Greetings. Welcome to the Shift4 Second Quarter 2024 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Tom McCrohan, Executive Vice President, Investor Relations. Thank you. You may begin.

Thank you, operator. Good morning, everyone, and welcome to Shift4's Second Quarter 2024 Earnings Conference Call. With me on the call today are Jared Isaacman, Shift4's Chief Executive Officer; Taylor Lauber, President; 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 at Shift4. Our quarterly shareholder letter, quarterly financial results and other materials related to our quarterly results have all been posted through our IR website. Our call and earnings materials today include forward-looking statements. These statements are not guarantees of future performance, and our actual results could differ materially as a result of certain risks, uncertainties and many important factors. Additional information concerning those factors is available in our most recent reports on Forms 10-K and 10-Q, which you can find on the SEC's website and the Investor Relations section of our corporate website. For any non-GAAP financial information discussed on this call, the related GAAP measures and reconciliations are available in today's quarterly shareholder letter. With that, let me turn the call over to Jared. Jared?

Thanks, Tom. This is, once again a very busy quarter, and I'm reasonably pleased with our quarterly results and the momentum we have heading into the back half of the year. So as a quick summary, we outperformed our financial KPI goals for the quarter. We closed on 2 acquisitions, Revel and Vectron. We continued our organic international expansion efforts in support of our very large strategic customer, and we won thousands of new hotels, restaurants and stadiums here in the U.S. and internationally. So on to the quarterly results. For the second quarter, we generated 50% year-over-year growth in end-to-end payment volume, 38% growth in gross profit and 41% growth in gross revenue-led network fees. We also generated $162 million of adjusted EBITDA, representing 48% year-over-year growth as our margins expanded 240 basis points to 51% versus the corresponding quarter a year ago. Our operating margins expanded despite the margin drag from the acquisitions of Appetize and Finaro, which together negatively impacted our margins by approximately 250 basis points for the quarter. Now naturally, as synergies are realized, we expect that the drag from those acquisitions to disappear and contribute to our ongoing margin expansion targets. Most importantly, we generated $76 million of adjusted free cash flow, up 18% versus a year ago. Our blended spreads also remained very stable, coming in at approximately 62 basis points despite considerable volume growth. Now with the aim of being a bit more succinct compared to some of my prior prepared remarks, I wanted to share the following highlights. Now starting with our core. Our signature win this quarter is Whistler Blackcomb, which is part of Vail Resorts as well as new hospitality properties, Nobu Chicago and Nobu Toronto. We also signed Pier Sixty-Six Resort, Yosemite National Park, Scott Resort and Spa,…

Thanks, Jared. As in prior quarters, I'm going to spend a bit of time talking about the current operating environment, but I'd also like to talk about our backlog and provide detailed insight into a couple of recent acquisitions to demonstrate how we unlock value from M&A. . Starting with the operating environment. We do our best during times of economic uncertainty and now is no different. Merchant growth and same-store sales performance was generally within our expectations during Q2. It is important to note that despite the constant comparison to others in the industry, we are well diversified, and we've never relied on same-store sales for our growth. This diversification was a commitment we made at our IPO and has increased our resiliency even while growing our total volumes at a 75% CAGR in the 4 years since IPO. As many of you know, we have been cautious that the $100 stake would not last forever, and it appears that restaurants may be experiencing a mild slowdown. On the contrary, hotel travel, stadium attendance and retail merchants are all doing reasonably well, and we continue to add lots of merchants. These conditions favor Shift4 as we grow by aggressively taking share across -- and cross-selling payments and software. This works quite well as our products are competitively priced and a low fixed cost of ownership, which is attractive to merchants. Our strong balance sheet, free cash flow also allow us the flexibility to grow when others are shrinking. We use these times to invest in our business. Building, buying and partnering at a time when many in our industry are urgently trying to prove they can even achieve a modest profit margin. Jared provided a thorough rundown of the various drivers underpinning the step-up in growth for the back…

Thanks, Taylor, and good morning, everyone. We delivered another quarter of consistent and solid results, outperforming our quarterly guidance and demonstrating again our ability to deliver top line growth while continuing to drive margin expansion and strong free cash flow conversion. Total Q2 volume of $40 billion grew 50% year-over-year. Gross revenue less network fees grew 41% to $321 million. Our adjusted EBITDA for the quarter was $162 million, up 48%, and adjusted EBITDA margins expanded 240 basis points to 51% versus the same quarter last year. Excluding the impact of the legacy Finaro and Appetize businesses, margins expanded more than 500 basis points. Our quarterly results were driven by the continued strength of our hospitality and restaurant verticals, momentum across our enterprise merchants, further monetization and conversion of gateway customers and an increasingly larger contribution from stadiums and ticketing. We see the impact in both our payments-based revenue growth and the increased contribution from SaaS-based fees. Organic revenue for the quarter was 24%, and we are reiterating organic growth to be well north of 25% on a full year basis. The in-quarter contributions from Revel and Vectron were immaterial given both acquisitions closed in mid-June. Blended spreads for the second quarter and the first half of the year was 62 basis points. Spreads across our core business of restaurant, hospitality and specialty retail continue to remain stable. Based on our year-to-date performance and the vertical mix and customer size driving our volume, we now expect full year spreads to average no less than 61 basis points for the full year, up from the 60 basis point floor we provided previously. Subscription and other revenue was $71 million in Q2, up 93% compared to the same period last year. The growth in SaaS and other related software revenue was driven…

Thanks, Nancy. So before we go to the line for questions, we are going to take -- well, it's a multipart question from -- that was submitted over X. So Tanner [ Triggs ], you're -- you've got the lucky pull here, and it's actually like 4 really awesome questions. So I'll try and hit it really quickly. . "Now that we've been playing the kind of the carrot-and-stick game on our gateway business for some time now, what is the future organic trajectory of the business look like?" Well, first, I'd say like the power in our gateway goes well beyond just the volume that's on it. It's those 550-plus software integrations that allow us to pursue these verticals that few others can. So great examples this quarter would be like Toronto -- or I'm sorry, Nobu Toronto, Nobu Chicago. They were never on our gateway at all, but they require those integrations. We had the better value proper, the other 2 that could compete for that business, and we won. When you think about it, our whole stadium vertical right now, I mean we acquired the software to pursue that vertical several years ago, but we bundled it with our payment offering and we've bundled it now with our ticketing integrations. All of that is organic growth. So we're taking a lot of products and services like SkyTab, which was in an organic initiative. And we're growing really quickly in the U.S. with them, and now we're able to do it in Canada and Europe. So from my perspective, like the organic growth trajectory of the business is going to be extraordinarily long after the gateway conversion story plays out. You had a couple of other things about how easy it is to take our products and services…

[Operator Instructions] Our first question is from Darrin Peller with Wolfe Research.

Maybe we could just start off looking a little bit more of the acquisition contribution. And then a little more on the strategy and road map of how -- your plan to really monetize and make the most of those. And so I know you talked about some of the guide increase being $15 million in EBITDA, $35 million from revenue from acquisitions. Can you just explain the margin dynamic there for us from Revel and Vectron? And then more strategically, Jared, can you just hone in a little more on the road map on how to really -- what your expectation on milestones are to monetize those, in terms of moving some of that software over and moving it over onto payments? And some more -- maybe a little more color on the time line of how you could monetize those deals.

Yes. Darrin, Jared here. Let me kind of start out with some of the high-level points, and then I'll kick it over to Nancy to get into any of the specific margin drag dynamics. So I mean, first of all, as we've kind of demonstrated in our earnings reports with the Focus POS and the VenueNext look back, We do take a very quick and deliberate approach to pivot the business model of these type of acquisitions. So oftentimes, it's forgoing hardware, software revenue. Even SaaS revenue will throw away if it accelerates a migration. So keep that in mind, I'd say, especially with respect to Vectron, which probably looks a little bit more like some of the deals that we have done in the past where a heavy concentration of kind of more onetime revenue that can go away very, very quickly when you pivot strategies. Now let's start with Revel right now. So we said last quarter when we announced that deal that we expected $15 million contribution for the back half of the year. You should assume almost all of that is coming from cost synergies. Revel was very much a tech start-up. Big cash burner. We say that we go in very deliberately, we burn the shifts so that we can focus on the future. The future is SkyTab in our world. So that isn't to say that we don't see a huge opportunity from the 18,000 customers that we're going to cross-sell payments and eventually move to SkyTab. But these are bigger chain customers. That's going to play out over some period of time. Immediate move is to say, "Look, we're not actively developing in Revel anymore, and that's some big cost synergies there." That's why I think some people had some questions, "Hey, you've…

Yes. I think what I would add is to understand, we certainly spent a lot of time looking at this. And I would say the best property for consolidated gross margin for the year is [indiscernible] I expect on an all-in basis [indiscernible] is very similar to what you're seeing in the quarter with puts and takes of obviously huge drag from Revel and Vectron. And we continue to synergize still Finaro and [indiscernible] last year. So if you think about the synergy process as that will sometimes take more than 12 months. So even though we're lapping Finaro, we are certainly still doing lots of integration work there. So that's how I would think about it as this thing is going to get a little more complicated. Obviously, with our patent acquisitions are kind of [ sometimes ] flowing up 1 bottle and getting [indiscernible] that this is [indiscernible] over. So I think starting to get like a good proxy for what to expect at the back half of the year, Darrin, it's probably looking at exactly what we [indiscernible] it to do.

Okay. That's really helpful, guys. Very helpful.

Sorry, Darrin, I remember it's the first part of a longer question, so I want to make sure we address it. Nancy, do you mind commenting on the -- it was de minimis, and I think we said that, but just further clarification on revenue contribution from Revel and Vectron in Q2.

Yes, for sure. I think that's why we wanted to put out the 24% organic because remember, we only had 2 weeks and we're talking about something completely immaterial for Q2. So I wouldn't even think of them as a contributor for the quarter. And certainly, when you look at the guide grades, we tried to contemplate the benefits going into the back half of the year.

Okay. That's really helpful. And very quickly, the backlog was really helpful to [ get ] guys. Just considering that gives you a lot of idiosyncratic reasons to be confident on the second half. Just any macro conservatism built into the outlook at this point? Or I mean, I know there's some in terms of same-store sales on certain verticals, but maybe just comment on that, and I'll turn it back to the queue.

Yes. Certainly, when we built the original guide, and I think some of the pull down on volume when we tweaked it a little bit, we were thinking about that we knew the global days were not coming. And you know we've been talking about the prices of the states were going to bust up at some point. So the way I would think about it is when we pulled out the high end knowing that we wouldn't have kind of any upside. We definitely consider that in the macro. And generally, when we put our low out to begin with, we had some conservatism there. But generally, coming out of Q2, we had a really solid same-store sales. And while we're seeing some softening maybe in early July, it's definitely offset from like really solid performance across the other verticals. So right now, I think we're just kind of holding steady for now from a midpoint perspective.

Our next question is from Dan Dolev with Mizuho.

Jared, Taylor, really good results here. I have a quick question about the volume. Can you maybe clarify what drove the volume reduction to the full year guide? And maybe give us a little bit of your sense of confidence into the macro in the second half. That would be great.

Yes. I mean I can start that one off. Nancy, she kind of mentioned in her last remarks, but it really was driven in 2 parts. One of which is when we put out our volume bridge last year, we put a big slug of restaurants and hotels in Europe in it. And for as much progress as we are making, we're announcing awesome wins every quarter. we didn't have the 65,000 customer layup that we will eventually have control over in the balance of this year with Vectron. So I think just like there is some delays in getting to the thousands of restaurants and hotels that we were hoping for this year. The other part is as Nancy mentioned, is like just the good times aren't rolling anymore. So when we initially set a volume guide at the beginning of the year, we said the upper end is that the $100 stakes continues. Though we're always cautious that, that will have like real staying power. So I think that's just prudent to just to tighten that up. I will say, generally speaking, on the macro. Look, we have grown double digits in volume and revenue, our entire history of 25 years. And there's been a lot of downturns throughout that period. If you're growing volume at the pace that we are, it's not to say like 3% reduction or something in same-store sales and restaurants isn't a factor to consider. It certainly is. And believe me, if there's a restaurant, I think it's all bets off -- I mean, I'm sorry, if there's a recession I'm sure it's all bets are off for everybody at that point. But from our perspective, like how we're hitting our volume targets is doing smart things like Vectron and Revel, where I guarantee you, it will be a hell of a lot easier for us to predict where our next 65,000 customers are coming from in Europe than it will be, say, for somebody else who's just beginning to enter into that market. And that's how we have like just greater control over the volume trajectory of the business versus trying to underwrite down to the 100 basis points on a same-store sales movement.

Our next question is from Timothy Chiodo with UBS.

I want to hit on the stadiums and ticketing wins. There was a really strong list of adds this quarter. Many of them you noted are already starting with ticketing from day one. And you've mentioned also the ongoing cross-selling opportunity. I think a lot of that has to do with the integrations that you've made throughout the ticketing ecosystem with numerous platforms, I think basically all of the major ones. But the question really comes down to that rough TAM. I believe it's in the $100 billion or so range for the U.S. Maybe you could update or correct that number if I'm off. And giving us a sense on what portion of that you're working with in some way? Whether it's only on ticketing or only on concessions. But how much of that do you think you've already achieved as a part of that, again, let's call it roughly $100 billion TAM. And then if you don't mind after, I have a quick follow-up on mix.

Yes, sure. So Tim, this is Taylor. I'll cover that. I think very important to distinguish the 2 concepts, market share versus wallet share, especially in these like stadium environments, where the revenue centers are very fragmented in many regards. So we feel really good about our market share by -- and these numbers can vary. But whether it's 2/3 or 75% of the stadiums and theme parks in every league in the United States, we have a customer relationship in some way, shape or form. It's a minority of those where we have kind of the Holy Grail, which is the entirety of the stadium plus ticketing, as you mentioned. But that is the most common of the offerings that we go to market with now. It's probably the most common of the offerings that's taken from, let's say, a hypothetical appetite stadium moving over to venue next. So we're really enthused and quite frankly, our customers see a ton of value in giving us the bulk of the revenue center management and ticketing inside of that. I think the harder part is that the volume comes in reasonably choppy when you do that. At least, it takes kind of a year or maybe 2 years to fully season. And the example I would give is we acquired Appetize in the back -- just before the last quarter, of 2023. And we have been installing more stadiums in a month on VenueNext than we have in our busiest quarters in any other year. So pace of installation has been incredible. But from a revenue and volume standpoint, you won't see that until the sport season starts up. And then in the case of ticketing, usually the bulk of ticketing happens after the season when they sell season tickets for the following year. So we feel really good about our market share. We feel really optimistic about the ultimate wallet share. I'd say the choppier part and this has kind of led to a back half weighted volume expectations throughout our guidance through the year. It's just that the cadence of that.

Excellent. The brief follow-up is kind of a pie chart question. So in the shareholder letter, you mentioned that now you're at about 1/3 of volume, 33% from hotels and resorts. If you wouldn't mind, just updating what the rest of that pie chart might look like, meaning, how much of that is restaurants, stadiums, et cetera, based on the existing base of end-to-end volume?

Yes, sure. We love this. It's about 1/3, 1/3, 1/3, meaning that you've got restaurants, hotels and then all other. And all other would include stadiums, but it also includes specialty retail. Things like Jared mentioned, our big strategic customer, et cetera. As I mentioned in my scripted remarks, we made a deliberate commitment at the IPO to diversify the business. And that's, I think, paying some dividends today. . We do see a modest amount of softness, as Nancy mentioned, very recently in restaurants, but we're seeing none of that in hotels and we're seeing kind of continued spending across all these other verticals. And we've got a handful of merchants that are growing really nicely inside of that all other bucket, which is great. It offsets kind of any expectation you'd have in the macro.

Our next question is from Will Nance with Goldman Sachs.

I wanted to ask on -- just on the gateway revenues. I know you guys had discussed kind of like a kind of nonstandard gateway conversion towards the end of last year. And we saw the -- I guess, what we call the gateway revenues in the model coming down over the last couple of quarters. I think we got to like $1 million or so this quarter. So just could you update us on sort of where we are in that journey? And then just like clarifying because those revenues appear relatively low now, relative to the large base of volume. I realize it's really low take rate, but just kind of making sure that we're understanding the kind of the economics as they exist today on the existing gateway volume.

Yes. Will, I'm happy to take that. So there is still a very large quantity of volume that is still there that we make very, very little off of. So these are some very big customers that go back to the First Data JPM JVs, with very long contracts with lots of price protection at very low rates. Because during that JV, they chose to monetize the relationship upstream from the gateway. So we're still working through it. It's a lot of volume. There's certainly a lot of like low-hanging fruit in there still to get smaller customers that we -- that contribute to our growth every single quarter. But there's a lot of big ones in there as well, and there has been for some time. And we are very incentivized to cut deals to get them over so we can start sunsetting connections that we don't want to upkeep anymore. So I think like every quarter that goes by, we are more incentivized to want to delete those old parts. Like we maintain a lot of infrastructure to Heartland, GPN, Fiserv, Worldpay. But yes, it's a lot of volume at like ridiculously low take rates in there. So that should represent some opportunity because literally, any deal that we cut with them should have some uplift. And obviously, it will almost be like 100% flow-through because we're doing a lot of support for those customers.

And Dan, we also try to illustrate this in our shareholder letter. You'll see kind of tags next to a bunch of the different wins that were gateway conversions. As you know, that pulls down gateway revenue, but much to the benefit of end-to-end volume and revenue. So it's been a very consistent funnel for us. I wouldn't try to imply in any way that a reduction in revenue there mitigates meaningfully our opportunity set.

No, that all makes perfect sense. And then I guess the second question is just on SkyTab. It seems like the momentum there is really strong and obviously, adding lots of more opportunity with some of the acquisitions that you just did. So just any color, I guess, in broad strokes, where you are seeing the traction in the deployments? Whether that's through direct sales channels, through the existing indirect channels that you still have as well as if there are any call-outs around some of the acquisitions you've done over the past couple of years. Where are you guys seeing the most success in deploying the SkyTab platform?

Yes. Well, so happy to hit that. I mean it's a -- whether it's direct or indirect, it's entirely a factor of just where you're at in the country. So we already -- back in 2022, summer of 2022, so more than 2 years ago, we already in-sourced all of our partners in the market that we wanted to have a direct presence in. So probably -- we haven't done any in-sourcing in 2 years. So we said those were markets that we were pretty committed to. A lot of production comes from there. And then more on the West Coast and Central U.S., more sparsely populated areas. That's where we have third-party distribution because it's just -- we'd rather have the variable cost in that case than the fixed cost. I'd say in the U.K., for example, in Ireland, we have a small direct team. We also have a couple of partners, and we're just kind of really learning the market there with them. But I mean, you can see the results as we post them on Twitter and X. It's like covers the gamut every day from start-ups to like really beautiful restaurants. So we love the traction. There is no -- in terms of the legacy brands, going back to 2017 that we acquired, like we deleted those parts. There is no future POS production or Harbor POS production or [indiscernible] POS production, like everything is SkyTab and has been essentially for 2 years now.

Yes, makes sense. If you don't mind a follow-up. I guess when you think about those legacy brands and the ones that -- the customers that you've had on the platform for a really long time, I guess, what's sort of the mix of back book conversions versus kind of net new sales?

Yes. I mean, it's almost all net new. So I think we've said a couple of times over the quarters. We're enhancing our Lighthouse product, which is our business intelligence platform to have a -- I don't know, kind of like iPhone 15 upgrade path, "You now qualify for SkyTab and kind of click here, and we transfer your database over." It just has to be done in the most automated way possible. So it's not a lot of manual programming. So we have only, by policy, been doing SkyTab upgrades to the existing base for retention purposes, which represents like a very small -- very, very small percentage in production every single month. The reality is like we do, we do have tens of thousands of existing customers on our other products that we will migrate over the next couple of years. It will just be done like thoughtfully over a couple of years to a relatively automated path.

Our final question is from Andrew Schmidt with Citi.

I was wondering if we can just level set on the restaurant business for a minute. Maybe talk about just where you're positioned? Obviously, there's a lot of variation in terms of assets out there. But QSR versus table service post-Revel, where you guys are positioned on a go-forward basis?

Yes, it's a good question. I mean we've always said for some time that people, I think, are -- I actually think the restaurant TAM might be a little bit bigger when in reality, there's like very -- there's 3 very distinct swim lanes in it. And they have their own kind of competitive set. So -- competitive landscape associated with it. So in terms of your cash and carry, that's your coffee shops, your bakeries and such. That is Clover and Square. And essentially, that is it. Then you have your fast food, which is per Xenial, Revel did play in that lane a little bit, and then you have table service. And that is really just Toast and Shift4. So I would say the Revel acquisition did give us some interesting capabilities where they have some retail functionality in it that we wouldn't have otherwise built. They have really solid fast food and enterprise capabilities. So we are just engineering that into SkyTab. So I mean, we already said like the $15 million of EBITDA that came from cost synergies, we're not building on that product anymore. There will never be another new feature that goes into Revel. We'll certainly upkeep it as we eventually migrate customers over to payments and SkyTab. But all our dev efforts have been towards SkyTab, including the Revel resources and talent that we've held on to. So we are building in those same type of Revel enterprise, quick service and some retail capabilities into SkyTab right now. I think for the next year and change, like you'd continue to expect Revel SkyTab to excel within the verticals that we focus on, which is table service. But I do expect a year from now, we are going to be able to move into some of those other layer.

Got it. And then maybe expand on the -- just the internal systems work. Does that -- obviously, there's an efficiency component, but there's also an office component, in terms of being able to build faster, go to market faster. What does the internal systems work bringing in terms of tying everything together as what?

So much. I mean, this is -- I love this because like look, we're a 25-year-old company that started my parent's basement. Our first CRM, which was largely in use up until a year ago, was homegrown, like it started in access and Sequel, I mean bolted together through so many years. And then, of course, we have done a handful of acquisitions, and some of them have a homegrown system or CRM. And you find your employees just from an efficiency perspective are touching like 8 different systems. It's not a great foundation to work on it. It means you're carrying a lot of extra personnel to do all the things you need to do every day as fast as you possibly can. So we kicked off almost like 3 years ago. We called Project Phoenix. It's like a full rip and replace of all of our internal systems. It's built on Salesforce and Palantir. And it's going well. Like we constantly pump out new modules. Commercial team rolled out with it a long time ago. Now our new ticket system is all being generated from it. And I think it's important, and this is like the foundation for so much more. Now we can run AI solutions for like fast building POS menus. That saves efficiency or that's time to install like time to revenue for getting the systems out in the field but also unlocks a lot of efficiencies. We're building our whole mission control system. So that's like our no-fill operations all over the world. So when you're having go-lives in Europe at the same time as the U.S., it's monitored in a very like proceduralized environment just like I've seen in other industries. So this is an important foundation we must have in it. And I think a lot of this goes to the eventual margin expansion that Nancy talks about all the time is like people probably don't appreciate how much personnel we have. We have 3,500 employees that upkeep a lot of old things. Whether it's old POS products, old internal systems, gateway connections to our competitors that as time goes on, we delete those parts and then can repurpose that talent to move even faster at new business. So it's like this way that we can keep head count flat while accelerating growth and improving margins. It's pretty cool, add on that. Well, I appreciate that question. I'm pretty excited about those 2 projects. But okay, thanks, everyone, for dialing in. I know we'll catch up with some of the other analysts shortly on the next call. But yes, thanks for dialing in and take care.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.