Greetings, and welcome to the Shift4 Third Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tom McCrohan, Executive Vice President, Investor Relations for Shift4. Thank you. You may begin.

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

Hey, thanks, Tom. So we have a lot to cover today. So I'm going to break up this call into the following sections. So we're going to start with Q3 results, and then we're going to go into the deep dive by vertical and major initiative. We'll talk about expectations for Q4, and then end off on reflections on our performance since the IPO. So we were really pleased with what was a reasonably strong quarterly performance and our overall execution within the variables that we can control. So we've delivered quarterly records across all our major KPIs, so volume, gross revenue less network fees, adjusted EBITDA and adjusted free cash flow. Our adjusted EBITDA margins were also a quarterly record of 51.3% or nearly 54% when excluding a 250 basis point drag from recent acquisitions. Specifically, we delivered $187.4 million of EBITDA, generating $111 million of adjusted free cash flow, which is up 46% versus a year ago, and represents a 59% free cash flow conversion. So let's talk about what really went well in the quarter. So it was absolutely one of our strongest quarters for new logo wins, especially within hospitality. So I can't actually recall a better quarter for mega hospitality wins. It starts right off with KSL Properties, as well as a very large Las Vegas international casino operator that also committed to Shift4. So we believe we are number one in end-to-end hospitality payments in the world. Similarly, we believe we're number one in end-to-end sports and entertainment payments provider in the world. So the stadium, theme park, and ticketing wins continue to roll on. We believe we're number two in the world when it comes to our cloud-based restaurant POS product, SkyTab. As SkyTab installs and the associated SaaS revenue streams continue a…

Thanks, Jared. I will begin by discussing the current operating environment, provide some insights into our current backlog and growing cross-sell opportunity, and also update you all on the progress with our key strategic objectives, and then share interesting efficiency indicators that we use internally to track our productivity. During the quarter, we experienced the customary seasonal spending lift in the months of July and August as consumers take vacations and travel more. Although, as we noted on the Q2 call, spending in restaurants had moderated, and most customers in that vertical were experiencing a roughly 3% decline in same store sales year-over-year. While restaurants did not materially worsen, we also saw some modest softness in other verticals in September as leisure travel subsided in conjunction with back to school. These year-over-year declines in same store sales have generally been low single digit percentages and off of historic highs, but are notable in the context of consumer sentiment versus previous quarters. Looking at October, we've seen hotels improve to roughly flat year-over-year same-store sales, while restaurants remain modestly below last year's levels on a same-store sales basis. Sports and entertainment has been a particular bright spot with numerous overlapping seasons, and the World Series leading to record weeks. Our current backlog is now approximately $33 billion, up from $25 billion in Q2, due to the many new wins signed during the quarter that have yet to be installed or are still ramping. Despite converting roughly $5 billion of our backlog, the pace of enterprise wins has been strong, resulting in a higher number than last quarter. We view our growing backlog as a testimony to the productivity of our sales teams and a positive leading indicator for sustained volume growth into future quarters. Of note, the vast majority of merchants…

Thanks, Taylor. And good morning, everyone. We delivered another quarter of consistent and solid results, setting quarterly records across all of our major KPIs highlighted by strong adjusted EBITDA margin, and free cash flow conversion. Total Q3 volume of $43 billion grew 56% year-over-year. Gross revenue less network fees grew 50% to $365 million, and we remain on track to deliver organic revenue growth north of 25% for the full year. Adjusted EBITDA grew 51% year-over-year to $187 million. Adjusted EBITDA margins were 51.3% or nearly 54% excluding a 250 basis point drag from recent acquisitions, which we expect to synergize over the next 12 months to 18 months. 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 and software only customers, and an increasingly larger contribution from stadiums and ticketing. This quarter is yet another proof point that our vertical diversification since IPO allows us to deliver strong results even when facing macro headwinds in one or two verticals. We see the impact in both our payments-based revenue growth and the increased contribution from SaaS-based fees. Blended spread for the third quarter was 60 basis points. Despite a softening consumer, spreads across our core businesses remain stable and we still expect full year spreads to average 61 basis points for the full year. Subscription and other revenue was $102 million in Q3, up 111% compared to the same period last year. The growth was driven by our success across SMB, SkyTab, and further penetration of the sports and entertainment vertical, as well as a full quarter of Vectron and Revel legacy revenue streams. As I mentioned in previous earnings calls, growth in this category will not always be linear as we often…

Okay. Thanks, Nancy, and appreciate everyone bearing with us. I know it was a little bit longer than usual, so we're going to have an Investor Day coming up. There's always a lot going on at Shift4 and planning to talk about. So before turning it over to the analysts for Q&A, I did want to take a question that was submitted from Twitter or X, sorry. So this is from [John G] (ph) in Boston, Massachusetts. Two questions. From the retail side, as someone who's followed Shift4 and its creative acquisition strategy over the past few years, I was curious about the following. One, why do you believe that another firm hasn't replicated this strategy? And two, how long do you believe you can continue to pursue this strategy? So John, thanks. A lot of companies are reasonably active at M&A. I mean, across all sectors. I think, within payments specifically, Adian is probably the only example of a scale payments company that has not done an acquisition. I mean, even Stripe has laid Square. They've all done deals. So I would say, when an industry is in transition and there's opportunity, deploying capital intelligently to take advantage of it is a pretty obvious strategy. In fact, last quarter I gave examples of Palo Alto networks, Apple, Amazon, all of which have taken advantage of different transitions within their respective industries. So look, the issues are, are you doing a deal to take advantage of an opportunity or are you doing deals to fix problems? And I think many examples of late from people are trying to fix problems versus actually having a pretty solid strategy and then using capital intelligently to pull it forward. So I think where people make mistakes, they don't have good conviction around their…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Timothy Chiodo with UBS. Please proceed with your question.

Great. Thank you for taking the question. I want to talk a little bit about the $49 billion high end of guidance for end-to-end volumes in Q4. You talked a little bit about annualization of EBITDA. So two points I was hoping we could touch on. One is, Q4 seasonality around end-to-end volumes. In the past, seasonality used to be a little bit lighter in Q4, but things have changed in terms of the mix. Is it fair to assume that there's much less seasonality and we could essentially use the $49 billion as a jumping off point for next year? And as related to that, if we take that $49 billion and just multiply it by four, we start to approach $200 billion in volumes versus the high end of this year at around $166 billion. Now I was just hoping, appreciating that you are not giving a fiscal 2025 guide but just to help investors for some of the building blocks right, there's Vectron and their dealers, there's the Revel and Givex opportunity, there's gateway conversion both active and dormant, there's regular wave production. There's just a lot of building blocks for next year. I was hoping you could just highlight or elaborate on those. Thanks a lot.

Hey, Tim. This is Taylor. I'll let Jared hit kind of the main building blocks. He's always great at summarizing the real big needle movers for 2025. But in terms of thinking about, let's call it the seasonal cadence of the business, you're correct to assume that Q4 is somewhat more predictable than it had been in the past. What's happening there is, you generally have sports and entertainment that is scheduled quite literally, and it has a heavier impact on Q4. You do see somewhat volatile behavior in restaurants through Q4. Just keep in mind, weeks like Thanksgiving are not heavy restaurant spending weeks. Travel can be mixed. But I think all of that ballast with sports and entertainment adding to what traditionally would have been a quarter that's just a little bit below 25% of the year's volume, even including some growth. Now, in terms of how you use that as a jumping off point, we think it is an appropriate thing to kind of consider Q4 as, let's call it, an average quarter on a volume basis for an average year, but Q1 is probably not the right way to contextualize that, right? Q1 is always a little bit softer spending across all of our verticals than 25% of the year, if that makes any sense.

Yes. And Tim, I'll just layer on. Look, there's no way -- I mean, look, the simplest answer on anything is if you just annualize Q4, you're going to realize that we're in pretty good shape, no matter what. We pointed to EBITDA because, the emphasis is always on profitable growth. If you look at volume, we also said, hey, we've got a $33 billion contracted volume backlog. We rolled five of it into actuals this past quarter. Like, these are -- this is signed deals. It's not like a weighted pipeline, so you can count on that too. So I think the idea is generally we're looking pretty good. In terms of just like where all the needle movers come from, that's why we have to have an investor day, or else like I'm already long-winded as is when it comes to my script and my letter. We got a lot going on. I mean, we talked about like, I don't know, some of the largest cities in Europe this past quarter rolling out Shift4 payments for their mass transit system. That doesn't come up all the time, not to mention what we're doing just in our core areas of focus like restaurants, hotels, stadiums, and global e-comm. So we owe everybody like, I don't know, at least three quarters of a day to just kind of break everything down so you have a good way to figure out what the next three years should look like now that we've beaten our last three-year midterm outlook. So I think like manualizing Q4, looking at the volume backlog, the idea is it should be giving everyone a fair amount of comfort in looking to the year ahead.

Thank you. Our next question comes from the line of Dan Perlin with RBC Capital Markets. Please proceed with your question.

Thanks. I just wanted to dive in a little bit on the pull forward for Revel and Vectron's integration plan. So I guess partly like what drove that pull forward dynamic? Secondly, kind of what are some of the early learnings that you're seeing in POS in Germany, UK, and kind of versus the US? And then if you could also just kind of put that to the cross current as Jared is what you kind of identified as what went wrong in the quarter where you did have, like you said, a little bit of a slow down or maybe under execution in Canada and European card present transactions getting rolled out. Just trying to understand all the various dynamics and puts and takes that have to go into a lot of those complex transactions actually happening. And then just kind of how that's going to play out through the next couple of quarters. Thank you.

Yes, Dan, it's a good question. I mean, I think there's just somewhat of a timing. I mean, look, our playbook is, it's not that hard. We literally send a letter to every customer that take a hypothetical Vectron or Revel, for example, that says we will waive gateway fees and -- or waive hardware costs or waive some software costs if you sign up and then we give you free devices and some sort of a signing bonus. I mean, this is literally what we've been doing since 2017. I think the timing of that doesn't always line up perfectly when you waive or make certain concessions or pivot a model versus when volume starts to ramp. So I actually would say like in terms of the pivot part, that's actually going exactly as planned. I'd say it's just the timing of boarding thousands of accounts. I put in there like, hey, we went live with four of our beer gardens. My goal was 100 in October. And then obviously my goal throughout the entire 2024 was 10,000 restaurants and hotels across Europe. We always said at the beginning of last year or beginning of this year and the end of last year like, hey, look, the riskiest part of our guide is the 10,000 restaurants and hotels in Europe we don't have yet. And that was a big focus area for the year. I think the learning points are, I mean, look, there's always something -- there was -- I think we had some debit card certifications that we had to get going in -- with like Bank of Nova Scotia in Canada. We had another debit card thing in Germany. You can't like -- even if you're like 97% ready to go, like no restaurant is going to be happy that 3% of expected transactions wouldn't have gone through or something. So you got to learn that quick, fix it, and then you go back to rolling it all out. So I think it was just more -- it was less about like the -- kind of the predicted revenue destruction alongside some of these deals and just more about how quickly we ramped up the new customer ads. But it is working now. I don't think there again will be any mysteries where our next 65,000 restaurants from Vectron come from in Europe. And then we also said this quarter, we just signed another very big international hotel operator. So I think everything's generally working. Like when we trip and stumble and hit greater than 50% volume growth, I think we're still doing okay.

Thank you. Our next question comes from the line of Rayna Kumar with Oppenheimer & Company. Please proceed with your question.

Good morning. Thanks for all the details. Could you give us an update on your gateway conversion process? How much opportunity still exists and are you facing any challenges given the softening consumer spending on converting the remaining gateway?

Hey, Rayna, it's Taylor. I'll hit that. The opportunity is still largely as it has been in the past couple of quarters. So we've made good progress with some of the large enterprises that take longer for the conversation but bring meaningful volume when they come in. And there's still a lot of volume left. I think the last stat we quoted was probably $120 billion. There's still over $100 billion of annualized volume on the gateway today. So it remains the gift that keeps giving. I think the one thing to kind of balance my remarks is that, the conversion pace is much more programmatic now. There's enterprise customers that we have mapped out over a series of dialogue, and then there's like the smaller single locations that eventually get around to it. So it continues to give. The interesting kind of dynamic here is that the revenue contribution is like really, really paltry. And so you're left with kind of an interesting conundrum. It's not very consequential to the extent the revenue went away, but the opportunity is still enormous. So you want to keep it going. I would tell you the strategic focus of the business is really on continuing to make sure that funnel, that gateway conversion [indiscernible] funnel is as full as possible, which is what things like Givex bring us. But it is by no means a dormant opportunity, if that makes any sense.

Thank you. Our next question comes from the line of Darrin Peller with Wolfe Research. Please proceed with your question.

Hey guys, thanks. Nice execution on adding this magnitude of new business. But I guess what I'd like to hear from you guys is a little bit more thoughts on some of the differentiation you find yourself having in the international markets. You've obviously done extremely well in stadiums and hotels and kind of your legacy verticals. As we move into some of these markets, there's some overlap, there's some incremental. So maybe just if you could list off the top areas you're most excited about for the international growth of the business, so many moving parts would be helpful and then what the differentiation you plan to bring there is going forward.

Yeah, sure, I'll start and then Jared can layer in if you'd like. Let's talk about kind of why we're so excited about Europe and the rest of the world. Software plus payments has yet to converge. That is just like a factual statement. So what we started to see in the late 2000s in the US where software providers were coming to market with a bundled solution that is now completely commonplace in the US has not yet happened throughout the majority of Europe and that's really, really exciting to us. Now, in terms of differentiation, what are we bringing to the market? Not only are we bringing a bunch of kind of go-to-market expertise on how software, hardware, and payments can be bundled together to deliver a heck of a lot more value to the merchant, but increasingly we're bringing that entire stack as a single vendor. So if you think about Vectron, the acquisition of Finaro, our own go-to-market expertise and systems, you have a completely bundled solution that's entirely in-house. So even the software providers that we've seen try to approach Europe with this value proposition have largely outsourced significant components to other vendors, which is, of course, as we've seen in the United States and hotels, it's multiple mouths to feed, it's multiple phone calls when something's not working. So we're highly convicted in how the macro theme of software plus payments will play out throughout Europe across basically every vertical. The ones we obviously own assets in is really, really compelling to us. So we're highly convicted in the macro theme. We also bring kind of operational expertise, but also every piece of the value chain for these merchants.

Yes. And Darren, just to layer on. I mean, keeping it like really simple, I think number one, which shouldn't be too surprising, but it even is to us in some respects, which is just complex card present capabilities. So if you think about the giants of Europe that have done an absolutely outstanding job, Adian started as a card not present player. You're talking more basic single software type integrations for card present because it's a relatively new world for them. Stripe, incredible e-commerce capabilities, very basic card present capabilities. I mean, ShopPay, Simple Terminal, this is why, like, from my perspective when I ask, like, why are we even involved in all these transit systems or why are we getting -- why are we winding up in all these EV operators across Europe? It's because there isn't like that super tech player in Europe that focused on card pressing capabilities. So it's traditional old stuff. It's Barclay Cards is huge, say in the UK. Worldline does a lot of volume. It is not an integrated payments player. So I think that is turning out to have some surprising benefits for us in Europe. But I mean our main focus of going over there with Card Present was our restaurant product, our hotel integrations, our stadium product, but we are clearly doing well in kind of complex integrated payments from a card present perspective. Now when it comes to global e-commerce, our eventual game plan there is to differentiate through geographic coverage. I mean, we have to take advantage of following our big customer into all these new markets. You can see our kind of Twitter releases going out. I mean, we are in a lot of places that others are not. And eventually, other blue chip players are going to want to be in those markets too and take advantage of kind of the rails we laid for that one big customer. So I think it's like -- and we've seen that happen already with [indiscernible] right now where they've kind of moved into countries that we only went into because of somebody else. So I think it's only a matter of time before we have others just like that. And look, there's only a few that can really serve global e-com really well and we'll be really happy when we kind of join the stage as like a strong third choice.

Thank you. Our next question comes from the line of Andrew Schmidt with Citi. Please proceed with your question.

Hi Jared, Taylor, Nancy. Good morning. Thank you for taking my question. I wanted to dig in just on the organizational approach to managing complexity. You guys are obviously doing a lot, managing multiple acquisitions, going through internal simplification, you also have an M&A pipeline. Obviously, a lot of this is part of the Shift4 culture, but maybe just give us a glimpse into how you manage that complexity and you reduce risk associated with the number of initiatives you have spinning. Thank you so much.

Yeah, I mean I love this because it just goes to the Shift4 way and kind of the drum that I literally try and beat every day and reinforce every week. I think the idea for one is to kind of try and take what is a lot of activity and concentrate it into like three -- two or three like really needle moving initiatives and really that's like when we just had our executive offsite a couple weeks ago. There's three needle moving priorities for the year ahead. Now, there's a lot of like kind of sub bullets underneath it and our goal is to always kind of empower small scrappy teams to work on those. But in terms of leadership, it really all boils down to like three major things that we have to get right. I would say it's anchored on an incredible PMO office. That's where we have some of our best talent that's just keeping all the other good talent across the organization. So from legal, finance, dev, moving in the right direction. So investing in a very strong project management office a few years ago, I think, was pretty important. But really, if you look at the Shift4 way philosophies that we pound the table on all the time, radical ownership, deleting parts. I can't emphasize how much deleting parts matters when you do a reasonable amount of M&A and you want to like burn the shifts and focus on the future, procedurally driven so you don't stumble, make the same mistake twice, executing with urgency and again -- and staying flat, not absorbing lots of layers of management which delays decision making and the spread of information. So it's kind of -- it is the -- the answer is, it is the heart of the Shift4 way culture. And I'd say like, we also do a really awesome job elevating talent. There's leaders from the Finaro acquisition of a year ago that oversee aspects of our entire payments infrastructure. There's Q&A leads from Appetize that oversee Q&A for the whole organization. Enterprise reporting and multi-menu management for our restaurant division came out of rebel. So I think we have a lot of good proof points like that. So when you approach the next deal, like say Givex, which we had at the town hall recently, can go into it telling everyone, like absolutely the best athletes from here will wind up in key roles for the betterment of the whole organization. It makes people believe in that one plus one is a big number, but anyone else want to jump on?

Yeah, you covered it really well. I would also say, ROI is at the root of every decision made, and that's somewhat atypical with organizations. Like you are generally allowed a really long leash inside the company to be highly entrepreneurial and figure out the best path through, as long as your ROI math is sound. You can build, you can buy, you can partner, you can hire, et cetera. Nancy's organization has done a phenomenal job kind of pushing that through. It's led to tons of success, and how do we figure out a complicated enterprise win on the sales side, right? Well, ROI has to work, but you can be immensely creative in how you get there, as just one more example.

Thank you. Our final question this morning comes from the line of Sanjay Sakhrani with KBW. Please proceed with your question.

Thank you. Good morning. Obviously the trends are strong despite this, but could you just drill down a little bit on the softer consumer spending that you mentioned? Is there anything that changed significantly in the third quarter that leads you to be concerned, or is it just more on the margins? And then just maybe on SkyTab, obviously, you guys are doing really well there. Any observations above and beyond what you guys have talked about, given the success there? Thanks.

Yes, sure. I'll hit the consumer spending trends that we've witnessed. I would say there's been a notable same-store sales decline that's been reasonably persistent in restaurants since, like, the middle of the summer. I don't know how much to think about this, largely because restaurants have done quite well throughout the last couple of years. So in some respects, that's probably -- we could have predicted that it wouldn't be perfect forever. And we diversified the business accordingly. Hotels had a really strong summer. They had a slightly softer September. September was probably the only month where there was modest same-store sales declines across basically all of our verticals. But that rebounded across hotels, for example, in October, sports and entertainment, while you don't have as solid of a same store sales base because we're adding tons of customers, there are zero signs of weakening consumer inside of that little facet of the economy. So I'd say it's still mixed. There's no significant reason for high optimism or pessimism for that regard, and our diversification has been paying dividends, so we're quite content.

I think we're pretty pleased with the pace of progress with SkyTab, especially in Europe now. I think if you're following our Twitter or X account, you're going to see -- I mean, we post a lot of SkyTab wins in general. You're going to see a lot more out of the UK and Ireland, I think a lot more in Q4. We're pretty pumped about that. And then just the overall pace of progress. Every one of these deals, whether it's Revel or Vectron, even Givex, you're taking talent again. You're burning the ships of the past and repurposing them on the things that matter. So like Revel, your QSR, your basic retail and your enterprise multi-management capabilities, now build that into SkyTap and only worry about that because the Revel shift has been burned here on that. Or in the case of Vectron, where their product is all across central Europe. Yes, we have 65,000 Vectron systems cross-selling payments. Eventually, they have to be replaced with SkyTap. Start localizing the product for all these markets, fiscal compliance. So, like, you're always gaining more talent through every one of these deals that you can apply in our go-forward strategy. So, like, just velocity there is continuing to increase, which is nice. So like I said, we're like -- we're number -- I think we're number one in the world at payments in a lot of categories, and we're number two next to toast in restaurants. That's totally fine. Like we have a plan there, and the more we close that gap, the more value we create and who knows, maybe we'll edge one out at some point on them.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.