Greetings, and welcome to Shift4 Q1 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Tom McCrohan, Executive Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to Shift4's first quarter 2024 earnings conference call. With me on the call today are Jared Isaacman, Shift4's Chief Executive Officer; Taylor Lauber, our President and Chief Strategy Officer; and Nancy Disman, our Chief Financial Officer. This call is being webcast on the Investor Relations section of our website, which can be found at investors.shift4.com. Today's call is also being simulcast on X Spaces, formerly known as Twitter, which can be accessed through our corporate Twitter account @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 call -- let me turn the call over to Jared. Jared?

Thanks, Tom. So if you've already reviewed our earnings letter, then you already know this was a very busy quarter, and there's an awful lot for us to discuss today. So we wrapped up a strategic review. We continue to win some of the most coveted enterprise merchants. We added thousands of new SkyTab customers. We cross-sell ticketing into our numerous stadium wins, and we announced a synergy-rich and very attractively priced acquisition, alongside continuing our geographic expansion and delivering reasonably strong results and record free cash flow. So I think the only thing we probably could have done better is help analysts capture the right seasonal cadence of our business. We're obviously diversifying and growing very quickly. So to help with that, we have largely reaffirmed and positively revised our EBITDA and free cash flow guidance, and we broke it out on a quarterly basis for the balance of the year. So I just said a lot, and I'd like to break it down and expand on it point by point. So with respect to the strategic review, I would encourage you to read my shareholder letter if you'd like my complete personal take on the matter. But the bottom line is there was a lot of strategic interest and multiple formal offers materially higher than our present trading price. It should also be obvious that a go-private option is usually available, and others have clearly shown that to be the case. However, the go-private option presents clear complexities alongside competing strategic offers. And I, of course, always want my interest to be completely aligned with the rest of my fellow shareholders. So now as the strategic review process progressed, we continue to record some very big wins. And as a result, our price expectations rightfully kept going up.…

Thank you, Jared, and good morning, everyone. The current operating environment is reasonably favorable for us. While we began the year with some headwinds in same-store sales, merchants exited the quarter roughly flat on same-store sales from a year ago. Merchants also continue to seek out technology that helps streamline the commerce experience. The persistent uncertainty around consumer spending actually helps steer them towards solutions like ours, which eliminate multiple vendors and help save money. We are also advantaged from a capital perspective and can invest in our business at a time when many competitors are pulling back. I'll talk more about how we're allocating capital in a moment. We spent much of Q1 focused on M&A integration. As seen in our recent press releases and earnings material, our approach to sports and entertainment is resonating well with Appetize customers. As Jared mentioned, we recently had the opportunity to host investors at a Yankees' game, which was a former Appetize customer and is now using our VenueNext technology and Shift4 payments throughout the stadium. Our ability to deliver world-class technology into complex environments quickly and in a way that delivers meaningful value for our merchants is just one of the reasons we move decisively when M&A opportunities like this present themselves. Similarly, the Finaro business is now operationally and technically integrated into Shift4. You will find numerous examples of European restaurants, hotels and stadiums who have recently chosen Shift4 in our earnings material, all of which would not be possible without the capabilities brought to us via the Finaro acquisition. Contrary to popular myths, these integrations do not distract from our ability to continue to seek out new growth opportunities. When M&A is done right, everyone knows the playbook from the day of closing and is working expeditiously to achieve…

Thanks, Taylor, and good morning, everyone. We delivered another quarter of solid results in line with our expectations, demonstrating again our ability to deliver top line growth, while continuing to drive margin expansion and strong free cash flow conversion. Total Q1 volume of $33 billion grew 50% year-over-year. Gross revenue less network fees grew 32% to $264 million. Our adjusted EBITDA for the quarter was $122 million, up 36%, and adjusted EBITDA margins were 46%. Excluding the impact of the legacy Finaro and Appetize businesses, margins expanded nearly 450 basis points. Our quarterly results were driven by the continued strength of our hospitality and restaurant verticals, momentum across our enterprise merchants, including new verticals, further monetization and convergence of gateway customers and increasingly large contribution from stadiums and ticketing. The blended spread for the first quarter was 62 basis points, in line with our expectations and consistent with our full year guidance for spreads to average 60 basis points. While the evolution of our business has been significant since IPO, and certainly over the last 12 to 18 months, as we have moved upmarket and diversified our verticals, we believe we are approaching a floor of 60 basis points that we expect to hold for the balance of the year. Any deviation from this will likely be a function of volume outperformance. It is worth noting that the spreads across our core business of restaurant, hospitality and specialty retail remained stable. Gateway revenue decreased sequentially in the quarter, reflecting the continued success of our gateway sunset initiative. The remaining gateway conversion population currently represents less than 3 basis points of spread. This highlights the magnitude of the remaining opportunity ahead of us. Subscription and other revenue in Q1 was up 45% compared to the same period last year, driven in…

Thanks, Nancy. Okay. This was a long one. So a lot of ground covered, a lot of good wins.

Before we go to the analyst Q&A, we did say we were going to select 1 or 2 questions from our -- from X. So first one is from Jared Block. From one Jared to another, why did a deal not close to be acquired? Was it valuation? Do you see that a possible acquisition could happen in the near future? Jared, thanks for the question. I mean, this is really what I dedicated my whole kind of opening letter to in the shareholder note. I tried to give the full play by play. There was a lot of strategic interest. And once you have strategic interest, that means really anything from a go-private perspective that has to be sidelined. And I think, look, rightfully, price expectations kept going up because we knew all about these wins. And the market reacted the way they did over the last month. Analyst notes come out the way they do, indicating potential price ranges, and that's what a good independent Board and Special Committee looks at to make determinations. Do I see a possible acquisition in the future? Look, I mean, part of my letter was to say, like, we're very focused on executing on our plan. We outlined our plan and the associated results. That said, long term, I mentioned I don't see my grandkids running a payments business someday. The idea is to make so many problems and create so much frustration for our competition that, at some point, they make the problem go away. I have no idea what that time frame looks like. Also just hitting real quickly, [ Christian Mohammad ], I think this is the third quarter in a row that we've taken one of your questions, but you have good ones. So how has the expansion…

[Operator Instructions] Our first question today comes from Darrin Peller of Wolfe Research.

But look, with regard to growth and the guidance, obviously, it's great to see the wins you're having. It sounds -- Nancy, it sounded to me like that was the driving force of the conviction of the ramp was all the new wins you've had and those ramping as the year progresses combined, I guess, with SkyTab's success. Maybe just to reiterate, is there -- how much conservatism do you have in understanding that the implementations are going to be timed appropriately? Is there room for timing changes or anything embedded in the outlook? And then maybe just what the actual contribution is from new business versus the original guide you gave on that road map on volume would be helpful. And then a quick one on just organic. I'm assuming it's still in the 20% plus or mid-20s, like as it would be, but if you can comment on the first quarter.

Yes. I mean, I'll start. And certainly, these guys could jump in, but I'll reiterate really what was in my prepared remarks. We absolutely are still reaffirming that we expect organic growth to be in that 25% on a full year basis. And yes, there's definitely acceleration in that through the year, but Q1 was really right in line and very strong. I think when we think about all the things Jared just said, every one of them is certainly quantified to an Excel level that you would expect. So they're not just words on the page, right? So when we think about the acceleration into the back half, there's a lot of detail behind that. And I think that we -- you start with SkyTab, right, and the excess -- the success we're having toward the 30,000 goal, right, totally on track and measurable. The featured wins that we talked about, I don't think we spent as much time today, but the ticketing wins, you know how that works, right? It's just additive and flow through, and that's where you see our incredible positivity around upping the guide on EBITDA and free cash flow, right? That whole unit economic and what we've been talking about for the past 12 months, it's really coming to fruition as you see these go-lives quarter after quarter. And yes, of course, they're timed around certain seasons and so forth with the teams. As we think about hospitality and moving forward with hospitality in Europe and Canada, those wins are happening, right? Two quarters ago, we weren't able to actually bring those on, right? So now those are boarding and live and ramping and absolutely contributing into the back half. And I think just as you think about -- I know Jared talked about the strategic e-commerce customer, right? That's something that is a little bit -- we time it, and it can move just like some of these enterprise launches that we have could move. So we're always going to have that mix issue that we could have a delay because of installs, but our line of sight has always been pretty good. And so I think that's why our -- we've had high conviction around the ramp, and it's not different than what we planned when we gave our original guide.

Yes. And Darrin, it's Jared here, just to kind of weigh in on those points a little bit more. I mean, first, I'm trying to break things out on a quarterly basis. I mean, simply put, we wouldn't do it unless we had pretty high confidence in it. We're a pretty motivated organization. We like posting wins every quarter. So if things are off the cadence that we believe is likely, we want to correct it and set the proper cadence for the year. So I'd say that, that should be a sign of confidence. In terms of ramp for the back half, to Nancy's point, yes, it's everything you list out in this quarter's earnings report and probably many of the prior quarters as well, like the last 2 or 3. It's just not instantaneous, right? I almost liken it to a manufacturing backlog, right? Maybe we should look at talking about how much in terms of billions of volume of backlog is waiting for installation because we've been posting stadium wins and ticketing wins for several quarters now. And some of them, they might say the go-live is June of 2024, things of that nature. BEI Hotel is a cover of our earnings report 1.5 years ago. It hasn't opened yet. So the -- as that backlog continues to grow, you can get -- you can actually forecast it out with a degree of margin greater than you would have previously. And the last thing I'd just say on your question on the organic side, and Nancy mentioned in her remarks about blowing up the revenue model, I don't think anyone -- people really appreciate the lengths that we will go to wreck a failed revenue model of an acquisition in order to pivot in the right direction. We said this before around the Appetize time, but we will absolutely give freebies away on their SaaS fees for a year or their hardware fees a year, things that were part of their historic business or revenue at the time we acquired just to move them over to our new products, so we can delete parts and monetize through payments. So like it's -- I know that's very tricky for analysts to get their arms around, unless we really itemize it out. But you should assume most of the acquisitions we've done have intentionally been set back from a legacy revenue perspective to move five steps forward in our preferred direction.

Yes, yes. That's great. So it sounds very bottoms up. So that's really helpful. Just very quickly, international, it was great to see the wins, the stadiums, the hotels on both sides. Just the progress you're having there seems like it's truly happening. Any -- what's your opportunity there in the near term? And then maybe -- we know the long term is big, but is that pipeline still continuing in the near term?

Yes. I mean -- Darrin, Jared here on this one. I think I didn't expect last quarter to be able to talk about as many wins in Europe and Canada this quarter. I mean, we really started. So I mean, there were some pretty impressive wins in there. I know I rattled off a pretty long laundry list there, but we had some pretty big hotels, some pretty big operators. I mean, you got Pizza Hut in a couple of countries. That's pretty good from an online ordering perspective. We've had amazing traction with EV operators. So yes, I'd say in terms of our plans for Europe and Canada, we're ahead of where we thought we were, especially a quarter or 2 ago. That's why we kind of mentioned -- or I mentioned before, we started making some investments. It's in our guide towards the middle of this year just to ramp up some of our distribution firepower in Europe because we think we'll need it.

The next question is from Will Nance of Goldman Sachs.

Look, I think the back half ramp in the guidance is kind of the main focus this morning. I'm just getting comfortable with it. I realize Darrin just asked about this. But I guess, can you put a finer point on just what's different about this year from an implementation perspective from prior years? Because I think I'm getting to something like 56% to 57% of revenue in the back half, and it's been pretty consistently more like 54% to 55%. And maybe the answer is just you've got a lot more of these chunky stadium and ticketing wins in the back half. But I was just wondering if you can kind of double click on what's sort of different about the implementation schedule this year versus in prior years just to help people kind of get a better understanding for that.

Yes. Well, I'll start and then invite Taylor and Nancy to come in. I would really just call it that growing backlog of go-lives. We have certainly been moving up market as demonstrated by the average volume for merchant data. I think it's one of the slides that we periodically put in our earnings report. We've been -- done nothing but move upmarket and diversifying to kind of more complex verticals, like stadiums and e-commerce. And we just have really good visibility into go-lives, and they start stacking up. I mentioned before, there are certainly stadiums and hotels and resorts that we announced 2 quarters ago that are in our backlog for go-lives. And frankly, the bigger the backlog grows, the more margin you have when you start forecasting out, which is largely customer-driven dates when they'll go live. So I think it's a big part of it is just the mix shift and the fact over the last couple of years being in these new verticals, you just have more -- you just have a greater sense of -- or greater visibility into when they'll turn on. Also, I mean, just from a seasonality perspective, the football season, when they do a lot of ticketing, a lot of these are travel and leisure are more seasonally in play in the second half of the year. Nancy or Taylor?

The one thing I would say just to kind of tack on a slightly different topic is we are continuing to synergize prior acquisitions, right? So as we do that, those revenue synergies are helping back half of the year. Also our gateway, since that initiative, it's -- that's a great example of where we have complete visibility of who's moving and when. So the process there will definitely help both from conversion monetization. As you guys know, we talked about carrots moving slightly more to sticks, and it's working. We're getting those conversions end to end. So that, I would say, similar to ticketing, we have visibility to when those moves are going to happen.

Got it. I appreciate all the helpful details. And just a follow-up, actually, Nancy, on that last point, maybe just to rewind a little bit the last quarter. It sounds like there was a bit of a more unusual gateway deal in the prior quarter. I was just wondering if you could kind of update us on how that's impacting the numbers. I know you mentioned the gateway revenues coming down sequentially this quarter again. And so just remind us about the process of getting the converted end-to-end volume up to the kind of the standard net revenue take rates that we would typically expect in those deals. And maybe just some context for -- roughly, I guess, did it come on at significantly lower spreads initially? And just what is that delta that you guys are closing over the course of, I guess, the repapering of the franchisees?

Yes, sure. Actually, this is Taylor. I'll hit that having been involved with the relationship. It's a dynamic that we described in detail last quarter, which is effectively that we've got a few different opportunities whereby we can contract with franchisees on a direct basis and a higher spread. The way this represents itself in our financials is that we have end-to-end volume today that we would determine -- we would designate as kind of undermonetized, meaning it's paying a lower spread. However, the way the relationship we expect to evolve is that we will be able to contract with the franchisees directly, provide them more services, et cetera. So again, it's a -- Nancy alluded to the spread stability that we're starting to see. This is one area of comfort for us in that regard, which was effectively an institutional relationship where we can take on more of the burden for that large enterprise and contract with the franchisees that -- what are closer to sort of small- to medium-sized businesses rates, one level of spread, but it also takes a while to roll out. It's not something you can attack thousands of locations all at once. Again, kind of alluding to more activity from a revenue perspective in the back half of the year.

Got it. So it is an in-year benefit, the repapering. It's not a multiyear thing.

It's as fast as we can get to thousands of locations. I don't want to be more specific than that. We try hard. And it also gets -- it also competes with net new business from time to time. So...

The next question is from Timothy Chiodo of UBS.

I want to touch on the $500 billion figure that's in the shareholder letter. It's the total undermonetized end-to-end volume funnel. At the last update, I believe the gateway opportunity had about $120 billion left. Software was another $30 billion. I was hoping you could just bridge us to the total $500 billion and just expand a little bit and elaborate around that pretty large end-to-end funnel opportunity.

Yes, sure. So I'll hit this one as well. We put those two slides in there because there's been a lot of talk about capital allocation, how do we think about the dollars we deploy. We believe it's a core competency of our business. It's a really strong differentiator. And I think we're actually quite agnostic in terms of how our dollars get allocated, be that product development, M&A, stock buybacks, customer acquisition costs, et cetera, as long as the math makes a ton of fundamental sense. And so we tried to illustrate kind of what our track record has been over the past few years in terms of total dollars deployed and what the opportunity that those dollars have presented exists. So we've all cited the gateway regularly. That was a portion of that $500 billion, but every dollar we've deployed towards M&A opportunities and otherwise has presented a volume base that we can go attack, that hasn't monetized payments well. And I think we've called out things like Appetize and Focus POS, all of those transactions had volume that isn't quite as daily measurable as the gateway volume, but it's an incredible opportunity. So we laid that out. Again, just to be very clear, you can consider our existing gateway population is a portion of that $500 billion. You can consider Appetize customers inside of that $500 billion, et cetera. What's not inside of that is the transaction that we announced in the page just after that. So we tried to give investors just a sense for why we allocate capital the way we do, what we look for when we deploy a dollar. Again, we are agnostic to whether that dollar is to hire an employee, to build a product, to buy another company or to buy back our own stock as long as the returns make a ton of sense. And hopefully, that gives investors some confidence that when they see us invest dollars, and we announced two interesting ones today in the form of Revel and a large stock buyback, they should be really excited that we found opportunities to meet those return objectives.

Perfect. The brief, just a quick numbers one, if you're able to update. I know that last year, or a few years back when you did the in-sourcing, there was the 350 direct sales force. You likely had some other direct sales folks in-house, plus the reseller. So that was a U.S. number. Can you just, one, update the size of the distribution in the U.S., both direct and indirect, and then touch on where that sits for Europe in terms of how much hiring there has been for sales in Europe? And then how many of those distribution partners you have, which I recognize that you just mentioned them a few questions back? But if you could put some numbers to it, that would be appreciated.

Yes. I'll actually start in reverse and let Jared cover the U.S. sales force. We've been spending a lot of time on the European opportunity. Our European sales force largely consists today of the former Finaro sales team, plus a handful of early-stage software partners that we've had in the U.S. that also install systems throughout Europe, and then a very small handful of incredibly talented folks that put up a disproportionate number of the wins you see in this earnings stack. We are by no means at the scale we'd like to be with regard to European distribution. We've got pretty strong and ambitious plans for our sales force in Europe, but it is by no means where we'd like it to be. Jared, do you want to comment on the U.S.?

Yes. I think from the time that we did distribution in-sourcing, so I guess, almost 2 years ago, we've increased. We've had several hiring classes for our direct team. So if we increase the size of the direct team by 10% or something, it seems like generally in the ballpark. And then we have added additional authorized partners, mostly in the West Coast, where we just always kind of lacked a direct presence. So yes, and I think it's probably fair to say we'll continue to slowly add more headcount to our direct sales team just to account for SkyTab demand.

And as you think about the synergies we look for in M&A transactions, the Revel business had an awesome sales team, both direct and the series of partners. We're really excited to work with them as the transaction comes to a close.

The next question is from Dan Dolev of Mizuho.

Great to see the organic growth reiteration for the year, very, very strong. I have a quick question about Revel. Kind of -- it was very interesting to see the acquisition. Jared and Taylor, can you maybe give us a sense of the strategic rationale behind it and what you expect to get out of it?

Yes, sure. Jared here. I'm happy to kick this off. Yes, I mean, this is totally our playbook. I mean, this should be looked at very similarly to Appetize or Focus POS. I mean, we can apply all of our strategies to this. I mean, first and foremost, you have a massive payment cross-sell. So if anyone is familiar with Revel's history, it was valued once at over $500 million. We've certainly announced the purchase price meaningfully less than that. But it was an organization that intentionally overlooked payments for a very long time. It built really good software, won great customers, but payments was somewhat of an afterthought until the last couple of years. So instantly, you have the ability to pursue existing customers, switch them over to payments. Second, again, it's kind of our Space X philosophies that we've adopted here, deleting the parts. You don't need two restaurant products. You're going to take the best capabilities out of Revel for QSR and enterprise and bring them over into SkyTab. And you're going to do that with a lot of talent that happens to be in the same -- [indiscernible] is essentially in the same area as our monster development team in Vilnius, Lithuania. And then you get a lot of distribution to sell a product that you know wins, that has a winning value proposition, meaning, as Taylor mentioned, Revel has a lot of salespeople direct already. They also have authorized partners in Europe for their product as well. So you've got a massive cross-sell. You've got to take out the parts, so delete duplicative product offerings. You pick up a bunch of talent, and then you have a lot of distribution. As Taylor mentioned, we're just going through the standard kind of regulatory approval process. But assuming July 1, it could very well be before that, we said $15 million of EBITDA in the back half of the year, you annualize that, and that's with an acceleration ramp of the following year, you can already get a sense that it was just a perfectly fine financial transaction on its own right.

Yes. Jared summarized that well. I don't have too much to add, except that we're incredibly excited to get this one over the line. And don't expect it to be much more than July 1, as Jared mentioned.

Our last question today will come from Sanjay Sakhrani of KBW.

I guess, I have a question on SkyTab. I know it's early days, but maybe you could just help us think about the revenue contribution and how you see that developing over time, and maybe also just the revenue potential of a SkyTab customer versus a non-SkyTab customer.

Yes, I'll start with this, and I think it's important to dimensionalize kind of what our book looks like today. SkyTab is exclusively focused on net new wins, adding customers. When we add a SkyTab unit, it is overwhelmingly a customer that didn't exist in the Shift4 ecosystem prior to that. We also have the opportunity, should we choose to kind of lean on it, to upgrade customers that are on other pieces of restaurant software to SkyTab over time. We will get a SaaS lift from that, but these customers are typically already giving us payments. And as you've seen, we try to price the SaaS offering in SkyTab to be very attractive, vis-a-vis other competitors in the market. We've seen lots of success, as evidenced in kind of our earnings materials and prepared remarks with this strategy. Although we do think there's plenty of room to move price when our nearest competitors brag about the number of modules they can sell to a customer, and all of ours are included in our base pricing, you see the opportunity to charge for it over time, although we're not seeing the need to do that in the current environment to attract a lot of customers. What you should expect from a SkyTab site just kind of at the macro level versus averages in our book is that the restaurants, they're typically a little bit smaller volume than what you have in an average hotel and significantly smaller than a stadium, although we earn a higher spread and we earn a SaaS component on top of it. So a very, very attractive customer in terms of the revenue contribution per dollar of volume. Nancy, I don't know if you want to give any more color on that.

Yes. I would just reiterate. We said that SaaS alone restaurant growth was 55%. All within that is a very high percentage coming from SkyTab well in excess of that. And I think it's just all the components that Taylor talked about, just the ramping. We -- I think the one thing you didn't talk about is just we don't charge for every enhancement right now and every module within SkyTab. It is -- I would say it's not only is it a low cost competitively in the market offering, we also are generally giving 1 year free to many of our customers. So there's this ramp that you're going to see as we start lapping SkyTab. That's going to have -- it's going to impact the back half of this year and certainly in the near term, just bigger revenue, bigger SaaS revenue, just great trajectory.

Appreciate it. And just my follow-up, Jared. I appreciate all of the comments on the strategic review. But maybe just help us think about sort of what valuation you think makes sense if you were to go down the path of a sale. Or we're just -- I'm trying to dimensionalize sort of what would get you excited and how we should think about the trajectory from here.

It's a really tough question, right, because I think there's a pretty big gap between how we are valued today and, frankly, how we've been valued for quite some time relative to some of our high-growth peers that don't even kind of share our profitability profile. So I guess, the thing I would point you to is, I mean, during the strategic review, I think almost every analyst put out a note with where they thought Shift4 might transact at and the rationale behind it. And I was -- I think, generally, especially those on the higher end of it, were thinking things through correctly. But I think if you watch the evolution throughout that strategic review, those notes kept getting higher and higher, and I think that was rightfully so, especially when you look under the hood at some of the things that are going on. That certainly makes it hard for, I think, the strategic parties when there's a new note kind of every day and the direction it's going. But I didn't disagree that on the top end of some of those ranges that, that would have been a more appropriate valuation. But certainly, it's well, well above where we're at presently today.

That's all the time we have for questions today. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.