Shift4 Payments, Inc.

Greetings and welcome to the shift for third quarter 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, Mr. Tom McCrowan, Executive Vice President, Investor Relations for Shift4. Thank you. You may begin.

Thank you, Operator, and good morning, everyone, and welcome to Shift4's third quarter 2024 earnings conference call. With me on the call today are Jared Isaacman, Shift4's Chief Executive Officer, Taylor Lauber, President, 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 xSpaces, 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 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?

Hey, thanks, Tom. So we have a lot to cover today. So I'm going to break up this call into the following sections. So we're going to start with Q3 results, and then we're going to go into the deep dive by vertical and major initiative. We'll talk about expectations for Q4, and then, you know, end off on reflections on our performance since the IPO. So we were really pleased with what was a reasonably strong quarterly performance and our overall execution within the variables that we can control. So we've delivered quarterly records across all our major KPIs, so volume, gross revenue less network fees, adjusted EBITDA, and adjusted free cash flow. Our adjusted EBITDA margins were also a quarterly record of 51.3% or nearly 54% when excluding a 250 basis point drag from recent acquisitions. Specifically, we delivered $187.4 million of EBITDA, generating $111 million of adjusted free cash flow, which is up 46% versus a year ago and represents a 59% free cash flow conversion. So let's talk about what really went well in the quarter. So it was absolutely one of our strongest quarters for new logo wins, especially within hospitality. So I can't actually recall a better quarter for mega hospitality wins. It starts right off with KSL Properties, as well as a very large Las Vegas international casino operator that also committed to shift four. So we believe we are number one in end-to-end hospitality payments in the world. Similarly, we believe we're number one in end-to-end sports and entertainment payments provider in the world. So the stadium, theme park, and ticketing wins continue to roll on. We believe we're number two in the world when it comes to our cloud-based restaurant POS products, Skytab, as Skytab installs and the associated SaaS revenue streams continue a very strong growth trajectory. I'd say we are unranked when it comes to our global e-commerce capabilities, but that's quickly going to change as we follow our strategic merchant relationship literally all over the world, and we expect to win other blue chip customers just like them. Over the last quarter, our contracted volume saw $5 billion flow into actuals, and alongside an incredible list of new logos brings our contracted volume backlog to $33 billion. We set a big goal to hit 10,000 international restaurants and hotels in 2024. I think it's pretty clear we're going to come up short in that regard. But we do have over 1,000 international card present merchants with our first Vectron installations complete. So I think we're four down, 64,996 to go. We also enhanced our capital structure. We added more firepower and topped off our gateway conversion funnel, if you will, with the acquisition of Givex that's going to add about 130,000 premium customers and what we believe to be at least $300 billion in volume that we can convert, alongside the fact that its gift and loyalty capabilities are very good, and we're going to bundle that into the rest of our offerings. I'd say synergy realization and a culture of deleting parts and staying flat has resulted in expense discipline and continued profitable growth. As a result, we have once again raised the midpoint of our gross revenue less network fee and EBITDA guidance for the fourth quarter. So that brings you to what could have gone better? Well, we grew incredibly quickly, but as you've heard from others, clearly there's been some consumer spending softening, especially in some of the verticals that we serve. As mentioned, we also would have liked to have been much farther along with our Canadian and European card presence strategy. So we have about 1,000 unique merchants processing card present payments in these new geographies, which is pretty good for a year's work. But we certainly were hoping to have had several thousand more processing by now. But the momentum is building very quickly, and there should be really no mysteries where the next 65,000 European restaurants will come from as we look to the years ahead. Now, similar to prior quarters, I'd like to do a bit of a deep dive into each vertical. Our customers are really the envy of the industry, and we appreciate the trust they've placed in Shift4. So for those questioning our growth rates, please keep in mind every one of these wins I'm about to rattle off includes payments, and the associated revenue stream is entirely organic. And this is just a summary of the wins that we have delivered this past quarter. So as I mentioned before, I think we are clearly number one in hospitality payments in the world. And the announcements this quarter kind of reinforce that statement. So, you know, just starting off with KSL Resorts, operator of many incredible properties, including, you know, Blue Mountain or Camelback for us. East Coast skiers who learned how to ski on ice and a variety of other mountaintop and beachside resorts, including nine other premier resorts. And we're going to continue to expand on this into the future. We are also very proud to sign a new and undisclosed mega resort in Las Vegas that also includes their other domestic and international locations. And I want to emphasize, we don't just process the payments for the restaurants in the hotel. I think at times people confuse us with others in this regard. When we announce all these resorts and refer to being number one in hospitality in the world, it means we are processing the reservations and the guest stays, the retail shops, the bar, the spa, and the restaurants. So moving on, I believe we are number two in the world in restaurant POS and payments, with Skytab leading the way as our signature cloud-based offering. We do spend considerably less on traditional sales and marketing than our closest competitor, but we believe our investments in deals like Revel and Vectron, even Givex, deliver lots of distribution, talent, and most importantly, a massive customer list to cross-sell payments to. And by virtue of these deals, we have more than a foot in the door to discuss a broader software plus payments relationship. And we can generate a lot of revenue without ever having to win a new customer. Now, the proof points include growing subscription and other revenue streams alongside our profitable results that demonstrate we know how to sunset legacy products quickly and rally the organization around a single product offering, which is Skytab. Now, some notable restaurant wins this past quarter include Lombardi Family Concepts, which operates 22 restaurants primarily in Texas, Big B Coffee, a fast-growing coffee chain that currently operates over 400 locations in 13 states, and Shakey's Pizza, which operates dozens of locations in California and Washington. Now, we encourage investors to search Shift4 on Twitter or X, and you can see the wins are posted daily. Now, since coming out of beta two years ago, we have installed over 55,000 Skytab systems and we are on pace to far exceed the 35,000 install goal that we set in 2024. It's also worth pointing out that we are never satisfied being second best. We have a great roadmap to further enhance the product. We have the experience and we believe we'll take Skytab literally all over the world. Now, moving on, I believe we are number one in the world when it comes to sports and entertainment, theme parks, software, and payments. We continue to deliver software plus payment wins each quarter alongside many ticketing wins. So this quarter includes the Memphis Grizzlies, the San Antonio Spurs, the Brooklyn Nets, Dallas Stars, University of Arkansas, the Washington Capitals, the Washington Wizards. and more of your favorite teams. If you took your family to Six Flags or Disney or any other theme park this summer, you're almost assuredly interacting with our commerce technology. And we are still in the early days of gaining wallet share within this important vertical, but this past quarter marks the highest processing volume in stadiums yet, with no signs of it slowing down. Now, turning to nonprofits, our donation platform, The Giving Block, continues to attract a lot of new nonprofit customers. So this quarter we signed Habitat for Humanity of Silicon Valley, the American Israeli Education Foundation, the Montana Community Foundation, Follicular Lymphoma, Mount Sinai Medical Center. These are just to name a few. I can tell you year-to-date volume is already more than double last year's volume, and we're not even in prime giving season yet. So moreover, our integration with GiveLively is now live, and we've begun migrating merchants over to Shift4 from Stripe. So as a reminder, GiveLively offers nonprofits a free of charge fundraising technology platform, and it's currently used by over 9,000 nonprofits. We're also beginning to see the fruits of our prior investments in innovation. As a reminder, we acquired The Giving Block about two and a half years ago to pursue what is a $500 billion donation opportunity that's made annually through nonprofits. Now at the time, we also established the Crypto Innovation Center to explore ways crypto could benefit really all of our customers, not just nonprofits. Now this really goes back to our IPO commitment of always trying to be where the puck is going. And with a new administration that's very pro crypto, we think our timing is rather opportune. So to that end, we announced in October that we intend to make available crypto and stable coins as a form of payment for many of our merchants. We see really three initial use cases. So luxury goods where people who have significant crypto wealth seek to spend their crypto on luxury items. So this could be a hotel suite, a private jet charter, or even big events at high-end restaurants. These charges now would have historically been paid outside of the Shift4 platform via wire or other electronic transfers. So the goal is we want to bring these transactions onto Shift4 Rails. A second use case, as we follow our strategic customer into developing and emerging countries all over the world, credit and debit card availability is low, but crypto and other APMs are growing in popularity. And last, there are merchant categories looking to combat fraud, typically encountered with traditional payment methods. And we think that is a great use case for crypto as well. So overall, we are seeing significant interest from existing clients to learn more about these capabilities. We already have customers such as TAO Group and luxury charter flight company Blade are among our early committed customers for this pay with crypto initiative. Now turning to gaming. We continue to roll out our SkyTab mobile devices at more BetMGM Sportsbook locations, and we are now live at the BetMGM Sportsbook at State Farm Stadium, which is home of the Arizona Cardinals and the annual Fiesta Bowl. We're also live at the BetMGM Lounge at MGM Grand Detroit. So in online gaming, we went live with online gaming site Play Live, which is affiliated with the Live Casino located in the South Philadelphia Sports Complex. And we also expanded our relationship with Lotto.com for the State of Maine's Lottery. Moving on to international, our strategy for some time now has been to follow our strategic customer all over the world and then bring the products, software integrations, and other services that have helped us be successful in the USA into those markets. That process is going very well. So this past quarter, we launched in four new African countries, Zimbabwe, South Sudan, Botswana, and Burundi. We expect to launch in between four to six additional countries in Q4. with LATAM and Australia and New Zealand on the horizon for early 2025. Now, we believe we have added sufficient global e-commerce capabilities, both local to local, cross-border, and soon MOR, that our solution is now a viable option for other global enterprise e-commerce customers, just like our strategic customer. Meanwhile, we are running the playbook and bringing our CardPresent capabilities and products into these markets. For example, I fully expect to see hotels, stadiums, and SkyTabs installed in Australia and New Zealand in 2025, alongside the rest of our CardPresent international rollout. Now, in Europe, we announced this last quarter the acquisition of Vectron and have already made meaningful progress transforming the revenue model and laying the foundation for our go-to-market offering to support restaurants throughout Europe. So we have a head start now through Vectron's existing install base of 65,000 merchants, and it's supported by 300 strong POS reseller network. So the team is energized and motivated, and as I mentioned earlier, we already began installing our first several restaurants in Germany. We made progress expanding our relationship with other international merchants and have expanded into new use cases. So for example, we increased the scope of our relationship with NIAX, providing card present capabilities to their recently expanded base of global retail customers. And separately, we have developed a transit solution that is gaining traction within the European public mass transit system. So our offering supports the Visa mass transit and MasterCard pay-as-you-go protocol and is currently live in Portugal, Spain, Germany, Romania, and Italy. And our pipeline of other countries is growing. We've also signed additional international hospitality wins, including the Magnuson Hotels, which is a collection of over 2,000 independent hotels, and the Fort Garry Hotel, Spa, and Conference Center, which is one of Winnipeg's architectural landmarks. Some of our other international wins this quarter include Exolvus, which is a software solution for auto workshops and their customers, Classwagon, which is a car rental service for Romania and Hungary, Move, which is an online travel agency, and two important nonprofits, the Poppy Appeal, which provides key support services to veterans of the UK armed services, and RNLI, which provides life-saving lifeboats for the UK and Ireland. So at times, our unique formula and growth rates make it hard to always nail the exact timing, but we're pretty pleased with how the stage is set for the balance of the year. As mentioned, with less than two months to go, we have once again raised the midpoint of gross revenue, less network fees, and EBITDA expectations to account for really the limited contributions from Givex, but mostly outperformance as we grow profitably in line with our plan. We continue to expect full-year organic gross revenue, less network fee growth to be in excess of 25%. Now, we will save 2025 expectations for our investor day early next year, and we have no desire to further raise expectations at this time. But if you simply take the midpoint of our updated Q4 guidance and annualize it, you will see we are already there on 2025 EBITDA consensus estimates without any growth or seasonal adjustments. Now, with Q3 and the balance of the year complete, I think it's worthwhile to take a step back and just view the progress we've made over the last four and a half years since we went public. First, we have accomplished everything we said we would since our IPO and since setting our midterm guidance. So we established very ambitious medium-term volume and net revenue targets at our inaugural analyst day. back in the fall of 2021. And we are currently tracking to meet or exceed those targets, including a 50% CAGR in end-to-end volume and 30% CAGR in gross revenue less network fees through the end of 2024. Now, since our IPO, we also diversified into a half a dozen new verticals, including expansion internationally and today dominate in some of these verticals, notably hotels and sports entertainment. We have followed our large strategic e-commerce customer into multiple geographies around the world and have executed well on our plans to use this opportunity as our yellow brick road towards geographic expansion. Second, we showcased our experience and accomplished this profitably, while most who established midterm goals in 2021 used economic and geopolitical challenges to explain away their shortfalls. We execute on our strategic objectives, which led to financial performance exceeding consensus expectations. So if you go back to November of 2021, our inaugural analyst state presentation, consensus expectations for our full year 2024 volume gross revenue less network fees and adjusted EBITDA were $144 billion, $1.1 billion, and $433 million respectively. It should be reasonably apparent we surpass these expectations. Today's consensus expectations for our volumes are $25 billion higher than those numbers, or 17% higher, at nearly $170 billion. For gross revenue less network fees, consensus is now $250 million higher, or 23% higher at $1.35 billion. And for adjusted EBITDA, consensus is $240 million higher, or 55% higher at $673 million. Moreover, we're on pace to deliver 390 million of adjusted free cash flow in 2024, nearly double what consensus reflected three years ago. I challenge you to find any other scaled fintech who similarly exceeded expectations over the past three years. Now third, and despite what skeptics may think, we accomplished the majority of this growth through organic initiatives. So this includes simply adding tens of thousands of net new payment customers, unlocking material revenue synergies from cross-selling payments to an installed base of customers, and capturing more share of wallet with our existing customers by adding new software integrations, such as what we've done with ticketing and new geographies. As a result of our unique approach to acquiring customers, the cross-sell funnel you underwrote at the time of the IPO is actually meaningfully larger today. From an initial cross-sell funnel comprised primarily of gateway and software-only restaurant customers, we have materially topped off this funnel through acquisition. This past year alone, we've added over 200,000 additional customers and a funnel of nearly $350 billion in payment volume to cross-sell payments on. And we've just started at that. Now, on that note, we recently announced the acquisition of GiveX, which recently closed and represents another classic Shift4 acquisition. We acquired over 130,000 additional customers in what we believe to be a $300 billion payment cross-sell opportunity from GiveX alone. Now, similar to our gateway strategy, we will use our proven playbook and cross-sell payments to these customers, essentially the same strategy that has worked so well with our gateway-only customers. Now, as a bonus, we also gain more distribution, a best-in-class gift and loyalty solution that we will bundle into the rest of our payment offerings, and talent to accelerate our product development and entry into new markets. Now fourth, our balance sheet and free cash flow afford us the necessary flexibility to keep doing exactly what we've been doing. So we have continued to delete parts and expand margins, improve efficiency and free cash flow conversion, and with an attractive deleveraging profile that allowed us to opportunistically enhance our capital structure, We are constantly tracking a long list of targets that will keep us busy for quite some time, not to mention a healthy buyback authorization to ensure we always weigh any investment against simply the benefit of buying back our own stock. So we have the flexibility and track record to deploy capital intelligently, to take advantage of the opportunity that the convergence of software plus payments affords, and you should expect us to keep doing it. Lastly, We have considerable work to do internally to improve our overall operational efficiency. So as I mentioned in my shareholder letter, we are delivering all these results as what I would consider a good company, not an excellent one. So I've stated many times that our earnings reports inevitably force us to focus on celebrating the wins. But I can promise you every other day of the quarter, we relentlessly focus on what we are not good at. So we have a lot of legacy parts to delete as we sunset gateway connections, upgrade legacy POS solutions, implement new internal systems like Project Phoenix. We're going to centralize all our operations around mission control. And then we're going to incorporate AI to improve the speed and quality of our services. These initiatives are in their early days. And as they play out, you should expect us to continue to expand margin and free cash flow generation and overall just consistent profitable growth. So on that note, I've always run Shift4 to be a profitable business and never really understood the mindset of growth at all costs. So we welcome the industry shifting towards profitable growth. Not only does this drive more rational behavior, but it reinforces our conviction that our strategy was the correct one. So profitability is where we derive our strength. It informs all our decisions from keeping expenses flat but upgrading talent to underwriting an acquisition. So we will never let up on identifying ways to improve how we service our customers and manage operational complexity every single day, which really brings us to complexity. So I think many of you appreciate that we have a lot going on in shift four. So over the last few years, we have really transformed the business from a small domestic player focused really just on restaurants to a commerce enabling platform uniquely equipped to serve not just restaurants, but hotels, stadiums, global e-commerce, nonprofits, theme parks, and now really all over the world. So we have great products and services, we have growing distribution, we have the firepower, the formula, the strategic partnerships, and really the will to endure and succeed for years into the future. So as a public company, our investors are entitled to a pretty extensive understanding on really how all this comes together, but There's honestly only so much of an education that we can reasonably capture between our earnings presentation, my letter, and really this call. So as such, we will be hosting a far more extensive investor event alongside our next earnings report. And with that, I will turn the call over to Taylor. Taylor?