Shift4 Payments, Inc.

Thank you for standing by. My name is Brianna, and I will be your conference operator today. At this time, I would like to welcome everyone to Shift 4's first quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. I will now turn the call over to Tom McCrowan. You may begin your conference.

Thank you, operator, and good morning, everyone, and welcome to ShiftForce first quarter 2023 earnings conference call. With me on the call today are Jared Isaacman, ShiftForce chief executive officer, Taylor Barber, 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 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 the result of certain risks, uncertainties, and many important factors. Additional information concerning those factors is available in our most recent reports on Forms 10-K and 10-Q, which you can find on the SEC's website and the Investors' 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. Good morning, everyone. So we are pleased to report a reasonably strong start to the year, including quarterly results that we believe will put us on pace to meet or exceed our previously provided guidance ranges. We set quarterly records for end-to-end volume, gross revenue-less network fees, and free cash flow. Our performance was driven by momentum within our high-growth core, contribution from new verticals, and ongoing success converting gateway volume to our end-to-end service. Our 2023 plan assumed a likely pullback in consumer spending. For the most part, we did not observe any concerning spending trends in the quarter. January and February exhibited typical spending patterns, but we did see spending moderate towards the end of the quarter. Early March was in fact strong, including record weekends around St. Patrick's Day, but there was some softness in the last week of March. This does seem consistent with commentary provided by others. We are cautiously optimistic on April data, but the real test will be in May and June, where we would typically expect to see seasonal strength. So while we have positively revised our guidance for the quarter, we are taking into account and watching closely this data. It is important to emphasize that today restaurants represent approximately 40% of our total N10 volume compared to around 55% of our volume back in early 2019. This percentage shift occurred despite growing restaurant volumes and is due to our rapid growth in hotels, new verticals, and larger enterprise merchants to our mix. On that note, we currently have roughly 50 merchants processing more than 100 million of annualized volumes on our N10 platform, and an additional 70 that are in the addressable gateway-only population. We expect this trend of adding large enterprise merchants either through us converting a gateway customer or simply winning a net new merchant to continue and only accelerate as we expand internationally. This diversification is what gives us the confidence to raise guidance even in the face of what is still an uncertain economic environment. So now on to our quarterly performance and results. For the first quarter, we generated 66% year-over-year growth in our end-to-end payment volume, 36% year-over-year growth in gross revenues, and 34% year-over-year growth in our gross revenue less network fees. which were all quarterly records. Our high growth core continued to be the primary driver of our growth, with an increasing contribution derived from newer verticals, such as sports and entertainment, sexy tech, travel and leisure, and gaming. We are very proud of our overall profitability, which is derived from the following four factors. A, continued momentum serving high growth enterprise accounts, which require less overhead. Growth in new and predominantly card-not-present verticals, which require less hardware. Our Gateway Sunset Initiative, where we are deleting unnecessary parts and properly monetizing the value of our gateway services. D, consolidating legacy POS brands and a direct sales model in support of our SkyTap POS program. All of these initiatives have either reduced or eliminated growth CapEx requirements relative to prior years and enhanced the overall unit economic model of our services. I will focus the rest of my comments on three areas, our high growth core, new verticals, and our global expansion initiatives. So starting with high growth core, at shift four, our high growth core does continue to be the primary engine of growth. And as a reminder, our high growth core includes the entirety of our business at the time of the IPO and is our core integrated payments offering built on a library of over 500 mission critical software integrations and over 150 billion of gateway volume available for conversion as of March. With many years of success executing on the strategy, we are still clearly in the early innings of our gateway conversion, sunset, and further monetization strategy. Our win rates between net new merchants and gateway conversions, along with their associated take rates, all remain consistent and stable. A component of our high growth core also includes our new restaurant POS system named SkyTap. Like last quarter, we've added thousands of new systems and our Q1 volume growing at over 300% on annualized growth rates. We are uniquely positioned in our ability to offer our SkyTab POS across multiple verticals we serve, including stadiums, theme parks, and hotels. So, for example, this past quarter, we successfully renewed and expanded agreements with two major hotel clients, which also includes them promoting Skytab in their restaurant locations throughout their franchise. Considering our strong presence in hotels and our close relationship with software companies that serve hotels, we believe this new business pipeline for Skytab is very promising. Additionally, Skytab POS capabilities are evolving quickly. We recently entered into partnership agreements with OpenTable and Restaurant365, the two leading providers of online reservation and accounting software for the restaurant industry. As a reminder, the insourcing of our restaurant distribution late last year was timed to coincide with the launch of our new cloud-based SkyTab POS products offering. This important initiative served two purposes. First, it substantially improved the margin, cash flow, and unit economic model of our POS offering by pivoting to a more direct sales model. So this initiative not only eliminated a recurring commission expense from existing accounts, but also from all new accounts going forward since we essentially hired 400 of our best partners as a component of the insourcing initiative. So we basically acquired a costly variable expense and took on additional overhead in markets that we know we're going to have a lot of demand for SkyTap, the results of which we believe are working out very, very well so far. Second, it also allowed us to gradually sunset several of our legacy POS software brands. So as a reminder, that includes FuturePos, PosiTouch, Restaurant Manager, and HarborTouch. and basically unify and energize our development, engineering, sales, and service efforts to a single product strategy, which is Skytab POS. So this represents a significant efficiency gain that we believe will play out over many, many years and enable us to continue to grow rapidly without having to add headcount. It also freed up resources and capacity to run the playbook of acquiring another legacy POS software company, cross-sell their customers' payments, and eventually migrate their customers to our modern Skytab software solution. This is very textbook shift four. So we are back at it again. We completed an acquisition that has interested us for more than five years. So this quarter we acquired a POS software company called Focus POS, which supports over 10,000 restaurants representing up to a 15 billion payment opportunity that are not on shift four. FocusPause does not have a direct payment processing capability and instead relies on several other vendors, including an existing software integration with Schifor, which allows us to work very, very quickly. By acquiring FocusPause, we've added a major talent in the form of MyCam, and together we are executing on a playbook that we know very, very well, which is by owning the software, we plan to bundle payment processing capabilities and over time convert the installed base of 10,000 plus FocusPause merchants to use shift four payments and eventually migrate to SkyTab. Like we've shown in the past, we believe this approach represents a very low cost way to acquire established high quality integrated payment restaurant customers. And as Taylor will talk about in a minute, we believe that FocusPos acquisition will ultimately prove to be an organic revenue and volume contributor in 2024 as we wind down the existing revenue model of the business So moving away from their historic hardware and software license sales model. And instead, we will pivot them towards a payments and SaaS strategy consistent with the comparable deals we've done in the past. So in short, we expect minimal revenue and volume contribution in 2023. And our guidance raise can be attributed entirely to Q1 outperformance and a slightly more optimistic view of the 2023 macro picture. So moving on to hotels. We signed numerous signature resorts during the quarter, including the brand new 60-acre resort property named VAI, which is now Arizona's largest resort. Additionally, we signed two large Las Vegas properties, one being an especially new and notable entertainment center. We also signed Woodlock Spa Retreat, located in Pennsylvania, the Lucerne Hotel on the Upper West Side of Manhattan. These signature wins represent a nice balance between gateway conversions and simply net new wins leveraging the power of our 500 plus unique software integrations. So moving on to new verticals, our end to end volumes continue to benefit from incremental contributions from merchants within our new verticals, which overall still have a long runway before reaching steady state levels. We define new verticals as consisting of all the new end markets we entered into post our IPO. including sports and entertainment, sexy tech, travel, nonprofits, and gaming, as well as volume contributions from international expansion, APMs, which is our alternative payment methods, and crypto donations. It's worth reiterating that as we continue to expand internationally and partner with international gateways and APMs, like PayPal, we may not be directly settling funds for those payment transactions. The impact of which is that our gross revenue and gross revenue less network fees will essentially be the same. Bringing this to your attention so you can take that into consideration when modeling future gross revenue in the context of international and APM volumes becoming an increasing portion of our mix. The overall ramp in new verticals witnessed late last year continued into this quarter with a nice uptick in volumes from our stadium and entertainment vertical, including incremental ticketing volumes, travel, gaming, and of course, our strategic enterprise relationships. Our recently announced partnership with PayPal also began to ramp throughout the quarter. In sports and entertainment, we will process all food and beverage volume for the Washington Commanders of FedEx Field, as well as the Chicago White Sox, where we will process not just concessions at Guaranty Field, but all their parking and retail too. In college sports, we signed an agreement to process food and beverage with the University of Arkansas and Oregon State University, Outside of sports, we also assigned all the Six Flags locations in the U.S. for their food and beverage operations, along with a ticketing and payment processing agreement with popular water park in Denver called Water World, and all food and beverage processing for Chicago's Lincoln Park Zoo. In ticketing, we are live with Paculin, and we are processing all ticketing for the Wells Fargo Center in Philadelphia, including advanced sales for non-sport performances including the recently announced Alicia Keys Summer Tour. Now that PACULIN is live, we will now begin pursuing ticketing for college athletics as well, which includes advanced season ticket sales. In gaming, we went live last week in seven additional states throughout our partnership with BetMGM and are currently operating in 14 online jurisdictions. SHIFT4 also added OCT as a product offering, which is highly desired in the gaming market. Two online operators currently in integration are adding OCT to their Go Live, which is anticipated later this quarter. Shift4 signed an agreement with Light and Wonder, the leading cross-platform global games company in the digital and brick-and-mortar casino verticals. Specifically, Shift4 will provide processing for Light and Wonder's Atom product, which is a cashless gaming solution for table games. Atom enables players to access funds via debit card transaction without leaving the table. Initial support will be in the U.S., but we are also adding Canada. Moving on to nonprofits, we entered 2023 following a year of remarkable growth in the number of nonprofits joining the giving block marketplace, despite an otherwise really challenging year for crypto in general. We added over 1,000 nonprofit clients last year, bringing our current roster of nonprofits connected to our donation platform to over 2,000. The pipeline to cross-sell card processing to this base has grown considerably, especially when you consider over 150 nonprofits currently on our platform process more than 100 million of annual donation volume. As a result, the initial 45 billion plus cross-sell opportunity we sized for you when we initially announced the giving block a year ago is now well over 50 billion of cross-sell. The 50 billion represents just the donation volume associated with our existing nonprofit customers, The total charitable giving opportunity we're pursuing is over $450 billion. We are still investing in capabilities, including smart donation forms, recurring billing, ACH, and integrations to important third-party donor management software. We've recently added key enhancements to our product, such as stock donations, peer-to-peer fundraising, and donor accounts, all of which we believe will increase our right to win the traditional card cross-sell which is why we pursued the Giving Block in the first place. I'd highly recommend you to check out the Giving Block's 2023 annual report on charitable giving, which can be found at thegivingblock.com for more key stats on the industry. Moving on to global expansion, as I've mentioned many times over the last 18 months, we're on a payment 3.0 journey. We're expanding organically and inorganically all over the world following a signature strategic merchant relationship and then bringing all the products, services, and integrations that made us successful in the U.S. into those new markets. To that end, international expansion remains our number one capital allocation priority, both in terms of our M&A pipeline and organic investment initiatives. We are still awaiting regulatory approval from bank regulators in Europe regarding our acquisition of Finaro, which remains the final obstacle to get this deal closed. We recently met with the Finaro team in Europe, as well as the regulators, and believe the deal will close in approximately 90 days or less. Unfortunately, European banking regulators have had some high-profile and high-priority matters that have captured their attention in the last few months. We have made great use of this time, though, between signing and closing. So over the last year, we've completed technical integrations between Shift4 and the Finaro platform. We have begun processing live card-not-present transactions and now card present transactions. We have collaborated on commercial opportunities, international expansion priorities, marketing and go-to-market strategy, and the consolidated organization and operating plan. We are ready to hit the ground running after closing. In fact, we feel so prepared that we've been able to shift a fair amount of attention to other opportunities in support of our Payments 3.0 priority. As a reminder, our 2023 guidance does not include any contribution from Panaro, which we will update accordingly following the deal closing. We are currently processing international volume in connection with the PSP we acquired last quarter, and also benefiting from their Stripe-like offering, which is focused on developers and online card acceptance tools for our enterprise customers. We currently offer these online capabilities now in over 40 countries. Our organic expansion into Canada, the Caribbean, and Eastern Europe is on track to be completed this year, and we are exploring a number of M&A opportunities that will expand our reach into LATAM, Africa, and APAC. Before handing the call over to Taylor, I wanted to provide some additional comments on how we are currently thinking about 2023, our capital allocation priorities, and our general attitudes towards success. We have been consistently forthcoming in expressing our concerns about the operating environment, including highlighting our concerns as early as March of 2022. As a result, our guidance and entire budgeting process has been informed by our view that current market conditions will test the sustainability of consumers' willingness to spend. Our upwardly revived guidance assumes consumer spending remains reasonably stable with the low end assuming a mild recession. Given this uncertain climate, we've been laser focused on controlling expenses and continue to plan for our headcount to remain as flat as possible for the year. Our preference is to take advantage of the recent tech layoffs, including at several companies we admire, to upgrade talent where appropriate. I believe that is the responsible way to navigate the year ahead. Consistent with prior quarters, our top capital allocation priority is delivering on our payment 3.0 global expansion requirements. We have a strong pipeline of opportunities ranging from completely transformational to strategically significant and smaller tactically beneficial transactions. We are generating a lot of cash, ending the quarter with an adjusted net leverage ratio of 2.5 times. Considering our stronger cash position, we have elected to make some small investments in facility upgrades, while at the same time closing and consolidating a number of our operating locations. We also have begun making investments in internal system replacements to include a new Salesforce CRM, which we believe will improve the efficiency and productivity of our workforce. Considering our strong balance sheet and our present EV to EBITDA evaluation being below prior buyback levels, our board has authorized up to $250 million in share buybacks. While we are prepared to be opportunistic with this authorization, we are admittedly excited about a variety of other avenues available to create shareholder value. You know, as a public company, it's pretty typical to spend earnings calls patting ourselves on the back and celebrating successes. I do want you to know this isn't the real Shift4 attitude, though. I can assure you, as a management team, we pretty much only talk about the things we don't do well at all. To that end, we are constantly improving our products, customer experience, and internal processes to ensure we are always in a position to win, no matter how challenging the operating environment. We believe that even small incremental improvements can have a powerful compounding effect over time. And we'll get there by following the shift four way, which is all about embracing radical ownership, staying flat, taking out all the parts, being procedurally driven, and executing with urgency. This is the way. With that, I'll turn the call over to our President and Chief Strategy Officer, Taylor Laubert. Taylor. Thanks, Jared.