Shift4 Payments, Inc. (FOUR) Q1 2022 Earnings Report, Transcript and Summary

Hello, everyone, and welcome to the Shift4 First Quarter 2022 Earnings Call. My name is Charlie and I will the coordinator for today's call. [Operator Instructions] I'll now hand over to your host, Thomas McCrohan, EVP of Strategy and Investor Relations to begin. Thomas, please go ahead.

Hi, good morning, everyone. And thank you, operator. I'd like to welcome everyone to Shift4's earnings conference call for the first quarter ended March 31, 2022. Before we begin, I'd like to remind everyone that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and -- all statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including: Statements regarding management's plans, strategy, goals and objectives; the expected impact of COVID-19 on our business and industry, including with respect to economic recovery, increases in vaccination rates, the reopening of the country and any volume recovery by us; gateway penetration and spend seen by our gateway merchants expectations regarding new customers; acquisitions and other transactions including Finaro and The Giving Block and their anticipated financial performance, including our financial outlook for the year ended December 31, 2022; and the anticipated impact of each of the Finaro and The Giving Block acquisitions on our adjusted EBITDA and end-to-end payment volume for the year ended December 31, 2023. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results. Performance or achievements expressed or implied by the forward-looking statements factors discussed in the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2021, and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the forward-looking statements made on this call. Any such forward-looking statements represent management's estimates as of the date of their of this call. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so if and if subsequent events cause our views to change. In addition, we may also reference certain non-GAAP measures on this call, including adjusted EBITDA, free cash flow and adjusted free cash flow, which are reconciled to the nearest GAAP measure in the company's earnings release, which can be found on our Investor Relations website at investors.shift4.com. And with that, let me turn the call over to our Chief Executive Officer, Jared Isaacman.

Thanks, Tom, and good morning, everyone. We got a lot to talk about today, so let's begin. We reported reasonably strong first quarter results this morning, including nearly 70% year-over-year and then volume growth, and a corresponding growth of 53% in our gross revenue less network fees, driven primarily by continued share gains in our high-growth core. As we discussed in early March, when reporting our 2021 year-end results, the Omicron variant began to impact our volumes in December of last year and really continued to do so into 2022. By the end of February of this year, Omicron appeared to be behind us, and we once again began hitting new record levels of weekly end-to-end volumes. I'm also pleased to report that this trend has continued as we set numerous records throughout the month of April. It's also worth reinforcing that Q1 volumes included very little volume from our new verticals or much in the way of international or corporate spending, though we do expect to see gradual contribution throughout 2022. Our adjusted EBITDA came in at $44.3 million, which was in line with our expectations, and Brad will review our quarterly financials in more detail in just a bit. Similar to prior quarters, I'd like to provide updates on each of the major components of our business, starting with our high-growth core. As a reminder, our high-growth core represents the payment opportunities we pursue primarily in complex restaurants, hospitality and specialty retailers. Shift4 has been growing at an accelerated rate in this arena by leveraging our 425 unique software integrations and other pain point solving technology to win share by migrating merchants off our gateway platform and on to our end-to-end service, as well as just net new wins in what is a very large addressable market. We believe we operate in the competitive landscape of few and we differentiate with our software integration and by possessing more links in the payments value chain to deliver a much lower effective cost of service to our customers. Said differently, when merchants in our high-growth core use Shift4's end-to-end solution, we're able to offer them more capabilities at a lower cost because we no longer need to depend on a multitude of other costly vendors to attempt to achieve a comparable solution. So during the first quarter, we began -- we again organically grew our end-to-end payment volume faster than any of our peers, including faster than Visa and Mastercard, as we continue to take share in restaurants, hotels and specialty retailers. One proof point would be the 40% 4-year volume CAGR. Another would be that we grew through an unprecedented pandemic when our end markets have been quite impacted, and some continue to be impacted even today. Additionally, our volume is 288% of pre-pandemic Q1 2019 levels, along with gross revenue less network fees at 224% and adjusted EBITDA at 215% over the same period. This quarter, we signed a number of new resort properties and high-end restaurants, including the soon-to-be opened WAKUDA Restaurant at the Venetian Resort in Las Vegas and the Silverado Resort and Spa in Napa Valley, California. Our customers are moving to Shift4 to solve problems. So to be clear, merchants are largely not switching to Shift4 to save basis points in pennies per transaction, even though they usually do benefit from an overall lower effective cost of service. What they require is commerce solutions that enable them to better engage with their customers and patrons, such as QR codes or online ordering, mobile and contactless payments, business intelligence and more. That is why despite our continued move-up market, our net spreads have remained relatively stable over a multiyear period. Our above-market volume growth remains the best leading indicator of our ability to deliver solutions that solve the needs of our merchants, which increasingly requires integrations with disparate and complex software required in the demanding commerce environments that we serve. We understand that the payment ecosystem can be confusing from the outside looking in, and we sometimes hear from investors that they're unsure where we fit in the competitive landscape. So I look at the market along 2 dimensions. From one axis, you have integrated and non-integrated payment processors; and along the other axis, you have scale player versus niche player. We are a high-growth, scaled, software-integrated payments provider gaining share from low-growth scaled non-integrated legacy acquirers. We're now approaching our 23rd year in business, having grown revenue every year throughout even the most challenging economic times. We have an excellent track record in finding verticals where our technology or expertise affords us a right to win, and then building on a value proposition that is both unique and differentiated. Our gateway with 425 software integrations is an example of a differentiated offering that affords us the right to win throughout our high-growth core. So on that note, we acquired our first gateway in 2017. Our intention was always to offer our end-to-end payment processing capabilities to those merchants, and we've been very successful executing against that strategy. At the same time, we have mentioned to many of you over the last few years, it was never our plan to offer extensive gateway-only services indefinitely. In fact, over the last few years, very few new customers even elect to have that service when our end-to-end offering is clearly so compelling. As we mentioned just a few months ago, you should expect to see an acceleration of our gateway to end-to-end migration in the months and years ahead. Our gateway platform is the IP. It's the technology that enables the commerce experience including the software integrations, the point-to-point encryption, the tokenization and ultimately, the analytics and reporting. Despite that immensely valuable capability in a gateway-only environment, the lion's share of the economics are captured by the legacy merchant acquirer. Considering there are virtually no modern fintechs that embrace a gateway-only strategy, we believe we owe it to our shareholders to capture as much of the unit economics for all payment transactions made possible by our technology and through the software integrations we alone support. So this has been a topic on our minds from the day we acquired the gateways and something we believe is on the minds of our investors, considering the enormous and easily quantifiable opportunity that it represents. So first, before we get into the specifics of our initiatives, it's probably helpful to give an example on just how embedded our gateway-only services across a large portion of the hotels, restaurants and specialty retailers across this country. For a hotel that is a gateway-only customer, Shift4 captures the online reservation and front desk checking. Our standard technology encrypts the customers' payment credentials to a PCI-validated standard and tokenizes them, and then provides those tokens to a hotel operator to capture a holistic view of their customers' entire stay and adjust authorizations throughout the guest journey as they visit the lobby bar, the restaurant, the spa, the golf course and so forth. At checkout, we use the same token to submit a single card transaction. In this scenario, despite virtually the entire commerce experience being facilitated by Shift4 technology, the majority of the transaction economics accrue to legacy third-party acquirers, providing little functions that we could otherwise easily do ourselves. We view this imbalance as something that needs to be addressed and corrected at a faster pace. Now of course, this has been our strategy for years to convert what is a large population of gateway-only customers to our end-to-end service, where we capture the entirety of the payment economics and provide a lot of value to our customers through additional technology products and services along the way. But to be clear, we are in an enviable position that we can implement specific tactics to encourage gateway-only merchants to take action and further accelerate the migration of those gateway-only merchants to our superior end-to-end offering. We believe there is an attractive risk reward to implement a new approach that will further accelerate these conversions. So how will we do this? So through a combination of changes, including pricing actions and operational changes that encourage gaming to offer the same attractive incentives that have already proven to be very successful. So with no sign of our historic gateway to end-to-end strategy slowing, why make this change now? There is an important operational component to the strategy. By eliminating third-party connections, we free up technology and operational resources to focus on other important growth initiatives. We have almost 2,000 employees now and a large portion of them spend time maintaining connections that are dated, served to benefit our competition and do not help us deliver on our global commerce vision or help us win the next signature merchant relationship. By taking out unnecessary parts and repurposing internal resources as part of our Boldly Forward Shift4 Way initiative to eliminate unnecessary processes, components that are costly and might eventually fail and to optimize the excellent talent we currently employ. And I'd be remiss if I didn't give some credit to SpaceX, an organization I'm fortunate to observe closely and how well they have pioneered and embrace these philosophies. So we will always remain a customer-first organization. We cannot force the gateway-only customer to consolidate their end-to-end processing with Shift4, however, at the same time, we believe implementing this new approach will result in conversations that are in our mutual interest of Shift4 and our gateway only customer. And we want our gateway-only merchants to consider the value we're providing and how much better it gets when taking advantage of our end-to-end offering and incentives. This is always a good conversation for us both to have, and we expect the results will begin to become quite apparent in the second half of this year. So while we're still talking about our high-growth core, I'd like to update you on the progress of our next-generation POS product that will serve the restaurant market. As we discussed before, we're getting close to fully launching our new cloud-based restaurant POS platform called SkyTab POS. We're already a major player in the restaurant POS arena, having grown payment volume at accelerated levels for well over a decade, and this new offering will ensure we will continue to find success as new and existing restaurant customers seek out next-generation solutions. We currently have several thousand restaurants operating in beta on the SkyTab POS solution, which will move out of beta shortly. Total operating -- total merchants operating in the SkyTab POS platform have increased 158% in March versus the same period a year ago. We are positioning SkyTab as the next-generation cloud-based POS platform servicing the mid to high-end restaurant customer. It is based on Android technology stack built from the ground up at Shift4 and equipped with very modern and purpose-built mobile solution, which is 0also comes with some pretty space-aged hardware. We already have 125,000 restaurants to pursue that are already customers operating across the 4 software brands we already own. SkyTab POS, of course, will be the migration path for existing -- our existing base of restaurants who are seeking out new capabilities to better serve their patrons. Not to mention our distribution channels will use SkyTab POS to continue to take share and grow across the vertical just as we've done for well over a decade. We also see an opportunity for SkyTab POS in sporting arenas, theme parks and entertainment venues. Combined with our mobile technology from VenueNext, we have a differentiated right to win in stadiums as venue operators continue to view us as the category-leading solution that delivers a unified commerce experience for their fans. As mentioned previously, SkyTab POS has already been installed in several arenas. Lastly, the fact that we have in excess of 3,000 restaurant clients that signed up for SkyTab POS during the beta is clear proof statement that our offering has already been validated by the market. To summarize what I've just covered in our high-growth core, we're excited about the combination of our accelerated gateway-only conversion plan, our new SkyTab POS offering and our unique integration with 425 mission-critical software suites, which leads us to believe our high-growth core will remain the primary contributor to our growth over the next several years. In fact, it's worth mentioning that the above high-growth core initiatives could have quite a meaningful impact as early as the upcoming second quarter. Moving into our new markets and verticals, we continue to maintain momentum within stadiums and venues. During the first quarter, we signed a number of new major lease stadiums, including Philadelphia's Wells Fargo Center, where we'll provide ticketing and payments for all the events at this venue, including the Philadelphia Flyers and 76ers. We also entered into an agreement to power payments for all the food and beverage concessions and retail purchases at Oracle Park, home of the San Francisco Giants, major league baseball team and the Food and Beverage and Concessions, at Lone Depot Parks, home of the Miami Marlins. In car and horse racing, we will power point-of-sale in multi-based solutions for 4 of the Speedway Motorsports racing venues across the United States. And we'll also power payments in New Jersey's Meadowland Racing and Entertainment venues, been very busy. We're also excited to share that the Ohio State University has selected our VenueNext software and payment services to power all their sports and entertainment transactions, including the fourth largest college football field in the country, Go Buckeyes. We also signed an agreement to process all food and beverage transactions for San Diego State's new Snapdragon Stadium scheduled to open later this year. As mentioned before, we believe our VenueNext mobile commerce technology is the category leader in sports and entertainment venues. Our software is installed well over 100 stadiums and our new business pipeline in the space remains very strong. In gaming, we're adding new gaming licenses and scaling our volume with BetMGM. Our daily gaming volume process through BetMGM increased 4x since we began processing in February of this year, but it's still around 1% of the total volume we anticipate processing in the year ahead as new territories are added. Similarly, in non-profit, we began processing for St. Jude back in January this year, but also have only processed about 1% of the volume we expect to capture over the next several quarters as we complete key software integrations to serve the non-profit vertical. I mentioned it's not in the light of disappointment at all, but to highlight how strong we performed this past quarter despite only just beginning to make traction in our new verticals. In airlines, we remain on track to begin processing volume in June with Allegiant Airlines and for SpaceX Starlink, testing is complete, we'll begin processing U.S. volume in Q2, with U.S. volume ramping up as the domestic subscriber base grows. It's worth noting that SpaceX is on a pretty eye-watering pace of Starlink satellite launches. They aim to ramp up to a weekly launch cadence and grow their subscriber base domestically and across the world. Moving on to our 2 recently announced acquisitions. The Giving Block acquisition is an example of how we identify a pain point in a specific industry, in this case the desire by non-profits to accept cryptocurrency donations, and then bundling and cross-selling with our end-to-end payment solutions to pursue what we believe is a $450 billion payment opportunity. For those of you on the call that are unfamiliar with The Giving Block, they operate a donation marketplace that connects non-profit organizations with crypto donors, and we acquired the company rather recently. Since we closed in late February, crypto donation volume is up 4.7x versus a year ago. The number of non-profit customers on the platform is up 7.3x, and total revenue is up 6.5x. We've also signed several Giving Block customers to our end-to-end platform, which was part of the $45 billion cross-sell opportunity of existing Giving Block customers that we highlighted as part of the acquisition. We are in active conversations with many others. While on the subject of The Giving Block, I'd like to personally thank those of you that participated in our Caring with Crypto fundraising campaign. We launched this fundraiser in mid-March to raise awareness within the crypto community, and I agreed to personally match dollar for dollar for every crypto donation made on The Giving Block marketplace platform. Since launching the campaign, we have raised more than $15 million for charities and important causes, such as the humanitarian relief efforts in Ukraine. We are increasing the network effects of our donation marketplace by connecting more members of the crypto community with more non-profits and vice versa. The fundraising campaign is still underway, and I encourage all of you to check thegivingblock.com website for more information. Last, I'd like to give an update on the Finaro acquisition. As some of you may recall from our last report, we announced the acquisition of a European cross-border e-commerce platform with processing capabilities and licenses in Europe and parts of APAC. Given our structure the the transaction encourages both sides to pursue commercial opportunities and begin integration efforts as early as possible. This means integrating the Shift4 platform and products, such as our hotel software integrations, our VenueNext Stadium software, our SkyTab POS restaurant software, our Lighthouse business intelligence product and preparing for important customers like Starlink, while we are waiting on the regulatory approvals. I'm pleased to share -- so we recently completed our first cross-border test transactions, and Finaro is just the first step as we move boldly forward with our global expansion endeavors. So we are not sitting still. We retain significant firepower with just over $1 billion of cash, a low pro forma leverage ratio and a ton of conviction around our strategic plan. Despite our clear enthusiasm, we are leaving our 2022 guidance unchanged. We believe that the macro environment, including inflation and varying consumer sentiment warrants some caution as we look out across the full year. That stated, we remain optimistic across the various initiatives I mentioned previously and may elect to revisit guidance as the year progresses. And with that, let me turn the call over to our President and Chief Strategy Officer, Taylor Lauber.

Thanks, Jared, and good morning, everyone. I will focus my prepared remarks on how we see our volumes trending for the balance of the year, an update on our acquisitions and then some additional color on major strategic initiatives. Our previously provided volume guidance for this year assumes a modest recovery in international and business travel, absent any reinstatement of restrictions resulting from newer COVID variants currently impacting other regions of the world. Not included in our guidance is a meaningful contribution from the new verticals Jared mentioned or M&A. Despite a tough January and early February with Omicron, March volumes were a record for the company, which was further exceeded in April. Of note, our hotel volume grew meaningfully month-over-month. This is a cohort we have yet to experience a normal contribution from, and we've added over 5,000 hotels since the pandemic began roughly 2 years ago. Applying typical seasonality trends to our year-to-date performance, you can be quite optimistic about the remainder of '22. What remains challenging to model is the pace of recovery in light of higher inflation and rising interest rates and how all this will impact consumer spending. This is part of what informed our decision to leave our full year guidance unchanged at this point despite the weekly records we continue to set. Turning to acquisitions. We closed on the acquisition of The Giving Block on February 28 and are tracking for a fourth quarter close of Finaro. We are making significant progress with identifying cross-sell opportunities within The Giving Block space of customers and have already begun outreach to prospective merchants. We are adding credit card acceptance to The Giving Block's online widget, which we anticipate will be operational by the end of the second quarter. From a KPI standpoint, the donation volume for the month of March is included in our reported end-to-end volume because we derive a spread on that. However, the impact is quite negligible, less than 10 basis points. For context, this business accepts the majority of donations during the fourth quarter and in December more specifically. Our Caring with Crypto campaign was quite successful in adding new nonprofits to the platform and should position us well for this year's giving season. For Finaro, we are working diligently on our pre-closing objectives, which include partnering to deliver a global cross-border solution for customers. We have already achieved a notable milestone of running successful test transactions in both the U.S. and Europe. There's much more work to be done, but these important first steps further validate our acquisition thesis and help build upon our strong conviction for international expansion. The Shift4 and Finaro teams are jointly energized. We are excited about welcoming the Finaro employees to Shift4 later this year. As a reminder, we're not including any contribution from the acquisitions in our guidance, but do anticipate positive contribution in '23. For Finaro, we anticipate $15 billion of end-to-end volume and $30 million of adjusted EBITDA contribution in 2023, and for The Giving Block we anticipate $5 million of adjusted EBITDA contribution in 2023. Turning to our gateway conversion strategy, I want to provide some numbers that are anchoring our thinking and helps you model the potential revenue pool we're going after. In '21, gateway-only revenue totaled approximately $70 million. The gross profit lift from converting this gateway-only revenue stream to end-to-end is a gross profit lift of roughly 4 to 5 times, implying a $280 million to $350 million incremental gross revenue opportunity if we converted 100% of the remaining gateway-only customers. To put that into context, we generated $278 million of gross profit in 2021 for the entire company. While this conversion strategy has been a meaningful contributor to our growth already, we're making a deliberate pivot to pursue the strategy more aggressively. We believe the impact of this strategy will accelerate conversions but also make us a more efficient company. Lastly, we remain well positioned for further M&A and continue to pursue opportunities to enhance our global offering. This includes PSPs with unique front-end capabilities and vertical specialization, as well as scaled gateway platforms where our current strategy has proven to be quite successful. And with that, I'll turn it over to our CFO, Brad Herring.

Thanks, Taylor. So now I'll review the financial performance for the quarter. Q1 gross revenues were $402 million, up 68% from the same quarter last year. Gross revenue less network fees were at $149 million, an increase of 53% over last year. The components of our revenue growth breakdown as follows: a 70% year-over-year increase in net processing revenues, driven by continued merchant adoption of our end-to-end solution; a 30% increase in our SaaS and other revenue stream, driven by expansion into new verticals and further penetration into our core restaurant and hospitality verticals; and finally, a 16% increase in our gateway revenue stream, driven largely by modest recovery in the hospitality sector. Spreads came in for the quarter at 76 basis points, which is 1 basis point higher than what we reported for the same period last year. It's worth noting there was a pretty significant shift in the mix between debit and credit when compared to Q1 of last year. It was primarily related to the second round of government stimulus checks that were issued in March of 2021. That mix shift resulted in lower-than-normal spreads for last year's first quarter. Using consistent debit-credit mix between last year's Q1 and this year's Q1, spreads were down approximately 4 basis points. This is in line with previous guidance on an overall spread decline due to moving up market into larger volume merchants with lower spreads. This move-up market is evident by 2 factors: one, hotels, which produced an average of 2.5x as much volume as the average restaurant, now make up 21% of our end-to-end volume compared to 12% in the same quarter last year; and two, the size of our average restaurant customer has increased by over 25% compared to last year. For the quarter, we reported an adjusted EBITDA of $44.3 million, which is up 100% over the same quarter last year. Excluding the abnormal merchant failure we experienced in Q1 of last year, which resulted in a credit loss of $5.2 million, adjusted EBITDA was up 62% over last year. The resulting adjusted EBITDA margin for the quarter was 30%. Excluding that previously mentioned credit loss from last year, this represents approximately 170 basis points of margin expansion over the same period last year. As we've talked about previously, our high-growth core continues to expand margins commensurate with our increased scale. We believe that margin expansion with prudent investments in our recently announced new verticals that, once scaled, we believe will achieve the same margin profile similar to our core business. With respect to capital transactions within the quarter between January 1 and March 31, we repurchased approximately 302,000 shares at an average price of $56.78 per share. Our buyback program continued into April. And by the end of April, we have cumulatively purchased 1.8 million shares at an average price of $55.08 per share. Repurchased shares are reflected as treasury stock on our balance sheet. Adjusted free cash flow for the quarter was $13.7 million, which represents $22.4 million of improvement over the same period last year. Adjusted free cash flow as well as free cash flow conversion will both continue to increase as the year progresses due to the cash flow pass-through of our incremental growth and the continued scale benefits we will achieve on our CapEx. A full reconciliation of adjusted free cash flow is available in the appendix of our earnings materials. With respect to our guidance, as you've heard, we are reiterating the figures we provided in our previous earnings call. While we're extremely confident in our continued ability to profitably grow our business, there are a number of uncertainties that could influence their trajectory over the next several months, most notably would be macroeconomic forces that could influence consumer behavior as the year progresses; and the continued pressure on global travel and commerce, driven by the continued volatility in Eastern Europe. So with that, I will turn it back to Jared for a few closing comments before we open it up to questions.

thanks, Brad. Yes, I appreciate everyone joining us earlier joining us this morning, and I think we can just roll right into Q&A at this point.

[Operator Instructions] Our first question comes from Dan Perlin of RBC Capital Markets.

Great. Jared, you outlined a little bit the concept of kind of getting these conversions to be quicker for end-to-end from gateway. Can you just give some sort of like real-life example or hypothetical example maybe without giving kind of competitive, I guess, issues out there, about what really is taking place like practically? I know you talked about pricing and some of the carrots that you put out there from incentives. But -- any real-world examples about how you would structure that would be very helpful.

Ladies and gentlemen, unfortunately, we've lost connection with our speakers. Please bear with as we reconnect them. We now have the speakers back with us.

Sorry, can you repeat the question?

I'm sorry. Yes, sure. So Jared, I was just saying you gave some details around the conversion, like the ability to accelerate conversion from gateway end-to-end. I was hoping maybe you could provide a little more detail about, kind of real-world structures of what that might look like. You called out pricing. And then obviously, there's some carrots that you guys have historically done with incentives. But I think it's hard for outsiders looking in and investors to really understand practically what you're doing. And then I'm not asking you to give kind of the competitive strategy here, but maybe some real-world examples even on a high level would be super helpful.

Yes, sure. Happy to do it. So I think it's important to point out when you're operating as a gateway, which again, I think it's pretty clear, it's a legacy model. There aren't many new fintechs, again, starting up with the idea of routing transactions to their various competitors. Fully integrated end-to-end offerings is where the market is going. But we did inherit what could be dozens of pipes to all our various competitors that we're essentially upkeeping. And a very large portion of our resources are being spent maintaining connectivity to our various competitors. It's actually quite resource intense. Every time a new security or EMV protocol comes out, or a new device needs to be certified, we have to do it for ourselves and everybody else. And as a result, a very large portion of our workforce is spent kind of maintaining the path and enabling our competition instead of winning our next great customers. So this strategy of moving customers off of those connections to our end-to-end platform has been working incredibly well for a long time now. What we're saying is there's an awful lot of volume there, and we need to pull it forward so we can, kind of, free up our resources to focus on winning the next major merchants and building out our international strategy. So how do you do it? Well, for sure, we can collect the toll. We are providing all the technology that enables that commerce experience. We should be better rewarded for it. So tolls are definitely 1 component of the strategy. Another is we will outright sunset connections. So for a very specific example and kind of to the heart of your question, we have a connection to one of the old legacy acquirers, and one of their very first connections that they did like 25 years ago. And there's probably less than 150 merchants on it. So there's kind of no choice there. We're just going to give notice that at the end of a period of time, we're just going to sunset the connection. We'll provide a lot of warning, and we'll probably do some brownouts to make sure everybody -- we have their attention of this relatively small population of customers. And then we'll -- then we will basically put them to the test of do you want to use one of maybe the other to payment platforms that are out there that can serve your vertical? Or do you want to take the easy button and just move to our end-to-end platform because this connection has to go. In our minds, we see this very similar, like forcing Microsoft to support Windows 95 indefinitely. You can't make progress as an organization and think about the new technology, the new innovations that are required if you're continuing to maintain the software and the technology you built 25 years ago. And we have a lot of connections to go through like that. So what we're just saying is we're kind of taking a strategy that was very carrot first, and that's what we've been doing for the last 5 years, and we're introducing some forcing functions to it to kind of pull forward that volume onto our end-to-end platform and kind of liberate some of our resources to work on the next major projects for us.

Okay. No, that's really, really helpful. Just a quick follow-up, if I could, on sports and the entertainment vertical. You highlighted a lot of new logos on the slides. And the question really is, you called out some where you're processing ticketing, food, beverage, retail, like parking. Others you called out just utilizing VenueNext POS. And so the question is, when we see these kinds of announcements, how do we draw a distinction between the amount of end-to-end volume that you're really getting? Because I would suspect there's a pretty material difference between how you're connecting. And then is it your anticipation that over time, you're able to kind of pull all of those together under the same POS and then obviously, your end-to-end processing.

Yes. Dan, it's a really good question. So first, just to be clear, we don't announce anything that we're not capturing both the software and payments on. So every one of these kind of signature wins we're announcing, there is payment volume coming along with it. Now how much, it's a great question. Because if you're getting ticketing, you're getting a lot if you're getting point-of-sale, so mobile, in-seat ordering concessions, you're obviously not getting quite as much. Now there's timing elements to this. So these sports teams could sign 5-year agreements with a certain ticketing vendor that we're not integrated into, in which case, for sure, we're happy to kind of get our foot in the door, get our technology powering a large portion of that venue. And then when those contracts are up on ticketing, we're in an optimal position to try and capture it. Now there are other venues that we're able to get it all right out of the gate. And I think this is pretty exciting because last year, when we were having kind of these conversations or really just introducing you into VenueNext, ticketing was the upside. There is a lot of volume there. There's very good spreads. But we had to get integrations into like SeatGeek and Ticketmaster, which we didn't possess at this time last year and really were unable to pursue that volume. Now we're announcing ticketing wins, so it's a huge step in the right direction. In terms of like the overall contribution of sports entertainment, venues and ticketing, it's still incredibly small, like a super small portion of our business today. Very, very like minute portion of Q1. But we do expect this to become quite material, probably not this year until we get a lot more of those, the Ohio State University type wins under our belt. But I think starting in probably 2023, we might be able to call out a little bit more how much our sports and entertainment volume and ticketing is really contributing to our growth.

SP1 Our next question comes from Darrin Peller.

When we look at the magnitude of the wins you guys have had and the record volume weeks you were having, and you extrapolate on that, plus the obvious gateway conversion potential, you would think that end-to-end volume is trending above what you would even have expected. And such that just a little bit surprised of the guidance being maintained. And now I understand conservatism. I think investors, it would be helpful to just get a sense of what assumptions really were built into that, what kind of conservatism from a macro standpoint or any other variables, that could be helpful.

Darrin, this is Taylor. I'll address that. Obviously, the question that's going to be on people's minds in this kind of economic cycle. Bring you through our thinking, let's start with the data we're experiencing inside the business, and then let's kind of talk about the world around us and where we think conservatism is prudent. Taking our payment volume from January through April, and annualizing that on the same trajectory we experienced last year, we would be ahead of our guidance for the full year. That is what we've experienced year-to-date, and that's with Omicron, that's encouraging. The new wins and the acceleration of the gateway strategy are obviously further encouraging. It just felt like in the current environment, with the macro picture is uncertain as it was, it wouldn't be prudent to change that full year guidance this early in the year. So that -- we debated it quite a bit and landed where we did based on those -- that framing. Jared, I don't know if you want to layer anything else into that.

Yes. I think I would. I mean we've been -- we're approaching our second year as a public company. We thought we had to overcome COVID-19 and then we ran into Delta in the fourth quarter of 2020. We thought we overcame it again, and then we ran into Omicron. I mean there are things that are just unpredictable now that are out there where it just seems like, one, I don't think we're going to be rewarded properly for it either. And just -- there is uncertainty in the world. That said, like we're being as transparent as we can about what we're seeing. We're showing you where our records are in April. We're delivering a lot of wins, and we're telling you about really 2 organic initiatives that are underway right now that we think will have -- I think, as I described in my letters, like a pretty impactful -- quite impactful in 2022 and may cause us to kind of revisit what we've already shared. So I don't think anyone should read into it other than, look, it's been an incredibly chaotic time to be a public company with our end markets the way they are, and we just want to play it safe.

Yes. I think that makes a lot of sense in this environment. As long as I think investors just want to understand if it really was just conservatism, but probably better off. All right. That's really helpful. And just one quick follow-up on free cash conversion, which we were obviously happy to see the inflection in the quarter to a nice positive free cash conversion number in the mid-20% range. Can you just touch on that a little further, though, maybe Brad, just talking about the trajectory of that? I think you had talked about 30% or 35% potential conversion for the year as the year progresses.

Darrin, I appreciate the question. You're exactly right. I mean, it's one of the reasons we've tried to be more front-footed on talking about free cash flow based on some of the feedback we've gotten. And Q1 is a really good quarter for us. I think we'll post -- it looks like a 30% conversion rate when you do the math on it. Our guide for the full year was 35% to 40%. One thing to keep in mind for the quarter, there will be some quarterly interest payments that will hit in Q2 and Q4. So there's a little bit of bouncing around across the quarters, but we still feel good about the 35% to 40% guide for the year. And it's really driven by 2 things, right? As we continue to grow, we have really good pass-through rates at the cash level on that incremental growth. We've talked about that over time. The other piece that I think may have been kind of underappreciated was the value of scale benefits we get out of our CapEx. What you'll see even in our Q1 results, as much growth as we've been able to put on the table for the last couple of quarters, our CapEx numbers haven't grown commensurate with those revenue streams or even the volume streams. And that's what we've talked about, we've been able to leverage some of the CapEx scaling. As we go up market, we've talked about equipment. Remember, we don't necessarily deploy as expensive of equipment into these new verticals. So you're not going to see the growth in those CapEx lines commensurate with volume or revenue. So those 2 items are going to continue to expand free cash flow just from a quantum number and as well from a conversion number.

Our next question comes from David Togut of Evercore.

Could you unpack your blended spread, which improved 2 basis points sequentially to 76 basis points? That was ahead of our expectations. It appears you picked up some yield in restaurants and your all other categories, while lodging was flat to down, recognizing that lodging is now 21% of end-to-end volume. And what is the impact from that progressing going forward?

Yes, David, a good question. There's a lot of mix that goes on. Typically, Q1 is going to have a little bit lower spread. One of the things I mentioned in the script that we want to make sure people are kind of aware of is this credit debit mix. What we've seen in the data is finally by the time we got to Q4 of last year and Q1 of this year, that number has largely stabilized. Just to put it in context, if you go look at Q1 of last year, debit was 25% of our volume. Q1 of this year, it's 18%. So that's a pretty big spread lift you get year-over-year, which is one of the points I was trying to articulate in my remarks earlier. When you look at the spreads within the verticals, we have seen very solid spread behavior. We've seen within restaurants, within hotels, spreads have maintained. A lot of that has to do with our ability to continue to add feature functionality to the -- to our end-to-end solution, which we've always talked about will monetize through 1 or 2 basis points of spread at a time. So we expect the spreads within the verticals to maintain themselves, but you will start to see, I think going forward, now you got the spread mix as we move larger up market is going to be more evident because it's not going to be masked as much by that debit credit mix that we think is largely behind us.

Understood. Thanks for that, Brad. Just a quick follow-up. I think, Jared, you mentioned you had under 1% of total annualized volume in the quarter from new verticals, but these are growing very rapidly. Are there any timing issues we should consider in terms of seeing verticals contribute more materially? And what's built into the guidance for this year from new verticals?

Yes. Really, really good questions there, David. I think, again, just pointing out, as you move into new verticals as an integrated payments company, you need to integrate into software. I mean, that's what makes us special. When you possess software integrations, I mean, it is very, very hard for other payment companies to kind of encroach in your territory, and we obviously have a lot of them in our high-growth core. As we expand, whether it's in gaming, airlines, in the travel management systems, e-commerce, some of our signature customers that like well, even nonprofit, they have numerous systems, like it takes time to accumulate those software integrations. But they're pretty rare and precious when you get them. So like nothing is unexpected at this point at all. I was actually kind of just highlighting that 1% just to point out, like, hey, we did pretty good with our restaurants and hotels in the quarter where Omicron really pulled back some consumer spending. Imagine what it's going to look like when some of these new verticals are firing as we anticipate them to do so. So yes, I mean, we're completing software integrations as we go. I think we called out St. Jude. We've been processing since January, but that means that was one integration that was live there. We've added a bunch more. We'll continue to add throughout the year. The same goes for BetMGM and some of these others. So I'd say it's like very, very little baked into our current full year volume guidance on what these new verticals will contribute, but we obviously have pretty high expectations so that when they all start coming online.

And David, just to put up your point on that. This is Taylor. It's less than 5% of our full year guidance. So again, conservatism on that front, we believe. And to Jared's point, highlighting the value of that high-growth core and the progress yet to be made in these verticals was kind of the point of the statement.

Understood. Look forward to seeing some of these new verticals ramp.

Our next question comes from Chris Donat of Piper Sandler.

Jared, I think in your prepared remarks, you said that some end markets are still impacted. Can you give us a little color there? And then kind of ballpark where we are in the recovery with lodging and restaurants? Or are we fully recovered? Partially recovered? Just trying to get a sense on maybe what's not yet working, and understanding there's a lot of macro crosscurrents here going on also.

Yes. Look, I think it's a good question. I mean when we break down our portfolio based on various regions of the country by vertical, I mean there are certainly some cities where aren't going out to lunch for business meetings the way they did before. There are certainly some hotels that cater very much towards business travel that aren't back to where they were. There are some hotels right now that are -- if we looked at it, kind of on a static pool to 2019, they're up in volume, but they're still not at full capacity. And it's -- whether that's labor induced or otherwise in terms of their ability to fully support their customers. I think in general, A lot of the customers that we support have recovered quite well. But I wouldn't say it was at 100%. I don't know, Taylor, if you want to add.

Just one stat I want to reiterate. Jared mentioned this, it's in our materials as well. But if you look at our average merchant from 2019, they're up about 21% in total since then. If you look at our business, we're up nearly 300%. So I think those 2 stats are really important to ground. The verticals are recovering, and yet the business growth has really been the predominant driver of our overall volume growth. The one thing that I would call out, and I think it's really important is we had very, very little hotel exposure prior to the pandemic. and we've added over 5,000 hotels through the pandemic. So this is a little bit of uncharted territory for us, knowing what the full expected volume of those hotels should be is something we struggle to forecast. Although we know in many cases, when we look at the growth, when we look at things like spring break and compare that year-over-year, that there's still room to grow inside of that population specifically.

Okay, got it. And then just with the -- with the transitioning some of the gateway volumes and more than gateway customers, not so much the volume. Do you have any issues with having the capacity to do that transition? Or is that -- it's already baked in the case as far as what you're doing. So there's not much incremental expense from a Shift4 perspective that needs to be done there. Just help us understand if there are some challenges with those transitions.

No. I mean, if anything, it kind of frees up resource capacity. So -- I mean we're processing these transactions today. I mean we're doing all of the heavy lifting for it. We're just then outputting the transaction volume to a third-party acquirer instead of just processing it entirely ourselves. So if we -- not to say that if we didn't pull like -- we pull $100 billion of gateway volume over to end to end over the next year, there is a certain amount of headcount required in customer service and technical support for fielding some questions that we aren't doing today, for example. But like largely, there's not a lot of incremental costs associated with it. I think what the idea here is, though, that there is a very large portion of our workforce today that is maintaining the past and not helping us build the kind of the future we want to conduct business in. So I think the idea is as we kind of progress with the strategy and we start closing down some of this old piping that we don't need any more, not only does it have like a pretty material impact on the performance of the company, and we're hoping to start to see that in another quarter or so, but it also frees up resources to accelerate what we're trying to achieve everywhere else in the world, which is our strategy right now.

Our next question comes from Jason Kupferberg of Bank of America.

This is [Cassie] on for Jason. I just wanted to ask a little bit about margins. So I know that the margin guidance implies a significant step up for the rest of the year. Can you just help us think about the quarterly cadence of it? And are you still planning to exit the year maybe in the mid to upper 30% range?

This is Brad, I'll take that. So one of the things that we've certainly talked about is how we're balancing top line revenue growth with margin expansion. I think Q1 is a really a good example of being able to put top line growth and margin expansion. I think you're going to continue to see that. There is a cadence across the quarters. Q1 will typically be one of our lower margin quarters, that will certainly expand into Q2 and Q3. And in Q4, you will see a small bit of retraction and all that's just based on seasonality of how the business evolves throughout the course of the year. But we still stand by, our year-over-year margin expansion of 300 basis points. And I think that, the context of that is really kind of threefold. It's one that balance between top-line revenue growth, two margin expansion, and three continued free cash flow production and free cash flow conversion. So, we still feel very confident so that balance is the right balance and puts three of those things at play.

Okay, got it. And can you just provide any more color on maybe like Q2 expectations for top line metrics, like volumes or revenues? I mean, obviously, the year-over-year comps get significantly tougher. But just anything else you can share on that front for your expectations. A –Brad Herring: Yes. I don’t think we’ve talked too much about Q2 expectations in general. Well, we have put out – we did put out some numbers on April, to give some context for that. But I don’t think we’re providing necessarily Q2 numbers specifically.

Our next question comes from Andrew Jeffrey of Truist Securities.

Jared, I'd like to ask about the evolution of the gateway strategy and the way you described it is changing. There's two things: One, does it mean that the company will now pursue sort of end-to-end relationships sort of skipping the gateway step? And what does that imply, if that's right, what does that imply for sales cycles perhaps? And then is there a risk that with some of these customers as you sort of try to nudge them off the gateway to end-to-end, that they choose alternative providers? How do you frame that up?

Yes. So let me just kind of start with the basic there, with respect to our high growth core, which is where all our growth is coming from -- from really, it comes from 1 of 2 avenues. You're just winning a net new customer that requires the software integrations that we already possess. And every quarter, there's a bunch of hotels, restaurants, specialty retailers that fall in that category. That's like 50% of our production, and they come right into our end-to-end platform. And then the other 50% is from this population of like, call it, approximately $180-or-so billion of volume that's already on our gateway, that's already leveraging those integrations, and we're doing all the heavy work, but we're outputting that volume to a third-party acquirer. And every month that goes by, we're kind of showering them with carrots and incentives, to incentivize them to move over from the gateway to our end-to-end platform. And that's 50% of our production every month. That's a very easy thing to do. You're changing a merchant number in the system and kind of turning off the faucet to a Heartland or Global or Worldpay and you're keeping it yourself, right? What I'm saying is that for 5 years now, it's been pretty much an entirely carat-first approach. And what we're going to do is kind of like you said, nudge them a little bit more, where we're either going to put tolls on, or tolls or just -- and also kind of simultaneously sunset some of the connections that are just too small to -- that are not really worth upkeeping anymore. Now this does put them to the test. Can you move to 1 of the other 2 gateway platforms? Yes, it's not very easy though. There's an awful lot we're doing when we're tokenizing and encrypting transactions and providing analytics that doesn't like transfer over very easily. They're going to wind up paying more in the process, and they're not going to really get a better commerce experience going for their customers. So what we're attacking here is the status quo that people have other things to worry about in a given day, and this isn't a high priority. So we're kind of bringing it to the top of their decision list, if you will. So I expect very, very little, as I mentioned in my kind of prepared remarks, like for sure, there is a risk-reward here. We think it's a very attractive one. We do absolutely think the end result is a large portion of that gateway business is coming forward faster. I do want to say, though, that this is not actually a new strategy. This was always the strategy. It's just the last gateway that we bought was in the fourth quarter of 2019 and within like 4 months of that acquisition, you had a worldwide pandemic. And leading with anything other than carrots during that time period did not seem appropriate. It's at a different point now. So again, it's not -- we're not rethinking our approach. We're just -- it's just a better time to execute on what we had already planned. And it has nothing to do with our current approach, not working. It's about making it work a lot faster.

Okay. That's really helpful color. And then just as a follow-up, on SkyTab POS, can you talk about the kind of monetization lift you think you can get? I think you mentioned 120,000 customers that it sounds like are back book conversion potential. What are the economics of converting them to this new point-of-sale system?

Yes. I mean it's kind of twofold, right? So similar to just talking about our gateway strategy, we have a product that's going to be able to win very effectively in just an addressable market. We have lots of great distribution channels. So you're going to win the same type of customer that's contributing the same kind of spreads and annual gross profit contribution like they look today in our restaurant book. But on top of that, you're also getting a SaaS lift, because the vast majority of the customers we are signing up today, and 85% of our existing book of restaurant customers do not pay any SaaS fees at all. We monetize entirely through payments. So you're going to get the same type of customer you had before, plus you're getting SaaS on top of it. And then we don't charge for access to our marketplace, which is like your third-party integrations to Grubhub, Uber Eats and DoorDash, [indiscernible] does charge that. We don't have a capital program. There's going to be a capital on a payroll program that are part of SkyTab POS. So you have a lot of additional monetization opportunities that you're not presently getting today. And then you have your existing base of customers where, again, 85% are not paying SaaS fees at all. They're all going to want to move to a next-generation POS product with new hardware, new capabilities. So you're going to get a SaaS lift from the existing base, but then you're also going to get it through operational efficiencies. Again, we -- like 2,000 employees, a large portion of them are supporting Windows-based POS systems that are more labor intense, if you will, more maintenance than a newer cloud-based product as well. So there's a lot of benefits that we're going to get kind of on the top and bottom of our P&L.

Our next question comes from Timothy Chiodo of Credit Suisse.

I wanted to revisit the bridge that you provided for end-to-end volumes for 2022. In that original bridge, you had a nice portion of about $3 billion or so related to the new markets. But also things seem to be going really well with stadiums and entertainment with a lot of the new wins that you announced today. Just wondering if there's any change that we should think about to that bridge or if all of this was fully contemplated in that $3 billion for new markets?

Tim, I'll address that. The bridge, again, I think we've been using the term provocative. It was designed to show you sort of a relatively easy way for us to get towards our full year guide. I think the $3 billion is a conservative figure. The only thing to keep in mind is that it's probably just the SME vertical has some seasonality and the nonprofit vertical has some seasonality. SME, towards kind of the last 3 quarters of the year and nonprofit specifically towards the last quarter of the year. The Giving Block, I called out the example, the vast majority of their donations happen in Q4, and then the majority of those happen in December specifically. So still early in the year. All these wins are encouraging. I would say the one area that's kind of outsized encouraging is the amount of ticketing wins, and I think we called that out last quarter. Q1 is relatively slow for SME in general, but the number of ticketing wins are quite encouraging because of the outsized volume they contribute.

Excellent. A quick follow-up. I don't know if you're willing to share this or not, but on the SkyTab POS, it seems like the growth in locations is really strong. Are you able to share what the absolute number is at, and fully appreciate that it's still really early days. .

We haven't disclosed the specific figure in our data this quarter, but it's over 3,000, which I think that would be around -- it's above where we listed last -- our Q4 call by several hundred merchants.

Our next question comes from Jamie Friedman of Susquehanna International Group.

Congratulations on the results here. I'll ask my 2 questions upfront. Taylor, in your prepared remarks, you talked a little bit about inflation. When we look at the, like from some of your hotel customers or some of your restaurant customers, it looks like tickets are up. So can you talk about how inflation in the take rate model might help or hinder? And then the second one is -- can you talk at least at a high level about gateway volume growth? I don't think you disclosed that. If you did, I'm embarrassed. I apologize, but if you didn't, at least at a high level, could you talk to that? So first on inflation and second on gateway.

Both good questions, thanks for asking them. Inflation helps to a point. And I would say that the restaurant vertical is an example of that, even at slightly lower than peak capacity restaurants have been able to deliver volume in excess in pre-pandemic levels. And that's largely price lift that they've exhibited inside of their business. I would say on RevPAR, it's a little bit of a different story, and it's less of an inflation and more of a pent-up demand and an inability to satiate that demand because of supply constraints at hotels. So 2 very different dynamics. One is that you've got above industry average revenues inside of restaurants because they kind of led the pricing increases even before inflation was talking. If you went out to dinner last summer, you probably looked once or twice the menu at prices. Hotel is a different story. They're charging more because there's a lot of demand. And quite frankly, over the past several months, they haven't been able to adequately address that demand. Now it does appear like labor challenges are softening, and so hotels are filling up. And again, this kind of goes back to services and guidance. I think the question is as these businesses are able to satiate 100% of the demand that they see, as they address their supply constraints more adequately, do prices come down or do prices stay where they are? And that's kind of the big macro level question we consistently ask ourselves. And it just leads to that cautionary level of conservatism. The other piece that we're always conscious of is that, yes, prices going up inherently supports our business model because we drive a spread on those prices when customers pay. But there is a tipping point at which people simply go out less and they spend less as a result of higher prices. So things like gas prices are something we focus on a lot and the potential impact they could have on restaurant verticals. I will say, if you look back historically, these verticals have performed really, really well. People cut back on a lot of other discretionary spending before they cut back on taking their family out to dinner once a month or once a week. So we're encouraged, but I think it's prudent to be cautious because there's some pretty unprecedented trends that we're seeing across the macro environment. With regard to gateway volume, we quote it from time to time just to give a sense that it's very sticky volume. It's largely the same as it was when we acquired the gateways, less what we've converted over. There's probably room for that gateway volume to grow slightly because hotels, we do believe, are still under a normalized run rate. And there's a lot of hotels inside of that gateway, roughly 40% of the hotels in the country are on those gateways. But we didn't omit it for any reason other than it's largely status quo from quarter-to-quarter. .

Our final question of today's call comes from Eugene Simone of Moffatt Nathanson.

I wanted to ask about international, we haven't talked about it as much on the call today. So great to hear about the work you've been doing with Finaro. I'm just curious, based on this work, what's your greatest -- relate a sense of kind of the time line to shift for having the full scale capabilities to do a global payment acceptance processing? And what are the pieces that as you --

I mean we were really pleased that we were able to share on this call that some of the first cross-border test transactions between the Shift4 platform hosted here in the U.S. and the Finaro platform has already taken place. So as we mentioned last quarter, the earnout structure of the transaction very much incentivizes is both parties to work towards connecting all the plumbing between our 2 worlds, which is great. Now what does that mean when this deal closes? And I would say like we'll be able to immediately kind of go to market with a North America plus European capability that, I'd say, is pretty unique in terms of the number of payment companies out there capable of delivering such a solution, especially with like e-commerce capabilities. But the work can't stop there. We do -- we are very fortunate to have this strategic agreement with a customer that will be delivering subscription services all over the world, not just in North America and Europe. So for as much energy as we're putting into kind of connecting the dots so we can hit the ground running for that big customer, but also for all the other integrations and products we serve, we're also putting a lot of energy towards the other parts of the world that we don't have covered yet. And some of those parts of the world, like when you think about Central and South America, Africa, APAC, I mean, these are going to be regions where there's going to be very high demand for broadband capabilities. So hopefully, that gives you -- if we're telling you that we feel like we're very confident we're able to absorb Finaro and hit the ground running with that, while still at the same time, looking at other international opportunities, it should give you a sense of our confidence on how that integration is going.

Got it. Very helpful. And then a quick follow-up, just on your distribution strategy and how it might be shifting overall. So you obviously historically relied very heavily on a partner network. It's worked very well for you guys. As you enter new verticals, are you growing your direct sales force? How is that progressing? And where is the impact of that on the P&L, how we might see it translate to kind of your expense structure in the P&L over the coming quarters or years?

Yes. So Jared here, I'll take the first half of that and then kick it over to Brad. It's interesting 2 years ago, at our virtual roadshow going up to the IPO. I mean, all we would have talked about is how important third-party distribution is and the operating leverage it gives us. And that's very true for the verticals at the time. Since the IPO, geez, we've entered sports and entertainment, e-commerce, non-profits, travel and leisure, gaming. All of our new verticals are being pursued via direct strategy. I mean it's not hard either. I mean we -- generally, it's pretty easy to find where all the sports stadiums are out there, and they're always willing to have a conversation. So I'd say that pretty much the entirety of kind of our new vertical expansion strategy has been around an in-house enterprise and direct sales team. And look, obviously, it cuts out a residual expense that is pretty -- that is a pretty meaningful expense for us on an annual basis as we move into these new verticals. And I'll kind of kick it over to Brad to share a bit more.

Eugene, so how that's going to manifest itself, so Jared kind of teed it up a little bit. So residuals are obviously going to be zero on this particular distribution channel. But you'll see a couple of pickups in some other spots. You'll see some other cost of sales pick up slightly because that's what we'll do our integration costs to bring on these new merchants. One of the calls earlier had mentioned some discussions around adding some expenses into our G&A line. So that's where the bodies you'll see as part of our in-house sales efforts you're going to put in the G&A line. And you'll also see a little bit of advertising and marketing pickup to support some of the go-to-market strategy. But at the end of the day, those ads are going to be certainly favorable to what's going to come out of the residuals. So you'll see residuals come down more than what you'll see the adds coming back in those lines I mentioned.

At this current stage, we have no further time for any questions. This concludes today's call. Thank you for joining, and you may disconnect your lines.

Thanks, everyone, for joining.