Shift4 Payments, Inc.

Hello and welcome to the Shift4 fourth quarter and full year 2022 earnings conference call. My name is Lauren and I'll be coordinating your call today. There'll be an opportunity for questions at the end of the presentation. If you would like to ask a question, then please press star voted by one on your telephone keypad. Please note that this call, along with the Q&A, will be for a duration of 60 minutes. I will now hand you over to your host, Tom McCrohan, Head of Investor Relations to begin. Tom, please go ahead.

Thank you, Operator, and good morning, everyone, and welcome to Shift4's fourth quarter earnings conference call. With me on the call today are Jared Isaacman, Shift4's Chief Executive Officer, Taylor Barber, our President and Chief Strategy Officer, and Nancy Disman, our Chief Financial Officer. This call is being webcast on the investor relations section of our website, which can be found at investors.shift4.com. Our quarterly shareholder letter, quarterly financial results, and other materials related to our quarterly results have all been posted to our IALL 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 report on Forms 10-K and 10-Q, which you can find on the SEC's website in 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 call the, let me turn the call over to Jared.

Jared? Thank you, Tom. Good morning, everyone. We are very pleased with the record results we delivered this year in the face of ongoing economic uncertainty. We ended full year 2022 with record levels of volume, gross revenue, gross revenue left network fees, adjusted EBITDA, and adjusted free cash flow, all in excess of our midterm outlook. Our 2022 results were predominantly driven through organic initiatives, including the release of new products and well-timed entry into new verticals. Our high growth core, which represented the totality of our business at the time of our 2020 IPO, was still the primary driver of our growth last year with an ever-increasing contribution from our new verticals. Chip4 continues to live the intersection of payments and commerce enabling software, and we are well on our way to delivering that capability globally. On that note, this past year included several important company milestones. It marked the beginning of our European and international expansion, the successful launch of our next generation restaurant point of sale solution, SkyTap POS, including a pivot towards more direct distribution, And we also cemented our position as the preferred technology provider for sporting arenas and entertainment venues across the country. Our entire management team is extremely proud of our employees embracing the Shift4Way, which embodies the core principles and beliefs driving our success. As we enter 2023, our team is very excited about the abundance of opportunities we see ahead of us. Our excitement for the future is used in the lens of cautious optimism in light of the uncertain climate we currently operate in. Industry-wide payment volume was moderated during the December quarter, and as such, this informed our internal planning process, including how we constructed our 2023 guidance. That is to say that while we remain confident in our ability to deliver profitable growth well in excess of our peers, the range of potential outcomes is wider this year, as you would expect. Nancy will go into our more detailed assumptions surrounding our guidance later in the call. Regardless, we will respond accordingly to changes in market conditions and are confident our growth model affords us a higher degree of relative visibility or stability, otherwise unavailable to our peers. For those that are a bit newer to the story, SharePoint possesses significant competitive advantage given the embedded opportunity that lives within our gateway as well as our software products. This was best demonstrated in 2020 when we delivered double-digit growth despite the overwhelming majority of our customers comprised of restaurants and hotels that were highly impacted by the pandemic. Our ability to take share and grow has only accelerated since, and that confidence remains as we look to the year ahead. So onto our quarterly performance and results. For the fourth quarter, we generated 55% year-over-year growth in our end-to-end payment volume and 36% year-over-year growth in our gross revenue less network fees, both quarterly records. In fact, we achieved quarterly records across all our KPIs, including gross profit, adjusted EBITDA, and adjusted free cash flow. The cornerstone of our performance remained our high growth core, with an increasing contribution from our new verticals, particularly sports and entertainment, gaming, travel and leisure, and tech-to-tech. Our gateway conversion strategy continues to be a reliable source of incremental volumes, And we continue to renew additional Enterprise Gateway customers on economic terms, comparable to our end-to-end offering as part of our Gateway Sunset initiative. As a reminder, our Gateway Sunset is a multi-year initiative that remains in its early innings. And there are new actions on the table for 2023 that are also in the works. The fourth quarter represented the first time we participated in cross-border and European payment. And despite early success, the needle will really begin to move only after the closing of the FNARO acquisition. and Taylor will provide a more detailed update on Finara, including expected contribution and synergies during his prepared remarks. I will focus the rest of my comments on three areas, so our high-growth core, new verticals, and global expansion. On the high-growth core, the foundation of our high-growth core remains the over 500-plus software integration that allows us to go to market and service the needs of merchants, especially complex merchants operating in a multi-software environment. We added over 100 new software integrations during 2022 and continue to identify new ways to incentivize our gateway-only customers to convert to our end-to-end offering. As we highlighted in our recent investor event this past November, we officially launched our new restaurant point of sale system in September of 2022. We now have over 10,000 SkyCat POS systems deployed and are highly encouraged with our overall sales pipeline. And keep in mind, we have yet to turn on the marketing engine and continue to enjoy an industry-leading customer acquisition cost. We are pleased to announce a chain of major entertainment venues called Live, signed up to install SkyTab POS at restaurants operating across all of their U.S. venues. This includes venues such as Xfinity Live near Wells Fargo Arena in Philadelphia, Texas Live, located between the Texas Rangers Globe Life Baseball Stadium and the AT&T Stadium, home of the Dallas Cowboys, and the Power and Light District located in Kansas City. We anticipate just live locations, contributing hundreds of millions in SkyCap POS payment volume in the year ahead. It also includes sports and social and PBR Cowboy Bar, two of the fastest growing concepts in the country. Not only do these entertainment-related venues provide a natural extension of our growing presence in professional sports and entertainment, They also validate the capabilities of our SkyCab POS offering to the marketplace overall. Other notable SkyCab POS wins this quarter include LA Music Center and FedEx Field, home of the Washington Commanders professional football team. SkyCab POS is also making amazing progress with traditional restaurants. Its disruptive price-to-value proposition is resonating as we had expected, and we have a highly motivated and energized direct sales team called SkyForce that has already signed thousands of new restaurants. It's important to note our success has been without much marketing or promotional efforts. By offering an unmatched customer experience with leading-edge technology at disruptive price points, SkyCap TOS represents a compelling migration path for our existing base of restaurants who are seeking new capabilities and key integrations to better serve their patrons. We expect this to represent meaningful cost savings and drive operational efficiencies in the year ahead. Additionally, when serving such a large existing base of customers, We can generate substantial referrals, which also contribute to our low customer acquisition costs, and as a result, a very attractive unit economic model. Moving to our other organic initiatives within High Growth Corps, we signed numerous hotels and resorts during the quarter, including Manhattan Club, luxury hotel located in New York City, Charleston Harbor Resort outside of Charleston, South Carolina, The Cliffs at Princeville, located on Kauai's North Shore, I'm also really pleased to announce that we signed a strategic enterprise agreement with a major hospitality operator that we are unable to disclose, but that we expect will contribute billions in additional payment volume in the year ahead. All of these organic initiatives are driving our performance. When viewed on a four-year volume CAGR growth basis, our volumes grew 45% in 2018 compared to low double-digit growth at the two major card networks. our average volume per merchant continues to increase, and with 200% of pre-pandemic 2019 levels for the most recent quarter. Our quarterly volume growth is 342% of our pre-pandemic levels, along with gross revenue less network fees at 237%, and adjusted EBITDA at 456% over the same period. Our mix continues to shift towards higher-end merchants, Although it's important to highlight that spreads within our restaurant and hotel verticals remain very stable. On to new verticals. We consider new verticals to consist of all the verticals we entered into post our IPO, including sports and entertainment, sexy facts, travel, nonprofits, and gaming, as well as volume contributions from various alternative payment methods or APMs we currently support as a result of our international expansion. Consistent with our commentary from last quarter, we're not breaking out volumes or spreads between our new verticals, including our strategic enterprise relationship and our high-growth core due to confidentiality and competitive sensitivity with certain strategic customers. That stated, and as we expected and previously communicated, we did witness a sequential improvement in our spreads during the fourth quarter as a result of new customer boards alongside processing of international and ATM volumes. It's worth highlighting, as we continue to expand internationally and partner with international gateways and alternative payment methods, like our recently announced PayPal partnership, we may not be directly settling funds for those transactions, the impact of which is that our gross revenue and gross revenue-less network fees will essentially be the same. For the quarter, volume contribution across all our new verticals continued to ramp, as expected, as we benefited from the fall NFL football season, including ticketing sales, the nonprofit donation season, volume contribution from large strategic customers, and contributions from Allegiant Airlines, whom we are now processing all of their U.S. ticketing volume. As mentioned above, we also signed a partnership agreement with PayPal to enable PayPal checkout, including PayPal Pay Later, as well as Venmo, to our enterprise clients. We will also more prominently promote PayPal as a checkout option to ship for shop merchants and QR Pay customers, in return for an expanded revenue share wherever PayPal is selected at checkout. In sports and entertainment, we signed picketing agreements with Premier Productions and the Space Center in Houston. Last month, we also began processing picketing for several professional teams, including the New Orleans Saints, New Orleans Pelicans, and Arizona Cardinals. We also signed payment processing and picketing agreements with the Baltimore Orioles, the Baltimore Ravens, the Florida Panthers, Cleveland Cavaliers, and the University of Minnesota. We will see much more ticketing volume in 2023, now that the integration with SeatGeek is complete. And in college sports, we expect to begin processing ticketing for college sports through our integration with Paculin in the coming weeks. We will look back on 2022 as the year shift for cementing its position as the preferred payments and technology partner for sports and entertainment venues, including ticketing. Our pipeline remains very healthy in sports and entertainment vertical. In gaming, we signed Saucon Casino Resort in Southern California, one of the top 10 largest casinos in California, as well as the Tulap Casino, one of the largest casinos in the state of Washington. We also signed a partnership with Passport Technology, a leading gaming technology provider for cash advance and ATM services, where Shift4 is assisting in the development of a cashless gaming experience. We continue to add state and tribal gaming licenses, including the District of Columbia, and added additional states with that MGM. We anticipate being live in every online state with that MGM by the end of this first quarter. We are constantly adding critical integrations within our online gaming ecosystem and are currently testing multiple B2B integrations that combined operate in more than a dozen jurisdictions. We're also incorporating Sonaro's European gaming capabilities within our US payment platform. Moving to nonprofits, Our nonprofit vertical continues to grow, and during 2022, we added over 1,000 new nonprofits to the platform. The Giving Block has expanded outside of crypto, enhancing their product suite to include stock donations in addition to the ability to accept traditional card-based payments. The Giving Block has evolved from its position as the leading crypto donation platform to the leading non-cash fundraising platform that supports all forms of digital assets. The giving block will continue adding new payment methods and product capabilities as we pursue the $450 billion payment opportunity living with inside the nonprofit vertical. In travel, the integration of Allegiant Airlines is now complete, and we are now processing all of Allegiant's ticketing volume. We signed another U.S. airline during the quarter, which we look forward to disclosing next quarter. With respect to SexyTech, we continue to serve an increasingly exciting mix of next-generation e-commerce customers. As you are aware, one very fast-growing customer is driving the next evolution of SIP4 and our global expansion strategy. Additionally, we've entered into partnerships with Zip-In, Mask-In, two next-generation retail concepts that allow customers to check out without having to interact with a cashier. Zip-In is already in use at several retail locations in the Dallas-Fort Worth Airport, and Mask-In is deployed at more than 2,300 locations across the U.S. Additionally, in this category, we began processing for PayBiz and completed a Bridger Pay integration. All of our success supporting much larger merchants in a variety of new verticals has garnered interest from other large multinational merchants. We are evaluating several exciting RFPs across all our new verticals, which we believe will only accelerate as we expand internationally. On that note, I also would like to provide you with an update on our global expansion progress. International expansion remains our number one capital allocation priority, both in terms of our M&A pipeline and organic investment initiatives. We expect to receive final regulatory approval on Panara shortly, and our 2023 guidance does not include any contribution from Panara. We will update our guidance accordingly following the deal closing. In the interim, we are integrating our payment platform, the EnormScience Partnership, and continue to refer merchants to each other. As you recall, we announced last quarter that we acquired a highly capable European Payment Service Provider, or PSB, that now affords us strike-like integration capabilities to offer our European and U.S. merchants. These capabilities include the ability to optimize conversion and authorization rates, sophisticated fraud protection, and best-in-class recurring billing payment technology. We now offer these capabilities in over 40 countries. We are also expanding organically into Canada and the Caribbean, and in partnership with Tenaro, we're already expanding into Eastern Europe. In the year ahead, I firmly believe we will begin processing payments across Europe for many hotels, restaurants, and stadiums. Before handing the call over to Taylor, I wanted to provide a few more comments on 2022 and how we're thinking about 2023. In the beginning of 2022, we were one of the first payment companies to express concern about the deteriorating macroeconomic conditions. I commented that this is the type of climate that SHIFT4 performs best in. Unlike many of our peers that grew up in a zero interest rate environment and a growth at all costs mentality, we self-funded SHIFT4 through the first 15 years of our existence. We grew through every economic downturn, including the Great Recession and the challenging pandemic conditions of 2020. Based on past experience, I stated we would reduce spending and focus our resources in 2022 on the true needlework. As a result, we generated growth rates in line with our midterm outlook in 2022 and expect to continue driving real growth across our core and new verticals. We are accomplishing this while expanding internationally and expanding our margins and free fast flow. As we look ahead to 2023, we have assembled guidance that we feel confident we were able to deliver upon, and assuming consumer spending remains reasonably stable, we are poised to deliver another year of similar performance. Nancy will go into this in just a minute, but I want to speak a bit about expenses. I've expressed a very strong position to the leadership team at CHIP4 that we will meet our growth targets this year while striving to keep expenses and headcount as flat as possible exiting Q4. I fully expect we will be upgrading talent throughout the year as competitors we admire continue to shed personnel, but I will resist to the greatest extent possible increasing spending. I believe this is the responsible way to navigate the year ahead and will demonstrate the scalability of the SHIP4 platform. Last, SHIP4 is a strong record of unlocking value through creative M&A. Our balance sheet remains strong, and we are reducing leverage now at an accelerated pace. Our adjusted net leverage on a trailing 12-month basis is now 2.7 times, giving us ample capacity to pursue other strategic priorities. And with that, I'll turn the call over to our President and Chief Strategy Officer, Taylor Lover. Taylor? Thanks, Jared, and good morning, everyone. I'd like to provide a bit more detail on some of the more interesting trends we saw in the fourth quarter, early views on 2023, and how we are positioning ourselves strategically for the year ahead. As Jared mentioned, we approached 2022 with a deliberate caution given what we viewed as the potential for a slowdown in consumer spending in the face of rising interest rates and broader economic pessimism. While we believe that approach to be highly prudent, it has not manifested itself in our processing volumes. Merchants largely exhibited a normal seasonal cadence with restaurants moderating from the summer highs and our sports and entertainment and other new verticals filling the gap nicely. Hotels performed stronger than usual as travel was not impacted by the large waves of COVID that we had experienced in prior years. As we mentioned during our Q3 call in November, we also began to see some benefit from market international expansion and alternative payment methods during the fourth quarter, which helped contribute to spread expansion versus Q3. Early indications for 23 are positive. We saw record volume days as travel resumed during President's Day weekend and suspect that spring break and Easter travel will create strong month-over-month growth as it has in prior years. As you may recall, we typically experience our slowest period during January and early February. While that was true, we have benefited from some easier comps when considering the impact of Omicron in January of last year. We are sometimes compared to payment companies operating in a single industry vertical, and I think our performance in Q4 highlights the advantages that our vertical expansion strategy has created. We have large and fast-growing franchises in restaurants, hotels, sports and entertainment, gaming, nonprofit, travel, and, of course, sexy tech, all of which serve to bolster our performance when a single sector experiences moderation. Most importantly, we've been able to deliver these strong results and expand our margins and free cash flows. As we've mentioned before, many of our competitors in the FinTech arena have not been required to operate with a focus on profitability and positive cash flow. Shipboard has approached our growth with a very disciplined and consistent process, constantly balancing a desire for growth with a realistic payback assumption. This means that we generally deploy capital with an expectation for positive returns within 12 to 18 months or less. As investors justify if they put higher demands for results in free cash flow, we believe that many of our competitors will be forced to dramatically change their behavior. As Jared mentioned, this type of an operating environment is typically where Shipboard thrives. And we are leaning into the current environment, which positions us well to continue to grow and take share, as well as to continue to operate in the same fiscally responsible manner that we have since our founding 24 years ago. To that point, stock-based compensation and the dilutive effects on shareholder returns has been a significant focus in the investment community of late. Since long before our IPO, we've been prudent in balancing the benefits of broad-based employee equity ownership with the dilution it causes to existing shareholders. We have had average dilution of about 1% a year for 21 and 22, and this includes the impact of equity used for acquisitions. Our adjusted EBITDA grew by nearly 75% during that same timeframe. A strong early mover understanding of integrated payments alongside of M&A has been a significant driver of our ability to rapidly gain share in numerous verticals and geographies. And the current climate in our balance sheet positions us well to continue to execute in that regard. We did not have any M&A transactions during the fourth quarter and have not included the impact of potential M&A in our guidance, but do suspect it will present upside opportunities in the quarters ahead. On that note, we are nearing what we believe to be the final stages of regulatory review for our acquisition of Finera. Bear in mind, these regulatory approvals can typically take up to 18 months. And while the timing is by its nature uncertain, we believe a closing during Q2 is likely. You will recall that when we announced the transaction, we estimated a full year contribution to volume and adjusted EBITDA of 15 billion and 30 million respectively. We will continue to update you on the closing progress and pro forma economic contribution as we progress towards closing. Before turning the call over to Nancy, I'd like to sing her praises for just a moment. During a short time as CFO, she has made meaningful contributions to help enhance our operating performance, free cash flow, and forecasting abilities. Her approach to expense discipline is also particularly helpful as we strive to maintain both best in class growth and our very strong margins. Nancy?