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

Okay. Great. Welcome, everyone. My name is Tim Chiodo. I'm the lead payments processors and fintech analyst here at UBS. We are glad to be joined today by the Shift4 team, including Jared Isaacman, CEO; Taylor Lauber, President. We also have Tom and Paloma from the IR team joining us. And I just want to thank all four: Jared, Taylor, Tom and Paloma for making the trip out here to Arizona. We're going to change up the way that we run this session a little bit, a little bit different approach. So we're going to start out by addressing the news put out by Jared and the company today. Jared will take the floor to kind of make some opening comments. Then we're going to go to Q&A on that topic specifically. And it will be opened up to the audience. We'll bring you a microphone if you'd like to ask a question. Then with the remaining time, we'll get into some of the questions that we had already planned to discuss around the business and what's happening at Shift4. So with that, Jared, we want to hand it over to you to address and talk about the news from today.

Yes. Sure. Thank you. So first, I mean, just apologies to everyone that we had to kind of cancel some of the one-on-ones and redirect towards like this kind of consolidated effort. It seemed there would be a lot of similar questions. This might be more efficient also for the stock price reaction. I don't know if you're either giving me too much credit or not enough credit to the management team at Shift4. Like we have 4,400 employees, like this has long been about way more than just 1 person. So I think just so everyone's aware, I mean, this is a reasonably long process. Who knows, maybe it's more efficient with this administration or whatnot. But like this can drag on for like many, many months, which is why I intend to completely show up for work and do the same thing I do every single day. I intend to be at the Investor Day and kind of sharing what our -- what we've been doing, what our technology looks like and set expectations for the next 3 years. I intend to remain the largest shareholder in the organization. I mean, I had -- the lawyers made me caveat that like subject to ethics and all that. But I think that Shift4 far enough removed from anything space light related where that shouldn't be a problem. But I do have every intention to unwind the super boats. I think that is a very net positive for the organization. I'm sure it's kept us out of some index funds. For those of you who've ever interacted with me on the subject of good corporate governance, it was the first. I never asked for the super boats. That was never my thing. It was our old PE sponsor and the banker said it's free anyway, you might as well take it. I actually don't believe in that and like disproportionate voting controller of the business, and there's no kind of better time to unwind that than now. So I know our Board and our various advisers are working on that. Also probably worth noting, I mean, this is all done really since I was 16 years old. If there was -- it would have taken something that was really in a lane that I thought I could apply knowledge to and make a difference in to ever walk away from it. Hopefully, this job makes sense for those of you who know me, and it kind of checks that box or else, I'd still be doing what I'm doing. Not sure anything you would add on that, but happy to take any questions.

Yes, why don't we do that, why don't we open it up? Would anyone like to ask a question of Jared or Taylor? Okay. Well, okay, here we do have one. Here we go.

Congratulations on the role. I think it's very exciting. You mentioned it quickly, and I'm trying to make sure I understand. As of now, the expectation is you will not have to -- you won't be forced to liquidate your shares in the company. Is that correct?

I mean, to say that this all came together rather quickly would be an understatement. So I've had enough time to have a handful of phone calls. I think that the -- there may be like a world where things wind up in a blind trust. I don't know. I would say that there seems to be enough distance that this does not necessitate like a liquidation. I'm sharing my best of my knowledge at this point. My overwhelming preference is not to have to unwind any position. But I think like there are inputs from various legal and advisers. But hopefully, you have my intentions.

Would anyone else from the audience like to ask a question of Jared? Here we go.

I'd echo congratulations. It's awesome opportunity. But the one potential conflict we've kind of talked about would be Starlink. Like I know you have a good relationship there. I don't know if there's any considerations you'd have on whether or not that would need to be solved or anything of that nature?

I mean, that is -- I mean, we serve, I don't know, I mean, directly, indirectly hundreds of thousands of customers. I mean, I'm sure any argument that could be made in terms of like percentage of volume, percentage net revenue or profitability would show that like that is not a concentration for the organization. I mean, we're in the payments business. We serve people across a number of verticals. So I -- again, I'm not the legal team or the advisers on that, but I can't imagine that would be problematic.

All right. Great. Thank you. Did anyone else like to jump in? All right, Jared, as I'm coming back to the stage, there was a comment also about the potential for return to the company. Would you be able to just address that briefly?

Yes. I mean, look, this is -- again, since I was 16 years old, this was all I did. I mean, there's a whole process, a Senate confirmation process to go to. Then I got to do a good job. I mean, maybe I get fired, I don't know. So there's no place like home. Certainly, I wouldn't want to do -- I mean, I can't emphasize enough, my confidence in Taylor and the team. I mean, look, I went to space twice where the Board had to have very high confidence in the succession plan. That's obviously existed for a very long time going back to 2021. So I certainly would never want to do anything that was disruptive to a good thing going, but I'm just putting it out there. That's certainly in the realm of possible.

All right. Excellent. Well, Jared, Taylor, thank you for taking time to start off the presentation with that. With that, I think we're going to get into some questions on the business. So I think a good place to start is the Shift4 way and how your approach to M&A is very different from any of the other companies in the space. For those that are maybe less familiar, can you recap what makes your approach to buying companies so different in highlighting that oftentimes, basically every time, but Finaro, you're not actually buying end-to-end volume.

Yes. I mean, I think pretty much our M&A strategy other than really Finaro's kind of the only example where we bought a business that actually had our #1 KPI. And frankly, that was the fastest way to have a pan-European acquiring license with a lot of card-not-present capabilities that were going to be very important for an important customer we have, but also something we could build upon for pursuing restaurants, hotels, stadiums in the European market. Outside of that, almost every other deal we do is either about plusing up distribution or arriving at a lower customer acquisition cost within the verticals we aim to conquer. There's really -- look, we've been doing this now again for 25 years. There's 2 approaches I see. When you have something that works and you can just -- no matter like how good the product is, like people generally, unless it's Apple aren't lining up around the corner for the next version. So again, with Toast, all their might and everything they've accomplished, they hired like hundreds and hundreds of people and spend like hundreds of million dollars on marketing to share to the world that they have a good product, and it's worked very well for them. From our perspective and just how we evolved in an organization, it's maybe there's a better way. And we've acquired restaurant POS assets that have really fantastic customers that have been around a long time. They've certainly overcome their new business failure risk, and we delete the part and move them over to SkyTab. We yellow brick road them over. In the hospitality world, a number of gateway connections supported by hundreds of software integrations were formed to serve the challenges of incremental authorizations and complex software environments in the hotel resort environment. For whatever reason, they chose to be Switzerland and Merchant acquire agnostic. And even though they were delivering the overwhelming value in the transaction chain there, they charge very little for it. We bought those businesses in turn, cross-sold them all over to our end-to-end solution essentially doing it. So I'd say like for the most part, other than like maybe 1 or 2 examples, almost all of our M&A work is about plusing up distribution intelligently and super low-cost customer acquisition. And we just take those customers and literally put them in the funnel for the teams that own it. Take GiveX, for example. The $300 billion payment processing cross-sell opportunity, we just sliced up, okay. They've hotels, restaurants and specialty retailer. Take the hotel customers for North America, give it to the hotel North American team, take the restaurant customers in North America, give them the restaurant team. Oh, they've got assets in New Zealand and Australia, we're going there. That's perfect. Well, that will help us kind of underwrite the investment case for going into those markets. And then just run the same playbook. All the same incentives apply across almost every deal. We'll upgrade your hardware, we'll give you new software, we'll waive gateway fees or we'll waive your gift and loyalty card fees, give you a signing bonus. But if you know at some point, we might charge more for the service. That kind of carrot and stick mentality, that playbook is kind of well proven, and we recycle it almost every deal.

All right. Excellent. I want to talk about more of an industry competition topic. You've been in the industry for a long time. You were one of the first to identify and capitalize on the trend of more and more payments running through software. I think everyone in this room would agree that the old-fashioned nonintegrated brick on table is a slightly negative CAGR business in the U.S., and more and more and more of the volumes and the unit economics are running through software platforms. Shift4's well aligned with that theme. But given you've been in the industry for some time, can you just provide some historical context on the competition that you're seeing? What's changed in the last 3 years, 5 years? There's got to be some things that stand out to you.

Yes. I mean, just to start in terms of the idea that integrated payments is where everything is going, like 100% of our transaction volume is integrated. Like we don't -- that kind of leaky bucket dynamic of like isn't -- like do you have customers in your base that will inevitably have to use a Shopify or a Stripe or an Adient. Like all of our customers, all of our volume is software connected into payments. So we start from -- we've come from a very good starting place. And that absolutely is -- goes all the way back to nearly 20 years ago, like 2004, 2005 time period with Harbortouch, where we embarked on our integrated payments journey. And I'll tell you what that kind of early exposure to integrated payments taught us is that you have to evaluate by vertical, like one, should you even be here at all? Like for starters, like we made a choice going back like really early 2000s, like if you can download an application or an iPhone or an iPad, we don't want to be here because we think almost anyone can do it. Like it will be very, very high customer acquisition cost and like switching cost is an installing yes. But outside of that, like it's like within the verticals we do want to play in. Is this something where we should be building a product for it? Should we be buying a product and pivoting it over to our integrated offering? Or do we not want to bet on any horse within that particular vertical and just play nice with everyone. We had 20 years to get really, really good at that. So I say all that from like a competitive dynamic, like we have chosen to be in lanes that we don't think are very competitive. We hear it all the time like, man, it must be ruthless in the restaurant market. It's not. It's us and Toast. We're the only 2 companies that have invested in cloud-based restaurant -- table service restaurant solution that's distributing it and supporting it at scale. Of course, there's Clover and Square and kind of your Cash and Carry. There's [ Queue ] and Xenial and PAR in fast food. But those are very different lanes, different features, different value-added services you need to service those customers in hotels. Like there are 3 essentially players in that space. One is very good at donating share, and then there's us for the end-end offering. And then there's somebody else that pretty much anyone -- any bank that's trying to preserve a relationship will take their customer to. Sports Entertainment, we size that up very well. Four players in the space, 2 will always be cloud -- on-prem solutions. They will always share one fast up income that's not -- that's overlooking payments and then one like really mismanagement company. We said, let's buy the fast up and comer and take over the market and we wind up doing that in that particular space. So at applying of like, do you even want to be here at all, then build by or partner by vertical is like very important. As a result, I think we're in very narrow competitive lane.

All right. Excellent. Let's move into another one around the industry before we get into some more Shift4 specific. So pricing. So over the years, generally, investors think about pricing in the payments industry is coming down. And I'd say that in the enterprise space, we've seen some of that, right? But in the SMB space, just to give some hard evidence, it seems like it's been going the other way with pricing increases coming from Toast, Square, Shopify, Clover and others we've seen publicly announced. Can you talk about that pricing environment and why you think that's happening?

Yes, sure. I'll hit that. And I actually think it dovetails really nicely with the comments Jared already made. If you're not offering a superior commerce experience for your customers, you're losing customers. And the only chance you have to retain them is to lower price. And in fact, that doesn't really work. They tend to favor solutions that help them run their business a hell of a lot more. So like the days of IV payments as this commoditized product are largely gone. Customers don't view it that way. They view their business and their commerce value chain as something that needs to be tightly integrated, have a lot of components that help them sell more. And so I think the players that you called out as best-in-class are all great examples of being able to take price because they're delivering a hell of a lot more value than an approval or a decline.

There's no doubt. I mean I can't -- 100%, like there is virtually nothing that like a GPN or Pfizer, Worldpay could do to a customer who needs Shopify. Like it doesn't matter if you're like, I'll do it for free. There's no way. It just makes it -- you're going to get a separate web designer and shopping card gateway for that? No way. Like it's just life's too much easier to go in that particular direction. Just like Shopify couldn't be like, look, we're thinking about doing something within stadiums, but we need every consumer to order off of a website for -- instead of like a mobile application that migrates into POS. You just couldn't do it no matter how low you made the price. So I think what you're seeing here is this is the Integrated Payments 2.0. This is the convergence software and payments for a broader commerce experience. And the companies that are doing that are growing very quickly, and they can charge more because they are doing more than approval or decline. But I think there is a definite misconception out there that it's like, well, they can just put a lot of pressure on you and just lower price. If all you're doing is offering an approval or decline to Taylor's point, the more likely outcome is they're just simply leaving.

All right. Thank you, Jared. Thank you, Taylor. All right. We're going to move on to a more Shift4 specific topic. So being cognizant and respectful of the fact that you're not in a position to provide a formal fiscal 2025 guide. I do think it would be helpful to just talk about directionally and kind of ranking the building blocks for next year. So I think what a lot of investors are doing is they're looking at the Q4 end-to-end volume guide. They're looking at that $49 billion at the high end and they're essentially annualizing that, right, because the seasonality in the business isn't quite what it used to be. We can roughly take 49 times 4 and start there. You've also disclosed a large backlog of $33 billion or so, maybe some of that gets eaten into during the quarter. Maybe you add a little bit more to it during the quarter. But those are the starting points. From there, there's new production, right, whether it's just the regular way of production, whether it's conversion of either an acquired asset or gateway conversion. And then, of course, there's same-store sales and there's churn. Maybe you could just talk directionally, as helpful as you can be, around how investors should be thinking about building to a 2025 estimate?

Yes, sure, I'll take that. I think the comment around Q4 is really that there has historically been seasonality in the business. The growth of our Sports & Entertainment business suggests that Q4 looks much more typical of an average quarter throughout the year. So it is not an awful baseline to start with if you're thinking about annualizing for the year ahead. In terms of the components that we talk about like building our bridges, annualizing the customers that joined in the year before is always the biggest driver, right? Any customer is going to give you more volume in their first full year with you than they give in a partial year. That's like kind of in the bag. We understand it. We can underwrite it reasonably well. We can even understand kind of the seasonal cadence of it. We have international expansion that's always been kind of this ambition of ours. We have all the pieces in place to execute on that now. I think last year, it was certainly an ambition, and we had the road map, but not the pieces in place of that road map. So we're highly confident in international's contribution in the mix. And the one thing I'd say regarding the backlog is, it's great that we now have visibility into this large base of enterprise customers that have signed that haven't yet gone live that are going to be installed at a specific date, and we can predict the volume we're going to get from them. But the majority of what we do never falls into a backlog. It is our day-to-day sales people that sign up a restaurant on SkyTab or a partner that convert someone. It's a pub that signs up in the U.K. There isn't enough time to calculate it inside the backlog because it's usually installed in a number of days. That's the majority of our production. We have really high confidence in it for 2 reasons. Number one, the international footprint is really, really nicely laid out now, as I mentioned earlier, but also the funnel, as we like to say. Meaning the customers that we can cross-sell into payments back to the M&A strategy you started with is as big as it's ever been. The M&A opportunity for us to buy these pieces of a complex payments value chain and the customers associated with it and deliver a holistic solution, cross-sell them onto our payment platform is really, really robust, and we're super optimistic about that. I think what Investor Day is going to be about is explaining kind of the relative cadence of each one of these. What will the average customer look like as we kind of work through this really awesome sales funnel in this international opportunity in the years ahead.

Maybe just to layer on, I think that's very important to -- look, the backlog should just give you some comfort that you can underwrite some growth a quarter or 2 and ahead or 3 quarters generally at most because those are customers that already signed, like those are done deals. What I can just really be looking at is like what is the -- what is our -- what we refer to as our low-hanging fruit. What does our cross-sell funnel look like? I mean, that's over $400 billion and several hundred thousand customers. So why I connect to this, right? Like I started my career in payments and sales. I think that it's very hard to convince a customer that they should drop whatever else they're doing and prioritize integrated payments is the problem for the day. Like generally speaking, it's not going to be on the top 5 for most of our customers at any point in time. So -- like what do you do about this? Like I said, like even the companies that people would generally agree, like, oh, they must have a really great product, spend a ton of money on sales and marketing. Like from our perspective, if you can have a foot in the door, right, where somebody on the other end has to take the call, has to have the conversation, like you power their entire gift and loyalty efforts for their business. That's super sticky, really hard to move away. Or you power their gateway or it's their software that you're using. Even though you're sunsetting it and moving them to another product, say, in the case of Revel, they're going to take the call. That is like the whole key to our success. And I think like maybe overlooked in a powerful statement that was in Taylor's portion of his prepared remarks this past quarter is like that cross-sell funnel is bigger now by a very wide margin than it was at the time of the IPO. This is very important, I think. So when you start looking for the next couple of years, like we're working on, and this was in my letter going back to earnings is like, hey, the first half of the year, we're going to focus on setting up Australia and New Zealand and making our global e-commerce product that much better like expanding into Latin America because you can only do that because you feel very good about what the cross-sell funnel is going to do and that, that should be reasonably automatic.

All right. Great. Thank you. Let's move on to the sports and entertainment vertical. So we think back to the last Investor Day and the time of the IPO and think about all the progress that you've made in that vertical is pretty impressive. There's a couple of things that stand out there. One is the VenueNext acquisition and not only the point-of-sale system, which is a modern point of sale but also the mobile ordering capability. And the other one that I sometimes think is underappreciated is the -- which I now believe are completed integrations to SeatGeek, Ticketmaster [ ticket socket ] and Paciolan, which are not easy integrations to get. So maybe you could just talk a little bit about how that positions you to address the, let's call it, roughly $100 billion of U.S. volume TAM for stadium's, events, entertainment?

Yes, sure. So let's start with what a stadium is from like our point of view. It is very akin to our most complex customers. It is a really demanding commerce environment with a ton of revenue centers and all sorts of different software that needs to go into fulfilling that fan experience. We identified VenueNext as really the cutting-edge sizzle feature that stadiums wanted to have. It was, your fan can order the hotdog and beer from their seat. You can take your busiest concession stand and literally close it, and we can drive more commerce through this solution. In its own right, that attracted a ton of attention, stadiums loved it. They quickly had VenueNext expand into kind of all of the food and beverage that they needed technology around inside their stadiums. But what we were able to bring to the business is now a payment platform that can integrate to all of those other revenue centers. So it's a fanatic store. It's a parking application that exists you can pay for your parking. It's a night club in the case of the Las Vegas stadium that lives field side. That was like taking our know-how about these complex merchant environments knowing no one piece of software can fulfill the entirety of the experience, but the platform that can stitch it all together on behalf of the merchant is going to be what rules the day. I think what was fascinating to us throughout the evolution is, yes, we knew stadiums were going to adopt the in-venue solutions en mass, but they were quickly seeking to adopt us for every avenue of commerce that they're conducting. I mean being able to follow your ticket purchaser throughout the stadium from a data and analytics standpoint, is a super powerful thing for these organizations. And so they were the foot in the door to all of these great ticketing platforms. And we treat them just like any of the 600 pieces of software that are integrated to us. If commerce is flowing through it, we can process the transaction, we can deposit the funds and we can give really good analytics to our customers. Now why does that matter? It takes a vertical that in itself was probably like high single-digit billions of payment volume when you can penetrate it at a reasonable rate and multiplies that by like 3 to 5x, right, because you're typically spending 3 to 5x on your tickets than you're spending on the concession. So we've got a customer base that's kind of demanding this integrated solution. We've got a heck of a lot of volume behind it. And we've got this embedded base of lots of stadiums that we get to go now cross-sell ticketing on since the integrations are complete. So it's really been taking kind of this combination of knowledge that we have about let's not just fulfill this one bespoke need for a merchant, but let's talk about the entire commerce solution. And as we attract the ISVs that they use, it opens an even wider TAM for us. Every one of those ticketing platforms supports lots of customers that aren't just the sports team in the stadium, and we now have kind of an out-of-the-box way to support them.

Excellent. Thank you, Taylor. All right. I think we'll try and squeeze one more in and then maybe we'll give the audience one last opportunity in case anyone wants to ask anything. But I'm going to -- let's try and make -- let's get in something on GiveX here. So maybe I know you've given some of these numbers, but just recapping the opportunity inherent in GiveX, meaning locations, meaning volume opportunity, but maybe more importantly, what are the teams already doing right now, meaning the dealers and other sales reps that you have to already start attacking this immediately?

Yes. Well, I think first, I guess, probably people won't know this. Like we actually looked at this deal before they went public, I don't know, maybe 3 or 4 years ago. It's actually very common with a lot of the transactions we do. So we've said, like, generally, if we're doing our job right, the deals we announced should be ones that you've never heard of at all. And like GiveX was on our radar for a very long time. So like what changed is we knew a large portion of their installed base was going to be located in Canada, the U.K., Europe, Australia. You circle back because you say, well, now we can actually affect a cross-sell and underwrite a greater portion of that installed base in order to do so. Maybe you say that so you get a little bit of a sense of like what's what kind of works on the inside of our business, and like we're not like reaction area like this is a good time to own Gibson loyalty platform. All that said, it is as close as you're going to get to a gateway cross-sell. But there's only so many hospitality optimized gateways out there in the world. So it should be safe to say that we do know where they all are. It's just that we're knocking on those doors. They already pretty much know what our plan is and their price expectations may be a little bit different. In the case of something like GiveX, for those not familiar, it's any of the gateway integration to Shift4. So when you're a software company that builds this cool hospitality platform or something or property management system that makes available gift and loyalty, you don't integrate to Shift4 for Visa, MasterCard, Discover and Amex. And then separately integrate to GiveX. You integrate to us for everything, and then we route the transactions to GiveX instead of Visa or MasterCard. So like lots of visibility inside to them already. And that tells you also that their hospitality and restaurant customers, specialty retail customers are using software that generally speaking, is already certified to Shift4. So playbook is identical. So we've only owned the business for a very short time. Every one of those customers already got switch over to Shift4 acquiring and get free EMV readers, like the touchscreens that we do. Like it's our standard playbook. You get a signing bonus to it, your gateway fees will go to 0. Your gift and loyalty card fees will go to 0. That's an easy trade, believe me, like they don't really pay much for that, which comes the other side. If you don't use one of our preferred acquirers in the case of Shift4, then your gifts and loyalty fees eventually will start going up. It's carrot stick combination. That happened like in a week of closing the deal. And again, it's the same teams working it. Like we don't retrain people to work just the GiveX cross-sell. They're the same hospitality and restaurant customers that you'd otherwise go to. And then look, you always get bonuses on these things. Like we underwrite these deals, like we have like 10 different ways to get to the -- what we refer to like this the glorious case, right? So they have their own POS platform, GiveX POS, you didn't need it. That team was told day 1, full transparency, you're all working on SkyTab. That product is going away. Let's move them over to that. We also could use the best-in-class gift and loyalty platform, bundle it with SkyTab, price it really disruptively and enhance the value prop of our SkyTab solution and you're in a lot of new geographies. So this should always be the case. Like you should always be able to ask us like, all right, the obvious one is the cross-sell. That should always be #1 in your deals. Give me the next 3 or 4 things about why this is a touch down, and we should be able to fire them off pretty quick.

All right. I think actually, given the limited time left, I think what we should do is we should just shift into if there are any closing remarks that either Taylor or Jared would like to make, the floor is yours.

Thank you all for coming.

Yes. Thank you.

All right. Well, I would like to say congratulations to you, Jared. So wish you the best of luck. It's been a pleasure working with you, and we hope we get to do it much more. And Taylor, to you and the team, likewise. Wish you the best. And on behalf of our team and everyone at UBS, we want to thank Tom, Paloma, Jared and Taylor for making the trip to Arizona. Thanks for being a big part of the conference.

Thank you.

Thanks.