Shift4 Payments, Inc.

Greetings. Welcome to Shift 4, third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Tom McCrone, SVP, Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Shift4's third quarter 2023 earnings conference call. With me on the call today are Jared Isaacman, Shift4's chief executive officer, Taylor Lauber, our president and chief strategy officer, and Nancy Dissman, 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. Today's call is also being simulcast on X, formerly known as Twitter, which can be accessed through our corporate Twitter account at Shift4. 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 a 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 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 turn the call over to Jared. Jared?

Thank you, Tom. I opened my shareholder letter with some thoughts on the conflicts, the suffering, and the humanitarian crises that are taking place around the world. And I would be remiss not to mention again how saddened we are at shift four for the loss of innocent lives. We're a global company now. And while we are small, we will certainly play our part in trying to make this world a better and healthier place. With that turning to the quarter, it's been busy. So once again, we've delivered reasonably strong quarterly results that represented records across all of our KPIs, including N10 volume, gross revenue, gross profit, gross revenue less network fees, and adjusted EBITDA. Our margins and cash flow continue to improve as we benefited from spread stabilization and disciplined expense control. I'm especially pleased with Q3. We achieved these results without the help of all of our previously announced stadium and resorts that really didn't begin processing until essentially Q4, nor did we have any of the revenue synergies that we've been accumulating over the last 20 months inside of Finaro. We still generated 36% growth in end-to-end payment volume, 23% growth in gross revenue, 34% growth in gross profit, and 24% growth in gross revenue less network fees. We also generated 124.5 million of adjusted EBITDA, representing 46% year-over-year growth as our margins expanded 780 basis points to 51.2% versus the corresponding year-ago quarter. Our adjusted free cash flow also improved to 75.5 million, up 69% versus a year ago. Our blended spreads also stabilized at 64.5 basis points. To be incredibly clear, Q3 did not have any contribution from Fennaro or Appetize. This is unfortunate, as we've spent the last 20 months working closely with Finaro, and some one-third of their net revenue is generated from existing Shift 4 customers. If you were to overlay an approximately $7 million in achieved revenue synergies from Finaro into Q3, gross revenue less network fee growth would have been over 27% with a very strong Q4 ahead, as our numerous enterprise accounts have begun processing as expected. Additionally, our SkyTab POS installs are resulting in higher subscription and other fees in Q3, and that's a real positive trend that we're excited to build upon. Continuing on, As many of you know, we're thrilled to have received the final regulatory approval on our European acquisition of FNARO, and the deal officially closed on October 26. As mentioned above, we've already unlocked material revenue synergies at FNARO during the extended regulatory approval process. We are thrilled to finally move on to the next chapter of our international expansion plan, especially with so much of the integration work already having been completed over the last 20 months. Before going into some of the specifics, and despite some of the unanticipated delays, we're obviously really pleased with the results this quarter. We're excited about the opportunities in front of us, which is why we made some positive revisions to our guidance with respect to EBITDA and free cash flow. And we've also provided a 2024 volume bridge alongside reaffirming the third year of our midterm outlook. On that note, we are often asked, how are we able to sustain growth rates well in excess of industry averages? It's our successful capital allocation strategy alongside bold execution. Keep in mind, this is not always an M&A story. We have grown revenue double digits year over year for 24 consecutive years, even through several downturns. We had no outside capital, nor had we completed any acquisitions throughout our first 15 years in business. Examples of organic investments include building our flagship POS product, SkyTab, or back in 2021 when asset prices were out of control, we elected to invest organically in new verticals that are now driving substantial growth in e-commerce and travel and gaming and parts of the nonprofit vertical. We continue to make sound investments as we organically expand into Canada and other parts of the world. This is part of our IPO promise to try and always be where the puck is going. We are also quite good at M&A, and I understand there is some rightful skepticism around M&A. I don't think many of our peers have executed as well as we have, and now there is a general distaste for acquisitions. That is a mistake we're not going to make at Shift4. For starters, the convergence of software and payments into a broader, stickier, more valuable commerce-enabling experience is still very much early days. There has only been one public scaled payments company to get there without M&A, and as recent events have shown, it does not guarantee limitless growth. Second, we're going to play to our strengths, and we have an excellent track record. We're very good at identifying differentiated technology assets where we believe we have a unique ability to unlock an embedded payments opportunity. We can then confidently underwrite those cross-sell synergies and ensure there is a path to leverage those assets to accelerate net new wins and be financially deleveraging inside of 24 months. The acquisition of Shift4 and the MerchantLink gateways many years ago are great examples of this, as well as our acquisition of NUNext and FocusPause. We remain highly disciplined in the prices we pay, and sellers are increasingly viewing Shift4 as having the unique skill set to maximize payment-related synergies. And I want to also be clear, we've never won a banker auction process. If you do your diligence, you won't find a banker that says Shift4 is at the top of the bid list. We have our own proprietary pipeline, our own process, and oftentimes bankers are just as surprised by our announcements as the street. The recent acquisition of Appetize in the sports and entertainment vertical was really a case in point. Now, there are some that believe we possess a degree of sorcery that enables us to compel a major competitor to sell their assets at an incredible discount just in time to fill a hypothetical quarterly hole. And if you believe that, then you should be just as bullish on shift four as you would be for the truth, which is we don't control the timing of when deals happen, but we do ensure the outcome is solid. In the case of Appetize, we already had the best mobile technology in Venue Next that sports teams and venues wanted, and we also demonstrated an ability to monetize the embedded payments opportunity within this vertical by bundling the software and payments. Our leading fan-first mobile technology is the true point of difference that opens the door to provide payments throughout the entire venue, and we are unique in our ability to unlock ticketing volumes through our integrations with major providers such as Ticketmaster and SeatGeek. And similar to how we win in hotels, we own more links now in the sports and entertainment value chain than any other competitor. This provided more ways to profitably differentiate and win, and ultimately, that's what compelled Appetize to seek out a deal. We are very excited now about the prospect to pursue the significant embedded payments opportunity as we migrate 600 plus Appetize customers over to our Venue Next platform. And as Taylor will go into shortly, we are taking Appetize, which is a business that has hemorrhaged cash since its inception, has overlooked payments and adjacent opportunities like ticketing, and turn it EBITDA positive by the end of this year. And in fact, we expect to exit 2024 with 15 million of run rate EBITDA, on a $100 million purchase price with a lot of room to grow from there. our capital allocation strategy supplements our growth algorithm algorithm our growth algorithm is very straightforward it comes down to two things land and expand and add new merchants land and expand involves capturing the existing embedded payments opportunity that already exists in our install base of merchants such as converting a gateway-only merchant to end-end or capturing say the ticketing opportunity associated with one of our sports and entertainment clients You can think about this as really just ARPU expansion as every merchant is using our software or a unique software integration. The strategy has been working very well for many years and it represents approximately 50% of our production each month. We have tens of thousands of software only customers and additionally over 150 billion of gateway volume to continue this land and expand approach. And you can be sure we're going to continue to find ways to keep this funnel topped off. Now, as to the other half of our growth algorithm, which is adding net new merchants, that's simply it. Merchants that are attracted to both our library or software integrations and the various differentiated technology offerings we offer in the end markets we serve. So great examples, Venue Next software, Skytap software. The result is that we win net new merchants every single day, which represents the other 50% of our production. And we're going to be spending a lot more time in the months ahead educating investors on our growth algorithm and the sustainable growth rates. As mentioned above, we're very confident in our organic growth rate and reaffirm the third year of our midterm outlook. This quarter, we provided a volume bridge to our 2024 medium-term volume growth target, which Nancy will highlight later in her prepared remarks. But first, let's review highlights from our core business and new verticals. So starting with restaurants, we have been winning at restaurants for nearly two decades with strong double-digit growth. Our product offerings have evolved from software we've built to those that we have purchased, and now we are in the midst of a very successful consolidation into our new cloud product, Skytab. We have made tremendous progress signing new Skytab POS restaurants, as our lower total cost of ownership continues to resonate with restaurant operators, coupled with our recent promotional activity. We have installed over 8,250 Skytab POS systems during the third quarter, which is not necessarily one for one with a location, and over 23,000 total installations since we officially came out of beta with Skytab just a year ago. If you search on Twitter or X, Shift 4, or Skytab, you're going to see pictures and posts of installs that are taking place every single day. We are now installing Skytab POS in restaurants located within stadiums, including Amway Center, which is home of the Orlando Magic, and Paycom Center, which is home of the Oklahoma City Thunder. We also signed an agreement with BetMGM to install SkyTab Mobile, which is our mobile solution. And there are over two dozen sportsbook locations across the country. And we are installing SkyTab in the Paper Mill Pub, which is located inside Truist Arena, home of the Charlotte Knights minor league baseball team. Other restaurant wins include Pinstripes, which is a fast-growing chain that combines the experience of eating out with bowling and playing a game of bocce, and Stonefire Grill, which is a Southern California chain of family casual restaurants, and several other restaurant chains, such as the Great American Restaurants and Hyde Park Prime Steakhouse. It is worth re-emphasizing our cost advantages. As a reminder, for a restaurant processing 1.5 million of annualized volume, our SkyTab POS solution is less than a third the cost of our primary competitor, including zero upfront costs. Restaurant operators are extremely focused on cost, especially in this environment. And we're also seeing benefit from our recent promotions that took advantage of the actions taken by one of our competitors over the summer months to push through an online ordering fee that caused a great deal of consternation among their restaurant clients. We also benefited from one of our competitors that experienced a very prolonged outage. As mentioned above, this past quarter, we added thousands of new restaurants. Our shareholder letter includes just a sampling of those restaurants that have selected SkyTap POS, but I really encourage you to search on Twitter or X for many, many more examples. Let's turn to hotels. So we had a blowout quarter signing new hotels, as well as extending relationships with existing clients. We renewed and dramatically expanded our relationship with Pebble Beach Resorts. We also renewed and expanded our relationship with Sonesta Hotels, who has agreed to make Skytac POS their preferred restaurant POS across all Sonesta managed locations. And we have partnered with Skytac Technology, which is a property management system company, to promote SkyTap POS to all the restaurant venues across their 7,000 hotel properties. We also signed a European-inspired chain of boutique hotels, Aries, that is based primarily in Southern California, and several hotels on Nantucket Island, including the historic White Elephant Harborside Hotel, the Wawanit, and Jared Coffin House. Other hospitality wins this quarter include the Ocean House Hotel in beautiful Watch Hill, Rhode Island, the Tiburn Golf Club and Resort in Naples, Florida, the host of several PGA Tour events, and Spinnaker Resorts, operator of a dozen separated hotels, primarily in Hilton Head, South Carolina, as well as other states. So as you can see from our shareholder letter, our success in hospitality is a combination of adding net new merchants, and converting gateway-only merchants over to our end-to-end platform. Our land and expand approach affords us the ability to grow our end-to-end volumes without ever having to add a single new hospitality customer. Moving on to new verticals. In sports and entertainment, we're obviously very excited to announce the acquisition of Appetize, where we more than tripled our market share within professional sports. But before getting even into Appetize, I wanna highlight some of the other progress we've made in the verticals this quarter. So we expanded our relationship with the Orlando Magic NBA team, where we're now installing SkyTap throughout the arena. We're handling all their mobile ordering, their retail and kiosk sales as well. And we will begin processing primary ticket sales for the Orlando Magic through our recently completed integration with Ticketmaster. For the San Francisco 49ers, we also added primary ticket sales through Ticketmaster and expanded our relationship to add food and beverage payments as well. And for the Miami Dolphins, we will now begin processing primary ticket sales also through our integration with Ticketmaster. We have only just recently completed this Ticketmaster integration, and we've already announced three ticketing wins this quarter, the Dolphins, the Orlando Magic, and the San Francisco 49ers. Now in college sports, we added the University of Georgia, who will be implementing our Venue Next technology solution for mobile ordering and point of sale. We also signed up Music Fest, a large annual music festival here in hometown Bethlehem, Pennsylvania, which takes place every summer, and the Palm Springs Aerial Tramway, which is the world's largest rotating tram car that transports visitors along the desert cliffs of Chino Canyon, which is part of the San Juacito Mountains located in Riverside County, California. Now, with the acquisition of Appetize, we're adding some really awesome venues, such as Fenway Park, Yankee Stadium, Madison Square Garden, Dodger Stadium, Bush Stadium, Globe Life Field, and Progressive Field. We will be transitioning Legacy Appetize Venues onto the Venue Next platform and begin the process of unlocking the embedded payments opportunity across their entire portfolio of customers. So this includes mobile payments, concessions, retail parking, and as you could guess, especially ticketing. Legacy Appetize's revenue model was highly dependent on selling hardware and software with very little payments revenues. We are pivoting that model immediately to payments and expect a material portion of their revenue to go away as we will no longer be selling hardware and any other payment referral revenue that they were generating will likely also go away as our competitors turn off those rev share programs. Despite that transition, it's a playbook we know really well. And this is a very synergy rich deal, both from a cost and revenue perspective. We also added an integration to Ticket Return, which is the leading provider of minor league baseball ticketing in the United States and Canada. Ticket Return has a relationship with over 300 venues and facilitates more than 55 million ticket sales annually. They also serve minor league hockey, minor league soccer, basketball, and lacrosse. In the nonprofit vertical, our momentum continues to build. At the end of September, we announced a partnership with GiveLively, which powers donations for nearly 9,000 nonprofits and is our most important ISV integration in the sector to date. The giving block remains the category king of non-cash giving in the nonprofit sector. The focus of the GiveLively integration is to add Shift4 as the preferred traditional credit card processor, and we were able to win this deal because of our unique ability to offer other donation methods, such as crypto and stock, that other competitors, including Stripe, can't offer. The giving block also secured integrations with ministry brands and endowment, both of which are expected to go live in Q4 ahead of a very busy giving season. In addition to new platform integrations to power card, crypto, and stock donations, the giving block continues to sign additional marquee clients such as Global Citizens, Habitat for Humanity International, Easterseals, and many more. We are successfully cross-selling our card processing capabilities into the install base of GivingBlock customers. This quarter, we added Cuddles for Clefts, Pediatric Cancer, Alma Swim Foundation, Waco Foundation, and the Purple Heart Foundation. The cross-sell opportunity within the nonprofit vertical remains very large and remains one of our exciting land and expand opportunities going forward. And in retail, we also signed the Landmark Boards retail store in Philadelphia. As mentioned above, we did finally complete the long-awaited Finoro acquisition, and this is a much better business, as we've said many times, than it was at the time of our announcement. With considerable card processing capabilities, broader geographic coverage into Eastern Europe, and approximately one-third of their net revenue coming from existing Shift4 customers. We've already unlocked considerable revenue synergies, and now we're really just getting started. Nancy and Taylor will go into more specifics shortly, but we are enthusiastic about the potential to board 10,000 plus restaurants and hotels in Europe and Canada in the year ahead. This is really what we've been waiting for. Before handing it off, I want to reiterate that for more than two decades, we've consistently demonstrated an ability to gain share in the end markets we serve. Our initial guidance ranges for 2023 volumes were 100 to 109 billion. This range contemplated everything from business as usual with same store sales growth on the high end to a mild recession on the low end. We expect to finish this year in excess of the high end of our previous range with minimal same store sales growth in our core verticals and two months benefited from our organic and inorganic international initiatives. The midpoint would imply 2023 full year volume growth of 52%. What was far more in our control was fighting for flat head count, investing in automation and AI tools. And as a result, we've continued to beat expectations, especially on margin and free cashflow, raising the midpoint even for Q4. We have further provided a very helpful table on page 15 of our investor deck that shows how we, as management, think about and normalize Q4 growth, taking into account the legacy contributions of Fennaro and Appetize and Focus Paws, the expected synergies that we expect to realize, and then normalize Q4 growth rates, assuming a full quarter of Fennaro. As mentioned, a large part of our success is our understanding of the ongoing integrated payments evolution, the competitive landscape, and how that informs our capital allocation investments. It's also about identifying talent and creating a culture that ensures we have the most motivated athletes on the field competing to win business every day while also keeping our existing customers satisfied. Our employees embrace the shift forward way, including radical ownership and accountability, and I believe this culture of ownership starts at the top of the house. Our entire executive team leads by this example and boldly forward. And with that, let me turn the call over to Taylor.