Earnings Call Transcript - FOUR Q1 2024

Operator, Operator

Greetings, and welcome to Shift4 Q1 2024 Earnings Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tom McCrohan, Executive Vice President, Investor Relations.

Thomas McCrohan, Executive Vice President, Investor Relations

Thank you, operator. Good morning, everyone, and welcome to Shift4's first quarter 2024 earnings conference call. With me on the call today are Jared Isaacman, Shift4's Chief Executive Officer; Taylor Lauber, our President and Chief Strategy Officer; 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 @Shift4. Our quarterly shareholder letter, quarterly financial results, and other materials related to our quarterly results have all 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 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?

Jared Isaacman, Chief Executive Officer

Thanks, Tom. If you've reviewed our earnings letter, you know this quarter was quite busy, and there's a lot to discuss today. We completed a strategic review, continued to attract some of the most sought-after enterprise merchants, added thousands of new SkyTab customers, cross-sold ticketing in our many stadium partnerships, and announced an attractive acquisition while expanding geographically and achieving strong results and record free cash flow. We could have done better at helping analysts understand the seasonal rhythm of our business. We're diversifying and growing rapidly. To address this, we've largely reaffirmed and positively revised our EBITDA and free cash flow guidance, providing quarterly breakdowns for the remainder of the year. I’ll elaborate on these points. Regarding the strategic review, I recommend reading my shareholder letter for my full perspective. The key takeaway is that we received significant strategic interest and multiple formal offers considerably higher than our current trading price. A go-private option is typically available, but it comes with its complexities alongside competing offers. I aim to align my interests with those of my fellow shareholders. As the strategic review evolved, we had notable wins, leading our price expectations to increase. After reviewing the quarter's presentation, it will be clear why we could not accept an offer that undervalued the business’s future. We achieved substantial milestones, including signing one of the largest casino properties globally, Foxwoods, and partnering with a major casino operator, with more on the way. Our SkyTab growth accelerated, with nearly 9,400 system installs in Q1, a 38% rise from the previous quarter. We saw continued momentum in sports and entertainment, securing stadium and ticketing deals with the NFL champion Kansas City Chiefs. We also announced the acquisition of Revel, which I'll discuss later. We followed a key strategic customer into new international markets, including Albania, Mongolia, and soon several African countries, Fiji, and the Maldives. The results from these efforts met our expectations, setting up a solid foundation for the rest of the year. We generated 50% growth in total payment volume, 27% in gross profit, and 32% in gross revenue less network fees. Our adjusted EBITDA reached $122 million, growing 36% year-over-year, with margins expanding to 46%. Our operating margin grew despite the impact of the Appetize and Finaro acquisitions, which lowered our margins by nearly 300 basis points this quarter. As we realize synergies, we expect these challenges to diminish and contribute to our margin expansion goals. Importantly, we generated $78.2 million in adjusted free cash flow, a 34% increase from the prior year. Our blended spreads also held steady at approximately 62 basis points, despite significant volume growth. An area for improvement lies in helping analysts model our seasonal business cadence better. Q1 is typically our slowest quarter, and this year follows that trend. Last year's Q1 benefited from growth over an Omicron-affected Q1 in 2022. Additionally, our rapid diversification into many new verticals complicates modeling. To assist with this, we are providing quarterly guidance for the rest of the year, including positive revisions to EBITDA and free cash flow conversion. Our guidance doesn't include the recently announced acquisition but reflects our accelerating organic growth and expense management. Now, I’ll dive deeper into our performance across different verticals, including our international progress and insights into our recent M&A activity. Starting with our core business, which primarily includes restaurants, hotels, and specialty retail, we once again made meaningful contributions to our growth. We have a significant advantage in winning hotels and resorts due to our robust software integration library and leading business intelligence tools. In the restaurant sector, we have a growing distribution network and view Toast and SkyTab as the only modern cloud POS solutions capable of effectively serving table service restaurants at scale. Our unique development and go-to-market strategy allow us to maintain lower service costs for our customers. With restaurants, we secured many notable brands, including Pizza Twist, Diverse Concepts, and 4Top Hospitality Group, among others. In the U.S., our SkyTab production ramped up, achieving nearly 9,400 system installs in the recent quarter. We launched the SkyTab Business Intelligence platform this April, which is provided free to our SkyTab POS customers, enhancing our product offerings without additional charges. We believe our SkyTab POS provides the most appealing value proposition in the market, and we are on track to exceed our goal of 30,000 system installs for 2024 at the current rate. Internationally, we are building awareness of SkyTab in the UK and Ireland and have signed new restaurants, including Suvlaki and Ram's Restaurant, and we've been awarded the online ordering for Pizza Hut in Spain and Portugal. We're optimistic about signing 10,000 new restaurant and hotel customers in Europe and Canada by the end of the year. In the hotel segment, we experienced a record quarter for major signings, including significant partnerships with leading casino operators and various hotel properties. Our expansion into Canada is progressing well with several hotel signings. In specialty retail, we signed agreements with Russell Stover and Ledson Winery, and expanded our relationship with Goodwill Industries. We continued to build our presence in Europe by processing payments for various companies and expanding our digital wallet capabilities. In the travel, gaming, and tech sectors, we've made important moves, including signing deals with BetMGM Sportsbook and integrating with online gaming clients. Our collaborations with various e-commerce and tech platforms are also thriving. Internationally, we're executing our strategy successfully, following important customers worldwide and bringing our successful products and services to new markets. We feel confident about achieving our goal of signing 10,000 international restaurants and hotels while exceeding our target of 30,000 systems in the U.S. Regarding M&A, we’re excited about the Revel acquisition, which aligns with our strategy to lower customer acquisition costs and enhance growth. In closing, those familiar with Shift4's journey know we've experienced some frustration due to the lack of appreciation in public markets. It often feels like we’re combating misconceptions while outperforming our competitors, who may lack our diversification or profitability. Despite the challenges, we have a strong portfolio of desirable customers in high-growth verticals, which positions us for sustained success. We've significantly grown our EBITDA, yet our market valuation hasn't reflected this adequately. I believe those betting against us may soon find their arguments diminishing as our performance, particularly in free cash flow, prevails. Finally, while it may appear we're celebrating our successes, our focus prioritizes addressing our shortcomings and inefficiencies. Our commitment to continuous improvement drives our momentum. We embrace ownership and aim for efficiency, execution, and urgency as our guiding principles. With that, I'll turn it over to Taylor.

Taylor Lauber, President and Chief Strategy Officer

Thank you, Jared, and good morning, everyone. The current operating environment is quite favorable for us. Although we started the year facing some challenges with same-store sales, merchants ended the quarter approximately flat compared to last year. They are also looking for technology that streamlines the commerce experience. The ongoing uncertainty about consumer spending actually drives them towards solutions like ours, which eliminate the need for multiple vendors and help save costs. We have a strong capital position and can invest in our business while many competitors are pulling back. I will discuss our capital allocation further in a moment. We dedicated a significant amount of Q1 to integrating our M&A activities. As highlighted in our recent press releases and earnings materials, our approach to sports and entertainment is resonating positively with Appetize customers. Recently, we had the chance to host investors at a Yankees' game, where we showcased our VenueNext technology and Shift4 payments, now used throughout the stadium. Our ability to rapidly provide world-class technology in complex environments, delivering substantial value for our merchants, is one reason we act decisively on M&A opportunities. Additionally, the Finaro business is now fully integrated into Shift4. There are many examples of European restaurants, hotels, and stadiums that have recently chosen Shift4, all made possible by the capabilities gained through the Finaro acquisition. Contrary to common misconceptions, these integrations do not detract from our pursuit of new growth opportunities. When M&A is executed effectively, everyone is aligned on the objectives from day one and is focused on achieving shared goals. This includes generating revenue synergies and reallocation of resources, which is reflected in the margin expansion we've achieved while continuing to invest in the business. We have also maintained our investment in the SkyTab product and payment platform, onboarding thousands of new merchants across various sectors during the quarter. This combination of strong products, an extensive distribution network, economic advantages, and fluctuating capital markets continues to create excellent capital allocation opportunities for us. As a reminder, we generally allocate capital across four key priorities: product innovation, customer acquisition, share repurchases, and M&A, which can significantly enhance our strategy, as demonstrated by the Appetize acquisition. In our shareholder letter this morning, we detailed this framework along with our growth capital expenditure over the past five years. This strategy has led to adjusted EBITDA increasing sevenfold in the past five years, as Jared mentioned earlier. While we take pride in our achievements, we understand that our journey is ongoing. I will now discuss how we are positioning ourselves for the future. Frankly, we see more attractive capital allocation opportunities than we can reasonably address, which is an exciting challenge. There is still much work to do in expanding our products in Europe and globally. Our M&A pipeline includes compelling opportunities in various areas: enhancing capabilities, geographical expansion, and improving customer acquisition costs. We also view our equity as one of the most straightforward investments at current trading multiples. In that context, we announced our intention to acquire Revel POS for $250 million this morning. While I cannot provide extensive commentary until we complete a few necessary steps prior to closing, this is a process we execute very well, and we look forward to discussing our plans for the business. If the transaction closes by July 1, we expect about a $15 million EBITDA contribution for the remainder of the year and even greater EBITDA growth in 2025. We will provide further updates when the transaction closes. Regarding other capital allocation priorities, our strategic review and M&A activities have limited our ability to be an active buyer of our equity in recent quarters, which has been disappointing. Similar to 2021 and 2022, we find our equity highly appealing at current multiples, and we have announced a larger $500 million repurchase authorization and an ongoing repurchase plan to capitalize on the dislocation in our equity value. As always, we aim to balance this with our previously mentioned priorities and manage our leverage profile to ensure sustained profitable growth and free cash flow generation in the short, medium, and long term. I will now turn the call over to Nancy to discuss our financial results.

Nancy Disman, Chief Financial Officer

Thanks, Taylor, and good morning, everyone. We delivered another quarter of solid results in line with our expectations, demonstrating again our ability to deliver top line growth, while continuing to drive margin expansion and strong free cash flow conversion. Total Q1 volume of $33 billion grew 50% year-over-year. Gross revenue less network fees grew 32% to $264 million. Our adjusted EBITDA for the quarter was $122 million, up 36%, and adjusted EBITDA margins were 46%. Excluding the impact of the legacy Finaro and Appetize businesses, margins expanded nearly 450 basis points. Our quarterly results were driven by the continued strength of our hospitality and restaurant verticals, momentum across our enterprise merchants, including new verticals, further monetization, and convergence of gateway customers and increasingly large contribution from stadiums and ticketing. The blended spread for the first quarter was 62 basis points, in line with our expectations and consistent with our full year guidance for spreads to average 60 basis points. While the evolution of our business has been significant since IPO, and certainly over the last 12 to 18 months, as we have moved upmarket and diversified our verticals, we believe we are approaching a floor of 60 basis points that we expect to hold for the balance of the year. Any deviation from this will likely be a function of volume outperformance. It is worth noting that the spreads across our core business of restaurant, hospitality, and specialty retail remained stable. Gateway revenue decreased sequentially in the quarter, reflecting the continued success of our gateway sunset initiative. The remaining gateway conversion population currently represents less than 3 basis points of spread. This highlights the magnitude of the remaining opportunity ahead of us. Subscription and other revenue in Q1 was up 45% compared to the same period last year, driven in part by the success we are having in sports and entertainment and with SkyTab and the restaurant vertical overall. Restaurant SaaS was up 55%. In total, you'll see that Q1 subscription and other revenue of $52 million was down sequentially from Q4, reflecting our continued success of converting Appetize and software-only clients to acquiring and the timing of onetime hardware revenue. This also serves as a good opportunity to remind investors that we often blow up the legacy revenue model of our acquisitions and pivot them towards our signature Shift4 Payments field value proposition. In Q1, total general and administrative expenses increased 25% year-over-year to $107 million driven by the impact of the acquisitions completed in Q4. We remain highly committed to a disciplined approach to cost management while continuing strategic investment for growth. Our goal of keeping overall 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. As a reminder, stock-based compensation expense of $23 million is higher in Q1 than other quarters, as has been customary, due to the timing of our annual awards. Our first quarter adjusted EBITDA margins were 46%, representing over 150 basis points of expansion compared to Q1 2023. As I previously just mentioned but worth saying again, excluding the impact of acquisitions, margins actually expanded nearly 450 basis points. We have high conviction on the many opportunities to further improve margins that are still on the horizon, including remaining M&A synergies, utilization of AI technology, implementation of new internal systems, and the ongoing streamlining efforts to enhance scalability throughout our business operations. Our adjusted free cash flow in the quarter was $78 million, representing an adjusted free cash flow conversion of 64%, well above our current full year guidance. As a reminder, there will be fluctuations in our conversion rates on a quarterly basis due to the seasonality of our business, the timing of interest payments, and the deployment of capital to support growth. But the improvement in our unit economics and operating model give us confidence in our ability to deliver annual year-over-year expansion in our conversion rate. Net income was $28.5 million for the first quarter. Diluted earnings for Class A and Class C share was $0.31. Adjusted net income for the quarter was $50.5 million or $0.54 per A and C share on a diluted basis on a 93 million average fully diluted shares outstanding. Our balance sheet remains strong. And as of the end of the quarter, we have approximately $700 million of available liquidity. 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 2.4x. Our strong balance sheet, growing EBITDA, and expanding free cash flow 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. For full year 2024, we are tightening our guidance range for end-to-end volume and now expect a range of $167 billion to $175 billion, representing 53% to 61% year-over-year growth. We are also increasing the low end of our adjusted EBITDA range and now expect adjusted EBITDA to be in the range of $640 million to $675 million, representing 72 basis points of year-over-year margin expansion at the midpoint, which includes the drag from acquisitions. We are also increasing our adjusted free cash flow conversion expectations to 60% from 58% previously, which yields $395 million of adjusted free cash flow for full year 2024 at the midpoint of our adjusted EBITDA guidance. Our expectations for gross revenue less network fees remain unchanged. And as mentioned on our last earnings call, we expect organic growth of gross revenue less network fees to be north of 25%. We are also providing a quarterly breakdown of our annual guidance to help investors better understand the impact of seasonality on our business, which can be found on Page 19 of our shareholder letter. A couple of call-outs as it pertains to our guidance. We continue to expect a stronger second half in 2024 due to factors I will elaborate on in a minute. And secondly, our full year and quarterly guidance do not include any contribution from Revel. Once we receive the customary approvals, we will update our guidance at that time. There are several things to note relating to our guide. First, I would like to highlight several initiatives that contribute to growth accelerating through the back half of the year. While most of these points should be obvious by simply reviewing the numerous wins featured each quarter, it is worth emphasizing. SkyTab system installs continue to accelerate each quarter, and we are ahead of schedule on our 30,000 goal for 2024. Many of the wins featured each quarter, especially stadiums and related ticketing opportunities, major enterprise resorts go live several quarters after the announcement. We are particularly fortunate to have won several multibillion dollar opportunities in the hospitality industry that we expect to contribute meaningfully to the back half of this year. 2024 marks the first year we are really able to offer our services in Canada and across Europe. And early traction in both hotels and restaurants, including this quarter's Leonardo Hotels announcement, are confidence inspiring. Our strategic e-commerce customer continues to add volume quickly, and we have been expanding organically into several new international markets that Jared discussed, with strong visibility into the back half of the year. The low end of our guide contemplates modest headwinds in consumer spending, during which we are confident we can continue to deliver best-in-class growth among our peer set. On that note, it's worth pointing out that we have been very pleased with same-store sale recovery data we have observed in April. Next, the high end of our guide implies a continuation of recent trends in both our growth in consumer spending as well as several appropriately weighted international expansion initiatives. And finally, while the midpoint of our guide implies modest margin expansion, excluding the impact of legacy Finaro and Appetize, margins are expanding meaningfully in 2024. And to reiterate, the impact of Revel is not included in the guide. 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.

Jared Isaacman, Chief Executive Officer

Thanks, Nancy. This was quite lengthy and we covered a lot of important topics. Before we move on to the analyst questions, we promised to choose one or two queries from X. The first comes from Jared Block. Jared, you asked why a deal to be acquired didn't close. Was it due to valuation? Do I think a potential acquisition could happen soon? Thanks for the question. I dedicated my opening remarks to this in the shareholder note, providing a detailed overview. There was strong strategic interest, and once that arises, any plans for going private must be put on hold. Expectations for pricing increased as we acknowledged our recent successes, and the market responded accordingly over the last month. Analyst reports have indicated possible price ranges, and that’s what a competent independent Board and Special Committee reviews to make their decisions. Regarding future acquisitions, I want to emphasize that we are focused on executing our outlined plan and the results that come with it. However, looking long-term, I mentioned I don't foresee my grandkids managing a payments business. Our goal is to create enough challenges and frustrations for our competitors that they ultimately seek to resolve the issues. I can't predict the timing of that. Additionally, responding to Christian Mohammad, this marks the third consecutive quarter that we’ve addressed one of your inquiries, and they’re valuable. You asked about our expansion outside North America, including stadiums and SkyTab. Have we been able to follow our strategy as expected? Are we encountering major challenges during this expansion? I’m not entirely sure. We likely mentioned about a hundred names this quarter, which isn’t even the full list of our achievements for the period, though it may have seemed that way. We have secured several locations in Canada and Europe, which we couldn't previously discuss. Notably, Leonardo Hotels has several hundred locations, serving as a strong proof point. We also made significant inroads into the Canadian market, where we have billions in gateway volume we could not pursue until recently. I would say our traction is strong. SkyTab is performing very well. We made some investments mid-year to enhance our distribution across Europe, recognizing that success in this market is largely a distribution challenge. We need to effectively market SkyTab to many restaurants. Thanks to our extensive network of third-party integrations, we have been able to launch quickly in the European market. Overall, I'm satisfied with our international expansion efforts at this point. Thank you for those two questions from X. Now, let’s move on to the analysts.

Operator, Operator

Operator Instructions Our first question today comes from Darrin Peller of Wolfe Research.

Darrin Peller, Analyst

With regards to growth and guidance, it's encouraging to see the successes you're experiencing. It seems that the new wins you've achieved are central to the confidence in the ramp-up as the year unfolds, alongside the success of SkyTab. Could you clarify how much caution you have regarding the timing of the implementations? Is there flexibility in the timeline within your outlook? Additionally, it would be helpful to know the actual contribution from new business compared to the original guidance on volume. Lastly, I assume organic growth remains in the mid-20s range; could you comment on the performance in the first quarter?

Nancy Disman, Chief Financial Officer

Yes, I’ll begin. I want to emphasize what I mentioned in my prepared remarks. We are still confirming that we expect organic growth to be about 25% for the full year. There is definitely acceleration expected throughout the year, but Q1 was solid and met our expectations. When considering what Jared mentioned, all of it is clearly detailed and quantifiable, not just abstract ideas. As we look at the acceleration in the latter half of the year, there's a lot of supporting information behind that. For instance, with SkyTab, our efforts toward the 30,000 goal are on track and measurable. We also have several notable wins in ticketing that contribute significantly, which is why we are optimistic about increasing our guidance on EBITDA and free cash flow. The unit economics and discussions from the past year are now coming to reality as we experience these live implementations quarterly. These are scheduled around specific seasons and teams. In terms of hospitality, we are making progress in Europe and Canada; two quarters ago, we couldn't bring those on board, but now they are live and contributing positively for the second half. Jared also mentioned the strategic e-commerce customer, which is a bit time-sensitive like some of our enterprise launches. While there might be delays due to installation schedules, our visibility has been strong. That’s why we feel confident in our ramp-up plans, which align with our initial guidance.

Jared Isaacman, Chief Executive Officer

Yes, it's Jared here, and I want to elaborate on those points a bit more. First, I'm trying to break things down on a quarterly basis, and simply put, we wouldn't do this unless we had a strong level of confidence in it. We're a motivated organization and aim to report wins every quarter. If things deviate from our expected timeline, we want to address that and establish the correct pace for the year. This should signal confidence. Regarding the ramp for the second half, to Nancy's point, it encompasses everything mentioned in this quarter's earnings report, as well as many from the previous quarters. It's not instantaneous. I liken it to a manufacturing backlog; we should consider discussing how much backlog in terms of billions is awaiting installation due to our ongoing successes in stadium and ticketing ventures for several quarters. Some of these projects indicate a go-live date of June 2024, for example. The BEI Hotel was mentioned in our earnings report 1.5 years ago and isn't open yet. As this backlog grows, it allows for more accurate forecasting with a greater degree of confidence than before. Lastly, regarding the organic side and Nancy's comments on restructuring the revenue model, it's important to recognize the lengths we will go to reshape a failing revenue model from an acquisition in order to move in the right direction. We've made this clear previously during the Appetize period, as we are willing to offer substantial concessions on SaaS and hardware fees for a year, which were part of their previous business model, to transition them to our new products. This may be difficult for analysts to fully comprehend unless we break it down, but you should understand that most acquisitions have purposefully been set back in terms of legacy revenue to progress significantly in our desired direction.

Darrin Peller, Analyst

That's great to hear. It sounds very promising from the ground level. The wins in international markets, like the stadiums and hotels, are impressive. The progress you're making there seems significant. What opportunities do you see in the near term? We understand the long-term potential is substantial, but is the pipeline still active in the short term?

Jared Isaacman, Chief Executive Officer

Yes. Darrin, it's Jared here. I didn't expect to discuss as many successes in Europe and Canada last quarter. We really made significant progress. There were some impressive achievements, and I mentioned quite a few. We landed some major hotels and large operators, including Pizza Hut in several countries, which is a strong indicator for our online ordering capabilities. We've also seen great momentum with EV operators. Overall, regarding our plans for Europe and Canada, we're ahead of our previous expectations, especially compared to a quarter or two ago. That’s why I mentioned earlier that we started making some investments in the middle of this year to enhance our distribution capabilities in Europe, as we believe we will need them.

Operator, Operator

The next question is from Will Nance of Goldman Sachs.

William Nance, Analyst

Look, I think the back half ramp in the guidance is kind of the main focus this morning. I'm just getting comfortable with it. I realize Darrin just asked about this. But I guess, can you put a finer point on just what's different about this year from an implementation perspective from prior years? Because I think I'm getting to something like 56% to 57% of revenue in the back half, and it's been pretty consistently more like 54% to 55%. And maybe the answer is just you've got a lot more of these chunky stadium and ticketing wins in the back half. But I was just wondering if you can kind of double click on what's sort of different about the implementation schedule this year versus in prior years just to help people kind of get a better understanding for that.

Jared Isaacman, Chief Executive Officer

Yes. I'll start and then invite Taylor and Nancy to join in. I would describe the growing backlog of go-lives. We have definitely been moving upmarket, as shown by the average volume for merchant data, which we regularly include in our earnings report. We have consistently moved upmarket and diversified into more complex sectors like stadiums and e-commerce. We have strong visibility into go-lives, which are accumulating. I previously mentioned stadiums, hotels, and resorts from two quarters ago that are in our backlog for go-lives. As the backlog expands, it provides more margin when forecasting customer-driven go-live dates. A significant factor is the shift in mix, and having been in these new sectors over the past few years, we have a better sense of when they will activate. Additionally, from a seasonal perspective, the football season brings a lot of ticketing activity, and many of these are in the travel and leisure sector, which has more seasonal impact in the second half of the year.

Nancy Disman, Chief Financial Officer

I want to mention a slightly different topic: we are continuing to integrate our previous acquisitions. These revenue synergies are benefiting the latter half of the year. Additionally, our gateway initiative is a strong example of how we have complete visibility into who is moving and when. This process will certainly enhance both conversion and monetization. As you know, we've mentioned a shift from incentives to penalties, and this approach is proving effective. We're seeing conversions happening throughout the entire process.

William Nance, Analyst

I appreciate the helpful details. Just to follow up, Nancy, on that last point, I wanted to rewind a bit to the last quarter. It seems there was an unusual gateway deal in the prior quarter. Could you update us on how that's affecting the numbers? I know you mentioned that gateway revenues have decreased sequentially this quarter. Could you remind us about the process of increasing the converted end-to-end volume to the standard net revenue take rates we typically expect from those deals? Additionally, did it start with significantly lower spreads, and what is the gap you are closing during the repapering of the franchisees?

Taylor Lauber, President and Chief Strategy Officer

Yes, this is Taylor. I can address that based on my involvement with the relationship. We detailed this dynamic last quarter, highlighting several opportunities to contract directly with franchisees at a higher spread. Currently, our financials reflect end-to-end volume that we consider undermonetized, as it is generating lower spreads. However, we anticipate that the relationship will evolve, enabling us to contract directly with franchisees and provide them with more services. Nancy mentioned the stability in the spread we are beginning to observe, which reassures us. This pertains to an institutional relationship that allows us to assume more responsibility for that large enterprise and contract with franchisees at rates closer to small- to medium-sized businesses. Although the transition takes time and cannot be implemented across thousands of locations simultaneously, it suggests increased revenue activity in the latter half of the year.

Timothy Chiodo, Analyst

I want to touch on the $500 billion figure that's in the shareholder letter. It's the total undermonetized end-to-end volume funnel. At the last update, I believe the gateway opportunity had about $120 billion left. Software was another $30 billion. I was hoping you could just bridge us to the total $500 billion and just expand a little bit and elaborate around that pretty large end-to-end funnel opportunity.

Taylor Lauber, President and Chief Strategy Officer

Yes, sure. So I'll hit this one as well. We put those two slides in there because there's been a lot of talk about capital allocation, how do we think about the dollars we deploy. We believe it's a core competency of our business. It's a really strong differentiator. And I think we're actually quite agnostic in terms of how our dollars get allocated, be that product development, M&A, stock buybacks, customer acquisition costs, et cetera, as long as the math makes a ton of fundamental sense. And so we tried to illustrate kind of what our track record has been over the past few years in terms of total dollars deployed and what the opportunity those dollars have presented exists. So we've all cited the gateway regularly. That was a portion of that $500 billion, but every dollar we've deployed towards M&A opportunities and otherwise has presented a volume base that we can go attack, that hasn't monetized payments well. And I think we've called out things like Appetize and Focus POS, all of those transactions had volume that isn't quite as daily measurable as the gateway volume, but it's an incredible opportunity. So we laid that out. Again, just to be very clear, you can consider our existing gateway population as a portion of that $500 billion. You can consider Appetize customers inside of that $500 billion, et cetera. What's not inside of that is the transaction that we announced in the page just after that. So we tried to give investors just a sense for why we allocate capital the way we do, what we look for when we deploy a dollar. Again, we are agnostic to whether that dollar is to hire an employee, to build a product, to buy another company, or to buy back our own stock as long as the returns make a ton of sense. And hopefully, that gives investors some confidence that when they see us invest dollars, and we announced two interesting ones today in the form of Revel and a large stock buyback, they should be really excited that we found opportunities to meet those return objectives.

William Nance, Analyst

Perfect. The brief, just a quick numbers one, if you're able to update. I know that last year, or a few years back when you did the insourcing, there was the 350 direct sales force. You likely had some other direct sales folks in-house, plus the reseller. So that was a U.S. number. Can you just, one, update the size of the distribution in the U.S., both direct and indirect, and then touch on where that sits for Europe in terms of how much hiring there has been for sales in Europe? And then how many of those distribution partners you have, which I recognize that you just mentioned them a few questions back? But if you could put some numbers to it, that would be appreciated.

Taylor Lauber, President and Chief Strategy Officer

Yes. I'll actually start in reverse and let Jared cover the U.S. sales force. We've been spending a lot of time on the European opportunity. Our European sales force largely consists today of the former Finaro sales team, plus a handful of early-stage software partners that we've had in the U.S. that also install systems throughout Europe, and then a very small handful of incredibly talented folks that put up a disproportionate number of the wins you see in this earnings stack. We are by no means at the scale we'd like to be with regard to European distribution. We've got pretty strong and ambitious plans for our sales force in Europe, but it is by no means where we'd like it to be. Jared, do you want to comment on the U.S.?

Jared Isaacman, Chief Executive Officer

Yes. I think from the time that we did distribution insourcing, so I guess, almost 2 years ago, we've increased. We've had several hiring classes for our direct team. So if we increase the size of the direct team by 10% or something, it seems like generally in the ballpark. And then we have added additional authorized partners, mostly in the West Coast, where we just always kind of lacked a direct presence. So yes, and I think it's probably fair to say we'll continue to slowly add more headcount to our direct sales team just to account for SkyTab demand.

David Lauber, President and Chief Strategy Officer

And as you think about the synergies we look for in M&A transactions, the Revel business had an awesome sales team, both direct and the series of partners. We're really excited to work with them as the transaction comes to a close.

Dan Dolev, Analyst

It's great to see the strong organic growth for the year. I have a quick question about Revel. The acquisition was very interesting. Jared and Taylor, could you share the strategic rationale behind it and what you expect to achieve?

Jared Isaacman, Chief Executive Officer

Yes, of course. Jared here. I'm glad to start this conversation. This acquisition aligns perfectly with our strategy and should be viewed similarly to our previous initiatives like Appetize or Focus POS. We have a significant opportunity for payment cross-selling. For context, Revel was once valued at over $500 million, but we announced a purchase price notably lower than that. This is because Revel had long overlooked payments despite creating excellent software and gaining reputable customers, treating payments as an afterthought until recently. Therefore, we can immediately target existing customers to transition them to our payment solutions. Additionally, we're applying our philosophy of streamlining by removing unnecessary features. Instead of maintaining two separate restaurant product lines, we will incorporate the best aspects of Revel's offerings for both quick service and enterprise into SkyTab. We have a talented team based in Vilnius, Lithuania, which is beneficial for this integration. Furthermore, Revel has an established sales force and authorized partners in Europe, giving us robust distribution for a product with a compelling value proposition. As Taylor noted, we are currently navigating the standard regulatory approval process, but we anticipate that by July 1—or potentially sooner—we could see $15 million of EBITDA in the latter half of the year, and with an uptick for the following year, it indicates a sound financial transaction on its own merits.

Taylor Lauber, President and Chief Strategy Officer

Yes. Jared summarized that well. I don't have too much to add, except that we're incredibly excited to get this one over the line. And don't expect it to be much more than July 1, as Jared mentioned.

Operator, Operator

Our last question today will come from Sanjay Sakhrani of KBW.

Sanjay Sakhrani, Analyst

I guess, I have a question on SkyTab. I know it's early days, but maybe you could just help us think about the revenue contribution and how you see that developing over time, and maybe also just the revenue potential of a SkyTab customer versus a non-SkyTab customer.

Taylor Lauber, President and Chief Strategy Officer

Yes, I'll start with this, and I think it's important to dimensionalize kind of what our book looks like today. SkyTab is exclusively focused on net new wins, adding customers. When we add a SkyTab unit, it is overwhelmingly a customer that didn't exist in the Shift4 ecosystem prior to that. We also have the opportunity, should we choose to kind of lean on it, to upgrade customers that are on other pieces of restaurant software to SkyTab over time. We will get a SaaS lift from that, but these customers are typically already giving us payments. And as you've seen, we try to price the SaaS offering in SkyTab to be very attractive, vis-a-vis other competitors in the market. We've seen lots of success, as evidenced in kind of our earnings materials and prepared remarks with this strategy. Although we do think there's plenty of room to move price when our nearest competitors brag about the number of modules they can sell to a customer, and all of ours are included in our base pricing, you see the opportunity to charge for it over time, although we're not seeing the need to do that in the current environment to attract a lot of customers. What you should expect from a SkyTab site just kind of at the macro level versus averages in our book is that the restaurants, they're typically a little bit smaller volume than what you have in an average hotel and significantly smaller than a stadium, although we earn a higher spread and we earn a SaaS component on top of it. So a very, very attractive customer in terms of the revenue contribution per dollar of volume.

Nancy Disman, Chief Financial Officer

Yes, I would just like to emphasize that our growth in SaaS for restaurants was 55%, with a significant portion coming from SkyTab, far exceeding that percentage. This growth is driven by the various components that Taylor mentioned and their ramp-up. One aspect not discussed is that we currently do not charge for every enhancement and module within SkyTab. It is competitively priced in the market, and we also generally offer one year free to many customers. As we begin to scale SkyTab, you can expect an increase in revenue, particularly in SaaS, which will positively impact the latter half of this year and generate even greater revenue in the near term.

Sanjay Sakhrani, Analyst

Thank you, Jared. I appreciate your insights on the strategic review. Could you share your thoughts on the valuation that would be reasonable if you decide to pursue a sale? I'm trying to understand what would be enticing and how we should consider the future direction from here.

Jared Isaacman, Chief Executive Officer

It's a difficult question because there is a significant gap between our current valuation and how we've been valued in the past compared to some high-growth peers that lack our profitability. During the strategic review, many analysts projected potential transaction valuations for Shift4 and the reasoning behind those estimates. Generally, the expectations, especially the higher estimates, seemed to be on the right track. However, as the strategic review progressed, the projected valuations kept increasing, which was justified given the positive developments within the company. This trend complicates matters for potential strategic partners, especially with new valuations emerging frequently. I do agree that the higher end of those projections would have reflected a more accurate valuation, which is significantly higher than our current position.

Operator, Operator

That's all the time we have for questions today. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.