Because Global Payment’s General Council has looked at – but neither replied to commentary or numerous invites for dialogue on a shared draft of this article – conclusions herein are derived from observations and conversations with dozens of people inside and outside the perceived melt down of Global’s POS efforts. Global Payments not once refuted any of these figures or assessments.
Global Payments is working hard to convince Wall Street that it’s a software company. This comes with a free multiple arbitrage (software companies trade at 8x revenues while payments companies trade at about half that) even if there’s zero value creation, and it’s exactly what we’d expect from banker executives. We don’t mean that in a derogatory sense, it’s just that bankers aren’t exactly synonymous with actual value creation (i.e. Global can keep meeting quarterly earnings without providing any actual value vis a vis their rate increases). It’s sort of the same way hedge fund managers can reap billions of dollars without creating any new good or service that benefits society (but they can deflate the 401Ks of the less sophisticated who don’t have the luxury of watching the markets all day).
As it relates to our retail focus, Global Payments has now invested at least $488M into their POS efforts since acquiring Heartland by our count. How did we get this number?
- Global sunk $415M into SICOM
- Global’s all-in spend on Xenial hit $50M to-date, per Xenial insiders
- Global splashed $23M on MobileBytes which was rebranded Heartland POS
Not included in this sum is the additional ~ $100M Heartland spent to acquire its legacy POS systems which Global effectively paid for in its acquisition of Heartland. Let’s go through the three bullet points above in a little more detail.
SICOM was a private equity rollup sold under the greater fool theory. Underneath SICOM was archaic technology cobbled together and, ironically, reengineered as a recurring revenue software business. Global paid a premium for it. Our best read has been that Global acquired SICOM for its customers under the hope that the customers would later transition to Xenial, which is where we’ll go next.
Xenial has been troubled from the early days. Xenial was Global’s attempt at a cloud POS panacea. The first problem was that Global thought way too broadly about the application of POS software per conversations with sources over the years; Global was under the impression that the POS that could support a small jeweler would be the same POS to support enterprise restaurants. This happened because Global has no product or software culture and views things from a payments lens where broad applicability is real because there is no product.
See, because Global prioritizes payments it doesn’t attract product people. It also doesn’t invest adequately to support product initiatives according to any objective metric of R&D spend. If you’re a really good product person and the organization doesn’t respect what you think and doesn’t give you the resources to execute what they mandate that you to do, what do you think the employee does? They leave. We’ve heard it said that Global approached building Xenial with quarterly earnings in mind; that the only way they could justify investing any money in POS was if it became this magical unicorn that subsequently served every conceivable merchant. Except Toast has raised $500M (will be $1B when their new round closes) and is nearly exclusively focused on US SMB restaurants. In other words, product is 1000x harder than payments and POS in particular is 1000x harder than conventional products.
POS ain’t fungible.
At some point Global listened to their product people and realized that verticals and segments within verticals required drastically different POS functionality. It was then that Global bought MobileBytes, a SMB cloud POS that worked well in the channel (up until that point MobileBytes was 100% channel grown) to be the go-forward solution for its SMB restaurant business while it figured out what to do with Xenial. Global rebranded MobileBytes as Heartland POS yet MobileBytes seems to be the only POS product Global is focused on.
No, really.
According to our sources, SICOM isn’t being end-of-lifed but it’s not getting much attention either. Remember what SICOM is: it’s the poster child of a private equity rollup of three disparate, legacy solutions that were financially engineered to recurring revenue. Underneath SICOM is RTI, an antiquated enterprise reporting platform, Nextep, a decent foodservice platform, and SICOM itself, which is digital signage, kiosks, and a POS software built (and since untouched) by father time when he hit puberty. Per our sources, RTI was doing about $15M in ARR, Nextep $20M in ARR, and SICOM the undisputed leader at $50M ARR.
Xenial has pulled out of RFP’s since June of 2019 and was nowhere to be found on the circuit of restaurant conferences in 2019. This was explained as an internal shuffle within Global: once Christopher Sebes, Xenial’s original visionary and president, departed in summer of 2019, Xenial was moved under Heartland. Heartland siphoned all the marketing dollars out of Xenial and focused them on their Heartland POS SMB efforts. It was also during that time that Heartland started axing Xenial’s 350-some employees to force Xenial’s attention on enterprise pilot customers in fast casual and what they would call “QSR-lite”.
Not surprisingly many Xenial executives left (and are still leaving). ” Xenial is now basically SICOM, which is, uh, not that inspiring,” shared one of them.
Today Xenial is in pilot with Dutch Bros, Mandarin Express, Denny’s, and Long John Silvers in a POS capacity. The legacy XPient IRIS above store platform was rebranded “Xenial Cloud” but is not actually Xenial in the POS sense, causing quite a bit of confusion in the market. For example, Taco Bell is a client of IRIS/Xenial Cloud, as is Denny’s, and the latter may migrate to Xenial POS in 2020 but the former won’t due to feature shortcomings, at least for a few years.
But how did Xenial POS win over some of their notable accounts? Let’s look at Long John Silvers, or LJS. LJS is a declining brand. It’s turned through several private equity companies over the past decade and uses old, old hardware. We were told part of the winning POS pitch to Long John Silvers involved reprovisioning 15-year-old Windows hardware to run on Xenial. We’d have believed it if Xenial were ported to run on Orchard OS, but absent that this won’t go down that well. In fact we think this becomes a support nightmare for Xenial, much as it was for Brink when they tried to run on really old hardware.
Despite the large logos, sales execution of Xenial is a bit thin, likely due to product that can’t back up the bark; in total Xenial POS has about 40 active sites as was shared with us. Not exactly great for $50M in investment. It’s almost like Global, a payments company, has no idea how to build and ship product…
The only bright spot for Global’s POS efforts seem to be in SMB, but on only one of their many POS platforms: Heartland POS. Heartland has effectively abandoned work on Digital Dining, Dinerware, Liquor POS, PC America, and XPient. Per the below graphic Heartland is anticipating adding 300 locations per month on HPOS. If you attended Heartland’s reseller conference in June you’d have seen that the near-exclusive focus of the conference was on Heartland POS. Not every reseller is thrilled by this, with literally ~95% of their customers represented by the legacy systems Heartland is abandoning, although there are 100 HPOS dealers with plans for 30 more.
The real issue is that Global spent a ton of money buying market share under the assumption that they could build the requisite cloud POS solutions to migrate the accounts onto over time. It’s actually a great strategy if you’re a banker wielding spreadsheets, but it’s a horrible strategy if you’re a product person and recognize that you’re not working inside a product organization.
How would we fix this?
For starters we’d fire a lot of people and replace them with product people. Then we’d spin up an entirely separate organization that was focused on product. We’d get a guaranteed, multi-year operating budget from Global and make sure they were fully aware we’d be focusing 100% on product, not on payments.
As quickly as we could get moving we’d start replicating transaction data off every legacy POS installation we had. This would cost hundreds of thousands of dollars and Shift4 has already started doing some of this (though we have some Shift4 concerns which we’ll save for a separate post) for the obvious reasons that follow.
Once we had that transaction data we’d build a number of partnerships to start demonstrating actual value to our existing customers as quickly as possible. If we tried to build every one of these products we’d spend way too much time and money getting something usable (which is why we’ve said 100 times that POS companies should not try monopolizing the stack). If we demonstrate value through new product this decreases the chances that our customers leave our POS by extending the life of their existing POS investment a little longer.
In parallel we’d be working on the replacement POS solution. Given how far behind Global is they need to buy a POS product. Toast is moving upmarket. Oracle is fixing Micros Simphony. Brink just instituted a new CEO who brought with him a software culture and execution excellence. Meanwhile Xenial is limited to customizing features for only four potential enterprise customers in one segment of the market (fast casual) without any realistic ability to move globally within 3 years (i.e. add international features, which is very hard). In fact, if Global doesn’t have an enterprise POS product in the next 12-18 months we think they’re going to be forced to write off the majority of the SICOM acquisition.
That’s right: if Global doesn’t give their large POS customers any confidence of a tangible, modern, enterprise-ready POS in the next year we predict many of them will leave. These customers are already shopping and they’ll start pulling out their pens to sign new agreements.
Kiss at least $300M goodbye.
(Note: we get the $300M number by summing the amount spent on Xenial ($50M) with the $50M from SICOM’s core business at a 5x revenue multiple. Realistically RTI goes to zero over the next few years as enterprise brands get the RTI functionality – which is rather laughable – from their POS companies with Nextep being the only surviving cockroach from the nuclear fallout.)
If we were Global we’d buy a POS company called MediaWorks. We wrote about them yesterday, but they’re a very under-the-radar POS brand primarily because they’ve focused internationally due to the distorted economics in the US POS market. The team behind MediaWorks built the POS software for McDonald’s, Panera, Subway, and other large brands, and has deployed everything from SMB to enterprise across both QSR/fast casual and table service segments. And the real feather in the cap is that they’ve done it internationally, which is very non-trivial.
The coup de gras for Global is that MediaWorks already has massive overlap with the SICOM customer base. MediaWorks is extremely cozy with 3G, the private equity group that owns RBI which houses restaurant brands Burger King, Popeyes, and Tim Hortons, all of which happen to be SICOM’s largest customers. In fact MediaWorks is so close that they’re already displacing SICOM’s opportunities in Brazil at Tim Hortons, Popepyes, and at over 800 Burger King locations, with active pilots in most of Mexico’s Burger King locations too.
Once we had our new POS in place we’d start transitioning customers by porting all the value-add solutions over to the new POS first. What do we mean?
Imagine if you partnered with a third party to bring X solution to one of your legacy POS customers. When your new POS was ready you’d tell the customer something like, “Hey, we see our X tool is generating $10,000 in annual ROI for your business. We’re going to start deprecating support for this X tool in 6 months and it will only be available on our new POS system. But we’re also expanding the capabilities of X and based upon your business it would generate $20,000 in ROI if you use it next year. The cost of upgrading to our new system is only $2,000. If you make the move you’ll net $8,000 in new ROI in the first year alone.”
Now envision doing this across a number of X solutions – moving POS systems gets compelling pretty quickly. Heartland is trying a bit of this on the SMB side by only launching new features for merchants that use their payments processing, but there’s zero ROI in that for the merchant.
Even after $500M in spending Global Payments hasn’t shown it knows how to create the actual value necessary to be anywhere near pitching this to its merchants. Seriously: if you can’t invest a few hundred thousand dollars in data replication across all your sites that is all the data on “strategy” anyone needs. Given this information we predict Xenial effectively dies within a year, Global doubles down on SMB with more poor product decisions but attrits accounts faster than they add them, and SICOM becomes a walking zombie until its customers depart for products built after the Hadeon Era.
If you’re a third party delivery company looking to go after stack solutions, or if you’re a competitive POS company, Heartland merchants would be near the top of our list for picking off while, unfortunately, Heartland’s dealers become collateral damage in this onslaught with little control over their attrition thanks to the lack of support by the ISV. And given our interactions with Global, we are not left with the impression that they care to fix these problems.
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