Shift4 Payments, Inc. Q3 FY2021 Earnings Call

Hello and welcome to the Shift4 Third Quarter 2021 Earnings Call. My name is Emily, and I will be coordinating your call today. I'll now turn the call over to our host, Tom McCrohan, Head of Investor Relations. Please go ahead.

Thank you, operator. I'd like to welcome everyone to Shift4's earnings conference call for the three months ended September 30, 2021. Before we begin, I'd like to remind everyone that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding management's plans, strategies, goals, and objectives; the expected impact of COVID-19 on our business and industry, including with respect to economic recovery, increases in vaccination rates, the reopening of the country, and any volume recovery by us; gateway penetration and spend seen by our gateway merchants; expectations regarding new customers, acquisitions, and other transactions; and anticipated financial performance including our financial outlook for the year ended December 31, 2021; and any other comments regarding future operating performance. These statements are neither promises nor guarantees but involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. Factors discussed in the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2020, as updated by our quarterly report on Form 10-Q for the nine months ended September 30, 2021 and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the forward-looking statements made on this call. Any such forward-looking statements represent management's estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. In addition, we may also reference certain non-GAAP measures on this call, which are reconciled to the nearest GAAP measures in the company's earnings release, which can be found on our Investor Relations website at investors.shift4.com. Lastly, we're hosting our Investor Field Day event later today at Allegiant Stadium in Las Vegas. And as a reminder, the presentation portion of the event will be webcast and begin at 12:00 noon, Eastern Time, 9:00 AM Pacific. The webcast link can be found under the Events section of our Investor Relations website, investors.shift4.com. We encourage you to tune in at noon today to hear from our executive management team regarding how the company is positioned to deliver superior results in the months and years ahead. And with that, let me turn the call over to our Founder and Chief Executive, Jared Isaacman.

Thank you, Tom. Good morning, everyone. Today is significant, and we have a lot to discuss. As you may have seen, Shift4 reported strong results this morning, including end-to-end volume of $13.5 billion, which is a 90% increase compared to the third quarter last year and nearly 130% higher than the same period in 2019. Our quarterly volume represents record production levels for the company. We also reported impressive revenue and adjusted EBITDA for the quarter, with gross revenue less network fees up nearly 70% year-over-year and adjusted EBITDA margins increasing by 38%. Our adjusted EBITDA margins have grown by almost 500 basis points compared to the third quarter of last year and about 450 basis points sequentially, showcasing our scale and operational leverage. This expansion occurred despite increased investments to explore new verticals, which I'm excited to discuss shortly and will detail during our Investor Field Day. While our performance is commendable compared to our strongest competitors, it’s clear that our volumes in parts of August and throughout September didn’t meet our expectations, likely due to the COVID Delta variant. There were notable remarks from airline and hotel executives indicating that fall travel did not reach summer forecasts. I would like to concentrate my comments on three key areas: our core integrated payment performance, the remarkable progress we've made since our IPO, and the transformation that is on the horizon. This will serve as a brief overview of what we plan to elaborate on during our Investor Field Day today. First, our core integrated payments business, which enables us to stand out and compete in the challenging restaurant, hospitality, and specialty retail sectors, is performing exceptionally well. As a reminder, when we collaborate with our software partners, we win across a broad addressable market and transition customers from our gateway platform to our end-to-end platform, with over 99% of transactions processed at Shift4 being integrated. Success in these sectors hinges on software integrations. At the time of our IPO, we had about 350 unique software integrations. In the past 18 months, that number has increased to over 425, with many recent additions being modern cloud-based solutions. Many of our merchants require several software integrations covering multiple versions, making it nearly impossible to replicate our integration library. Our gateway volume has grown to nearly $170 billion since the last quarter, making it exceptionally defensible. This volume, closely tied to our gateway, connects to virtually every legacy merchant acquirer. It represents a huge economic opportunity with increased gross profit potential from moving to our end-to-end platform. The growth and resilience in volume are noteworthy. At Shift4, our rapid growth can sometimes overshadow the challenges of differentiating through technology, increasing volume, and achieving meaningful spread. Many of our competitors do not even report volume growth. At Shift4, we are expanding volumes rapidly with larger, more complex merchants, which can lead to confusion about how a mix shift upmarket, with higher merchant revenues, impacts spread compression. In reality, and as you will see during our Investor Field Day presentation, our spreads have remained stable or even increased in our core sectors despite perceived competitive pressures. Additionally, we provide value through technology. Merchants are not opting for non-integrated solutions. Legacy acquirers with many non-integrated merchants are losing market share and moving towards technology-driven platforms like Shift4. We have developed technology to address issues such as pay-at-table, order-at-table, QR code payments, online ordering, loyalty, business intelligence, and we will introduce a new comprehensive POS platform shortly. We previously mentioned our carbohydrate-reducing platform, which we have now named SkyTab POS. It's already deployed in over 2,000 merchant locations, including the United Center. This modern hybrid cloud software is feature-rich and grounded in a customer experience-centric philosophy. SkyTab POS is expected to drive additional SaaS revenue as about 85% of the 125,000 restaurants we serve currently pay minimal or no SaaS fees. It will also create new revenue opportunities as we introduce payroll services, capital, and monetize our marketplace platform. We anticipate that our extensive distribution partners will achieve success in this dynamic addressable market, improving margins as customers transition to a single, modern, and highly supportive platform. We are eager to share more details about SkyTab POS during our Investor Field Day. Our confidence in the competitive advantage of our core integrated payment business is what has encouraged us since our IPO to explore several new and fast-growing verticals. Since the IPO, we have invested around $200 million in both organic and inorganic initiatives to strengthen our core while expanding our total addressable market, bringing our integrated payment expertise into three new sectors: gaming, sports and entertainment, and e-commerce. Along the way, we have generated an additional $45 million in revenue, just beginning to tap into the payments potential within these sectors. This is primarily why we are raising our 2021 guidance for gross revenue less network fees. We have made significant strides across these three new verticals, including successes in the stadium sector with Toyota Stadium in Frisco, Texas, and T-Mobile Arena in Las Vegas. We currently have over 80 venues and sports teams using our Shift4 software and payment services and are thrilled with our decision to enter this market through our acquisition of VenueNext earlier this year. We also secured partnerships with several soccer teams during the quarter, including D.C. United and the Los Angeles Football Club. We are winning significant business away from competitors in industry verticals that were previously seen as too complex to switch. Through our 2020 acquisition of 3dcart, now Shift4Shop, we have increased the number of sites to over 72,000 and launched a cryptocurrency acceptance service with BitPay, alongside advancing several strategic partnerships and securing notable clients like adventure gear company, HIMALI. We continue to enhance the product by improving user experience, adding templates, and integrating with our restaurant products to develop a full-featured platform for restaurants. Lastly, as a newcomer in the gaming industry, we now hold eight gaming licenses and have formed several integrations with gaming software vendors, merchants, and alternative payment methods, all vital for competing in this vibrant new sector. We have announced preferred payment agreements with BetMGM and expect to have multiple relationships processing payments with us soon. We have built our gaming specialization organically by leveraging our expertise in in-venue gaming. The Las Vegas Strip has a relationship with Shift4, along with our strong position in stadiums. We made these investments while still expanding margins by nearly 500 basis points across the business. I highlighted three parts of this update: our core integrated payments business, our progress since the IPO, and the upcoming transformation. Now that we’re discussing transformation, I'm excited to announce that we are entering four new verticals and expanding our overall organization's total addressable market based on these key wins. These include Allegiant Airlines, a major player in the airline and hospitality sectors that will enhance our capabilities across the travel and leisure market; St. Jude Children's Research Hospital, which raises nearly $2 billion annually in donations, opening opportunities in the nonprofit and healthcare sectors; and finally, SpaceX with their Starlink broadband service, a company I highly regard. This five-year strategic partnership will bring our integrated payment service globally, with some analysts estimating the potential for the Starlink payment opportunity to exceed $100 billion annually. The agreement includes a commitment to transition domestic volume to Shift4 beginning in the first quarter of 2022, and it’s important to note that SpaceX has a restaurant and several hospitality venues planned in Starbase, Texas, which will utilize our innovative SkyTab hospitality platform. These partnerships have displaced respected payment companies like Adyen and Stripe, resulting in multiple new software integrations into our platform that allow us to pursue merchants in these exciting sectors and affirm that Shift4 is equipped to enter various new global verticals, including innovative technology sectors. As I mentioned in my shareholder letter, this quarter has been particularly eventful. We began with record volume in July, experienced the effects of the COVID Delta variant, faced a secondary offering from our former sponsor, a service outage from TSYS, a rocket launch, supply chain concerns, and several weeks of disappointing share price performance. While these events presented challenges, I believe we have remained quite busy, and our results and outlook are promising. There’s a lot more to discuss, including our multi-year outlook, which is why we are hosting our Investor Field Day this afternoon. We look forward to sharing our vision in a forum that encourages interaction with all of you. Lastly, I want to address a service disruption that occurred this quarter. On August 21, most of our merchants faced a service disruption due to a platform outage from one of the industry's key players, TSYS. Even though this outage was vendor-related, we acted promptly, reimbursing impacted merchants for their lost revenue. The financial impact from the TSYS outage for the quarter was about $25 million, of which roughly $22 million was recorded as contra revenue. Brad will provide more details on the financial impact from the TSYS outage later in this call, but we strongly believe that our response was the right course of action for our merchants, as we received overwhelmingly positive feedback. We remain confident in our recovery through appropriate channels. Finally, I want to thank everyone inspired to support St. Jude Children's Research Hospital. We set ambitious goals, and this was one of our most ambitious yet. Thanks to your generosity, the inspiration for the event raised over $250 million for a very worthy cause, and I assure you that St. Jude children, their families, and support networks truly appreciate your kindness. Now, let me hand the call over to our Chief Strategy Officer, Taylor Lauber, who will discuss volume trends and outlook as we approach year-end.

Thanks, Jared, and good morning, everyone. The net new merchant wins we've signed and boarded over the past year have set us up well for sustained volume growth throughout the balance of the year and into 2022. As you all know, many of the merchants we've signed are larger, whether that be hotels or, more recently, large stadium and event venues. Each of these contributes to our increasingly diversified volume mix and delivers higher average volumes and revenues per merchant. Forecasting volume remains difficult in the context of an uneven pandemic recovery, an evolving mix shift, and the impact all of this has on our seasonality cadence. With that being said, the monthly cadence was a record July and a reasonably strong August followed by a moderation in September. As we called out in our late October business update, we saw volume growth of over 80% through much of the month. With the months now being concluded, we're happy to report that our full month end-to-end payment volumes ended up 86% year-over-year. This strong volume growth is on top of what had also been a very strong October of 2020, which was up 28% year-over-year despite the pandemic. All else being equal, we anticipate the fourth quarter year-over-year volumes growth to benefit from easier comparisons and a continued increase in travel as we finish out the year. We also called out our active merchant growth of 25% for the same October period versus a year ago. We anticipate our fourth quarter active merchant growth to also benefit from more favorable comparisons as merchant growth in November and December last year was weaker due to increased COVID-related restrictions. Sequentially, we exited Q3 with roughly 5% more active merchants spending in Q2. As Jared noted, we continue to sign new stadiums within the sports and entertainment market and remain excited to see a return to capacity crowds. Outside of stadiums, we entered the nonprofit charitable giving market with the signing of St. Jude's Children's Research Hospital. We view the nonprofit charitable giving market as both growing and large with an estimated $795 billion of addressable volume in the U.S. alone. We believe we have a unique value proposition to offer charitable fundraising organizations, including the ability to integrate a wide variety of point of giving systems, both legacy and modern. Our addressable opportunity has increased substantially over the past year as we enter gaming and e-commerce, expanding our hospitality client base substantially through a combination of gateway conversions and net new wins. And now with SpaceX Starlink, we are ready to take all these verticals global. The gateway opportunity remains extremely healthy, with gateway volumes increasing to $170 billion, and we remain in a pole position to continue gaining market share in large complex hospitality environments as a result of our 425 software integrations. As a reminder, roughly 50% of our ongoing production continues to be generated from gateway to end-to-end conversions. Over the past year, we estimate that through both organic and inorganic initiatives, we've increased our addressable market by a factor of 3x from our IPO roughly 18 months ago. More importantly, we have marquee wins within each vertical, which validate our strategic positioning, guide our capital allocation, and diversify our revenue streams. Over the quarter, some of you reached out to us inquiring about a hardware vendor named PAX and our security-related concerns. While we use PAX devices, they represent less than 10% of our deployed terminals. Given our larger multi-vertical presence, it's always been important to support a robust family of device manufacturers. Those myriad device certifications pay dividends because supply chains can sometimes be constrained. It's also worth noting that we encrypt all our terminals with our proprietary encryption keys regardless of the device manufacturer. The security protocols we use are best-in-class and have insulated us from challenges other processors appear to have encountered. We remain active in the market evaluating M&A opportunities and remain disciplined on price, but have more strategic rationale than ever before to continue building and fortifying around our recent customer wins.

Thanks, Taylor. Before I get into the financial details, I’d like to make a few quick comments. First, when discussing our Q3 results and comparing them to other periods, we are not considering the effects of the TSYS outage in the current quarter. I will provide more details on that shortly. Second, it's important to compare our performance to pre-pandemic levels from 2019 to show our growth trajectory without the disruptions caused by COVID-19 in 2020. Just like last quarter, we are pleased to announce record performance across our KPIs. Gross revenue for the quarter reached $400 million, which is an 86% increase from the previous year, while gross revenue after network fees stood at $148 million, reflecting a 69% year-over-year increase and an 86% rise compared to Q3 of 2019. This continued growth was driven by a 73% year-over-year rise in net processing revenue. Shift4 continues to onboard new end-to-end merchants, and we see a recovery in consumer spending. In this quarter, net processing accounted for 67% of our gross revenue less network fees, which is a 2 percentage point increase compared to the same quarter last year. Moreover, our SaaS revenues are continuing to grow as we expand our total addressable market through acquisitions and investments in new sectors like gaming, e-commerce, and sports entertainment. We are also increasing our offerings and services, such as POS software, online ordering, pay-at-the-table, and order-at-table, among our existing base of over 125,000 restaurant merchants. Specifically, our subscription and other revenue sources have increased by 72% compared to the same quarter last year. The spreads for the quarter were at 74 basis points, which is a drop of 4 basis points from what we reported in Q2. This decline was slightly greater than we expected, largely due to a significant increase in hotel volumes which reduced overall spreads. This mix began to stabilize towards the end of Q3 as the summer travel season concluded. It’s important to note that spreads in our restaurant and hotel sectors have risen by about 8% from Q3 2020, which reinforces the pricing power of our unique end-to-end solution. For this quarter, we've reported an adjusted EBITDA of $55.8 million, marking a 94% increase compared to the last year and a 128% increase from Q3 2019. Our results this quarter yielded an EBITDA margin of 38%, which is nearly 500 basis points of margin improvement compared to Q3 2020 as we benefit from the scalability of our cost structure. Keep in mind, our margins could have improved even more if we had not chosen to make several strategic investments for growth in new, high-potential sectors. While these investments have already begun to contribute significantly to our SaaS revenues, we are still early in capitalizing on the natural payments opportunity. This is crucial as we aim to balance enhancing margins in our current integrated payment services while simultaneously growing revenues in new sectors. Regarding capital transactions this quarter, we successfully completed a convertible bond offering raising around $618 million in July. Following the offering, we ended Q3 with about $1.3 billion in cash and still have approximately $100 million available from our revolving credit facility. As I mentioned earlier, I'd like to briefly outline the financial effects of the TSYS outage. Our 10-Q will provide more comprehensive details, but to summarize: first, the $22.4 million paid to merchants is recorded as a one-time deduction in payments-based revenue as per accounting standards; second, the $2.3 million paid to partners is shown as a one-time increase in other cost of sales; finally, there were additional one-time costs totaling around $400,000 across various income statement entries, leading to a total quarterly impact of $25.1 million. This amount is included as an add-back in our calculation of adjusted EBITDA. I also encourage you to refer to the appendix of our presentation for adjusted figures on gross revenue, gross profit, net income, and net income per share, all adjusted for the outage's impact. Now I want to share a few updates regarding our guidance. First, we are reaffirming our most recent full-year guidance on end-to-end volumes; second, we are raising our full-year guidance for gross revenue less network fees to a target range of $520 million to $525 million, mainly due to the strong performance of our non-volume SaaS-based revenue streams from investments in new areas. Regarding adjusted EBITDA, we are also upholding our prior guidance of $175 million to $180 million. The reason we have not increased our adjusted EBITDA guidance, despite the revenue growth, relates to the discussion about the limited effect of early-quarter acquisitions and investments on adjusted EBITDA. Excluding the impact from the merchant failure discussed earlier this year, our adjusted EBITDA would actually fall between $180 million and $185 million. Lastly, while we do not want to preempt our Investor Field Day later today, we wish to share some medium-term expectations. Over the next three years, we anticipate at least 50% CAGR on end-to-end volume and at least 30% CAGR on gross revenue less network fees. We ask that you hold questions related to our medium-term outlook until our Investor Field Day, where we will have the chance to discuss some exciting developments in our business supporting this outlook. With that, I will hand the call back to the operator for questions.

Our first question comes from Darrin Peller from Wolfe Research.

Thanks, guys, and thanks for all this updated information on the outlook of the new verticals. It’s great to see. Just touching on that for a minute. The progress that you're now making in these incremental verticals looking at charity and some of the airlines, can you just touch on the leverage that you're basing your technology differentiation in your current verticals to allow you into those categories? I mean whether it's St. Jude's or it's some of the other charities you mentioned in the slides or it seems like the complexity you service with all the different ISPs is allowing for that. And how big could these opportunities be relative to some of the verticals you're in today? Again, when looking at some of the wins you're having.

Yes, Darren. Good question, Jared here. Thank you. Our payment platform is designed to integrate with commerce-enabling software to encrypt, tokenize, and facilitate secure payment transactions. We've primarily worked within restaurant software, and this complexity has driven the need for Shift4. There hasn't been a platform limitation preventing us from exploring other verticals. In fact, many of these verticals, such as hotels and specialty retailers, have similar characteristics to the restaurant industry, utilizing various software types to provide a commerce experience. Our experiences with nonprofits have been enlightening, as they use multiple software applications for their fundraising activities. These industries share traits that have contributed to our success. Ultimately, we drive transactions within commerce-enabling software, and we excel at it. Additionally, once we establish those software integrations in sectors like health care, nonprofit, and airlines, it’s important to highlight that the Starlink payment platform is quite proprietary. It opens us up to various merchants within those verticals. Specifically regarding Starlink, which is a global initiative, it allows us to expand our reach across our restaurant, hotel, stadium, gaming, and e-commerce businesses in the same regions we target with Starlink. As for the opportunities in these areas, we noted in our presentation that Allegiant Airlines, a public company, sees over $2 billion in payment volume at present. Thanks to our research hospitals and nonprofits, they approach nearly $2 billion in donations. Regarding Starlink, even in beta, it has surpassed $1 billion in payment volume, with analysts believing it could represent a $100 billion annual payment opportunity in the future. Thus, it's easy to see why we are enthusiastic about these significant wins.

That's very helpful. I have a quick follow-up regarding the revenue yields since you mentioned some SaaS revenue upside, which is encouraging, especially with the ongoing questions about yields throughout the year. As you expand, it's clear that you can maintain strong yields as we wait for the Investor Day discussion. Can you remind us about the seasonal yields by geography for the fourth quarter? Also, when you discuss these new verticals and larger categories, I assume they'll come with lower yields, but they also present bigger, broader opportunities. I want to ensure we're considering that correctly. Great job overall.

Darrin, you're exactly right. So for Q4, if you think of kind of normal seasonality, we'd expect a slight dip in Q4 just related to the normal seasonal pattern. I'm going to highlight, like we talked about before, we do expect that continued kind of 1 basis point to 2 basis point decline just with merchant mix. We're going to talk about some more of that later today in our investment discussions. And we're also going to talk a little bit more about the second point you made, which is very valid, which is as you go upmarket, you will see the economics play out that the spreads on larger merchants are slightly less than what we're seeing now on our average merchant size, and we're going to talk about that. But what's really important to understand is the quantum of revenue that we can generate off of these merchants. So if you look at a revenue per merchant basis, you're going to see some pretty staunch acceleration in that number as well. We're going to cover both of those in more detail today. So I look forward to diving into that.

Yes. And one thing I would just layer on to it. Obviously, we provide a lot of detail, and we'll talk a little bit later today on how different verticals have an impact on spread, but overall, your average revenue per merchant goes up. But these new verticals that we've announced have a lot of opportunities into them. First, they are priced with margin; but second, when you get into nonprofit charitable giving, there's opportunities to push costs back on the consumers making the donations, which usually come at a pretty healthy spread. When you get into international markets, it opens up cross-border payment opportunities, which also, as you guys are aware, usually come with pretty higher spreads. So I think there's going to be a lot more to talk about for sure as we move into these new verticals that I think will be pretty interesting.

Great question. This is Taylor. I’ll address it. There’s no reason to expect a slowdown. In fact, we’ve consistently observed an ongoing trend over the past several years, including during the pandemic. We have around $170 billion in volume and 425 software integrations that are naturally inclined to continue consolidating business with us through that gateway conversion mechanism. However, the installed base of those 425 integrations extends well beyond the $170 billion on the gateway. If you consider our perspective and look at production on our end-to-end platform in any month, approximately half comes from easy gateway conversions, while the other half is sourced from a larger installed base of those integrations. This has consistently worked well for us, even during unpredictable times. There are always some variations, such as a hotel chain opting for a massive shift in one quarter, which might result in substantial net new wins compared to gateway conversions. But generally, we have numerous opportunities against that $170 billion, with a much larger installed base beyond that, maintaining a balance around 50-50. Regarding acceleration, we continuously explore ways to enhance it. There are several approaches we can take. As Jared frequently mentions, we don’t have to act solely as a gateway. Acting as a gateway and directing volume to our competitors is a concession we’ve made due to the industry’s evolution over the last decade. We can take a different approach. Our current strategy involves offering incentives to migrate, educating merchants on why it's a better solution, and successfully converting about half of those merchants through gateway conversion while also securing net new wins. This serves as a practical compromise. At any moment, we’re assessing whether to maintain a legacy connection or form a more distinctive partnership with certain software integrations to encourage quicker migration. While it appears we maintain a consistent split of 50-50, these incentives motivate different ISVs to either convert more gateway merchants or secure numerous net new wins in any given quarter. We’re continuously making efforts in this area. Overall, the blended impact has consistently been around 50-50. However, we are cautious about implementing more aggressive strategies that could significantly speed up that migration due to the success we're experiencing with net new wins. This approach has fostered considerable goodwill throughout the gateway migration process for our customers.

Thank you for the details. It's impressive. I have a quick question regarding the SkyTab POS. Conceptually, do you believe this was necessary for controlling payment monetization in the long run? There's a significant cross-selling opportunity in SaaS revenues that seems to be overlooked. As the industry shifts towards more controlled POS systems, do you think this move was essential for competitiveness, or do you consider it unique and different from your other products?

Thanks, Dan. We didn't feel any pressure in the market to invest in and develop SkyTab POS. From our investor deck, it's clear we've been successful in the restaurant sector despite ongoing competition for many years. This is simply the right direction for us. Four years ago, we acquired software POS companies from an earlier generation, which had significant embedded payment volume and advanced distribution. These acquisitions allowed us to unlock substantial value, but our long-term goal was never to maintain four different restaurant POS platforms. We always intended to consolidate onto a modern cloud-based architecture that offers efficiency improvements from a support standpoint, utilizing a hybrid cloud Android-based operating system that requires minimal maintenance and is easy to update. Additionally, this approach opens up numerous opportunities that our previous strategy, focused on monetizing through SaaS, didn't cover. As evidenced this quarter, we can capture both SaaS revenue and significant payment volume. Currently, 85% of the 125,000 restaurants we work with do not contribute to SaaS revenue. We have a marketplace integrated with DoorDash, Uber Eats, and Postmates, with around 50 marketplace integrations and hundreds more in the pipeline. We don't charge a fee for marketplace use, unlike virtually all our competitors. It would have been much more challenging to introduce a capital and payroll offering while managing four different POS platforms instead of just one. We began this journey many years ago, initially called Project Edgewater, now known as SkyTab POS, not PowerPoint. We have 2,000 units deployed, including recent installs at the United Center, and many enthusiastic distribution partners ready to engage in the marketplace. This rationale has been in place for years and isn't a reaction to recent developments. In reality, significant progress on a entirely new restaurant platform takes time; this has been in progress for years.

Yes. No, that's super exciting. And then just quickly on the quarter, Taylor, you mentioned some of the stuff around the October volumes and kind of the cadence I just want to make sure we’re clear because that created some consternation during the period. So October was up 86%. I think generally speaking, at the midpoint of the guidance range, it's just maybe 110%. And I know there's some seasonality that typically takes place, I think, in and around November, but the numbers are suggesting an acceleration. So can you just again kind of walk through the cadence of that so that we understand your conviction level there?

Yes, absolutely. That's super exciting. What I'll do first is I'll convey the cadence of last year because I think that's very important. So last year, we had a downright strong October, up 28% year-over-year despite a pandemic. And then as we all recall, starting in kind of the middle of November and throughout December, we had a significant increase in COVID-related restrictions across the country. I think New York City is a good example, in California just simply shut off indoor dining right when the weather was getting cold. And you had a handful of examples across other states. What that resulted in was a decelerization in growth in November and then a further decelerization in December so much so that December actually contracted modestly year-over-year. So you went from an up 28% October to a contraction in December. That is not a normal seasonal cadence by any stretch of the imagination. That is a significantly impacted quarter as a result of the COVID restrictions. Now contrast that to this year, what we have is, again, a very strong October, up 86% year-over-year on a tough comp. We're very proud of that. But we expect that given the deceleration in November and December of last year, that it continues to improve. And I think the X factor is what exactly does this lifting of travel restrictions mean for November and December as travel increases across the country. I think we're of the opinion in the room that it will undoubtedly increase. It's just exactly the magnitude of that, and that's sort of where we're at today, which is October looks great, and we're going to stick with our guide given the relative uncertainty of those factors.

I want to start by asking for some more details on the new verticals, such as gaming. You've recently signed your first gaming plan, but you already have a significant presence in Vegas. What is the process for pursuing that? What is the competitive landscape like? Will you need to make more acquisitions or partnerships, similar to what Sightline and Everi are doing? Let me start there.

Yes, Ashwin, Jared here. I can address that. It's accurate that there were no payment companies fully prepared to tackle the domestic gaming opportunity initially, which had been dormant but has now become attractive. Shift4 and a couple of other payment companies are now moving rapidly in this space. To serve this vertical effectively, integration is essential. The integration we have in card-present gaming is quite different from what is required in card-not-present scenarios. This situation positions us as a logical partner for gaming organizations, as we offer insights into patron gaming and other hospitality elements in card-present settings, which can then be connected to mobile gaming environments. This enables us to provide valuable insights to our partners. Additionally, our presence in stadiums is also significant. However, it's important to note that all three companies competing in this area need to develop integrations and secure gaming licenses. As I mentioned earlier, we currently hold eight gaming licenses and have completed integrations with new providers such as Everi, along with others like NRT and Sightline. BetMGM's requirements involve various software integrations as well. Over the past six months, we've focused on building these integrations and alternative payment methods to ensure we meet our customers' needs once everything is in place. We are well on our way to achieving this, and as I noted, we anticipate the first mobile gaming transactions to be processed through our systems this year in the upcoming quarter.

Got it. Got it. Okay. And then on your medium-term outlook, which is by the end of 2024. So is that sort of an annualized 4Q '24? I mean can you sort of granularize what the actual expectations are and hopefully, maybe even the cadence of it, effects like is it organic? Does it include acquisitions already and things like that?

I believe it's best to set that discussion aside for now since we have dedicated significant time to outlining what we expect the core business to contribute over time. This includes where we've invested the approximately $200 million in both organic and inorganic growth, as well as the potential impact of our recent wins. So, if you don't mind, I would prefer to revisit this in a few hours.

Yes. That said, I do want to clarify, we're not getting queued on any sort of like 2024 exit rate making another year on Ashwin there. What we're saying is between the core business, which is highly stable and growing very quickly, as you can see in the presentation materials on top of the three new verticals that we started 6 months ago, which is gaming, sports and entertainment, and e-commerce; and these four signature new wins that are taking us across the world. What we're dealing with now is immense demand, lots of demand. And if you look at our verticals that we shared with you. But as mentioned, we'll go into more specifics in our Investor Field Day.

My question is related to SkyTab POS in a way, but also specific to the 7,000 expert distribution partners talked about earlier and prior and also in the slides today on Slide 25. When we think about those 7,000 expert distribution partners, you mentioned that they're hungry to be able to sell the software. Can you just give us some context on what are some of the other platforms that they're currently selling? How does Shift4 begin to take more of their mindshare? And sort of what is their status quo in terms of the platforms that they're most focused on at the moment that their attention will shift over to the new SkyTab POS?

Yes. I mean, Tom, it's a good question. The answer is, they're all -- I mean, they're all representing some Shift4 integrated product or another, whether that's Oracle or Focus POS or Future POS or Restaurant Manager. I mean, keep in mind, we have 425 software integrations. So we're not implying we're going to win these over from other software solutions. We're saying they're already supporting existing Shift4 products. They're very aware of how an integrated payments fuel value proposition can help them differentiate and win in the market. That is ready for the next wave of technology, this next innovative product. So we've obviously been communicating with them for some time. If you have 2,000 of these devices that are already -- 2,000 SkyTab POS is already deployed means that we've already been working with a select group of our best integrated partners that are out there. And we have pretty big expectations of what they can deliver because if they're finding as much success as they are with our current products, which are very good, and that's demonstrated in the volume growth, they should be able to only improve upon, both within our existing base of customers and a great cross-sell and what is a really innovative addressable market. Taylor, I don't know if you have more on that to layer on.

No. I think that's well said. Important to note, highly diversified group. I think within the restaurant vertical specifically, support a myriad of different software applications. And what we're going to talk about later today is that's a really differentiated edge. If you look at the restaurant industry specifically over the years, you've had lots of different POS providers gain success in particular swim lanes because of how they've built the product. And yet we have a dozen or more of these products under 1 roof and a lot of internal expertise. So the SkyTab products are really designed to help them widen the debt and address more of their own markets and then also upgrade what are undoubtedly some legacy systems within certain stocks. We don't want to pick on any one software provider, but we all know that there are big providers with a loyal brand following and a huge legacy base, but have been slow to migrate to the cloud. This allows those distribution partners to take advantage of that, Tim.

Yes. And Jared here, just to layer on, I mean, the idea is, should we expect our partners to be even more kind of energized, prioritize more of their time around this new product? Of course, I mean everybody likes the next new version of an iPhone. And right now, SkyTab POS has got a sexy interface. It's got a lot of capabilities embedded in it, free loyalty, embedded online ordering, a clean integration into a marketplace of third-party providers. We have a road map right now that's not far out with capital and payroll offerings. Hardware looks good. They're going to be excited to go out and win with it. So I mean, it's not hard to see. Toast is doing very well in the marketplace. I think they're the two fastest-growing players, at least within the restaurant vertical would be us and Toast. If we're introducing more innovative, better hardware with a new software interface with more capabilities embedded into it, of course, our partners are going to be charged up to get out there and distribute it, not just to our existing customers, which for sure, there is a nice SaaS lift and other revenue opportunities that have come from it. We're just going out and continuing to win in what is a very large addressable market.

I appreciate you taking the time this morning. I'm intrigued by the SaaS comments and the opportunity, Jared. And I wonder if you could talk a little bit about perhaps some of the areas where you think you have the greatest opportunity to drive attach. And how you might help us think about that over time? Do you start to talk about something akin to an ARPU? I'm just trying to think about how we're going to track that and where you're most excited about the opportunity.

Yes, Andrew, you raised some good questions. I believe Brad should also share his thoughts on how we plan to report our progress moving forward. What we are sharing today reflects our aggressive approach as an organization. We prefer to move forward boldly. Back in 2017, we made several acquisitions of restaurant POS software companies that did not have any SaaS or payment revenue. Having been a payments company for 22 years, we know how to succeed by leading with payments. We pursued those customers and many new ones through that software, mainly monetizing our relationships via payments, which worked exceptionally well. However, at the end of 2021, we find ourselves with numerous restaurants using our software that generates significant payment volume but pays little to no SaaS fees, which doesn’t seem appropriate given the current market. As we return to the market, leveraging our extensive network of distribution partners to gain new customers and upgrade existing ones, SaaS will indeed be included in our offerings. I don't think this will surprise our customers or face pushback; in fact, I believe they will be excited to transition to an attractive new platform with advanced hardware and features. They will be willing to pay some SaaS fees during this process, and we will continue to capture the same payment economics we have, plus new revenue opportunities from capital, payroll, and marketplace services. Additionally, we will gain many operational efficiencies by supporting one software type rather than four or five, and an Android-based environment is certainly easier to manage than a Windows environment. There are many opportunities ahead. I don’t see this as a big challenge. Now, I'll pass it to Brad to discuss how we will keep you updated on our progress.

Andrew, that's a great question. To elaborate on what Jared mentioned, we aimed to move entirely away from SaaS in payments. However, we've discovered there is significant SaaS revenue in this area that is not only substantial but also fosters strong customer loyalty. As we transition into new sectors, we are focusing on reassessing our pricing strategies to strike a balance between SaaS and payment components. We are examining an average revenue per user metric, along with the typical monthly charges for our various services. It’s important to note that SaaS generation involves not only the software itself but also additional features like analytics, pay at the table, and online payments. A primary goal for us is to refine our pricing models to fully capture all potential revenue streams. We will begin to provide more insights into SaaS, its drivers, customer behavior, and growth. More details on our delivery approach will follow.

Yes. So we think we’re in a great position, and I believe these new verticals will have an increasing share of our overall SaaS revenue. Just as a matter of fact, as we expand those markets, it's very much about how it can grow within our current footprint and through that balance as we open up a larger base. I think that we're going to on our conference today dive deeper into specifics, but I'm an optimist about it.

Our next question comes from Chris Donat from Piper Sandler.

Taylor, I just wanted to maybe approach the issue of fourth quarter expectations from a historical perspective, if that's even valid. You gave us nice comparisons with 2020 in October, November, December. Can you talk about what cadence you saw in like 2018 or 2019? Or is that even fair given how the business mix has changed for you over the last couple of years?

I don't know that it's fair to the extent you can take sort of a business that was predominantly restaurant and specialty retail focus back then with a much smaller average merchant and correlate that to a lot of hotels in the stadiums. And I think there are certain trends that are consistent, meaning the times of the year that people like to go out and celebrate and go to events and travel, and there's others that are less consistent. So I don't necessarily think, and trust me if I thought we could give a good seasonality profile we would. It's not lost on us that we deliver a very confusing message in that regard. It's just the reality of winning much, much, much higher quality merchants in segments that are adjacent to what our core verticals have been back then. We don't expect that the shift is going to be radical as like kind of COVID disappears. But you do expect some of the months that have been peak are your second-best month or your third-best month or something like that. How it translates to this quarter, again, we feel good about our guide. We feel like it's appropriate based on what we've seen one month into the quarter. And there's some uncertainty within really decent pockets of our merchant-based hotels specifically that we're just not clear on exactly how that's going to play through. Yet, we think that if it plays through in a modest way, our guide is a great guide.

Hey, John, you in there?

John has our email, so we can hop to the next question or I think we might be through the queue. So let us know what you'd like us to do, Emily.

We currently have no further questions. So I'll now hand back to Jared to conclude today's call.

Thank you very much. I appreciate everyone dialing in. Just as a reminder, we have an Investor Field Day that's kicking off shortly, and we've put an awful lot of slides out this morning, and there's quite a bit to talk about. So we invite all of you that have dialed in to join us during the Investor Field Day, either onsite or through the virtual connection, and we have a lot more exciting things to talk about. Thank you very much for dialing in.

Thank you, everyone, for joining today's call. This now concludes our conference. So please disconnect your lines.