Many readers have been asking us for a status report on the state of the US hospitality POS industry. This is going to be a long compendium so we’re going to break it into two parts.
For starters, we need to discuss the current status of the “major POS companies”. We’re defining major POS systems as those with at least 10,000 installations. Some on this list are a bit short of that number, but they’re included because they have some exciting things going on.
Aldelo
Aldelo really pissed off its channel a year ago as they pushed more of a direct model and launched Aldelo Pay. We can’t blame Aldelo too much though – payments is gobbling the world. Aldelo probably rationalized that it would find higher attach rates on processing if it had direct access to merchants. The move, however, hit Aldelo especially hard because many of their resellers where their own ISOs. Once Aldelo furthered its reach into the payments stack many in the channel started looking for another POS to sell.
That said, Aldelo is improving their cloud replacement product, Express, and building open APIs. In our opinion Aldelo is between a rock and and a hard place in that they don’t have the benefit of being First Data with tens of thousands of ISOs/agents to hock their POS, yet their POS is mostly known as a lighter weight offering and has difficulty penetrating larger merchants. To some extent this is the same problem Shopkeep has had.
Clover
Clover is basically the only growth engine inside First Data. First Data, being a processor, totally neglected to invest in Clover’s software and instead booted features to an app store. In their myopic focus on payments processing (and questionable focus on low margin POS hardware), Clover gave up a large opportunity in being early to the cloud POS market.
Clover is starting to invest R&D into software to improve its POS since they’re realizing they missed the market. They made an attempt at buying Salido, a more feature-rich POS focused on fine dining where First Data was an existing investor, but failed to win the asset over.
Still though, Clover prioritizes payments, as made evident by the first “feature” prioritized on their Clover site.
Some KKR executives told us that they had hoped their investment in First Data would have been more akin to Square, where the company would focus on building novel products with data. Yea, kinda impossible to change payments culture if the executives aren’t software and data entrepreneurs.
Brink
We haven’t spoken much about Brink but they’re one of the few “cloud” POS systems to penetrate Tier 1 merchants. We say “cloud” because they’re certainly better than Aloha or MICROS RES, but they’re still configured in an odd master-slave relationship and require Silverlight to access reporting and admin interfaces. If you’re wondering what Silverlight is it’s Microsoft’s shittier version of Adobe flash, it only runs on old ass version of Internet Explorer, and it’s since been deprecated.
Much like Clover, Brink is the only growing subsidiary of PAR, a government contracting business founded by John Sammon in the 1960’s. PAR was predominantly known as a manufacturer of POS hardware, but it got lucky when it acquired Brink in 2014 for roughly $15M; since then Brink has grown to an enterprise value of over 10x that amount.
PAR has been barely profitable and seems to have invested whatever cash the government business was throwing off into growing Brink. At the end of 2018 Brink had grown 80% over 2017 numbers, which is very impressive assuming EBITDA for the business unit was anything less than negative 40% (recall the rule of 40).
There was a bit of a shakeup at PAR in 2018 with the Sammon family ejected by activist investors and a board member placed as interim CEO. The board member found a quick $10M in savings (chalk it up to family slush) and is laser focused on the Brink asset, which is the only growth vehicle for PAR.
Unfortunately for PAR, Brink is not large enough to be a public company, and the public markets are giving PAR a premium that makes it pretty much impossible to divest of the Brink asset. PAR can really only raise financing for Brink at a subsidiary level, and even then investors will wonder what happens when the government business falters.
If we get a material pullback in the public markets PAR could be split into government and Brink. But with their new CEO at the helm, PAR has raised $60M in debt. If managed properly this could be enough to sky rocket Brink to a real leader in enterprise cloud POS as NCR and Micros lose share.
Focus
The one legacy POS asset with material market share, Focus remains an outlier. Although courted by Shift4 the deal wasn’t meant to be. Like Future, Focus finds itself between the cachet of Micros and NCR and being cool enough to call themselves cloud. It’s a reliable product but getting long in the tooth without significant R&D investment.
That said they have built an API, are replicating data, and are ahead of where many of the legacy systems that Heartland and Shift4 acquired would find themselves today if not for the intervention of well-capitalized acquirers. Still, the changes have come slowly, and their resellers are feeling pressure from competitors working off processing balance sheets.
We expect Focus will need to find a new home to continue its chances at success.
Heartland
Heartland was the first company to make a run at dominating the hospitality vertical by acquiring POS systems Dinerware, Digital Dining, PC America, and XPient. Recently Heartland has added MobilBytes and SICOM to its list of acquisitions.
It should be no surprise that Global Payments, who themselves acquired Heartland, wants to achieve a software multiple. Now that FIS owns Worldpay and Fiserv owns First Data, Global is no longer as big as it thought itself to be… another acquisition could be looming (i.e TSYS).
As it relates to the POS assets, however, Heartland prides itself on having the largest single reseller channel in the industry. They’ve culled their reseller numbers since their POS acquisitions and in our opinion this list will be winnowed further still as the channel consolidates for any of the 100 reasons we could list off.
While Heartland maintains that they will keep supporting the code bases of the legacy systems they acquired we have to think they’re glad they picked up MobileBytes as a cloud solution in SMB. The only downside with MobileBytes is that it is limited to iOS, which means it’s very pricey relative to Microsoft and Android equivalents.
Heartland will need to change that.
Like Aldelo, many of the MobileBytes resellers that came along with the acquisition were ISOs. To be a Heartland dealer in good standing under the new ownership you must punt processing to Heartland reps, and this is less appetizing to many of the MobileBytes channel. Several of the resellers we’ve talked to are again looking for greener pastures on the processing front, but honestly there are few viable alternatives left.
Heartland contends that it provides their dealers substantially more leads than they would otherwise generate by themselves since Heartland brings a salesforce of payments reps to source deals. Heartland shared that the close rates go up because leads are better qualified and Heartland has a broader product stack to offer merchants. We will need to watch the data on this relationship heading into summer since the partnership is still new.
Now we get to SICOM and Xenial.
Global wants to be a software company, but we don’t think they have the culture to understand enterprise software. In payments COGS are 0 and sales cycles are fast (because the offering is literally the exact same). In software, enterprise sales are long, and the customer extracts pounds of flesh. This is much, much different than Global is used to, which makes us question the level of commitment Global really has.
SICOM is a hodgepodge of legacy solutions. Yes, it gave Global more enterprise locations, but Xenial has been slow in coming (because enterprise customers suck). Every time we hear about Xenial it’s never in the POS capacity. So what is Xenial?
To set the record, Xenial is a collection of microservices – discount, tax, and order engines primarily, and it’s currently deployed to support mobile ordering for roughly 8,000 locations. When Xenial POS is installed, the same microservices boot up. Xenial has a headless POS instance in over 6,000 Taco Bells, supporting their kiosk ordering capabilities, and will grow to over 10,000 devices by year-end.
Heartland must still develop a universal API across all their legacy POS systems if they’re to be kept relevant. This has been slow to materialize, and timing is still a bit elusive. While they are working on some efforts through Mobile Manager, we think they need to prioritize rollouts if they want to keep pace with the market.
Lightspeed
The earliest of the first-generation cloud POS companies to go public, Lightspeed gives us all a glimpse at the sausage making for cloud POS. Their IPO was well received and Lightspeed is trading at favorable multiples (15x forward revenues) considering the company is still losing money and only growing at 35% (remember the rule of 40).
Lightspeed still has a large contingent of merchants (about 5,000 sites) on their legacy Mac retail POS but they’re spending considerable sums growing into hospitality and transitioning their retail base onto their cloud POS (which they bought, by the way). We are keen on watching two things for Lightspeed.
- Because everyone wants to be a payments company, we’ll see how aggressive Lightspeed becomes with their payments processing. Currently there’s no penalty if a Lightspeed merchant chooses another payments processor. But since Lightspeed has highlighted payments as their leading growth opportunity, this may change, and Lightspeed may either require merchants use their processing (like Clover, Toast, and Upserve, which only have one processing option), or start imposing penalties for merchants that choose another processing provider (like a $40/mo “gateway fee” or similar).
- Will Lightspeed continue down a precarious path and try to monopolize the entire stack on top of the POS? They’ve already announced to the market that they’re acquisitive, currently shopping for labor solutions to augment their offerings. But at the risk of beating a dead horse, this has never worked; the pace of innovation in any layer of the stack is sufficiently fast that the POS company falls behind quickly. How Lightspeed handles this reality will be telling.
While Lightspeed is still losing money, we think they’ll be fine. They’ve raised around $200M from their IPO and analysts expect them to be cash flow positive in 2021, which we agree with given their growth rates and COGS (i.e. most spend is coming from marketing, which can be slimmed as a worst-case measure).
Lightspeed still hasn’t really shown up in the US restaurant market, however. We don’t know if that changes (maybe they don’t care?) but the rest of world is plenty large for growth.
MICROS
MICROS became everyone’s favorite punching bag after their 2014 acquisition by Oracle. MICROS lost significant mid-market share as dealers fled and customers stopped getting support. Oracle, who only moves the needle in billion-dollar revenue chunks, wasn’t going to sell an overpriced cloud analytics tool to the 5-unit restauranteur.
Two years after what can only be described as a hemorrhaging of accounts to cloud competitors, MICROS is changing their approach. They have fewer resellers but have broadened territories. They even shut down several of their local offices to give more life to their channel.
Unlike NCR, MICROS has even opened up their APIs. As of 2018, those APIs are all publicly-facing (here for Simphony, here for back office, and here for RES). If a third party wants to integrate, there can be fees depending on the interface needed. For credit card processing there’s a fee, but for gift and loyalty there’s not. If a MICROS merchant needs to use a third party inventory system, as an example, they’d need a metadata interface, which has a cost. Regardless, it’s not like NCR, which charges a monthly toll because, NCR.
Perhaps the biggest change coming from MICROS will be a method to repurpose hardware.
Many merchants will tell you that hardware is the most expensive component of switching POS systems. For hardware companies like MICROS and NCR, they made their numbers by inflating this price as much as possible, and convincing merchants that their refresh cycles should be as fast as possible. Now that hardware is widely available from Asia at much lower prices, merchants (and consumers generally) feel much less compulsion to buy hardware with 50%, 60%, or higher margins baked in. And it’s not as if hardware is getting less performant and less reliable, either.
Imagine if a MICROS/Oracle merchant running RES, MICROS’ original POS software, could keep their hardware and upgrade to Simphony, MICROS’ cloud POS software. This helps Oracle earn recurring revenues and frankly fixes a lot of merchant issues by putting merchants an on constant trickle of updates and fixes (such is the benefit of cloud POS).
Oracle brought back one of their lead engineers (Paul Armstrong) to figure this out. We think this solution, if executed the way described, would fix a lot of MICROS’ POS issues and restore some confidence in the market. Will MICROS be able to execute it fast enough? Hard to say.
NCR
What can be said about NCR that we haven’t already said. Their Aloha channel has zero confidence in new leadership, and every quarter we hear blunder after blunder. NCR acquired JetPay, and we’ll undoubtedly see that being strong-armed into merchants where possible (because NCR is desperate for growth). If their existing POS solutions, Connected Payments, bolt-ons, or really any piece of software they’ve ever produced is any indication, JetPay is going to fall flat.
NCR has to fix so many problems we don’t see how they can right that ship without going private and bringing in entirely new leadership. It’s not worth any more words than that.
Revel
Revel was a dumpster fire of a company until it wasn’t. They burned through endless amounts of capital when they were led by inexperienced founders but the ship was turned around when WCAS bought the company in a fire sale and brought in professional management.
Now it looks like Revel might be one of the leaders in cloud POS.
Revel has simplified its offerings by focusing on some key verticals and segments within those verticals. They now have happy customers and a growing list of clients to thank for their efforts.
We hear Revel is about to announce its new API program so we’ll see how that will be managed. What’s promising, however, is Revel’s willingness to strike partnerships and admit that they can’t do everything. This is a 180 from many POS companies, so it’s very refreshing to hear. Revel is also building a channel with a super interesting model for SaaS solutions (e.g. where local advisory and business consulting are a material part of the reseller’s revenues) and that will be a real proxy for the pace of channel evolution – which is inevitable.
As with all institutional investments Revel will eventually need to find liquidity. This means they could IPO (their revenues are actually very impressive) or change hands to a strategic buyer or private equity firm. All things equal investors hate going public because you deal with the clusterf*ck that is Sarbox. (Side bar: When the government decided to require endless disclosures for public companies under the guise of “consumer protection” they did the opposite and motivated companies to stay private longer. Now companies like Uber are going public later and all the quick growth is had by early, private investors.)
If someone were to acquire Revel, whom would it be? It might be Worldpay, who still doesn’t have a POS of their own. More on that later, though.
Revention
Revention is a provider of Point-of-Sale solutions for Delivery/Carryout, Quick Serve/Fast Casual, and Full Service concepts. With over 3,500 customers and more than 10,000 locations, they offer a suite of POS, Online Ordering, and Loyalty Program for independent operators, regional franchises, and national providers. Revention was acquired by CapSstreet, a private equity company in October 2018. That in itself is not particularly interesting, but that Capstreet has also acquired CRS Solutions and additional Focus POS resellers means there could be another cross-sale play happening. This could make Revention large in a relatively short period of time.
CapStreet brought in a new management team with a focus on growing the combined business. The new leadership team is focused on investing in the product portfolio, expanding the GTM model, and the customer experience. It’s worth watching to see how this plays out. Our only concern is that private equity companies usually think they can monopolize the entire solutions stack. In fact their modeling is usually based upon it. SMB reality is much different than a spreadsheet, of course.
CapStreet shares that there is no plan to monopolize the entire stack. CapStreet’s investment thesis is based on the opportunity to grow in the POS space by offering a set of solutions, partnering across the ecosystem, and being focused on the customer experience. If true, this will be welcomed news to a traditionally myopic industry.
Shift4
Shift4 “copied” the Heartland model and bought POS systems Future, POSitouch, and Restaurant Manager. This was in addition to their own Harbortouch POS system and incoming Harbortouch Bar and Restaurant, a more mature cloud POS offering. We say “copy” because the difference in the Shift4 model is that they didn’t separate POS and payments: resellers in the Shift4 model can sell payments whereas under the Heartland model resellers refer it into a payments team. Under the Heartland model the dealers earn smaller residuals but the flip side is that, in theory, they collect more leads from their payments team.
Shift4 was earlier fighting litigation that labels them a monopoly but all injunctions filed by the plaintiff have been dismissed by judges; that charade is probably behind them. We’ve yet to see data that shows Shift4 increasing processing costs for POS customers who don’t use their processing but we’re not saying it doesn’t happen, either. All discretion in this regard is up to Shift4’s resellers, which is probably why the cases have been thrown out each time.
As it relates to their POS offerings Shift4 rapidly invested in data replication technology to give their merchants an API endpoint. The benefits of this cannot be overstated, and that is still being rolled out. How quickly Shift4 gets that into the field will dictate how soon their merchants can expect to benefit from seamless, free connections to third party companies.
Shift4 is still managing the overhead of 4 or 5 different POS codebases. Long term, this is expensive. Does Shift4 make enough payments revenue to justify perpetuation of legacy codebases? Sure. But it’s bad business practice if we believe the market is moving to cloud (and we strongly do). By the way, we think the same is true of Heartland. Shift4 will need to address this issue the next few years, probably by moving more and more of the functionality into the cloud and then releasing feature updates only for their Bar and Restaurant product.
Shift4 is also very appetizing to a larger processor who doesn’t have a POS portfolio. Shift4 is already processing with TSYS, so that might be their next owner. Or Elavon or even Worldpay. Because Shift4 has taken institutional capital from Searchlight they will need to exit eventually. Maybe they prefer the route of SARBOX on the path to IPO – Lightspeed’s multiples sure do look good, but we haven’t hit a recession yet, either.
The downside in any non-public transaction is a loss of culture, which Jared and Brendan have upheld masterfully. If we bought Shift4 we’d work extremely hard to keep the founders in the business because when they leave, so too does the excitement around innovation. Look at the 20-something founders of now-public tech companies: it’s very hard to replace the entrepreneurial bug. For more direct proof, NCR has not produced an EMV product that works, while Shift4 has several.
Shopkeep
Shopkeep is stuck in no-man’s land. Their product is sufficiently good for a small merchant, but struggles once they move upmarket. Their churn is still pretty high and thus user growth has stalled.
It appears as though Shopkeep is close to profitability, but given the amount of money they’ve taken they’re also going to need to find a home. We heard they were shopping for an exit in 2018 but didn’t find any takers. A round of financing in December of last year gave them the runway necessary to figure out their burn.
Shopkeep is not a bad product nor a bad business, it’s just immobilized in a me-too world of POS systems pushed by payments reps. But they’re not First Data with legions of bank reps. Given that First Data invested in Shopkeep’s last round of financing, it’s possible that First Data acquires Shopkeep to be a more mature version of Clover (Shopkeep built an Android version of their app after the partnership, for instance). This would kneecap a bit of Clover’s own efforts to mature their software, but at a hardware/payments company the size of First Data it’s faster to achieve a result via acquisition than it is to fight with your own culture.
Square
Square has become the Little Engine that could. Honestly all Square needs is a more mature POS offering and a channel to support and it they’d take over the market. While the POS industry is so myopically focused on payments processing Square is over here like, “let’s see what new products I can create with data today…”
Again, this is founder-driven innovation and we don’t see any payments company recreating that culture.
Square has a chance to materially disrupt interchange if they’re granted a bank charter. Their pace of innovation and willingness to forgo payments revenue (at a flat 2.75% processing rate they’re probably losing money on some merchants already) should be viewed as a serious threat to the complacent payments and POS incumbency.
While Square partnered with Touchbistro and Vend early on, they’ve built more features into their POS and have pretty much booted the POS partners from their partner program. This shows that Square, unlike Clover, is more focused on software than hardware or payments.
Things we’re watching from them:
- Expansion of Cash App. This app is essentially a mobile wallet at its core. What if Square decides that there’s no interchange for merchants whose consumers pay with Cash App? They have both sides of the equation, a consumer’s bank account on file, and can just ACH money. Yea, big implications.
- Feature maturity of the POS and reasonable channel programs to support larger merchants. What Square offers today in terms of a reseller program won’t work with restaurant merchants, but they have enough capital to figure this out.
- Novelty of products. Square has never been shy with trying new things. We expect them to launch a reformatted ad product sometime this year, probably quietly at first. They’ve already shown interest in growing into that part of the marketing stack and marketing is 3x larger than the payments opportunity.
Toast
There’s undoubtedly no cloud POS that has caused more noise than Toast. Boasting nearly $500M in capital raised and a locked-in processing model, Toast has materially changed the sleepy POS industry. With a valuation over $2.7B Toast will be gearing up for an exit in the next 18 months. Given Lightspeed’s performance in their IPO – and barring any recession – Toast could be well received assuming their financials are healthy.
Toast continues to build non-core products in efforts to demonstrate growth potential, but we’re not sold on those ideas. Nor are we sold on the idea that larger, enterprise merchants are keen to jump in bed with a POS company that only offers one payments processing option: the payments industry is notorious for gouging customers on rates so this just screams risk to any reasonable operator. Then again, merchants are really dumb.
That said, Toast has been rolling out contract language that guarantees rates for longer periods of time, and forces them to match competitive pricing should a merchant bring it to their attention. This is a good move on Toast’s part and we’ll have to more closely watch how this plays out – is it a blip or a going concern strategy?
Of course there’s nothing preventing a large strategic from taking a look at Toast. Yes, they’re burning lots of money, but they can probably axe two thirds of their engineering department (i.e. once features are built they’re less work to maintain) and perhaps half of their sales and marketing spend. Considering Toast already rides on Vantiv’s rails, Vantiv (Worldpay, FIS, whatever) is a likely suitor.
Toast definitely forced the market to reconsider its value and business proposition. We’re not fans of undercutting competition on price only to ream them on processing later, however, and Toast’s model could expose merchants to this risk because they only offer one processing option. What we’re waiting for is the other shoe to drop: how high will Toast’s processing costs go as they close in on an IPO? And if they file for IPO, will they lay out a plan that involves rate increases or expectations of certain processing margins?
Touchbistro
Another Canadian POS company, Touchbistro is surely benefiting from the successful IPO of Lighspeed. While Touchbistro is exclusively focused on the hospitality vertical they’ve likewise taken institutional capital and will either need to raise more money or find liquidity in an exit.
Touchbistro has wisely targeted larger merchants, which gives them a bit of a moat against competitors like Clover and Shopkeep. Alex Barrotti, Touchbistro’s CEO and founder, has publicly told us in articles prior that it’s often easier to “sell to 10, 5-unit chains than it is to sell to a 50-unit chain.” That leads us to believe that Touchbistro doesn’t want to chase larger merchants like Toast.
Touchbistro has not produced an open API, and that’s something we advocate. They’re technically a local-server “cloud” POS, which is not exactly ideal, but does give them some redundancy. If they rewrite their architecture to be P2P, it will be a huge boon. We’ll need to watch how Touchbistro structures new partnerships as they mature, too. It’s too early for a definitive prognosis on our end.
Upserve
Upserve sold to Vista Equity Partners and now has a more regimented growth plan. Even so, POS is a tough business and growth is hard to come by. Private capital has always had a challenging time with brick and mortar.
One of Upserve’s limitations was its dependency on iOS. While they cater to higher end restaurants that like the sex factor of Apple, cost is a legitimate issue in a low margin industry eventually. Upserve built their POS to run on Android in late 2018 and that will help them find more growth. Upserve also just announced a new Tableside handheld POS that was internally developed and programmed to compliment their existing POS terminals.
We’re also not sold on Upserve’s strategy to buy or build more of the stack, which they did when they acquired Simple Order for inventory. It’s hard to do POS well, let alone the breadth of products Upserve is currently supporting (analytics, online ordering, payments processing, inventory and now workforce). Micros and NCR both bought a number of solutions to grow their stack and how did those play out? Yes, we get the argument that those two companies were hardware cultures at their core, but how many founders want to work for someone else? There will always be some group of sweaty Stanford engineers working on a piece of that stack and do it really, really well.
ISO/Bank POS Systems
Lastly let’s talk about the ISO/bank POS systems out there – iMobile3, Linga, and Talech. Together they might account for 10,000 locations so we’ll bunch them all together.
iMobile3 was acquired by TSYS. ISOs that were using a white label iMobile3 POS will likely switch to their Vital POS, which is just the rebranded iMobile3 product. Talech goes head-to-head with Clover, but Talech has a deeper bench of features. Linga is actively chasing ISOs and in particular VARs who have become ISOs. Linga has many more features than any ISO POS we’ve seen in hospitality. While Linga is reportedly available across multiple operating systems (iOS, Android and Windows) iOS seems to be its most popular deployment. Linga has added around 250 new partners in less than a year and is growing 15% month over month. The product is also available in 45 countries.
The looming question is whether large ISOs can afford to remain on the sidelines. At what point is POS critical to your processing business? There were many ISOs who resold MobileBytes; when Global acquired the company the ISOs were looking for the next solution. Can ISOs afford the risk of relying on a third party POS partner?
In part 2 we’ll cover how we expect these trends to play out, and what lasting impact the changes will have on the industry.
