Shift4 Payments, Inc.

Hello and welcome to the Shift 4 Second Quarter Earnings Call. My name is Alex and I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star 1 on your telephone keypad. If you'd like to withdraw your question, you may press star 2. I'll now hand over to your host, Tom McCrone, Head of Investor Relations. Tom, over to you.

Thank you, Alex, and good morning, everyone, and welcome to Shift 4 Second Quarter Earnings Conference Call. With me on the call today are Jared Isaacman, our Shift4's founder and chief executive officer, Taylor Lauber, our president and chief strategy officer, and Nancy Tisman. This call is being webcast on the investor relations section of our website, which can be found at investors.shift4.com. Our quarterly shareholder letter containing quarterly financial results has also been posted to our IR website. Our call and earnings materials today include forward-looking statements. These statements are not guarantees of future performance, and our actual results could differ materially as a result of many important factors. Additional information concerning those factors is available in our most recent reports on Forms 10-K and 10-Q, which you can find on the SEC's website and the investor relations section of our corporate website. For any non-GAAP financial information discussed on this call, the related GAAP measures and reconciliations are available in today's quarterly shareholder letter. With that, let me turn the call over to Jared. Jared?

Thanks, Tom, and good morning, everyone. So we have a lot to cover today. As you may have seen from an 8K file last night, Brad Herring, our Chief Financial Officer, is pursuing other opportunities. We're really grateful for the time and effort Brad has contributed to Shift4. Since his joining of the company in 2019, we've gone public on the New York Stock Exchange, we've diversified into six new verticals, We've completed several acquisitions and grown our N10 payment volume over 200%, and all with the backdrop of a global pandemic. So Brad played a key role in all this, and we sincerely thank him for his service. As of tomorrow, Brad will be succeeded by Nancy Disman, who is both a phenomenal industry executive and a good friend to shift for. Nancy most recently served on our board of directors, from which she has resigned effective as of tomorrow. She is also recently the CFO and CAO of Entrato. Prior to Entrato, Nancy served as the CFO and CAO of TSYS Merchant Services, following TSYS's acquisition of TransFirst, where she also served as CFO. Nancy has also held executive roles at Synergy Data Corporation and First Data Corporation, and we're really excited to continue working with Nancy in her new role. So now for the quarterly update, as mentioned in my letter, We are really pleased with our results this quarter, including the progress we are making in all our new verticals, although our high growth core continues to be the primary contributor of our overall performance. For the second quarter, we generated 43% year-over-year growth in our end-to-end payment volume and 34% year-over-year growth in our gross revenue less network fees. We continue to gain market share across our high growth core, growing from net new wins and gateway conversions, and now with our new verticals beginning to ramp meaningfully, We believe we are positioned to deliver consistent, profitable growth even as we continue our expansion into new verticals and new geographic markets in the months and years ahead. As in the past, I will focus my comments initially on our high growth core, then speak to our new markets and verticals. But before getting into the components of our business, I want to highlight our current thoughts about the overall economy and its potential impact to our business. In short, We have not yet witnessed the material impact on our overall volumes from changes in consumer behavior. Our four-year volume CAGR improved from last quarter, and our monthly volume trends continue to improve as we approach the seasonally stronger summer months. Having said that, we're also realists. We are aware that persistent inflation headwinds could ultimately influence consumer behavior, and this could result in consumers pulling back on some discretionary spending. We are fortunate to have invested in our new verticals as well as specific levers that are less impacted by economic cycles. In short, we believe that we are prepared to manage our business through all economic cycles, just like we have done over the last 23 years, and we intend to continue growing revenue and volume every year through the best and most challenging of economic times. To this end, we are leaving our end-to-end volume guidance unchanged for this year while increasing our gross revenue less network fees, increasing adjusted EBITDA, and increasing adjusted free cash flow guidance. While we cannot predict consumer behavior in this uncertain environment, we have witnessed early success in our gateway sunset strategy, which gives us confidence in our ability to drive incremental revenue in EBITDA above our prior expectations. Our conversations with our gateway-only customers are very encouraging, and we view our decision to leave volume unchanged, but increasing revenue and adjusted EBITDA guidance as a balanced approach to take during these uncertain times. I want to emphasize our belief that unlike some of our peers, we are not completely at the mercy of the broader economy. Our gateway and software only merchants provide a highly unique asset in that we can grow exponentially without even adding a new customer. I'm going to focus the remainder of my comments on the performance of our high growth core and then an update on our new markets and verticals. So with respect to high growth core, As you can see this quarter, the primary driver of our performance does remain high growth. The high growth core represents the payment opportunities we pursue primarily in complex restaurants, hospitality, and specialty retailers. And as many of you already know, Shift4 has been growing at accelerated rates in this arena by leveraging our unique software integrations and pain point solving technology. We currently have over 450 now unique software integrations, and we continue to win share through a combination of migrating merchants off our gateway platform to our end-to-end service, as well as just net new wins in what is a very large addressable market. Our growing library of software integrations results in more links in the value chain to deliver a lower effective cost of service to our customers. Said differently, we're able to offer our customers more capabilities at a lower cost because they no longer need to depend on a multitude of other costly vendors to attempt to achieve a comparable solution. Throughout the quarter, we signed a number of new resort properties and high-end restaurants, including the soon-to-be-open Nobu Hotel in Atlanta, the New Orleans-based Hotel in Monteloni, the Langham Hotel in Chicago, Manhattan's Gazenvord Hotel, and Feld's Entertainment, which operates Disney on Ice, Monster Jam, Ringling Brothers, and Sesame Street Live, among others. As a result, during the second quarter, We again organically grew our end-to-end payment volumes faster than any of our peers and faster than Visa and MasterCard. One proof point would be our nearly 42% four-year volume CAGR, including 52% volume CAGR in restaurants and 170% volume CAGR in lodging. As a reminder, this four-year volume CAGR occurred during an unprecedented pandemic when our end markets have been quite impacted. For the quarter, our volume growth is 307%, of pre-pandemic 2019 levels, along with gross revenue less network fees at 243% and adjusted EBITDA at 272% over the same period. It's worthwhile calling out that this growth took place without the benefit of our new markets and verticals, which are now just beginning to ramp. As discussed in the prior quarters, we have just begun removing complexity, deleting parts, and increasing organizational efficiencies by executing on our Gateway Sunset initiative and are very confident in our ability to successfully convert Gateway-only merchants to our end-to-end platform or get paid more in line with the value our payment technology provides. While it's really early, the results are very promising, and Taylor's going to go into that in just a few minutes. I did want to highlight a case study on the Gateway Sunset strategy that I believe is emblematic of why we are so confident in this approach. During the quarter, we signed a world-renowned motorcycle franchise that we had historically been unsuccessful converting to our end-to-end platform. We had been soliciting this merchant for nearly five years, and despite our efforts, it was ultimately our Gateway Sunset initiative that enticed this merchant to engage with us to discuss the merits of switching to our end-to-end platform. We are in the process of migrating this motorcycle franchise to our platform, and we are having hundreds of similar conversations with other Gateway-only customers. So I could not be more excited about the pipeline. The Gateway Sunset Initiative is the right strategy at the right time and for all the right reasons. While contribution from our Gateway Sunset Initiative was minimal this quarter, we're highly confident the initiative will result in us getting paid fairly, regardless if clients pay us more to remain gateway only or elect to convert to our end-to-end platform. We expect that it will contribute incremental adjusted EBITDA and adjusted free cash flow and is one of the factors driving our increase to our full-year guidance. In restaurants, we reached an agreement with enterprise operator BJ's Restaurant and Brewhouse, a Southern California headquartered national restaurant chain with over 200 restaurants in 29 states. We signed a multi-year agreement with BJ's to provide POS software as a service for all their restaurants across the U.S. We also reached a similar agreement with one of the world's largest restaurant groups. These opportunities represent a meaningful recurring revenue and EBITDA contribution that we expect to be realized more towards the latter part of 22 and into 2023. This represents the first of several notable restaurant opportunities we are in discussions with on our restaurant POS offering. Moving to Skytab POS, I would like to update you on the progress of our next generation POS product that will serve the restaurant market. Restaurants remain a key market for us and that is why we have invested over the last few years in a new cloud-based restaurant POS offering called Skytab. We are getting ready to release SkyTab POS from beta at the end of this month, and it's already installed in thousands of locations. SkyTab is not just designed for restaurants, as we are also having early success installing SkyTab at theme parks and resorts. We also intend to bring this product into international markets. Recall, we are uniquely advantaged to pursue over 125,000 restaurants that are already customers using some form of Shift4 technology, and many of them are not on our end-to-end platform and even less are paying any fast charges. We expect that Skytab POS will represent the migration path for this existing base of restaurants, many of whom are seeking out new capabilities to better serve their patrons in addition to the large addressable market of just new restaurants. Skytab services the mid- to high-end restaurant customer based on a cloud-based Android technology stack built from the ground up and equipped with very modern and purpose-built space-age hardware. We have been going to market with SkyTap through our historic third-party distribution channels, but have recently begun pivoting towards direct sales in the same way we go to market in many of our new verticals. We have found some initial successes selectively insourcing some of our third-party distribution partners in the most desirable markets as the opportunity to insource distribution becomes increasingly viable with a cloud-based solution. We believe we can improve the customer experience alongside margins without compromising the same high touch support our customers have grown accustomed to receiving. So to summarize our high growth core, we are excited about the combination of our accelerated gateway conversion plan, the launch of our new SkyTab POS offering, and the momentum our high growth core supported by our unique integrations with over 450 mission critical software suites. All of this gives us confidence in our outlook and supports our decision to increase our gross revenue less network fees, our adjusted EBITDA, and adjusted free cash flow guidance for the full year. So moving on to new verticals, as I mentioned previously, our impressive volume growth has been without significant benefit from our new verticals. For clarity, we consider our new verticals to be sports and entertainment, gaming, travel, nonprofit, and what we refer to as just sexy tech. This should not be surprising. It should be challenging to get the attention of software companies and enterprise merchants to complete a payment integration. We often see that software companies and merchants tend to want to invest their time in anything but additional payment integration, which is why they become so valuable once you've achieved it. We are really pleased with the progress we made in the second quarter, though much of the progress was literally made in the last week of June when the Starlink integration went live. So while our new verticals contributed throughout the year and into June, they've only really begun to scale meaningfully in July, and Allegiant Airlines is not expected to go live until late August. So we added a chart on page eight of our quarterly shareholder letter depicting the year-to-date ramp in monthly volumes for our new markets, and while it has taken a bit longer for our new verticals to contribute to our volumes, we feel really good about how that ramp is progressing, the contributions they can make in the second half of the year, and how these strategic relationships and verticals align with our global expansion aspirations. To emphasize these points, we do expect to see a much stronger contribution from these verticals as the year progresses. For example, we're in the process of implementing a number of large NCAA and NFL stadium clients in time for this football season. We're adding more states and capturing more volume from Vet MGM turning on more integrations from our non-profit customers, and we're more than halfway through the Allegiant Airlines integration, and of course, Starlink volumes are on an impressive trajectory as they continue to populate their satellite constellation. I am biased, but I believe that we have never had a merchant in our history that is ramping as quickly or has so much upside as Starlink. In gaming, we continue to add new commercial and tribal gaming supplier licenses and BetMGM volume has more than tripled since our last earning call in May. We continue to build upon our early success with BetMGM and added several states this past week alone. As a result, we expect to see a further significant and sustainable spike in volume before the end of the third quarter, given the seasonally strong sports wagering tied to the football season. In nonprofits, we began processing for St. Jude's in January of this year, and overall volume continues to ramp. With our acquisition of the Giving Block, we've seen impressive results across multiple KPIs that Taylor will talk through in just a minute. Given the nature of nonprofits, we do expect the fourth quarter to represent the peak season for donation volume. We are scheduled to complete an integration of Allegiant Airlines by September 1st, and we have signed a European travel agency, Kiwi.com, as a customer and expect to begin processing shortly as well. Turning back to stadiums, we signed a number of new professional and college sports stadiums, including the University of Alabama, University of Wisconsin, University of Notre Dame, and professional sports teams, including the New Orleans Saints and Pelicans, where we also provide ticketing. Our VenuNext mobile commerce technology is the category leader in sports and entertainment venues, and our software is now installed in well over 100 stadiums in the U.S. Our new business pipeline in this space remains very strong, including international stadium discussions. Perhaps the most important competitive win this quarter came from sports-focused retailer, Fanatics. We will process all of Fanatics in-venue payment processing at approximately 50 sporting and entertainment venues, including PGA Tour events and NASCAR races. As a leading manufacturer and distributor of sports-related merchandise, Fanatics will be a tremendous partner as we mutually expand our footprint in the sports and entertainment space. Our performance across these new verticals, alongside our stated international expansion plans, has attracted the interest of many notable customers. Some are in the negotiation phase, others we have won, and in some cases we're not permitted to announce publicly, and in others, like Fanatics and Time, we have recently selected Shift4 to power their payment strategies. It's worth reinforcing that Shift4 wins because of our ability to solve our clients' problems. Merchants are not switching to Shift4 to save a basis point or pennies per transaction, even though, in our experience, they usually benefit from an overall lower effective cost of service. Instead, they switch because we offer complete commerce solutions that enable them to better engage with their customers and patrons, such as QR codes, online ordering, mobile and contactless payments, business intelligence, and more. This is why... Despite our continued move-up market, our net spreads have remained stable over a multi-year period. And our move-up market has been at an unprecedented pace. We have effectively doubled the size of our average merchant since 2019. So before passing things off to Taylor, I wanted to provide you with an update on our recently completed acquisition of the Giving Block and the pending acquisition of Finara. The Giving Block's crypto donation platform continues to sign up new nonprofit customers despite the drop in value in crypto assets. As I write this, a single Bitcoin is still valued at over $20,000, and nonprofits are still interested in accepting cryptocurrencies such as Bitcoin. Since we closed the deal back in March, The Giving Block has signed up over 400 new nonprofit customers, including the world's largest humanitarian organization, the World Food Program. as well as many other highlighted in our quarterly shareholder letter. The Giving Block has introduced a card widget for nonprofits so they can accept traditional card-based donations, and the growth in their client base has resulted in a nearly six-fold increase in their SaaS revenues versus a year ago. The team continues to execute on a significant $45 billion cross-sell opportunity and successfully converted several Giving Block customers to our end-to-end platform. We believe our go-to-market offering remains unique in the nonprofit sector and remain highly attracted to what we view as a $450 billion payment opportunity where we now have a unique right to win. While on the subject of the giving block, I would like to personally thank those of you that participated in our Caring with Crypto fundraising campaign. We launched this fundraiser in mid-March to raise awareness within the crypto community, and I agreed to personally match dollar for dollar every crypto donation made on the giving block Marketplace, up to $10 million. Parts of this fundraising campaign are still underway, and I encourage all of you to check out the givingblock.com website for more information. We are also making progress receiving all the necessary European regulatory approvals to close on our acquisition of Finaro later this year. As a reminder, we announced the acquisition of Finaro back in March in conjunction with our year-end results. And for those unfamiliar, Finaro is a European cross-border e-commerce platform with processing capabilities and licenses in Europe and parts of APAC. The two of us are making great progress connecting the payment platform via arm's length partnerships during the regulatory review period, and we have successfully tested transactions between the US and Europe. We intentionally structured the EARNAP portion of this transaction to encourage both sides to pursue commercial opportunities up until closing, and the teams are working together nicely on a number of initiatives. For example, we are beginning to refer each other merchants. Finario services many e-commerce merchants in Europe that also have U.S. operations supported by a U.S. payment processor. I'm pleased to announce the Denmark-based online sporting goods retailer SkatePro as one of the first wins alongside Kiwi.com. SkatePro is an e-commerce customer of Finaro who relied on Finaro for their European e-commerce processing but outsourced their U.S. payment processing to a U.S. competitor. Going forward, SkatePro will switch their U.S. payment processing to Shift4, effectively consolidating all their global e-commerce payment processing business into a Shift4 Finaro solution. There are many other merchants we are currently in discussion with regarding a joint U.S.-EU offering and are pleased that our planned acquisition is yielding synergies in advance of the planned closing date. We do retain significant firepower to pursue additional acquisitions and remain focused on building out our global technology capabilities in the markets to support our signature multinational customer. We have a low pro forma leverage ratio and a ton of conviction around our strategic plan. Internally, we remain very focused on operational improvements to make us a much more efficient company consistent with the SHIFT4 way. This includes investments we have made in our payment platform that have delivered 100% uptime during the quarter despite immense growth and something few of our competitors were able to achieve over a comparable time period. In addition to the executive transition mentioned at the outset of the call, this past quarter we promoted Samantha Weeks to the Chief Transformation Officer role to better align our human resources, learning and development, transformation, project management, and mission assurance functions under a single department. Her team will identify and execute on various productivity improvements, and we are confident our initiatives will drive productivity, excellence, and further margin expansion in excess of what we have already communicated earlier this year. I would be remiss if I did not comment on the current market environment adversely impacting financial technology companies, including Shiftwork. We strongly believe that there remains a disconnect between our growth and our valuation in the public markets. We have generated superior growth and are on track to deliver over 30% revenue growth and over 50% adjusted EBITDA growth this year and expect to generate over 100 million of adjusted free cash flow. Despite these results and unparalleled performance during a completely unforeseen pandemic, we still trade well below what I believe to be our intrinsic value. Some will view these comments as self-serving, but I've challenged our company to thoroughly evaluate the cost of being a public company against this backdrop. We view our strategic initiatives, customer wins, and operational tactics as highly valuable, and even more so during times of economic uncertainty. Sharing them regularly is just one example of the unnecessary headwinds we face. So with that, let me turn this call over to our President and Chief Strategy Officer, Taylor Lauber. Taylor?