FOUR 9.11.26

It's possible that they’re running out of window or ceiling for these types of things, if that's what you're implying. Maybe there was a window where these businesses with multiple pieces of software in card-present environments were just a mess, and they were able to take advantage of that. Based on the work we did, I think they solved a genuinely difficult problem. If you build software integrations and the infrastructure that you need to put together all those payment environments, I think share can move pretty quickly in that sense. Once you solve a painful problem that competitors or maybe even their own customers had ignored for a long time, it changes things.

Even right now, they're facing this. The product had to be much better to overcome whatever was in place before, because they've acquired some hotel properties and have also realized, in doing so, that hotels aren't always eager to rip out their payment infrastructure. If a chain is willing to switch, the new product probably has to be much better. Based on what they've said and the company's history, the merchant experience was horrible back then, and the burden of integrating these things was pretty high.

They could be out of runway to do this. They're obviously a large player in hospitality. I don't think they've reached the seventh or eighth inning there, but that's an argument for why the core business is genuinely good. Maybe they did harvest the easy share gains and hotels and arenas are now saturated, but if that's true, that would change the growth rate, not the quality of the installed customer base. Does that make sense? If you have a 40% share in a sticky vertical such as hotels, the economics probably don’t support winning a lot of new logos. It’s probably a combination of what they’ve done historically. They already won these deals, retain the customer, process more volume over time, cross-sell more products, add locations, or do whatever they can on price. That could still be a good business.

If Shift4 were a commodity payment processor, I think it would be difficult to explain how they went from no presence in some of these verticals to becoming a pretty dominant presence, and also held those positions or market share while spreads have maintained, which isn’t what you see across the payment space. In almost every case, you see spreads decrease. I guess the question is, in that position, can they still produce enough growth or incremental growth now that the white space is smaller? Maybe that's what you're getting at. It's a great question. I’d like to just think about it a little bit more. Looking at hotels and arenas may just prove they can build a pretty strong position, but it doesn't obviously clear up the next 5 to 10 years, if that makes sense.

It's a hard question, and you could probably interpret fast share gain in one of a couple of ways. As you said, it could be that they actually have a moat, have built a better product, solved a difficult problem, and it's hard to replace. Or it could be a low barrier thing. But there's been no evidence so far in the core business that things are deteriorating even as the white space decreases. So I think we're kind of hanging our hat on that. They've held the leading position. They have hundreds of software integrations there. The Americas' payments segment is still growing nicely. Spreads have held up.

That's why I get excited thinking about how little significant growth is required. They've said that if we stop doing M&A, we could grow at a mid-teens rate over the years. I don't really take that at face value, but I do think a good business can quickly gain market share and then keep growing once it becomes large. They're still showing that in the Americas payments segment, but I think it's being obscured by other factors, whether it's capital allocation or management credibility.

Before Global Blue, we thought this business had the potential to become a compounder. It's very different from the payment processors. It's not commoditized in our view, and they're growing faster than all of them. With a decent amount of organic growth, there's some pretty good operating leverage in the business and some margin expansion. They're going to generate a lot of cash, and then they can do things like buy back stock and some M&A, not on the Global Blue scale, but some M&A here and there. You have a real chance to grow free cash flow per share at a significant rate. Then Global Blue happens. I think it's muddied what was originally, when Jared Isaacman was involved, a really good story, probably why the stock got up to $120. To be fair, we absolutely wish that he were still involved. I think the core business is still good, despite some noise in a number of areas right now.

I think there's still some gateway conversion in there. We haven't really underwritten anything close to mid-teens. I'm not taking that at face value until it's demonstrated. There's a difference between reported organic growth and whatever is truly organic, which is the big debate. I wouldn’t equate the 11% of reported organic growth with pure internally sourced growth. When you buy a business, once those acquired businesses' anniversary is over a year, whatever gateway conversion and end-to-end stuff they did, cross-sell, can enter the calculation of organic growth. Some portion of it will always be the return on the capital they deployed in prior years.

It does seem like the bear case takes that criticism a little too far. They don't disclose it, which makes it difficult. It's like trying to triangulate or back into a number, but I think the bigger question isn't so much whether it's going to be mid-teens as whether it's 7%-8% or 2%-3%. Whatever they've done in the last couple of quarters or since we've been involved makes it hard to believe that organic growth is significantly lower than the narrative suggests.

If the underlying business were actually growing low single digits, but they were trying to disguise that via M&A or accounting, which is what I've seen thrown at the wall, I’d definitely expect a lot more deterioration in volumes, and I’d expect to see fewer wins on the merchant side. I’d expect spreads to come down a bit, or same-store activity to look horrible, without geopolitical stuff or whatever else they're being affected by. If organic growth is overstated a bit, I think the number is still high enough to support a pretty good growth rate or rate of return from here. If not, then there's a totally different conversation.

How much of that organic growth comes from the gateway conversion is also not disclosed. We haven't been able to successfully pull apart same-store growth, conversion, new logo, and whatever they're doing from cross-sell. We do know that gateway and end-to-end conversions are meaningful contributors, because that's obviously how they built the business. But I don't think that means that it's most of it. I think the math that we did was organic growth equals some piece of same-store sales plus new logo wins, plus what they're doing on the conversion side and cross-sell, plus whatever is happening on the pricing side, minus our estimate of churn. The weight of each of those buckets is highly estimated by us. We can back into a double-digit number, but I wouldn’t place any confidence in a specific number we've derived; we're just trying to be directionally correct. That's how we've thought about it. It's a very difficult question to answer.

I think solving for the software integration piece before doing M&A is pretty significant if you're going to go this route. They've just been so good historically at buying these businesses and then converting the unmonetized payment volume. I think it would be difficult without a large head start. Not that you need to be first in the industry, but I think it would be difficult without having spent decades doing that, to just start buying these businesses and then trying to integrate them or capture payment volume. That's basically what's come back in our primary work.

Where I diverge from maybe most people who are trying to figure this out is that we feel fairly comfortable with the moat here and the competitive position. But it's the other parts that make the stock work and that will force the incremental buyer to get involved. These are the parts that are difficult for us right now. I think that at today's valuation, the expectations are very low. But I’d prefer, at this stage, to be honest, if they stopped doing M&A of significant size. They've bucketed into a couple of categories of wanting to have a good strategic asset, buying a bunch of customer base, which is what they did with Global Blue.

At this point, they're about 3.5x to 3.7x levered. They're trying to integrate the largest acquisition that they've ever done. There are some concerns about the balance sheet for cash flow conversion. So I’d like to see them just take a break, monetize their existing payment volume, and then do things like buy back stock or pay down debt. We've been pretty vocal with management. We spent a decent amount of time with them. We've been pretty vocal about our desire to see them do that, have written them lengthy communications, and shared our math on both debt paydown and share repurchases. I’d be very happy if they put it on pause for a few quarters or maybe 12 to 18 months and focused on the other side of capital allocation.

But I do think that when good opportunities come up, like the acquisition they disclosed in the Q2 10-Q, which appears to be an A2A payments company, it probably makes strategic sense to help your customers save money or reduce fees. I have mixed feelings about it. At this point, I’d like to see some of the other parts of the story cleaned up again. In conversation with them and just looking at the industry, they may not be able to make a Revel-type acquisition, which would get you into a significant number of arenas immediately with this super valuable piece of software. But there's probably a decent amount of M&A to do within the core business, both in the U.S. and globally.

The runway didn't seem to be slowing down whatsoever. I feel like a lot of things were put on pause after Global Blue was done, so they could ensure they integrated it correctly, achieve synergies, get the cost structure right, and get the growth rate where it needs to be. Then you have things that further exacerbated the issue, like Middle East stuff and whatever's happening with the consumer. There's some softness. I don't know if, since they acquired Global Blue, we're seeing a normalized version of the business. They were just at a conference and discussed their expectations for Global Blue to be a mid-single-digit grower in 2026. But it's the first year of the deal, and so they want to be intentionally conservative. What does that mean? That normalized growth for Global Blue is much higher.

I think there are so many moving parts at this stage that another acquisition of any considerable size would sort of muddy the picture even further. I think part of the reason the stock has been punished is maybe a small credibility issue, but also because they're having difficulty committing to a clear capital allocation path. Long-winded way of saying, I do think that there's significant runway for more M&A, and I do think it would be difficult for a competitor to just start doing these types of deals and integrate them seamlessly into software without their cost structures going up, without having to add additional headcount. I do think they should do things if it makes sense, but I’d probably like to see them hit the brakes on M&A for a bit and focus on other things.

If you look at last month's Q2 results and the stock's reaction, I think it was down 25% after they reported a very good quarter. But they had to reduce guidance again. It was something like a $25 million impact on gross revenue, less network fees, and a 3% impact on EBITDA due to the Middle East conflict. They lowered Q3 guidance. Then, the full-year free cash flow conversion came down a bit. I think that was the revision from where they were to where they went, and the stock was down like 25%. There's a little bit of a shoot-first, ask-questions-later sort of mentality with the stock right now. They probably earned that, to be fair. If they do more M&A from here, aside from the deal they just disclosed in the 10-K, then I think that the market would react badly. That's not a good reason to stop doing M&A, but I think there's just a lot of moving parts right now that maybe they should try to address sort of one by one, if that makes sense.