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spk04: Ladies and gentlemen, thank you for standing by and welcome to the shift for payments fourth quarter 2020 earnings call. At this time, all participants on a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone keypad. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Sloan-Bullen Investor Relations. Thank you. Please go ahead.
spk08: Thank you. I'd like to welcome everyone to ShiftForce fourth quarter 2020 earnings conference call. Before we begin, I'd like to remind everyone on this call that it will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding management's plans, strategies, goals, and objectives, the potential annualized gross profit related to the conversion of gateway-only merchants, our acquisitions, and their ability to bring us into a high-growth vertical, the expected impact of COVID-19 on our business and industry, and anticipated financial performance, including our financial outlook for the first quarter of 2021 and the full year 2021. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results. Performance or achievements expressed or implied by the forward-looking statements, factors discussed in the risk factors section of our financial perspectives filed with the Securities and Exchange Commission, PURSUANT TO RULE 424B4 ON DECEMBER 4, 2020 AND OUR OTHER FILINGS WITH THE SEC COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY THE FORWARD-LOOKING STATEMENTS MADE ON THIS CALL. Any such forward-looking statements represent management's estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. In addition, we may also reference certain non-GAAP measures on this call, which are reconciled to the nearest GAAP measure in the company's earnings release, which can be found on our investor relations website at investors.shiftforward.com. And with that, let me turn the call to our Chief Executive Officer, Jared Isaacman.
spk10: Thank you, Sloan. And good morning, and thank you all for joining us today. For our agenda this morning, we will take you through the business performance, payment and merchant trends, and strategic initiatives. And we're going to save a bit of time for the fun stuff at the end, which is the road ahead. To begin, and as I mentioned some of these points in my shareholder letter, we just concluded a very challenging year. The economic, social, and political issues did not spare anyone. Despite these extraordinary circumstances and having exposure to highly impacted verticals like restaurants and hotels, the team at Shift4 performed incredibly well. And I'd like to highlight some of our 2020 accomplishments. So for the year, we grew every material KPI, including number of merchants using our platform, the volume they process, and the revenue it generated. This marks our 21st consecutive year of year-over-year revenue growth. But mostly it reinforces that Shift4's value proposition is compelling and it's winning share during the best and, you know, during the most challenging of economic circumstances. We also completed multiple capital market transactions to strengthen our balance sheet, diversify our base of shareholders, and provide capital to fund organic and inorganic growth initiatives. We also completed two great acquisitions, including the 3D card e-commerce platform, which we now call Shift4Shop, which has greatly expanded our e-commerce capabilities and significantly expanded our TAM. We also released several products like our new generation online ordering products, mobile payments for takeout, delivery and curbside ordering, and QR code-based ordering and payments, all of which were quite timely given the pandemic and we think will continue to feel growth in a post-pandemic environment. We owe our 2020 performance not just to these reasons, but also the dedication of our employees, the support of our software partners, and the perseverance of our customers. It's during these challenging times that they make me most proud. As to the fourth quarter specifically, we delivered another reasonably strong quarter given the circumstances. As previously shared, we celebrated the highest volume month at the time in October, which slowed in November, and then significantly so in December. We attribute this entirely to COVID requirements on social distancing and cold weather that was not conducive to travel and outdoor dining. Despite these realities, Q4 end-to-end payment volume grew 12% from the previous year to 6.8 billion. Our ability to grow merchant count and volume while serving some of the hardest hit industries is a testament to our technology, our business model, and most importantly, our people. To make no mistake, this is a quarter that included some really rough business conditions. While volume growth is nice to see during a tough quarter, we also look at active end-to-end merchant count, which grew 4% quarter over quarter. This continued growth in our merchant base makes us incredibly optimistic as we look forward into 2021. This end-to-end volume growth drove 5% growth in gross revenue less network fees, which resulted in adjusted EBITDA of $26.7 million for the quarter, which is up 10% from the prior year when normalized for our change in accounting for leased equipment. It's also worth reinforcing that virtually all of Shift4's merchants and all those that we have been adding throughout 2020 are operating at substantially below normal levels, which we anticipate is becoming quite the coiled spring. As previously announced, we also acquired two businesses in the latter part of 2020, each very unique in serving different verticals and increasing both our capabilities and our TAM. The Shift4 shop acquisition has significantly expanded our capabilities to serve online merchants, and dramatically expanded the market we are capable of addressing with our services. Taylor will provide some additional color on our month-to-month trends, but as I noted at the onset of the call, December volumes declined meaningfully as weather became colder and COVID cases accelerated, resulting in stricter social distancing requirements across the country. And we'll speak to the uncertainty that still exists from COVID, but what is clear to us is that our nonstop innovation and unique value proposition continues to win across a growing range of merchants and market segments. For those of you who are new to the story, we hope you see Q4 as a perfect example of our business model. We offer innovative solutions to merchants across a broad range of industry categories. Our technologies go far beyond traditional payment acceptance and often give us an incumbency advantage versus other payment providers. We use these advantages to offer a vertically integrated solution at a lower total cost of ownership than the competition. And lastly, we don't sit still and are constantly looking for new industries and geographies as evidenced by our acquisition of Venue Next, which Taylor's going to talk about shortly. As we spoke about on our last quarter's call, and I described in my initial letter to shareholders at the IPO, our philosophy is to drive change where we see inefficiency and incremental value for our merchants, and to ensure Shift4 is always positioned in the direction the puck is going. So as you may recall, during 2020, Shift4 became the official payments partner for the Las Vegas Raiders, the first sports and entertainment venue in our history. Within a few months, we have found significant successes across what was a pretty neglected vertical, supported by multiple expensive vendors and lots of legacy technology. We have found that our strength in serving some of the most complex and demanding environments in commerce has made us well-suited to solve problems and deliver a better fan experience in sports stadiums, theme parks, and other similar venues. This is why we're so excited to talk about our most recent acquisition of Venue Next, which again, Taylor will discuss shortly. On the same note, we just announced today that Staples Center will be using Shift4 payment technology. We believe stadiums and theme parks will contribute meaningful incremental end-to-end volume in the months and years ahead. It was just a few months ago that we announced the acquisition of 3D card e-commerce platform, which, again, we now call Shift4 Shop. Our entry into e-commerce came as a surprise to some, but I think it's worth reiterating. This is textbook Shift4. We observed an industry category like e-commerce that is massive and growing quickly, yet unnecessarily complex and with multiple layers of fees. Taylor will speak about our go-to-market strategy with regard to shift for shop in a few minutes, which I also believe will drive the new layer of growth for a business. These are two new markets that are quite meaningful from a TAM perspective and were largely foreign to shift for at the time of our IPO just nine months ago. Despite having operated this business for over 20 years, I can't recall a time when I was more optimistic about the road ahead. Our merchants are back to experiencing healthy volume growth with a very strong start to 2021. We continue to win share in our core markets and also find new exciting verticals enter. We also have an impressive capital position right now that affords us the ability to invest in growth accelerants for which I thank all of you again. And while I have the mic, I feel compelled to share a personal project and a call to action As some of you may know, I am fortunate to command the first all-civilian mission to space later this year, which will be a personal achievement beyond my wildest childhood dreams. And in reflecting on the significance of it, I couldn't help but think about all the children who don't get a chance to live out their dreams. It's for that reason that I've made St. Jude Children's Research Hospital my co-pilot on this mission. We've begun a very ambitious, even for us, fundraising campaign, and I would urge you all to consider donations. and you can still visit inspiration4.com to learn more. And with that, let me turn the call over to Taylor to discuss our fourth quarter operating results in more detail. Taylor? Thank you, Jared, and good morning. I'm going to take a minute to give some additional detail on volumes through the fourth quarter and then also provide an update on what we've seen to date in 2021. First, we included a monthly snapshot of the quarter to give you all a sense for the reasonably pronounced impact the pandemic had on end-to-end volume throughout the holiday season. We are pleased to report that this decelerization was isolated to December. January, for example, represented a nearly 10% increase in end-to-end volume from the prior year. Seven of our eight highest volume days in our history occurred during just the last two weeks of February. These volume trends are quite positive when considering many of our merchants in large states like New York and California are operating at less than 50% capacity, and several states, including Texas, were without power during this time period. This ability to grow at a pace exceeding many payment leaders, despite a merchant base that continues to be heavily impacted by COVID and occupancy and travel restrictions, reinforces the power of our value propositions and the clear competitive advantages we have in our core markets. Jared mentioned the 4% sequential growth in active merchant count during the quarter. Hotels represented a larger than typical percentage as we won several large hotel groups, including Sonesta and their acquired brands to our platform. I do want to note that this Q4 activity does not reflect the impact of our 3D cart acquisition, now branded as Shift4Shop, as we've used the majority of the time since acquisition to reposition the business for what we believe is a highly disruptive go-to-market strategy. If you recall, the 3D card platform was a mature, feature-rich web store builder, largely reliant on SaaS revenue. The platform was the driving force behind billions of dollars in payment volume, and yet sending this volume to third parties, for which merchants were paying yet another vendor for. We've recently launched a shift core shop, a platform that is entirely free for any merchant using shift core payments. Competitive platforms charge as much as $300 per month and actually more for enterprise and B2B features and still rely on third-party payment processing. This investment isn't simply a branding and marketing exercise. We also repackaged the platform to make it highly intuitive and created a payments enablement process that is second to none. We also introduced Facebook and Instagram integrations and count fraud detection at no extra cost for our merchants. On that note, in the brief time we've owned and operated Shift4Shop, we've accomplished many of the integration and branding goals for our first year of ownership. We've also increased the number of web stores by roughly 8,000 or 54% since acquisition, which we think is the appropriate way to measure success this early in the integration process. We also have an exciting roadmap for Shift4Shop that we believe will continue to impress merchants and help them grow. Make no mistake, we believe this platform will compete successfully among the best e-commerce businesses in the world and believe we can double the pre-acquisition site count by the end of this year. While the depressed volumes are real in the fourth quarter, what is masked is the upside potential that Shift4 has across a broader set of merchants than when the quarter began. While there is uncertainty on the pace of economic recovery and consumer spend in 21, our growth should compound as that activity recovers given our expanded share. Before I turn it over to Brad, I wanted to close with providing you an overview of our acquisition of Venue Next. Venue Next is a best-in-class provider of mobile ordering and point-of-sale solutions for sports and entertainment venues. Their technology began as an in-seat ordering app envisioned and seeded by the San Francisco 49ers and has evolved into a full-stack solution, including point-of-sale for concessions. Their applications have been proven in every major sporting category, including the NBA, MLB, NFL, NHL, and MLS. and also power mobile ordering at some of the nation's largest theme parks. In a story that should be familiar to you by now, Venue Next was competing very successfully to win these marquee clients, but the integration of payment providers included a web of gateways, merchant acquirers, and hardware providers. We took an approach of partnering with Venue Next to offer a more streamlined solution and quickly won several world-class merchants, including the Staples Center in Los Angeles. We've discussed our enthusiasm towards this channel in previous calls, but now own the entirety of the stack and believe our solution will be incredibly competitive. The mobile technology also has applications in adjacent verticals and will have applications far beyond stadiums. We believe that VenuNext's best-in-class technology will attract $2.5 to $3 billion in incremental volume by the end of 2023. We've published a summary of the transaction on our website and have included a chart to illustrate how through these two transactions, our TAM growth has doubled since our IPO, which was just nine months ago. Now I'll hand the call over to Brad to walk you through our financials.
spk05: Thanks, Taylor. As mentioned in our release, we generated $88.8 million of gross revenue less network fees in the quarter. This represents a 5% increase over the prior year. It was up just 1% compared to last quarter for the reasons Jared and Taylor spoke to. The year-over-year variance was driven by a 23% increase in net processing revenues, driven by continued share wins and gateway conversions. Net processing revenue now makes up 63% of our gross revenue less network fees, up from 54% for the same period last year. Growth in net processing revenue was offset by modest declines in gateway and SAF other revenue streams. due to the impact of COVID-19 on our hospitality merchants and our continued efforts to convert gateway and non-recurring revenue sources to our ongoing spread-based monetization model. Our net spread for the quarter was approximately 81 basis points, while the spread on interchange remains at lower than normal levels due to shifts in card mix. Specifically, the spread on interchange for the quarter was approximately 179 basis points, 8% lower than prior year. We reported 26.7 million in adjusted EBITDA for the fourth quarter. If we apply consistent accounting treatment to our equipment leases in 2019, this represents a comparable increase of 10% over prior year. Our fourth quarter results represent an adjusted EBITDA margin of 30% against gross revenue less network fees. Again, applying consistent treatment of equipment leases, this represents a 110 basis points increase from prior year as we continue to benefit from additional scale. Compared to the third quarter, adjusted EBITDA margins declined by 270 basis points due to COVID-related volume slowdowns in the back portion of the quarter, as well as the impact of our recently announced acquisitions. Next, let me give you an update on our capitalization and liquidity, as we had a very busy quarter. First, at the end of October, we completed a successful offering of $450 million of senior notes that are due in 2026, and carry a coupon rate of 4.625%. The proceeds of the offering were used to pay off the entirety of our previous term loan facility, which saves us approximately $4 million in annual interest expense. Additionally, that offering establishes SHIP IV's participation in the public debt markets, which will offer us an additional source of capital going forward. Second, in December, we completed a highly successful offering of $690 million of convertible notes that are due in 2025. The deal was upsized from an original offer amount of $400 million and priced with zero coupon and a conversion rate of effectively $80.48 per share. Finally, in December, we completed a $9.2 million share secondary equity offering priced at $55.50 per share. These shares were sold exclusively by Searchlight Partners. As a result of these Q4 activities and our previous capital raises, we ended 2020 with with $927.8 million in cash and $89.5 million of available capacity on our revolving credit facility. Subsequent to the end of the quarter, we restructured our revolver and increased its capacity to an even $100 million. I want to take a minute to mention some financial revisions that will be disclosed in our 10-K filing. These revisions primarily impact 2018 and 2019. and reflect non-cash balance sheet adjustments and geography changes within the P&L. While there is an immaterial net income impact, it should be noted that these revisions have zero effect on our reported revenues, EBITDAs, or net cash flows. Finally, I'd like to discuss our outlook. During 2020, we provided quarterly guidance because of the significant variability in volume patterns driven by COVID. With volume trends returning to more normal levels of variability in the back half of 2020, For 2021, we'll be shifting to annual guidance. Let me first make a few comments about the first quarter. As you've certainly seen through our activities across various media channels, we have recently initiated a major rebranding effort related to the integration of 3D CART. These investments will place our new e-commerce solution, Shift4Shop, as a leader in the e-commerce market to drive additional merchant boarding to significantly increase our TAM. The impact of this effort will largely be isolated in Q1, and will be treated as a non-recurring integration expense in our financials. That said, here is our guidance for 2021. We expect full year 2021 end-to-end volumes to be between $36 and $38 billion. Gross revenues are expected to be between $1.1 and $1.2 billion, while gross revenue less network fees are expected to be between $450 and $460 million. Adjusted EBITDA is expected to be between $155 and $160 million. Note that this EBITDA guidance excludes the impact of the Q1 integration investments I mentioned previously, as well as any inorganic sources outside what has already been disclosed. Similar to my outlook comments for the last few quarters, there still remains a lot of uncertainty related to the recovery curve. While the numbers for the first two months of 2021 suggests the slowdown in Q4 was largely temporary. There are still a number of moving parts related to COVID that could impact our volume and results in the near term. With that, let me turn the call back to the operator for questions.
spk04: As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that is star 1. Please limit your questions to one question and one follow-up. To withdraw your question, press the pound key. We will pause for just a moment to compile the Q&A roster. Your first question is from the line of Darren Peller with Wolf Research.
spk06: Hey, guys. Thanks for the question, and congrats on a good year in a tough environment. When we look at the strategic investments you're making, clearly it's much further into shift more shop, e-com, and obviously now stadiums as well as we see these moves, probably more so than I think a lot of us even expected at this point after the IPO. So when you talk about First of all, if you have the right pieces now first on the e-comm side, you know, where are you in terms of your strategic build out there? Is there enough done that you can actually run with it? How material can this be for you guys through this year and next? And maybe just touch a little more on the differentiation you guys offer besides pricing that can really help that succeed.
spk10: Yeah, good morning. Thank you. Appreciate the question. So I guess first, just to say, I don't think, you know, it should be that surprising that we continue to seek out industries that you know, are challenged by multiple different, you know, software vendors adding complexity and cost that we think we can do, you know, a better job providing more vertically integrated solution. You know, it's as we were saying towards the end of, you know, last year, we get an awful lot of questions about our gateway conversion strategy, but, you know, we've been in business 21 years growing in payments and gateways were only part of our story for the last, you know, three and a half, almost four years. So, you know, you should expect us to continue to kind of find these interesting opportunities with, you know, a lot of growth behind them, a substantial payments opportunity to unlock and a big Camden Wind share from going forward. You know, e-commerce, if you look at kind of the spectrum that we're able to address, if you go back six months ago, we were able to do, you know, kind of the ultra-enterprise version of e-commerce that complemented, you know, some of our hospitality type of customers. Um, and, uh, and then ship or shop has added a very, you know, SMB, you know, kind of at the, um, you know, entry point into e-commerce type capabilities. There's an awful lot that lives in between, uh, that I would expect us to continue to invest in, you know, both organically and inorganically in order to cover the full spectrum of, of, of card, not present commerce. So that's going to be a pretty big focus for us. Just when you consider, you know, how much opportunity lives in that market. And then talking a little bit about venue next, we love the stadium space. Our exposure to it is actually rather recently with Raider Stadium, as we mentioned in our remarks. But what we learned there is, wow, this is not that dissimilar you know, to the hospitality environments that we do exceptionally well. You've got, you know, restaurants inside. You have ticketing. You've got merchandise sales. You have bars. Some of these newer, you know, stadiums have nightclubs. And it's like, wow, this looks very similar to the hospitality environment we're good at, and it's got multiple different software applications that are all coming together. This is an area that we should put more attention to. And our journey began mostly with collaboration with Venue Next. And then it was just clear based on early successes, as we mentioned, Staples Center was a big win we announced today, that we could take this a lot farther and not just end in sports entertainment, but bring it into theme parks and other large entertainment venues. And I'd say towards this general question is, is it done? No, no, it's not done because commerce is huge. And there's a lot of opportunity as commerce-enabling software and payments come together, both in new verticals in the U.S. market as accelerants to the current verticals we're already in, and then in new geographies that we think could benefit from an integrated payment solution like we're capable of offering.
spk06: All right. That's really helpful, Jared. Brad, just a quick one on margins, and then I'll turn it back to the queue. But you guys guided towards numbers on revenues that were above us. On the margin side, it seemed more in line. I'm just curious. I think you mentioned something about an expense in the beginning of the year of AMS, but just investments versus any one-time items. Thanks again, guys.
spk05: Yeah, hey, Darren. This is Brad. So there are a couple things. One is, you know, we do have some investments teed up next year to shore up some of the things that we talked about in some previous calls. And, you know, there's also a near-term impact of some of the acquisitions that will flow through over time as well. So you'll see that in the near term, but over time. the margins driven by those acquisitions are going to get us back to those numbers that we previously got into. But you'll see a little bit of compression here in the next couple of quarters as we absorb and kind of digest those acquisitions. Got it. All right. Thanks, Larry.
spk04: Your next question is from the line of Tim Chiodo with Credit Suisse.
spk10: Great. Thanks a lot. And that context on the margins is really helpful. So the data you gave around the number of merchants being up year over year is super helpful, as well as the up 4% quarter over quarter. It really gets to your point earlier around the coiled spring in terms of a lot of these volumes in this year's cohort coming on at a very COVID depressed level.
spk03: If there's any context you could give us around maybe the average size of the merchant base now, maybe relative to 2019 levels, And I guess for the context there, you mentioned that some of those more recent additions were in the hotel vertical, which would also be supportive of a larger size merchant.
spk10: Good morning, Tim. Mrs. Taylor, thanks for the question. You know, as we look at our average merchant size, we try not to spend too much time on 2020 over 2019 only because of the COVID impact. To answer your question in sort of a pointed way, we see across the gambit, usually merchants coming out of the tail end of 2020, we're down between 30% and 60%. And then there's lots beyond that, quite frankly, hotels that were flat out closed. A lot of the hotels we boarded during the quarter used that downtime to implement systems like our own. So we would say that the average size of the merchant we boarded in a normalized state is substantially higher, but you can't really discern that from their 2020 levels.
spk03: Yeah, completely with you. That's exactly what I was getting at, more of the normalized level, not on the COVID-depressed type level. So fully follow you there. Same page.
spk10: Okay, great. And then a minor follow-up on 3D CART. So that 8,000 incremental web store is pretty quickly, pretty impressive. Could you just give a little more context on those 8,000 web stores? Were some of them from existing Shift 4 merchants adding this capability? Were they fully net new? That type of context. Yeah, sure. Jared here. I'm happy to answer that. So this is almost all just share wins and largely related to the rebranding and promotion effort that we undertook over the last, really, call it five weeks or so. So we spent the first two months after the acquisition really just getting 3D Cart ready for its big debut, a shift for a shop. There were a lot of things we had to do internally in terms of you know having a more frictionless onboarding that's you know hyper appropriate for a shipboard shop type customer but not not really typical for say a hyatt or a hilton that you know the type of customers we typically interact with so there's a lot to get ready for internally and then uh obviously around february 1st we really highlighted the platform in a big way and that's where all of that growth uh really came from um and it's continued to maintain a very healthy state of production even since we actually only just began enabling our 7,000-plus software partners with a means to sign up ship or shop customers in the last probably week and a half to two weeks. So one of the areas that we're most excited about with the acquisition is enabling third-party distribution because that is not, you know, very typical at all. You know, call it the other shop that's out there or the other web store e-commerce players. So we're really kind of in the early innings of that. And, again, we actually haven't even really begun the cross-sell to the existing base of customers either. This was really just highlighting the platform with a pretty disruptive pricing model and making available an awful lot of features and capabilities that the other players charge quite a lot of premium fees for and seeing how the market reacts. And then, as you can tell, I mean, we've really increased the size of sites by about nearly 50% in a pretty short period of time.
spk02: Yeah, definitely. Thank you, Jared.
spk10: So sounds like all new and now third-party distribution is enabled. So very good. Thanks a lot for taking both of those questions. Thank you.
spk04: Our next question is on the line. Ashwin Sherbakar with Citi.
spk07: Thank you. Hey, Jared, Taylor, good to speak with you guys again. And good job in a tough environment. I guess let me start with asking about the cadence of quarterly expectations for 2021, particularly net revenues and EBITDA. You know, what are you assuming with regards to an economic recovery?
spk05: Hey, Ashwin, this is Brad. I'll take that. You know, we put together our guidance. That's probably where we spent the majority of our time as a leadership team, kind of looking at patterns. In fact, we were looking at patterns up until the last couple of days. You know, some of the numbers Taylor mentioned is starting to come in pretty well since January, February kicked off out of 2020. You know, the recovery curve is going to be a big question. You know, we think there's certainly signs. that um we are seeing recovery we talked about the cold spring as merchants start to get back to you know more normal processing levels we still think that's probably a year to a year plus before that full recovery really starts to kind of get us back to what we would consider you know quote unquote normal um you know the pace of which you're going to see some seasonality right we always see seasonality in this business q2 and q3 are going to boost because of weather a lot of outdoor dining etc But I still think 2021 is still going to be, you know, a recovery year that's going to behave a little different than a normal pattern. But I would expect, you know, a year to year plus for, you know, getting us back to normal and expect some seasonality boosts between Q2 and Q3, just like we would normally see in a more normal environment.
spk07: Got it. Okay. And then the other question, I just wanted to just dig in a little bit into sort of net revenue outlook versus end-to-end volumes. net revenue outlook was a bit higher than our estimate. So how much, you know, from a contribution perspective, yield, inorganic contribution, subscription, other than Gateway, maybe some kind of breakout like that, if you could provide, that'd be great. And before I get off, I also want to just say to Jared, just on a personal note, really appreciate what you're doing for St. Jude.
spk05: Yeah, sure, Ashton. So kind of talking about the revenue, you know, we've always had this ongoing premise, and it goes back to, you know, us in the IPO roadmap, talking about how we're shifting our revenue streams into the net processing revenue. One of the stats I mentioned in my previous readings was around, you know, shifting that from 54% last year, you know, in the quarter, now we're at over 60%. So there is an ongoing, you know, movement on our behalf, very intentional to, you know, make sure that that net processing becomes bigger and bigger as a proportion of our revenue streams. We will be, you know, looking at the gateways for conversions. We're always, you know, targeting different ways of driving those merchants to convert from the gateway to the end-to-end solution. And then we still have some SaaS and other revenue streams. Now, those have been, you know, boosted a little bit lately with some of the acquisitions that have more SaaS models. Now what we are exploring is how do we How do we morph those back into our existing revenue model where we convert those SAS and other fees back into the payments model? So I think you're going to see a continued trend, right? You're going to see continued trends that the net processing revenue becomes more and more of our revenue streams. which is also going to be, you know, very helpful for us as soon as these recoveries do kick in. That's where those recoveries are going to monetize. So I think, you know, we positioned ourselves really well, and that's, you know, part of our ongoing model, whether it's, you know, the back book, if you think of the gateway, or the forward book, if you think about our recent acquisitions of 3D cart and now being next. Got it.
spk10: Thank you.
spk04: Thanks, Ashwin.
spk10: And thanks, Ashwin.
spk04: Your next question is from the line of Matthew O'Neill with the Goldman Sachs and Company.
spk02: Yeah, hi. Good morning, John, and thanks for taking my questions. I was hoping we could dig in a tiny bit more on the acquisition. So on venue next, for example, I appreciate the guidance in the out years, but I was curious if there was any way to frame either what you're expecting for this year for it to contribute or maybe, you know, what 2019 was like in kind of a pre-COVID more normal environment. uh and then similarly um i was just curious on 3d card now uh shift for shop is is that back end completely converted so is it all accruing as end-to-end volume kind of following the rebranding um and i guess the same question for for venue next if it is now or will it be at some point soon yeah hey matthew it's taylor thanks for uh the questions
spk10: I'll answer your second question first, which is from a payments compatibility standpoint, yes, both platforms are able to take payments via Shift4. It was actually relatively easy. As we mentioned, I think, on an earlier call, the Shift4 shop platform had integrated to numerous payment gateways. So this was like a week-long effort from about the midpoint of November forward. That was the preferred payment method for any of the new shops that were boarding. Venue Next, as we mentioned, this is a phenomenal transaction that we're thrilled about. I mean, this is a partner that we would have considered one of our top partners coming into the end of 2020. It's a software application that was winning in its own right with its full pricing in some of the most demanding venues in the United States. That gave us all the confidence in the world to to um to partner up with them and you know through an acquisition make the value prop that was clear to customers um and so in terms of expectations we sort of laid out uh you know a three billion dollar by year end uh 2023 target i think the reality is that's you know not a terribly significant portion of the sports and entertainment market and yet this tool has been able to win share an incredibly rapid rate with a sales model that's somewhat disjointed, meaning you've got to bring in a payments partner, you've got to bring in a gateway. Sometimes you're integrating into other software suites. So we think we'll be able to far surpass that. We like to set conservative goals for our shareholders when we put out guidance. But we're incredibly optimistic about the path and also the adjacent verticals, right? This is a mobile first technology that has performed incredibly well in stadiums, but it is a demand that merchants in a lot of different categories have. It already exists in the largest theme parks in the country. And you can see its application across lots of resorts and other things. So we are incredibly excited, not just for the ability to cross-sell into a vertical that was, you know, an emerging vertical for us, but also the ability to deliver best-in-class technology across multiple verticals. And do the payments work with Shipboard? Yeah, that's how we went out and won the Staples Center, you know, last year. And, Jared, here, just to layer on to some of Taylor's comments and go into some of the specifics, you know, we wanted to set expectations, which is why we gave a sense of where we thought we would be in terms of end-to-end volume contribution from Venue Next in the next couple of years, but really didn't want to drill down into any more specifics because there's a lot going on here. First, this business, again, is growing very, very fast. um you know if you look at the presentation we put out there's a lot of obviously you know recognizable sports team and entertainment venue uh logos those were accumulated essentially over the last 18 months so to taylor's point this is technology that's doing incredibly well in its own right kind of charging full freight for everything uh so you you know we we just have a lot of fast experience that when you combine those type of models with you know our integrated payments approach and eliminate some of those pain points you're only going to accelerate growth so we have to see what that looks like and then second like To Taylor's point on some of the adjacencies, and I think this is probably just a bullet point that may get overlooked in the presentation itself, we see Venue Next as providing our right to win within, you know, kind of regulated gaming environments. So, you know, if you look at whether it's fantasy or some of the other, you know, sports betting type opportunities that are happening in-app, it's our relationship with Venue Next that's already made some of these conversations come together. And that in itself is very, very hard to predict because it is also growing at a really wicked fast rate. So we want to at least just kind of set some initial expectations with the idea that we're going to refine it in the quarters ahead as we kind of bring together that, you know, vertically integrated value prop that's done well for us in the past. So I would expect more updates in the future.
spk02: All right. Understood. Thanks, everyone.
spk04: Your next question is from the line of John Davis with Raymond James.
spk10: Hey, good morning, guys. I just wanted to hit on 4Q revenue for a minute. Obviously, with the COVID spike in cases in 4Q and the corresponding lockdowns, volume fell quite a bit short of your initial expectations, yet you were still able to hit the revenue outlook. So just curious kind of what came in better in 4Q from a revenue perspective than your initial expectations?
spk05: Hey, John and Fred, I'll take that. You know, we've talked previously about kind of spread expectations, right? We've talked about, you know, as the average merchant size grows, we expect to see that spread start to decline just based on purely mix from those larger merchants. You know, when the volumes pull back You know, it certainly had an impact on those larger merchants as well. So what we did see is spread come in over over expectation for the quarter. That's why I mentioned 81 basis points for the quarter, which is slightly ahead of what we were expecting to see. Given the pattern, we would have expected to see with a larger merchant base coming on board.
spk10: Okay, great. And then, you know, as we think about year-to-date trends, I think, you know, January uptens encouraging. Can you give us a sense on what February was on a year-over-year basis or even the exit rate just to help us with 1Q modeling? Yeah, sure. February was a really interesting month. And the exit rate we really wanted to highlight because The back half of February in particular was incredibly strong. You know, we sort of phrased it with the idea that seven of our eight best days in our history were during that second two weeks. And that's really what drove it. February on a year-over-year basis was up just shy of 6%. And that's topping off a really strong February pre-pandemic 2020. But if you look at that exit rate, you get pretty exponential growth, even into the early days of March. this is an area where we're starting to be incredibly optimistic. I think, you know, as you heard from Brad, our long-term guidance suggests about the same recovery out of the pandemic that we would have told you pre-IPO, right? It takes about 18 months. And yet we're seeing incredibly positive trends in just the last few weeks. And I think what's important to understand is that There's really no seasonality that should drive that. So it's really just merchants across the country. And it's also, as was mentioned, occurring at a time when significant portions of the country, like Texas, had no power. So there was like no contribution of volume. So we're incredibly optimistic. I can't say it enough about where we're exiting February and what early March looks like.
spk09: Okay, great. And then one final one, Brad, just CapEx outlook for 21?
spk05: Yeah, I think what you're going to see, we typically run about $5 million and a quarter in CapEx per acquisition cost, which is obviously one of the biggest things that we focus our capital deployment on. I think you're going to see some gradual creep in that. We've talked about increasing our our customer acquisition costs as we shorten the payback periods because we think we have such a significant opportunity to board new merchants. But, you know, I'm thinking of probably a 5% to 10% increase over the exit rate of 2020. Okay, great. Thanks, guys.
spk04: Your next question is from the line of Andrew Jeffrey with the Truist Securities.
spk03: Hi, good morning. Appreciate you taking the questions. Jared, I wonder if you could comment a little bit on the growth you're seeing by channel. My inference from the update you gave in January on fourth quarter volumes with 20% growth and the end-to-end channel suggests that that's really outperforming, which I assume is a function of conversions. Maybe you could elaborate a little bit there and just a sense of how you're doing in the ISV channel versus your direct channels? I assume some of that contributes to the comments about the leverage to recovery on the other side of COVID.
spk10: Well, I mean, at first, I'd say almost all of our customer production, whether it's gateway conversions or just pure net new wins, originate through, you know, an aligned software partner. So, I mean, that is our model. We do have, you know, we you know, we do have a direct team, but they work, you know, and they work in collaboration with our software partners. So virtually everything is an ISV channel for us because 99% of all of our transactions are connected into software. I would say in terms of the performance that we've been sharing over, you know, the last few quarters and even the update as of today, it's almost all coming from the core elements of the business, which is our focus on you know, hospitality, restaurants, and more complex retail. So the production mix between gateway conversions and net new wins is still rather consistent at about 50% in each direction. I think what you have here is just a lot of continued sharetaking. Merchants are continuing to migrate to a single-vendor solution and cutting out the cost and complexity of a multi-vendor environment. You know, the acquisition of of Shift4Shop, which is taking us more into e-commerce. It was a recent event, and we spent literally the last three months in an accelerated integration plan focus to be able to board customers of that size, and the impact of which we've only started to really see in terms of it in February. And even our interest in stadiums, of which certainly there was Raider Stadium and what we've recently announced with Staples, that's contributed virtually zero volume at this point, just given the realities of the pandemic. So all of the growth that we're seeing, like the numbers that Taylor shared that have already, you know, been rather eye-watering in the last couple weeks of February and early March, is all a result of our focus on hospitality and restaurants.
spk03: Okay. That's helpful, Culler. So it sounds like vertical-driven growth. And then, you know, Ship4, Jared, you've done a lot of things that are pretty innovative and groundbreaking in the industry and Now, when I think about shift for shop and the pricing model, can you talk a little bit about the economics around that and how, over time, you drive good returns as you subsidize, I guess, maybe the front end of the e-commerce selling effort?
spk10: Yeah, I mean, it's certainly a good question, right? You know, how is shift for shop going to go to market? and completely forego a lot of SaaS and premium fees that it seems some of the largest giants in industry are heavily dependent on. And how are we going to be able to monetize entirely through payments? Well, I think there's a couple of factors there. First, we were very fortunate to buy an asset that had already invested quite heavily over the years in a lot of capabilities and features that we don't need to invest quite as much in in the road ahead. So that's one factor. Two, the fact that we own all of our own payments infrastructure is pretty important because it means we're going to be able to capture greater spreads off payments, which will contribute more meaningfully to the bottom line. It allows us to monetize the relationship with that customer in a way that's a little bit different, even from the super behemoths that are out there that do depend on other third parties, which does eat into some of their payment-related margins. So we are pretty focused on this. I think what else is important is that, you know, the story doesn't end with just buying, you know, 3D cart and rebranding it and then having a disruptive pricing model. You know, there is an ongoing investment, you know, to fund, you know, various internal and, you know, through inorganic initiatives. We look at Share4Shop as a, you know, kind of as a means to serve customers that are very different from our core customers. I fully expect it to turn into something that has a lot more, you know, direct-to-merchant self-help type capability for even card-present retail shops, you know, smaller restaurants. We will absolutely incorporate as part of our roadmap capital offerings and, you know, certain things we're looking at with crypto acceptance because you're dealing with a different audience than our traditional, you know, kind of upmarket enterprise-y restaurants and hotels where some of those features wouldn't necessarily be available. you know, of greatest utility. And these are all things we're taking into account for the long term and how we're going to move the needle with SuperShot.
spk03: Super helpful. Thanks.
spk04: Your next question is from the line of Jason Kupferberg with Bank of America.
spk10: Hi, good morning, guys. This is Mike filling in for Jason. Just a quick follow-up on margins. So if we look at the implied adjusted EBITDA margins at the midpoint of the guide of around 34.5%, I believe you've been expecting margins to approach the upper 30s by the end of 2021. Now, is this still the case, or should margins be slightly lower than this exiting the year, perhaps due to the step-up in investments you talked about? It sounds like there could be some pressure in the first quarter or two as you integrate recent acquisitions. But how should we think about margins in the back half of the year? Thanks.
spk05: Yeah, sure, Mike. Hey, this is Brad. No, very good observation. And you're exactly right. We are expecting, you know, the full year guide at this point in the mid-30s, but think about how that's going to evolve over the course of the year, right? The first quarter or two, as we digest some of these acquisitions we mentioned, you know, those will be, you know, a little bit lower, and they will certainly accelerate as we get into the back half of the year. So the guide for the back half of the year in the high 30s is not changing. Great. Thank you.
spk04: Your next question is from the line of Chris Dunnett with Piper Sandler.
spk11: Good morning, gentlemen. Thanks for taking my questions. I wanted to ask one on the end-to-end volume guidance for 2021. Just to confirm, is there any material volume coming from shift for shop in venue next in your 21 guidance, or is that immaterial at this point from the acquisitions?
spk10: It's largely immaterial. I mean, what we're signaling, and Brad sort of commented on a little bit with the first quarter, second quarter margins, is we're signaling, you know, really strong assets and desire to invest in these businesses and incredibly strong potential, you know, over the back half of next year and into the fall.
spk11: Okay. And then, Jared, in your view, shareholder letter, you comment that you're pursuing several strategic opportunities. Just curious where you're allocating your time with the shift for shop acquisition. And, you know, you got a lot planned there and then venue next. And then, you know, you had an incredibly busy 2020. I imagine you're going to have an incredibly busy 2021 with some other activities also. Just trying to understand where you're putting your focus this year.
spk10: Well, the answer is we're doing all of the above, and you just don't need an awful lot of sweep. So we've spent an awful lot of time in – well, first, I have to say, like, we have an incredible team, just to be clear. I think if you, you know, you replay some of our discussions, probably our Q2 and Q3, you know, earnings calls, we said we're going to be investing in talent. You know, as some of our competitors are going through their own, you know, big merger integration plans and talent's becoming available in the market, we're going to get it because we do intend to do, you know, take advantage of a lot of these opportunities we see in the market at the same time. So there's a great team here. And we have some really talented people focused very much on the shift for shop roadmap and what that's going to look like. And I gave some hints as to some of the things that we are, you know, that are in works right now. And we obviously have a lot of good things going on from a day to day perspective, because that is what's moving the needle. You know, as mentioned, all the performance we're seeing in a very, very depressed market is coming largely from the hospitality restaurant and specialty retail customers we have today, and that will continue to win share from the, you know, in the journey ahead. But there are also other strategic opportunities we're pursuing in a couple very interesting directions, actually. So You know, I think the answer is it's certainly worth our time to pursue all these opportunities while they're available and do the other day-to-day things at a pretty exceptional rate. So, yeah, I think that's the philosophy right now is we're not going to pass up anything. Okay, got it. Thanks very much.
spk04: Your next question is from the line of Michael DelGrosso with Compass Points.
spk09: Good morning, guys. Thanks for taking my question. I wanted to ask about some of the legacy gateway platforms, MerchantLink, et cetera.
spk10: I know you're a little bit over a year into those integrations, but how much of that gateway volume has been converted? And then some of a longer-term question is just around your expectations for conversion in 2021? I mean, 2020 was really a transformative year in terms of tech investments from merchants. I think a pretty significant opportunity for those merchants to shift if they wanted to. So what are your expectations around 2021? And what are you thinking it's going to take to get those merchants across the line if they haven't converted already? Thank you. Yeah, so really good question. You know, and as I mentioned, our production still is rather consistent on average that, you know, 50% of the customers that are joining our platform are pure net new wins, just just share taking the market. And then 50% continues to come from the existing gateway customers who are shedding all that complexity and costs from the multi-vendor environment and adopting our end-to-end solution. That's consistent even through today. Largely, as we think through our planning for the years ahead, we continue to make very consistent type of assumptions. You know, there's a lot that goes on in that gateway world. You have 350-plus ISVs. You have a lot of enterprise customers. And, you know, as we've always said, the carrots, the incentives that we make available to our partners and customers, you know, they kind of click at different times. And, you know, the problems that we solved for our customers two years ago that, you know, influenced a lot of gateway migrations are different than the problems we solve today. You know, in the last, call it two weeks, I'd say, You know, Radisson, which is one of our gateway customers, big hospitality brand, you know, actively started endorsing all of their customers, all of their locations on our gateway to move to our end-to-end platform. And that created a nice surge. Similarly, Jonas Club, which is another ISV that's more in, like, you know, golf and sports. membership clubs, if you will, they're an existing gateway customer, gateway ISV that we've had for a long time. They just started actively endorsing. So this type of thing just continues to happen and will continue to happen as it goes forward. I think one of the questions that we're going to start asking ourselves, and this is not in the next year or two years or three year type thing, but is being a gateway, if you will, and making available connectivity to what are essentially our competitors, Is that even a good strategy anymore, or is it just a legacy model that should go away and we just no longer even offer that service? And I mention that because if you look at some of the, you know, really fastest-growing, you know, type integrated payment solutions that are on the market, they don't offer a gateway at all. First Data or FiveServe's Clover product does not have a gateway option to ship for or global payments or anyone else out there. You know, Toast, a fast-growing, obviously, restaurant player, does not have a gateway option. Square does not have a gateway option. You know, Shopify has some very punitive costs if a merchant uses another provider. So right now we love the kind of carrot and incentive first approach that's been serving us really well with the gateway migration. But certainly at some point in time we might want to ask ourselves, is the product and feature set we're making available to our customers of such value that it no longer is really even required? And in doing so, we would certainly expect that would also pull forward a lot of volume from that gateway to our end-to-end platform. You know, Jared did a good job about commenting on the future there, but I do think it's worth revisiting the past a little bit. I think it's important to note not a single merchant who's joined our end-to-end platform from the MerchantLink acquisition has given us a normalized month worth of volume. There is still tons of growth potential inside of the merchants that have already migrated, and I think that's worth emphasizing because we acquired that business towards the end of 2019. We boarded you know, merchants pretty steadily throughout, but, you know, the pandemic hit very shortly thereafter. So we tried to sort of allude to this during our comments, but the volume potential inside of all those merchants that have already joined is pretty phenomenal as well.
spk09: Okay, thanks. That's helpful, Color. My follow-up is on capital allocation. I mean, I think The elephant in the room, so to speak, is the nearly billion in dry powder that you guys have. And you just completed a $70 million or so acquisition. Is that the size of deals that we should expect going forward?
spk10: Or, Jared, how are you thinking about some of the options for strategic M&A going forward? Sure. Yeah, and certainly Taylor should weigh in on this too. But one, I mean, obviously we feel very fortunate to have such a significant cash position that really affords us a lot of options that we can look at in the market. One thing, and we've said this before, even, you know, in the fourth quarter when people were expecting us to do something rather large, it's like we're not going to feel pressured to do, you know, anything that we don't want to do right now. If playing small ball works for us really well and we can continue to find opportunities Just total gems like Venue Next and 3D Cart, where we know we can unlock a lot of value, that's what we're going to do. I'd say that, you know, Taylor has a very full pipeline right now. And in terms of, like, deals of size, you know, that could be rather transformative, you know, you're talking about at least three that we've been investing a fair amount of time in. And then if you're looking at smaller deals that kind of similarly have a profile like a Venue Next or like a 3D Cart, there's an awful lot of them there, too. So I think, like, throughout our whole history, we've really been rather disciplined allocators of capital. You know, we tend to think about all the things that can go wrong and not get excited about necessarily, you know, the shiny thing in the moment. And that's going to continue to, you know, influence our decision making on the road ahead. Taylor, if you want. Yeah, well said. I think, you know, Jared summarized it pretty well. The bookends are that there's always a handful of really transformative transactions that we'd love to get done. But they're complicated. They require, you know, a party on the other side. And we'd like to keep optionality with those. I can tell you there's more than one that help us grow exponentially in completely opposite directions. And we keep those both on the table as long as we can. And we'd love to do both to the extent the environment affords that. There is also an incredibly long line of the Venue Next, the 3D carts of the world that, you know, have just watched our ability to help a business like theirs grow. through a vertically integrated customer model. And so there are, quite frankly, more of those than we can handle. A plug for the strategy department, we're taking resumes. We'll do as many of those as we possibly can. And to the extent they give us access to new verticals, like both those transactions did, we love it. So yeah, we keep a really open pipeline. On the small end, they're coming to us, quite frankly. Yeah, you know, one thing I'd add in terms of, you know, an area that we've kind of taken, you know, new interest in as of, you know, the last really quarter is in charitable giving. You know, I think the exposure that we've had, you know, collaborating with St. Jude Children's Research Hospital on Inspiration4 has really, you know, enlightened us as to, you know, the payment industries that kind of support, you know, philanthropic and charitable giving. And there's actually an awful lot there. You know, there's There's technology now that enables, you know, donations in live stream video games, and it actually, you know, has quite the following. So there's actually quite a few things as we turn our attention a little bit more towards that that have been, you know, rather enlightening to us that I think, you know, just will be something that we'll probably get some focus on in the months ahead.
spk09: Understood. Thank you. I appreciate you taking that question.
spk04: Your next question is from the line of James Fawcett with Morgan Stanley.
spk01: Hi, this is Priscilla Rizan for James. Two quick questions. So you've talked about a number of hotel deals coming on on the platform. Can you talk about the RFP slash competitive dynamics so far in 2021? Are there particular verticals or merchants that have been decided to look for alternative payment providers such as yourself early on this year?
spk10: Well, as we mentioned before, we actually aborted quite a few hotels over the last two quarters, some pretty sizable actual properties that would be in areas that were more impacted by the pandemic, which really afforded them the opportunity to have the conversation, look at their infrastructure from a technology perspective. and use that downtime to make good decisions, which Chippewa certainly has benefited from. And that just kind of reinforces the point that Taylor's made a few times. Every single one of the customers that we have at Chippewa today and every single one of the customers we've boarded essentially over the last years is operating in a pretty depressed state. So that's that, you know, like hypercoiled spring effect that we're going to be paying attention to. But as to your question on RFP specifically, You know, we boarded 25,000 plus customers. And that doesn't take into account any of the ship or shop numbers that we shared before just in the last year. And I think maybe, you know, less than five of those relationships came from an RFP. And that's really consistent throughout our entire history. We try and position ourselves so that, you know, there's no one else who can really compete from an RFP perspective. Because certainly, you know, it was the thing of the past. you know, prior to shift forward strategy really being developed over the last four years, where hospitality merchants would have an RFP for, you know, payment hardware. And they would have an RFP for, you know, secure payment gateway. They might even do an RFP for tokenization or PCI validated encryption. And then they do an RFP for merchant acquiring. And that's because that industry was essentially served by four or five different vendors to complete a payment experience. Now, with our M&A strategy and how we've kind of bundled together our services and really created that vertically integrated solution for the market, we're able to eliminate all those vendors and all the costs associated with it to really have a differentiated solution. And as a result, a lot of the merchants that we boarded have migrated to our platform without ever really needing to do an RFP because the solution we're able to provide is so unique. And I actually can't recall a single RFP we've seen in 2021 so far.
spk01: Perfect. And then just one quick follow-up. Jared, congratulations on the Inspiration4 mission announcement. How should we be thinking about the day-to-day operations and the management of that as you proceed with that endeavor? Is there going to be any change to shift for? And if not, any clarification on that would be helpful.
spk10: No, as I mentioned before, we really benefit by having a rock star team that we've actually been investing in quite a bit over the last few quarters and adding talent to the organization. We actually have, as Taylor was kind of joking before, we actually have quite a few open positions, too, that we're continuing to look to fill. But, you know, I did shed quite a bit of responsibility prior to the IPO. You know, I was one of the co-founders and CEO of a reasonably sized defense aerospace company for a decade. I did give up my CEO position. I resigned my board position just to free up bandwidth so that I could focus on all the things that are very important to shift for, as well as some of the other things of interest like Inspiration4. I am lucky that I'm able to structure an awful lot of things on nights and weekends, so it doesn't impact any of my day-to-day responsibilities. But, of course, these are conversations that have been well-discussed with our board of directors. all of the various appropriate governance and contingency things have been discussed, but I don't expect it to be impacting any of my day-to-day responsibilities.
spk01: Perfect. Well, congratulations again. Thank you. Thank you.
spk04: Your final question is from the line of Dan Perlin with RBC Capital Markets.
spk09: Thanks, guys, and thanks for sneaking me in today. I had a question about embedding guidance as a gross profit margin at 60%. And, you know, I fully appreciate the mix shift that goes along with, you know, in the end, that's been a big part of the story. But 60% margins, that's even better than I think, you know, we would have all expected, even in the out years, you know, at the time of the IPO. And so I'm just wondering, what are some of the other incremental drivers to that? Because obviously that cost to sales number at 40% is also a lot lower. So is there a bigger mix shift that's occurring because of all these other solutions that you've rolled in? And then how do we think about the cadence of that gross profit margin throughout the year? Thank you.
spk05: Hey, sorry. Hey, Dan, Brad, I'll take that. You know, we're really proud of that gross margin rate. I mean, I think, you know, a big part of that is going to be you know, what we think our spread performance looks like. You know, this all comes back to this underlying strategy of how we're monetizing different products, you know, and services we offer. And this is why when you monetize those items through spreads, you're actually able to get some spread expansion. So, you know, that's why we, you know, we report a spread of T4 just around 81 basis points. And we've seen that historically. You know, if you look around our competitive, you know, landscape, you're not going to see those kinds of numbers. So as we shift these, you know, these modernization models out of, you know, lower gross margin type items, think of equipment sales that a bunch of our competitors are going to see. That is a very thin margin business. So the way we monetize, you know, our equipment deployments, the way we monetize encryption and all the different components of our end-end solution through the spreads allows us to maintain, you know, gross margins that we're really proud of and are going to be, you know, in that 60% range.
spk09: Great. And how do we think about that as an exit rate when we go into the back half of the year since we're going to be jumping off at a materially lower rate, it seems like, in the first half? Thank you.
spk05: Thank you, Ray, out of 2020.
spk09: Out of 2021. I'm just thinking about second versus first half because the margin profiles look quite different.
spk05: Yeah, and I think you're going to see that. You're going to see the first half The first quarter is going to be, you know, first and fourth quarter are typically our lowest margin quarters just because there's some seasonality factors in there. You're going to see margins expansions in Q2 and Q3. So as we get into the back half, I think you're going to have to factor in kind of that normal seasonality, you know, focus of Q1 and Q4 are going to be a little thinner. Q2 and Q3 are going to be a little bit heavier. But we still should see some expansion from Q1 into Q4. You know, we've talked about this recovery curve and As we get back to normal, the increased scale of us with the really high pass-through rates is certainly going to flow through as margins. So I think you've got a little bit of abnormality related to the recovery curve, but exit numbers out of 2021 are going to be slightly higher than they're going to be in Q1. And then the objective is by the time we get to 2022, we're going to be a much more normal seasonality pattern. Got it.
spk09: Okay. Thank you guys very much.
spk10: Well, thanks everyone. Really appreciate the great questions. Um, so just to close things out here, um, you know, obviously really appreciate everyone giving us some time this morning here, uh, some of the updates that we have going on on shift, uh, at shift four, I'll end by emphasizing again that, you know, 2020 for all of its challenges is a year that everyone at shift four can take a lot of pride in. We not only operate the business through turmoil and volatility, but we grew rapidly because of our unique approach and value proposition for merchants. In addition, we applied the ambition in Shift4's DNA to lay the groundwork for growth in new and large markets like e-commerce. And most important, our commitment to our customers has never been more evident through community engagement like Shift4 Cares. So I appreciate, again, everyone's time for joining in. Thank you, and have a great day.
spk04: This concludes the Shift4 Payments Fourth Quarter 2020 Earnings Call. Thank you for participating. You may now disconnect.
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