Shift4 Payments, Inc.

Hello everyone and welcome to the shift for first quarter 2022 earnings call. My name is Charlie and I'll be the coordinator for today's call. You'll have the opportunity to ask a question at the end of the presentation. If you'd like to register a question, please press star followed by one on your telephone keypad. I'll now hand over to our host, Thomas McCurran, EVP of Strategy and Investor Relations to begin. Thomas, please go ahead.

Hi, good morning, everyone, and thank you, operator. I'd like to welcome everyone to Shift Corps' earnings conference call for the first quarter ended March 31st, 2022. Before we begin, I'd like to remind everyone that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding management plans, strategy goals, and objectives, The expected impact of COVID-19 on our business and industry, including with respect to economic recovery, increases in vaccination rates, the reopening of the country, and any volume recovery by us. Gateway penetration and spend seen by our gateway merchants, expectations regarding new customers, acquisitions, and other transactions, including Finero and the Giving Block, and their anticipated financial performance, including our financial outlook for the year ended December 31, 2022. and the anticipated impact of each of the FINERO and the giving block acquisitions on our adjusted EBITDA and end-to-end payment volume for the year ended December 31, 2023. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results. Performance or achievements expressed or implied by the forward-looking statements factors discussed in the risk factors section of our annual report on Form 10-K for the year ended December 31st, 2021 and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the forward-looking statements made on this call. Any such forward-looking statements represent management's estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. In addition, we may also reference certain non-GAAP measures on this call, including adjusted EBITDA, free cash flow, and adjusted free cash flow, which are reconciled to the nearest GAAP measure in the company's earnings release, which can be found on our investor relations website at investors.shift4.com. And with that, let me turn the call over to our Chief Executive Officer, Jared Isaacson.

Thanks, Tom, and good morning, everyone. We got a lot to talk about today. So let's begin. We reported reasonably strong first quarter results this morning, including nearly 70% year-over-year and then volume growth, and a corresponding growth of 53% in our gross revenue less network fees, driven primarily by continued share gains in our high growth core. As we discussed in early March when reporting our 2021 year-end results, the Omicron variant began to impact our volumes in December of last year and really continued to do so into 2022. By the end of February of this year, Omicron appeared to be behind us, and we once again began hitting new record levels of weekly end-to-end volumes. I'm also pleased to report that this trend has continued as we set numerous records throughout the month of April. It's also worth reinforcing that Q1 volumes included very little volume from our new verticals or much in the way of international or corporate spending, though we do expect to see gradual contributions throughout 2022. Our adjusted EBITDA came in at $44.3 million, which was in line with our expectations, and Brad will review our quarterly financials in more detail in just a bit. Similar to prior quarters, I'd like to provide updates on each of the major components of our business, starting with our high-growth core. As a reminder, our high growth core represents the payment opportunities we pursue primarily in complex restaurants, hospitality, and specialty retailers. Shift4 has been growing at an accelerated rate in this arena by leveraging our 425 unique software integrations and other pain point solving technology to win share by migrating merchants off our gateway platform and onto our end-to-end service, as well as just net new wins in what is a very large addressable market. We believe we operate in a competitive landscape of few, and we differentiate with our software integrations and by possessing more links in the payments value chain to deliver a much lower effective cost of service to our customers. Said differently, when merchants in our high growth core use Shift4's end-to-end solution, we're able to offer them more capabilities at a lower cost because they no longer need to depend on a multitude of other costly vendors to attempt to achieve a comparable solution. So during the first quarter, we again organically grew our end-to-end payment volume faster than any of our peers, including faster than Visa and MasterCard, as we continue to take share in restaurants, hotels, and specialty retailers. One proof point would be the 40% four-year volume taker. Another would be that we grew through an unprecedented pandemic when our end markets had been quite impacted, and some continue to be impacted even today. Additionally, our volume is 288% of pre-pandemic Q1 2019 levels, along with gross revenue less network fees at 224% and adjusted EBITDA at 215% over the same period. This quarter, we signed a number of new resort properties and high-end restaurants, including the soon-to-be-opened Wakuta Restaurant at the Venetian Resort in Las Vegas and the Silverado Resort and Spa in Napa Valley, California. Our customers are moving to shift forward to solve problems. So to be clear, merchants are largely not switching the shift forward to save basis points and pennies per transaction, even though they usually do benefit from an overall lower effective cost of service. What they require is commerce solutions that enable them to better engage with their customers and patrons, such as QR codes or online ordering, mobile and contactless payments, business intelligence, and more. That is why, despite our continued move up market, our net spreads have remained relatively stable over a multi-year period. Our above-market volume growth remains the best leading indicator of our ability to deliver solutions that solve the needs of our merchants, which increasingly requires integrations with disparate and complex software required in the demanding commerce environments that we serve. We understand that the payment ecosystem can be confusing from the outside looking in, and we sometimes hear from investors that they're unsure where we fit in the competitive landscape. So I look at the market along two dimensions. On one axis, you have integrated and non-integrated payment processors, and along the other axis, you have scale player versus niche player. We are a high-growth, scaled, software-integrated payments provider, gaining share from low-growth, scaled, non-integrated legacy acquirers. We're now approaching our 23rd year in business, having grown revenue every year throughout even the most challenging economic times. We have an excellent track record in finding verticals where our technology or expertise affords us a right to win, and then building on a value proposition that is both unique and differentiated. Our gateway with 425 software integrations is an example of a differentiated offering that affords us a right to win throughout our high-growth core. So on that note, we acquired our first gateway in 2017. Our intention was always to offer our end-to-end payment processing capabilities to those merchants, and we've been very successful executing against that strategy. At the same time, we have mentioned to many of you over the last few years It was never our plan to offer extensive gateway-only services indefinitely. In fact, over the last few years, very few new customers even elect to have that service when our end-to-end offering is clearly so compelling. As we mentioned just a few months ago, you should expect to see an acceleration of our gateway to end-to-end migration in the months and years ahead. Our gateway platform is the IP. It's the technology that enables the commerce experience, including the software integrations, the point-to-point encryption, the tokenization, and ultimately the analytics and reporting. Despite that immensely valuable capability, in a gateway-only environment, the lion's share of the economics are captured by the legacy merchant acquirer. Considering there are virtually no modern fintechs that embrace a gateway-only strategy, we believe we owe it to our shareholders. to capture as much of the unit economics for all payment transactions made possible by our technology and through the software integrations we alone support. So this has been a topic on our minds from the day we acquired the Gateways and something we believe is on the minds of our investors, considering the enormous and easily quantifiable opportunity that it represents. So first, before we get into the specifics of our initiative, it's probably helpful to give an example on just how embedded our gateway-only service is across a large portion of the hotels, restaurants, and specialty retailers across this country. For a hotel that is a gateway-only customer, Shift4 captures the online reservation and front desk check-in. Our standard technology encrypts the customer's payment credentials to a PCI-validated standard and tokenizes them, and then provides those tokens to a hotel operator to capture a holistic view of their customer's entire stay, and adjust authorizations throughout the guest journey as they visit the lobby bar, the restaurant, the spa, the golf course, and so forth. At checkout, we use the same token to submit a single card transaction. In this scenario, despite virtually the entire commerce experience being facilitated by Shift4 technology, the majority of the transaction economics accrue to legacy third-party acquirers, providing little functions that we could otherwise easily do ourselves. We view this imbalance as something that needs to be addressed and corrected at a faster pace. Now, of course, this has been our strategy for years to convert what is a large population of gateway-only customers to our end-to-end service, where we capture the entirety of the payment economics and provide a lot of value to our customers through additional technology, products, and services along the way. But to be clear, we're in an enviable position that we can implement specific tactics to encourage gateway-only merchants take action, and further accelerate the migration of those gateway-only merchants to our superior end-to-end offering. We believe there's an attractive risk-reward to implement a new approach that will further accelerate these conversions. So how will we do this? So through a combination of changes, including pricing actions and operational changes that encourage gateway-only merchants to migrate to our end-to-end offering, while also continuing to offer the same attractive incentives that have already proven to be very successful. So with no sign of our historic gateway to end-to-end strategy slowing, why make this change now? There is an important operational component to the strategy. By eliminating third-party connections, we free up technology and operational resources to focus on other important growth initiatives. We have almost 2,000 employees now, and a large portion of them spend time maintaining connections that are dated, serve to benefit our competition, and do not help us deliver on our global commerce vision or help us win the next signature merchant relationship. By taking out unnecessary parts and repurposing internal resources is part of our boldly forged Shift4Way initiative to eliminate unnecessary processes, components that are costly and might eventually fail, and to optimize the excellent talent we currently employ. And I'd be remiss if I didn't give some credit to SpaceX, an organization I'm fortunate to observe closely, and how well they have pioneered and embraced these philosophies. So we will always remain a customer-first organization. We cannot force a gateway-only customer to consolidate their end-to-end processing with Schick War. However, at the same time, we believe implementing this new approach will result in conversations that are in our mutual interest of Schick War and our gateway-only customer. And we want our gateway-only merchants to consider the value we're providing and how much better it gets when taking advantage of our end-to-end offering and incentives. This is always a good conversation for us both to have, and we expect the results will begin to become quite apparent in the second half of this year. So while we're still talking about our high growth core, I'd like to update you on the progress of our next generation POS product that will serve the restaurant market. As we discussed before, we're getting close to fully launching our new cloud-based restaurant POS platform called SkyTab POS. We're already a major player in the restaurant POS arena, having grown payment volume at accelerated levels for well over a decade. and this new offering will ensure we will continue to find success as new and existing restaurant customers seek out next-generation solutions. We currently have several thousand restaurants operating in beta on the Skytab POS solution, which will move out of beta shortly. Total merchants operating the Skytab POS platform have increased 158% in March versus the same period a year ago. We are positioning Skytab as the next-generation cloud-based POS platform, servicing the mid- to high-end restaurant customer, It is based on Android technology stack built from the ground up at Shift4 and equipped with very modern and purpose-built mobile solution, which also comes with some pretty space-age hardware. We already have 125,000 restaurants to pursue that are already customers operating across the four software brands we already own. Skytab POS, of course, will be the migration path for our existing base of restaurants who are seeking out new capabilities to better serve their patrons. Not to mention our distribution channels will use SkyTap POS to continue to take share and grow across the vertical, just as we've done for well over a decade. We also see an opportunity for SkyTap POS in sporting arenas, theme parks, and entertainment venues. Combined with our mobile technology from Venue Next, we have a differentiated right to win in stadiums as venue operators continue to view us as the category-leading solution that delivers a unified commerce experience for their fans. You know, as mentioned previously, SkyTap POS has already been installed in several arenas. Lastly, the fact that we have in excess of 3,000 restaurant clients that signed up for SkyTab POS during the beta is clear proof statement that our offering has already been validated by the market. To summarize what I've just covered in our high growth core, we're excited about the combination of our accelerated gateway-only conversion plan, our new SkyTab POS offering, and our unique integration with 425 mission-critical software suites, which leads us to believe our high growth core will remain the primary contributor to our growth over the next several years. In fact, it's worth mentioning that the above high growth core initiatives could have quite a meaningful impact as early as the upcoming second quarter. Moving into our new markets and verticals, we continue to maintain momentum within stadiums and venues. During the first quarter, we signed a number of new major league stadiums, including Philadelphia's Wells Fargo Center, where we'll provide picketing and payments for all the events at this venue, including the Philadelphia Flyers and 76ers. We also entered into an agreement to power payments for all the food and beverage concessions and retail purchases at Oracle Park, home of the San Francisco Giants Major League Baseball team, and the food and beverage and concessions at Lone Depot Park, home of the Miami Marlins. In car and horse racing, we will power point-of-sale and mobile-based solutions for four of the Speedway Motorsports racing venues across the United States, and we'll also power payments at New Jersey's Meadowland Racing and Entertainment venues. We've been very busy. We're also excited to share that the Ohio State University has selected our Venue Next software and payment services to power all their sports and entertainment transactions, including the fourth largest college football field in the country, Go Buckeyes. We also signed an agreement to process all food and beverage transactions for San Diego State's new Snapdragon Stadium, scheduled to open later this year. As mentioned before, we believe our Venue Next mobile commerce technology is the category leader in sports and entertainment venues. Our software is installed at well over 100 stadiums, and our new business pipeline space remains very strong. In gaming, we're adding new gaming licenses and scaling our volume with BetMGM. Our daily gaming volume process through BetMGM increased 4x since we began processing in February of this year, but it's still around 1% of the total volume we anticipate processing in the year ahead as new territories are added. Similarly, in nonprofits, we began processing for St. Jude back in January of this year, but also have only processed about 1% of the volume we expect to capture over the next several quarters as we complete key software integrations to serve the nonprofit vertical. I mentioned this not in the light of disappointment at all, but to highlight how strong we performed this past quarter, despite only just beginning to make traction in our new verticals. In airlines, we remain on track to begin processing volume in June with Legion Airlines. And for SpaceX Starlink, testing is complete. We'll begin processing US volume in Q2. With you, it's volume ramping up as the domestic subscriber base grows. It's worth noting that SpaceX is on a pretty eye-watering pace with Starlink satellite launches. They aim to ramp up to a weekly launch cadence and grow their subscriber base domestically and across the world. Moving on to our two recently announced acquisitions. The giving block acquisition is an example of how we identify a pain point in a specific industry. In this case, the desire by nonprofits to accept cryptocurrency donations. and then bundling and cross-selling with our end-to-end payment solution to pursue what we believe is a $450 billion payment opportunity. For those of you on the call that are unfamiliar with the GivingBlock, they operate a donation marketplace that connects nonprofit organizations with crypto donors, and we acquired the company rather recently. Since we closed in late February, crypto donation volume is up 4.7x versus a year ago. The number of nonprofit customers on the platform is up 7.3x, and total revenue is up 6.5X. We've also assigned several GivingBlock customers to our end-to-end platform, which was part of the $45 billion cross-sell opportunity of existing GivingBlock customers that we highlighted as part of the acquisition. We are in active conversations with many others. While on the subject of the GivingBlock, I'd like to personally thank those of you that participated in our Caring with Crypto fundraising campaign. We launched this fundraiser in mid-March to raise awareness within the crypto community And I agreed to personally match dollar for dollar for every crypto donation made on the GivingBlock marketplace platform. Since launching the campaign, we have raised more than $15 million for charities and important causes such as the humanitarian relief efforts in Ukraine. We are increasing the network effects of our donation marketplace by connecting more members of the crypto community with more nonprofits and vice versa. The fundraising campaign is still underway, and I encourage all of you to check the GivingBlock.com website for more information. Last, I'd like to give an update on the Finaro acquisition. As some of you may recall from our last report, we announced the acquisition of a European cross-border e-commerce platform with processing capabilities and licenses in Europe and parts of APAC. During our structure, the transaction encourages both sides to pursue commercial opportunities and begin integration efforts as early as possible. This means integrating the Shift4 platform and products, such as our hotel software integrations, our Venue Next Stadium software, our SkyTab TOS restaurant software, our Lighthouse business intelligence products, and preparing for important customers like Starlink while we are waiting on the regulatory approvals. I'm pleased to share that we recently completed our first cross-border test transactions, and Fennaro is just the first step as we move boldly forward with our global expansion endeavors. So we are not sitting still. We retain significant firepower with just over a billion of cash, a low pro forma leverage ratio, and a ton of conviction around our strategic plan. Despite our clear enthusiasm, we are leaving our 2022 guidance unchanged. We believe that the macro environment, including inflation and varying consumer sentiment, warrants some caution as we look out across the full year. That stated, we remain optimistic across the various initiatives I mentioned previously and may elect to revisit guidance as the year progresses. And with that, let me turn the call over to our President and Chief Strategy Officer, Taylor Lauber.