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

And then on the M&A side, how are you thinking about potential size on the spectrum between tuck-in acquisitions and Global Blue, where are you thinking is the right use of capital there?

Staying absolutely consistent on kind of the messaging over the last few quarters, this is about tuck-ins. This is about investments that are going to accelerate existing strategic alternatives, enhance capabilities on the platform, expand distribution in the markets that we think we have a really unique right to win. Those are going to be the areas, nothing of the material size and scale, certainly of an investment like a Global Blue. But that's, I think, the best way to think about it this year is a focus on tuck-ins.

Yes. Okay. All right. So let's talk about organic growth. I think the organic growth disclosure has been a really helpful disclosure. It has given investors a common language to talk about the growth in the business. You printed 11% for 2 quarters. Tax-free shopping rolls into organic starting in the third quarter. It sounds like the message is kind of 9% to 13% is sort of the pro forma organic growth rate in the back half of the year. How should investors think about durable organic growth rate? Is it that 9% to 13% range? And then how do you think about opportunities to accelerate that when they come?

Yes. So a few parts there. One, I appreciate you saying that people have appreciated the incremental disclosure around it. We're probably still one step to go, which is to -- given the global nature of the business, introducing a constant currency concept within that probably is one more net helpful piece to the equation. Because, for example, if you were to have looked at kind of a constant currency basis for Qs 1 and 2, you would have actually seen Q2 was about 145 basis point expansion in organic growth on a constant currency basis relative to Q1. So you would have seen sort of -- about 9-and-change percent in Q1 would have come to 10.5% or so in Q2. So I think that's something that folks should expect us to evolve into. When you think about your point about the implied second half reported growth of 9% to 13%, it is important to appreciate that, for example, in Q3, we've got a guide out there for 10% reported growth. Organic would therefore be high single digits. It will be just underneath the reported number. And that will end up kind of converging over time. Certainly, as Global Blue becomes organic in the third quarter, Smartpay becomes organic in the fourth quarter. As those all roll in, you sort of end up in a range where reported kind of high single digit to low double digit, organic should be just a little under that. But I do think that in general, this kind of consistency around high single-digit growth to low double-digit growth, that's what's been showing up within the numbers, both organically and even on sort of parts of the reported basis. It's kind of what we point to within the growth algorithm in the second half implied. And I think that's the right framing.

Got it. Okay. All right. Very helpful. One thing that came out of the quarter in the 10-Q, I think you disclosed a roughly $300 million acquisition for an account-to-account platform. $140 million upfront. The balance is contingent consideration. Presumably, that's not in guidance, maybe you can clarify that. But bigger picture, can you provide any more information on it and maybe how you think about how much that could add inorganically once it's closed?

Yes. So clarify that point for sure, not in the guidance. That's a transaction that after we signed it, we were expected to have, call it, 90-ish days between signing and closing for the close process. So the account-to-account opportunity is a really unique one. It's a very interesting one. It's something that we've been pursuing for multiple years. And I'll start with the first part. The topic that comes up or question comes up a lot is the kind of the decisions around the disclosure of it. And I'll start with wanting to clarify that when we were approaching the earnings and talking through the best way to disclose, we knew we had disclosure around subsequent events, but it was a decision between kind of all of the parties involved that a key commercial discussion and negotiation was happening for the business and that it would be in the best interest to not sort of shine a spotlight on it in such a large forum. We absolutely are committed to talking about why we're excited about the business, the thesis of it and the sort the minute we get to the close of it. And happily, the negotiation that really brought this into the forefront is going well. So we're happy about that, but it was an important decision that we had to make, hence, the disclosure choice that we had. Account-to-account is interesting because when we talk about being a payments company within different payment modalities, it's very easy to think solely about cards. And I think that actually is a very -- we're a business that was born in the Americas. It tends to be America-centric that the cards culture here is really strong and prevalent. But there are many other payment modalities that, especially in other countries around the world, are the lion's share of volume. And bank rails tends to be an area. In our Bambora acquisition, we were able to obtain an ACH capability, an integrated ACH capability that we were already building, but we were able to acquire. And that gave a bank-to-bank kind of capability. But think of that as B2B, a corporate bank-to-bank capability. A2A is basically the consumer-to-business side of bank-to-bank as a rail. It tends to be for things like for categories where a payment card may not be as well suited. So think of a large ticket transaction where you might exceed a card limit, you might exceed an authorization limit, you're likely to see a high kind of rate of failed transaction. That is where an account-to-account, a bank transfer may actually make sense. Those can happen in high-ticket environments like high-ticket luxury, ticketing, where there's a onetime purchase that may be outside the norms of the spending patterns for that cardholder or even making a deposit on a special night out in a restaurant for like a private room. Those kinds of kind of spikes in cardholder behavior tend to trip kind of an auth rate, in which case a user or a consumer may want to start to go to an account to account or they might be topping up a wallet of some sort. So having all of these different payment modalities in our platform just help us round out the total value proposition to a merchant and allow us to take off the table any one-off things that the platform may have otherwise been missing, and therefore, the merchant may have a reason to look elsewhere. Dynamic currency conversion was one. We took that off the table. ACH was one. We took that off the table. A2A was one of the last ones we needed.

Great. Makes a ton of sense. All right. I wanted to maybe zoom out a bit, a lot of financial-oriented questions. Let's talk a little bit about the business and maybe start with Shift4 Venue and the experience economy. I think there's been a big point of framing that the team has leaned into recently about Shift4's exposure across multiple dimensions for the experience economy. We just had the World Cup, great showcase for your leverage to that theme. How does the positioning around the experience economy impact the way that you think about the resilience of the business and sort of the long-term growth prospects of the company?

Yes. No, it's a great question. And we like to think of it as when you step back and look at some of the bigger trends, trying to zoom out to the trend level, it is clear that there is a growth and a demand for experiences over goods, and that trend continues. And experiences in our world is also nicely aligned to the fact that it tends to be very in-person, right? It tends to be in the real world. It tends to require all of the physicality of provisioning of payments and commerce solutions that help make that moment happen. We like to think of it, too, that our technology -- especially in a place like a sports and entertainment venue, our technology is actually the last technology that the consumer is probably interfacing with sitting in their seat, ordering ahead or they're a season ticket holder, so they might actually be using like a wallet that's provisioned by us. And that's the last interface between consumer to technology in the venue. But we're also the last piece of technology that a sales associate or an employee is likely interfacing with before they face the consumer, too. So the technology that exists that we're providing, whether it's payments or POS tends to actually be that last piece of touch point where technology now meets a person, either an employee or an actual consumer. And we think that's really powerful because when you think about crafting kind of future experiences around commerce, around payments, unifying them together with things like loyalty, unifying them together with accessing the proprietary data assets we have on fans, on luxury shoppers, there's a lot that we are able to innovate with our merchants as a result of it. And we like knowing that we're in the conversation with some of the most innovative experience makers. It's the folks that are right at the forefront of the resort hotel ecosystem, right at the forefront of stadium entertainment, at the forefront of luxury retail, like categories that we think are unparalleled in their desire to deliver the best experiences within shop, dine, stay and play. And so that knowledge base and us being able to then cross-pollinate the ideas that we have with each of these categories, each of these experience makers, I think also gives us a pretty unique differentiation.

Okay. Let's talk about luxury retail a bit. I think this is one of the biggest swings at the Shift4 playbook that you guys have taken born out of the Global Blue acquisition. This is your way of integrating that platform with Shift4's payments platform. Can you walk through what that sales motion looks like and talk about how your visibility into the $80 million of revenue synergies from that deal has changed? And what are your latest views on timing?

Yes. So Shift4 One is a really exciting product for us because it brings together a few of the things that we've been strategically and tactically putting together to be differentiated in a massive category of retail, luxury retail in particular, and give us the entry pan-regionally into Europe, again, with a fundamental point of difference. Because when you take tax-free shopping, combined with payments and combined with currency solutions like DCC, it's really that tax-free shopping piece that is one of one, right? That is a 75%, 80% market share leading value proposition that is very difficult to displace because that's a system that is integrating merchants to fiscal authorities, to customs authorities at airport checkout and housing that data in order to deliver a pretty unique experience of money movement and payment. And when you take that piece of uniqueness and then you actually then say, well, by the way, this tax-free shopping experience works best when the payments are integrated because a card that gets swiped with a foreign BIN range, a foreign bank can automatically detect whether that person should be eligible for a tax-free shopping rebate. So the integration makes sense to you as the merchant, makes sense to your consumer for a better experience. We're going to displace an unintegrated bank device that is probably provided by a local bank that's not investing nearly as much in commerce technology, and we're going to match a rate. And we can do all of that and have incremental revenues. You add currency solutions on top of that, which, again, is actually a unique product because the merchant can actually make money off of that solution, too. So when you combine it all together, the value proposition is very compelling to the merchant, not just for themselves economically, but because it's better for their consumer. And it's incredibly compelling to us because when you stack all of that ARPU together, tax-free shopping, currency solution, payments and pull that together, that actually gives us the ability to certainly have that ARPU built, create the best unit economics in the business, but it also gives us quite a lot to be able to maybe invest back into the customer. So where I said match the rate, well, we could actually consider having some amount of a strategy to go after the market share. So it's a pretty compelling overall offering. Our go-to-market and selling motion with this solution today is about going country by country, building up go-to-market resources, a mix of direct and indirect partner. You're going to see the direct build first and build fastest. And that's been the experience that we've been seeing. And that's because the partner channel, unlike in the U.S., where integrated payments has been able to teach partners, partners being software companies themselves or the distributors that sell the software and integrate it, aka, value-added resellers. In the U.S., those partner channels have had more than a decade to mature in becoming payments salespeople. That didn't exist a decade ago. Those revenue streams and commissions to those types of partners, that was a foreign concept. In Europe, it's still a foreign concept. So what we're seeing is mobilizing these channels and mobilizing these partners is something that is going to take some time, but we think it's a very worthwhile investment because we can just take the pattern recognition of everything we saw in the U.S., accelerate that time frame to mobilizing these partners. But we know that if we're the first to be able to do it and really build the loyalty within that channel, it's an incredibly powerful channel. And so that's the investment we're making. So as we move country by country, we start with direct, we then add the indirect. We acknowledge the indirect. It will take a little more time, but it's a very worthwhile investment. because if you get it, it's a pretty fantastic asset.

And how do you think about the achievability of the $80 million through direct channels versus needing that kind of extra push from the indirect side?

So the plan was always to have the combined power of a dense go-to-market model where the revenue synergies are going to come from the combination of Shift4 One, DCC, the cross-selling motion of the variety of solutions that came out of Global Blue, moving through this now larger and scaled go-to-market asset spread out across the many countries that we'll be live in and bringing some of those solutions live into the U.S. So the combination of all of that is in motion. We haven't yet begun the reporting out against revenue synergies. That will be in '27. But what we can say is that we're hitting the progress milestones that we needed to hit on product, on go-to-market scaling, on countries live, which is a really important metric and on being ready with payment platform capability that can actually deliver these in-person payment capabilities that we need to be live. So we're hitting all of those milestones and feel good about it.

Got it. Great. All right. We've got just about a minute left. Chris, I wanted to maybe get your thoughts on the stock as both an investor and CFO. The stock seems to be pricing at a much lower level of earnings and growth than what it has historically. And that seems disconnected from a lot of the energy that's coming out of the team, from you, Taylor and everyone. What do you think the market is telling you about the business? And what do you think the market is missing?

Yes. Well, first, I can say we can be very patient people. I've been involved in the business for 10 years, and you can go back to the S-1 of the company, take a look at fiscal '18, fiscal '19 financial stats, and you're going to see 30%, 40% CAGRs through time. Like I mean, we know that our playbook works. We know that the combination of doing what we do well of cross-selling, of enabling payments and commerce technology to converge and then allocating capital to create outsized through inorganic investment and other outsized rates of growth. We know that, that formula works. And we're committed to it. We're excited about it. So even when you sort of have the backdrop that you have of macro and markets and volatility as a result of all of that, we know that we can put our heads down and just execute our way through. And we know on the other side of this, we will be able to continue to compound at high rates of growth. The valuation, though, is at times something that simply means that in your capital allocation framework, you have to take a serious look at, in some respects, the gift that the market is giving you, right? There's a whole host of reasons that these things can happen, industry-specific, macro specific. And at best, what we can do is play our playbook, execute that and allocate capital if we think it's attractive to something like share repurchases. And that's what we have been doing. But as an investor, I do think that it does seem like we're at a point in time as someone that's kind of studied the payment space for like 20-plus years as an investor, you can look at the multiples to growth ratio, and we're at the low point, right? We haven't seen this since GFC, right? So the idea that I can take simple ratios like a PEG multiple. I can take simple ratios like EBITDA, adjusted EBITDA to growth rates over a multiple, like that's simple math. And I can look at it at a whole sector level and acknowledge that, wow, this is not a sector that's supposed to be running at a 0.5 PEG, right? That is for like speculative junior gold, right? Like this is not that. I think payments has always been recurring revenue, durable and certainly warrants a growth-adjusted multiple that reflects that kind of durability. So I think we do know that we're at kind of an interesting point in time right now.

Yes. Makes sense. Well, I think we'll have to leave it there. Thank you for joining. It's been a great conversation.

Yes, awesome. Thank you for having me.