Shift4 Payments, Inc.

Greetings, and welcome to Shift 4 Q1 2024 Earnings 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tom McCrowan. Executive Vice President, Investor Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to Shift4's first quarter 2024 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 Spaces, 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 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?

Hey, thanks, Tom. So if you've already reviewed our earnings letter, then you already know this was a very busy quarter, and there's an awful lot for us to discuss today. So we wrapped up a strategic review. We continued to win some of the most coveted enterprise merchants. We added thousands of new Skytap customers. We cross-sold ticketing to our numerous stadium wins, and we announced a synergy-rich and very attractively priced acquisition, alongside continuing our geographic expansion and delivering reasonably strong results and record-free cash flow. So I think the only thing we probably could have done better is help analysts capture the right seasonal cadence of our business. We're obviously diversifying and growing very quickly. So to help with that, we have largely reaffirmed and positively revised our EBITDA and free cash flow guidance, and we broke it out on a quarterly basis for the balance of the year. So I just said a lot, and I'd like to break it down and expand on it point by point. So with respect to the strategic review, I would encourage you to read my shareholder letter if you'd like my complete personal take on the matter. But the bottom line is there was a lot of strategic interest and multiple formal offers materially higher than our present trading price. It should also be obvious that a go private option is usually available and others have clearly shown that to be the case. However, the go private option presents clear complexities alongside a competing strategic offers. And I, of course, always want my interests to be completely aligned with the rest of my fellow shareholders. So now as the strategic review process progressed, we continued to record some very big wins. And as a result, our price expectations rightfully kept going up. And I imagine after reviewing this quarter shareholder presentation, it will be even more obvious why we could never accept an offer that didn't properly value the trajectory of the business. So on that note, we did deliver some very big wins. I will go over the full list by vertical shortly, but we signed one of the single largest casino properties in the world, which is Foxwoods, alongside developing a major partnership with one of the largest casino operators in the world. And we'll talk more about that soon. And we have many more to follow. Our SkyTab growth further accelerated with nearly 9,400 system installs in Q1, which represents a 38% increase quarter over quarter. We have continued momentum in our sports and entertainment vertical, including notable stadium and ticketing wins for the NFL World Champions, the Kansas City Chiefs. We also announced this quarter the acquisition of Rebel, which I'll speak to a bit later in the prepared remarks. We followed our very important strategic customer into several new international markets, including Albania, Mongolia, and soon in several African countries, Fiji and the Maldives. And the associated results from all this met our expectations and set the stage very well for the balance of the year. So we generated 50% growth in end-to-end payment volume, 27% growth in gross profit, and 32% growth in gross revenue less network fees. We also generated $122 million of adjusted EBITDA, representing 36% year-over-year growth as our margins expanded 150 basis points to 46% versus the corresponding year-ago quarter. Our operating margins expanded despite the margin drag from the acquisitions of Appetize and Finaro, both of which negatively impacted our margins by nearly 300 basis points for the quarter. Naturally, as synergies are realized, we expect that drag to disappear and contribute to our ongoing margin expansion targets. Perhaps most importantly, we generated 78.2 million of adjusted free cash flow, which is up 34% versus a year ago. Our blended spreads also remain stable, coming in at approximately 62 basis points despite considerable volume growth. As mentioned earlier, an area of which we can improve is helping the analyst community better model the seasonal cadence of our business. Q1 typically represents the seasonally slowest quarter of the year, and 2024 has followed that pattern. Now, if you recall, the Q1 of last year benefited from growing over an Omicron depressed Q1 of 2022. That aside, we also know we are diversifying into many new verticals and growing quickly, which makes modeling challenging at times. So to help with that, we are providing quarterly guidance for the balance of the year to include positive revisions to EBITDA and free cash flow conversions. Our guidance does not include the recently announced acquisition, but does account for the accelerating organic growth that we have great visibility into, as well as expense discipline and efficiency gains. From here, I intend to provide the usual double-click by vertical to include our progress internationally, as well as more insights into our recent M&A activity. Now, starting with our core, which, as a reminder, is composed primarily of restaurants, hotel, and specialty retail, once again contributed meaningfully to our growth. We are uniquely advantaged to win hotels and resorts with our 550 plus strong software integration library, including industry leading business intelligence tools and ever expanding geographic coverage. With restaurants, we have a very powerful and growing distribution network that includes both our direct sales team and authorized partners. We are advantaged as we see really Toast and Skytap as the only modern cloud POS offerings capable of servicing table service restaurants at scale. We further believe we have a more effective and lower cost development and go-to-market strategy, which in turn delivers a lower overall cost of service for our customers. Now, specifically with restaurants, we signed many notable brands to our platform and set new records with SkyTab installations. We signed chains such as Pizza Twist, a growing chain of Indian-inspired pizza with locations throughout the US and Canada, Diverse Concepts, a professional restaurant management company with seven restaurant concepts, and Four Top Hospitality Group, a multi-concept independent restaurant group with 15 locations across the southeast. We also signed Grape Street Cafe and Wine Bar with two locations in Las Vegas and Summerlin. Vessel, located in historic repurposed Lutheran Church in mid-city New Orleans, the infamous Hog Breath Saloon in Key West, Florida, and the award-winning Union League Cafe directly across the street from Yale University, which recently celebrated 30 years in business. In the U.S., our SkyTab production accelerated with approximately 9,400 system installs during the recent quarter. Our cloud-based feature-rich and low-cost restaurant solution continues to resonate with restaurants. In April, we launched SkyTab Business Intelligence, which is a reporting and analytics platform that is free to SkyTab POS customers. This follows the launch of our AI website builder last quarter. You know, we've released many modules, as indicated in our shareholder presentation, and we don't charge for any of them. We don't believe there is a restaurant out there that is excited to pay POS companies for more modules and instead prefer a lower overall cost of service. So on that note, we believe our Skytap POS offering offers the most compelling value proposition in the market with a total cost of ownership that is extremely competitive versus comparable solutions. At the current Q1 run rate, we are on pace to exceed our goal of 30,000 system installs of Skytap for 2024. Now, outside the United States, our team is building awareness of the Skytab POS product in the United Kingdom and Ireland and continues to sign up new restaurants, including Suvaki located within London's West End and within walking distance of the Prince Edward Theatre. We also signed Ram's restaurant just outside of London city limits. Further, we are really excited to have been awarded the online ordering for Pizza Hut in Spain and Portugal. And these early international strides, organic product investments alongside our M&A strategy, inspires confidence in our goal to assign 10,000 new restaurant and hotel customers, specifically in Europe and Canada, before the year ends. Now turning to hotels, we had a record quarter of major signings. And as alluded to earlier in my prepared remarks, we developed a partnership with one of the largest casino operators in the world that we plan to speak to later this year, as well as signing one of the single largest casino properties in the world, the largest in North America, which is Foxwoods. We also signed Ho-Chok Casino Hotel, a Native American hotel chain located in Wisconsin. In addition to these major casino wins, We had a record quarter of gateway conversions. We signed The Ranch at Rock Creek, which is a Montana-based five-star rated luxury spa and dude ranch, Sunseeker Resort on Florida's Gulf Coast, an Acme hospitality and operator of several hotels, and multiple award-winning restaurants throughout California. We also signed Tropical Beach Resorts, a collection of boutique hotels in Siesta Key, the River Street Inn, located in Savannah's historic River Street, the Eddy Taproom and Hotel, which is a boutique hotel located in Golden, Colorado, Rosada Hospitality, which is an upscale resort located in central Oregon's Cascade Mountains, and Mohawk Mountain House, a national historic landmark and resort located in the Hudson Valley of New York State. Our expansion into Canada is also going well, and we signed hotels including the Halcyon Hot Springs Resort, which is a spa resort located in British Columbia, Fairways Hotel on the Mountain, which is a golf resort in the mountains of the capital city of Victoria, Coastal Hotels, which is an operator of multiple Canadian hotels, and the Lac Lungerne, which is a hotel that's located on the shores of beautiful Lac Lejeune In Canada. In Europe, we also signed Leonardo Hotels, which is a European brand with hundreds of locations throughout Europe and in the UK. And our business development pipeline for European hotel prospects is building very, very quickly. Now, in specialty retail, we signed Russell Stover, which just celebrated its 100th anniversary, and Ledson Winery, which is a fifth-generation family-owned winery located in the heart of Sonoma Valley. We also expanded our relationship with Goodwill Industries and will serve as a primary payment processor for their three new Goodwill stores, which opened in Puerto Rico. In Europe, we entered into an agreement to process payments for online beauty retailer Lux Plus, a card present payments provider in Southern Europe's EV charging network, Aliante, and card acquiring services for the digital banking platform, One Money Way. We were also enabling merchants to accept digital wallets such as PayPal, Venmo, and Cash App in Europe through a partnership with Boss. We entered into agreements to provide card acquiring services for Bravo Tours, which is a Danish online travel agent, as well as Sweden's Dent Friends, which is a network of hundreds of dental clinics, and signed a partnership agreement with a couple of European PSPs, Pater and Fabrik, which service merchants in the Netherlands, Italy, Spain, and the UK. Moving on to new verticals. Now in sports and entertainment, we continue to add ticketing volume with our existing clients and successfully migrate appetized customers onto the Shift4 Venue Next platform. So we were awarded ticketing from the Kansas City Chiefs, the Chicago White Sox, and the Minnesota Vikings. Now the Vikings and White Sox represented a ticketing upsell to an existing stadium customer. We also converted American Airlines Center, home of the Dallas Mavericks and Dallas Stars, to our platform and signed University of Oklahoma, University of Utah, and the University of Nebraska, the last of which we will also be powering ticketing for via our partnership with Pac Yolen. We also recently hosted an investor event at Yankee Stadium, highlighting one of our largest Venue Next installations that was also a conversion from Appetize. We signed payment processing agreements with several convention centers, including the Boston Convention Center, all of which were legacy appetize customers. Now in minor league baseball, we entered into ticketing and concession deals with 10 additional minor league baseball stadiums, increasing our total roster to approximately 60 minor league baseball teams that are shift four customers. And we are really excited to announce two European stadium wins, including the famous FC Barcelona alongside Exeter City. And our strategic partnership with FC Barcelona includes deploying a comprehensive technology and payment stack to their iconic new stadium, Spotify Camp Nou. I often remind investors when we are asked about the organic growth profile of the business or revenue acceleration to think about literally the dozens of major wins that I just talked about just now alongside every other quarter. I mean, we are literally powering the best experiences at the coolest venues from the Super Bowl to the Rolling Stones. And these caliber of merchants are not selecting shift four because we were somehow a fraction of a penny less expensive. It's because the commerce enabling solution we are providing is the best fit for their business. So continuing on with new verticals to nonprofits, the first quarter should actually be a seasonal low. We are in fact seeing the giving block transaction volume and donations up quarter over quarter, which we estimate will lead to year over year growth in excess of 400%. We entered into inspiring collaboration with Cabrini Mission Foundation to power meaningful change through crypto philanthropy. The Cabrini Mission Foundation embodies the spirit of St. Francis Xavier Cabrini, the patron saint of immigrants, and her story continues to resonate notably on the big screen. We've taken our first steps with key integration partners such as Give and Gain and GiveLively. These integrations and others to come will dwarf our efforts to process for individual nonprofits, unlocking opportunities to process for tens of thousands of charities. Outside of direct relationships with major organizations like St. Jude, these integration partnerships will be the drivers of our success in the nonprofit sector. So beyond traditional credit card and crypto volume, we also continue to make tremendous progress growing our market share, processing alternative donation methods for nonprofit organizations via the giving block, such as stocks and donor advisory fund grants. This quarter, we signed large charities like the Jewish Community Foundation, the Catholic Charity Fund, and expanded our relationship with the American Heart Association. In other new verticals like travel, gaming, and sexy tech, we signed Grand Canyon Airlines, the oldest aerial tour operator providing sightseeing tours for the Grand Canyon. In gaming, we are now live with SkyTab mobile devices at our first BetMGM Sportsbook locations, National Stadium in Washington, D.C., and next month we will be live at the Cincinnati Reds Stadium. We expect to be live in all 24 BetMGM Sportsbook locations across nine states by the end of this year. SkyTab devices are also being integrated with Passport technology to enable various cashless gaming experiences on the casino floor at casinos such as the Morongo Casino outside of Palm Springs. Separately, we signed several new online gaming clients during the quarter, including launching more states with Lotto.com in Nebraska, Florida, and Arizona for state lottery. We signed Prime Sports Betting, an online sports betting platform currently operating in Ohio, New Jersey, and Kentucky. And Kentucky is actually soon to follow. And lastly, 1010 Gaming and online gaming and sweepstakes site blending social media with slot and casino type games. We also went live with Rolling Riches during the quarter, which is now live processing on Shift4. In Sexy Tech, we teamed up with unified business to business commerce platform, Peppery, to offer buyers on their platform a more efficient and convenient way to pay. Peppery powers the front and back office for over 1,000 B2B e-commerce merchants in over 70 countries. We signed a payment processing agreement with VinSeeker, which provides consumers and businesses the most comprehensive vehicle history reports in the industry. Perhaps most exciting, we can continue to grow volume very quickly with our large strategic e-commerce customer and have organically expanded into several new countries that I mentioned earlier. We've also built on our various domestic and international EV partnerships, including an undisclosed but personally a very special collaboration to support new restaurant concepts at EV charging locations. Now, internationally, as mentioned throughout our call, we are executing on our strategy to follow our important strategic customer all over the world and then bring all the products and integrations and services into those markets that made us so successful in the USA. We have signed notable restaurants, hotels, e-commerce, and sexy tech providers all over Europe and even into Canada. We feel confident we are well on our way to achieving our 2024 goal of 10,000 restaurants and hotels signed in just international markets in addition to the 30,000 systems goal we are on pace to exceed in the USA. Now, with respect to M&A, to accelerate our growth, especially in the restaurant vertical and international markets, we've announced a really exciting acquisition of Rebel this quarter. This deal very much follows our playbook of achieving a lower customer acquisition cost, enhancing distribution to accelerate growth in a core vertical, alongside talent and other synergies. And Taylor will go over this further in just a bit. So in closing, for those familiar with the Shift4 story over the last few years, It's probably not much of a surprise that we've been frustrated from time to time with the lack of appreciation in the public markets. You know, it seems like we are always battling one theory after the next to try and explain away our outperformance. And at times it feels our competitors always get the benefit of the doubt, be that the fastest growing single vertical players that lack our diversification or profitability profile, or the slower growing competitors that ran out of good ideas or those that will go private at a two or three turn EBITDA premium to our present valuation. Meanwhile, we have the best customers in the most desirable verticals growing faster than just about anyone else and riding several advantages that make it easier and more affordable for us to win while constantly improving the profitability profile of the business. To put a finer point on it, we've grown EBITDA 7x since our IPO, and yet Shift4 is only 1.6 times more valuable, all while being more diversified and with a much better economic backdrop than a global pandemic. And on that note, I don't know why the long-term weighing machine hasn't quite kicked in yet, but I do believe those that continue to bet against this are going to quickly be running out of stories to tell as ultimately performance and especially free cash flow prevail. Finally, if you only follow us through earnings, you may think we love celebrating all our wins. And I certainly read a lot of them on this call. That actually couldn't be further from the truth. We are obligated, maybe more so than many other companies, to promote and defend our accomplishments. But day to day and in the boardroom, I can assure you, we spend all of our time on the things we don't do well, our shortcomings and inefficiencies. In fact, I believe it's our relentless focus on our inadequacies that fuel so much of our momentum. All of our employees know this, and we need to embrace ownership, challenge the status quo, delete old and costly parts, proceduralize, and automate to the extent possible, and always execute with urgency. That is the shift forward way, and with that, I will hand it over to Taylor.