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

RBC, and I am delighted to have Taylor Lauber, CEO, right?

Yes.

This is real man. This is real. So thank you so much for being here with Shift4. Super excited for you. I know the past week or so has been probably somewhat tumultuous, and we won't make you recant that.

But what I wanted to do now that you have taken the reins as the CEO, understanding that you've been a big part of the organization and the strategic role for a very long time. I want to get a sense of maybe some of the nuance changes maybe you've been starting to make along the way and in anticipation of this transition and then things maybe you want to change a little bit as you go forward.

Yes, sure. So first of all, thanks for having me. This is a business that's evolved dramatically kind of every year of its 26-year history. So there really hasn't been a change in our priorities nor should they be. We've been on an awesome strategic trajectory. We've got all the tools we need to continue to win. But what has changed, and this has very little to do with the CEO transition. What has changed is we're going to end this year with 6,000 employees all over the world. 65% of those employees are non-U.S. We're going to have a product capability, several capabilities as a result of Global Blue that we've never had before. we're going to have a massive base of customers and some of the best global retailers in the world that we've never had before. And so you have to adapt in the face of all of that. Again, this has very little to do with the CEO transition and have much more to do with just a growing international business. What that means on the surface is a heck of a lot more time on airplanes, paying attention to all these constituents and making sure that our philosophies aren't getting muddled with cultural realities in countries we're trying to expand to. It's always an interesting balancing act for us. We are implementing go-to-market philosophies that have been proven to be highly successful in the United States and other parts of the world. And so you are, in some ways, disrupting the way they've traditionally done things for good reason. And in other ways, you have to be mindful of the ways people like to pay, the way consumers like to interact with merchants, the way merchants like to buy things. So all this means a heck of a lot more time on airplanes, talking to all these constituents, analyzing the local markets, which is all really fun activity. Fortunately, it's not a hard thing to do to convince my wife and kids to go to France for the summer. And then just making sure we're structurally organized, so all 6,000 people know what's going on every day.

Got it. That's great. One just point of clarification we want to get out of the way. So the multi-class shares and the TRA that Jared, I guess, was officially going to be part of that's all off the table now because that was all predicated right off of his confirmation...

Yes, correct. So he had indicated that if you were to separate from the company, he would be converting his voting interest. What I don't think was as well known is there's a very significant tax consequence to doing that, which does not make any sense to do to the extent he's staying with the business. So he'll retain control, which is great. There's no ambiguity around who's in charge, which I love. And the share structure will sit as it has since we've been public.

Okay. Good. We just want to get that out the way. We keep getting questions on the clarification there. So one of the things that we're running through on all companies here is just trying to get a sense of what's happening in May or what happened in May, rather. So maybe any kind of compare and contrast to what's transpiring in May for your businesses, how that looked maybe relative to April? Any early looks in June is great as well. But...

Yes. This is where we're decidedly boring. I think it's one of the few categories we're boring in, which is that the consumer trends we've been seeing over the last 18 months are very consistent. We've seen modest year-over-year increases in hotels, offsetting modest declines in restaurants. Everything moves around by no more than 1% month-to-month. Things look generally quite healthy.

Okay. Good. So no change. When we talk about the evolution of the business, you kind of touched on this a little bit. But when we think back to the time of the IPO to kind of where we are today, one of the major changes, in particular, is really the go-to-market strategy. So much more direct distribution versus indirect distribution, in particular in the United States, but also even more specifically around restaurants. So how do you think about direct versus indirect as you want to continue to invest in the business? And again, we're just going to keep this in the United States for now because I know there's a whole another strategy outside that.

Yes, it's a great question. We've been indirect virtually the entirety of our existence. And as we evolved into larger and larger merchants, that just made less and less sense. We don't need third parties to tell us where Yankee Stadium is. We don't need third parties to help us cross-sell customers that we've inherited via M&A. And so there was this natural growth of a direct sales force inside of the business over the last 5 years. And then with our restaurant products specifically, we decided that there were specific markets we wanted to own distribution. The fixed costs are worth it because the markets are large enough to support that direct distribution and really just control of our own destiny inside of those markets. We still do third-party distribution in markets where they are not dense enough to warrant the fixed cost. We love our sales partners in that capacity. They can help fill out gaps across the country for us in a tremendous way. And then it wasn't necessarily part of the question, but internationally, it is very much a partner-led strategy. This is where I think people can get too religious about one path or the other. When in reality, through something like Vectron, we inherited 300 partners that speak German, that know how German merchants like to talk about their products and implement their products, it would be silly for us to try to build that sales force on a direct basis in a new and growing market like that.

Yes. So when we think about the states, obviously, and we were talking about restaurants, but direct distribution as we think about stadiums and venues...

Really anything enterprise.

Anything enterprise. So the distinction now as we think about it is support enterprise with direct distribution at a high level. On the SMB side, we'll still go through partnership channels.

Yes, except in dense markets. So whether it's Florida, whether it's New York, whether it's Boston, Chicago, we have direct sales force for restaurants because the markets are big and we can sustain it and the fixed costs are far less than the variable cost of partnership. And then we use partners to fill out the rest of the country.

You have to have a sizable professional services organization in order to support those enterprise clients? Or do you feel like -- and okay, so you're shaking your head, yes. So do you feel like you've built that up to the point where you're able to continue to grow at that trajectory? Or are you going to have to continue to put dollars there?

So we feel like we've got the right-sized sales force. We try to, on the service side, make sure everyone is capable of handling the most likely use case in a geography. We also do some kind of fun and innovative things like anyone in the company can go sign up and get trained on how to install a stadium because that's where you have surges, right? You need to go install Yankee Stadium in a month, and you're relying on a lot of people, but that opportunity or that need might not be there. So we've got dozens of employees across the company that raised their hand. They work in finance or they work in technology, and they said, "I want to be able to go to opening day at the Yankees and they go and install it, and then they go back to their day jobs. So it's a pretty fun, especially in these really high visible fun places to be installing things to create a variable model like that, where you can leverage them temporarily and then they can go back to their day jobs. And then obviously, you've got this extensive force that's installing restaurants every day around the country.

Okay. So that's interesting because that's one of the concerns that comes up fairly frequently. You've got these massive installs. I mean these are large -- like to your point, these are enterprise clients now, huge and the capacity with which to actually implement those. Part of that is coming from what it sounds like is your existing workforce that you're just retraining periodically for them to do it, and that's enough.

Totally. Yes. so keep in mind, this is one of the few segments when we bought a business like Appetize, we took everyone that was involved in installation. We brought them on because we knew there would be this lift. But in general, if it's a really fun place to be and it's a cool experience, why not take someone from any corner of the company and say, we're going to train you to do this. It's going to be a fun travel experience. It's going to be a fun entertainment experience. And by the way, you're going to teach us a heck of a lot about what's wrong with the product because you're not interfacing with it every day. You're going to teach us the things that a novice adopting it would find challenging that people doing it every day wouldn't necessarily see.

Interesting. Okay. Yes. I mean I often worry that there's just not enough capacity for all that stuff, but it sounds like that's not the case.

It's -- I understand the sentiment, but this is one thing that M&A does bring us, right? So M&A brought us nearly 1,000 employees over the course of the last year will bring us another 2,000. Rather than focus obsessively on expense synergies, which are, by nature, pretty negative to implement across an acquired business, focus on training these people to where the future is going to be, and they find that much more rewarding, and we solve the hiring need.

Yes. So one of the other major structural shifts of the organization, and you touched on this again in kind of your opening remarks there is going from a domestic-only kind of company to a much broader international company. So maybe speak to the mix of the business today? And then how do you think about putting an incremental dollar to work on investment U.S. versus international now?

Yes, sure. So mix of the business, and I'm -- Global Blue is going to augment this significantly, but still less than kind of 20-odd percent is international revenue and yet on a customer ad basis, we've got a lot of customers joining us from different markets. We've mentioned over 1,000 restaurants joining us in the U.K. alone. We've got several hundred joining us each month in Germany. And so the operational focus of the business is skewed towards these growing markets. I think we're kind of constantly challenging people to say, these are high-growth markets. They should not look like the U.S. We should be devoting a disproportionate amount of time. We should be obsessing over the local experience in the delivery model. So it's certainly a disproportionate amount of our focus. And what's really nice about when Global Blue enters the fold is they are a very international business by nature. And that's not just that they have like products all over the world. Their product inherently is helping one consumer from one country shop in another country and the fulfillment experience of that. So they're very well adept at how to be organized internationally to take advantage of local skill sets where it matters and yet to implement structure where running 50 different countries is otherwise challenging to do.

Yes. We'll go on to get to Global blue in a second. I want to talk about SkyTab, something that's more tangible maybe right at the moment and rolling that out in Europe. So you've got it in U.K. and Ireland, but it does feel like Germany has been a little bit of a different beast in terms of bringing that to market. So can you draw a distinction between what you're doing in markets where it's been -- the inertia has kind of held in and maybe some friction points that you're figuring out and maybe Germany is the right one.

Yes, sure. So the challenge is that depending on the market, you've got localization. That could be tax fiscalization, it could be language localization. It could be customization of the product to suit just how merchants and consumers interact with it. Very little of that in the U.K. and Ireland. So we saw instant opportunity to distribute SkyTab and have near 100% adoption with little customization of the product. So it was obvious for us. Germany would be kind of a multiyear step to have SkyTab ready for the market. And what presented itself as a really cool alternative was acquiring a business like Vectron that already had 65,000 restaurants using their product. Day 1 of that war is to get all of those customers on to our payments and make sure SkyTab is ready for those customers when they choose to evolve in the future. So it's by no means a lesson learned. It's actually a deliberate part of the strategy. And I would say, had we been religious about SkyTab first, we would have been waiting several years and not adding several hundred restaurants a month in Germany the way we are today.

So the question we get often is why does it take so long to go and do all that customized work in a country. So the fiscalization of the tax codes, language and stuff like I understand that. But like it does sound like when you talk to people who have had to do this, it takes like 12, 18 months or longer. Like -- and so that seems like an absene amount of time to have to cover that. But -- so what's the level of complexity that requires that?

So it varies very much by country. Yes. So I'll start with that. The payment methods inside of a country might be easy to get, it might be hard to get. That creates time as well. Fiscalization could be easy or hard, statement requirements, what it looks like to the consumer, all these things. They do take time when you add it up. And that's why a strategy like ours where we're very happy to sign up hotel customers that already have installed and localized software attaching our payments. And there's none of that work required. It's already been done for you is a faster way to get to market. And I would say that the players that are the most challenged that we've experienced are the really low into SMB, really wide of capabilities. You now have to adopt payroll solutions and capital solutions and all these other things that are part of your ecosystem, it makes the time line that much longer. So we start with software products that are already installed locally because you can attach payments very quickly and where the friction is not as high in a product like SkyTab in the U.K., it works exceptionally well. And behind the scenes, we're being informed on all the ways to localize. We are much faster at localizing something like SkyTab for Germany owning Vectron than we would be without it.

100%. 100%. And that's a massive distribution asset for you.

Yes, 300 dealers.

300 dealers?

Yes.

Yes, yes, yes. And so the playbook again on that is you've got these 300 dealers, they were selling other products, right? Maybe just talk about how that...

Yes, absolutely. So international expansion without this would have meant you're hiring local sales teams. I don't speak German, it would have been an awkward interview to try to assess the right sales talent. And yet through acquiring Vectron, we get 300 dealers that speak the local language, have installed the systems, know where the customers are. And now you're asking them to attach payments. And by the way, they'll save money because they won't have to buy as many Vectron products as they had before, they'll cost less, and they'll get a rev share for having done it. So it's a real accelerant into a market that you'd otherwise be hoping you get hiring right and no one gets hiring right kind of half the time. These are established sales channels with established customer bases. You're going to win. It's a question of how fast you can do it. And it's certainly worth the compromise of not having every single customer on SkyTab when you have an opportunity like 65,000 restaurants.

Yes. And one of the other things that seems to be a bit of a pushback is a lot of European -- Well, just countries in general, they've historically relied on their bank to handle payments, not a technology company. And so how do you get them over the hump to say to those merchants like I know there's a value proposition that you're offering, but there is also like this cultural thing. Sometimes that seems to stick with them.

Yes. This is an awkward thing to say with this logo behind me at a conference monopolized by financial professionals. No one likes their bank for payments. And if you look at the evolution of payment processing in the United States over the last 20 years, it has increasingly been leaving these entrenched financial institutions for technology that helps the merchant conduct more commerce. And when that friction occurs, what the bank inevitably says is, please just give me the deposit, meaning the banks don't even hold on to this business. It's not super high margin for them. So we go after it by delivering a heck of a lot of technology that's tightly integrated. It's displacing a bank terminal that a merchant was certainly not ascribing a lot of value to. The bank is -- doesn't love that trade, but to the extent they get to keep the deposits in their core business anyway, they don't feel it's terribly threatening. And I think the lesson we should sort of plan on seeing in Europe is that much like we've seen in the United States, the companies that are going to grow are going to be adding a heck of a lot of technology value to merchants. It's not going to be approvals and declines at a fraction of $0.01.

Yes. Yes. No, that transition definitely took place -- started taking place 20 years ago in the States. So that's pretty -- that's good to hear. So let's talk about Global Blue for a second. So a couple of things. One is, obviously, let's review the key attributes of this asset, the largest deal you've done in the company's history. And so what are those attributes? And then the playbook that you're going to run to integrate this into the company, it feels different to me than other acquisitions you've done. And so maybe draw a distinction between that.

Yes, sure. It starts with an incredible business. They just posted their earnings growing 20% year-over-year. They operate in what's largely a duopoly in their tax-free business where they help consumers get tax refunds on goods that they're purchasing abroad. So they have really high applicability in some of the best merchants in the world. These are the all the LVMHs of the world that are selling luxury goods internationally throughout the world and really strong brand appeal from consumers who can stand to get meaningful savings. It could be $1,000 or more back going through this Global Blue process. They have a significant market share in the markets that they serve for the customers that they serve, really high attach rates, really high loyalty and demonstrably better refund rates than their competitor, which means the product just works better. Consumers more often than not go through the process and are happy to get this money back. So it's deeply entrenched within merchants, and it gives us a really, really powerful tool within which to sit at the table of the largest global retailers in the world. This is something that they demand, like the Louis Vuitton in Paris demands that the is be available, and they're very happy with Global Blue. So as we looked at the world, we kind of often ask ourselves, what's our point of difference? If we're going to go after a particular market or a particular geography, what's going to make us undoubtedly special and put us ideally in the camp of having one or fewer good competitors. And we looked at retail for the last 6 years and said, this thing is a point of difference. It's a huge point of difference. And the ability to sit down with a retailer and talk about this product. And by the way, also be able to fulfill 5 or 6 other things that go into the commerce experience is going to be differentiated. And so that's playing out, and we don't even own the business yet. So we're able to have kind of these interesting conversations with customers about how we can fulfill more of that commerce value chain and reduce friction, and they love the Global Blue product. They're not going to kick it out. They also are one of the largest currency conversion businesses in the world for merchants, and that's something we've never offered.

This is GCC?

Exactly. So the idea that as a consumer, it presents you your local currency and the currency of the country you're in, right at the payment terminal and you get to choose. It's very commonplace as you travel internationally. It's less commonplace in the U.S. and yet we support 40% of the hotels in the country that have never offered this product. It was such a logical thing to -- as we looked at our product pipeline, we had to solve for it and Global Blue gave us that. And not just like a little bit, they're like 1 of the 3 largest players in that industry. So we've got a best-in-class product on the currency conversion side, highly applicable for hotels, stadiums are asking for it as well. And so it's kind of a perfect marriage in that we get world-class retail product and access to a vertical with a highly differentiated right to win. We get a currency conversion product that we can apply to our own customers in a way that we would have had to solve for anyway. And now we have beachheads in 50-plus countries around the world where we get to ask ourselves, is this a market for restaurants? Is this a market for hotels? Is this a market for stadiums, all the ways we've traditionally grown. What I think kind of makes it maybe a different business than other businesses we've acquired is it's a 20% grower in its own right. So there is an element of don't screw this good thing up -- that comes into this. We like to come into businesses and really shake things up and change their go-to-market really dramatically for the sake of winning. In this business, you're just a little bit more cautious because them doing what they're doing would quite frankly, meet all the expectations we set for the Street anyway.

Right, right. So prior acquisitions, historically, you kind of tear it down and build it back up under your kind of distribution plan and your payment and strategy. This one stands on its own. You're going to plug it in. You obviously get synergies coming into you with DCC. And you've got -- but the other thing I've often wondered is they actually have a fair number of relationships with SMBs in all of these different countries. And so how much of an opportunity will that prove potentially for SkyTab to go into those markets?

That's the largest and most immediate opportunity is the SMB that is using one vendor for payments. They may have currency conversion, they may not. The VAT process is disjointed because it's not integrated to those other 2. And we see the ability to deliver an all-in-one solution to them. And it's quite literally going to take 3 or 4 things off of their countertop. And those merchants historically have not had the conversion rate on that the large enterprises have because they're guessing at whether or not you're eligible and they've got to take another step. We envision being able to deliver them a product where at the point you tap your card, you're on the Global Blue journey. Automatically, it assesses that you're a foreigner and that you're eligible for this. It's going to shove a lot more people into their app. Right now, there's about 15 million consumers that use the Global Blue app throughout history. And the product is going to be quite differentiated from what these SMB merchants have historically been used to dealing with. So that's kind of the early plan is this SMB. And obviously, the really nice logos to win are all there for us as well, which is kind of the big global enterprise.

Yes, that's going to be awesome. It's going to be awesome. So let's talk about just the timing of the deal closing and then any other kind of regulatory approvals or hurdles that we need to be mindful of?

Yes, sure. So there's one regulatory approval that we're waiting on, which is the Bank of Italy. It's their money transfer license. It's a pretty perfunctory thing, but you do have to wait for the approval process. Just to remind everyone of kind of the expectations we set, I think originally, at the time of the deal, it was second half. We refined that to Q3. We refined that to early Q3. We were on track for that.

Okay. So no change there?

No change.

No change in terms of whatever has happened at the organization right now with you guys, it's all steady state. That's great. So I want to talk about kind of visibility, but we get a lot of conversations going with clients around '25 guidance feeling a little conservative, I guess, is what people would tell me. And so since we've got you here, how do you think about the cadence and the trajectory and visibility that you have as you're sitting here today having set the '25 tone?

Yes, we think it's achievable. We think it's highly achievable. And that's, I think, appropriate given everything that's going on in the world is to set the level of expectations. So Jared mentioned this in his letter, we're certainly on track for everything we've laid out. It does not include Global Blue, so we'll have to adjust it when the Global Blue transaction closes, but that should be positive, which is great.

So nothing -- nothing to say otherwise except positive.

So you're boring, unfortunately boring grows at high margins.

That's fine. I wish I had invested in boring for a longer period of time. So the R&D dollars, so you guys talked a little bit about this in terms of the Investor Day that you had. And you talked about, I think it was 6x the amount of investments that you've done over the past maybe 3 or 4 years. So where are all these dollars landing? I mean I know when there's doing -- you're putting money into these M&A activities after the fact, but like where are these M&A dollars going? And kind of what is that expected trajectory as we think about R&D?

Yes. So it's more finite than it sounds, right? It's the SkyTAb product is a significant portion of our R&D investment. International expansion is another, and that comes in a few different flavors. It's generally bolting on payment methods that are used all over the world, settlement methods as well, making sure merchants get their money in the ways that they're accustomed to getting it as frequently as possible. And then international expansion on the back of a handful of big global e-commerce customers that are putting us in countries we otherwise wouldn't be in before. I think I mentioned this recently, we were in one country 20 months ago. We're in over 50 with payment processing capabilities now. Believe it or not, that's like a much smaller team that's focused on that, but they're delivering on behalf of handful of clients. And again, these are just more markets that we get to assess the opportunity for our core verticals once we have lighten them up.

Yes. Okay. So like recession fears have appeared to have abated for now. But it still begs the question of like the cyclical nature of your business, how do you think about that? A lot of people think about more or less the idiosyncratic growth opportunities that just get stacked on you guys? And so maybe just talk to that point a little bit here.

Yes, sure. I'll start with the investment community tends to get this wrong, meaning that they tend to lump consumer discretionary is this like giant bucket that when things get dicey, everyone pulls back. That's not how consumers behave. It's not how anyone in this room behaves when they're uncertain about their own future. What tends to happen is the longer you take to think about a purchase, the less likely you are to make that in a time of uncertainty. Houses, then cars, then furniture, then consumer electronics, then fashion, a restaurant is like a day of maybe a week before decision. You still make that decision. You tend to pull back a little bit on price, but the restaurant vertical is highly adaptive to that. When the $100 steak doesn't sell, they present you another option. And so it's just far less dramatic than I think investors typically assume. And yet you can go back and look at consumer spending data throughout multiple times throughout history. Visa makes all this very available. And you find that there's modest pullbacks in these verticals despite being consumer discretionary. So we can take confidence in knowing that real strong economic hits will not manifest themselves one for one in our merchant base. The trade-off, by the way, is when things are euphoric, you don't get mega same-store sales growth. These are just kind of established businesses with good models. It's fine because we've always experienced this, and we know the only way we're going to grow is add customers, period, full stop. And so we make sure that whether it's our M&A strategy or our direct go-to-market, we've always got a really, really large base of customers to go access in times of economic uncertainty because one thing does happen when the world gets less certain, is you don't make decisions as a business as fast as you would when things are going great. So economic uncertainty is something we kind of embrace and make sure the business is well positioned to offer things like consolidate products, cross-sell merchants, save them money, reduce complexity because they care a lot about it when their own business is down a few digits same-store sales.

100%. Al right. So post Global Blue, I think your leverage and I think what you said net leverage at the end of '25, again, post-COVID like 3.3 turns, somewhere thereabouts. So it just begs the question, is M&A still in the cards? You have to digest this thing for a little while. Are you just going to lean in some buybacks? Like how should we be thinking about those opportunities still?

Yes. It's the right question, although I would say we rarely get to choose when we do M&A. And no matter how many times I tell investors this, they don't believe it. Every single transaction we've done over the last 2 years is something we worked on as far back as 5 years before that. So if you're really disciplined about your acquisition model, it's not always up to you when the criteria are met. But when the criteria are met, you have to challenge yourself as to why you should be doing this, and you should probably be doing it. So we maintain the team. We maintain the list of opportunities. We pursue them all with the same vigor that we would have before. We raised about $3 billion, $3.3 billion of capital for the Global Blue transaction, plus to extend some maturities, yet we had $20 billion of interest. So we're not going to kind of lose that M&A muscle for the sake of our short-term leverage ratio, but we'll be very disciplined about how the next dollar gets deployed.

Yes. So we got just 30 seconds. So just on that debt raise, it was pretty unique, right? You had euro. I think you had convert, you had variable, you had fixed. So like just 2 seconds on the structure of that thing because it speaks to the growth of this company's plans, I think, longer term is what I read into it.

Well, we just had a bunch of priorities going into it. One was leverage ratio. It was preserve optionality into an uncertain future. And so we weren't going to take on more traditional debt than we thought the leverage ratio was appropriate. So we said we're going to be at 3.6x on a traditional leverage ratio metric, which meant some preferred into the stack to raise capital around it. I think it's a healthy discipline for the company that we've managed equity dilution incredibly responsibly. I think since we've been public, shareholders have been diluted about 15%, and yet we've delivered 10x the EBITDA inside of that. So we managed dilution prudently, and we're not afraid to use a little bit of dilution when it matters. And if it turns out, we didn't need that capital, we will absolutely buy back stock and manage dilution that much further. So we did a term loan, which gave us access to floating rate prepayable debt, which we thought prudent. We did euro, which kind of helps balance out the proportion of the revenues that are becoming -- are going to be coming from Europe. And then for the rest, we did this preferred instrument that gives us just a lot of flexibility in terms of future dollars deployed.

Awesome. All right. We're out of time. But Taylor, thanks so much for being here. Congratulations on the new appointment. And there's a lot of great things that are happening at this company. So I'm super excited to see where this goes.

Thank you.

Thank you. Good to see you.