Shift4 Payments, Inc. Q2 FY2022 Earnings Call

Hello and welcome to the Shift4 Second Quarter Earnings Call. My name is Alex and I will be coordinating the call today. I will now hand over to your host Tom McCrohan, Head of Investor Relations. Tom, over to you.

Thank you, Alex, and good morning everyone and welcome to Shift4 second quarter earnings conference call. With me on the call today are Jared Isaacman, Shift4's Founder and Chief Executive Officer; Taylor Lauber, our President and Chief Strategy Officer; and Nancy Disman. This call is being webcast on the Investor Relations section of our website, which can be found at investors.shift4.com. Our quarterly shareholder letter containing quarterly financial results has also been posted to our IR website. Our call and earnings materials today include forward-looking statements. These statements are not guarantees of future performance and our actual results could differ materially as a result of many important factors. Additional information concerning those factors is available in our most recent reports on Forms 10-K and 10-Q, which you can find on the SECs website and the Investor Relations section of our corporate website. For any non-GAAP financial information discussed on this call the related GAAP measures and reconciliations are available in today's quarterly shareholder letter. With that let me turn the call over to Jared. Jared?

Thanks, Tom, and good morning everyone. So we have a lot to cover today. As you may have seen from an 8-K filed last night, Brad Herring, our Chief Financial Officer is pursuing other opportunities. We are really grateful for the time and effort Brad has contributed to Shift4. Since his joining the company in 2019 we've gone public on the New York Stock Exchange, diversified into six new verticals, completed several acquisitions and grown our end-to-end payment volume over 200% all with the backdrop of a global pandemic. So Brad played a key role in all of this and we sincerely thank him for his service. As of tomorrow Brad will be succeeded by Nancy Disman who is both a phenomenal industry executive and a good friend to Shift4. Nancy most recently served on our Board of Directors from which she has resigned effective as of tomorrow. She is also recently the CFO and CAO of Intrado. Prior to Intrado, Nancy served as the CFO and CAO of TSYS Merchant Services following TSYS acquisition of TransFirst, where she also served as CFO. Nancy has also held executive roles at Cynergy Data Corporation and First Data Corporation, and we're really excited to continue working with Nancy in her new role. So now for the quarterly update, as mentioned in my letter, we are really pleased with our results this quarter including the progress we are making in all our new verticals, although our high growth core continues to be the primary contributor of our overall performance. For the second quarter, we generated 43% year-over-year growth in our end-to-end payment volume and 34% year-over-year growth in our gross revenue less network fees. We continue to gain market share across our high growth core growing from net new wins and gateway conversions and now with our new verticals beginning to ramp meaningfully. We believe we are positioned to deliver consistent profitable growth even as we continue our expansion into new verticals and new geographic markets in the months and years ahead. As in the past, I will focus my comments initially on our high growth core then speak to our new markets and verticals. But before getting into the components of our business, I want to highlight our current thoughts about the overall economy and its potential impact on our business. In short, we have not yet witnessed the material impact on our overall volumes from changes in consumer behavior. Our full-year volume CAGR improved from last quarter and our monthly volume trends continue to improve as we approach the seasonally stronger summer months. Having said that, we're also realists; we are aware that persistent inflation headwinds could ultimately influence consumer behavior and this could result in consumers pulling back on some discretionary spending. We are fortunate to have invested in our new verticals, as well as specific levers that are less impacted by economic cycles. In short, we believe that we are prepared to manage our business through all economic cycles, just like we have done over the last 23 years and we intend to continue growing revenue and volume every year through the best and most challenging economic times. To this end, we are leaving our end-to-end volume guidance unchanged for this year, while increasing our gross revenue less network fees, increasing adjusted EBITDA and increasing adjusted free cash flow guidance. While we cannot predict consumer behavior in this uncertain environment, we have witnessed early success in our Gateway Sunset strategy, which gives us confidence in our ability to drive incremental revenue and EBITDA above our prior expectations. Our conversations with our gateway only customers are very encouraging, and we view our decision to leave volume unchanged, but increasing revenue and adjusted EBITDA guidance as a balanced approach to take during these uncertain times. I want to emphasize our belief that unlike some of our peers, we are not completely at the mercy of the broader economy, our gateway and software-only merchants provide a highly unique asset and that we can grow exponentially without even adding a new customer. I'm going to focus the remainder of my comments on the performance of our high growth core and then an update on our new markets and verticals. So with respect to high growth core, as you can see this quarter, the primary driver of our performance does remain high growth. This high growth core represents the payment opportunities we pursue, primarily in complex restaurants, hospitality and specialty retailers. As many of you already know, Shift4 has been growing at accelerated rates in this arena by leveraging our unique software integrations and pain point solving technology. We currently have over 450 unique software integrations and we continue to win share through a combination of migrating merchants off our gateway platform to our end-to-end service, as well as net new wins in what is a very large addressable market. Our growing library of software integrations results in more links in the value chain to deliver a lower effective cost of service to our customers. Said differently, we are able to offer our customers more capabilities at a lower cost because they no longer need to depend on a multitude of other costly vendors to attempt to achieve a comparable solution. Throughout the quarter, we signed a number of new resort properties and high-end restaurants, including the soon-to-be-open Noble Hotel in Atlanta, the New Orleans based hotel in Monteleone, the Langham Hotel in Chicago, Manhattan's Gassing Board hotel and Feld Entertainment, which operates Disney on Ice, Monster Jam, Wrangler Brothers and Sesame Street live, among others. As a result, during the second quarter, we organically grew our end-to-end payment volumes faster than any of our peers and faster than Visa and Mastercard. One proof point would be our nearly 42% four-year volume CAGR, including 52% volume CAGR in restaurants and 170% volume CAGR in lodging. As a reminder this four-year volume CAGR occurred during an unprecedented pandemic when our end markets have been quite impacted. For the quarter, our volume growth is 307% of pre-pandemic 2019 levels, along with gross revenue less network fees at 243% and adjusted EBITDA at 272% over the same period. It's worthwhile calling out that this growth took place without the benefit of our new markets and verticals, which are now just beginning to ramp. As discussed in the prior quarters, we have just begun removing complexity, eliminating legacy parts, and increasing organizational efficiencies by executing on our Gateway Sunset initiative and are very confident in our ability to successfully convert gateway-only merchants to our end-to-end platform or charge them more in line with the value our payment technology provides. While it's early, the results are very promising, and Taylor is going to go into that in just a few minutes. I did want to highlight a case study on the Gateway Sunset strategy that I believe is emblematic of why we are so confident in this approach. During the quarter, we signed a world-renowned motorcycle franchise that we had historically been unsuccessful converting to our end-to-end platform. We had been soliciting this merchant for nearly five years and despite our efforts, it was ultimately our Gateway Sunset initiative that enticed this merchant to engage with us to discuss the merits of switching to our end-to-end platform. We are in the process of migrating this motorcycle franchise to our platform and we are having hundreds of similar conversations with other gateway-only customers. So I cannot be more excited about the pipeline; the Gateway Sunset initiative is the right strategy at the right time and for all the right reasons. While contribution from our Gateway Sunset initiative was minimal this quarter, we're highly confident the initiatives will result in us getting paid fairly, regardless of clients paying us more to remain gateway only or electing to convert to our end-to-end platform. We expect that it will contribute incremental adjusted EBITDA and adjusted free cash flow and is one of the factors driving our increase to our full-year guidance. In restaurants, we reached an agreement with the enterprise operator BJ's Restaurant and Brewhouse, a Southern California headquartered national restaurant chain with over 200 restaurants in 29 states. We signed a multi-year agreement with BJ's to provide POS software as a service for all the restaurants across the US. We also reached a similar agreement with one of the world's largest restaurant groups. These opportunities represent a meaningful recurring revenue and EBITDA contribution that we expect to be realized more towards the latter part of 2022 and into 2023. This represents the first of several notable restaurant opportunities we are in discussions with regarding our restaurant POS offering. Moving to SkyTab POS, I would like to update you on the progress of our next-generation POS product that will serve the restaurant market. Restaurants remain a key market for us and that is why we have invested over the last few years in a new cloud-based restaurant POS offering called SkyTab. We are getting ready to launch SkyTab POS from beta at the end of this month and it's already installed in thousands of locations. SkyTab is not just designed for restaurants as we are also having early success in selling SkyTab at theme parks and resorts. We also intend to bring this product into international markets. Recall we are uniquely advantaged to pursue over 125,000 restaurants that are already customers using some form of Shift4 technology; many of them are not on our end-to-end platform and even fewer are paying any fast charges. We expect that SkyTab POS will represent the migration path for this existing base of restaurants, many of whom are seeking out new capabilities to better serve their patrons, in addition to the large addressable market of just new restaurants. SkyTab services the mid to high-end restaurant customer based on a cloud-based Android technology stack built from the ground up and equipped with very modern and purpose-built space-aged hardware. We have been going to market with SkyTab through our historic third-party distribution channels, but have recently begun pivoting towards direct sales, in the same way we go to market in many of our new verticals. We have found early success selectively insourcing some of our third-party distribution partners in the most desirable markets as the opportunity to insource distribution becomes increasingly viable with the cloud-based solution. We believe we can improve the customer experience alongside margins without compromising the same high-touch support our customers have grown accustomed to receiving. So to summarize, our high growth core, we are excited about the combination of our accelerated gateway conversion plan, the launch of our new SkyTab POS offering and the momentum from our high growth core supported by our unique integration with over 450 mission-critical software suites. All of this gives us confidence in our outlook and supports our decision to increase our gross revenue less network fees, our adjusted EBITDA and adjusted free cash flow guidance for the full year. So moving on to new verticals. As I mentioned previously, our impressive volume growth has been without significant benefit from our new verticals. For clarity, we consider our new verticals to be sports and entertainment, gaming, travel, nonprofit and what we refer to as sexy techs. This should not be surprising; it should be challenging to get the attention of software companies and enterprise merchants to complete a payment integration. We often see that software companies and merchants tend to want to invest their time in anything but additional payment integration, which is why they become so valuable once you've achieved it. We are really pleased with the progress we made in the second quarter. So much of the progress was literally made in the last week of June when the Starlink integration went live. So while our new verticals contributed throughout the year and into June, they've only really begun to scale meaningfully in July, and Allegiant Airlines is not expected to go live until late August. We added a chart in page eight of our quarterly shareholder letter depicting the year-to-date ramp in monthly volumes for our new markets. And while it has taken a bit longer for our new verticals to contribute to our volumes, we feel really good about how that ramp is progressing, the contributions they can make in the second half of the year, and how these strategic relationships and verticals align with our global expansion aspirations. To emphasize these points, we do expect to see a much stronger contribution from these verticals as the year progresses. For example, we are in the process of implementing a number of large NCAA and NFL stadium clients in time for this football season. We are adding more states and capturing more volume from BetMGM, turning on more integrations from our non-profit customers, and we're more than halfway through the Allegiant Airlines integration and, of course, Starlink volumes are on an impressive trajectory as they continue to populate their satellite constellation. I am biased, but I believe that we have never had a merchant in our history that is ramping as quickly or had so much upside as Starlink. In gaming, we continue to add new commercial and tribal gaming supplier licenses and BetMGM volume has more than tripled since our last earnings call in May. We continue to build upon our early success with BetMGM and have added several states this past week alone. As a result, we expect to see a significant and sustainable spike in volume before the end of the third quarter, given the seasonally strong sports wagering tied to the football season. In nonprofits, we began processing for St. Jude's in January of this year and overall volume continues to ramp. With our acquisition of The Giving Block, we've seen impressive results across multiple KPIs that Taylor will talk to in just a minute. Given the nature of nonprofits, we expect the fourth quarter to represent the peak season for donation volume. We are scheduled to complete an integration of Allegiant Airlines by September 1st, and we have signed a European travel agency, Kiwi.com, as a customer, and expect to begin processing shortly as well. Turning back to stadiums, we signed a number of new professional and college sports stadiums, including the University of Alabama, University of Wisconsin, University of Notre Dame and professional sports teams, including the New Orleans Saints and Pelicans where we also provide ticketing. Our VenueNext mobile commerce technology is the category leader in sports and entertainment venues, and our software is now installed in well over 100 stadiums in the US. Our new business pipeline in this space remains very strong, including international stadium discussions. Perhaps the most important competitive win this quarter came from sports-focused retailer Fanatics. We will process all of Fanatics in-venue payment processing at approximately 50 sporting and entertainment venues, including PGA Tour events and NASCAR races. As a leading manufacturer and distributor of sports-related merchandise, Fanatics will be a tremendous partner as we mutually expand our footprint in the sports and entertainment space. Our performance across these new verticals alongside our stated international expansion plan has attracted the interest of many notable customers. Somewhere in the negotiation phase, others we have won, and in some cases we are not permitted to announce publicly, and in others like Fanatics and Time, we have recently selected Shift4 to power their payment strategies. It's worth reinforcing that Shift4 wins because of our ability to solve our client's problems. Merchants are not switching to Shift4 to save a basis point or pennies per transaction, even though in our experience they usually benefit from an overall lower effective cost of service. Instead, they switch because we offer complete commerce solutions that enable them to better engage with their customers and patrons such as QR codes, online ordering, mobile and contactless payments, business intelligence and more. This is why despite our continued move upmarket, our net spreads have remained stable over a multi-year period and our move upmarket has been at an unprecedented pace; we've effectively doubled the size of our average merchant since 2019. So before passing things off to Taylor, I wanted to provide you with an update on our recently completed acquisition of The Giving Block and the pending acquisition of Finaro. The Giving Block's crypto donation platform continues to sign up new nonprofit customers despite the drop in value of crypto assets. As I write this, a single Bitcoin is still valued at over $20,000, and nonprofits are still interested in accepting cryptocurrencies such as Bitcoin. Since we closed the deal back in March, the Giving Block has signed up over 400 new nonprofit customers, including the world's largest humanitarian organization, the World Food Program, as well as many other highlighted in our quarterly shareholder letter. The Giving Block has introduced a card widget for nonprofits so they can accept traditional card-based donations, and the growth in their client base has resulted in a nearly six-fold increase in their SaaS revenues versus a year ago. The team continues to execute on the significant $45 billion cross-sell opportunity and has successfully converted several Giving Block customers to our end-to-end platform. We believe our go-to-market offering remains unique in the nonprofit sector and is highly attractive to what we view as a $450 billion payment opportunity where we now have a unique right to win. While on the subject of The Giving Block, I would like to personally thank those of you that participated in our Caring with Crypto fundraising campaign. We launched this fundraiser in mid-March to raise awareness within the crypto community, and I agreed to personally match dollar for dollar every crypto donation made on The Giving Block marketplace up to $10 million. Parts of this fundraising campaign are still underway, and I encourage all of you to check out the givingblock.com website for more information. We are also making progress receiving all the necessary European regulatory approvals to close on our acquisition of Finaro later this year. As a reminder, we announced the acquisition of Finaro back in March in conjunction with our year-end results. For those unfamiliar, Finaro is a European cross-border e-commerce platform with processing capabilities and licenses in Europe and parts of APAC. The two sides are making great progress connecting the payment platform via arm's length partnerships during the regulatory review period, and we have successfully tested transactions between the US and Europe. We intentionally structured the earn-out portion of this transaction to encourage both sides to pursue commercial opportunities up until closing, and the teams are working together nicely on a number of initiatives. For example, we are beginning to refer each other merchants. Finaro services many e-commerce merchants in Europe that also have US operations supported by US payment processors. I'm pleased to announce that Denmark-based online sporting goods retailer SkatePro is one of the first wins alongside Kiwi.com. SkatePro is an e-commerce customer of Finaro who relied on Finaro for their European e-commerce processing but outsourced their US payment processing to a US competitor. Going forward, SkatePro will switch their US payment processing to Shift4, effectively consolidating all their global e-commerce payment processing business into a Shift4-Finaro solution. There are many other merchants we are currently in discussion with regarding a joint US-EU offering and are pleased that our planned acquisition is yielding synergies in advance of the planned closing date. We do retain significant firepower to pursue additional acquisitions and remain focused on building out our global technology capabilities in the markets to support our signature multinational customer. We have a low pro forma leverage ratio and a ton of conviction around our strategic plan. Internally, we remain very focused on operational improvements to make us a much more efficient company consistent with the Shift4 way. This includes investments we have made in our payment platform that has delivered 100% uptime during the quarter despite immense growth and something few of our competitors were able to achieve over a comparable time period. In addition to the executive transition mentioned at the onset of the call, this past quarter we promoted Samantha Weeks to the Chief Transformation Officer role to better align our human resources, learning and development, transformation, project management and mission assurance functions under a single department. Her team will identify and execute on various productivity improvements, and we are confident our initiatives will drive productivity, excellence and further margin expansion in excess of what we have already communicated earlier this year. I would be remiss if I did not comment on the current market environment adversely impacting financial technology companies, including Shift4. We strongly believe that there remains a disconnect between our growth and our valuation in the public markets. We have generated superior growth and are on track to deliver over 30% revenue growth and over 50% adjusted EBITDA growth this year and expect to generate over $100 million of adjusted free cash flow. Despite these results and unparalleled performance during a completely unforeseen pandemic, we still trade well below what I believe to be our intrinsic value. Some will view these comments as self-serving, but I challenge our company to thoroughly evaluate the cost of being a public company against this backdrop. We view our strategic initiatives, customer wins and operational tactics as highly valuable, and even more so during times of economic uncertainty. Sharing them regularly is just one example of the unnecessary headwinds we face. So with that let me turn this call over to our President and Chief Strategy Officer, Taylor Lauber Taylor.

Thanks, Jared and good morning everyone. I will focus my prepared remarks on how we see our volumes trending for the balance of the year, an update on our acquisitions, and then some additional color on our major strategic initiatives, which is primarily our Gateway Sunset initiative. Our previously provided volume guidance for this year assumed a modest recovery in international and business travel and $3 billion of contribution from the new verticals, such as nonprofits, Starlink, gaming and sports and entertainment venues. We are benefiting from the ongoing resumption of travel evidenced by the sequential improvement in our lodging volume CAGR, although the volume contribution from our new verticals had initially been slower to ramp than we would have predicted. This is both a benefit and a detriment. A detriment because we'd always like to see the volume sooner than the benefit because the work is complex and with that complexity comes barriers to entry for our competition. Said more simply, the longer it takes the more confident we are in our competitive positioning. This is all to say that we are optimistic about our success in net verticals, but still somewhat cautious about the macro environment. We did witness the typical seasonal uptick in volume throughout the quarter and into the month of July. Our hotel volumes continued to grow meaningfully month over month, and we continue to add new hotels at a decent clip. Our volume trends throughout July were consistent with our expectations, but we remain cautious on predicting volume trends for the balance of the year given the uncertainty around consumers' reactions to persistent inflation and rising interest rates. We do believe that consumers will ultimately pull back on discretionary spending if food and fuel prices remain high, but predicting how and when behaviors change remains something we believe everyone is struggling with. We are leaving our volume forecast unchanged for 2022, and despite the delay in new verticals, we find it very encouraging that the contribution from these verticals is starting to ramp up nicely. Turning to acquisitions, we closed on the acquisition of The Giving Block on February 28 of this year and are working through the necessary European regulatory approvals for a fourth quarter close of Finaro. In regards to The Giving Block, the ongoing volatility in the crypto space has not altered our initial view that our right to win in the nonprofit space has improved by owning The Giving Block. And going to market with a differentiated offering that includes crypto acceptance provides us with a unique advantage. As you recall, we intentionally structured the transaction with a significant portion being tied to revenue targets in order to insulate the many shocks in the crypto markets. In short, we believe that we are very well protected on our initial investment and the business continues to operate at breakeven. Nonprofits continue to get added to The Giving Block's platform, all of whom are paying SaaS revenues. The customer count is growing and we remain cautiously optimistic heading into the end of the year as the majority of donations occur during the fourth quarter and in December more specifically. In the meantime, we continue to execute on the $45 billion cross-sell opportunity and are improving the product every day, including adding the online widget, which Jared mentioned earlier. For Finaro, we are pleased with our ability to deliver a cross-border solution for global e-commerce merchants and have successfully completed testing transactions between the US and Europe. As Jared highlighted, we will begin processing US e-commerce transactions for SkatePro, Kiwi.com, as well as European transactions for Starlink later this year and are in discussions with many more. As a reminder, we are not including any contribution from the acquisitions in our guidance but do anticipate a positive contribution in 2023. We are leaving our expected 2023 adjusted EBITDA and volume contribution for both The Giving Block and Finaro unchanged. As a reminder, for Finaro, we anticipate $15 billion of end-to-end payment volume and roughly $30 million of adjusted EBITDA contribution. And for The Giving Block, we anticipate roughly $5 million of adjusted EBITDA contribution. As mentioned in May, we embarked on our Gateway Sunset strategy during Q2. You will recall that this strategy is comprised of numerous short and long-term benefits to the company. It is designed to grow revenues, add end-to-end merchants and reduce operational inefficiencies. The pandemic slowed our business in many ways, not the least of which was delaying the implementation of these plans until just now. Our plan involves limiting our gateway-only offering, deprecating legacy connections and accelerating end-to-end convergence. Our process has been good, having identified roughly $4 billion on such connections and already converted approximately $700 million of that $4 billion. We have also increased pricing which more appropriately assigns value for the critical services we're providing as a gateway. Another notable event during the quarter is the increased opportunities with regard to M&A. We've been patient with our capital and suspect that this patience will be well rewarded as we look to execute interesting growth catalysts. As Nancy is in the process of onboarding to become our new CFO effective tomorrow, I will review the financial performance for the quarter. Q2 gross revenues were $507 million, up 44% from the same quarter last year. Gross revenues less network fees were $183 million, an increase of 34% over the last year. Our revenue growth breaks down as follows: First, 43% year-over-year increase in net processing revenues driven by year-over-year growth in end-to-end volume. Second, a 25% increase in our SaaS and other revenue stream driven by higher merchant counts in our high growth core and expansion into new verticals. Finally, our gateway revenue stream was roughly flat year-over-year as a function of decreased transaction accounts from the gateway conversion I mentioned earlier, offset by a partial quarter of our recently launched Gateway Sunset strategy. Spreads for the quarter came in at 78 basis points, which is consistent with what we reported for the same period last year. Similar to our discussion last quarter, Q2 of ‘21 spreads were depressed approximately 2 basis points because of a higher debit mix from the issuance of last year's government stimulus. This is evidenced by our interchange rate, which has increased from 182 basis points in Q2 last year to a more typical 192 basis points this quarter. When adjusting for card mix, spreads in the second quarter of this year declined by approximately 2 basis points year-over-year. This is expected as we continue to expand larger merchants and new verticals. For the quarter, we reported adjusted EBITDA of $66 million, which is up 45% over the same quarter last year. The resulting adjusted EBITDA margin for the quarter was 36%, which represents a 270 basis points of margin expansion over the same period last year. I want to note that we are continuing to invest methodically into our growth strategy while delivering this margin expansion. Adjusted free cash flow in the quarter was $16.4 million, which compares to a nearly neutral free cash flow position for the same period last year. It's worth noting that Q2 also includes a semi-annual interest payment of roughly $10.4 million, which can distort the quarterly comparisons. And in that regard, it makes Q2 look even more favorable for this quarter. The current quarter result brings year-to-date cash flow to just over $30 million, which equates to a free cash flow conversion percentage of roughly 27%. A full reconciliation of the adjusted free cash flow is available in the appendix of our earnings materials. With respect to capital transactions within the quarter between April 1 and June 30, we repurchased approximately 3.6 million shares. Our buyback program has cumulative purchased 4.3 million shares. And as Jared mentioned, we continue to believe the stock is meaningfully below the intrinsic value of the company. You can also see a reconciliation of our shares in the back of our earnings materials. You will note that our guidance reflects both the cautious outlook on the consumer but also a significant optimism in the performance of our business during the second half of the year. We believe that the Gateway Sunset strategy and early indicators for SkyTab and new verticals warrant a modest increase in our gross revenue less network fee outlook and are increasing our guidance range to $690 million to $710 million, up from $675 million to $705 million previously. We are also increasing our full-year guidance on adjusted EBITDA to $255 million to $265 million, up from $240 million to $250 million previously. Finally, we are reaffirming our previously discussed free cash flow conversion rate of 35% to 40%, but do expect full year free cash flow conversion to land towards the upper end of that range. Lastly, I'd like to welcome Nancy to our first earnings call.

Thanks. Taylor. I've had the privilege of watching Shift4 from my seat as a Board member and couldn't be more excited to join and expand on the great foundation Brad has built in the finance organization. I also look forward to spending time with our shareholders and analysts in the coming weeks.

And with that, Alex, we can turn it to questions. Thank you. Our first question for today comes from Ashwin Shirvaikar from Citi. Ashwin, your line is now open. Sorry Ashwin, we're not receiving any audio. Your line is now open.

Hey, sorry about that. Can you hear me now?

Yes, we got it. Yes.

I wanted to ask with regards to gateway conversions, are you seeing success maybe in any particular end markets. Now, obviously, you've had this arrow in your cooler for some time. Maybe could you review what's different now in terms of client receptivity and if there is economic weakness would gateway conversions accelerate?

It's a great question, and I appreciate you bringing it up because it's important to highlight where we stand in this journey. We've had significant success in increasing payment volume from restaurants and hotels during the pandemic. However, it's worth noting that this wasn’t a primary focus for restaurant and hotel operators during that time. Our initiatives on the gateway have enhanced our visibility with these merchants throughout the quarter, which is fitting as we near the end of this pandemic phase. We presented several examples to demonstrate our diversity, including noteworthy healthcare opportunities and securing a Board meeting at the Langham in Chicago, a stunning hotel we acquired through these efforts. Our strategy has been about prioritizing specific connections and how we engage with them. The case study I mentioned involved identifying around $4 billion in connections, which have actually been around for a long time but needed to be phased out, allowing us to secure $700 million in annualized volume just by focusing on discussions about these connections within a month and a half. We are pleased with our success rate and are taking a methodical approach given the current economic conditions. In terms of market reception, a downturn in the broader economy doesn't lessen interest; in fact, it heightens our merchants' eagerness to find cost-effective solutions. Every business operator we're speaking with is currently more conscious of their expenses, and our offering provide a more economical option. While a decline in consumer spending might reduce volume for each merchant, we do not believe it will hinder this initiative.

Hey, Ashwin, it's Jared. I wanted to focus on which sectors within the gateway are gaining traction. It's particularly evident in lodging. At one point, we indicated that we believe we handle about 40% of the hotel lodging volume in this country. However, from an end-to-end perspective, we've stated that we're at approximately 10%. There's a significant gap between 10% and 40% that we find easily reachable since we're already facilitating that commerce experience. Moreover, when customers switch to our end-to-end platform, they typically benefit from lower service costs. During the pandemic, pursuing hotel customers was challenging as many had furloughed their IT teams and prioritized other issues over changing their commerce provider. Currently, we're successfully acquiring lodging customers, and we see plenty of opportunities to expand further. These customers remain easily accessible for us to engage with. Even if there were to be a slowdown in travel and hospitality, the increase in gross profit from these gateway customers transitioning to our end-to-end platform will drive our growth. This aligns with our ability to grow during the pandemic when all our end markets were significantly affected, yet we still saw double-digit growth in end-to-end payment volume. I believe lodging is a key area in our high growth segment where we will continue to see strong traction this year and in the future.

Got it. Thank you for that. And then the other question was volume contribution from new verticals. As we think of modeling the rest of the year and maybe a point question on one specific client Allegiant. It's one client, but it is a measurable client, was that in your outlook previously, the specific timing or has that timing also changed?

Well, so we never gave any real specific customer targets in terms of volume. I mean, we might have given some approximations of what we thought they could represent at the Investor Day last year. We generally in our bridge said in 2022 we're expecting a contribution of about $3 billion in end-to-end volume from our new verticals. So I'm sure, I mean, if you were to look up what Allegiant Airlines represented as a standalone customer relative to that $3 billion, you could say it's a big portion of it. At the same time, there is a lot of other customers in there that are huge. The idea was always that $3 billion target for 2022 and new verticals was to be viewed as conservative, no matter which direction you looked at it from the stadium side, from the Starlink side from Allegiant side. So I guess, probably the real message that we are trying to communicate this quarter is that, integrations take a long time, it's largely dependent on third-party software companies that are powering e-commerce solution or the time that an enterprise customer is willing to commit to work through an integration. So it did take a little bit longer, but they have essentially come online with the exception of Allegiant in literally the last week of the second quarter and it's now ramping pretty quickly as you can see from July. So whether Allegiant is delayed a week or not, whether Starlink is more than people would have expected or whether it's NCAA or NFL like they're all going to be pretty meaningful contributors. You kind of just choose your own adventure, which one kind of carries the bulk of the weight in the second half of the year.

Right. Thanks. But basically the $3 billion is still a decent number and we can take that traction into next year.

Allegiant is a significant number, but when you consider the NCAA stadiums and NFL stadiums that we now have thanks to Starlink, it's clear that we are seeing substantial growth. BetMGM, for instance, is significantly ramping up, with several states added just this week. In reference to the $3 billion in new verticals, Allegiant is an important part of that, along with everything else; all are starting to perform well.

Understood. Got it. Thank you, guys.

Thank you. Our next question comes from Tim Chiodo from Credit Suisse. Tim, your line is now open.

Great. Thanks a lot. Good morning everyone. So I think Jared really hit on it in terms of Shift4’s ability to have an idiosyncratic driver, essentially despite the macro. Given all the macro uncertainty, I think that investors are even more focused on the gateway conversion opportunity for Shift4 than ever. So to that point, I think Ashwin's question really hit on it, but maybe as a follow-up, could you just recap again the various approaches that you can take, so there's this cost that you have to maintain those connections. Of course, one is the sunset approach, but there's also sort of the quicker price increase, there is the slower price increase and maybe some other initiatives that you're doing to help better monetize overall, even if it's not a full conversion. Maybe you could just provide some additional context on maybe the mix of those approaches.

Yeah, sure. Hopefully, you also picked up on Jared’s comments around us being slightly hesitant to explain our detailed strategies in real environments like this, but I'll give you the broad brushes and you capture the essence of it right, which is that there are significant operational efficiencies to our organization for simply being less of a gateway and then there are significant revenue opportunities for us converting merchants to end-to-end, and we balance those two approaches all the time. The first, and I would say the softest of the approaches, that we limited a series of activities that were related to our gateway-only customers. These are services that independent gateways would traditionally provide like moving from one processor to another. We limited those functions and saved several hundred cycles for our operations team every single month, that's an immediate win and quite frankly pretty low friction to all of our existing customers. We also identified roughly $4 billion of connections that, quite frankly, should have been sunsetted longer, we had identified these connections in the end of 2019 when we acquired Merchant Link and it would have been inappropriate in our view to do so during the kind of peak of the pandemic. So that compelled a really nice wave of merchants to move over and it simply provided them notice that these connections won’t stick around for a period of time. I think we spoke about them at a lunch you hosted as well. On separate from that, we have identified certain categories of merchants that are non-economic and we just won't maintain that relationship in that context. In almost every case, that resulted in a nice and meaningful revenue lift from that basket of customers and we'll continue to do that as the initiative moves on.

Yeah. Jared here. I mean there's so much to talk about with respect to the Gateway Sunset initiative. And just the gateway conversion strategy in general which really affords us a pretty unique right to win relative to others that kind of happy what they go out there. I'd say, first, as part of Gateway Sunset it's probably worthwhile to reinforce that one of our gateways that we acquired in late 2019, it was a joint venture between two of the largest payment companies in the world. They intentionally underpriced many of the customers on that platform in order to kind of capture the economics upstream of the gateway at one of those two financial institutions. I mean, almost to a ridiculous level. So just the fact that those agreements, some of them are dated 10 to 15 years old, but they are absolutely enormous customers are coming up for renewal. It's kind of a time to have a reset of what actually is the kind of fair value for the service that's being provided and what it's doing, it's stimulating conversations on our end-to-end platform that had we not taken this approach would never have happened. I also want to go to the complete other end of the spectrum, which is not just kind of the stick base, but care base. The PCI Council out there does a great service for us. Every four or five years they pretty much declare that every EMV contactless device that's deployed in the country is no longer compliant, in which case every one of the customers is forced to consider a pretty large capital outlay. Now, we have always leaned in heavy in terms of the inventory we're willing to carry for EMV devices. We have our own PCI validated key injection facility. So we maintain chain of custody of those devices because we know at any given time you could have a very large several hundred location customer decide to move to our end-to-end platform and we want to light them up rather quick. So it lines up saving that customer the initial capital outlay plus the ongoing cost of service is less by moving to our end-to-end. I just want to reinforce that the tariffs that have helped us win and convert gateway customers for five years now are still driving a ton of the action that's going on in our gateway to end-to-end conversion process.

Thank you for that Jared and Taylor. And congratulations to Nancy.

Thank you. Our next question comes from Andrew Bauch of SMBC Nikko Americas. Andrew, your line is now open.

Hey, good morning, guys and thanks for taking my question. Wanted to touch upon some of the guidance here, it's suggesting gross profit margins for the full year being at 65% of net revenues, it implies a pretty steep ramp in the back half of the year. So could you just give us additional color on how we should think about that and what are the key drivers there in the line items?

Yes, sure. This is Taylor. I'll cover that. I think the bulk of it comes from what we've witnessed in the early days. Our Gateway Sunset initiatives, as Jared mentioned in his scripted remarks, we're also incrementally positive and quite frankly, notably so on what we've got going with SkyTab POS as well. So those are the two most significant drivers of those two. We've got some contribution from new verticals as well, so that's going to ramp. But I would stick to those first to seeing a lot of starts.

Is that exit rates like a level that we should be modeling kind of in the out years?

I think it's too soon to make a prediction about that. We feel very confident about the end of the year. Our success in new verticals can affect our spread, and that can be enhanced by our SaaS success and SkyTab POS. It's a bit early to determine the impact for the later part of this year, but we feel really good about our margins.

Got it. And if I could just ask one more follow-up for Jared. You are getting a lot of questions around some of your comments on your evaluation being a public company. Could you just give us some additional detail on how you're thinking about that?

Sure. I want to build on Taylor’s point regarding what our new verticals mean for us. It's difficult for me not to think back to the early days of the company. For 18 years, we catered to very small customers, like local restaurants. Each of these customers adds a decent volume, but they also come with a significant service burden. Currently, we have over 2000 employees. In contrast, if you look at a company like Adyen, which we admire, their profit margins and free cash flow are extremely high, and they deal with major clients like Facebook and Microsoft that bring in large volumes with minimal overhead. Most of their extra volume can go straight to profit. Looking at our new verticals, we recently announced a partnership with Time Magazine for their digital subscriptions. Starlink and large stadiums play a huge role in this too. These partnerships sometimes involve hundreds or even thousands of smaller clients, reducing the support burden. It's surprising to realize how many employees we needed to reach our first $50 billion in transactions compared to how many we think we'll need for the next $50 billion. This highlights the potential for better margins and cash flow moving forward. On the topic of our valuation, in a time when all asset classes have faced significant losses, it’s hard not to notice that the market is valuing us at around 10 times next year’s EBITDA, which is even less if we factor in our recent guidance increase. This raises the question of whether the cost of being a public company is justified. We are aware of the obvious costs associated with being public, but there are also less tangible costs like complete transparency. As a private company, we wouldn't disclose our strategies to competitors. For instance, our gateway sunset strategy, which could convert up to $200 billion in transactions, is critical information that, when shared, becomes advantageous to our competitors. Thus, when our valuation declines significantly, we have to consider whether the price of transparency is worth it, especially regarding our obligations as a public company. That’s the essence of what we were trying to communicate.

No, really appreciate the insight and congrats on a solid quarter.

Thank you. Our next question comes from Scott Wurtzel of Wolfe Research. Scott, your line is now open.

Hey, guys. It's Scott on for Darrin here. Thanks for taking my questions. First one I wanted to touch on is just on the net yields. I mean even accounting for some of the normalized sort of debit behavior. I mean these are still only down 2 basis points year-over-year, which I guess is a little bit sort of better than what we had expected historically. So I was just wondering if there was any sort of change to your outlook on the trajectory of yields even as you continue to penetrate larger merchants? Thanks.

I'm just going to beat the same drum which is that we continue to grow into larger and larger merchants and so this is something that the degradation of blended spread is something that our investors should continue to expect a little bit delayed in part because I think we were slower in the new verticals than we'd hope to be in the first half of the year. It hasn't changed our optimism; hasn’t changed our long-term view. In fact, our optimism has kind of been bolstered seeing kind of the last week of June and some contribution from those verticals. But if anything, that is probably the reason that you've seen kind of spreads stay a little bit elevated is that new vertical contribution.

Got it. Thanks guys. And then just a follow-up, just on the digital media vertical, it is interesting to see that win with Time Magazine. Just wonder if you can give a little color on sort of how you entered that vertical, and it's one that we should expect the company to continue to go after going forward?

If I were the artist behind the materials, I would have grouped that into sexy tech. Let me elaborate on this a bit. We recently announced some exciting wins, which on our industry day last year we didn't anticipate, but they turned into a great opportunity for us to invest in international expansion and enhance our payment platform capabilities beyond what would typically be expected for restaurants, hotels, or specialty retail, extending beyond our historical scope. We have started receiving requests for proposals from unexpected customers, and it's surprising because a year or two ago, I wouldn't have imagined we could compete for some of those brands. However, it's not entirely unexpected since without our involvement, they really only had a couple of companies to consider. When you think of those large, recognizable brands, they would typically send proposals to Adyen and Stripe, and possibly to JPM or a local bank. But for multinational players looking for a single portal with core capabilities like recurring billing and business intelligence, they are mainly in the Adyen and Stripe space. Having some notable wins at industry day roughly nine months ago has increased our visibility. We have also had to invest in our capabilities to support these types of clients. Time is one example, and there are actually two other clients that we couldn't announce who committed to us this quarter. I expect more clients to join that attractive sector, and we are quite enthusiastic about it.

Thank you. Our next question comes from Eugene Simone from Moffatt Nathanson. Eugene, your line is now open.

Hi, good morning guys. Thanks for taking my question. I wanted to come back for a second to total end-to-end payment volume growth. So it’s 43% year-over-year and I'm hearing, obviously, there are still a lot of puts and takes and macro impact that are going on, some recovery from the pandemic, some new kind of macro uncertainty and so I am wondering can you give us, hopefully quantitative, but if not qualitative dimension on how much of that rate, that 43% that we see in this quarter was depressed by the macro uncertainty headwinds versus what's the normalized trend could be?

Great question, Eugene. While we haven't made significant progress on answering it, I can say that our average merchant appears to be in good shape. If we set aside Q2 and look specifically at July, we experienced nearly double-digit growth compared to June, marking the largest increase we've observed between these two months in recent years. Consumer spending seems robust, supported by extensive card brand data and travel statistics. Nonetheless, we remain cautious about how this will play out in the second half of the year, especially with the return to school and more people going back to the office. We've been cautious for the past couple of quarters in this regard. On the positive side, we're optimistic about our new verticals. As Jared mentioned, we've installed numerous stadiums in July in preparation for August, which we believe will contribute positively, along with other verticals that are beginning to gain traction. Additionally, we haven't completed our Allegiant integration yet, so we're weighing all these factors. Overall, our perspective on average merchants and consumers is that they remain quite healthy up to this point.

Thank you for that. I wanted to follow up, Jared, you mentioned in your prepared remarks that you are closely examining additional mergers and acquisitions given the decline in valuations. Could you provide more details on the types of assets, capabilities, or markets you may be considering for any potential new initiatives?

Yeah. This probably is such a serious point about like a reluctance we want to convey this information. Yeah. I'm good very comfortable saying though that our priorities are quite consistent with what we laid out back in November. So valuations aside, international expansion and capabilities that help deliver some of the things that Jared talked about to support these new verticals is a heavy emphasis of ours.

The main focus for us is to expand our reach globally. People worldwide seek fast internet, and we aim to enable their payments and subscriptions no matter where they are. By achieving this, we can replicate the successful products and integrations we've found in the US in other parts of the world. Our top priority in capital allocation is to serve an exceptional customer who aspires to compete alongside major players like Adyen or Strike. The second priority is to identify any opportunities that align with our existing strategies, allowing us to accelerate growth in the verticals we're currently in. We don't anticipate exploring entirely new verticals but are focused on international expansion to support our key customer and finding consistent ways to boost growth in our existing markets.

Got it. Thank you very much.

Thank you. Our next question comes from Chris Brendler of D.A. Davidson. Chris, your line is now open.

Hi, thanks. Good morning and congrats on nice results. And I just had a quick clarification question if you don't mind, when you took the new verticals and the ramp we're seeing in July, certainly exciting stuff. Is the July ramp more the sexy techs? And just from your comments, it seems like sports entertainment may be the bigger opportunity of all these at least in 2022. I just wanted to confirm that was the case. And just another reason to get excited about football season it sounds like, so just wanted to hear your thoughts on how this ramp in the second half?

Yeah. So I don't want to get too specific on the contribution within each one. The one thing I would say about sports and entertainment is it's not as significant a contributor in July and that seasonality of some of the merchants that we cover. So there just aren't as many events at the locations that were installed that. Contrast that the fall is typically a much better time, and we're adding a lot of big name brands, where there's a lot of volume. So we feel good about it, but I don't want to sort of comment on the relative contribution. And if I let Jared comment on it, he won't stop talking. So he loves the sexy techs vertical.

That's right.

On the sports side, it seems like the opportunity you're taking advantage of is progressing more quickly than I anticipated. These are significant deals, and you're consistently signing up stadiums. Is there something unique about that business that makes it easier to convert or sign up? Is it the strength of your product? It appears to be quite a large undertaking for a sports venue to implement this, yet I keep seeing new announcements.

Hi, this is Jared. I can address that. This was a specific product we developed a little over a year ago, around 14 or 15 months back, based on our observations of the sports and entertainment landscape. For example, in restaurants, if you have a non-integrated terminal or cash registers, you will transition to a point-of-sale system. Once you switch to a point-of-sale system, there aren't any significant changes in how you serve a cheeseburger. You'll probably continue using it until the costs of upgrading a Windows-based system reach a point where you're ready to invest in new technology. Stadiums are different. From our early experiences in sports and entertainment stadiums about two years ago, we identified a significant shift toward mobile ordering, where everything will be managed from your phone. You'll order your food and drinks from your seat without waiting in concession lines. If you want merchandise, like a jersey, you'll order it from your seat and pick it up without waiting. Whether it’s for betting or other activities, you can manage it all through your phone. Sports and entertainment stadiums are also planning to incorporate their loyalty and rewards programs into mobile applications. Recognizing this shift, we decided to lead with a mobile application that addresses these needs, moving away from older technology. This strategy is proving successful; every stadium wants this solution, and it’s becoming essential. Once you experience a stadium where everything operates via your phone, going back to a traditional setup feels outdated. Each new announcement only motivates more stadiums to adopt our system. There’s also a seasonal aspect to consider. No one switches while their league is active, but once the season ends, many are eager to sign up. We stand alone in terms of our product capabilities with Menu Next. We’re excited about the progress and I’m particularly looking forward to the upcoming football season, with some of the most exciting teams now being Shift4 customers, giving even more reason to tune in on Saturday.

Great. And just one more quick one I get a little late here. Any like guide posts or milestones on the Finaro regulatory approvals. Are we close? Because it seems like a bit more difficult just given the international nature and for the other factors at play at Finaro. It sounds like once you get that regulatory approval, you're going to put the switch in Europe. Does it happen that quickly?

Yes, sure. So there are three jurisdictions that we require approval from, and we have it in two of them. I suspect it's two to three more months, maybe four. I don't like to bet on the productivity of European regulators, but we feel really good about the pace and it's consistent with what we laid out at the announcement of the transaction.

Great, thanks. Congrats, guys.

Thank you. Our final question comes from John Davis of Raymond James. John, your line is now open.

Hey, guys. I'll make this one quick. Jared, earlier this year when you guys laid out the guide, you kind of gave us a nice bar chart that showed the walk for your volume for the full year. Obviously, things have changed. If we were to add a bar for kind of macro headwinds, so far kind of what you guys think. Was it safe to say that could be a few billion dollars of volume that you'll have macros stay the same if you would have gotten. Just trying to understand the magnitude of the macro headwinds that are kind of baked into the unchanged volume guide?

Yes, we haven't raised our end-to-end volume guidance for two main reasons. First, we experienced a slow start to the year due to Omicron, which we anticipated would create challenges. Second, the new verticals took longer to gain traction than we expected. We initially thought that some major clients would begin their activity earlier than they did, with some only ramping up in the last week of the quarter. The growth in our core business continues, and as Taylor pointed out, July showed nearly double-digit month-over-month growth, giving us plenty of reasons to feel optimistic. We're just being realistic about the current situation. For instance, considering restaurant expenses are around $90 to $100, if inflation does not decrease significantly, it's plausible that some consumers might decide against dining out. While our data hasn't reflected this trend yet, which aligns with reports from other card brands and payment companies, we want to maintain a realistic outlook. If the second half of the year is robust and the new verticals perform well, we will have the opportunity to reassess expectations during our quarterly check-ins.

Okay. Appreciate that, guys. Thank you. Our final question comes from Anita Zirngibl from SIG. Anita, your line is now open.

Hi. Thanks for getting me in. I just had a question on total volumes. I'm not sure if you mentioned it already, but if you could just give some color on how sort of gateway plus end-to-end volumes are trending? Whether or not you've seen any kind of macro headwinds in that kind of overall volume?

Yes, we haven't observed any issues. The gateway has a larger concentration of hotels compared to our end-to-end book. Therefore, you would expect that the volume is fairly strong right now considering the current travel situation.

Super. Thank you. We have no further questions for today. So I'll hand back to Jared Isaacman for any further remarks.

I really appreciate everyone joining in. I know we discuss the Shift4 approach to increasing efficiency by eliminating parts. We'll consider applying that to some sections of our script for the next earnings report. That said, thank you. We had a lot to cover, and I appreciate your patience. We are thrilled to have Nancy Disman with us; I've known her for a long time and am familiar with her excellent reputation. She will be a great addition to the executive team, and we look forward to hearing from her in the coming weeks. Thanks again.

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