Shift4 Payments, Inc. Q4 FY2021 Earnings Call

Good morning and welcome to today's Shift4 Fourth Quarter 2021 Earnings Call. My name is Bailey, and I will be the moderator for today's call. All lines will be muted during the presentation portion, with an opportunity for questions at the end. I would now like to pass the conference over to Tom McCrohan, Head of Investor Relations. Tom, please go ahead.

Thank you, operator, and good morning everyone. I'd like to welcome everyone to Shift4's earnings conference call for the year ended December 31st, 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 including Finaro and The Giving Block; and anticipated financial performance including our financial outlook for the year ended December 31st, 2022; and the anticipated impact of each of the Finaro and The Giving Block acquisitions on our adjusted EBITDA and end-to-end payment volumes for the year ended December 31st, 2023. 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 31st, 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, including adjusted EBITDA, free cash flow, and adjusted free cash flow, 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. And with that, let me turn the call over to our Chief Executive, Jared Isaacman.

Thank you, Tom, and good morning to everyone joining us. We have quite a bit to talk about today, but first, I’d be remiss if I didn't bring up the conflict that's ongoing in Ukraine right now and just say that all of our thoughts are with the Ukrainian people during these really tragic times. So, this morning, Shift4 reported another quarter of strong results highlighted by end-to-end volume of $13.4 billion, which is 97% higher than a year ago and nearly 100% higher than the same period in 2019. We've met or exceeded three of our four guidance metrics and built off the momentum we have in our high-growth core, as well as making investments in new verticals, including two acquisitions that we announced today, all of which I'm looking forward to discussing further. It's important to call out that our full year 2021 volumes ended up coming in about $10 billion higher than the initial guidance introduced about a year ago at this time. Our high-growth core continues to drive market share gains evidenced by the fact that during the fourth quarter, we grew volumes four times faster than Visa and MasterCard. We achieved this industry-leading organic volume growth despite our end markets, like restaurants and hotels, continuing to be impacted by COVID. This includes delays in the return of business and international travel, and especially, the Omicron variant which dampened results in the fourth quarter. Our high-growth core, which represents domestic merchants in the restaurant, specialty retail, and hospitality industries, continues to represent the primary driver of our growth. As you all know, our gateway and 425 unique software integrations provide us with a captive backlog of volume, something we intend to attack even more aggressively this year, as well as the right to win across a very large addressable market. As I mentioned in my letter, merchants are not switching from one inadequate payment solution to another. We're growing volume at an accelerated pace and it means merchants are switching to Shift4 because we are solving pain points. We're adding value, and we're delivering a superior experience than the previous provider. On that note, we're also excited about the early successes we're seeing with our new restaurant point-of-sale offering, called SkyTab POS. Despite the product still being in beta, we are already seeing material uptake with new merchants looking for a technologically robust cloud-based POS offering that provides a full suite of functionality and add-on modules that help differentiate us in the mid to higher end of the market we serve. While our high-growth core drove our 2021 performance and we expect will remain the primary contributor of growth well into the future, we do expect our new markets and verticals will start to contribute more meaningfully in the ensuing years, especially in light of the two acquisitions we announced today, both of which I'll elaborate on in a moment. As mentioned, COVID was a drag on our performance throughout all of 2021 and Omicron, especially in the fourth quarter. So, I’d like to share some of our thoughts on how the pandemic informs our expectations for 2022. Throughout the fourth quarter, we did not see the return of business and international travel that we were expecting, and we believe Omicron had the most pronounced impact in the latter part of December, a headwind that continued through January. Despite the headwind, December was shaping up to actually be a record month. During the first few weeks of December, we were achieving our highest levels of weekly volumes in our firm's history. We went from hitting record weekly volume levels in early to mid-December to a sharp decline in late December, which bled into the month of January and actually in early February. While it remains difficult to attribute week-to-week volume movements between Omicron and other possible factors, it's reasonable to conclude that Omicron was the material reason the historic weekly volume levels we witnessed in early December did not sustain themselves throughout the entire month. Regardless, Omicron was definitely a headwind, but it was short-lived, as our weekly volumes have returned to over $1 billion a week in the first part of February and most recently set new weekly and daily volume records. The bottom line is that we view the pandemic impact for 2022 to be contained to the first quarter and there's significant pent-up demand as mandates ease and consumers and businesses resume more normal travel patterns. Our weekly volumes in February are accelerating and we are now achieving again new company records. Now, similar to our November Analyst Day or Investor Day, I'm going to structure my remaining comments into three areas. One, our high-growth core and why we believe that our impressive growth is sustainable. Two, our new markets and verticals, specifically an update on our progress since announcing several major wins including SpaceX Starlink, St. Jude Children's Research Hospital, and Allegiant Airlines just a few months ago. And three, the strategic rationale behind the acquisitions we announced today. Both acquisitions are foundational transactions, fulfilling our commitment to globalize our existing business while providing new technology capabilities aligned with our previously communicated strategic priorities. So, let's start with the high-growth core. Over the past four years, we've delivered a CAGR volume growth of 37%, more than three times the industry with our restaurant and hotel volumes growing even faster over the period 51% and 140%, respectively, which changed since our Analyst Day in November as continued stability in our average spreads despite our volume mix shifting to larger merchants. Our success in signing larger merchants continued during the quarter, with signing several new hotels, including the Palms Casino, Overby Resorts, and Halekulani in Hawaii, as well as the country's largest self-storage operator StorageMart and one of the largest airline concessionaires, Concessions International. All of these were gateway conversions, which means we received a 3x to 4x gross profit lift from these merchants converting from gateway-only to our full end-to-end acquiring solution. As mentioned previously, merchants do not switch to comparable or inferior technology solutions in 2022. They're switching to a Shift4 end-to-end offering because we are solving pain points, we're adding value, and delivering a more cohesive commerce experience than whoever they were using previously. On the above note, we do believe the time is right to reevaluate the free flexibility we currently afford our gateway-only customers. Our basic premise on gateway-only customers is that while we provide the majority of value and all the technical capabilities in a gateway environment, the majority of transaction economics still accrue to third-party acquirers providing functions we could easily do ourselves and should do. It's worth noting that the few fast-growing FinTech providers still offer an acquirer optionality through a gateway and instead, they all endeavor to deliver a better and lower-cost experience through an end-to-end offering. We believe there are additional measures, incentives, and capabilities we can offer our very large population of gateway-only customers that will accelerate the migration to our end-to-end platform faster, and free up organizational resources to focus on our many other strategic priorities. So, our objective is to begin the process of starting these conversations that we believe will lead to an acceleration in the current pace, which is already very fast of conversions from our gateway to our end-to-end platform, hopefully with tangible results beginning early next year. Outside the gateway opportunity, we continue to see an incredible opportunity in mid-market table service restaurants, with our overall restaurant volumes witnessing 51% CAGR growth since 2017. We are clearly very competitive in the marketplace and will continue to remain a market share gainer with our new SkyTab POS offering that we plan to release from beta and formally launch in the second quarter this year. We currently have approximately 3,000 restaurants already operating on our SkyTab POS solution, which represents a 162% growth in merchants on the platform in December versus the same period a year ago. Moving to some of the new verticals we've entered into since the IPO, in stadiums and arenas, not only did we announce several new wins, but we extended our mobile fan-first experience to ticketing via an integration with SeatGeek. Ticketing can represent over five times the average volumes versus in-venue purchases and also comes with higher spreads. Our stadium business is evidence of how we successfully identified a new vertical, identified the best technology, and then go-to-market with a differentiated offering. Our wins this quarter include Audi Field in Washington DC, home of the professional soccer team DC United, where we are powering all the in-game commerce from mobile food and beverage to concessions to merchandising purchases, including an integration with Fanatics who operates the Audi Field Club Shop. At Children's Mercy Park in Kansas City, we partnered with Sporting KC to offer fans an integrated ticketing experience being integration with the ticketing platform, SeatGeek. Supporting our growth in the sports and entertainment vertical, we serve as presenting partner for player signings, including Shift4 being featured on social media graphics and posts and in-stadium branding. With all of our recent wins in this sport, I would be remiss if I didn't say that football is life. Our commerce technology is now powering payments in over 100 venues across the United States, and we can confidently say that the VenueNext acquisition has exceeded all of our expectations. As we've mentioned before, we believe Shift4 has a unique right to win in the rapidly growing online gaming vertical, leveraging our expertise and business intelligence products from in-venue gaming and bringing it to the mobile world. I'm pleased to report that we now have over 10 gaming licenses, and we have begun the first phase of transaction processing for BetMGM with transactions expected additionally from Sightline just later this month. Furthermore, we expect our growth in this vertical to only accelerate as a result of our two acquisitions that I'll touch on shortly. Moving on to the new verticals and signature wins that we announced at our recent Investor Day; St. Jude Children's Research Hospital, our first marquee in the non-profit and healthcare verticals, has begun processing their first end-to-end transactions already in January of this year, and we've completed several key software integrations. We will continue to take on more volume through phases over the next several quarters, and I'll have more to say on the non-profit sector in a little bit given one of the acquisitions we have announced is the crypto donation platform, The Giving Block, which actually counts St. Jude as one of their customers. For Allegiant Airlines, we expect to begin processing our first airline transactions by June of this year as the integrations are presently underway. And finally, on SpaceX Starlink, we've already begun processing transactions and expect the first phase of our volume to cut over later this month. We were also anticipating the installation of SkyTab POS in their Starbase restaurant locations later this week. Finaro, which I will discuss shortly, is especially relevant for our global expansion ambitions and supporting the SpaceX Starlink expansion across the world. All three of these signature wins represent entries into new, exciting new verticals like travel and leisure, healthcare and non-profits. When combined with our recent acquisitions that will expand Shift4's reach across the world, they represent a material TAM expansion. Much like Allegiant Stadium from a year or so ago, I believe that we will look back on these three wins over time as critical milestones in the growth of our company. So, moving to the big news, we did announce two acquisitions today, The Giving Block and Finaro for a total upfront consideration of $579 million, comprised of an aggregate of $213 million in cash and the balance in equity. First, let's talk about The Giving Block. We closed on this acquisition yesterday for $54 million in total consideration, with an earn-out of up to $246 million based on hitting certain revenue targets. The Giving Block is a crypto donation platform, an area of increasing interest for non-profits. Crypto donors are seeking to donate their crypto to a charity, and non-profits are seeking access to this new category of donors, especially given the average size of a crypto donation is $10,500 versus around $300 for traditional donations. The addition of this crypto donation capability, coupled with the software integrations and charitable giving that we are building with St. Jude, gives us a powerful go-to-market offering in the non-profit space. Crypto represents a fraction of the donations received today by charities, but it's growing more quickly than the mid-single-digit growth of traditional charitable donations. We intend to bundle the crypto capabilities with our end-to-end processing to go after the $45 billion-plus of total donation volume that's already embedded within The Giving Block's 1,300 contracted nonprofit customers. Additionally, through a bundled crypto plus traditional card offering, we now have a significant edge in pursuing what is a $450 billion charitable giving market across the world. The Giving Block team includes incredibly talented crypto and blockchain talent that will establish the Shift4 Crypto Innovation Center with the aim to expand crypto acceptance and settlement capabilities across the organization. Finally, in connection with this transaction, we will be announcing shortly a campaign to challenge the crypto community to donate some of their crypto to their charity of choice through The Giving Block platform. I will personally match dollar-for-dollar each donation with the aim of achieving the largest crypto funding campaign in history. We think this is an excellent way to raise awareness for both sides of The Giving Block's network connecting more donors with non-profits and our crypto donation marketplace. We are also entering into an agreement to acquire a pan-European full-service e-commerce acquirer called Finaro with licenses to support the U.K., Europe, Hong Kong, and Japan. Finaro is both a modern architected e-commerce and card-present payment platform, as well as a bank with FX, card issuing, and capital offering capabilities. This transaction is not scheduled to close until regulatory approvals are received which is likely later this year. We are acquiring Finaro for $525 million in upfront consideration and up to a $50 million earnout. We anticipate that Finaro will contribute over $15 billion in end-to-end volume and $30 million in adjusted EBITDA in 2023. We also believe Finaro, independent of all the synergies we have to offer, is a 30% net revenue grower with high adjusted EBITDA margins that we expect to continue. It's worth pointing out that our diligence has revealed a few digital content versions representing a negligible amount of volume that are not compatible with our corporate values and will be based out shortly after closing. These two acquisitions we believe are accretive to our long-term growth. We retain significant firepower with almost $1 billion in cash and are excited to continue our organic and inorganic investments to support our strategic plan. I would like to address our full-year reported adjusted EBITDA performance for the year, which came in slightly below our guidance range. Quite a bit of this was attributable to Omicron and the lack of business and international travel, previously contemplated in our plan for the full year. But there were some continued growth investments we are making in the business as we enter new markets and prepare to go global. This should be consistent with our Investor Day where we emphasized our desire to expand margins in our high-growth core while also investing in our new verticals which are performing well and largely the reason for our performance on gross revenue less net fees, but still early in the development of their margin profile. We will continue to balance profitability and growth and our guidance calls for mid-30s margins for the full year in 2022. We also believe our guidance, which Brad will cover in a few minutes, is consistent with our medium-term outlook, despite starting the year at a disadvantage due to the impact of Omicron. I'd also like to emphasize the organizational transformation that is taking place over the Shift4 way that was just implemented a few months ago. We've begun embracing a vision, mission, values, and philosophies, many of which were influenced by my exposure to SpaceX. One component of this initiative, the dramatic expansion of our RSU program to include every employee in the company regardless of grade. This ensures our workforce has the right alignment, promotes retention, and helps us recruit the talent we need to deliver on our ambitious objectives. It's also worth pointing out that I'm personally funding 50% of the stock being allocated to this program, which expands equity ownership to all employees. It also includes a five-year vesting, that is back half weighted to promote the right long-term commitment to the company. Before I turn the call over to Taylor, I want to highlight the news surrounding my personal participation in the privately funded space program called Polaris. I feel fortunate to be able to partner with SpaceX on this endeavor, which will further advance human spaceflight, conduct important scientific research, while also raising awareness for causes here on planet Earth. In terms of aspiration, I do believe this will likely result in good things for Shift4, in the same way my prior mission raised awareness for St. Jude, and resulted in both St. Jude and SpaceX Starlink as Shift4 customers. As Shift4's largest shareholder, my interest is fully aligned with building long-term shareholder value for this company, which is to say I'm fully engaged and will remain fully focused as we take this company global and integrate these two exciting acquisitions. And with that, let me turn the call over to our President and Chief Strategy Officer, Taylor Lauber.

Thanks, Jared, and good morning everyone. Before touching on the acquisitions, I'd like to provide some additional color on the seasonal spending patterns we've seen over the fourth quarter and into the first. While we raised our guidance several times during 2021 due to outperformance, our decision to raise our volume guidance was based on a slow but linear recovery of travel and leisure spending, as well as a more modest recovery in corporate and international travel. If not for this continued delay in business travel, we feel strongly that our full-year volumes would have exceeded our expectations. Nonetheless, we delivered impressive 92% end-to-end volume growth and corresponding 81% gross revenue growth for the full year 2021, which compares very favorably to our peers. Our expectations for full year 2022 remain cautiously optimistic. If you recall, we experienced a similar trend last year whereby the second wave of COVID depressed volumes from Thanksgiving to Valentine's Day. That week, while a record at the time represented only 1.4% of our total volume for the year, as growth recovery in warmer weather caused rapid volume growth across our portfolio in subsequent months. Following that same logic, we're quite pleased with our positioning as we exit February with more record weeks. In fact, we had our first $200 million volume day just yesterday. To help you conceptualize how we construct our full-year guidance, we included a volume bridge in our press release this morning detailing the main drivers of our next year's volume growth. In a typical year, the majority of volume growth is actually derived from merchants boarded the prior year, followed by new merchants and gateway conversions boarded during the year. For example, in 2021, we estimate approximately $14 billion of our volume growth was derived from merchants boarded in 2020 and 2021. With the remaining growth from the pandemic recovery and contribution from merchants boarded prior to 2020. For 2022, we estimate we will have at least $16 billion in volume growth from merchants boarded last year, coupled with new merchants, to be boarded during 2022. All of this pertains to just our high-growth core. We deem the $16 billion as conservative as it assumes 14% growth over 2021 production, despite exiting the year with record levels of active merchants. We also pushed into new areas such as stadiums gaming and new verticals such as non-profits and SpaceX Starlink. Combined, we envision these new markets and verticals will contribute a conservative $3 billion of our volume in 2022, resulting in us arriving at the midpoint of our guidance range of $69 billion. We believe there is upside to our guidance from pandemic recovery, volumes exceeding our forecasts, and the pace of gateway conversions show how fast we can scale these new markets we entered recently. On the other hand, our guidance is also informed by the realities that inflation and occupancy impacts, our end clients, notably restaurants and hotels, which have been struggling to meet capacity demand due to labor issues. Regardless, our 2022 volume bridge hopefully provides some help as you think about the year. Turning to acquisitions, I want to talk through some of the terms of both transactions and how the combination of both sets of capabilities will provide unique differentiation to the markets we serve. The Giving Block is very exciting given the crypto donation space is relatively young, growing extremely fast, growing high spreads, and contains material cross-sell opportunities to offer a bundled end-to-end processing capability to non-profits, who are seeking to consolidate both their crypto and card-based donations with one platform. We were already excited about targeting the non-profit vertical with the marquee win of St. Jude Children's Research Hospital, and now are supercharging our right to win with the addition of crypto donations. There's also an interesting consumer play to this transaction given that The Giving Block's relationship with crypto donors provides interesting conversations across all of our merchants who could benefit from access to crypto holders. We're acquiring a talented team of technology individuals and intend to work with the founders of The Giving Block to create a Crypto Innovation Center to become thought leaders in this emerging space that specifically enhances Shift4's acceptance and settlement capabilities across the organization. We structured this deal with a significant earnout. The upfront consideration is $54 million, structured 75% in stock and 25% in cash. We are acquiring the company in its early years in a growing sector with expectations for considerable growth as crypto becomes mainstream. To this end, we structured the deal to have roughly 80% of the total consideration tied to future revenue growth, with a total maximum earn-out of $246 million. In 2022, we believe the revenue contribution to be modest and the EBITDA contribution to be neutral as we embark on our organic growth and cross-sell objectives. In 2023, we expect at least $5 million of adjusted EBITDA contribution, which is achievable through even a modest combination of crypto donation growth and payments cross-sell. And as Jared will always tell me, it's probably way too conservative. Turning to Finaro, we entered an agreement to acquire Finaro for $525 million in upfront consideration and $50 million in earnout tied to integration objectives. The upfront consideration is structured approximately 62% stock and 38% cash. And given the scarcity value of these assets in the marketplace, our assessment of the banking and technology platform, the talent of the individuals who will be joining us, and the synergies we believe this combination will create, we view the multiple we paid as quite reasonable. We have confidence the combination of Shift4 and Finaro will provide a winning combination needed to service Starlink and other multinational e-commerce merchants. It's important to note that over 95% of Finaro's transactions are e-commerce and over 80% cross-border. The closing timetable is a bit longer in light of the fact that Finaro is a bank, and we anticipate closing later in 2022 after receiving regulatory approvals. Finaro is expected to contribute over $15 billion in end-to-end volume in 2023 and over $30 million in adjusted EBITDA. This was a business historically growing adjusted EBITDA at over 50% given its capabilities and exposure to high-growth verticals. We believe that growth is sustainable and can be accelerated by our business combination. As with any business combination, we believe strongly in aligning both sides around a common set of objectives. Each transaction not only includes a substantial portion of equity, but also mandates a holding period that is consistent with the long-term value we intend to create for shareholders. We have demonstrated that we are disciplined allocators of capital and have a track record of delivering an attractive return on our acquisitions from the two gateways that remain a cornerstone of our growth today to more recent acquisitions like VenueNext, which have resulted in a continued cadence of new stadium wins.

Thanks Taylor. I'm now going to discuss the numbers for the quarter. In Q4, gross revenues were $399 million, which is a nearly 90% increase compared to the same quarter last year. Gross revenue plus network fees reached $147 million, an increase of 65% year-over-year. The year-over-year growth includes a 79% rise in net processing revenues due to the ongoing adoption of our end-to-end solution by merchants. Additionally, we saw a 38% increase in our SaaS and other revenue streams, driven by our expansion into the stadium vertical and deeper penetration in our core restaurant hospitality verticals. Our gateway revenue stream also grew by 50%, largely due to recovery in the hospitality sector compared to the COVID-affected Q4 of 2020. The spreads for the quarter were 74 basis points, consistent with what we reported in Q3 and eight basis points lower than the same period last year. The mix of our book remained largely stable between Q3 and Q4, with a notable year-over-year increase from the recently onboarded UPS stores during the holiday season. As previously mentioned, the year-over-year spread decline was entirely due to shifts in our mix, with our lodging vertical now accounting for approximately 19% of end-to-end volume, up from about 8% from the same period last year. Spreads in our restaurant and hotel verticals increased year-over-year by 10% and 6%, respectively. For the quarter, we posted adjusted EBITDA of $44 million, which represents a 65% increase from the same quarter last year. This result fell short of our 2021 guidance by around $8 million due to three key factors. First, as Jared pointed out earlier, the resurgence of COVID in the fourth quarter temporarily impacted our restaurant segment and significantly hindered the recovery of international travel, affecting results by $3.9 million. Secondly, we deliberately accelerated $2.1 million of OpEx aimed at scaling our technology platform and providing upfront promotional support for the upcoming SkyTab POS launch. Lastly, we incurred an additional $2 million in OpEx from various small items, including the timing of audit fees and state-specific franchise taxes. The adjusted EBITDA margin for the quarter was 30%, unchanged from last year but down approximately eight percentage points from Q3, mainly due to the aforementioned factors and typical seasonal compression in Q4 margins, which I will elaborate on later. Regarding capital transactions for the quarter from October 1st to December 31st, we repurchased about 378,000 shares of common stock at an average price of $55.81 per share, reflected as treasury stock on the balance sheet. Based on discussions with investors and analysts over recent months, I’d like to address our adjusted free cash flow. Our adjusted free cash flow is defined as free cash flow adjusted for the cash impact of items included in our reconciliation to adjusted EBITDA. For the entire year of 2021, adjusted free cash flow was $18 million, representing an 11% conversion rate to adjusted EBITDA, which is particularly relevant given the depressed volume figures we faced in Q1. In the latter half of 2021, our adjusted free cash flow was $26.5 million, which translates to a 27% EBITDA conversion rate. A complete reconciliation of free cash flow and adjusted free cash flow is available in the appendix of our earnings materials. Now, looking ahead to 2022, I would like to provide our full-year guidance. We anticipate end-to-end payment volume to be between $68 billion and $70 billion, with gross revenues projected between $1.9 billion and $2 billion. Gross revenue minus network fees is expected to be between $675 million and $705 million. Lastly, we forecast adjusted EBITDA to be between $240 million and $250 million, implying a full-year margin of approximately 35%, an increase of over 300 basis points from the 31.6% margin we expect to report for 2021. To provide more insight on margins, we indicated at our Investor Day that our high-growth core business is approaching a 40% margin profile, and this trend will carry into 2022. We also noted that we are reinvesting part of that margin into new markets and verticals to seize future growth opportunities. Combining our high-growth core and new growth pursuits brings our full year 2022 margin into the mid-30s as I just described. It’s important to note that margins will vary quarter to quarter mainly due to seasonality, with the first quarter typically having the lowest margins. We expect margins to expand as the year progresses, ultimately closing the year in the mid to upper 30s. Additionally, our guidance incorporates the benefits of migrating off the thesis back in platform, with most of that benefit expected to be realized in the latter half of the year according to our Merchant Migration plan. For adjusted free cash flow conversion, we project our cash conversion rate to adjusted EBITDA to range between 35% and 40% for the full year. In closing, it's vital to emphasize that while Omicron caused a sluggish start to 2022, management's confidence in our guidance is strengthened by the fact that by the end of February, we started setting new weekly records for end-to-end payment volume again. As of now, our year-to-date volumes through February total $8.2 billion. We believe this guidance aligns with our medium-term outlook shared during our Investor Day at Allegiant Stadium in November. Lastly, the 2022 guidance provided does not reflect any significant contributions from the two acquisitions discussed earlier. However, for 2023, we estimate that these transactions will contribute approximately $15 billion in end-to-end payment volume and at least $35 million in adjusted EBITDA. Now, I will turn the call over to the operator for questions.

Thank you. The first question today comes from Darrin Peller from Wolfe Research. Darrin, please go ahead, your line is now open.

Thanks guys. Congrats on these two acquisitions. Before we get into that, I just want to touch on the actual impact from Omicron, if you can provide us a little more detail in dollar terms on Q1, whether it's end-to-end volume, or it's the revenue and EBITDA contribution that you saw it pull back in January and into February? And then maybe help us understand the exit run rate on weekly volume. And Taylor to your point on conservatism and building bridge for 2022, I think a lot of investors coming in see those numbers as conservative also, we're just trying to figure out the magnitude of what kind of upside you could see from both the existing business you've already signed and obviously the new areas to grow? It looks like there's some real opportunity to be raised as the year goes on? Thanks.

January was particularly weak, with a decrease in active merchant counts and volume. Interestingly, some of that shortfall was made up in the past two weeks of February, suggesting that the decline may be short-lived. There wasn't a significant difference in the performance of various sub-sectors; both restaurants and hotels faced major declines. As we look ahead to the recovery this year, restaurants have improved significantly compared to a year ago. However, hotels still have a long way to go, as they accounted for about 20% of our overall volume even at lower levels. There is potential for growth in the hotel sector among our existing merchants. The recovery in the restaurant sector has just begun, typically recovering faster since people can easily book trips and flights. The $200 million a day figure I mentioned reflects our positive outlook. Jared and I noted that just two years ago, we were celebrating our first $100 million day. The experience last year was marked by significant restrictions lifting around Valentine's Day, and as the weather warmed, more people began spending at our merchant locations. The uncertainty lies in the impact on stadiums; although we had major sporting events, overall attendance at entertainment events across the country was limited, even with more venues coming on board. I'm particularly excited about that. Brad, do you have anything to add?

Yes, I believe you covered most of it. Darrin, if you consider the impact in January, I think it was mostly balanced out by February. Therefore, for the quarter, it’s likely to even out, but you're looking at around $0.5 billion of volume that’s shifting within a month. However, what we observed in February has largely alleviated the shortfall we mentioned in the earnings materials.

Okay. All right guys. Just a quick follow-up, Jared. When we consider the deals you're making, whether it's Credorax or the new name, these opportunities should really enhance the international potential you're looking into. We've talked about Starlink; can you elaborate more on how that can benefit your business in terms of how quickly you can utilize those capabilities in Europe and other regions now compared to your previous efforts? Can you leverage some of the relationships you have in the U.S. internationally beyond just Starlink and similar ventures? Thanks guys.

Yes, absolutely. Let's start with The Giving Block, which we have already acquired. We value its position in the non-profit sector, as it aligns with our strengths in integrating various software solutions to enhance donor experiences. Non-profits typically utilize multiple donor management platforms instead of just one, which makes this an attractive area for us. Our experience in connecting diverse software systems within restaurants, hotels, and stadiums positions us well to deliver a comprehensive commerce experience. Our initial collaboration with St. Jude Children's Research Hospital has provided us insight into the challenges these organizations face, and we aim to expand from that foundation. Partnering with a reputable organization like St. Jude gives us a strong starting point. Additionally, our technology addresses real pain points within a $500 billion payment market. Non-profits may not fully understand cryptocurrency but are eager to accept it to tackle their challenges. The Giving Block facilitates a marketplace allowing crypto donors to easily connect with the non-profits they wish to support, which accounts for 80% of the platform's donation volume. This effectively resolves the transaction challenges faced by non-profits, making it an essential tool that leverages our momentum with St. Jude. We plan to cross-sell traditional card payments totaling over $45 billion within our existing customer base, maximizing this as a gateway opportunity. Overall, we are thrilled about this acquisition, which will enhance our capabilities in crypto authorization and settlement across our organization. Now, regarding international expansion, it has been a consistent query from our shareholders since we went public—when will we go global? We have prominent hotel clients like Hilton, Hyatt, and Marriott, along with restaurant chains and global stadiums, which raises the question of why we haven’t expanded internationally yet. The simple answer is that we've been preparing for it. Signing with SpaceX Starlink, which presents a potential payment opportunity exceeding $50 billion in the coming years, has been a significant motivator for us. They are already processing payments globally, which solidified our decision to pursue this acquisition. Once it is finalized, we will swiftly move to target stadiums across Europe with VenueNext and implement our SkyTab POS technology throughout the region, reaching out to all of our hotel clients. This will greatly empower our integrations and product offerings, enabling us to expand into new international markets.

That makes a lot of sense. Thanks, Jared.

Thank you, Darrin. The next question today comes from Dan Perlin of RBC. Dan, please go ahead, your line is now open.

Thanks. Good morning. And it's a lot to talk about, great acquisitions here to expand the TAM. But the question I wanted to go back on Finaro for a second. When we think about the Starlink relationship and I know you had kind of the contractual obligations to the United States, is that similar as we think about the international opportunity? Or is that going to be more of a jump ball that you'll have to compete with Addie and understanding you're clearly coming at it from a position of strength?

Thank you, Dan. I am fully confident that the agreement requires all Starlink volume, with the only obligation being the 120 days to transition domestic volume, as we had the capability at that time. As far as the regulatory process allows, we will be working on integration to prepare for the transfer of the remaining Starlink volume, which will largely utilize the same integration work we've already completed to handle the initial transactions for that organization. As soon as the necessary approvals are obtained and we can finalize this, we will transition that volume. Therefore, I have no doubt that we will support Starlink transactions globally.

Got it. That's great. Just a follow-up on spreads; they've actually remained more stable than I expected. You've mentioned that some of the new opportunities you are facing may come with higher spreads. As we look ahead to this year and next year, should we anticipate that spreads will continue to degrade, or is it possible that the new opportunity cohorts you are introducing will provide more stability? Thank you.

Hey, Dan, this is Brad. I'll take that. I think you should still expect to see it. Mix is still going to change as you bring in some of the larger stadium merchants, etc. So we're still anticipating this, call it, three to five basis point decline on an annual basis. There's going to be some quarterly seasonality to that. But over time, I do think you're still going to see that spread gradually decline. And like we said, it's completely due to mix. I think our ability to maintain spreads within the vertical shows a lot of how sticky our solution is. And it also shows how we're continuing to kind of add feature functionality to those solutions that helps us maintain pricing, so we don't fall into the commoditized spread trap that you see in a lot of the traditional acquirers. But I would expect to still continue to see that decline over time exclusively related to mix.

One interesting anecdote, Dan, this is Taylor. If you consider our continued progress with larger, world-class merchants, The Giving Block provides some notable data points. They support approximately 1,300 charities that together handle $45 billion in total donations. When you compare that to our portfolio, you'll find that these merchants are significantly larger than the average in our book. So, as Brad mentioned, as we keep moving forward, we believe we've strategically chosen areas where our product offering stands out. We can command a premium over our competitors, and maintain that premium over time. However, the fact that we are consistently winning larger merchant accounts suggests that, on the whole, we should anticipate some degree of decline.

Yes. High quality problem. Excellent. Thank you guys. Congratulations on the acquisitions.

Thanks, Dan.

Thank you. The next question today comes from Tim Chiodo from Credit Suisse. Tim, please go ahead. Your line is now open.

Great. Thank you. Good morning, everyone. Just wanted to touch on the bridge that you provided on slide 14. That's really helpful to get to the 2022 volume guide. There is a nice component there from the new wins and gateway conversions during the prepared remarks, you mentioned some actions that you might take around accelerating gateway conversion for next year. So, I'm assuming, it's safe to say that next year's algorithm might include a slightly greater portion of gateway conversions. And I was just hoping you could put a little bit more context around essentially those actions that you might take and the mechanics behind accelerating gateway conversion, what that looks like in real life?

Thank you, Tim. First, I want to emphasize that our strategy has been highly successful for nearly five years. Specifically, half of our new customer acquisitions come from effectively penetrating the addressable market through our integration, while the other half are from existing customers on our gateway. We provide them with comprehensive technology and value, including encryption, tokenization, and business intelligence products, yet we primarily serve the legacy acquirer community without being fully recognized for our contributions. Over the past five years, our approach has been largely carrot-first, resulting in significant annual gross profit contributions from customers transitioning from our gateway to our end-to-end platform. We’ve consistently stated that we don’t intend to remain a gateway provider indefinitely. Many of the leading Fintech companies do not offer gateway solutions but focus solely on end-to-end services. Therefore, we must consider the resources required to maintain connections with competitors, especially with ongoing changes like new device certifications and security protocols. What we are conveying is that our tariff-first strategy will have to evolve. We need to capture a larger share of the payment economics from these transactions, either by being properly compensated for the gateway services or by encouraging migration to our end-to-end platform. We are currently planning for these transitions, which began in 2022, and expect to see an acceleration of trends, with more customers moving to our end-to-end solutions by the end of this year and into 2023.

Excellent. Thank you, Jared. I really appreciate that context on the gateway conversion. My brief follow-up is on the processing coming in-house. This is more for Brad. Is there an updated estimate on what the gross margin benefit might be in terms of the basis points we might see in terms of the lift related to that move? And when we should start to see that really phase in and start to impact gross margins?

Yes. Hey, Tim, this is Brad. Our estimate is about 150 basis points in total for the full year. However, due to how we're transitioning our merchant base, you can expect to see about half of that beginning around May, June, and July.

Excellent. Thank you both.

Sure.

Thank you. The next question today comes from Jason Kupferberg from Bank of America. Please go ahead, Jason. Your line is now open.

I appreciate the year-to-date volume number through February, but was just hoping you could maybe give us a little bit more detail on your full Q1 expectations for volume, for revenue, for adjusted EBITDA, just to make sure we get the models into the right place, and then maybe a little bit more just on quarterly cadence of growth. I know, the comps are going to get progressively tougher beyond the first quarter.

Hey, Jason, this is Brad. I'll address that. We're not providing explicit guidance for Q1, but we wanted to give some context regarding the year-to-date volume figures. There are a few things to consider while calibrating your Q1 model that we mentioned in my script. You can expect some volume acceleration as we approach March, which is a typical seasonal trend for us, especially with the improvement in weather and an increase in travel during spring break. Additionally, it's important to note that Q1 margins usually represent the lowest margins of the year, generally around 300 to 500 basis points lower than what you see in Q2 and Q3 due to seasonality. So, while we're not specifically guiding for Q1, we hope we've provided enough information for you to refine your models.

One thing just because this is the most interesting quarter for us, it probably helped you a little bit. We talked about that $8.2 billion in volume that we've seen in the first two months of the quarter. A little bit more than half of that was February. So that should drive with this concept of being slow in January as a result of Omicron, and then, quite frankly, a really nice finish to the month of February. March typically has a pretty significant step function up from February, if you recall from prior years. I don't think, we would doubt that's likely to occur again, although, we are cautious on spread margins just because of the way Q1 typically manifests itself vis-à-vis the others.

Yes, I guess one last thing I would put into this is, I don't know if anyone actually recalls like what our updates were like in February of 2021. But we basically were communicating that from Valentine's Day weekend through February, we were setting new weekly volume records every week. So, now we've already said in February that we saw our first day a daily record of over 200 million in volume that's nearly double the highest volume day from last year in the same month.

Okay. Yes, that's all good color. And then just a follow-up on the volume bridge chart that I wanted to ask about just as we think about this 46% to 50% guide for 2022. I mean, I know you talked about 50% plus CAGR at the Analyst Day, but it does sound like there's some elements of potential conservatism here. So I was just wondering, as we look at those pieces of the bridge, where some of that conservatism might be most likely to manifest itself based on what you guys know today?

So, I think we all have areas where we think we're probably being conservative. Mine, in particular, is that contribution of new markets you see that $3 billion number. If you think about some of the marquee wins that we announced. It doesn't take a lot from anyone of those single names to get you most of the way there. I think the one thing that we're just like cautious about is just activation of those marquee merchants throughout the year, put any one of them in good progress, and it could accelerate new. I mean, we don't like to set immediate expectations around acquisitions because we really like to focus on getting the integration right, and go to market perfect. But that $45 billion of donation volume across the giving loss charity base is something that kind of business development is laser-focused on and they were talking about intensely last night at our closing dinner. So I think there's a bunch of areas inside of it. I talked about the return of hotel travel being something that could lift this meaningfully. But my particular favorite is contribution to the markets, although, I do expect it's a second half contribution more so than the first half.

And just to pile on to that point. It’s probably a quarter or two ago now, I guess in the last quarter since we announced St. Jude. The question came up of how big we see gaming contributing to our volume going into the years ahead of which we've said we believe we're is well positioned in anyone to win more than our fair share on wagering, especially considering our in-venue casino presence. But I also said that I anticipate non-profits being far bigger. I mean, mobile wagering in the U.S. market could be mid to high single-digit billions in volume opportunity, which again, we think we're pretty well positioned to win. We now have a $45 billion cross-sell in non-profits alone, just from the 1,300 customers we already have, by virtue of The Giving Block acquisition, along with the capability that virtually the entire non-profit sector space is going to need to embrace at some point or another. If we are going to really surprise and shine in this year, my bet would be is it's going to come from the non-profit vertical and maybe even directly from the week fast organic growth that you're seeing inside The Giving Block itself, even before the cross-sell synergies.

Okay. Very helpful, guys. Appreciate the commentary.

Thank you very much for joining us today. We know we had an awful lot to cover, and quite a bit took place for sure in the fourth quarter, but hopefully, after going through everything, it remains clear. We're growing incredibly fast across all of our core verticals, as well as all the new ones that we've expanded into. And we've reinforced that with two acquisitions that are going to just further our right to win in some of these verticals and expand our reach globally. So a lot going on. I would say really, I'm speaking for all the management right now. We've probably never been more enthusiastic about the opportunities that are ahead and appreciate all the support. Thank you.

That concludes today's Shift4 fourth quarter 2021 earnings call. Thank you for your participation. You may now disconnect your lines.