Does Vantiv Save Toast?

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First let us say this: the jury is still out on toast. They might pull out something that nobody in the POS and payments industries saw coming. So long as it’s fair for merchants and moves brick and mortar forward (which is basically impossible NOT to do), we’re all for it.

But we’re also rational people who look at numbers and data. In God we trust, but all else bring data, right?

Subscribing to that mantra, we have some premonitions that might come to pass. If we look at the consolidating world of payments and POS, we notice something quirky:

Vantiv hasn’t made a move.

Think about it: doesn’t it strike you as odd that the (now) largest merchant acquirer doesn’t have a POS strategy – especially since they’re in the SMB market? Here’s a list of the largest acquirers, even before the Worldpay-Vantiv merger. We understand why some of these processors wouldn’t dip a toe in the POS water (because they’re focused on B2B processing), but Vantiv seems to be missing the boat.

Most of us know that First Data made a huge strategic purchase in Clover POS, a lightweight POS solution that even First Data has implicitly acknowledged will probably not move upmarket. Absent actual published numbers, First Data’s CEO said the following on the Q1 2016 earning call,

… it is still the early innings but as Himanshu said over 200,000 [Clover] units have been shipped and from where we started to where we are, we have a full product suite in there.

Many of these “shipped” units are not used for POS but a dumb processing terminal, and given the merchant segment considering Clover there’s probably 30% annual churn, so Clover has somewhere around 50K active installations realistically. Which is a pretty good number if you think about it.

Global (really Heartland) also made a strong play in acquiring five POS systems that account for more than 100K restaurant locations and putting it under the Heartland Commerce umbrella.

According to the press release announcing this latest acquisition, Heartland has more than 100,000 customer locations using its Heartland Commerce software.

Harbortouch also made a move in buying Restaurant Manager, a restaurant POS asset that was being run into the ground by its founders. This brings Harbortouch another 12K locations on top of its restaurant and retail POS base of 30K+ merchants.

Yet Vantiv has remained mysteriously silent.

While payments become ever more commoditized, adding real, tangible value outside the processing stack is critical. Vantiv showed some self-awareness in its partnership with Womply. But they still haven’t taken it far enough in our opinion.

Vantiv’s “neutral” position on POS might be a vestige from Mercury Payments, a company Vantiv acquired in 2014. Mercury’s strength was its integration into most restaurant POS systems to facilitate processing. Over time Mercury taught POS dealers that they could wet their beaks on credit card residuals. In doing so, Mercury could never risk favoring one POS over another for fear of aggravating their defacto dealer channel.

But if we think about the necessity of changing the payments business to operate on data, Vantiv comes up short. When Vantiv’s board figures this out, they’ll call for something drastic (which, by the way, is the ridiculous catalyst for most M&A activity):

buy something!

When Vantiv reaches this point in a few years Toast will have burned through its $101MM (assuming there’s really $101MM on the balance sheet and part of their round didn’t go towards secondary capital). At that juncture this is how we expect toast to present itself.

Toast will be doing >$100MM in top line revenue. We think toast is earning somewhere around $40MM in annual revenue today, and toast is on a sales hiring spree. Doing a quick Linkedin search for people with Sales and Business Development titles yields 140 people.

Toast salespeople share that they maintain a quota of 4 deals per month. 140 x 4 x 12 = 6,720 new accounts annually. Toast will see considerable churn though, so those numbers are more likely 5,500 net new accounts a year. Even so, on an annualized basis each account is worth somewhere around $5,000 in top line revenue.

5,500 x $5,000 = $27,500,000 in new annual revenues.

Since toast wants to hire another 1,000 people over the next 18 months it’s not unreasonable to see this top line number grow 3-5x in the following 18 months. In other words, if toast earns $40MM in top line today, it’s reasonable to expect them to add upwards of $100MM over the next 18 months, yielding a revenue number above the floor needed to take a company public.

But an IPO filing would likely be little more than a head-fake. We expect toast to still be upside down on their unit economics in 18 months, and seeing the performance of newly-public companies with bad fundamentals (like Blue Apron) would make their investors very leery – especially since there’s a lockup period after an IPO.

The only way toast can overcome the IPO dread is through sheer momentum. Square, which IPO’d in late 2015, ended up losing $150MM that first year. But they were also seeing processing revenues of over $1B and growing 50% YoY. Payments services can scale faster because they’re commoditized, while POS products are much more cumbersome to sell. The silver lining, however, is that once you’re in the POS, you really should be able to cobble together a number of other revenue streams.

But that’s a ways off yet. So toast will be looking at another liquidity option: an acquisition. Toast would have 15-20K restaurants at that time, making its user base a material number for Vantiv. But is it a good deal?

We’d shop elsewhere.

For starters there’s POSitouch, a legacy POS with a reported 30K merchants. POSitouch’s leadership has struggled mightily to pull together a coherent strategy to stay relevant, including punting the value of cloud connectivity to a third party. Many of POSitouch’s dealers have watched the slow decay and are looking elsewhere, including one of their more prominent resellers building a cloud POS themselves.

POSitouch doubtless has small amounts of recurring revenue and is still riding a legacy business model. With no signs of innovation emanating from Rhode Island, the asset could be purchased cheaply. A million dollars on some software updates would give POSitouch a youthful facelift and make it market relevant again, and that would be far cheaper than purchasing toast.

Another left field idea – but nonetheless part of the industry’s perpetual rumor mill – would be in acquiring Aloha or CounterPoint from NCR. NCR currently uses Worldpay for their processing arm, NCR Merchant Services. With the merger going ahead, NCR might consider looking elsewhere for a processing partner. What better time to begin dialogue for cleaving the asset.

If NCR starts rolling on a data strategy, however, it will become substantially more expensive for Vantiv. Vantiv needs to understand that the market is increasingly becoming about data. The later they get this, the more it will cost them.

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