Shift4 Payments, Inc. (FOUR) Earnings Call Transcript

All right. Here we go. So on behalf of Susquehanna and my group in the fintech team here, I am delighted to again this year be hosting this conversation with Shift4. It has been an exciting company to have covered since the IPO, and we have learned a lot from them and their refreshing perspective both on this industry and industry in general and even like they're just a delightful company to be covering and exciting. So with us from the company, we have Jared and Taylor and Nancy and Tom. And the structure of this one, guys, is going to be that if people want to ask questions, I'll just say this in advance, there's an app on the Open Exchange, and you can ask through there. And then I'll -- more than -- I'd be more than happy to get them in. Your questions are the most important, so I want to make sure we get them addressed.

But to start out, and I'll address this to Jared. I'm just curious what's top of mind for you these days? We're fresh off earnings. What would you describe as the priorities you think the company looks to achieve both near and longer term?

Yes. So again, thanks for having us. I guess the best way to answer that question, I mean, number one, I mean it's certainly expanding internationally. So I know we've said it many times, but we've been in the payments industry for 24 years. We grew revenue every year, 24 consecutive years even during the downturn. And why that matters is this is an incredibly competitive market, right? So we clearly have product services and integrations that are able -- that enable us to differentiate and win U.S., and now we want to bring those same capabilities into new markets. And we're incredibly fortunate that we have, hands down, the best strategic customer that you can ask for that's guiding us into all these new markets. And we achieved a pretty significant milestone with the first market, which is Europe. So now we're ready to do the second part of that story, which is bring in all those successful products and services that work for us here in the U.S. into those markets. So I think really top of mind, of course, international expansion; two is now bringing SkyTab, which we're having a lot of momentum with here in the U.S. into the European market. So I'd say those are like kind of top 2 things. And obviously, there's a lot there. International expansion is a very big deal. Big milestones there. Second, bringing products and services on markets like SkyTab in Europe, which we're really getting much closer to prime time for in that geographic region. And then I'd say like the next part of it is, is really just continued implementation of the Shift4 way, which we've been talking about for a couple of years. And as a reminder, these are kind of philosophies that I learned during my time with SpaceX that I think enable an organization to execute at just a different level. And we started that journey 2 years ago. And it involves taking out a lot of parts, which may be more efficient and able to execute a lot faster. And we're doing that, and it's reflected in our gateway sunset initiative and sunsetting legacy POS brands to consolidate around SkyTab. And the results of which are margin expansion and higher free cash flow conversion, greater customer satisfaction. So it's lower attrition, signing new customers, and those are all like early days and playing out really well. So that's kind of our focus areas right now. You're muted, sorry.

Oh, boy, that's embarrassing. Thank you. I was hoping you could talk about the competitive landscape across the end markets that can specifically comprise your high-growth core. For people who are newer, maybe explain what high-growth core means to the company and then the competitive landscape.

Sure. So yes, we call our high-growth course basically the business we were at the time of our IPO, which is restaurants, hotels, and kind of sounds like specialty retail. Of course, we've moved into a number of new verticals since, which are all doing well. But with respect to the core, which is kind of like you can count on this. We've been winning in these verticals for a very long time and expect to continue to do so. The competitive landscape varies based on kind of the lane you're going after. So with respect to restaurants, which is a component of our high-growth core, the landscape is really -- it's Toast and Shift4. And we both are doing a really great job winning from a lot of legacy players, older Windows-based systems, terminals, nonintegrated solutions. There's a lot of ground to go in that. That's not slowing down at all. Then there's hotels, which are probably our top competitors, U.S. Bank and [ Ola ]. We probably have, I don't know, some 5% share of hotels a handful of years ago. We talked about 40%. It's probably our fastest growing vertical, which is hospitality. It's also the one that's like shockingly the most resilient of all in the current economic climate. I mean you still got great same-store sales growth within hotels, and we're taking a ton of share. And then complex retail, which is like UPS stores and customer. Fanatics is a customer with their retail locations. That varies. You're taking share from kind of, I'd say, equally across all of the players. But it's a good question because even our core, even when we do -- what we've done well for decades is more than restaurants, which I think people kind of forget at times with the Shift4 story.

So with regard to restaurants, how has the focus POS acquisition been playing out? And can you remind us what the connection to SkyTab looks like for that suite?

Yes, sure. This is Taylor. I'll cover that. So Focus POS was an acquisition we completed in the first quarter. The idea behind this acquisition was actually a playbook that we ran incredibly successfully about 6 years ago, which is a phenomenal restaurant point-of-sale software with lots of customers using it, and yet those customers are using multiple different vendors for the payment experience. So while they're loyalty and interact with the Focus POS software every single day, the payments are typically an add-on from any number of third parties. And not only is it expensive, but it's also been [ stressful ] to manage. And we said we can acquire this business. We can tightly integrate the Shift4 payments experience. Any customer using the software gets an amazing software and payments experience bundled right out of the box, and they should be more successful in the market as they are. And over time, should merchants want to upgrade the SkyTab, we've got a nice pace of customers to do that from. But in the immediate term, you've had 10,000 customers using Focus Cloud software and not delivering payments to Shift4. So not only is there good long-term synergy in the migration strategy over to SkyTab, but there's awesome short-term synergy in helping out those 10,000 customers that are using multiple vendors. So at the time, we said it's a new acquisition give us a year or 2 to get this one under our belt. But we happy to say in the first quarter of owning that business, we've converted roughly 10% of that 10,000 merchants over. That's about $1.5 billion in payment volume that not only are the customers getting a better experience, but we were able to pull forward as part of our acquisition strategy.

Yes. And maybe just to layer on to that a little bit. So I don't know how familiar everybody is kind of with our history. I mean, as Taylor mentioned, this is kind of a small acquisition that just -- it just popped up. We tried to buy them 6 years ago. It's not like we went into 2023 saying this is a deal we need to get done. But the leadership there, Mike Hamm is awesome. He's like a legend and very well respected in the POS payments industry. Any opportunity kind of bringing good talent is always great. But he reached out and said, look, there's an opportunity to revisit this. There's 10,000 accounts here that are not on Shift4. You guys are pretty good at moving them over to payments. And in less than a quarter, we moved 10% over our already. So that's a pretty sizable, like $15 billion payment opportunity that we've proven works very well on how we run our playbook. But I also kind of want to point out, like this is our playbook. We don't apologize for it. We're pretty good at it. At the time that we started pursuing the restaurant ISV vertical 6 years ago, we were like a $50 million EBIT business. I think we've updated guidance towards the end of the year. We're saying, hey, we're almost 10x that. So we're pretty good at finding these kind of underappreciated and undervalued assets from time to time. And we have like a bulletproof playbook on how to move those very sticky, integrated payment customers over to our rails. And it's a pretty sizable lift in gross profit. I mean Taylor gave the math last quarter. But you just take 10,000 customers, $1.5 million a year times -- even throw out 50 basis points, which is 15 south of where our current portfolio blends at, and you can kind of get an idea of the synergy potential of it. We may not hunt these down like Focus POS all the time when they come about. And so it's an opportunity to kind of celebrate. Hopefully, people are starting to realize that.

So we wanted to ask you more about SkyTab and the upselling strategy. For people who were able to attend the SkyTab presentation here in New York, it was -- in my mind, it was an awesome event in part because you got to see the intuitive features and functions that had been built into SkyTab. The ones that I remember are like the way that it fits into the waiter/waitresses' apron. The way they integrate in the back end so that the presentation layer back to the bar, for example, is done in a certain way. A lot of the -- and also the way that it fits -- the entire menu fits relative to, say, the competition. These are all very intuitive things that even someone like me could relate to. So I appreciated that demo. So we want to get your perspective in upselling. What's the value proposition if you had to name a couple of SkyTab versus some of your competitors?

Yes. Well, I mean, look, I think the fact that you were there, you got to see SkyTab in action should just kind of, I don't know, dispel some of the mystique around restaurant point-of-sale payments that there's nothing cosmic about ringing up a cheeseburger. We've been saying it for a couple of years now. We've put it in our earnings reports. It's like we're very good at restaurants. We've literally been growing high double digits in the restaurant vertical for like 20 years. And we've always run into the next player who's going to -- winner take all, right? I mean at one point, it was Square, then it was Revel, it was NCR Silver, TouchBistro. And it's like the end of the day, right, you're ringing up a cheeseburger. You want to add onions, drop tomatoes. Like we love being in the restaurant vertical. But we also like being in 6 or 7 other verticals that are growing really quickly at it, too. So anyway, with respect to like competitive advantages, I think both us and Toast are advantaged in that we have a fully cloud-based solution. So why is that important and not just like buzzwords, it's -- in today's world, restaurants are relying on lots of different software to grow their business. They have integrations. They require integrations into Uber Eats, Door Dash, Grubhub, Payable, Loyalty, Gift. They want to be able to run their business from their cell phone and like see real-time stats on what's working and what's not, have great insights into labor management such like they can keep their expenses and revenue track. Cloud solutions do this really well. On-private solutions do not. So if you deliver that [ COG ]-based solution, it brings up a cheeseburger well and provides all those good business intelligence insights, and it costs a lot less. I mean, I think we tried to illustrate in our earnings report that our solution is probably like 1/3, 1/5 the cost of our competitor over a multiyear period of time, then you're going to win. And they're going to win, too. And that's fine because it's a really big market, and I think both organizations have our sites set on the globe. So there's plenty of business to chase down. But I think that's pretty -- a lot of expertise over decades of being in the vertical, cloud-based solution that runs on Android, sexy handheld devices at an attractive price point. That's how you win.

And then sticking with the restaurant theme and zooming out a bit, can you talk about for strategy when it comes to marketing and winning more merchants and distributing more terminals in the restaurant vertical more broadly?

Yes. Well, I mean I can answer it for restaurants, but it's really a factor of the entire business, which is we do everything we can to get a foot in the door with a customer and then grow wallet share over time. So good examples of that would be over our history, we bought 2 gateways that got us over $200 billion in volume where, over time, we can move to our N10 platform and get a 3 or 5x lift in gross profit and provide them an overall lower cost of service. And we also have acquired ISVs, like Focus POS and others where you have just the software relationship, and then you can leverage that, you get payments as well and deliver them a lower cost ownership. And what I would say is that kind of wallet share growth strategy of the business is like half of our production, and that has worked very well for a long time and will continue to work well for like a decade into the future. And then we also build really good products that allow us to go out and just win new restaurants and new hotels, and that's the other 50% of our business. So when you see like Virgin hotels being announced this quarter, it was never a gateway customer. It was never a software customer. That's an example of just winning a net new customer. But if you take Clyde's Group, for example, which we talked about this quarter, which is Old Ebbitt Grill, historic restaurant in Washington, D.C., that was the software-only customer that moved over to end-to-end. And now they're paying less. But from our perspective, it was like probably a 5x uplift in gross profit. So this is kind of our strategy. So in terms of marketing and getting the word out there, we're very good at creating noise and making the phone ring. Generally, we let the products drive the demand and let customer referrals do a good part of it. But I see this past quarter, an opportunity was presented to us where maybe some trust was shaken with one of our competitors, and we decided to use a little bit of our growing free cash flow to put some marketing out there and some incentives in order to stimulate growth further, and it's working. It's bringing a ton of demand.

So I just want to mention again, there's a tab in the top right corner, a tab that people could drop down. If you want to ask questions. Or you could just hit me on the Bloomberg and I'll ask them for you, or you can send me an e-mail. So I wanted to pivot over to hotels for a second. Within hotels, how does Shift4 approach that market differently versus, say, restaurants? And contractually, what might be some key differences, especially if the hotel has a franchise model?

Yes. So I think the key to winning hotels is a unique 550-plus software integrations that like basically solve every possible combination of software required in a hotel resort. If you're even short one integration, you're out of the mix, right? So you take some of our customers that we -- whether it's Virgin Hotels or Pebble Beach, for example, you're not going to be able to win that relationship if you don't have a key integration. Pebble Beach is not going to switch and say, okay, you can do everything for me but our golf [ houses ]. That's not going to work. All the software has to be able to talk to each other, work over common tokenization, encryption and business intelligence and settlement for the entire resort environment in all of the revenue centers. So the point is you need 550-plus software integrations across a lot of years of urgent history to even have a seat at the table. And there's 3 companies in North America that can do that. They're Shift4. There's one that I mentioned before that lives inside U.S. Bank. And then there's 1/3, which just does gateway services, so only owns kind of one piece of the value chain. And as a result, all those software companies I mentioned before that all have huge teams of sales force out in the market trying to win hotels will steer those customers to Shift4 because they know the overall cost of ownership for payments will be less because there's simply just less hands in the pie and we're able to provide a lot more value to the [indiscernible]. For the devices, we basically only experience end-to-end. So the merchant gets a lower cost of ownership. These software companies have less pain and friction in the sales process. And it probably also comes down to a much narrower competitive landscape when you have, again, only other 2 competitors that are capable of addressing the vertical, and we just have more links in that value chain. Just kind of the one throat to choke or one hand to shake-type environment. I don't know if there's anything you want to add, Taylor?

No. You covered it well.

So about that, what are some of the metrics you track when thinking about customer stickiness across the high-growth core more generally? I mean you're saying that there's a ton of software on the back end, say, for hotels. I would assume that, that would imply that it is really durable and sticky in that respect. But how is the churn in there?

Yes. So the churn is incredibly low. I mean what you'd find basically with any merchant that's using software that's tightly integrated to a payment experience is the churn is substantially lower than a merchant who is using a nonintegrated or stand-alone payment experience for the obvious reasons. As the merchant uses more and more software, the stickiness grows in conjunction with that. So these are -- for better or worse, these are mature markets. You don't typically have a lot of new businesses popping up and/or failing inside of these verticals. And so you can imagine a merchant that's relying on 20 or 30 or 70 different pieces of software to power their estate and every one of those needs to work flawlessly with the payment experience, they are very hesitant to switch that out. And as Jared mentioned, the competitors that can serve them are so few and far between that it really doesn't behoove them to do so. So what they're asking for is an experience that works reliably, 100% of the time, no matter what, and also an enhanced view of their customer. They want to be able to follow their customers throughout this web of revenue centers in a reliable way. And if Shift4 can provide all that, plus make things easier like your device management, like calling one vendor for 5 or 6 things that might have been separate phone calls before, the customer is highly likely to stay.

Okay. I wanted to shift over to consumer spending trends. What's your view on how consumer spend feels these days? Are there any pockets of weakness that have appeared? Or is it generally running at or better than expected?

Well, so I'll start, and then if Nancy wants to layer in. I would say we've been pessimists for a long time on this topic, and we're happy to be proven wrong. So consumer spending has been quite resilient. It does feel like the economy is firing on slightly different cylinders, though. So for example, you had really strong restaurant trends in 2021 as a result of the pandemic, but you hadn't yet had hotel travel pick up. And so while we've seen restaurants moderate, you're not seeing spending decrease, but you're also not seeing it grow substantially. Hotels, on the other hand, are going really well, as is sports and entertainment. So it really looks like the consumer to us is eager to spend. However, the categories they're spending on are slightly evolving. As the world is reopened, and they get to engage more experiences, they're seeking that out. And restaurant spending, which has been strong for 2021 and 2022, is holding more than we would have expected, quite frankly.

Yes. I think Taylor covered it. I mean we remain cautiously optimistic that consumer spending will continue to be resilient, but certainly a little bit more cautious on spending at restaurants moderating.

Okay. I wanted to pivot over to sports and entertainment. How is the market here different from or similar to the high-growth core? And in your answer, if you could talk a little bit about the importance of ticketing, I think that would be instructive.

Yes. Well, I would say it's incredibly similar to many other merchants in our high-growth court, which is walking through a stadium is not incredibly dissimilar from walking through a big resort. When you think about the number of revenue centers that you engage with, what the operator of that stadium is trying to deal with their fans, they're trying to push mobile engagement, they're trying to predict what you want, they're trying to bring you a beer and a hotdog in your seat if that makes your experience better. So the ability to stitch all these revenue centers together and provide a common both commerce experience and payment experience for the merchant and fan is incredibly valuable. So our success in stadiums, having had none at the time of our IPO, well over 100 now really being a category leader for us, is not at all surprising because we identified stadiums as a vertical that could use a solution like Shift4 had pioneered in so many hotels. What has been a surprise to us is that, traditionally, ticket spending has been in a totally separate ecosystem from the stadium itself. And yet as we start to engage with our teams and engage with our venues, they said, this is a major revenue center for me that I need to be able to see alongside of everything else. And can you help with that? So obviously eager to participate in solving that problem for the merchant. We engaged in software integrations with all the largest ticketing platforms and are happy to report today basically the 3 major ticketing platforms in the United States are integrated into Shift4. And therefore, any customer using them can use Shift4 for payments. So how does that work mechanically? A team says, I am using SeatGeek or I'm using Ticketmaster, and you are powering the concessions at the retail and the parking at my stadium. I want to see all the payments through a single settlement engine, through a single set of reports and analytics. Shift4 can do that simply by working with the ticketing provider to say send us the payments when the consumer engages with buying a ticket for that event.

No, that makes a lot of sense, that sequence. Hopefully, you can also help make my teams any better. So I wanted to pivot over to nonprofits. So from the recent earnings call, it sounds like Shift4 has made some significant progress in the not-for-profit front. Can you talk about what you're doing there to win? And what do take rates and profitability typically look like versus say that more traditional parts of your business?

Yes, I'm happy to jump on that. So this was the most material update on the nonprofit verticals in almost 2 years since we announced signing St. Jude Children's Research Hospital, which was a heck of an anchor relationship for entering into a new vertical. But what you're seeing with nonprofits is very similar to the ticketing story, where you get good land and expand in a complex payment environment that requires lots of different software to deliver a commerce experience. That's what Shift4 does well. So we have one signature customer, taught us an awful lot. We then reinforced it through the acquisition of The Giving Block, which is its largest nonprofit crypto donation platform. That story is much more about access to 2,200 of the world's greatest nonprofit brands and a ticket to pursuing a $450 billion payments addressable market within the nonprofit space than it is anything we've heard of. And we basically spent again, almost the last 2 years, building out integrations and rails for traditional payment donation volume and then cross-selling all of those existing The Giving Block customers. And it was slow. I mean it takes a long time to get all of the integrations that are needed because these nonprofits use a lot. I mean that's why we were attracted to it. It's not like just a Square app going to like a charitable dinner. I mean they take donations across that are initiated through their CRM system, through their website, through a hosted payment page. Influencers are attracting donations through YouTube and Fortnite. I mean it's complicated, right? So almost 2 years later, you've got a nice breakthrough. Those reference logos, [ National Cancer Society ]. Then we put in Give Lively that we put into our earnings deck. Those are traditional payment wins. So yes, it's been hard to enter a new vertical like that, but now we're getting some real momentum behind it, which that is very much like the Shift4 story. It's the same thing Taylor is talking about. No stadiums really 2 years ago. Now the category leader in the space and not just stopping with like in-seat ordering and concessions. But going for ticketing where you get 5x the volume and 3x the spreads. It's pretty nice like expansion -- land and expand planning out. So -- and that's what we're seeing across e-commerce and gaming and our other verticals that we've entered into since the IPO as well.

So I wanted to ask you about the gateway conversion discussion, which is one that's really attracted a lot of investors. Our view on it is that, to some degree, or can make your own weather through this initiative. So a couple of questions here. The first one is, we're just interested, what does the conversation look like on the back end when you go into the merchant to discuss this topic? And what kind of conversion penetration do you think is realistic?