Shift4 is the anti-Toast

It is more dependent on enterprise, global, multi-vertical, and M&A

Key insights in this post

• Shift4 & Toast have similarities

  • They have similar global TPV

  • They both earn most of their revenue from payments processing

  • They both have Restaurants as a key vertical

• They have more differences that similarities

  • Shift4 has grown via M&A while almost all Toast growth is organic

  • Shift 4 has been global from early on, while Toast just began to globalize

  • Shift 4 serves many Enterprises, while Toast focused on SMB until recently

  • Shift 4 is multi-vertical, while Toast is primarily still restaurants

• M&A focus

  • Shift4 just closed its Global Blue acquisition which makes it more global, adds a vertical, and introduces new kinds of revenue streams

  • Toast has mostly acquired companies that that increase share-of-wallet at single-location restaurants; the acquisitions added ARPU to the core

  • Shift 4’s strategy serves as a substitute for R&D investment but leaves integration challenges to rationalize overlapping code bases

• Globalization

  • Shift4 acquired going concerns outside the US in Europe, Australia & NZ, and elsewhere, creating complexity across several code bases

  • Toast is globalizing on its core platform, first in Canada, Ireland & the UK; they are executing their US model across new geographies

• Segment focus

  • Shift4 serves many Enterprise-class merchants in Hotels, Chain Restaurants, sports venues and elsewhere;

    • It is often the payment processor for another company’s software

    • It earns IC+ payments margins of ~5bp

    • It’s SMB segment is multi-vertical and geographically fragmented; in some markets, acquiring margins are lower

  • Toast is overwhelmingly SMB

    • For SMB it is both the software provider and the payment processor at margins of 60-100bp; it may also provide VAS such as lending

    • For its nascent enterprise segment it is generally just the software provider

• Vertical focus

  • Shift4’s serves 10+ verticals with Restaurants, Hospitality & Luxury Retail (Global Blue) as the top 3 and the other 8 accounting for 20-25% of TPV

    • Each vertical requires tailored functionality, raising costs

    • They are not a share leader in all but one (Sports Venues) and lack scale

  • Toast is clear #1 in US SMB Restaurants with as much as 50% share and has only recently added “Food-related retail” as a second vertical

• Conclusions: Toast is a simpler business by design: Focus leads to superior results

  • Toast’s model generates more organic growth and earnings than Shift4’s on a similar TPV base, even though both companies focus on restaurants

  • Shift4 is underinvested in R&D and distribution; areas that could lead to higher margins and more organic growth

  • Instead, Shift4 uses M&A and partnerships to grow inorganically across verticals, segments, & geographies but, then has all the complexity challenges associated with that strategy

    ---

---

Introduction

I have often been asked my views on Shift4, but, I never actually thought about the company deeply before sitting down to write this. I almost never see them in the wild at small businesses: 2 local restaurants use Sky Tab (one is a small chain) and one Revel kiosk in a nearby mall. That’s it. I sometimes see the Shift4 logo on a standard POS terminal as part of a VAR deployment.

They have more of an enterprise focus that other payments Fintechs, serving stadiums and hotels for example. They are multi-vertical although Restaurants are their biggest (They claim to be #2 in the US). They are further along in globalization than several other Fintechs. And critically, they have grown inorganically more than most other Fintechs; most recently with Global Blue.

They are different from every other name I follow. As I sat down to write this it occurred to me that the strategies that fuel Shift4 growth are almost the opposite of what fuels Toast growth.

• Toast has rarely made acquisitions; when it does it is to extend along the value chain to capture share-of-wallet, not to diversify and capture share

• Toast is US-focused but, has now begun to globalize

• Toast is SMB-focused but, has now begun to tackle Enterprise

• Toast was single-vertical until a recent diversification into Food-Related Retail

The two entities have similar TPVs, but got there in different ways. I thought it might be a good lens to assess Shift4.

Q3 performance – Inorganic vs. Organic growth

Shift4 showed remarkable QoQ growth until you look deeper:

TPV grew 36% and Payments Revenue 22%, but network fees only grew 6%. That only happens if a good part of TPV is not from card processing, and it isn’t. During Q2, Shift4 closed the Global Blue acquisition.

Global Blue is a global, duty-free goods processor. Tax Free Shopping (TFS) commissions make up 80%+ of revenue, but would not incur network fees. Another 7% is Dynamic Currency Conversion fees (DCC). Acquiring is only 3.5%. Shift4 counts all these as payments revenue, but DCC & TFS are not classic acquiring, but more like VAS.

Global Blue accounted for $156M of the $189M in Payments revenue growth. Without Global Blue, payments revenue would have grown QoQ at ~5% -- very similar to the growth in Network Fees. The acquisition prevented an actual decline in non-payments revenue. Global Blue must also have accounted for a material portion of TPV growth. I would expect QoQ growth to mimic Network Fee growth again in Q4.

Contrast this to Q3 Toast, who grew TPV 3% QoQ but Gross profit on “Financial Technology Solutions” 10%. Toast did no M&A in the last two years, and generally buys companies that extends its value chain rather than diversifies its revenue stream:

• 2023: Delphi Display Systems for digital display and drive-thru capabilities

• 2022: Sling for payroll and team management capabilities

• 2021: xtraChef for accounts payable and inventory management capabilities

In other words, Toast pursues a share-of-wallet strategy to cross-sell more services to its customers. It doesn’t buy into adjacent segments or verticals or geogrphies.

In contrast, Shift4 has a history of diversification acquisitions:

While many of these services could also be cross-sold, most of them were pure diversification into new products, segments, verticals or geographies. The important thing for all of them was that they brought in new customers and TPV rather than increasing share-of-wallet at incumbent customers

The challenge with all this M&A-driven growth is platform proliferation. Shift4 can’t get much operating leverage until it consolidates all these platforms to a common code base. There is some mention of this activity in the investor presentations. The hard part is getting customers to convert to the target system. Lightspeed, FIS, & Fiserv all faced the same trade-off between customer retention and cost reduction. They have typically chosen customer retention.

Toast’s acquisitions were additions to the value chain that required integration, not conversion. Given the API-centric nature of modern technology, integration is less of a disruption for customers than converting core platforms.

US versus International

Toast has begun expanding internationally, starting with Canada, the UK, and Ireland. The international share of revenue or locations is not reported, likely because it is not material. In contrast, Shift4 has a chart on Q3 page 6 that shows ~20% of revenue outside the Americas in Q3 24 and ~40% today; the recent globalization is mostly due to the Global Blue acquisition.

Two recent acquisitions added substantially to the global SMB count:

• SmartPay added 40K locations in Australia & New Zealand

• Vectron added 65K locations in Germany and across Europe

Those two alone account for over half the ~200K locations. In the US, the Revel acquisition added only 7K+ locations, with ~20% outside the US.

Shift4 also bought two eCommerce specialists: Finaro in Europe and 3dCart in the US. In contrast, Toast has modest eCommerce revenue from providing online ordering for its clients.

All Toast’s nascent global growth is organic sales whereas most of Shift4 global growth is M&A, most recently via Global Blue.

Narrow vertical versus multi-vertical

As we know, Toast is almost a restaurant pure-play. It recently diversified organically into Food-Related Retail.; but, that is still nascent.

In contrast, Shift4 is multi-vertical. Global Blue complicates the vertical view, so I will use Q2 results to review scale by vertical. A chart in the Q2 investor presentation (Page 6) show TPV by vertical but doesn’t have a scale; eyeballing suggests a splintered view:

• Restaurants are ~40% of quarterly TPV, or – $20B globally, of which I would guess 80%/$16B is US.

• Hospitality (Hotels), are ~15% of quarterly TPV or $15B globally; this vertical may be more globally balanced than the others

• Unified commerce, is the remaining ~45% or $27B globally with an unclear split between US and Non-US. This is a grab bag of 8+ listed sub-verticals

Like Toast, restaurants are the core, but that core is only 40% of the total for Shift4.

Restaurants (~40%)

I was surprised that Shift4 claims to be #2 in US restaurants. They don’t disclose a source or methodology. Assuming Toast is #1, Shift4 has roughly one-third of Toast’s $50B Q2 TPV in the US. If it is #2, it is a distant #2. I would have thought Clover or Square was #2 (with the other being #3).

My instinct may be true in small business, but if we add Enterprise, the answer changes. The most recent census data shows 534K US restaurant locations from which I estimated share of TPV:

Micro

Think food trucks and farmers markets. These locations may use Square’s “hockey puck” or tap-to-phone technology to accept cards. Clover Go serves the same market. Margins are high (100bps+) but so is churn, fraud and overhead. Square reaches these locations via direct marketing while Clover reaches them via bank branches and ISOs. Shift4 has an offering here but not a distribution channel. I suspect its share is low, but it may not be worth pursuing given the distribution disadvantage.

Larger, single-location

This is the sweet spot for locations, TPV & margin, and is where Toast may have ~50% US share. Payments margins are 60-100bps. Toast reaches prospects through a direct sales force and virality – it is becoming the default choice in this segment. Toast monetizes via Payments revenue, lending revenue and software revenue.

Shift4 has a lending arm but I could find no detail on how big it is. Square Capital has some public data via Square Bank as I discussed last week. Clover Capital is also opaque.

Once again, Shift4 doesn’t discuss their distribution approach to this segment. Toast uses field sales, Square was direct marketing and now has field sales as well, Clover is indirect via bank branches. It isn’t clear how Shift4 distributes although it seems they may partner with some non-payments POS systems in a VAR arrangement.

Chains (Enterprise restaurants)

Toast, Square & Clover are all moving up-market into enterprise restaurants, most famously with Square serving Shake Shack. Chain restaurants have historically been served by two software solutions I don’t often talk about: NCR Voyix’s Aloha and Oracle’s Simphony (Micros).

Simphony claims 275K locations globally while 3rd-parties put Aloha at 100K globally. Assuming half are US, the two might serve ~200K domestic locations – although the Census count for chain locations totals 135K. Nevertheless, there isn’t much room for Shift4/SkyTab to be #2.

Except that Aloha & Simphony historically didn’t provide payments, just software. Large chains source acquiring on the IC+ pricing model at pennies per transaction. It doesn’t pay for a non-scale software provider to serve them; instead Aloha & Simphony earn their revenue on the software, not payments. Toast & Square are transparent about this in their disclosures about moving upmarket.

It seems that Shift4 often provides the payments in partnership with someone else’s software, in particular Oracle’s Simphony (Micros). That allows them to claim the location as a customer, but without much of the associated revenue. They report partnering with Simphony for “white-glove sales, service and support for Oracle Micros POS”. When I do see Shift4 it is usually at a Chain location using a standard POS Terminal rather than the Skytab tablet solution. Corporate cafeteria’s seem to be a common venue for them.

So their claim to be #2 in US Restaurants may measure pure payments processing in Enterprise rather than E2E revenue across all segments. In SMB Toast keeps the software revenue where Shift4 has to share it with Oracle. Both would make limited revenue on payment processing or VAS.

Hospitality

I was again surprised that Shift4 reported it was #1 in this vertical. I thought Oracle Opera (Micros) was the market leader. A quick google search suggested “Oracle holds 50% market share for property management systems among the top 100 global hotel companies”. Another site said it is used at 40K properties globally.

Hotels need to integrate all the payments venues under their roof: The front desk, the on-site restaurant, spa, gift shop, etc. That allows them to produce a unified bill. This usually requires what is known as a Property Management System (PMS).

Shift4 seems to partner with PMS providers, including Oracle, to provide the payment processing for hotels. It earns pennies per transaction but doesn’t usually control the commanding heights (the PMS). Sure enough, the actual claim is “#1 … to deliver the entire payments value chain under one roof”. That may be why Hotels are a big contributor to TPV but a modest contributor to revenue.

Unified Commerce

This is a catch-all phrase for “all other verticals”. On their web site they list:

In two of these, Shift4 reports #1 rank: US Sports & Entertainment and Global Luxury Retail. These seem credible. They have major stadium deals in the US and Global Blue is big internationally. The other verticals are just a grab bag of small stakes.

For example, most of their 100K+ small merchants are likely in the Retail vertical. The US alone has 10M+ merchants in this segment. Major airlines typically process via WorldPay (now GPN), Elavon, Fiserv or JPM. Shift4’s airline customers are likely smaller carriers. Etc.

In eCommerce, they made one acquisition in the EU and one in the US, but those must pale in comparison to Adyen & Stripe. Total Q3 Unified Commerce TPV is roughly $25B, a fraction of which is eCommerce; but in Q3, Adyen did $400B TPV and on Shopify alone, Stripe did $90B+. Shift4 is not material.

The challenge here is that each vertical needs distinct software support, which is expensive to do. Without scale, these verticals likely deliver modest profitability. Concentrating software spend in its bigger verticals would be more productive.

Small Business versus Enterprise

Elsewhere in the presentation Shift4 points out that card processing margins (i.e., acquiring) outside the US are lower due to interchange caps andother geographic differences. But, outside the US, Shift4 also processes alternative payment methods where margins are higher. Here is Shift4’s visualization of margin by vertical but without a scale:

You can see that Lodging & “All other” is at a low spread while restaurants must be close to 100bps. We can roughly calculate Toast’s Q3 payments margin at 61bps.

The Toast figure may include lending while the Shift4 figure includes those TFS commissions. Shift4 also includes some non-traditional payments income that likely operate on higher margins than card processing.

“Included in payments-based revenue are fees earned from our international payments platform, strategic enterprise merchant relationships, and alternative payments methods, including cryptocurrency, gift cards and stock donations.”

Toast TPV is just card volumes.

For the US at least, I am confident that Enterprise margin per unit of TPV is under 5bps as it is typically at IC+ pricing with minimal non-card volume. Assuming Shift 4’s US SMB margin is 100bps, and its US Enterprise margin is ~5bps, then 40% Enterprise TPV share would lead to a “blended” margin of 62bp. Given the focus on Hotels, Stadiums, Airlines, Casinos and QSR Chains I can believe 40% of US TPV is Enterprise.

In Q1 earnings, Shift4 reported serving 195 Enterprise clients and surely has increased that count since then. It defines Enterprise at a reasonable >$100M in annual TPV.

In contrast, Toast is new to Enterprise and has won just a few national chains. TPV growth is good proxy for revenue growth at Toast, but not at Shift4. Enterprise growth adds more TPV than Revenue. See Fiserv’s Merchant Solutions investor reporting for a more transparent treatment of this phenomenon.

Conclusions

Toast’s market cap is over 3x Shift4’s despite almost identical TPV. Both stocks are down for the year, Toast by 8%, Shift4 by 35% as I write this. So, nothing I wrote above should surprise anyone. I just add a lot of detail.

It is not that Shift4 has a bad business, it just means their choices add complexity:

• They need to keep doing M&A because their distribution channels are not as effective and they don’t have ARPU opportunities in Enterprise

• They need to support a global business across many markets with localized infrastructure spread across many products

• Their TPV has a high share of Enterprise where revenue per transaction is low

• They need to spread R&D spend across too many verticals and platforms rather than focusing it on a few champions

This combination produces a different expense mix than Toast. Both companies had similar Q3 operating expenses, but the mix was different. A few things that jumped out at me in the 10-Q’s were:

• Toast spent $144M on Sales & Marketing (virtually all US) while Shift4 spends $168M spread over two line-items:

  • $8M globally in Advertising & Marketing across all geographies and verticals

  • $160M globally in “Other Cost of Sales” (likely distribution costs)

• Toast spent $102M on R&D while Shift4 doesn’t disclose this figure. Instead Shift4 seems to buy its new technology via M&A

  • G&A costs of $188M increased “primarily due to expenses associated with our continued growth, which includes the impact of our recent acquisitions”

  • Professional services costs of $35M increased “primarily driven by higher acquisition-related costs”

  • Depreciation & amortization expense of $85M increased “primarily due to the amortization of intangible assets in connection with the recent acquisition of Global Blue”

• G&A at Toast was $102M while it was $188M at Shift4, partially due to M&A

The two spent about the same on Sales & Marketing but Toast got more organic growth out of theirs. Shift4 carries higher overheads, partially to manage a more complex business and partially to keep the M&A machine going. Getting down to fewer platforms to reduce costs risks losing customers. Focusing on Enterprise grows TPV faster than revenue.

Toast has a far less complex business model, but is adding complexity with new verticals and geographies and is itself moving into Enterprise. But these are organic moves on a single code base. Even after this diversification, Toast will still be a simpler business than Shift4.