Shift4 Payments, Inc. ($FOUR)

My name is Dan Perlin. I head up the fintech practice here at RBC. And I am delighted to have our long-time friends from Shift4 joining us again today. From the company, we have Chris Cruz, who's the company's Chief Financial Officer. So thank you so much for being here. Very much appreciate it.

Thanks for having us all.

Yes. I wanted to start a little bit with your journey because you've only been the CFO for a little over a year or so, but you've been affiliated with this company for over a decade in various facets. And so maybe 2 seconds on that, and then we'll dive into the philosophical view.

Sure, sure. And thanks again for having us. It's a phenomenal conference. Amazing to hear you say this is the 11th year. I've probably been coming here for, yes, almost 10 years and so it's great to see it. So thank you for having us. For those that don't know, I took on the Chief Financial Officer role about 10 months ago coming from the Board of Directors, a seat that I had held for the company -- at the company for, as Dan had said, almost 10 years. I got involved in the business after leading a private equity control investment into the predecessor company back in 2016. And it was actually in May of 2016. So the 10-year anniversary just transpired. And it is incredible just to sort of never would have imagined sitting here today sitting in this executive seat, but have the vantage point of, we'll say, the industry as a whole because in that role that I previously had, I've been investing in the payments space, in the fintech space for almost 2 decades. So -- and at a fund that had a global mandate. So the ability to understand fintech payments, its evolution over a multi-decade history is one that I think is a really important piece of context to have, especially when we are in the midst of changing times. That's probably piece one. Piece two, the company has grown into something beyond my wildest dreams and is a business model that does actually, even as different as it looks today, reflects the origins right from the beginning when we made that investment back in 2016, the thesis was that payments and integrated software would come together and create really dynamic and disruptive unit economic models that would accrue to the benefit of a merchant in terms of lowest total cost of ownership and heavily disrupt the providers of monoline services, software only, payments only and so on and so forth. And today, I think that thesis has not just proven out in our 4 walls at Shift4, but for a number of players that have been able to express that very well. But it's an interesting context to kind of go down memory lane and look at it, Dan, I think the last time probably we saw each other in person was like the Analyst Day. The Analyst Day event for Shift4's IPO at Pebble Beach back in like 2020. And so it's -- but it's great. It's a great reflection, but it is an important context to have, especially in as dynamic of a time as we are right now, but it's a great seat.

Well, with that context, let's talk about some of the priorities that you brought, understanding that history and maybe your philosophy on how you're going to go about communicating that to investors.

Yes. So I was very fortunate to succeed a fantastic CFO, long-time friend and a member of our Board, again, Nancy Disman, who did an incredible job of building the foundation of a global finance organization. And so I definitely owe a lot of credit where credit is due in terms of all of that foundational building that she had done and that the finance team had done as a whole. So there wasn't as much to do in terms of just optimizing there. It was actually more about the fact that in July of last year, we closed on the acquisition of Global Blue, which meant an integration of a finance organization that had a global footprint and the systems and processes of that, which we are well through and we are solidly on fine footing on. And so that was a key priority. And then the second of the key priorities was actually highly relevant to this room, which was to really try to create the bridge between the narrative of what we do at Shift4 with our strategies that are often viewed with a certain amount of complexity because they are disruptive and differentiated and take that narrative and try to bring it into a world of financial modeling, right? Just really, can you help us understand how to model this business, how to predict, how to unpack the variables. And that was like a key priority. And I think that, that key priority has been expressed. Hopefully, folks have been able to appreciate that dynamic. when we established kind of our guide for the year and created a growth algorithm disclosure around it that allowed people to not only appreciate that tax-free shopping would be its own disaggregated revenue category, but that within payments, it's really a tale of 2 stories where we have a really great set of leadership inside of our integrated payment offerings in the Americas, growing at mid-teens. And then we have this incredibly fast-growing international opportunity in front of us growing at high 20s, but in the first quarter grew 51% year-over-year. And being able to like unpack those parts, being able to understand how incremental free cash flow and seasonality of free cash flow might be different and then committing to EPS guidance I think those are all things that I was hoping to establish early in order to try to set the tone for investors that I think we're really seeking out the fundamentals of how do I model this business, how do I better understand it. And given my background, something that was a bit more natural to do. But beyond those 2 as like key priorities, it was kind of do no harm, support the company in a global growth, create kind of one global finance for Shift4 and let the team do their thing.

That's great. That's great. Well, I was on all those calls and the callbacks. And so I would tell you that there's a lot more clarity that was being brought and continues to be. So we'll talk about that, too. As we take one step back before we dive into something deeper, it is important to help frame where Shift4 kind of sits inside of the payments ecosystem. I find oftentimes conversations with investors, they're all over the board as to where they want to compartmentalize you guys. How would you describe it, especially in the context of the experience economy that you talk about and then in-person payments, which is not as much a thing as e-commerce in a lot of people's minds.

Yes. It's a good question, the kind of the mapping exercise, and it's one that is constantly evolving. But one of the easiest ways that I start to think about where are we categorized relative to the space as a whole. And I'd like to start with the idea that if you made the strategic decision to be an integrated payments company to align your model of payments and connect it to software in everything you did, you are growing 2x the market, right? If the baseline of the market is a single-digit volume growth market, your strategic choice to be integrated and everything we do is integrated to software, you're a 2x grower to the market. And if you chose to not just lean into that, but achieve leadership positions in select verticals in end markets that might be growing faster than that broad economy, a.k.a., the experience economy, we believe, grows fundamentally faster than the broader economy, you got anywhere from another turn of faster growth to plus. Hence, when we look at our business growing at kind of low double digits as a business as a whole, mid-teens in the Americas, we view that growth as 3x what the market growth is, and that's not an accident. That was very deliberate strategic decisions that we made going all the way back to the early 2010s. And so that's piece one. Piece 2 of very deliberate strategic decisions was actually to not try to be an e-commerce leader, which was an incredibly contrarian viewpoint at the time in sort of that, again, that kind of like early 2010 time frame. And it was because when you looked at what the business was good at, what the core fundamental assets of operational provisioning of reverse logistics, service support, like those durable moats were things that we fundamentally believed in, and we were seeing how good the e-commerce tech stacks and ecosystems were. This is dating us all the way back to kind of like the early 2010s. And so we leaned into that as a strategic imperative. -- hence, and very naturally, we ended up with our first major experience economy vertical was going to be restaurant. But when you pull that thread further and you say, okay, so take what you're good inside of the restaurant space, where you've bundled software, hardware, services, data and payments, put that together, what are the other verticals that kind of resemble some of these same kind of attributes and might see the value proposition of this combined bundle might see value in that. And that's where very quickly, we realize, oh, it's hotels and hospitality. It's stadium entertainment, it's luxury retail. And I think for those that have followed us for a little while, they've seen other verticals that we've talked about within our shareholder letters, our materials that we believe are really great experience economy verticals, too. But this idea, this tie that binds that to be good at in-person payments, right, obviously, we are great at e-commerce payments as well. We're totally competent and capable at doing it. But when you think about what it means to be good at in-person payments and the moat that creates for you, I think you have to have a DNA that has like fundamentally grown up there. And so relative to, I think, the broad ecosystem of what people think about when they think of like Stripe and Checkout and others, it's like for us, it's really important that people appreciate and contextualize that a big part of what we've strategically chosen to do is be absolutely excellent at in-person payments. But there's no such thing as being kind of single thread anymore. Every one of our customers is omnichannel by nature. It's just that the moat, the really -- the place where value proposition is appreciated and where I think margins are earned is because we're so good at in-person.

Yes. So let's tease this out for a second in the context of your ability to consistently grow above same-store sales growth, which is oftentimes like the pushback in some instances around the cyclicality of just payments businesses more broadly. You have caught many waves early on, not the least of which was stadiums, which is probably the biggest upgrade cycle win that we've seen in a lot of companies over multiple years. But how do you balance those 2? And what's the message to investors around that context?

Yes. So I think one of our underappreciated assets in the business is certainly how strategically forward-looking the underlying like companies' drivers are. So -- and what do I mean by that? I mean that we have teams that either live inside of their product universe. They are kind of element members of our commercial team. And then there's our strategy team, which I have to give credit to as a whole, who all come together and within our operating model are constantly trying to push us to identify whether it's a vertical or whether it's a solution inside of our existing experience economy verticals, push us to identify those waves. And the -- from there, we take that and we are either organically developing or we are unafraid to inorganically approach an expression that goes after that wave. And I think one of the things, though, that I think is very important about that type of approach is that you have to be proactive and willing to kind of watch a vertical, watch the technology and commerce changes in that vertical for many years. So people think that luxury retail and tax-free shopping and Global Blue, one day we woke up and that's a great idea. Let's go talk about it. No, like we were monitoring that business and that industry solidly before COVID, right? It's a business that we had known well because when you think about being in restaurant, lodging, stadium, it's very obvious that retail is one of the largest TAMs. But when you look at the retail tech stack, you would have been absolutely incorrect to try to roll up POS systems in retail because if you had done it in physical presence, you would have completely missed the wave of e-commerce as the tech stack that wins, and you didn't want to have to make that call. So when you unpack the retail ecosystem around the world and look for what's the killer application that will allow me to cross-sell and bundle payments, we came across TFS, tax-free shopping, VAT refunding and the idea that Global Blue was like an 80 market share global leader in it, which meant that we could be incredibly disruptive in a place that the incumbency advantage, the relative market share would probably be like durable to receive it, right? So when you apply our strategy of disruptive cross-product bundling, payments on to pick that application, gateway, POS, tax-free shopping, gift card, it puts the customer base in what is, I'd say, a little bit of a disruptive dynamic, right? You put them through a little bit of a challenge in the moment. But if the base that you're selling into is a product where you are far and away the leader, then the resilience of the customer to accept that cross-product selling motion is incredibly high. So I think that for us, the unsung hero is really patient strategy development to identify the other adjacencies inside of the experience economy that leverages our existing assets to go after, and we've just been doing that for many years now.

Yes. So that dovetails into the question around durability of your organic growth that you've put up thus far and the vision that you have going forward. You did 11%, I think, in the most recent quarter. How should investors think about that, both in terms of the ability to underwrite that for long-term periods, but also the sources of that?

Yes. So I would say, right now, this idea of being able to outgrow sort of the baseline of the payments growth market by like a 3x factor. So being like a low double digit versus a low single-digit type of a grower, it is -- it starts with the fact that if you unpacked and just said integrated -- and you could look at a large body of data, you could look at a lot of research from yourself and peers to see that the integrated payments market is a high single-digit grower, right? Once you start there, then the walk to durable organic being a premium to that because we are a leader in so many of our verticals, I just don't think that intuitively, that should be that hard of a walk to understand. But what I think is harder to understand is in this year, we have sort of these 2 headwinds where Triple-S has not come back to the place that it has historically been. Triple-S has historically been for a long time series, low single-digit positive contributor to the book of business. We're not seeing that right now. We didn't see it in the fourth quarter. If anything, we saw it as negative. So it's been, we'll say, a headwind to the relative growth historically. And then the second relative headwind to the growth historically has been that the post-COVID few years allowed companies, not just payments companies, not just ourselves, but go check your Netflix subscription, right? You've seen inflation that's allowed for pricing power across every industry, and that persisted for many years. And that created this low single-digit contributor. So I kind of view right now where we're sitting as a premium to the integrated payments durable growth of high single digits. sitting here as like low double digits, that seems like a very fair baseline. But the reality is if Triple-S can come back and if pricing power as a result of an inflationary backdrop were to come back, I think you're going to see the ability to actually outperform that. But from a durability standpoint, importantly using that word, I think it is fine to just view us as a company that should be able to durably outperform the baseline of the market by 2 to 3 turns.

Yes. So in the spirit of that and the desire to have incremental transparency to help us map to those, you did release kind of the disaggregated revenue disclosure. You've talked about it a little bit interspersed in our discussion, but maybe you could talk about it more specifically. Why did you do it? What exactly did you do? And what are your expectations for that going forward?

Yes. So I think it was really important for people to appreciate that as payments investors, the tax-free shopping revenue bucket was going to be something that you needed to acclimate to. So the first of the starting places in the growth algorithm, as we call it, that we disclosed was to commit to the disaggregation of tax-free shopping, right? That was, I think, a key question, which then allows for a more transparent view of a part of the business that is growing that we admittedly is growing slower than the base of payments. But there are so many strategic reasons beyond the tax-free shopping revenue base that made the Global acquisition so attractive. But staying in line with this idea of what is in the growth algorithm, I would then move to payments-based revenue. That is the North Star of how us as a payments-born first kind of a company operates and thinks about what the important growth variable is, giving people visibility into payments-based revenue growth and then unpacking it in terms of here is the market that is largely unaffected by M&A as close to sort of an organic number before I give you an actual organic number is Americas payments-based revenue. We've been in this market for 2 decades plus. And this is a market where all of our products are offered in live, and that's a market that's going to grow at mid-teens. And giving that, I think, disclosure was a really important one to help people like unpack how to model. And then they could then allow themselves to take a view on things like SSS and take a view on pricing above inflation, 2 very important variables that not only you could take a view on, but you can then also track in the marketplace through different data sets. So then you get to the worldwide piece, which is give me some visibility into this fast-growing part of the business, which is where largely the Global Blue and the tax-free shopping cross-sell is going to live and help me be able to track that and model that and make sure that the revenue synergies that you talked about at the time of the transaction come through, they'll come through into that category. And that was really important to break apart. And then separate from the growth algorithm components, we ultimately gave the organic disclosure just to help people underpin against what should be the way you think about underpinning a forward-looking multiple. Because if there's durability at a double-digit growth rate, then you would think and presume that, that should have some semblance to what underpins the underlying model -- multiple of growth on the business. And then from there, we really tried to further unpack for folks how we view margin profile, how we view incremental free cash flow. And then like I said before, we landed on, we need to commit to giving an EPS guidance as well. So I'd like -- I'd hope that it's, a, well received and that it creates some clarity at a time when the industry as a whole has probably not done itself many favors on creating skepticism because of the last couple of quarters of certain other peers is reporting.

Yes. I completely agree with that. So let's talk about the international opportunity. also in the context of moving into this new vertical of luxury retail. The biggest bastion of growth seems like the international market. This Global Blue acquisition opens you up to so many countries and licenses and regulatory frameworks that you would have otherwise not had. So maybe just speak to the, I would say, the strategic importance of it, but also this vertical, which is new.

It's hands down the most exciting part of the business right now. And you love all your children equally sort of thing. But it is hard to argue that when you think about the tax-free shopping cross-sell opportunity, which is where I'll start, this idea that we have an ability to cross-sell payments, dynamic currency conversion onto a tax-free shopping base, which already has a fantastic revenue model and do so without having to deprecate a legacy revenue stream this could translate and should translate into the best unit economics in the business. And even though I love my children equally, unit economics is how you like win my heart. And so I think that's going to ultimately be the thing that wins. But I do think that the unit economic power of cross-selling, which we productize as Shift4 One is one of the most exciting initiatives. It's a big part to the revenue synergy component that we talked about in underwriting the transaction. The lesser appreciated -- and that product is now live in 7 countries. Our target by the end of the year is to be live in 15 countries. And so we're hitting all of the operational milestones. But obviously, as we start to realize those revenue synergies, reporting out against them is going to be the key KPI. But the unsung hero and I think the underappreciated part that you sort of astutely unpacked is that to bring a product like Shift4 One live in a European country, it's not just putting a product together, putting it into a device, shipping it out and then provisioning, servicing and supporting it. You actually have to build an entire payment infrastructure and a set of very unique capabilities onto your payment platform. And you have to do it again in every country that you open and you operate because the fiscalization is totally different. The underlying language dynamics are totally different, the way with which that you are going to integrate into local debit networks, local APMs are totally different. If you go live with your in-person payment product in Germany and you don't have Girocard, the local debit network, you don't have a right to play. And same goes in France with Cartes Bancaires. And the same goes with almost every other country around the world outside of the United States. These local debit schemes and these local payment methods, they could be wallets, they could be any sorts of other thing. The integration to that is the hardest part. And it is what we would broadly call scheme management, but not the Visa, Mastercard schemes. It's the everyone else' schemes. But when you think about doing the work to make that happen for Shift4 One and its cross-sell, it means the work is already done for when stadium entertainment, Shift4 Venue wants to come in and go and serve FC Barcelona. It is ready for when the hotel product -- when our hotel integrated payment capabilities can come in and serve a number of hotel banners that we already serve in the Americas. And it's how we're going to bring Shift4 Dine outside of just the U.K. and Germany and bring it across all these other countries. Basically, all of our battle-hardened products from the Americas can just fast follow. Once Shift4 One is laying the groundwork as kind of the first boat to land, everything else can come back in. And so for us, that's like, I think, one of the most underappreciated aspects of why we did the transaction because it was going to be the forcing function to create a pan-regional in-person payment platform to be complementary to our Finaro kind of card-not-present capabilities that we already had in droves. And I think the last thing within it was that you also didn't want to limp into the European market. I think there -- when we studied the strategy of American companies going into Europe, I think one of the telltale miscalculations was you could just bring all the Americans in and it was just going to work. And the practical reality is having all the infrastructure to do everything from hiring to having the IT and the systems, all of the localization of products to have teams that already had that because they're selling tax-free shopping and they were already selling DCC and certain payments was an absolute asset that we wanted to be well invested in, in order to bring all of our products all at once. We don't like to do things slow. If we're going to disrupt the entire European banking market from payments, we want to go fast. We want to be disruptive, and that's our style.

So I'm going to give you 10 seconds that we're over, but since you have this unique lens and background as an investor in the company early on and kind of where you see it today operationally, what do you think are the biggest disconnects that the public market investors are missing?

I look at probably the biggest disconnect right now is the last time valuations and payments sort of sat in this kind of like call it, 6 to 8 time zone, and you probably can keep me honest on this, is like pre-GFC, right? You think about like the Heartland Payments like data breach type days, right? And fundamentally, if you were to just kind of close your eyes and look at 2 moments in time, just look at the business model. You had a pretty commodity categorized as BPO and IT services type of an offering that realistically, when a payment is just attached to a Pin pad and is unintegrated, that's like a high teens to low 20s attrition rate, right? You fast forward to today at payments when integrated to software has a completely different moat, completely different value proposition. You could throw value-added services, so many ways to grow the ARPU. And the core unit economic model has an attrition rate of like high single digit to low double digit. So how the multiples can be the same makes no sense to me, right? And I feel like we're forgetting how to just intrinsically value a company. And I think that disconnect just -- it exists. But I also appreciate there are many other broad technical factors, right? The S&P 5 has never been as concentrated in 7 stocks in its history, right? There's been a lot of kind of like SMid-cap to large cap rotation. And our sector hasn't done itself any favors in terms of like creating a little bit of skepticism because of some peers. But put all that aside, just come back down to pure unit economics and intrinsic value math, and it doesn't make sense. But I think people will eventually come back to that.

Cool. Well, Chris, thank you so much for your time. It's been a great discussion. Looking forward to seeing you more often than 15 years from now.

Exactly. Exactly. I appreciate that.

Thank you so much for the rapid fire.