My name is Dan Perlin. I [held] the FinTech practice here at RBC, and I'm delighted to have Shift4 with us today. From the company, we have Taylor Lauber, who's the company's President and Chief Strategy Officer. Thank you so much for being here. It's been a fun journey. Maybe taken private, maybe not taken private. Now we're back to living on our own again. What I thought maybe we would do just to kind of level set is just talk about maybe some of the top priorities.
We'll funnel into a lot more of the detail in a second, but what are some of the top priorities you're starting with as you sit here today and start to progress throughout the year?
Yeah, it's much simpler than it sounds or seems from the outside, which is we have a massive base of customers to cross-sell in the United States and the verticals that we've been immensely successful in. So whether that's restaurants using a software brand we acquired that we can migrate to payments or onto SkyTab, which is our next-gen product, whether it's hotels on our gateway that we can migrate over to end-to-end processing, or whether it's a stadium that, quite frankly, we're winning a ton in the open market, but also our number one competitor sold us their business.
So you've got an awesome embedded cross-sell opportunity in that. Between the cross-sell and our ability to win share in those markets, there's really no slowing down. And we've also seen opportunities to accelerate this convergence from payments and software together and legacy software into next-gen software through acquisitions.
We've done a handful of those. Appetize being another great example. That Revel, which is a transaction we announced recently, all of these represent exceptionally low customer acquisition costs and a playbook that we can execute quite well.
Yep,
We're very excited about that. Now, that is doing what we've done for 25 years in the United States and doing it constantly. On the occasion, like we did with stadiums or with hotels, finding a new vertical that can benefit from everything that we've learned from.
You have to separate that from what I think is a much more interesting longer-term strategic opportunity, which is that this convergence of payments and software that we take for granted in the United States because it's been connected for 10 years or more has not happened in the rest of the world.
So if you believe in the growth potential inside of an Adyen, if you believe in the growth potential inside of a Stripe, it's all the theme that the markets of commerce and software are converging. In the rest of the world, that convergence has happened slower than in the United States. Despite all the potential we see for it here, you can go to an incredibly developed payments market or just economy like London, and there's still a bank terminal maybe sitting next to a piece of software, and that is an incredibly inefficient way to run your business.
The industries of software, hardware, and payments still all live on kind of opposite corners of the street. We have an immense focus in saying, how do we deliver an awesome integrated payments experience and all the efficiencies driven from that?
How do we consolidate from these three industries and vendors down to one for the benefit of the merchant in the rest of the world?
Yeah, there's a lot to unpack there. So let's start with, at a high level, your capital allocation philosophy in terms of these things, because we want to talk about these deals, including kind of Vectron, just so we know where that sits.
Yeah,
But you said in the past, the incremental dollar almost doesn't matter as long as the returns are what you need them to be. And then you go around and you kind of tear down these businesses that you buy. And so that causes a lot of, I think, heartburn for investors who are not familiar with what that kind of somewhat unorthodox manner in which you'd buy these assets.
But you're doing it, as you say, incredibly low customer acquisition, and they have very high returns. It's a little bit unorthodox.
Maybe talk about that at a high level, and then we'll talk about some of these deals specifically.
Yeah, you made the comment, it doesn't matter. I want to be pretty specific about the return on capital for us matters immensely. Quite frankly, it's the most important metric for us. Whether that dollar is invested in buying a company, hiring an employee, or investing in R&D is somewhat indifferent if we think it's going to generate the right results. It's almost exclusively focused on customer acquisition cost. So while we say it's a payback on the dollar that we hope to be 18 months or less, it's generally focused on how is that dollar deployed going to add to our customer count?
Again, I mentioned a couple of really awesome high-growth payments companies who have generally benefited from serving markets that grow really nicely for them. We are in restaurants, hotels, and stadiums. They're phenomenal places to go.
Yeah,
The industries don't grow much.
So for us to grow, we've got to add lots and lots of customers. And I would say philosophically, and I'll take the Vectron transaction as an example of that, you have a software asset that is on its own phenomenal. It is a massive share of the restaurant point of sale market inside of Germany.
Yep,
They have roughly 65,000 locations that have adopted their software. They're everywhere if you've happened to be there. And yet they've never monetized payments in a substantial way. And that might look like an overlooked opportunity for the software asset, but it's also a tremendous inefficiency for that restaurant.
There is a bank terminal that has a totally separate agreement. The point of sale reports and the deposits from the bank may or may not ever match each other. There's no good way to reconcile those things.
We, having had a 20-year head start on the convergence of software and payments, look at that and say, there is no good reason this should exist the way it has, except for a little bit of inertia and complacency in the business and the markets that they serve. We say, okay, what is a reasonable customer acquisition cost? And how do we drive incentives through that business to change the behavior that's existed in the way that it has? We believe through the purchase price of the business, operating the business, we get access to the 65,000 customers. We can really drive decision-making across that base.
We know what the inefficiency is. And we're not selling extra widgets. We're selling them a service that they have to buy anyway. And they would much prefer it to be tightly integrated to the payments experience.
Yep,
And then we say, when we do our math, are there other incentives that need to exist? You need to pay a local installer $a few hundred to make the installation work.
Maybe stepping back from the Vectron transaction specifically and saying, if you look at the growth of our business by any measure, whether it's volume, whether it's revenue, or whether it's free cash flow, and you compare it to who we would consider incredible kind of competitors or just industry benchmarks, you could call it Square, you could call it Toast, you could call it others, you'll find that for the same amount of growth, we've spent a very, very, very small fraction of the capital to get there. And we would argue we did it in a less risky way than finding new customers.
Yeah, totally. Well, let's pivot a little bit towards the Revel acquisition, right? This was something that, if it closes, I guess, hopefully or very beginning of July, you put out some numbers around that. Maybe just talk about the strategic benefits for this asset in particular, where that's heading, and then maybe how you might adjust that business model as well in order to make it fit the strategy that you guys are going to employ.
Sure. So let's start with it's a business we believe we understand very well. It had been private equity-backed. It had been owned for a lot of time. And I say this with all the right sensitivities. We've been private equity-backed. It means you're kind of always for sale. It means that you get the opportunity to look at these businesses over the course of multiple years. And again, this is the byproduct of being very rigid and disciplined in how we think about customer acquisition cost, how we think about the return on a dollar invested. We had a pretty rigid price expectation for that asset that we would pay.
And we were light years apart in early years of their attempts to sell the business. And we stayed firm, but also in touch for a long period of time.
And then one day our price seemed to work for them. And so why did we sit at it for so many years? We understood the product. We understood the niche within the restaurant vertical it served. Interestingly enough, they had done a round of layoffs eight years ago at their tech center in Vilnius, Lithuania, which is what compelled us to put our tech center there because there was this excess of talent that needed a home. And we said we admire the product and we admire the team, and we'll take advantage of that. So we now, our largest office is there. They have a very large presence there as well.
There's tons of tech synergy in that regard. We know exactly where our technology dollars were going to be spent, and this kind of helps solve that for us.
Yep,
And again, a large embedded base of customers that payments was largely overlooked on. So we will cross-sell those customers onto payments. We have a natural product for them to land on, which is SkyTab. I think we can increasingly look at a transaction like that and say customers would probably have ended up with ourselves or with our nearest competitor if you just left things alone. But if you own it, can you solve a bunch of your future growth needs with respect to, personnel and technologies? Also, can you give those customers a much more stable path in kind of getting fed up with the product over time?
Yeah. So you got Vectron. Revel, I think, has, to your point, some European presence. So the question there that we get all the time is European distribution.
Yeah.
Right? Like you're strong in stadiums, and so they're kind of natural extensions. You're strong in hotels. That's kind of a multi-country natural extension.
Yep,
But the restaurant one, I think, leaves people kind of scratching their head, like, how do you do it, especially country by country? So is this an early kind of indication of where you're heading? Is this a jumping-off point, or is this just two good assets you saw?
So, both the Revel business and, to a much greater extent, the Vectron business had a reseller model in Europe and in the rest of the world that we admired. So Vectron has 300+ distribution partners. These are the people that take the software and the hardware. They install it in a local location. They help configure menus and things like that. And quite frankly, they take the phone call when something's not working. And so that was a critical criteria for us in how we thought about our European strategy.
I don't think you can be too cautious about what local customs, local language, and all these things can be in terms of a barrier to entry. And what better way to bridge that than 300 local resellers who speak the language and have known these customers for a decade or more in many cases?
That's a huge benefit. I think there's good philosophical debates about direct versus indirect and when to go. Entering a new geography, having a loyal set of resources that are going to vouch for the product, that are going to advocate for you, but also stand in between you and the customer and bridge all those divides that can be created in the early days of a strategy is immensely helpful.
Yeah. So that's a good jumping-off point for them. Let's pivot a little bit to Appetize. Like this one is a fantastic asset. Here again, the strategy is you buy this thing and then you start to reshape it into your own form. So maybe just remind people what you're doing there, kind of the expectation hurdles that need to be set so that we don't get ahead of ourselves or miscalibrate in certain categories when we think about how that business is going to grow.
Yeah, sure. Appetize was the category killer in sports and entertainment four years ago, meaning point of sale software, mobile software, etc., for a stadium. The problem is they were generating a decent amount of revenue through this penetration of a new market and losing $30 to 40 million a year doing it. That business was for sale, and we couldn't get our heads around that math. We ended up choosing a business called Venue Next, which was just a bit more nimble in our regards, much smaller, but also running as a break-even business.
And we just kind of agreed with philosophically the direction they were taking things. We were very pleasantly surprised that last summer, the owners of the Appetize business called us and asked if we wanted to buy it. It's not contrary to healthy investor skepticism.
You don't get to will your number one competitor to call you and sell you a business at a significant discount to what they paid for it. So we were thrilled to take that phone call. What were the challenges? We knew that there couldn't be two products.
Yep.
It just wouldn't be viable. I mean, they, as experts running the business, couldn't run that product profitably at any point. And so we knew we had to have confidence that the VenueNext product would win. Thankfully, that confidence was instilled on us by the fact that we were winning most new stadiums anyway.
Yep.
We had won a healthy amount of customers away from them. And then it came a question of, okay, you're accelerating an event here if you buy Appetize and you push the customers towards your product.
And what is the benefit of that acceleration, and what should you pay for it? Well, not dissimilar from what we found in Europe, we needed a lot of technology talent in our sports and entertainment space. We needed installers. So it was a very easy decision to say, anyone focused on support and installation, you got to come over. But really, the people focused on the product are not going to fit well in this ecosystem. And it's worked phenomenally well. We've installed some of the more challenging customers within two months of the acquisition, meaning fully migrating them off of Appetize and onto VenueNext.
Yankee Stadium being a perfect example of a customer that generally is best in class and not going to move quickly, but saw the value prop immediately.
And right now, we're installing more stadiums with VenueNext in a month than we have in our busiest quarter at any point in the past. Now, important for those of you that focus on the financial modeling, what does this mean? It generally means you're kind of shutting off the Appetize revenue stream. You shut off all the one-time hardware and software that they used to charge for. And you say, we'll give you the whole solution. We want to monetize this primarily through payment processing. And you install the stadium, and then when the sports season starts, you get a lot of revenue from that.
So we have had to educate investors on the consequence of this, turning off what we viewed as less attractive in one-time revenue for the benefit of longer-term revenue.
Yep.
And in sports and entertainment, you got to follow the season.
But we haven't found a single environment that hasn't benefited tremendously from this transition.
So in your opening kind of comments, you talked about all this incremental business that you have. You started to introduce kind of last quarter this idea of a backlog.
Yeah.
I mean, as an outsider looking in, it's hard to model 151 stadiums being implemented. And then how do you add on ticketing? And then how do you add on? It's a little bit of a disconnect relative to, I think, the opportunity set that you want the street to underwrite. So how do you help us do that in terms of thinking about the duration and durability of the model, given that you have all of this demand, but it's not always as clear as how it falls into financial numbers?
It's a great question. I think in our SMB business, it's not as prevalent, right? We've got a long history of selling into the bar and grill in Boise, Idaho, and a really good track record of plotting our efficiency. Quite frankly, the installation timelines are not very long. The second you install it, you're generally getting revenue the next day.
Got it.
It's most exacerbated in large hospitality rollouts, which, for better or worse, are somewhat finite. On the occasional new property that's being built, we've learned from our mistakes about trusting the developer when they say the property is going to be done.
It's most exacerbated in sports and entertainment.
Yep.
I would say it's for the reasons I mentioned, which is that you're going to do all the work. Quite frankly, you're going to spend all the capital.
You're going to give a stadium all their hardware in the off-season. And you're going to do all this installation. Then you're going to wait for the first event. And in some cases, they'll rush to put you in for something that doesn't at all correlate to what a year's worth of revenue is going to look like. We installed at MetLife Stadium, which powers the Jets and the Giants games recently just for the draft. They wanted the technology in place for that event. Saratoga Springs we installed last week for the benefit of the Belmont Stakes. And then you just kind of have to wait for the busy season to start up.
So yes, it's challenging. And ticketing is immensely challenging because it's very binary as to whether you win it or not.
And then most of the sales happen in a very finite timeframe when they're selling season tickets. What I would encourage investors to do is look at the expectations for the business four years ago when we IPOed and our results and the fact that sports and entertainment wasn't even a contemplated vertical at that moment in time. So do bear with us when we find these new opportunities and learn what the sales cadence looks like. And for better or worse, if sports and entertainment is a guide, it's been four years and we went from none to 75% of the stadiums in every league in the United States.
For better or worse, we're growing to scale quite quickly.
Yeah. I mean, it's an amazing upgrade cycle. But the question ultimately becomes, how do we measure it?
Yeah.
And so is it your intention, do you think, as an organization to start to help us dole that out a little bit? Because for right now, I mean, you just do it at a bunch of stadiums.
Yeah.
Do you have 75% actually rolled out? Do you have 25% rolled out? I feel like that's the complaint.
Yeah. Jared mentioned this. I do think a backlog insight is helpful. I think it's most helpful in sports and entertainment.
Yeah, just for that.
I don't think it would be radically different in sort of restaurants where we've got a very regular cadence.
Yeah.
On occasion, hotels. Europe will be quite interesting, for example, where we know our sales strategy. We will have really good insights into receptivity, and installation timelines might be a little bit longer than in the United States. So we're not at all opposed to it. Quite frankly, Jared offered it up. I do think sports and entertainment is where it's most exacerbated. I think that's temporary, to be fair. I think it's, quite frankly, the Appetize transaction and the base of customers that provided us with that is exacerbating the problem.
Yeah. I'm probably leading the witness here a little bit, but you do have a second-half ramp
Yes.
that's built and implicit into that. So what are the, if we had a drop-down menu of categories that you'd want us to focus on to get comfortable with that second-half ramp, what would that look like?
So it's predominantly that sports and entertainment phenomenon I mentioned and Europe.
Okay.
Which is that we knew that the Vectron business for us would give us the technical right to compete in Europe. It would not give us the sales resources we needed to go win. So we expected to need something to fulfill our production goals in the back half of the year. And then the Appetize example, I think, is where it's most strained because you're giving up short-term revenue in exchange for much better long-term revenue. But the timeline might be six months if you're looking at the extreme end of forgoing a hardware sale, installing a stadium, and then waiting for the revenue to start up.
Okay.
So that's a really important thing to keep in mind.
I think investors struggle with it because when we announce an acquisition, they immediately dive down to what's the revenue of that acquisition. We model most of that will disappear as a result of the actions we're going to take. Then what we also model is how long does it take to get above breakeven and then how high does it go after that. When we're buying an acquisition, it does kind of, there are calories we have to burn off associated with their revenues.
Okay.
That creates kind of this imbalance in the year as well.
Yeah. Any commentary around just kind of the recent trends environment? I think one of the things you said around the quarter was that it was reasonably favorable out of the original Q1.
Yeah.
But what does that mean? You're right.
Yeah. We were talking in the other room about how you can look at just the three large networks and get a very different story of what's going on.
Yep.
We see, for example, significant strength in the hotel space, surprising level of strength in terms of kind of room rates and same-store sales. I don't want to be hyperbolic there, but any same-store sales growth over what was a phenomenal summer last summer is kind of impressive to us.
Yeah.
Sports and entertainment's the same. Venues do not seem to have a problem filling up. And there seems to be no dearth of appetite to go to these things. Restaurants is a bit more nuanced than I think you could find this evidenced by all of the different restaurant data we get exposed to. We look at, by the way, whether it's competitors' data points or whether it's network data points.
We always raise an eyebrow one direction or the other because we never quite see exactly what they're seeing. I think that's because you have destination resorts, cities, quite frankly, just caliber of restaurants that are doing well-ish, are doing quite fine selling $30 cocktails. Then you've got this other set of the population that is struggling with same-store sales compression at a modest rate. All of that manifests itself to be somewhere between kind of flat and down 1% on a given month. Fortunately for us, I think I was at this conference two years ago saying the sky is falling in the restaurant vertical.
We run our business with the anticipation that our customers won't grow for us. I think that's a good posture to have.
I would manifest this all to say our caution has been prudent in terms of how we run the business. It has never manifested itself in any vertical. For those kind of worried about the restaurant health or the consumer health, we had a global pandemic four years ago, and we're 99% restaurants and hotels. We did pretty damn well through that. Some of our posturing is we grew payment volume 20% year-over-year in the third quarter of that pandemic. A little bit of same-store sales compression isn't going to change our view that we got to find a hell of a lot more customers every year to continue to grow.
Yep. All that said, organic growth for the full year is still ± right in that 25% range.
Yeah,
No deviations from that. Let's pivot to SkyTab. The rollout here, 9,400 installations. You're clearly ahead of your goal to get to 30,000. And you've also got another 10,000 you're talking about within the international market. So just talk through some of the successes, but also some of the challenges that you might be having in that market.
Yeah, sure.
Or with that product, I should say.
I would start by saying it's always fun to hear investors look at our SkyTab success and have a pleasant surprise. But it's not a surprise to us. We've been in the restaurant vertical for 20 years.
Yep,
A lot of the success you see used to just be manifested across the four or five brands that we went to market with.
Yep,
We've now said SkyTab is the product. Stop selling legacy products and start focusing on SkyTab. So our sales penetration is, while we're never completely content with it, it's not at all a surprise to us. It's not straining our internal systems to be able to install the number of restaurants we are. I do think the focus has helped us tremendously on this product because you get to take resources that were perpetuating the past, and you get to allocate them to this.
Virtually every CTO of a business we acquired still works at Shift4, and they are now dedicated to specific tasks within our ecosystem. So Peter Lipman, who is the CTO of POSitouch and the founder of that business, is focused on enterprise capabilities inside of SkyTab. So in terms of opportunity and challenge, the challenge is making sure that when you acquire an asset, that nobody is focused on making that asset better, that they are all supporting a common goal and a product like SkyTab. We're very happy with the pace of progress.
Yeah. When you look at the type of client that you're getting in the international market as you roll out SkyTab there, what do they look like relative to maybe what you would have here?
Yeah. So generally a little smaller in volume with a higher mix of debit. So your spreads are lower. But there's revenue streams they've been accustomed to paying for, like software, like hardware, etc. So I don't want to paint too bleak of a picture. The other thing is a substantial portion of the business is in cash that will not stay that way.
Yeah,
So if you look at a market like Germany and it's 40% cash, that won't be that way a decade from now.
Yep,
And so how do you balance kind of the lower TPV, near-term opportunity in Europe and the higher debit mix? Well, you balance it with the idea that integrated payments will command a premium to buying the three products individually. It absolutely will because you get far more efficiencies from it.
And then cash to credit will not stay this way in the rest of the world.
Yep,
It will continue like in the US. It might not be exactly in the form of a Visa card. It might come in the form of a Girocard in Germany or something else. But you will get a natural tailwind in these assets that we really haven't benefited from in the United States, which is great.
Yeah. No, that's awesome. Maybe update us on this. I guess you're now just referring to them as your strategic e-commerce client.
Yeah. An interesting day.
Where do you guys stand in that relationship? How's that rollout going?
I think it's going really well. It's everything that Jared said it would be three years ago when none of us could quite believe it, which is the product is suddenly all over the world.
Yep, it's far off places too. I mean.
Fiji.
Yeah. Maldives , like all these.
Yeah, exactly. And when they enter these challenging markets, they ask us for help in enabling the payments. So I would say we believe that that customer can be the largest of their kind in their industry. We admire the hell out of the product. And quite frankly, we admire the drive of the business and the customer to force perfection and force fast growth. So they're giving us reasons to be in countries that we otherwise would have never put on the list. And then we've got a reason to go back and look at that and say, "What about the restaurants? What about the hotels, etc.?"
And I also have to believe that the incredible demands that that customer puts on their vendors for outcomes will lend itself to a product that has a lot of applicability for other-like merchants. So it's going exceptionally well.
Cool. I did want to just touch on Gateway for a second. Historically, I don't know, ±50% of the end-to-end volume growth opportunity. How do you see that playing out as you go forward with all these other new opportunities that you're rolling on top of?
Yeah. So it's a significant contributor to the sites that join our end-to-end platform every single month.
Yep,
I say that somewhat deliberately because the Gateway conversion is very easy logistically to do. There's still a ton of them left, which is super encouraging. It has become a well-oiled machine inside the company to compel these conversations. Like what we assumed when we acquired it, these things fuel growth for a long period of time. We've also had lots of visibility into our pricing strategy. We've had a few at-bats, if you will, at driving more phone calls.
The pricing strategy, it's really all designed to get the merchant to call in because if you're operating a place like this, your payments provider is not on your top 50. Making the guest experience better is usually one through 50 of that list.
So anything you can do to compel the phone call. I would say we've gotten increasingly smart around what things drive that. There's always technology upgrade cycles that we benefit from when the payment devices get too old or when suddenly it's embarrassing to not take Apple Pay or Tap or something like that.
Yep,
It can compel the conversation.
Okay.
That's been the blessing and the curse is compelling the conversation.
Cool. So we got a few minutes left. I want to make sure the audience has an opportunity to have a voice here. If there's any questions back there, and I'll repeat it. If you have a mic, great. If not, I can repeat it.
[inaudible]
Yeah, sure. So just to repeat it for those who didn't hear, the question is really hot, what's the ecosystem and how do things like Uber Eats and DoorDash help hurt, etc.? For better or worse, they're here. In most regards, restaurants believe that to some measure they have to take them. And they're sick of the iPad hanging on the wall. So they want a really tightly integrated experience. They don't want it to mess with their workflow. They don't want a diner who's buying a bottle of wine inside the restaurant to have a bad experience because 30 Uber Eats orders just came in and put their appetizers to the bottom of the list.
So there's a really strong demand for a tightly integrated experience. In some cases, we benefit from the payment volume. In other cases, we don't.
But there's an increasing demand to make sure that software plays nicely with everything going on, which is what compels people to adopt something like SkyTab. If you're a restaurant, again, much like a hotel, your technology and software isn't on your top 20 list. But getting the iPad off the wall and creating a more seamless guest experience and better throttling orders when you get too busy is something that they're all increasingly focused on. I would also say price sensitivity is here. Restaurants were quite content to raise the price of the cocktail from $10 to $20 to $30.
And now that they struggle to raise it to $40, the cost of third-party solutions like that is a significant focus. Our online ordering is free. I think at one point we were paying $1 for every online order that flowed through our platforms just for fun.
So merchants, and maybe just take Uber Eats and DoorDash to the side, merchants are increasingly focused on fixed costs and how to make these things work better and how to get every order in as cheap of a way as possible. And our solutions naturally kind of are top of mind in that regard. Our nearest competitor in the restaurant vertical on a fixed cost basis is three times more expensive. So on the margin, yeah, cost matters more. And I'd say an integrated experience matters a heck of a lot more.
Cool. Any other questions in the room? We have just a little bit of time left. Anybody? All right. Well, I think we're out of time. So that's great.
Thank you all very much.