Shift4 Q3 Shareholder Letter Leaves Us Really, Really Baffled

Late to the party, but this isnt our full time job, so you’ll have to be patient.

We pick and choose what we have time to cover, and Shift4’s Q3 2021 earnings had a lot of good content to digest.

Their shareholder letter can be found below.

Here are the big things we saw.

New positioning

Shift4 is doing a clean rebrand it would seem. But one of their slides needs some more explanation:

Does increasing fees equate to trust? Outside of helping Shift4 meet their quarterly projections, what are those fees doing for their customers? We highly doubt any customer feels more entrusted to Shift4 with this shenanigans.

Major customer wins?

We’ve been told that that major wins in Shift4’s concessions portfolio are marketing wins, where Shift4 is losing money on the account for PR purposes. Nothing new here, and companies have been using marketing dollars to underwrite highbrow customers for years.

Shift4 notes that Shoney’s, a buffet restaurant, is piloting their new POS.

From a feature perspective, supporting a buffet-style restaurant is about the easiest shot on goal you can get. If Shoney’s isn’t happy with the product, it would likely mean many more years of development before Shift4 has a respectable chance of selling a restaurant cloud POS.

And as we’ve heard it, Shift4 has stopped development on their legacy POS systems, which we would have done as well.

Skeptical metrics

We’re skeptical on a few fronts.

The first is end to end processing.

Shift4 doesn’t have a compelling POS solution to convince larger merchants to move to their processing so we don’t get where these growth numbers are coming from.

We suspect it’s conversion of the SMB merchants Shift4 acquired through their POS deals, but many of those merchants are upgrading from Shift4’s legacy systems to a competitor’s cloud POS, as Shift4 doesn’t own a cloud POS system that we’ve found to be relevant for larger merchants.

Shift4 tries to demonstrate their growth in a slide but conveniently omitted Toast, who we would argue to be one of the most relevant analogues, which grew volume at more than 100% over the past year.

Second, organic growth.

We’re not sure what they’re winning. Larger merchants are leaving Shift4 POS in droves. We have no idea how they can compete with the likes of Toast or Square in the SMB part of the market either when they don’t invest in R&D.

The numbers just look very funny to us.

Lastly, data.

Shift4 talks about monetizing data but we haven’t seen anything. They’re still spending a paltry amount on R&D as a percentage of revenue. Oracle has about 300 engineers just dedicated to Simphony, and SpotOn now has something like 400 engineers after the Appetize acquisition.

And they’re hiring more still.

Data scientists aren’t cheap so we’re not sure what Shift4 is cooking here.

You make HOW MUCH payments spread!?

Yowsers, Shift4 is making a blended spread of 74 bps… which includes tier 1 hotels and casinos, so their SMB customers have to absolutely be getting crushed.

This isn’t sustainable and invites competition as we’ve previously noted.

Even in Shift4’s gateway conversion example they expect to earn 50 bps on a merchant doing $1.5M of card volume.

Bro.

Seriously?

Toast is getting skewered for raking 55 bps of margin. And that includes a huge shift to higher cost card not present that won’t last.

And Toast’s average merchant is nearly a third the size of the $1.5M of annual gross processing volume (GPV) Shift4 is demonstrating in this example:

$25.4B GPV / 40,000 locations = $635K GP based on 2020 full year Toast data.

As merchants get larger they’re expected to pay much less, or do you want us to believe that MGM is going to pay Shift4 200 bps of payments margin?

Who’s believing these numbers?

Big skewing of numbers thanks to large merchants

It’s clear to us that a lot of Shift4’s numbers are being skewed by some large accounts. This would explain the large increase in merchant volume (reported as 33% CAGR from 2019) while simultaneously explain how Shift4 grew volume faster than revenue: look at the 46% volume growth but only 31% revenue growth.

We know Shift4 has had, by our counts, at least 3 fee increases in 2021, so one would expect margins to go up, but there must have been a large win on volume somewhere.

How else could you explain this?

Rebrand includes Edgewater POS -> Skytab POS

Shift4 has wisely rebranded their POS efforts to be consistent with their handheld mobile device since POS is really just becoming an ordering node (something that Qu POS realized a long, long time ago).

But while Shift4 talks about the potential market for Skytab, we’re having trouble reconciling that with current traction, and what we see in the market.

For starters, none of Shift4’s reseller partners have had impressive comments on the product. It’s still a lightweight Clover analogue as we hear it, relegated to use at micro merchants. We’d chalk this up to a function of under investment and a lack of cultural know-how (Shift4 is core payments, not software).

Second, Shift4 has to be losing material market share to the Toasts and Squares of the world.

Many of Shift4’s resellers have also transitioned to sell SpotOn. Why?

SpotOn is investing aggressively in R&D and giving us relevant products to sell.

Shift4 reseller

This would mean that the potential TAM Shift4 mentions in their report (slide 25) is rapidly dwindling.

Lastly, Shift4 has mentioned their 7,000 sales partners at multiple points in the presentation.

Sure, that’s a nominally impressive number, but remember that Heartland has 248 “partners” who generate a meager 500 net new sites a year.

We think the same thing is going on here:

Shift4 only managed to install 1,200 sites in 12 months with 7,000 partners.

While Heartland looks to be generating about 2 installations per partner per year, Shift4 is ONLY generating 0.17 sites per partner per year.

This install number can be skewed both ways:

Maybe Shift4 only allowed certain partners to sell it over the past year, but at the same time maybe Shift4 is counting their original Skytab device as a Skytab POS installation.

Either way something here isn’t fully baked.

Remember that Toast added 13,000 rooftops from 2019-2020 and was on pace to add 16,000 in 2021.

There’s no way Shift4 will keep pace with competitors at this rate, despite what their CAGR slide says.

Again, we’re having trouble reconciling their numbers just looking at broader industry metrics.

Ridiculously expensive customer acquisition, ethical questions

Every one of Shift4’s competitors will point out that Shift4’s CEO made so much money on payments he literally flew to space.

What we find a little sad is how Shift4 used this PR to ensnare St Jude’s Hospital – and to a lesser extent SpaceX – onto their payments processing.

Abstract yourself for a second and imagine this scenario.

St. Judes’s: Sorry ma’am, we won’t be able to save your daughter.

Mom: OMG, what do you mean?!

St. Jude’s: Well, it turns out we’re about 4% short of the money needed for your daughter’s treatment…

Shift4: Hey guys, we’re hitting our earnings! Look how much money we’re making from processing St. Jude’s after all our rate increases!

Shift4 should process Jt. Jude’s for free.

Even though Shift4’s CEO raised money for Jt. Jude’s, something here doesn’t sit well with us.

Toast comparison falls flat

Shift4 tries to compare itself to Toast at the last minute, using selective metrics, mind you, but there are very few similarities.

Shift4’s positioning is that Shift4 is underpriced given Toast’s multiples, but anyone who understands software had a great LOL over this.

Toast invests in material R&D.

Toast’s product is much more defensible and can actually serve a large portion of the TAM Shift4 wishes it had in the restaurant vertical.

Toast’s distribution has proven superior despite what Shift4 is claiming (16,000 annual additions for Toast vs 1,200 for Shift4).

Toast’s lack of in-house payments is irrelevant.

Toast could offer payments to any of the industries Shift4 claims to have given their buy rate but they know that software, not gateways, are going to win the “end to end” volume over the next decade, and even Toast will concede they can’t deliver relevant software for multiple verticals.

Shift4 needs to get some real software. Anyone who believes payments will still be standalone in the near future is clearly misinformed.