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

All right. Let's hope this works. Good morning, everyone. All right. So this is just a quick overview video about us at Shift4. [Presentation]

Okay. Awesome. Thank you for that, Chris.

So I wanted to jump in here. For those that are less familiar with the Shift4 story, I mean, can you just provide a quick overview of the company and including what differentiates you versus other payment processors?

Sure. And first off, thanks, Madison, for having us. Always a great event to be a part of. So Shift4 is a business that really, when I think about it in sort of the 10 years that I've been involved with the company, is really synonymous with this notion of integrated payments when payments comes together with software, wrapped with proprietary data solutions. As that -- as those convergences have been transpiring within our industry over the last 10 years, Shift4 has really capitalized on being at the center of that. But separate in a way from that megatrend or that theme of payments meets software meets data, Shift4 has always been focused on the most demanding commerce environments. So we talk about it there synonymously with the experience economy. What are we really saying? We're saying that it is not 3 lines of code that runs payments integrated to software in a place like we're sitting in right now. In a complex resort ecosystem environment, in merchant bases where there are tens of revenue centers, not just one point of checkout, in environments where you're talking about stadiums entertainment, just the complexity of cross-border dynamics, multi-currencies, multiple payment modalities, we run towards that challenge. We look for the most demanding environments. And as a result of that, our experience economy vertical leadership has manifested in restaurants that are complex, manifest itself in being a leader in lodging, a leader in stadiums entertainment, and then most recently now, a leader within luxury retail, in particular, for those high affluent travel shoppers. And that's not where we intend to stop. I think our model is to continue to leverage the scale that we have to identify all of the newer, harder, most demanding parts of the experience economy and announce leadership vertical after leadership vertical thereafter and do so all on the backs of this broad-based integrated payments meets data trend that's expanding globally. And so that's a little bit about us.

Okay. That's a helpful background. And then I wanted to ask about you specifically. You're relatively new to the CFO role but...

Where is this going?

Certainly not new to Shift4. I'd love to just hear about what attracted you to kind of take the CFO role? And what are some of your key priorities here as you get in the business?

Yes, sure. So it's going to sound like a bit of an academic answer because of like the framework that I've applied when I was making like my decision. But when you step back and look at where we are on the -- where we are in fintech, where we are in integrated payments, in the backdrop that we sit in right now from a market standpoint, I actually think that one of the best ways with which to express the growth of the industry and really the expression of that growth globally is through this company. And so in my past life from allocating capital, investing capital on a direct basis, the idea that there are potentially huge advantages to do that through a business that already has a proven track record over a quarter century of having been able to identify areas to thematically invest behind within the experience economy in order to be able to bring their solutions to synergize those areas and to be able to like compound and build value there, that's definitely the most appealing part. If you are already interested in understanding like that this is a megatrend that isn't just happening in the Americas, this notion of integrated payments meets software, meets data. This is a trend and a need that's happening all over the world. That's probably piece one. I think piece two, the business is at a really interesting inflection in terms of like where it sits in the relative scale and size of the ecosystem that is integrated payments. Big enough and scaled enough to be able to expand borders, to expand globally with kind of like the bold ambition and pace that it always has had. At the same time, still small enough and nimble enough to be able to make bold decisions that allow it to more aggressively enter markets with speed, with disruption in mind and have those attributes. So having that kind of dynamic of being both scaled enough but also nimble enough is a really rare attribute for a business that's trying to compete in an area that's going through, we'll say, this like this transformation and inflection at an industry level. And then at a personal level, like I've known so much of the team, so much of the organization for almost 10 years, I've kind of worn every hat when the company was private within the context of wearing a lot of hats in that role. But then as the company has been public, playing every role on the Board, chairing committees, including audit, most recently a lead Independent Director. And through that journey, it's hard not to kind of really make friends with the folks that you're working with. And it's a really special group where the culture of the company, even at the scale point that it's at, highly entrepreneurial, highly gritty and definitely a culture that wants to win. So all things that are a lot of fun to be around.

Awesome. And before we dive kind of in more detail of the business, I would love to get your thoughts on AI, just given what's going on in the market. Just would love to hear about where you see potential opportunity for AI, but also what risks you're assessing when it comes to AI?

Yes. I think you can start on when you're looking at such a generational change in technology, and technology is obviously something we in the company are around constantly, the idea of looking at it through the lens of, first, like what are the ways with which this technology is going to create disruption, going to create challenge, going to like approaching it through the lens of, okay, paranoia, right? Like that is one way to look at it. And I think it's very easy for a lot of companies to almost get petrified by looking at things through that framework. In our world, I would say that the opportunity side is probably the most compelling because we are unafraid to adopt technology. That's just not ever been a problem within the DNA of the business. You can look at the track record across the last few years to know that change is the only constant in what we do. And so for us, I think there's a lot less of that kind of petrified approach to it and a lot more of the opportunity side approach to it. Now the question is where and the question is pace. And because nothing comes for free, even though we're living in what seems like an early phase of abundance where access to AI technology is at almost like a limitless type of approach in cost, like token costs are rising in various parts of model consumption. And you have to be mindful of that, especially sitting in the seat that I sit in. But put aside the fact that you know how to control costs around it, you'll be optimizing constantly. The area of opportunity to unlock margins, the area of opportunity to massively enhance products, the area of opportunity to produce products on much tighter cycles, faster features, faster time to market, those areas are like the scratch the surface areas. And I think that we are going to see a lot of pace of change and a lot of opportunity as a result of it. The core question that I think you all need to ask is, is the company that I'm looking at, do they have the flexibility, the culture, the boldness to be able to embrace technology and change quick enough to be able to both capitalize on the opportunity and keep pace with competition around the adoption of these things.

And before we get into Global Blue, I did want to dive into 4Q a little bit, just a little bit of a clarification here. So there's been a lot of debate coming out of earnings around just the contribution from Global Blue and Smartpay in 4Q. You guys talked about 18% organic growth in 3Q. You talked about 23% growth for the year, excluding those businesses. So you gave enough detail to help investors kind of back into it. But can you just level set so everybody is on the same page around what kind of growth you saw specifically in 4Q, excluding the contributions around Global Blue and Smartpay?

Yes. No, it's a great question. And you're right, Madison. I think we provided the pieces. And I think it should be unambiguously clear that if you do the math on it, the quarter, excluding the contribution of acquisitions, is a low double-digit growth quarter. And I think we knew that going in, right? That fell entirely in line with the expectations of what we were looking at when we looked at the fourth quarter. If you've been following the business or you sort of look at the historical financials on the business, that Q4 comp was a tough comp going in. It was always going to be the stack comp across 2 years. You're talking about a fourth quarter that was growing off of a mid-30s growth quarter in the prior year and -- which was already growing off of a mid-20s growth -- or high 20s growth quarter the year before. So the 2-year stack comp we knew going in was going to be -- was always going to be challenging. The spread dynamic that we saw as a result of the enterprise positive mix shift, which obviously weighs on spreads, that definitely was a variable that impacted towards the -- definitely impacted towards the lower end of that kind of range of outcomes, but still solidly in line with the range of outcomes that we had guided to from a quarter standpoint. And then, of course, the trends coming out of Q3 that we saw on SSS, which I think we were incredibly transparent on and incredibly clear on that if those trends persisted, we were going to land towards the lower end of that revenue range, which contributed to that kind of low double-digit outcome. And that happened, but we also had some weather events in December that kind of added to it. When you take it all as a whole, I think everything fell still solidly in line with the range that we expected, which is why the full year spread range still ended up above 60 basis points and why the quarter's guide still ended up inside the range that we guided to. And I think it's important, though, that once you take that as sort of, okay, this is what happened in the quarter ex the contribution of those businesses, and what I think is important is to then understand, but then how do I translate that into your go-forward guide. And I think that's where people are really getting confused around how to do that.

Yes, certainly. And we'll dive into that a little bit more here. But I did want to shift gears to Global Blue. That was the biggest acquisition in company history. You guys paid about $2.5 billion. The deal closed a few quarters ago. But can you just remind investors what exactly Global Blue does? And why was this such an attractive asset for FOUR to own?

Yes. So indulge me for a minute because I'm going to answer this in sort of a multi-parter because I think any time you think about how does Shift4 identify an acquisition, it has to be understood that it is always the product of a multiyear effort having tracked either the industry vertical that it sits in, the -- unpack the industry ecosystem, whether that's the software integrations, who are the competitors, what are the value propositions that either win, thrive and certainly lose in a given space. Luxury retail, tax-free shopping, the things that make up the most important part of Global Blue, that, in our opinion, is a killer application within the world of retail, full stop. You can unpack all of the different commerce-enabling applications inside of retail, you can then narrow it down massively to who actually influences a payment transaction, like who was touching the payment transaction. And you will find a very short list of companies that have the definitive value proposition difference that Global Blue has. With an 80 share, a 4x relative market share to the next competitor, a mission-critical component of a commerce enablement for anyone that's in luxury retail, working with all of the marquee brands and doing so globally, once you add that to your criteria set, it's one of one, unequivocally clear. And the reason we want that kind of a totally differentiated value proposition inside of retail is because there are a lot of undifferentiated retail applications. Like if you had bought a retail point of sale, you're dead in the water. That's a terrible idea from an industry structure understanding perspective because you don't even know whether the in-store commerce experience is going to be the tech stack that wins for the omni commerce of that merchant, right? E-commerce being as prevalent as in-store presence, in-store commerce for a lot of retail merchants. So you could have gotten that tech stack completely wrong by making a bet one way or the other. And importantly, POS doesn't have nearly the same level of influence over the payment transaction as it does in, let's say, restaurant, or even in stadiums and entertainment. So I think that's like the important for example, within how do you land at that place that says a tax-free shopping solution that is a one of one. Why is that -- why was that so important? It's important to us because our model is about bundling off of that strength, right? It's about taking that tax-free shopping experience, which is one of one, which has the strength and relative market share, which has all the customer references, which already has kind of the pre-existing treasure trove of data, like a data asset on affluent travel shoppers that no one comes close to. Once you have that, you're well moated to be able to then bring in the cross-sell of payments, of currency conversion, of gift card and be able to have a conversation with the most global marquee luxury brands to say, hey, we're probably not ready to be your processor today. But as you start to think about geographies that we're in, that maybe your preferred processor is not in, you're going to give us a shot. And then as we start to think about unifying your experience across borders, you're going to give us a shot and maybe it'll start with us getting a 20 share of your overall payment volume, but we're always going to have a shot. And one day, when we're ready, you might give us the majority. And I think that notion of being able to build off of that killer application is one of the most important components, the thing that I don't think people appreciate because they do understand the revenue synergies, the cross-sell capability, the way we talk about applying our model to tax-free shopping, the thing I don't think people understand about another attribute of Global Blue that we liked, it gave us day 1 instant pan-regional EMEA, APAC infrastructure from which to bring all of our battle-tested Americas market-leading solutions into the region instantly. And it's a business that has like truly, truly global credentials with everyone from merchants and customers, but frankly, fiscal authorities is who they serve within this tri-party network. And that kind of credentialing from which you can bring your market-leading solutions in, I think that's a critical underappreciated asset.

Okay. That's very helpful overview. And then just on the 2026 tax-free shopping outlook, you guys are kind of targeting mid-single-digit growth here. Can you just help us unpack how much of that mid-single-digit growth is driven by kind of growth with existing customers versus signing new customers? And then has the growth algorithm of the business changed at all since you acquired them?

Yes. And just to be clear, it's mid-single-digit pro forma growth. Obviously, the annualization effect will have a much larger impact on growth of the business. The growth algorithm of that business has not changed at all. The growth algorithm of that business, at its core, separate and away from the synergies that we are going to employ as we continue to execute on the cross-sell of the all-in-one device and the all-in-one value proposition of TFS meets payments meets currency conversion. Separate and away from that, the growth algorithm of the business has not changed. For the most part, the growth algorithm of that business is P times Q. It is a volume metric that they call sales in store times a spread metric, no different from the way we think about things in merchant acquiring. Now the core components of that sales in store, I think we talk about quite a lot as having different drivers, different macro drivers that can impact things like demand for cross-border travel, demand for -- like demand that's impacted as a derivative of tourism between nations. And it is impacted by cross currency like a euro-USD cross. And so you have to like factor that in, which I think we talk quite a lot about. But other than that, the core of that growth algorithm is you're growing with your customer base and the luxury backdrop is one that tends to have a really powerful amount of inflationary pricing built into its model. I think like a Hermes bag or a Chanel bag has probably outperformed most stocks. And I think that, that dynamic is kind of baked in within the industry. But I do think that it's a very simple kind of a P times Q model. And when you have an 80 market share, market leader, a 4x relative market share, you're winning customers, but frankly, at this point, the logos you're winning aren't necessarily like the biggest contributors to driving the growth, you're already riding the right horses from a winners standpoint. And so you're really moving with just the components of that -- those broad trends.

Okay. And then I did want to shift back to the payments business. And kind of starting here in the Americas, you outlined a target again for 2026 for mid-teens growth. That should be a pretty clean number. I don't think there's really any M&A contribution there. But can you just talk about as we think about the mid-teens, like what are the key verticals that should contribute this year? And then given you guys do have a pretty strong presence here domestically, I mean, how much runway is left for you guys to kind of continue to take share and grow at these levels over more -- a longer period of time?

Yes, sure. So within our payments-based revenue, which is kind of the North Star within our disaggregated revenue bucket, we tried to lay out a growth algorithm in the latest shareholder materials, which is like a net new concept that allows you to see payments based deliberately separate from tax-free shopping, so as investors acclimate to that disaggregated revenue line. But you look at payments based and what we try to do is break out the 2 distinct narratives of our Americas region, which will make up the majority of the revenue within payments based. You look at that Americas region, it's the mature market that we've been in for multiple decades. It's where all of our market-leading experience economy, commerce solutions are present and it's a market where in '26, it will be largely unaffected by the annualization of prior year M&A. It's a clean figure. And that's why we wanted to show it to you. That's the mid-teens, and we think our outlook there is mid-teens growth in the North Star of payments-based revenue, and that's a separate contrast from the worldwide segment, which is growing off of a small base and growing at a really high rate, but is impacted by the annualization effect of M&A. And we wanted to make those points clear. So your question on the Americas, mid-teens, which, for all intents and purposes, if you're looking at the relative growth rate of the baseline market, that's like a 2.5, 3x, north of 3x growth rate to the baseline of the market in the Americas. We think we have a ton of runway. I mean the idea that you can look at a market that's probably our most mature, which is restaurant, and we acknowledge that we're not even the leader in it, right? So you then say, okay, let's look at the other areas you're in, whether that's lodging, whether that's stadiums entertainment, whether that's retail as a whole. And that's without even us continuing our track record where since IPO, almost every other year, we've announced being a leader in a new vertical, and I don't think that we intend to stop that, right? That's something that is not even baked into the algorithm, that continues to provide that perspective of compounding growth that I think will continue to allow us to get into that market share in the Americas. But one thing I do want to say before we kind of leave the Americas and this idea of the mid-teens. Like I think that it is important that people understand that even though we've broken out payments-based revenue in the mid-teens, it's not as if we don't acknowledge that when you look at the algorithm as a whole, that you can land yourself to a place that says, okay, this is on a blended basis, sort of a low double digits kind of a growth algorithm. When I think about what's happening in sub and other or when I think about what's happening within TFS and I think that, that math is totally valid. I think that, that math is completely fine. And when you think about where we are coming off of in the fourth quarter as a low double digit, I think anybody that's thinking it's de-selling from there is also just way off on the math of Q1 because they're completely mismodeling the contribution from M&A in the first quarter, right? There's seasonality within the business lines that would definitely make it inaccurate to model Global Blue flat Q4 to Q1. And so I just think that the path that we're trying to explain of Americas is a mid-teens business, blended with the other parts, I understand the low double-digit piece to it. But we're trying to give you those building blocks so that we can really be -- we can really understand how to model the business.

Yes, that's very helpful. And I know we're getting close to time. So I'm going to jump around a little bit, ask on free cash flow because that's very topical. So the guide that you have out there does imply that kind of free cash flow conversion will be down relative to 2025. You provided a really detailed bridge, so we don't have to kind of go through some of that. But just longer term, how can investors think about the reacceleration of free cash flow conversion? Do you think that kind of 50% plus number is still right on a normalized basis?

Yes. I would say the place to look is everything is about incrementals. So in that free cash flow bridge on -- I think it's like Page 13 in the shareholder materials, is the concept that, yes, there are components in the bridge, and I won't belabor them because we're running out of time. But the part that I would want people to focus on and take away is the call out of the incremental free cash flow that's converting at a 59% rate implied in the guide, a 60% rate in the Q1. Like mathematically, asymptotically, that's where you should be driving forward growth to go, right? You can pick your number on the dollar growth that you think is going to be achievable within adjusted EBITDA. But when you convert it, you should be converting it at the incremental level. And from there, when you actually think about that incremental free cash flow conversion, that's converting off of a largely fixed cost capital structure. So capital structure was probably one of the biggest variances in understanding in that free cash flow bridge. We have an 82% fixed cost capital structure. And so growing off of that largely fixed cost capital structure means that those incremental free cash flow margins should be able to expand. And that's separate and away from the expansion in the operating leverage of the business as a whole. So I think that when you think about the modeling exercise of it, you got to be factoring in that that's asymptotically what you should be modeling towards.

Okay. And I'm sure we could fill another 30 minutes here, but unfortunately, we're out of time.

Good thing, I'm here all day.

Yes, exactly. Really appreciate you being here with us.

Yes, Madison, thanks very much.

Absolutely. Thank you.