Interview. Shift4 CEO Taylor Lauber and CFO Christopher Cruz on Capital Allocation, Competition, and Global Blue Strategy.

(upbeat music) Hello and welcome to the Synopsis, a business and investing podcast. I am really excited for today's episode. We have both the CEO and CFO of Shift4 on the podcast today. We're gonna ask them a bunch of different questions about their business and really try to understand it better from a long-term investor's perspective. For those that don't know, Shift4 is a leading payment processor. They have about 40% market share in hotels. They're a number two player in restaurants, 80% market share in stadiums and venues. And is also now a number one player in tax free shopping that has to do with their big global blue acquisition. Certainly a topic of a lot of questions from investors that we'll get into. Their market cap right now is about $4 billion and enterprise value though of $9 billion with one and a half billion dollars in gross profits and $420 million in free cash flow after stock-based comp and cash. So that is what Shift4 is and guys welcome. Thanks so much for having us. - Yeah, thank you for having us. - And so did just kinda kick us off here. Can you give us a brief overview, very brief, of kinda the payment value chain and where you guys fit into that? - Yeah, sure. So the majority of what we do lives on what we would call the merchant side of the business. So we are helping businesses accept funds from their consumers, their fans, their guests. And the value chain is actually grown increasingly complex for businesses. The way I like to contextualize it for people is your average small restaurant might be using as many pieces of software to run their business as like a large hotel five or 10 years ago. So the value chain can be made up of software, can be made up of hardware, can be made up of the actual payment processing in and of itself. And as you could imagine that it gets increasingly complex from there, the bigger the business gets, dedicated things for loyalty, for gift cards, for analytics, et cetera. So it gets increasingly complex and that's kinda where we found the ability to differentiate is helping merchants navigate that complexity. - Okay, so you guys though, you have something called the gateway, then you also are a merchant acquireer, you have payment processing as well, and then also POS. So it's kind of across all of those different aspects of the value chain you're hitting. - It is. And so it's important to recognize that merchants need to be able to accept their revenue and we fulfill that chain. They generally need software to help them run their business, but they might need lots of software. They might need software to run their spa, their golf course, their front desk. And so we have technologies like the gateway that you mentioned that stitch all of this software together for a single payment experience. But we try to approach it with the mindset that merchants shouldn't need to know all these parts exist. They should generally know that we can collect revenue in a safe and secure way and provide analytics, kind of whether it's a barring grill in Boise, Idaho or the largest casino resort in Las Vegas. - Okay, so a great business is able to do things that others can't copy easily. So what aspects of your business do competitors struggle to copy the most? - So it's a great question. What I'll start with is we were the first in the industry to bundle software hardware and payments and deliver that experience in a cohesive wrapper for a small business. That was at a time where that was inconceivable. That was a payment terminal and maybe some software off to the side. They didn't talk to one another. And these were largely three cottage industries that didn't communicate with each other. And as you could imagine, the merchant experience was quite frustrating at that time. So as far back as 20 years ago, we kind of bundled these offerings together and made it all work for the benefit of the merchant. We learned a ton. We kind of had to evolve from being just a payments company into a software company, into hardware expertise, et cetera. And what we found is the ability to solve that problem of bundling these things together in a single package for a merchant is as well received by a small business as it is by the largest enterprises in the world. And so we've been on this SMB journey for 20 years as I mentioned, and we still do an incredible job for many tens of thousands of SMBs. But where we found kind of the thinnest air or the least competition is delivering that value proposition to the largest enterprise merchants in the world. Doing billions in transactions where it's not one piece of software, it's hundreds across a largest state. So it's this ability to take a make it simple for the SMB mindset up into the most complex environments imaginable that's really created differentiation for us. So it kind of just reading into that a little bit. Are you also saying that your value prop is much better received by enterprises because this idea of bundling everything? By now, it's become a little bit more commoditized on the lower end because you have toast, you have square. And so there's a lot of ways you can accept payments that's very easy to set up for an SMB. But if you're going to the enterprise route, then it's a lot harder to be able to integrate all this. I would say it's slightly differently. Anyone who serves the SMB always has to worry about the competitive positioning of their software in that environment. And there's always gonna be interesting software popping up. So you mentioned toast and square, we've been in the restaurant vertical for over 20 years at this point. And there's kind of always been one or two good competitors. And that's the both challenge and opportunity of the SMB market is that if you're providing a point solution, other point solutions will compete with you. What we've found a lot of differentiation in is when that complexity grows and that business grows and they need lots of different point solutions to run their business. The number of providers that can manage that drop dramatically to one or zero. And what you'd find in the United States is when a large hotel is RFPing, their payments infrastructure, it's usually like shift four, maybe one other phone call. And that's where we like to play. So it's a really complex environment that have to manage on behalf of your customers, but from a competitive standpoint, very few can do it. - And that's more on the enterprise side though than the SMB side? - Yeah, but I think investors tend to just treat that comment as a binary one. There is a SMB and there's an enterprise. There is a ton in the middle. And so we've found that just in general, the bigger the merchant gets, the more vendors they need to serve them. And the more opportunities shift four has to eliminate those vendors or consolidate those solutions into an offering. So we might call a restaurant that does $10 million a year in sales and enterprise customer, but that really can grow to that restaurant sitting in, again, a Las Vegas resort that does billion. So I don't like to use those labels so interchangeably because it's really in that middle area where you find tons of opportunity. - Okay, and let's just like double click on a little bit of competition. So if you're looking at toast, for instance, it's kind of accepted that they're much more expensive than SkyTab or shift four dynas, I believe, it's now called. Does that mean that customers are valuing toasts product more? - It's a really good question. It's a philosophy about go to market. We began as a payments company and started to introduce technology as the world evolved. And so we start with the basic premise that we want to align ourselves to the revenue streams that our merchant values the most. And so we lean more on the payments revenue stream than on fixed costs, like software modules, et cetera. And so I think the reality is they grew up as a software company and kind of evolved in the opposite way. And so they place more emphasis on the value of their software. Our approach is the merchant's gonna use all of it regardless. And so why not align yourself to what makes them successful? Which is align yourself more to payment space revenues so that when they grow, you grow, and when it doesn't work, we're both equally insented to make it to fix it and make it work better. And less on fixed costs because who likes fixed costs? - So that is essentially though, a cost leadership position, right? - You meaning from the perspective of your ship four? - Yeah, you're basically competing on price against toast. - Yeah, we do. It's one of the ways we compete for sure. And it's a very different philosophy. And I think it helps merchants kind of choose more clearly which one they'd like to align to for sure. - What are the things? 'Cause when I'm researching toast, a lot of restaurants they'll talk about very specific things within toast that ship four may not have yet. And it's hard to figure out exactly what they are. And it kind of reminds me a little bit of this conversation I had with the co-founder of Square Jim McElvy when he would talk about how, when they're competing against Amazon, Amazon didn't realize all of these little things they were doing until they started to get into that business as well. And so I'm kind of wondering, what are these aspects of toast that are harder for you guys to copy? Why can't you just create a perfect facsimile? - So what I would say, and we'd like toast as a competitor, we think they're an incredible company. So I'll start with that baseline. I think your question's a fun and provocative one. But before I get into it, I'll kind of give the disclaimer. We think they're an excellent company. The reality is that they charge a lot for a lot of different modules across their product. And I think they do a really good job selling the value of each one of those components individually. Ship four kind of does the opposite, which is we'll give you a solution that is all encompassing. It is in some of the largest restaurant environments. It's in many tens of thousands of restaurants across the United States and increasingly around the world. But we're gonna bundle it all and deliver it to you in kind of an easy to consume way. And so I think if you're a toast customer trying to look at the landscape, you've been trained to look at one component and say, I need value from this individual piece versus a ship four customer who says, I want a comprehensive solution that's easy to understand and the economics I know go up when I do well and I can understand that. So we have not found a feature set per feature set challenge implementing our solution in, you know, a toast customer by way of example if we're displacing them. But I will say that the merchants are trained very differently if you've adopted one solution versus another. The other thing maybe just to keep in mind is we have built our own restaurant software for 20 odd years at this point, but we've also acquired six or seven other pieces. So there really isn't much that we haven't seen and we haven't developed towards. I'll also say I think toast is a really good job with the out of the box experience and a self-service journey for their customers. We have kind of grown up in a what you call like a dealer model where there's a specialist helping to implement that solution. Virtually every one of our customers is hand installed by a shift for technician. And so at times we can if I'm being self-critical kind of embrace complexity that I think toast has tried to build a product that solves some of that complexity and doesn't need the human intervention. So it's a great question because I think they've developed a very different way of doing business and they've been very successful and we've operated in the opposite realm and been also very successful. And I think for investors again who were trained to kind of think there's one winner and everyone else is a loser. It's really fun to analyze folks like ourselves who've been in restaurants for 20 plus years and growing and toasts who's been growing quite successfully as well with different strategies. Okay, so just kind of taking that last comment you made toast is a newer company than you guys were and I know you guys didn't necessarily get into restaurant until you know a little later and all that. But why do you think toast does have at least by some metrics more market share than you in restaurant. Incredibly aggressive growth. I mean they had a business model that was it was not profitable for a very long period of time and if I were to contrast that to how our founder built the business. We didn't take outside capital for the first 15 years we existed and loans are anything. So the idea that we could live beyond our means is just not something that culturally exists inside of shift for it. So I think they built a good product. Number one you're never going to hear me sort of criticizing the quality of the product but they also had a hyper aggressive growth strategy that we would not have pursued as aggressively. We would not have kind of had the gumption to light capital on fire in pursuit of a growth opportunity. I think the way we deploy dollars is fundamentally different we need to see a near immediate return and so our balance of growth and profitability is just just different. One thing I would just like add to that is actually it speaks a little bit to the broader business outside of restaurant as well which is to say the capital allocation discipline. Lens that we have is one that actually allows us to also look at points in time where there might be points in time where investing heavily in the restaurants. Because of its underlying fundamentals and its underlying performance be it macro or micro drivers make it a point in time where investing for market share makes sense. There are also points in time where it doesn't make a lot of sense based on the actions of others trends happening in the market. But we actually have to look at that point in time on a relative basis to where else we could allocate capital which might be into going and competing with unintegrated bank terminals in a European market and bringing the market leading stadium entertainment solution there or bringing capitalizing upon the market leading globally tax reshopping solution there. And so that the dynamic of where do you want to put the dollar where do you want to allocate it it does have a lens of relativity within it as well on the margin so so we have that benefit within our overall model and that might make this discussion make a little more sense as to why not just drive all the capital at restaurant close all the product gaps and go after a market share dynamic that might be similar for us. The superiority or the inferiority of that relative to the superiority of allocating capital to our many other places of leadership it may not allow us to do that with if you have the discipline lens. Yeah and thank you for zooming us back out I think that's a very good kind of reframing so from that why don't we maybe talk a little bit about return on invested capital and how you guys do think about allocating capital what sort of metrics you look at because you had in your investor day or not investor day your earning slides you said you know you're looking at a whack of 8 to 11%. Is that really what you're thinking about internally is just beating that whack number or is there more involved in kind of this ROIC analysis you'll do. You know I'll hit it first and then Chris should hit it because we don't spend a lot of time on those variables what we look at is the best use of a dollar and the options available to us at any given point in time we've done M&A throughout our history we've invested in product we've done sales and centers you know we've purchased our own stocks we've got a pretty wide. Set of options to choose from when we think about how to spend the dollar we also have some pretty rigid viewpoints on what you should spend to acquire a customer across each one of our verticals and the return you should expect generally we think we should spend about 3000 to 5000 dollars to acquire a small business customer we think we should be paid back on that within 18 months or less you know and and we're probably much more flexible despite that constraint. So we're going to have that constraining framework on how that dollar gets spent as a result of it and you know Chris challenged us because I think what investors are seeing at this acute moment in time is we've deployed the largest amount of capital that we ever have which is a $2.5 billion acquisition so to show the impact of deploying more dollars than we ever have at the kind of peak of the pain curve which is that you've just done it and have yet to realize synergies from the investment was the point of the extra. So I think that's a great question. I do think that when you zoom all the way out right the purpose of a company the purpose of an entity collecting resources is so that it can drive return on invested capital greater than whack and do so on a sustainable basis and the wider that spread the more you are clearly demonstrating that you have competitive advantages advantages that are then turning into outsized returns. But they have been flow and that's the piece that I think people need to understand about a capital allocator model is that in the points in time where you do have the expansion of invested capital to the extent that you don't have the track record and the history of having shown how that expansion of invested capital is turning into not just adequate returns but high rates of incremental return at periods in time. Then if you don't have that track record I can see why an investor would have high skepticism over that company for us with the multi decade track record and even within the most recent past of looking at something like our acquisition of Finaro that enter us into Europe enter us into enterprise. Those periods are areas periods in time where you can look at the financials you can see the expansion of invested capital you can see then the incremental returns that come and know that even at the pain curves peak we still never drop below whack. And it's those metrics that balancing act of being able to expand invested capital generate high rates of return generate very high incremental rates of return and have the discipline to always be above your whack range that management model to me is the litmus test of a good business when you distilled down all of its complexities and that's why we were trying to articulate it because I can appreciate right now sitting where we're sitting at with the invested capital that was deployed. For the global blue acquisition you know it's creating a question it's creating a question when revenue synergies are about to come through even though you've got a world class best in class market share leading business and we have a thesis and a track record of having cross sold incredibly well off of market share leaders there is skepticism and but it was important for us to want to point people out this is what we know how to do. So I definitely want to pick back up on global blue but just kind of to clarify a little bit so the first thing Taylor said was the best use of a dollar and then you started talking a little bit about payback ratios like an 18 month payback ratio that's like a 66% return on invested capital depending on how you're calculating that so when you're talking about a payback ratio are you talking about payback on revenue gross profit or contribution margin or something else. Yeah it's generally it's a gross profit metric that we look at because that is the there's incredibly high flow through on a payments customer there can be different dynamics around whether we're paying a residual share to a partner who brought us the customer or something like that but generally speaking the gross profits the right metric to focus on for the incremental customer that you're buying with these dollars. Okay and then Christopher you were then talking about the ROIC of some of your investments and making sure that that was higher than whack is that kind of the main metric you'll use to allocate capital across whether you're going into SMB restaurant allocating more there a different acquisition something like that. Well I think my comment would actually be more at the at the entity level as a whole when you're looking at all things. There was nothing that we do would be that would be below the lack in terms of like what the hurdle rates are that you're talking about when you look at a stepping back in a generic view of a business of our size public company would you know I think it's pretty generic to have the whack range in this 8 to 11 zone but as an internal hurdle rate we actually have the luxury of being able to see high relative returns across a number of fronts within the capital allocation framework. And they are well in excess of a high single digit hurdle rate so I wouldn't think about our whack range as something that actually drives the relativity of our returns within capital allocation because just the position we find ourselves in we generally see really high rates of return opportunities across the range that we have in front of us. I never, and maybe you could educate me on this, because I never really quite got how you go from, you know, in this isn't the case with just four, it's a lot of companies when they talk about these payback ratios. If you're looking at, you know, an 18-month payback ratio, you know, roughly call it 66% return on capital there, and I get you're saying gross profit, then for you to drop from 66% to, you know, a high single digit, a low double digit number, that's gonna all be just a lot of acts basically, right? And so why is there so much in there dropping you from, such a high return on an individual customer to a low return on invested capital at the entity level? - Oh, I think that's just the law of large base rate, right? Like if you're trying to, if you can have high incremental returns, but all of the existing invested capital and all of the return generated on the blend as a whole, asymptotically, right? If we were to have a forever period of time and you're producing, and you're producing sort of incremental rates of return that are in the 50s or 60s, then of course, asymptotically, the business should eventually get there, but it's just the law of large numbers, right? You're talking about, you know, $6 billion of invested capital, and so to have the opportunities to generate high incremental returns on the marginal unit economics, for that to drive the 6 billion of invested capital, that will take a lot of time. But I do think that the important litmus test is, today, are you generating the spread over whack on the entity level, which I think is a, like, of critical importance, and B, do you have the track record of having done so on a sustained period of time, and then of course, C, by how much did you beat it? Because points in time, it's acceptable to just beat the whack. But if you can exceed whack by multiple hundred basis points at various points in your company's history, I think that's exceptional. - Yeah, that actually makes a lot of sense. Thank you for explaining that. So I wanna, before we get into global blue, I wanna kind of level set again, and just kind of think about your overall strategy. So it seems like you talk about how you're basically willing to forego software revenues to get the payment processing revenue. And you look at a lot of these acquisitions you've done in the past, Gateway is a great example where it's something that's very embedded in a merchant's payment chain, and as soon as you're kind of there, they're kind of forced to do the payment processing with you as well, because they're not gonna wanna rip out the Gateway, and you're not gonna support a standalone Gateway service in the future. And then it's kind of a similar thing for some of these point of sale acquisitions, where it's also pretty sticky, sort of element. I think when we get to then global blue, some people are questioning how sticky is tax-free shopping, is that really the best leverage point to really try to get into a merchant's POS, their payment processing and all that, because this gonna be too strong a verbiage, but with Gateway, it's kind of like your forced to use you guys for payment processing, because you're not gonna wanna replace your Gateway provider, and most people don't really care who their payment processor is that much. And so is kind of that the right characterization of the way you're competing, and tell me why I'm wrong about global blue, and why that's actually a really good leverage point. - Yeah, I love this question, because it gets to the heart of our strategy, and how our strategy is different from many others. - Such a good question. - We look at the entirety of the payments value chain, and a lot of times merchants don't necessarily understand how all these pieces fit together, and they certainly don't kind of pay each one of the components relative to the value that component is delivered. And I think the Gateway is a great example. The Gateway is critical technology for a lot of these hospitality merchants. It connects all of the software in their hotel or in their stadium in the theme park to create a payments experience. And yet throughout history, that Gateway would route transactions to one of 30 different payment processors who would be earning 10 times the economics, and yet doing nothing that is differentiated kind of to your point. So our strategy back 10 years ago was this is unfair. This piece is delivering far more value, and yet it's not earning the economics that it should, if we own this piece and bundled it with the rest, could we deliver a superior value proposition? And so we could earn more, because we're earning some of that payment processing revenue. The customer could also pay less, because we don't have to charge the same as a Gateway Plus a merchant acquire. And the service models infinitely better, because when these complex environments break, their historically was lots of finger pointing about why a transaction didn't work and why it didn't get to the bank at the end of the day. So this model of analyzing the value chain, seeing which pieces are more important than others, and trying to own those pieces and deliver the bundle has been immensely valuable to us. I mean, I'm just gonna foot-stop it, 'cause I think it's important. We weren't in a single hotel 10 years ago, we're in 40% of the hotels in the country. We weren't in a single theme park or stadium, and now we're in over 75% of all of the stadiums in every league. That's how powerful the business model can be if you're good at analyzing the piece that merchants described the most value to. And acting quickly, we struggled with retail. I mean, we looked at retail for well over a decade and said, does this phenomena exist in this environment? Is there a piece that is much more valuable than the others? And I think in e-commerce, that was quite true. You saw great businesses like Shopify and like Adian commanding really good unit economics because their piece that they were delivering was more valuable than the rest. And quite frankly, Shopify has done a great job of delivering a piece that merchants described the most value to and gaining lots of the other pieces like payments and other things. In retail and specifically physical retail, where we've got a lot of expertise in physical payment environments, we struggled and yet we found this concept of tax-free shopping being a critical component for all of the best luxury retailers in the world. So while you might argue, how does this piece relate to the others and I'll talk about that in a second, all of the largest luxury brands in the world demand tax-free shopping be available because in the countries that they exist in, this is a meaningful driver of value. If you go into a Louis Vuitton store in Paris, there is likely a 20% that applied to that purchase and the ability to get 20% off for a shopper on a really expensive item is critical to how that store operates and quite frankly, the shoppers that they attract. And so we knew the value of the product was immense. And then zooming out, we said, what's the competitive landscape? There's largely two tax-free shopping providers in the world. And global blue is an 85% market share in growing. So we knew the competitive dynamics for the tax-free shopping product, favored global blue immensely. And so we know it was a great product, we know it was demanded by a lot of excellent customers and the competitive mode was quite strong. And then the next step is, does this thing have anything to do with our bread and butter, which is payment processing, which I think kind of gets to the root of your question? And the reality is it does. They are incredibly closely intertwined. And in the best environments, what happens is when you go to pay, it detects that you're a foreigner based on the method of payment that you're using and the card that you're using. And it activates this global blue workflow that says, hey, this shoppers eligible to get a lot of money back. And make sure you walk them through that process, make sure they understand how to do it. So believe it or not, global blue is deeply embedded into payment processing already. And yet, it's through third parties. It's through third parties they've had to cooperate with to create that great experience. And so it wasn't hard for us to say, number one, tax free shopping is a pretty good business. And with very moat, very moated vis-a-vis their competition, they're already in all the best merchants in the world with regard to this vertical. But the payment experience is harder than it has to be because you're working with multiple vendors to make it happen. I'll say just one other point. Why not point of sale? Why wouldn't we just buy a point of sale business in retail, like we've done so successfully in the restaurant vertical? And that's because we couldn't make the same argument that we could in the restaurant vertical. In the restaurant vertical, point of sale is relatively consolidated to a handful of really good companies. In the retail vertical, that's not the case at all. And so if we wanted to buy one great retail point of sale company and try to win payments from great customers, we were unlikely to be successful because there isn't a dominant market competitor. And we likely would have offended all of the other retail software companies. So hopefully I'm giving you a little bit of a sense of our framework that we apply to expansion into a new vertical. It is number one, what's the value chain look like? Number two, where is it potentially mispriced? And number three, if you own that piece, how could you command a seeded table with regard to the other functions we really want to have? So what does that cross sell process look like though? Because I can imagine if we're going back to gateway, it looks like something like we're going to shut off gateway eventually because we're not going to support a standalone gateway provider. So we're either doing the payment processing for you or we're not going to support you anymore. And that's a pretty compelling sort of pitch. Whereas if you're talking about a retail merchant, has all these POS providers and all that. And global blue is sort of the best or the biggest tax free shopping company. How do you transfer that into actually getting into POS and ultimately the payment processing? It's a great question. So I'd start by saying it's the same value proposition as all the others, which is that we're going to eliminate complexity by owning more of this commerce value chain for you. So the value proposition is one of delivering more value, eliminating complexity. And at a lower cost than had you assembled multiple vendors together and tried to operate it as an ecosystem. We're starting with the SMB. And what the SMB that uses global blue looks like is two or three different bank terminals to accept payments based on what a consumer might come into pay with. Keep in mind this is a small business trying to cater towards tourists in a major destination city. So they might have one terminal for American Express. They might have another for local bank cards. They have a different setup if they want to do tax free shopping. They have an iPad that they pull out and they say, all right, I'm going to make sure that you're enrolled in the tax free shopping experience and that you've got the forms to deliver at the airport. What we're delivering is a single solution. And I know for the folks listening, they might not see this. But it's a single handheld that does all of that in one device. So it accepts all the local payment methods. It accepts the foreign international payment methods, whether that's like Ali Pay, WeChat Pay, American Express, et cetera. And when you pay, it tells the clerk and the consumer on the screen, this purchase is eligible for $X dollars. In tax back, you can take a picture of their passport right away with it or you can simply type in their email address and they'll get enrolled in the global blue app. Hopefully you can see how much value that would be to a small business who's trying to cater to tourists in a different geography today. They might not even know that the person's tax free eligible because I don't know, they might not have an accent or they might pay with a credit card that doesn't look foreign. So the ability to deliver all of that under one roof is incredibly valuable. We're already seeing that, by the way, with SMBs who are adopting the solution. But we believe that the ability to own all those pieces won't stop with the SMB and it'll be just this applicable for big department stores and quite frankly, global retailers that have a store in each major shopping district around the world. So we're trying to temper investors to expect what we've learned throughout our history, which is SMBs see the value quick and make decisions quick, but that value proposition will flow all the way to enterprise. And I don't think it's a function of we're going to shut you off. If you don't use it, I think the value proposition is quite clear. And the complexity elimination is really strong. So just kind of comparing those two, this is the way I see it and want to get your comment on this. So when you are thinking about kind of that gateway transition of payment processing, it much more is about avoiding a headache if you're a merchant. I'm going to do this because it's the path of least resistance. Whereas in contrast, when you're talking about kind of the global blue cross-hell, it's much more about adding value. In this case, it's much more about the bundle, the service of having everything together, the integration, which in some sense can be kind of a harder sell because you're trying to convince someone of your value. There tends to be a longer kind of sales cycle with that. There's less of a reason to kind of change an existing solution, even if it's not optimal. It still kind of works. Whereas in contrast, when you're talking about that gateway, once again, if you want to leave things the way they're working, you're going to have to use us for payment processing. Yeah, you know, I challenge you a little bit on that, which is that the I want to have a gateway that connects to another payment processor is nothing anyone has ever said. So it's not like the gateway standalone as a value proposition is something merchants embraced. It's the reality that there weren't providers that provided both under one roof until Shifford did it. Now, change, maybe to get to the root of your question, change is not something really anyone likes in the business sense. It is tough to get them to kind of make a decision if the solution's working. So we do have this combination of carrots and sticks that we put out. The first steps we put on the gateway was that every invoice that went out when we acquired it said, why are you paying this invoice? This invoice could be free if you switch to us for payment processing. Over the years, we certainly challenge where if we're maintaining a connection to a competitor and a merchant is not changing, we're going to charge more for that connection. And it's just rational business. And over time, merchants would say, why am I paying two vendors when I could pay one? I sort of use the example of the win Casino in Las Vegas as a good one, because they were never a gateway customer. They were never just an acquiring customer. They embraced Shifford as a net new customer, as a bundled solution for all of it. Now, to contrast that to the value proposition at Global Blue, you're right, we're selling value. We're selling a consolidated set of things that they're otherwise using five or six different vendors for. And change is not something that comes easily. We just believe the value is quite strong. I mean, the idea that you could attract shoppers with higher tax-free shopping acceptance rates than you've ever had before, because we're detecting that you're eligible in this device is incredibly powerful. I mean, if you look at that hypothetical luxury retailer in downtown Paris that's global, they might have 40% of the transactions where a tax-free form is issued at the point of transaction, because we've detected every time that they're eligible. And then the perfume store down the block, which tracks all the same shoppers, might have one or two percent. So we've got a lot of data to prove that when you detect the eligibility and deliver it in a bundled solution, you actually generate up to 35%, 40% more in shopping activity and tax-free form issuing activity. So we think the value propositions are. It doesn't mean that we don't have, by the way, the carrots and the sticks to use as influence over time. But right now, we see that Bertson's just want to adopt. Does this kind of competition feel a little bit more like the competition you have in restaurant in SMB, rather than maybe like venue next where you very clearly at the best solution were able to kind of take over that market pretty quickly? No, it actually feels more like the gateway days. It feels more like the early days of the gateway, which is that you're telling merchants there's a better way. They don't have to work with a hardware vendor and then a gateway provider and then a merchant services provider. So maybe to get to some of that, what I think is very fair skepticism behind your comments, the early days of the gateway sale were kind of interesting. We'd get an RFP and it would just be for gateway. And then you'd get another RFP. And that would be the technical team that's requesting it. Then you get another RFP and it's just for merchant services. And we'd have to kind of say, hold on, we can do all of that for you. So let us respond in a way that addresses multiple things and addresses CFOs, needs, in addition to CIO or CTOs, needs. This is what that feels like at the SMV level, which is you don't have to use those three. We have one. And so we are kind of training the market, but that's exciting. I mean, we don't shy away from that challenge. And I think arguing that there's a better way to do business is quite frankly a heck of a lot more exciting than our software is better than their software. Yeah, the only other two things I might add to it-- one part that is very similar in nature here is the piece that Taylor just alluded to in terms of the reduction of complexity and the ability to have an integrated value proposition. But one part that's very different is within the benefits of cross cell, the benefits of marrying payments to tax-free shopping and being able to create that payment eligibility detection, there's actually an economic motivation to the merchant that doesn't exist in any of our other offerings. In our other offerings, we can improve your total cost of ownership. We can improve your complexity. And then we generate value for you through workflow improvement reconciliation. In the case of tax-free shopping, something that's fundamentally different about it, is that the merchant actually participates in the revenue in a way that is unlike any of our other solutions. And therefore, they actually want to see the uplift in tax-free shopping. And that's at the owner level, may not necessarily be at the sales associate level, but it's most definitely at the owner level. And so as this cross cell comes through and as the tax-free shopping volumes increase, it actually drives a revenue effect at the merchant that is a fundamentally different component. So the cross cell actually creating revenue is something that is pretty unique and powerful about this equation. And that's piece one. Piece two, I would say, is actually also that as we bundle the solutions together, we are likely to see gross profit density expand, which is a bit different from some of the other things we do. When we marry payments plus a gateway revenue stream, the gateway revenue stream on the whole might actually deprecate a bit, but we gain gross profit density relative to where we were before. In this case, we might be just adding two things together and actually creating quite an expanded level of gross profit density. So I'm encouraged by what could be strong unit economics here that then allow us to do all types of new things in terms of being able to deliver value to the merchant. And then the last thing I would say is when we did the industry structure tear down on retail, something that obviously also didn't exist was a gateway. There wasn't some catch all gateway that gave you the full integration library of retail. With this proposition and the fact that we can prove to merchants that not just the payment experience but more the tax free shopping experience, when the whole solution is then on top of that integrated to your retail ISV, integrated to your retail POS, the solution gets even better. And therefore the volumes could grow more and therefore the revenue associated with this to you could grow. This is to us a very clean line towards building what could be the deepest and largest retail ISV integration library inside of Commerce Tech. So a few other areas that I just think are really underappreciated pieces. >> It's really hard to get us to stop talking about this but I think it's fair. It's the largest acquisition or history by an order of magnitude. Chris mentioned and I mentioned kind of the ability to affect the cross sell, the value of the cross sell. Global Booze is also an incredible business. So I cited their market share that speaks to the quality of the business. The vertical they're in is really nicely mowed. These are luxury shoppers who not just buy luxury goods but travel across the world for the purpose of buying luxury goods. That is a consumer base that is very resilient to basically anything but geopolitical turmoil which is really exciting. And then the last thing I'd say is it's probably the most unique data asset with regard to affluent shoppers in the world. I mean not only do we know that a person went from their country of origin into this city and purchased these individual products, we have skew level data but we also know everywhere else they've traveled around the world. And we know their passport and we know their email address and we know their home address and we're required to maintain all that for the purpose of fulfilling this tax free shopping experience and accommodating the needs of all the tax authorities. So we can tell you where all of the most affluent shoppers in the world travel, what they spend money on, what color they like their handbags to be at any particular moment in time. And so you won't find us really sort of critical of anything we've learned since the acquisition and quite frankly our relative caution in how fast we integrate is a reflection of just how high quality the standalone business was. And you mentioned it's a lower total cost of ownership which I really think is key. Do you have any numbers around that? How much lower the cost of ownership is for a merchant? Yeah, well it really comes down to what are they paying each of their providers and for payment processing specifically any revenue we generate is incremental. So I don't want to sound like we don't optimize towards the right economics to earn for the value we're providing. But we can go to effectively zero if it means winning payment processing on top of what we're already earning from a tax free shopping standpoint. So the way this looks typically is that merchants throughout Europe, I'll just pick on that geography, are largely using bank terminals that aren't integrated, they're paying relatively low payments rates. We can match or beat that and it's incremental revenue to us. And yet the merchants getting an integrated solution that's delivering a heck of a lot more value than that bank terminal. And over time we would expect that they will pay more over time because we're delivering more value and they're for the first time seeing the fact that when it's all integrated it does drive a lot more business inside of their equation. So it's kind of a choose your own adventure on lower total cost of ownership because any payment processing revenue is 100% incremental to us. We will be competitive with regard to the payment processing revenue that we're paying now and tax free shopping. We just have two levers within which to do it that our competitors don't. They have one or the other. And the other kind of question a lot of investors have is on organic growth. And before we kind of get into it, can you maybe just talk about how you think about organic growth conceptually because I know you'll kind of make this argument that why doesn't matter if we're acquiring the user with sales and marketing versus just buying them out when buying them out is usually cheaper. So why shouldn't that count as organic growth? Well, so maybe I'll lean into it but the other way which is to say if we're buying pure dollars of revenue, I think it's important to understand what those are and what the growth trajectory on those are. The reality is if you put kind of global blue aside, basically every business we've acquired was a revenue stream we intended to deprecate. We intend to say you're no longer going to pay for this if you adopt a bundled solution. And so I think all of us would unequivocally say that if we can attach revenue to their customers, it's organic, right? They couldn't do that as a standalone business. We buy it and we can attach payments revenue. That's organic growth. The trickier part comes into what if we're deleting some of their traditional and organic revenue in favor of a stickier, more bundled, faster growing organic revenue stream? And how do you manage those trade-offs? And so we've at times, and I think this is a fair skepticism from the public, struggled to kind of illustrate exactly where those trade-offs exist, where we're sacrificing acquired revenue for the benefit of a better revenue stream in bundling the solutions. And I think demystifying that is helpful. I think it's ironic because the skepticism from at least the markets today seemed to be the highest they've ever been. And yet we've actually bought like a publicly traded business. So it's pretty easy to understand the trade-offs between the two. But Chris, you as CFO get a lot more investor questions than I do these days. So maybe you want to comment. Yeah, I would say that, look, one of the things that I think is a fundamental misunderstanding about why we might have a different approach to organic than others is because we are unabashed about integrating businesses. We don't just, and integrating them in the op-ex lines means, well, at least you could maybe talk about, you know, gross profit or at least revenue. We integrate things through the revenue models. And so much so that we don't have segments, you know, that in the way that other companies do. We really are culturally wedded to the idea of get flat, stay flat, delete the parts, integrate these businesses and don't be afraid to be disruptive. And that includes meaning revenue models collapse and they come together. And so when you think about attribution, this is what makes the organic question, I think one of the hardest questions, it's this idea of attribution because it would actually be relatively easy if it was just about a cross-sell. You know, product A, cross-sells on to product B, product B's revenue stream goes to zero, product A's revenue stream remains. It's just not that simple in terms of how we operate. Because now, when you give us the chance, I will sell to a tax-free shopping customer payments, I'll sell them currency conversion, I'll sell them gift cards if they'll take it. I'll sell them integrated solutions, I will sell them using our backend portal that they'll be, that that merchant will now be a part of, I'll sell them the ability to integrate into third parties. So for us, the idea of attribution of organic and organic, it blurs so quickly because we move so quickly in how fast we integrate things. And that's the struggle. Now, I do think that there are ways, historically, that we've been able to increase the transparency of growth excluding M&A. The M&A contribution that was clearly still delineated and visible, we can do that, and I think one we can do that, we have done that. Just recently in the quarter, in the earnings, you could have done that on the full year, which then allowed you to understand it on the fourth quarter. And in the quarters leading up to it, we gave the equivalent of a rebased figure or an excluding M&A figure. But this specific word of trying to get at the organic, it is a tricky one. But I will say that in the newest quarter, we also did try to introduce something of a growth algorithm that really tries to underscore the point. But inside of our business, we have three disaggregated revenue buckets. And what we want you to understand is payments-based revenue is the North Star. It is, it makes up the vast majority of our revenues. And what we deliberately tried to do was break apart the America's region from the international the worldwide region. And we did so because in the Americas, it is the largest region still for payments-based revenue, therefore revenue for contribution for the company. And in this region, it is the most mature. We have been operating here for multiple decades. It is where all of our products have been mature for some time, whether it is restaurants, stadium entertainment, lodging. And it is the market that for the year of 2026 will actually not have the impact of prior year M&A and utilization in it. So this is as organic as it gets in a moment in time where it is as clean as it is going to be because it is an operating philosophy, not about trying to be somehow unsatisfactory to investors. That is not what this is about. This is about an operating philosophy that drives intensely quick, disruptive integration. But you do get the benefit this year of being able to see this America's region, our most mature region, perform in a way that is about as clean as it will be. So I'd like to. to think that we're always trying, but we're really unapologetic about the operating model that is really at the core of this dynamic. Yeah, I'll hit it once more because I think it's, I think about the question in a little bit of a different way, which is, I am immensely confident in our ability to grow, but what's the capital intensity required for that growth? Do I have to believe you're going to go buy things in the future or need to buy things in the future if I want you to grow at a pace that's X? And that's where really, you know, the, some of the analysis that we put into prior earnings releases, Chris updated it with the most recent return on invested capital analysis. I think that's, that's an important nod to that reality, which is you have done a lot of M&A. I don't think there's been much of a debate about whether that was the right thing to do or whether it grew the business in the right way or whether, you know, it was a good strategy, but how do I underwrite your growth and the capital intensity required? So we've tried to provide a lot more transparency there as well. Yeah, and I think it's actually kind of a little unfair, I think, the suspicion around organic growth because I get the idea of what the market's trying to say is that if you're growing organically, you know, we're going to assume there's a longer runway for it, whereas if it's acquisition lead, they're going to, you know, be one off every time there's an acquisition. And eventually if you run out of acquisitions, then you're going to run out of organic growth. But you know, it's true too when you're, I have a sales and marketing force, you can run out of tam of customers to go out and attract and then your customer acquisition costs starts going up too, which happens all the time. And so I think it's kind of a little arbitrary to me to focus so much on whether or not the growth is coming from buying an existing customer versus going out and trying to win one. And I can understand why there's a distinction all that, but they both have the same sort of issue that the runway could dry up. You know, it's, it's funny that you mention it because obviously we see companies in our industry that live and die by location count and how many locations they add. And of course they compromise on the quality of the location when they need to put up, you know, many thousand every single quarter. It's funny that you talk about the ability to continue to do M&A because the single group of people that are the most skeptical about a company's ability to continue to do M&A are investors who presumably do some form of M&A for a living. They're betting their careers on being able to find interesting investment opportunities or capital allocation opportunities at infinitum. And yet they struggle to think a company that is in 75 countries it wasn't in two years ago. And in a bunch of new verticals it wasn't in five and ten years ago might, you know, run out of capital allocation opportunities. We just, to that, we sort of say, look yourself in the mirror. And if you're betting your career on finding capital allocation opportunities, we can do. And I think it's also ironic because right now, you know, some of the biggest critics right now are saying are the people who are criticizing the global blue acquisition and at the same time they're saying what's your organic growth, which implies they want more acquisitions in the future. And so, yeah, maybe to just kind of ask this cleanly and I'm not sure you're going to have a great answer to this, but if you stopped all future acquisitions five years from now, ten years from now, what do you think organic growth would look like? I'll let Chris take the tough question here. I would just say we wouldn't do that. It's like a thought experiment for the sake of satiating an investor who wants to be able to like look and run the business on their own terms. The reality is we've been unabashed about what M&A's done to position us in the verticals that we're in. So Chris can kind of run through the academic exercise. And I think he's quite frankly more trained too as a professional investor. I would just say it's stand amount to saying, you know, what if the Yankees just didn't swing at every third pitch? It just doesn't make any sense. Yeah, I actually think a bit of the answer to the question lies in what is sort of a unique set of circumstances that is going to make the America's payments based revenue a pretty clean number. And so when you look at that, I don't want to look at it through the lens of absolute growth rate because we do participate in a market that has baseline levels of growth. So the way I actually look at it is in 2026 when we deconstruct the growth algorithm and we point people towards this America's payments based growth, most mature region, unaffected by prior year M&A annualization, what do you see? You see mid teens is the direction that we're trying to talk to people about. And that mid teens though, although that is good growth, what it really is, is it's like a 3X relative growth to the market, to the baseline of the market. And you have to understand and deconstruct like why is that? Is that all because of somehow M&A did all of that? It's actually no strategy did that, right? Because the first and most important relative growth rate differential to the baseline is that everything we do is integrated payments, right? If you didn't catch the wave of being on the integrated payment side versus the unintegrated payment side, you missed multiple points of relative growth rate and that's piece one, right? So that's a strategy decision, that's a determination. Did M&A get you there? Did your strategy get you there? Did your organic assets get you there? Probably they all did, right? But how can you disaggregate it? But directionally, if we didn't make the move to where every single transaction we do is somehow tied to software, we wouldn't be growing better than the market. But you take that as building block number one. Then you have building block number two. Why can you outgrow the market is because we have value proposition and we have places that we play where we are a one-a-market leader and generally two where the next player has a much lower relative market share than us and more often than not, there's only two of us. Restaurant aside, right? Restaurants are most competitive market. But when you look at stadiums and entertainment, when you look at tax reshopping, when you look at lodging, hospitality, we intentionally are in places where our value proposition should be able to also earn its right to price that value proposition and that's a component of growth algorithm that should exceed the baseline. And then because of those things together and the thoughtfulness around it, you have market share, right? So where in that can I isolate and dissect the long-term effect of M&A versus organic gets really colored really quickly, it gets really commingled really quickly. Do you think that you could, if you're looking out to like 20, 30 or something, you could say, oh, well, payment volume per merchant, it's going to grow 2 to 3%. Then you have merchants growing, maybe 5%. And then you have modules per merchant growing, another 5%. Is that not a way you would look at it? Yes, so I'd start with the beauty of the where we live is that the baseline of what we do is GDP plus because you're providing a service over the consumption. And I actually think the particularly good place of where we play is that broadly speaking, allocated dollars towards the experience economy. The areas that we serve are like the places that people shop, dine, stay, play. Those are winning areas. They also happen to be areas that are winning even in a long-term view that maybe the K economy might continue to compound. There's a few areas and sub narratives within it over and above the integrated payment way of cutting and slicing the data. But I think what you're getting at is are their building blocks that I can take a market level of volume growth. Let's call that GDP plus. I can then take the integrated payment theme, which is going to take a market share variable over the unintegrated. I can then take a land and expand, right? Sell more services on the same merchants that we have, absolutely in the track record. Pretty much the core of our philosophy, right? Like the idea of cross-sell, bundle, drive value, and then price that value, you can definitely do that building block algorithm and you'll probably still get to a place that it's multiple times the market. And that is how we think. To be the payments industry used to be really easy to underwrite from an investor's perspective because you had this cash to electronic phenomena that you could count on quite reliably for the first 10, 15 years of the industry's existence. There will be not just traditional GDP spending, but there will be more electronic transactions than cash transactions each incremental year. And so I think that when that slowed, particularly in the United States or maybe COVID, was kind of the terminal point at which cash disappeared from the equation, investors were surprised that just any generic payments business doesn't grow faster than the market. And to Chris' point, you have to be on this integrated theme to really be winning in the market. What's been fun to see as our international journey's evolved is that that cash to credit or cash to electronic phenomena is still playing out in so many other places around the world. So just being a generic market participant is not so bad. And then when we think about the relative value of an integrated participant, it's actually quite exciting. But maybe to put the cynical hat back on, we never would have been in these markets if we hadn't done the M&A that gave us the infrastructure to be there. And just kind of as we come to a close here, I've had a lot of people making sure I ask you this question. So a couple quarters ago, you put out a billion dollar free cash flow target exiting 2027. And then there's a little confusion whether or not that's still on the table. So is that still your goal post exiting 2027 to hit a billion dollars in free cash flow? Yeah, one of the things that I thought was really critical when I got into the seat, you know, as the new CFO, trying to lay out the first year of the guide is to really help people understand, how do you model the business, right? So the growth algorithm from the top line is the really important expression that we wanted to make sure people understood. But then how that flows through into margin and free cash flow was equally important. So when you deconstruct our shareholder materials, this quarter, and unpack how much we are trying to give you in the formula of the guide, that's really where I want people to focus, right? Because I'm not here in year one as a new CFO guiding the business to hear to say like, okay, let's all get focused on multi-year targets. That's not what I'm here to do right now. I'm here to focus us in on a really good grounding on understanding how to model the business. And with that statement, I would say this year, we've laid out a guidance of half a billion dollars of adjusted free cash flow that is essentially a 42% free cash flow conversion off of the adjusted EBITDA. But we're really quick to point out that the incremental adjusted free cash flow conversion rates, it's about 60, right? So for every dollar in your model, for every dollar of EBITDA, you think that the business can generate between now, between next year, between the year beyond that. Every dollar should flow through to free cash flow at 60 cents. That's the formula that I want people to understand. There are puts and takes to that 60 cent flow through. Of course, there's operating leverage in the business, so it could expand. But hey, if we see a phenomenal opportunity to lean into the unit economics and go get market share on the tax free shopping cross sell, we're going to lean into those unit economics, and that'll be a use of cash. Other than that, it might be a little bit lower than the 60. But in general, you should be thinking about modeling this business on a flow through of incremental 60 cents on the dollar. So then you have to do the math, right? Do you think that that is something where the incremental net change in adjusted EBITDA dollars is going to get you there or not? To me, what I'm focused on is you now have the formula, and let's get through this year. Unlike at any other point in our history, we're 12, 13 times the EBITDA we were five years ago, and we're valued the same or less. Buying back our shares is something that is fundamentally different than at other points in our history. And we do want to clearly emphasize that. So the use of a dollar has, we've always found very interesting ways to do it. The lines have generally been very clear in how we want to invest the dollar. But the ability to buy back stock now is so disproportionately better than many other ways we see deploying a dollar for shareholder value creation. That is a fundamental change over the course of the markets in the last few months is that buying our stock back is more of an imperative with free cash flow. And it has been at other points in our history. Okay. So just to kind of summarize that, it sounds like you want investors to do their own revenue modeling, understand that there should be 60% free cash flow conversion there, but we're kind of distancing ourselves from the billing to all their free cash flow target. And when you take a look at where sell side models and consensus are shaking out, I think the idea that is becoming better appreciated is that the financial formula of the business is something that is different and I want you to have the good grounding on it. And included within that is even just this idea of there is seasonality within the free cash flow profile. So the targets that we talked about even back then, they were targets that were based on a fourth quarter 27 exit figure. And that people didn't call the way appreciate even the seasonality dynamics of the business then. But the easiest way to get around it without even looking at the first half versus second half seasonality dynamics of free cash flow is the formula I give you. Trying to keep things simple is part of the job too. And having this formula of here's the revenue algorithm, here's the free cash flow algorithm and modeled the drop through of a just the dot dollar growth at 60 cents. That's going to get you the best forecasting. Great. And just kind of as a last one, you know, right now you guys have a $9 billion enterprise value. If I gave you $9 billion tailors, there any chance you would be able to recreate shift for? No, and I think many of our great competitors are examples of that. Quite frankly, you know, I think looking at the dollars it took to get awesome companies like toast and like square to similar stages of growth and profitability that shift where it has just shows you how damn hard it is to invest a dollar with the relative low rates of risk and incremental rates of return and short term profitability paths. On those dollars. So no, I think that's probably what distinguishes us most from everyone in our industry. It's not one person software versus the other. It's how many dollars did it take to achieve this financial machine that exists today? Well great. Thank you guys so much for entertaining many of our listeners questions, my silly questions as well. Really enjoyed talking to you both. Awesome. Yeah, thank you. (upbeat music)