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

Okay. Thank you, Mike, and thank you all for joining us today. I'm delighted to be hosting this fireside with the management of Shift4. We've got Tom and Taylor. And I was reminiscing that we had hosted a similar fireside last year with Jared. I looked through the questions from last year, because I save everything, and it's amazing how dynamic the company is because a lot of those questions, although some of them are evergreen and durable, there's been a lot of changes, and consequently, we updated them over the course of the last couple of days. And so in terms of the format for this one, like I said, this is a fireside, so I'm going to be asking the questions and Taylor and Tom will give us the answers. And if there is room at the end, which there may not be because we got a lot of ground to cover, we'll try and get yours in. Now folks, I'm on the Bloomberg, if you have questions, hit me there, send me an e-mail. But I think you'll see these are fairly comprehensive what we -- we've got a lot of people in this fireside, I'm very excited about that. And consequently, I hope you find this valuable. So Taylor and Tom, welcome.

I'm going to start off with a kind of open-ended kickoff question. But what have you found investors been focusing on in your conversations since reporting earnings last week?

Yes, sure. Thanks for having me, by the way. This is always a fun event to attend. And thanks for everyone who is dialed in. A lot of themes coming through the quarter, not indifferent from other quarters. There's tons of initiatives underway and a lot of investor clarity to provide around what's working, what's not working, and just simply the combination of the business with Global Blue, which was something that just closed in early July, and what the impact of that would have on our financials. So I would say the big themes across investor conversations are payment volumes and what does the average customer of Shift4 look like today versus years prior. What's the relative success of each one of these initiatives? We are very unique to have both an incredible enterprise and SMB opportunity inside the business. And I think that explaining that to investors is something that we've spent a bunch of time doing, which is we can win both and the impact of both obviously represents different rates of growth for volume, different revenue growth, et cetera. So just giving clarity around that. And then lastly, international expansion as a theme. This has been a theme for us for several years now, and hopefully investors are starting to appreciate that these pieces that we've talked about as far back as 4 years ago publicly have now largely come into place and we're able to execute against that strategic vision that we had. But the pace of execution and the relative contribution of different countries is certainly a big theme as well. Sorry, I think you might be on mute.

I type really loud, so I tend to mute myself. In terms of the CFO transition, can you touch on the CFO transition? As that seemed to catch some of us by surprise; Nancy is very talented. Chris Cruz is well known in this ZIP code, but I just want to make sure that everybody knows what he's about and why it is that you're making that change.

Yes, of course. So you're right, Nancy is incredible and she's been a driving force behind kind of the company's success, both before she was CFO, as a Board Member, and will continue to be as a Board Member after her tenure as CFO. One thing that she was adamant about, even before she signed up for the role, was that she wanted to contribute 3 years at the company in a full-time capacity and believed that she could accomplish her really long list of objectives inside of that 3 years. And to her credit, she did exactly that. So as her tenure was coming up, her 3-year agreement was coming close to its expiration, she said, "I'm happy to stay in a capacity to help through the transition with Jared and all that stuff. But fundamentally, I want to take a step back from the company and be involved as a Board Member and not in the full-time race." So we just certainly tried to keep her around for another 3 years. She politely said, "I'll give you some level of flexibility because I want to stay close to this, but I don't have another 3 years in me." Chris is a little bit of a different story because we've wanted Chris in the company in almost any capacity for a very long time. So for those less familiar, Chris invested in the company about a decade ago. Him and his firm bought a 60% share of the business and provided tremendous guidance throughout some of the most formative years of our growth and, quite frankly, stayed on our Board as an Audit Committee Member long past Searchlight's divestment in the company. So we've had him around forever. Obviously, if we had to lose Nancy, this was like a really safe pair of hands. And a lesser-known kind of fun fact is that Chris and Nancy actually know each other long before Chris knew Shift4 or Nancy knew Shift4. So there's a ton of continuity between the 2 relationships. And that's important to us. I mean you kind of talked about the, or you alluded to, the number of things we've gotten done in a year. It's a fast-paced company with tons of initiatives going on. And trying to get a stranger up the curve comes at a significant cost. And so we're thrilled that Chris can kind of step into the seat, bring a lot of continuity given his relationship with Nancy. Nancy can continue to give us advice. By the way, she'll be an employee through yearend, so this will not be an abrupt transition in any way. And it will all be the same kind of cast of characters just contributing at different levels. So I think the continuity will be there, but I also think we're going to get some fun insights with Chris and all of his brain power.

All right. The Shift4 Way. So in terms of guidance, should we anticipate any potential changes in the overall guidance philosophy or methodology with Nancy leaving?

No, I wouldn't say that. I will say that the company evolves. And you've been kind of right alongside of us as we've evolved, not having an international business by way of example, not having a sports and entertainment business, and suddenly we're, just short years later, one of the largest in the space. So I think we'll continue to refine at the pace within which we have. So nothing stays static inside the business. We have to help people with disclosures. Like the contribution of Global Blue, for example, is a big theme in the back half of this year. But philosophically, this is largely the same group of people contributing in different capacities than they have in the past.

Okay. So apropos of Global Blue, with that closing on July 3, you highlighted on the earnings call that you're now tracking towards that third scenario of the guidance. So for those of you who weren't at the Analyst Day or didn't -- the company set forth the structure, which I think was quite intuitive, maybe if you could revisit what that was. And then that third scenario calls for a 30% CAGR and growth in the gross revenue network fees and adjusted EBITDA. So maybe if you can give us some context as to why you set the structure that you did and why it is that now you're messaging the higher end.

Yes, sure. So it's been a common theme with investors that they want to kind of break down the parts of the business and understand the relative contribution. And M&A can make that difficult for investors to do. So at our Investor Day, we tried to lay out 3 scenarios that we think about when we're planning ahead for the business. First is sit on our hands. And it's kind of a joke internally because that's not what we've ever done for 26 years. But certainly happy to portray the results of that or the expected results of that for investors, which is we have this massive base of customers, over $1 trillion, that we can go cross-sell payment volume into. And we also have product-leading -- leading products across restaurants, hotels, stadiums, now specialty retail. And so the sit on our hands case is let's continue to win with those products in those verticals and let's continue to cross-sell the base we have, but not add to it in any way and not reinvest the capital. We laugh about it because that is the last thing we would ever do as a management team, is not think about how to reinvest the capital and keep our growth funnel as full as it could possibly be. But there you go, high teens is what we think is a reasonable 3-year CAGR for sitting on our hands. We also wanted to illustrate the impact of Global Blue, that's somewhat formulaic because Global Blue was a public company. They had their own forecasts and guidance set out to the Street. And adding Global Blue to that standalone mix would create kind of a mid-20s CAGR. And then the last one, which we deemed most likely, is, of course, you do those things because that's the way the business has been operated. But you also reinvest capital and seek out opportunities that we've done a pretty good job of pursuing over the years. For example, we announced a small tuck-in acquisition in Australia that gives us a sales force on top of a bunch of infrastructure that we already have. It's a very obvious thing to do when you have this infrastructure and this plumbing to go add a bunch of salespeople on top of it. And if M&A is an attractive return-on-capital way to inherit that sales force, all the better. So the most likely case, which you illustrated there, is kind of a 30% CAGR on our gross revenue less network fees. And it's simply a result of pursuing the base that we've already set up for ourselves over the last few years, the inclusion of Global Blue's capabilities which gives us really large vertical access and geography expansion, and then lastly, reinvest a modest portion of that capital into opportunities as they present themselves.

Okay. And then in terms of the additional capital deployed in future M&A, can you help unpack that? Yes. And the methodology you guys set forth at the Analyst Day was really fascinating. But yes, if you could talk about how the approach to investing that capital.

Yes. I want to be really specific in the description here because I think investors can sometimes get confused about how M&A works in our industry. We have an incredibly disciplined model whereby our price structure and how we underwrite the returns from an acquisition, how we intend to integrate that business, what revenue streams we want to delete from that business are all really, really rigid. And as a result of that, we don't often get to pick when we do M&A because we simply have a basket of companies we think are very interesting and a price model that we think makes sense for us and it's kind of take-it or leave-it up to the seller if they're willing to pursue that and whether they kind of buy into our vision. So in many ways, M&A isn't up to us. If it fits our model, we're going to pursue it within some modest, reasonable amount of leverage and we feel compelled to, if it sits between us and a really interesting growth opportunity like what we've just described in Australia. So as we look at outer years, it's imperfect. We modeled out hypothetical $200 million a year, which we think is a reasonable amount that you could deploy against opportunities. But I'll say it's certainly lumpy. You'll have opportunities like we saw in 2024 where 5 businesses that we had previously looked at many years prior all came to fruition at terms that we were pretty consistent on over those last 5 years, and then other times where cycles get great and people's expectations are high and there's not much of interest to us. I actually asked Tom and our investment banking teams to go back and look at our deployment of capital against the M&A cycle. And it's actually kind of interesting, the hot years for M&A, we did virtually nothing. And the slow years for M&A, we did a ton, which is what you should hope for from a capital allocator. So I'd say we hope we can deploy a modest amount every year, maintain a leverage ratio that delevers despite that deployment of capital, but add capabilities selectively around the world or in verticals that we think we've got a differentiated right to win.

And I'm just doing this from the Analyst Day slides, but the total capital invested from that vantage point was $2.7 billion. This is a 5-year return chart. 4.6x return on EBITDA, 6.4x return on free cash flow and a 16% free cash flow yield. So that's -- the system certainly seems to be working. Now in terms of -- okay, so thank you for -- about Global Blue. Thank you for disclosing the expected GRLNF adjusted EBITDA financial contribution from Global Blue for the second half. Can you talk through your early read on how that's performing and what it will take to achieve those targets?

Yes. Of course. So Global is doing great. It's largely though, today, acting as the independent business it was a year ago. And so what does that mean? It means that they are winning lots of clients to their tax-free solutions business. This is the VAT refund business that they are a category leader in and they've been adding great customers and great capabilities around the world consistently. Similarly, their currency conversion business is growing nicely. We gave ourselves, and I think this is just prudent given the size of the acquisition and given the slightly uncertain time lines around the regulatory review, we gave ourselves a year before we would expect meaningful synergies inside the business. And what do I mean by that? I mean the ability to kind of cross-sell our payments product to their merchant population, embed their currency conversion product across our merchant population. We don't think it will take a year. We think we're going to hit the ground running really, really nicely inside of Q1 with a broad-based set of capabilities. But in terms of kind of keeping, I think, a reasonable and prudent set of expectations, externally, that's the right thing to do. Again, there's technical work that needs to be completed. And then obviously, we have to go to market with these great products. And I think unlike some of the other acquisitions we've done in our past, this is an awesome business that's growing quite nicely, that's winning share without us. And so there's an element of do-no-harm that certainly comes in through the first several months of an acquisition. Let's make sure we all understand kind of the relative pace of execution, the big themes we're going after as a business and just the annoyances that come with M&A, which is like how do titles work, how does organizational structure work, et cetera. Let's get that right. Let's not distract from the success they're already having and let's set ourselves up really nicely in '26 for a set of capabilities that are going to be unrivaled.

And could you just repeat again, you said earlier the timing of when you anticipate the cross-selling opportunity?

Yes. So we've publicly said give us a year to put these capabilities in place. Now again, that was from when we started announcing the acquisition. There was an uncertain closing time line. We think we're going to be well within that and we think we're going to have an awesome set of capabilities to go demonstrate in the first quarter of next year. So we're really encouraged by that. But again, I want to emphasize, this is a business that you don't sprint at the synergy opportunity, because that can come at the cost of execution. They're growing quite nicely as a standalone business. We want to make sure they continue to win, and we embed our philosophies and our product capabilities over a reasonable period of time.

Now I found it interesting that you made Jacques Stern, the CEO of Global Blue, the Head of Shift4 International. So what best practices do you expect that he'll bring to the organization?

He's an exceptional leader. And unlike the Shift4 business, they were an international business from the start, meaning that their organizational structures, their governance models and their go-to-market, their support models are all built through the lens of operating in 50 countries around the world. Shift4 was in one country for the majority of its history, and now we're in over 50 countries, but moving very fast to get there. And so as Jacques and I got to know each other, it became obvious that the Global Blue governance structure would serve us well internationally. This means that in a country like Germany where we can sell basically every product under the Shift4 umbrella, our restaurant product, our hotel product, our sports and entertainment product, unified commerce, awesome retail capabilities with VAT refunds, et cetera, that should be under a German country head that gets to evaluate all these opportunities and pursue them based on what they see inside the market. Prior to this acquisition, Shift4 internationally was kind of structured as a series of acquisitions that happened to be in one country or another. So Jacques brings 20 years of executive experience. I mean he was a CEO of Edenred prior to Global Blue. He was a C-suite member at Accor, the global hotel franchise. So positioning us for organizational success, and by the way, to bridge this cross-sell, because the cross-sell is a new concept to a lot of the Global Blue employees, is something that we thought really important.

Yes, makes sense. All right. So I was intrigued by the comments you made on the earnings call -- oh, actually, this goes back previously to the Analyst Day, about the functionality that will be built into the Global Blue terminal. So can you elaborate how that will work relative to what it looks like today? On the earnings call, you discussed producing a "single, all-in-one terminal that consolidates 5 or 6 things." What are those 5 or 6 things? And yes, so I think you elaborated currency conversion, tax receipt. Anyway, if you could unpack some of the features or functionality.

Yes, sure. Well, I'll start with just fundamentally what does the purchasing experience look like in these environments. This is what we do as a company. We really obsess over what the purchasing experience looks like in a number of technologies that are required to enable that experience. And so you obviously have a consumer coming in to buy what's typically a luxury retail item, high ticket. That store operator may or may not have an inventory system and an ISV that they rely on for running the retail operations of their store, they have payment hardware, they have a local bank relationship typically that actually accepts the funds, settles them. If it's a tax-free eligible shopper, that's another set of technologies you need to bring to the mix, which is you want to capture their passport data, you want to capture their e-mail address. And you want to do all this in a seamless way as possible and in a way that doesn't offend this kind of luxury shopper. The best merchants in the world have been enabled by Global Blue to do this quite seamlessly. It recognizes at the point of payment that you are a foreigner and it tells the sales associate to get your e-mail address and just take as much friction out of the process as possible. It works phenomenally in the largest retailers in the world and in countries that enable this tax-free process. However, if you're not the largest retailer in the world, the process can be more cumbersome. And Global Blue has had a ton of success just eliminating friction from the experience. We want to take that to another level. We want to take that local watch boutique in Switzerland or local perfume store in France and give them the kind of consumer engagement experience that they would have if they were Louis Vuitton in Paris. And we can do that with a single device. So you're eliminating 1 or multiple bank terminals. You're eliminating a computer they might have to use to enable the TFS journey. You are helping them identify tax-free shoppers in a much less awkward way. It can identify simply at the point of payment that this person is not from this country and, therefore, eligible for money-back and might want to spend more in the store. So the idea is just to enable as much of this on a single device as possible. And if it sounds novel, it's not at all different from what we've done with hotels, which is take the multitude of technologies required to make all that software and payments work inside of a large resort and just simplify it down to as few devices and as seamless an experience as possible. So we know it's possible. We know we've got all the key ingredients to make sure that technology works well. And unlike previous implementations, there won't be handshakes from 1 vendor to another trying to make it all fit well. It will all be inside of Shift4, which as you can imagine, the retailer sees a lot of value in fewer hands to shake.

Ant and Tencent are strategic shareholders in Global Blue. What, if any, opportunity do you see to work together with them?