see the opportunities in Europe and Canada, and that's a big focus area for both organizations.

When a customer does choose Toast over SkyTab, what do you think is the reason?

They got to them before. We did and sign them up. Like they aren't bake-offs. They don't invite us both to the same and do side-by-side demos. It's just not that sophisticated of a process. There's no RFPs really. We respond to them and win a handful of RFPs a year, and they're not usually -- they're usually big hospitality operators. They're not restaurants. So it's really just who is in the door at the right time, right place. It's rarely we're both in there at the same time.

Makes sense. Okay. If we look outside of restaurants, what are other verticals you think there's a long-term opportunity in where you don't have a big presence today?

Well, I mean, we do have a big presence in it, but it's our fastest-growing vertical is hospitality. Like we do have lots of share. We have less wallet share, but lots of market share as we move customers over from our gateway to end to end. But it's kind of like I put in my letter. If we just only talked about hotels and said we were the Toast of hotels and stadiums, maybe we'll be valued more, but we are killing it in hotels and resorts. Like I'm super pumped about what's coming in the back half of the year. But we're winning all the new resorts and we're converting a lot of gateway customers over. And now we're able to take the integrated payment offering in hotels into Canada and Europe. We are just scratching the surface in Europe right now, like this is the top of the first inning. So I mean -- and this may be just another way to say, like, where are we going to make the most money over the next 4 or 5 years? It's going to be hotels, 1; restaurants, 2; stadiums and ticketing probably 3; and then e-commerce is like probably -- e-commerce, nonprofits, gaming, it's all like a distant fourth. So yes, I mean I got to be pretty excited about our hotel and resort business.

You seem very excited about the potential for your hospitality business in the back half of the year. What makes you so excited and confident?

I mean we gave you a backlog on what's contracted, not what's going through contracting. So I mean, I do have pretty good visibility about who's in the process of signing. So that's exciting.

Great. Okay. Moving on to gateway conversion. Obviously, that's been a big driver of your end-to-end volume growth. Can you talk about how much of gateway conversion remains and how much you anticipate will convert over the next few years? And do you have a time line on that? That would be great.

Yes. I mean I always feel like I say every year that the gateways conversion story is like should be over in the next 3 years, but it's just a lot of volumes so it just takes time. We didn't really give an update on the latter. I've said it's call it approximately like $100 billion remaining. What is largely remaining today is big customers generally that have contracts under the -- from merchant link from the -- when it was jointly owned between Fiserv and JPMorgan, and they hated each other and had a big divorce. That's how we were able to buy the asset, and they intentionally monetized upstream from the gateway or, I guess, downstream from it. And so they lock these customers in very long agreements at uneconomic rates. Some of them are sub basis point literally, like $0.0025, things like that. Some just have a flat rate fee, and they lock them in with price protection for 5 years and such. So these contracts are coming up for renewal, and we've never really been able to apply the kind of stick to them. We can -- we dangle the carrots all the time. So there's still a lot of gift to be given from the gateway. I mean every quarter, we're converting a bunch and we highlight them in our earnings deck. And I don't think that will end for 3 more years, at least. But the opportunity is pretty big. If you think about how much revenue we derive from that, like last $100 billion, it gives you a sense of the magnitude. Even if we only convert 20% of what's left, it's going to be -- it is going to be an order of magnitude, greater revenue than we're getting today from it. So it's still a big part of the story, although I'd say like way more than 50% of our production these days comes from just net new customers that were never on our gateway at all. And that will only increase, I mean, especially as you go on to Europe where you had no gateway connections. I wouldn't be surprised next year if 70% plus of our new production is coming from just net new and had nothing to do with our gateway.

Makes sense. Of the gateway customers that remain, are those contracts coming up for renewal? Or are they expiring soon so that those customers will have to make a decision in the near term?

I mean certainly over the next couple of years, totally. I mean there'll be some in -- there's some this year like in fall and there's some in '25 and '26. I mean it will take a while, but it's there.

Makes sense. Okay. You recently disclosed a $25 billion contracted volume backlog. How quickly do you expect to realize that volume? Is this a metric that you will continue to share on a quarterly basis?

So the first part of the question, the vast majority is getting installed in Q3 and Q4. And the largest chunk of it relates to sports and entertainment, stadiums and ticketing. So we have very specific windows before a league season starts is when you have to get it done. And hospitality would be the other large chunk of it. And yes, again, a lot of that is in Q3 and Q4. The reason we provided this, this was my good idea last quarter when everybody was kind of questioning the back half of the year acceleration, and I think it's -- I mean, it's worth pointing out like the vast majority of our volume goes live essentially the same month. So it never makes its way on this list. All the SkyTab production that we post on Twitter or X or hotels that generally just go live very shortly after we sign the agreement. And what I wanted to do is give you some insight and to, hey, look, there's all this volume that's either ramping or set to go live with specific install dates, and it's contracted. It's not -- this isn't like a weighted probability of our pipeline. These are contracted deals, and it's like I just want to give you some insight into it. That said, in my mind, it's not like a Boeing backlog of aircraft, like I want the number to be 0. I mean we aim for the fastest approval to revenue time possible. So I don't expect to give it out every quarter. I suspect if I did give a like alongside our year-end earnings in, whatever, February or something of 2025, I expect it to be a much lower number. I wouldn't be shocked if it's like $6 billion or $7 billion because we did exactly what we were supposed to, which has moved to both gone in Q3 and Q4.

Makes sense. Moving on to your adjusted EBITDA margin, it's now north of 50%. Have you reached the peak? Or are there other opportunities here to create efficiency in your model?

Not even close to peak. I mean first, I mean, we do, do deals from time to time because I think that's the most efficient use of our capital to get customers and capabilities and distribution. And you're not buying businesses generally that have 50% EBITDA margins. In fact, they have none. Appetize and Revel have been historic cash burners that never had a positive EBITDA year ever. So it takes time to unlock efficiencies and such, and that will continue to play out for years. Also, just all of the -- all of like the [ bare accusations ] over the years of buying lots of software companies and throwing people at problems and 2 gateways, it's all true. Like we -- I think that we should have like literally, we should be able to do what we do every day with 1/3 the amount of employees we have. We have 3,700. I think 1,000 can absolutely do the job. That's not a statement of like a cost reduction. What I want is just to triple revenue and not have to hire people. And that's why for the last 2 years, we've been pounding the table on flat head count despite the growth, which Nancy mentioned in her remarks, like sans M&A, we did keep head count flat over the last year. So to me, it's like your deleting parts is a big philosophy. I wrote all about this in my letter about just kind of our M&A philosophies, which is exactly what we're doing. We don't sign up any of the old legacy software brands anymore, future [ POS-y ] restaurant manager. They don't exist. It's all SkyTab. And as you do that, you get to move people that have been working on the past into supporting the future. And like that is just starting. Like we had -- the only reason I can even give you a $25 billion contracted backlog is because we took the first steps of replacing our 20-plus-year-old CRM that was homegrown in the basement to Salesforce. And we're only on release 1. We are literally gutting like, I can't even tell you how many internal systems we have and replacing it with Salesforce and Palantir for our mission control, and 10 people in that environment can do the job of 40 or 50. So look, this story will keep going. Gateway customers moving to end-to-end, legacy customers moving to SkyTab, deleting parts and realizing synergies, cost and revenue synergies from our transactions, and margins will keep expanding. I feel really good on that one.

Got it. Okay. If anyone in the audience now has questions, we're opening it up. [Operator Instructions] Okay. We have a few, Jared. Let's start with this one. This looks like a clarification on what you said earlier. Clover isn't #3. They don't -- do they show up at all? I guess when you mentioned total spend, Shift4, yes. How about Clover?

They don't compete in table service. They're not there. This is like a lesson I learned kind of long ago. When you talk about moving upmarket, bigger customers have more requirements, which means more features and functionality, which means more complexity in software. And as the software gets more complex, you need sophisticated distribution to support it. These are all tied together, more volume, more features, more complexity, more sophisticated distribution. So the problem with Clover and Square, Square goes to market entirely through their -- essentially their website, and Clover goes to market through like branch -- bank branch managers. So we were obviously very deliberate about in-sourcing distribution from dealers that know how to program, install, service and support POS systems for 20-plus years. That's what you need to move into like complex fine dining table service. So that's not a slight on Clover at all, Clover is great. I mean to me, shockingly, they're doing way better than Square, who people would have thought were -- was the best product company in payments for a long time. And that's a combination of good product and lots of distribution, but they also have to keep it simple. So yes, I mean, I tell you with 100% certainty, if you have an NCR customer or a MICROS customer that's leaving that product, it's going to wind up on Toast or SkyTab, not Clover and not Square.

Got it. Very helpful. Here's another question from an investor. Can you dive into detail on SkyTab share versus Toast? Toast had 8,000 units in '20. How does ARPU and take rate and net additions compare to that of SkyTab's?

Well, I'll never go into a location count. I think they marry themselves to a KPI that they deeply regret because if you go for stick count, it incentivizes all sorts of bad behavior like quantity over quality. And that, I think, is going to drive a lot of things like moving down-market and signing up more start-ups and whatnot and all that. So anyway, I think I would say is like we are -- I'm sure we're the #2 fastest growing in table service restaurants. And I'm totally fine being #2 when there's only really 2 competitors there, like I think we're blessed in that regard. We do focus on quality over quantity. We go to market entirely different. I'm very happy to buy an old ISV and sunset its product and convert 18,000 customers over and be at effectively like 1/10 their customer acquisition cost, happy to do that. And then I think in terms of monetization strategy, they're a software company first, and they charge way more than we do on SaaS. And we charge way less on SaaS, but we get a higher take rate on payment volume. And obviously, that works well in a reasonably inflationary environment. So we do -- I would say, probably pretty clear, we have a lower overall customer -- or lower overall customer acquisition costs, lower cost of ownership for the customer. Yes. I mean slightly different sizzle features. We don't have a capital offering by design, they do and things like that. But fundamentally, they all ring up cheeseburger steak and work in the cloud just fine. So I don't know, hopefully that helps.

Got it. Thanks for the details. And just to correct myself, the 8,000 units for Toast were in the second quarter, not 2020, as I said earlier. Since we only have a few minutes left, I have one final question for you, Jared. What are you most excited about in the next several months? And what are you most concerned about?

I'm most excited about our expansion into Europe. I mean we really -- everything has been going really well there. So we got great diversification with card-present customers. We got FC Barcelona going live. We've got our e-commerce customer that's -- we're following all over the world, which is exciting and that creates optionality for other big blue-chip e-commerce customers who follow. But you know what I'm pumped about, and I threw like stake down yesterday for the challenge for the team. Like I want one page in our Q3 earnings in November to be nothing but beer garden surrounding Munich during Oktoberfest. And that's cool. And those are the kind of things that get everybody excited internally. When you can sign up restaurants and hotels all across Europe, you put some cool incentives out there to target one particularly measurable thing, but the benefits of which allow you to scale up all over the continent, which is pretty cool. So yes, I think like our international expansion has got to be top of the list right now.

Excellent. Well, Jared, thank you as always for your time. Very insightful conversation.

Yes. Thank you.

Thanks to everyone. Thanks to all investors for joining. Feel free to email me with any questions.

Nice. Take care.

Have a great day.