Shift4 Payments, Inc. Q2 FY2024 Earnings Call

Greetings. Welcome to the Shift4 Second Quarter 2024 Earnings Call. Please note this conference is being recorded. I will now hand the call over to Tom McCrohan, Executive Vice President, Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Shift4's Second Quarter 2024 Earnings Conference Call. With me on the call today are Jared Isaacman, Shift4's Chief Executive Officer; Taylor Lauber, President; and Nancy Disman, our Chief Financial Officer. This call is being webcast on the Investor Relations section of our website, which can be found at investors.shift4.com. Today's call is also being simulcast on X Spaces, formerly known as Twitter, which can be accessed through our corporate Twitter account at Shift4. Our quarterly shareholder letter, quarterly financial results and other materials related to our quarterly results have all been posted through 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 certain risks, uncertainties and 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 SEC's 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. This has been a busy quarter, and I’m quite pleased with our results and the momentum we have as we move into the latter half of the year. To summarize, we exceeded our financial KPIs this quarter. We completed two acquisitions, Revel and Vectron, and continued our international expansion to support our large strategic customer, bringing on thousands of new hotels, restaurants, and stadiums both in the U.S. and overseas. For the second quarter, we achieved 50% growth in end-to-end payment volume year-over-year, 38% growth in gross profit, and 41% growth in gross revenue-led network fees. Our adjusted EBITDA was $162 million, which is a 48% increase year-over-year, with our margins expanding 240 basis points to 51% compared to the same quarter last year. Despite the margin drag from the Appetize and Finaro acquisitions, which impacted our margins by about 250 basis points, we anticipate that the synergies will offset this drag and help with margin expansion. Importantly, we generated $76 million in adjusted free cash flow, an 18% increase compared to last year. Our blended spreads remained stable at approximately 62 basis points, despite significant growth in volume. To be more succinct than in previous remarks, I want to highlight our key wins this quarter. Our standout win was Whistler Blackcomb, part of Vail Resorts, along with new properties like Nobu Chicago and Nobu Toronto. We also signed Pier Sixty-Six Resort, Scott Resort and Spa, several new properties in Yosemite, and others scheduled to open next year. Our pipeline includes major enterprise resorts that have never worked with us before, representing billions in new volume at prime hospitality locations. Moving to restaurants, our SkyTab growth is noteworthy, with nearly 10,500 system installations in Q2, reflecting a 12% increase quarter-over-quarter. Our SkyTab success is due to its feature-rich cloud capabilities and low cost of ownership. With our current run rates, we're on track to exceed our 2024 system installation goals, and we've highlighted several notable wins in the restaurant sector, including Xperience's 11 Mexican concepts and Alpaca Chicken's 16 locations. In specialty retail, we gained Turner's Outdoorsman and university bookstores for BYU and West Los Angeles College Wildcats. In Sports & Entertainment, we signed several professional sports teams, including the Miami Heat and Indianapolis Colts, along with numerous college teams. For the nonprofit sector, our volume contribution is significantly up this year, with expectations for a strong second half, driven by our strategic partnerships and recent wins like Malala Fund and Amnesty International. In Gaming, we continue to expand SkyTab at BetMGM's Sportsbook locations, with upcoming launches at key venues. Internationally, we’ve made great strides, especially following our key customer into new markets in Africa and the Asia Pacific. In Europe, we're processing payments for EV charging stations across multiple countries, leveraging our early mover advantage. Regarding capital allocation, we closed two acquisitions that will lead to meaningful synergies. Revel presents a vast opportunity for cross-selling payments in quick service and retail, while Vectron opens doors to significant expansion in Europe, driving payments adoption in restaurant sectors. We've also repurchased over $35 million in stock and are well-positioned for further buybacks and acquisitions. We’re making strategic investments to accelerate SkyTab and our international efforts. We want Shift4 to be as innovative and successful in fintech as SpaceX is in aerospace, focusing on major internal initiatives and building a robust infrastructure. We communicated investor feedback throughout this quarter and provided further details in our shareholder letter about our build-by-partner strategy and our M&A formula. Finally, we've once again revised our guidance positively, reflecting robust performance and the expected contributions from our recent acquisitions. Our diversified business model demonstrates resilience even amidst economic uncertainty. We are more than just a restaurant company; we strategically target established businesses with low failure risks and focus on efficient customer acquisition. Our track record showcases strong growth, expanding operating margins, and solid free cash flow, all underpinned by our software-integrated payments strategy. We're well positioned to replicate our U.S. success globally. Now, I’ll turn the call over to Taylor.

Thank you, Jared. As in previous quarters, I will take some time to discuss the current operating environment, our backlog, and provide detailed insight into a couple of recent acquisitions to show how we unlock value from M&A. Starting with the operating environment, we do our best during periods of economic uncertainty, which is the case now. Merchant growth and same-store sales performance generally met our expectations during Q2. It's important to note that, despite being compared to others in the industry, we are well diversified and have never depended solely on same-store sales for growth. This diversification was a commitment made at our IPO and has increased our resilience while growing our total volumes at a 75% CAGR in the four years since. As many of you know, we have been cautious that the $100 stake would not last indefinitely, and it appears that restaurants may be experiencing a slight slowdown. However, hotel travel, stadium attendance, and retail merchants are performing reasonably well, and we continue to add many merchants. These conditions benefit Shift4 as we aggressively grow by taking market share and cross-selling payments and software. Our products are competitively priced with a low fixed cost of ownership, making them appealing to merchants. Our strong balance sheet and free cash flow give us the flexibility to grow while others are shrinking, and we use this time to invest in our business, building, buying, and partnering while many in our industry struggle to achieve even modest profit margins. Jared provided a comprehensive overview of the various factors driving growth for the latter half of the year. I want to highlight our backlog, a metric we track internally that informs our guidance. Our current backlog stands at approximately $25 billion in volume, which represents contracted volume not yet implemented or at its expected run rate. While there can be delays, these merchants are either already installed or have installations scheduled soon. It’s crucial to understand that this is just one of several factors contributing to our confidence in volume growth for the latter half of the year. For instance, we have signed thousands of restaurants, hotels, e-commerce customers, nonprofits, and others that will start operations immediately. When you consider this number, think of sports stadiums and enterprise resorts that have signed contracts but are not live yet due to reasons such as waiting for the season or resort openings. As Jared noted, we expect the majority of this volume to be realized this year. With regard to our recent acquisitions, I’d like to provide some insight into two of our more established acquisitions, VenueNext and Focus POS, to offer better perspective on how their revenue models evolved over time. Both companies initially saw a drop in revenue after the acquisition, which was anticipated as we transitioned their models to bundled payment processing and SaaS. For Focus POS, their legacy revenue model relied heavily on one-time revenue, with about two-thirds being nonrecurring. Consequently, in the first two months post-acquisition, their gross revenue less network fees fell about 54% as we implemented our strategy of dismantling the legacy model and shifting to a bundled payment solution. Today, Focus POS's gross revenue, minus network fees, is 95% recurring and is now five times higher than their lows after acquisition and three times higher than before. By bundling services that merchants typically procure from multiple vendors, they save money and receive a greatly improved service experience. It's mutually beneficial. The situation with Focus POS is similar to that of Vectron. Vectron will experience a decline in revenue and EBITDA for the rest of the year, but by focusing on our payments plus software value proposition, we anticipate significant growth in revenue, EBITDA, and free cash flow in the medium term. For VenueNext, we also experienced a temporary decline in revenue before seeing substantial growth. VenueNext already had a recurring revenue model based on SaaS, although it also relied on one-time hardware sales. We enhanced VenueNext's superior technology with our distribution channels and offered a previously novel bundled payment solution to this market. After the acquisition, VenueNext similarly faced a temporary drop in gross revenue less network fees as we moved away from one-time hardware sales. Today, VenueNext generates gross revenue, minus network fees, that is more than seven times its pre-acquisition levels, with 90% being recurring. It took some time to educate the market on the benefits of this bundled solution, but we are now reaping those rewards. Volume from stadium and entertainment clients has grown over 50% year-over-year, with ample opportunity to capture additional share of wallet through cross-selling ticketing to our installed base. Our latest shareholder letter contains visuals to better illustrate these trends. In both of these cases, as with the majority of our other M&A activity, we steer clear of technical debt, layers of bureaucracy, and unnecessary elements. Focus POS and VenueNext have integrated into our payment platform alongside 500 other ISVs, marketing a new SaaS plus embedded payments offering and improving their positions in their markets. While we discussed only a few examples, it's important to note the broader opportunity set is also expanding. Our pipeline of exciting opportunities is currently larger than it has been at any time in recent history, putting us in a favorable position to be selective about how we invest our time and capital. While we allocated a considerable amount of time discussing M&A this quarter, we want to emphasize that we are not obligated to pursue deals. We remain confident in balancing our approach of building, buying, and partnering. As Jared mentioned, we did not execute a single acquisition in our first 15 years in business and still grew rapidly. What we won't do, however, is sit back and wait for opportunities to come to us while there remains so much potential to accelerate the convergence of software and payments. Now, I will pass it over to Nancy to discuss our financial results. Thank you.

Thanks, Taylor, and good morning, everyone. We delivered another quarter of consistent and solid results, outperforming our quarterly guidance and demonstrating again our ability to deliver top line growth while continuing to drive margin expansion and strong free cash flow conversion. Total Q2 volume of $40 billion grew 50% year-over-year. Gross revenue less network fees grew 41% to $321 million. Our adjusted EBITDA for the quarter was $162 million, up 48%, and adjusted EBITDA margins expanded 240 basis points to 51% versus the same quarter last year. Excluding the impact of the legacy Finaro and Appetize businesses, margins expanded more than 500 basis points. Our quarterly results were driven by the continued strength of our hospitality and restaurant verticals, momentum across our enterprise merchants, further monetization and conversion of gateway customers, and an increasingly larger contribution from stadiums and ticketing. We see the impact in both our payments-based revenue growth and the increased contribution from SaaS-based fees. Organic revenue for the quarter was 24%, and we are reiterating organic growth to be well north of 25% on a full year basis. The in-quarter contributions from Revel and Vectron were immaterial given both acquisitions closed in mid-June. Blended spreads for the second quarter and the first half of the year was 62 basis points. Spreads across our core business of restaurant, hospitality, and specialty retail continue to remain stable. Based on our year-to-date performance and the vertical mix and customer size driving our volume, we now expect full year spreads to average no less than 61 basis points for the full year, up from the 60 basis point floor we provided previously. Subscription and other revenue was $71 million in Q2, up 93% compared to the same period last year. The growth in SaaS and other related software revenue was driven by our success across SMB, SkyTab and penetrating the Sports & Entertainment vertical. Growth in subscription and other revenue will not always be linear. This is a good opportunity to remind investors that, as Jared and Taylor discussed, we often blow up the legacy revenue model of our acquisitions and pivot them towards our signature Shift4 payment field value proposition. Our continued success in converting Appetize and other software-only clients due to acquiring will cause subscription and other revenue to decline and offset some of the outsized growth we are achieving. Additionally, the timing of onetime revenue may cause some bumpiness quarter-to-quarter. In Q2, total general and administrative expenses increased 34% year-over-year to $110 million. Excluding the impact of the acquisitions though, completed in Q4 last year, G&A expenses were flat year-over-year. We remain highly committed to a disciplined approach to cost management while continuing strategic investment for growth. As Jared mentioned, we are making incremental investments in areas we see further opportunity. But overall, our goal of keeping headcount flat while investing in talent upgrades remains in place. We are quickly progressing on the overhaul of our operating model, which will further drive efficiency and scalability across our platform. Our second quarter adjusted EBITDA margins were 51%, representing 240 basis points of expansion compared to Q2 2023. As I mentioned, excluding the impact of acquisitions, margins expanded over 500 basis points. We have high conviction in the many opportunities to further improve our underlying margins that are still on the horizon, including the remaining M&A synergies to be realized from our ongoing integration efforts of recent M&A, utilization of AI technology, implementation of new internal systems, and ongoing streamlining efforts to enhance scalability throughout our business operations. Our adjusted free cash flow in the quarter was $76 million, up 18% compared to a year ago. As a reminder, Q2 cash outflows include a semiannual interest payment of roughly $10.4 million, which can distort the quarter-to-quarter sequential comparison. Total adjusted free cash flow conversion for the first half of the year is 54%, in line with our expectations. In addition to the timing of interest payments, there will be fluctuations in our conversion rates on a quarterly basis due to the seasonality of our business, the deployment of capital to support growth, and normal working capital cycle changes, period-to-period. Overall, the improvement in our unit economics and efficient operating model continue to give us great confidence in our ability to deliver annual year-over-year expansion and our adjusted free cash flow conversion rate, in line with our previous guide of 60% plus. I will talk about the slight drag we expect from our recent acquisitions in just a moment with our updated guidance. And with respect to capital transactions. In May, our Board of Directors authorized a new stock repurchase program pursuant to which we are authorized to repurchase up to $500 million of common stock through December 31, 2025. During the second quarter, we repurchased approximately 230,000 shares for approximately $16 million, leaving approximately $484 million of capacity available as of June 30. To date, in Q3, we have repurchased an additional 300,000 shares for approximately $20 million, and we will continue to be opportunistic. You can find a complete reconciliation of our shares in the back of our earnings materials. We have cumulatively deployed approximately $350 million on buybacks, repurchasing 6.5 million shares at an average price of $54 since our IPO. Of note, cumulative dilution from our stock-based compensation has been less than 2% per year on average. As employees, we are the largest shareholder of Shift4 and are very thoughtful about managing dilution. Net income for the second quarter was $54.5 million. Diluted earnings per Class A and Class C share was $0.58. Adjusted net income for the quarter was $89 million, or $0.96 per diluted share on a diluted basis, on 93 million average fully diluted shares outstanding. Our balance sheet remains strong. Our sequential decline in liquidity is due to the cash purchases of Vectron and Revel. Our total indebtedness has a weighted average cost of 1.35%, and we do not have any maturities until December 2025. Our net leverage at quarter end was approximately 2.7x. Excluding the impact of lower cash due to the acquisitions we just completed, net leverage dropped to 2.2x, our lowest level since January 2021. The deleveraging profile has been quite extraordinary. Our strong balance sheet, growing EBITDA and expanding free cash flow conversion afford us many options to fund strategic priorities, opportunistically buy back stock and satisfy year-end 2025 maturities without being punitive to our equity. Now turning to guidance. We are updating our full year guidance to include Q2 outperformance and the contribution from Revel and Vectron, which both closed on June 13. As Taylor just elaborated, we expect to pivot the revenue model of both companies to payments as we cross-sell payment processing to the installed base of merchants. For the full year 2024, we are further tightening our guidance range for end-to-end volume and now expect a range of $167 billion to $172 billion representing 53% to 58% year-over-year growth. We are increasing our gross revenue less network fees range and now expect the range to be $1.35 billion to $1.38 billion, representing 44% to 47% year-over-year growth. We are also increasing our adjusted EBITDA range and now expect adjusted EBITDA to be in the range of $662 million to $689 million. The year-over-year margin expansion remains virtually unchanged from prior guidance, despite the incremental investments we are making in Europe. We are also resetting our adjusted free cash flow conversion expectation to 59% from 60% previously to account for the drag from recent M&A. We estimate this yields $399 million of adjusted free cash flow for full year 2024 at the midpoint of our adjusted EBITDA guidance. We continue to expect organic growth of gross revenue less network fees to be well north of 25% at the midpoint of our full year guide, and are also updating our quarterly breakdown of our annual guidance to help investors better understand the impact of seasonality on our business, which can be found on Page 22 of our shareholder letter. A couple of call outs as it pertains to our guidance. We continue to expect a stronger second half of 2024; a long list of low-hanging fruit cross-sell payments and SkyTab, including from our recent acquisition of Revel; contracted annual volume backlog of about $25 billion that Taylor discussed, that is already contracted but not yet implemented or at its expected run rate. SkyTab system installs continue to accelerate each quarter, and we are way ahead of schedule on our 30,000 goal for 2024. Many of the wins featured each quarter, especially stadiums, ticketing opportunities, and major enterprise resorts are seasonally strongest in the back half of the year. Strong progress in Canada, including our signature win this quarter at Whistler Blackcomb and Nobu Toronto. This was previously an untouched market for Shift4. Real momentum in Europe, as demonstrated by the impressive list of hotel and restaurant wins we have shared over the last few quarters. And while it won't be a real driver of the balance of the year, we are really excited about the Vectron acquisition and what it brings. Our strategic e-commerce customer continues to add volume quickly, and we've been expanding organically into several new international markets with at least eight new countries set to go live in the back half of the year. The high end of our volume guide, which we have tightened in light of the delayed Vectron closing and control process and clearly a consumer that is not at peak spending, would imply seasonal trends consistent with prior years. It is also worth highlighting that we would have raised the midpoint of our EBITDA guide further if not for the anticipated drag from our European strategy. We have provided an EBITDA bridge on Page 23 of our earnings. For even further clarity, even without the recent acquisitions, we would have raised the midpoint of our guidance to account for Q2 outperformance. Before turning the call back to Jared, I want to reiterate that our balance sheet, cash generation, and profitable growth position us incredibly well for the current environment of macro uncertainty. With that, let me now turn the call back to Jared.

Thanks, Nancy. Before we take questions, I want to address a multipart question from Tanner Triggs that was submitted over X. Tanner, you’re lucky to have your questions picked, and they are quite insightful. First, regarding the future organic trajectory of our gateway business, the potential goes beyond just the volume; it lies in the 550-plus software integrations that enable us to explore unique verticals. Notable wins this quarter include Nobu Toronto and Nobu Chicago, both of which weren't on our gateway previously but required these integrations. Our offering was more compelling compared to our competitors, enabling us to secure that business. Currently, in the stadium vertical, we acquired the software necessary to pursue this market a few years ago and integrated it with our payment and ticketing services. This represents organic growth. For instance, SkyTab, which was developed organically, is experiencing rapid growth in the U.S. and is now expanding into Canada and Europe. Thus, the organic growth trajectory appears very promising, especially as we complete the gateway conversion. Regarding the adaptability of our products in Europe, it varies by product. SkyTab is already operational in the U.K. and Ireland with minimal localization needed, while countries like France and Germany require more time for customization. However, our software integrations for hotels, such as those with Oracle or Agilysys, function seamlessly across the U.S., Canada, and Europe. Our VenueNext software is also readily applicable in European stadiums. Concerning our progress with stadiums in Europe, we've shared some exciting updates on social media, including a video of our first stadium to go live in the U.K. We’re also preparing for the FC Barcelona go-live, and I believe the timeline for launching stadiums in Europe is similar to that in the U.S., primarily influenced by the end of the sports season. Lastly, about our success in areas outside the core markets of restaurants, hotels, and stadiums, such as the UPS stores or Fanatics, these businesses utilize the same integrations that we leverage for our hospitality clients. For example, large hotels and resorts with retail shops, like Caesars Forum Shops, share software with other retailers, including many ski resorts and shops. Therefore, these achievements don't signify a new vertical for us, but rather a continuation of leveraging our current integrations in diverse sectors. I appreciate these questions and will now turn it over to the analysts.

Our first question is from Darrin Peller with Wolfe Research.

Let's begin by discussing the contribution from acquisitions. I would like more detail on the strategy and roadmap for monetizing these acquisitions. You've mentioned a guide increase of $15 million in EBITDA and $35 million in revenue from acquisitions. Could you clarify the margin dynamics for us regarding Revel and Vectron? Additionally, Jared, could you provide more insight into the roadmap and your expectations for milestones to monetize these acquisitions, particularly in terms of migrating some of that software to payments? I would also appreciate more information on the timeline for monetizing these deals.

Yes. Jared here. Let me start with some high-level points, and then I’ll hand it over to Nancy for specific details on the margin dynamics. First, as we've shown in our earnings reports with Focus POS and VenueNext, we take a focused and prompt approach to pivot the business model following these acquisitions. This often means sacrificing hardware and software revenue, even SaaS revenue, if it accelerates a migration. Keep this in mind, especially regarding Vectron, which aligns more with past deals that had a heavy concentration of one-time revenue that can quickly disappear as strategies change. Now, concerning Revel, we mentioned last quarter after announcing that deal that we anticipated a $15 million contribution for the latter half of the year, mostly from cost synergies. Revel was primarily a tech startup and a significant cash burner. We strategically burn through that cash to concentrate on the future, which is SkyTab for us. Although we recognize substantial potential from cross-selling payments to our 18,000 customers and eventually transitioning them to SkyTab, these are larger chain customers, and this process will take time. Our immediate focus is that we’re no longer actively developing Revel, which results in considerable cost synergies. This is why there were questions about the $15 million of EBITDA; we’re not factoring in the conversion process right now—it will develop over a couple of years. Regarding Vectron, this is where we will definitely see some setbacks as we adjust our model. This won't unfold over two years like Revel; it's a long-term plan expected to take around ten years. We have 65,000 customers in Europe anticipated to engage with payments, along with over 300 distribution partners selling SkyTab throughout Europe. However, this transition will require time. We don’t have complete control over this company due to the ongoing delisting process. I hope that provides some clarity on where we face challenges with these businesses and how it could affect free cash flow negatively, for instance, with Vectron, but also where the larger opportunities will emerge over the years ahead. Nancy, do you want to discuss any margin aspects?

Yes. I think what I would add is to understand, we certainly spent a lot of time looking at this. And I would say the best property for consolidated gross margin for the year is similar to what you're seeing in the quarter with puts and takes of obviously huge drag from Revel and Vectron. And we continue to synergize still Finaro and the previous acquisitions. So if you think about the synergy processes, that will sometimes take more than 12 months. So even though we're lapping Finaro, we are certainly still doing lots of integration work there. So that's how I would think about it as this is going to get a little more complicated. Obviously, with our patent acquisitions are kind of flowing up and getting intertwined that this is going to be over the next little while.

Okay. That's really helpful, guys. Very helpful.

Sorry, Darrin, I remember it's the first part of a longer question, so I want to make sure we address it. Nancy, could you provide further clarification on the revenue contribution from Revel and Vectron in Q2? I believe we mentioned it was minimal.

Yes, for sure. I think that's why we wanted to put out the 24% organic because remember, we only had 2 weeks, and we're talking about something completely immaterial for Q2. So I wouldn't even think of them as a contributor for the quarter. And certainly, when you look at the guide grades, we tried to contemplate the benefits going into the back half of the year.

Okay. That's really helpful. And very quickly, the backlog was really helpful to get guys. Just considering that gives you a lot of idiosyncratic reasons to be confident on the second half. Just any macro conservatism built into the outlook at this point? Or I mean, I know there's some in terms of same-store sales on certain verticals, but maybe just comment on that, and I'll turn it back to the queue.

Yes. Certainly, when we built the original guide, and I think some of the pull down on volume when we tweaked it a little bit, we were thinking about that we knew the global days were not coming. And you know we've been talking about the prices of the states were going to bust up at some point. So the way I would think about it is when we pulled out the high end knowing that we wouldn't have kind of any upside. We definitely consider that in the macro. And generally, when we put our low out to begin with, we had some conservatism there. But generally, coming out of Q2, we had a really solid same-store sales. And while we're seeing some softening maybe in early July, it's definitely offset from like really solid performance across the other verticals. So right now, I think we're just kind of holding steady for now from a midpoint perspective.

Our next question is from Dan Dolev with Mizuho.

Jared, Taylor, really good results here. I have a quick question about the volume. Can you maybe clarify what drove the volume reduction to the full year guide? And maybe give us a little bit of your sense of confidence into the macro in the second half. That would be great.

Yes, I can start by addressing that. Nancy touched on this in her previous comments, but there are two main factors at play. First, when we released our volume bridge last year, we included a significant number of restaurants and hotels in Europe. Despite the progress we're making and the wins we announce each quarter, we don’t yet have control over the 65,000 customers we expect to have this year with Vectron. This means we are experiencing some delays in reaching the target of thousands of restaurants and hotels we aimed for this year. The second factor is that the favorable conditions we once enjoyed are no longer present. At the beginning of the year, we set our volume guide and indicated that the upper end would depend on the $100 stakes continuing. We've been cautious about that sustaining. It's wise to reassess our expectations. Generally speaking, over our 25-year history, we've consistently grown in both volume and revenue, even through various downturns. While a small decrease in same-store sales at restaurants certainly needs to be taken into account, we're optimistic about how we're achieving our volume targets through initiatives like Vectron and Revel. I can assure you it will be much easier for us to identify where our next 65,000 customers in Europe will come from compared to others entering that market for the first time. This gives us better control over the volume trajectory of the business rather than trying to fine-tune down to minute changes in same-store sales.

Our next question is from Timothy Chiodo with UBS.

I want to hit on the stadiums and ticketing wins. There was a really strong list of adds this quarter. Many of them you noted are already starting with ticketing from day one. And you've mentioned also the ongoing cross-selling opportunity. I think a lot of that has to do with the integrations that you've made throughout the ticketing ecosystem with numerous platforms, I think basically all of the major ones. But the question really comes down to that rough TAM. I believe it's in the $100 billion or so range for the U.S. Maybe you could update or correct that number if I'm off. And giving us a sense on what portion of that you're working with in some way? Whether it's only on ticketing or only on concessions. But how much of that do you think you've already achieved as a part of that, again, let's call it roughly a $100 billion TAM. And then if you don't mind after, I have a quick follow-up on mix.

Yes, certainly. This is Taylor. It's crucial to differentiate between market share and wallet share, particularly in stadium settings where revenue streams are quite fragmented. We are optimistic about our market share, and while the figures may vary, we have a presence in two-thirds to 75% of stadiums and theme parks across the U.S. In some cases, we have the ideal situation of managing the entire stadium and ticketing, but this is less common. It's more typical for us to transition clients from a hypothetical stadium to VenueNext. Our customers appreciate the value we provide in managing a significant portion of their revenue centers and ticketing. However, the revenue can be inconsistent, often taking a year or two to stabilize. For example, we acquired Appetize just before the last quarter of 2023, and we've been installing more stadiums on VenueNext in a month than in our busiest quarters before. The installation speed has been remarkable, but the revenue will not reflect this until the sports season kicks off. Additionally, most ticket sales occur after the season when they sell tickets for the following year. We're very positive about our market share and hopeful about increasing wallet share. The fluctuations in volume have resulted in a more weighted expectation for the second half of the year, which we have reflected in our guidance.

Excellent. The brief follow-up is kind of a pie chart question. So in the shareholder letter, you mentioned that now you're at about one-third of volume, 33% from hotels and resorts. If you wouldn't mind, just updating what the rest of that pie chart might look like, meaning, how much of that is restaurants, stadiums, et cetera, based on the existing base of end-to-end volume?

Yes, sure. We love this. It's about one-third, one-third, one-third, meaning that you've got restaurants, hotels, and then all other. And all other would include stadiums, but it also includes specialty retail. Things like Jared mentioned, our big strategic customer, et cetera. As I mentioned in my scripted remarks, we made a deliberate commitment at the IPO to diversify the business. And that's, I think, paying some dividends today. We do see a modest amount of softness, as Nancy mentioned, very recently in restaurants, but we're seeing none of that in hotels and we're seeing kind of continued spending across all these other verticals. And we've got a handful of merchants that are growing really nicely inside of that all other bucket, which is great. It offsets kind of any expectation you'd have in the macro.

Our next question is from Will Nance with Goldman Sachs.

I wanted to ask about the gateway revenues. I know you discussed a nonstandard gateway conversion towards the end of last year, and we've seen what we're calling the gateway revenues in the model decrease over the last couple of quarters. It seems we dropped to around $1 million this quarter. Could you provide an update on our progress in that area? Also, since those revenues seem relatively low compared to the large volume base, I'm trying to clarify the current economic situation regarding the existing gateway volume, considering the low take rate.

Yes. Will, I'm happy to take that. So there is still a very large quantity of volume that is still there that we make very, very little off of. So these are some very big customers that go back to the First Data JPM JVs, with very long contracts with lots of price protection at very low rates. Because during that JV, they chose to monetize the relationship upstream from the gateway. So we're still working through it. It's a lot of volume. There's certainly a lot of like low-hanging fruit in there still to get smaller customers that we contribute to our growth every single quarter. But there's a lot of big ones in there as well, and there has been for some time. And we are very incentivized to cut deals to get them over so we can start sunsetting connections that we don't want to upkeep anymore. So I think like every quarter that goes by, we are more incentivized to want to delete those old parts. Like we maintain a lot of infrastructures to Heartland, GPN, Fiserv, Worldpay. But yes, it's a lot of volume at ridiculously low take rates in there. So that should represent some opportunity because literally, any deal that we cut with them should have some uplift. And obviously, it will almost be like 100% flow-through because we're doing a lot of support for those customers.

And Dan, we also try to illustrate this in our shareholder letter. You'll see kind of tags next to a bunch of the different wins that were gateway conversions. As you know, that pulls down gateway revenue, but much to the benefit of end-to-end volume and revenue. So it's been a very consistent funnel for us. I wouldn't try to imply in any way that a reduction in revenue there mitigates meaningfully our opportunity set.

No, that all makes perfect sense. And then I guess the second question is just on SkyTab. It seems like the momentum there is really strong and obviously, adding lots of more opportunity with some of the acquisitions that you just did. So just any color, I guess, in broad strokes, where you are seeing the traction in the deployments? Whether that's through direct sales channels, through the existing indirect channels that you still have as well as if there are any call-outs around some of the acquisitions you've done over the past couple of years. Where are you guys seeing the most success in deploying the SkyTab platform?

Yes, I'm glad to discuss that. The results depend on the specific regions across the country. We took the step of in-sourcing all our partners in the markets we aimed to establish a direct presence in during the summer of 2022, over two years ago. Since then, we have not made any new in-sourcing decisions, as we are committed to those markets, which have substantial production. In more sparsely populated areas of the West Coast and Central U.S., we utilize third-party distribution to manage variable costs rather than fixed ones. In the U.K. and Ireland, we have a small direct team alongside a few partners, and we're actively learning about the market with their help. The outcomes are visible in our posts on Twitter and X, showcasing a variety of businesses from start-ups to high-end restaurants, and we are encouraged by the traction. Regarding our legacy brands acquired in 2017, we have phased those out; there is no remaining production from legacy systems or Harbor POS, as everything is now based on SkyTab, which has been the case for almost two years.

Yes, that makes sense. If you don’t mind a follow-up. When you consider those legacy brands and the customers who have been on the platform for a long time, what is the balance between back book conversions and new sales?

Yes, it's primarily all new. We have mentioned several times over the past quarters that we are improving our Lighthouse product, which is our business intelligence platform, to create a more streamlined upgrade process, similar to an iPhone 15 upgrade, where customers can easily qualify for SkyTab and transfer their database. This needs to be done as automatically as possible. Currently, our policy has been to limit SkyTab upgrades to the existing customer base for retention reasons, which accounts for a very small percentage of our production each month. The truth is that we have tens of thousands of existing customers on our other products that we plan to transition over the next few years in a thoughtful and relatively automated manner.

Our final question is from Andrew Schmidt with Citi.

I was wondering if we can just level set on the restaurant business for a minute. Maybe talk about just where you're positioned? Obviously, there's a lot of variation in terms of assets out there. But QSR versus table service post-Revel, where you guys are positioned on a go-forward basis?

Yes, that's a great question. We've indicated for some time that the total addressable market for restaurants might actually be larger than it seems, divided into three distinct segments, each with its own competitive landscape. For the cash and carry segment, which includes coffee shops and bakeries, that would be Clover and Square. Next, we have fast food, where Revel operated somewhat, and then there’s table service, which is primarily Toast and Shift4. The Revel acquisition has provided us with valuable capabilities, including retail functionality that we wouldn’t have developed otherwise, along with strong fast food and enterprise capabilities. We are currently integrating those features into SkyTab. We’ve previously mentioned the $15 million in EBITDA from cost synergies, and we won't be developing new features for Revel anymore. While we will maintain it as we transition customers to payments and SkyTab, all our development focus has shifted to SkyTab, including the resources and talent from Revel. We are currently incorporating similar Revel enterprise and quick service capabilities into SkyTab. For the next year and beyond, we expect Revel SkyTab to perform well in the focus areas, particularly table service. However, I anticipate that a year from now, we will expand into those other segments.

Got it. Can you elaborate on the internal systems work? While there's definitely an element of efficiency, there's also an aspect related to the office, particularly in terms of enabling faster development and quicker market entry. How does the internal systems work contribute to integrating everything?

This is exciting for me because we are a 25-year-old company that started in my parent's basement. Our first customer relationship management system, which was largely in use until a year ago, was homegrown, developed over many years using Access and SQL. Along the way, we acquired several companies, each with their own systems. As a result, our employees were often using eight different systems, creating inefficiencies and requiring a lot of extra personnel to handle daily tasks quickly. Almost three years ago, we initiated Project Phoenix, which involves a complete overhaul of our internal systems. This new system, built on Salesforce and Palantir, is progressing well, with new modules being continuously rolled out. The commercial team has been utilizing it for some time, and our new ticketing system is now fully integrated. This foundation is essential as it enables us to run AI solutions for quickly building point-of-sale menus, speeding up installation times and unlocking operational efficiencies. We are also developing our entire mission control system to ensure seamless operations globally. This allows us to manage simultaneous launches in Europe and the U.S. in a structured environment, similar to other industries. It's critical for achieving the margin expansion that is frequently mentioned, as many may not realize how many employees we have—3,500—who maintain outdated systems and products. As we phase out these older systems, we can repurpose that talent toward growing our business more swiftly. This approach allows us to maintain our headcount while accelerating growth and enhancing margins. I'm genuinely excited about these projects. Thank you all for joining the call, and we look forward to connecting with more analysts soon. Take care.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.