Shift4 Payments, Inc. (NYSE:FOUR) Q4 2023 Earnings Call Transcript

Shift4 Payments, Inc. (NYSE:FOUR) Q4 2023 Earnings Call Transcript February 27, 2024

Shift4 Payments, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to Shift4 Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Thomas McCrohan, Executive Vice President, Investor Relations. Thank you. You may begin.

Thomas McCrohan: Thank you, operator. Good morning, everyone [Technical Difficulty] 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 at @Shift4. A 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 can be found 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?

Jared Isaacman: Thanks, Tom. Okay, so we made a lot of progress in 2023 and I’m really pleased with how the year has ended. Every quarter we delivered consistent growth, record KPIs, expanding margins and free cash flow. Last year completed three synergy rich acquisitions, Focus POS, Finaro and Appetize. We successfully unified our sales team around our flagship POS system, which is SkyTab and installed over 25,000 systems and we also signed many notable hotel brands. We began processing for large ticketing partnerships and made investments in internal systems, AI and took big steps on our geographic expansion journey with hotels and restaurants now processing in Europe and Canada. That was all last year and I expect 2024 will be even more dynamic.

Turning to the fourth quarter specifically, we could — we did close on our long-awaited Finaro acquisition, but we also had our hands full with many enterprise go-lives and especially in the sports and entertainment vertical. And other than a few enterprise deals getting delayed and some timing nuances with our gateway migrations, we really delivered a reasonably strong quarter. On that note, our Q4 results were largely in line with our previously provided quarterly guidance. We generated 55% growth in end-to-end payment volume, 31% growth in gross revenue, 33% growth in gross profit and 35% growth in gross revenue less network fees. We also generated $136 million of adjusted EBITDA, representing 44% year-over-year growth, as our margins expanded 320 basis points to 50.5% versus the corresponding year-ago quarter.

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Q&A Session

Our operating margins expanded despite the margin drag from acquisitions of Appetize and Finaro both of which negatively impacted our margins by over 250 basis points for the quarter. We also generated $75.3 million of adjusted free cash flow, which was up 33% versus a year ago. Our blended spreads also remained stable, coming in at approximately 64 basis points. Now, our quarterly results would have been even stronger if it not for some large customers electing to delay their go-live dates and some timing nuances with a few enterprise gateway migrations. These include a large resort, VAI hotel, which further delayed its opening to the end of Q2 2024 along with a major resort that’s now going live in — expected to go live at the end of Q3 2024.

As mentioned, we entered into agreements with multi-billion dollar enterprise customers at pretty aggressive initial terms, but they do include a meaningful revenue opportunity in the coming years as franchises adopt more of our services. The result in the short-term is a reduction in gateway revenue and a slight drag on spreads, but we expect these deals to be more than worthwhile in the year ahead. And despite this timing nuance described above, we achieved our volume EBITDA and free cash flow targets for the quarter and feel confident we have very strong foundation for growth in 2024. It is worthwhile to take a step back and evaluate our overall financial performance since our IPO. We have diversified into many new verticals, we’ve in-sourced a large portion of our restaurant distribution.

We added 1,000s of hotels and resorts and expanded internationally. We’ve also invested in two new headquarters, internal system upgrades, and new products such as SkyTab that have proven to be very successful, while expanding margins and free cash flow. We haven’t had to cut our way to profitability. We’ve been investing in growing profitably the entire time. So where does that leave us at the end of 2023? Our three-year CAGR growth for our primary KPIs end-to-end payment volume, gross revenue less network fees and EBITDA grew 50%, 33% and 66% respectively. I think what also gets lost in this evolution, however, is the improvement in our unit economic model. Since our IPO, our incremental margins have improved considerably, despite the mix-shift driven decline in our blended spreads.

It should be clear the trade-off between spreads and incremental margins was a very good trade and I would refer you to the chart on page five of our shareholder letter, depicting the three-year trend and incremental gross profit margins. In short, our strategic investments made since our IPO have resulted in improved unit economic model, which in turn ultimately over time supports margins and free-cash flow. Now, I know many of you are waiting for an update on our recent acquisition of Appetize as well as the current operating performance of Finaro which from here forward, we’re just going to refer to as our European operations. And I’m pleased to report that the integration of Appetize and Finaro continues to go very smoothly. We’re unlocking meaningful synergies from both of these acquisitions in line with our expectations.

Now across our European platform, we have developed relationships to power EV charging and other unattended payment applications. Additionally, we have significantly expanded our relationship with [Technical Difficulty] European food delivery providers. As you may have seen on some of our Twitter/Xposts, we’ve been installing SkyTab systems in other U.K. locations. Now in the U.K., we signed our first retailer, which leverages our existing ISV integrations, which is Ede and Ravenscroft. We also have some big news on the horizon as we make our sports and entertainment debut in Europe. Now turning to Appetize, we remain on track to achieve $15 million of run rate EBITDA by the end of 2024, as we migrate their 600 plus clients over to VenueNext and capture payment processing economics along the way.

Some notable conversions that are currently working — that we are currently working on include Yankee Stadium and MetLife Stadium, home of the New York Giants and New York Jets. And I’ll be talking more on the overall sports and entertainment momentum, including ticketing in just a bit. Now, given the ongoing strategic review, we had no other M&A transactions during the fourth quarter, but we are pleased with the pipeline. We are good at identifying assets where we can unlock value that others simply cannot or possibly don’t fully appreciate and we do expect that acquisitions will remain a key part of our overall capital allocation priorities, especially those that can add distribution or other growth accelerants within our core or new verticals.

Now turning to our core, which is composed primarily of restaurants, hotels and specialty retail again contributed very meaningfully towards our growth, especially with the pace of progress as we convert and further monetize our gateway customers and distribute our cloud-based SkyTab POS solution. So let’s drill down on restaurants, so in restaurants, we were awarded the payment processing business for several large establishments, including Rocket Farm Restaurants, which owns a portfolio of approximately a dozen different restaurant brands in Atlanta, Houston, and Nashville. Andrew Scotto Restaurants, which operates restaurant concepts in the New York area. Medium Rare Restaurant Group, which is a chain of steak houses in the Washington D.C. area with ambitious expansion plans.

And they already opened a new location in New Orleans and have announced plans for Boston, New York City, Houston and San Francisco. We also signed Elmer’s restaurants, a longstanding Portland, Oregon restaurant started in 1960 that now has 29 locations throughout the Pacific Northwest, California, and Arizona. Additionally, we won the Metropolitan Hospitality Group, which is Virginia Beach, is Chick’s Oyster Bar, and Four Top Hospitality Group. Now our next generation cloud-based SkyTab POS platform continues to sign up 1,000s of new restaurants that are attracted to our modern architecture and really a low total cost of ownership. Not only we are seeing SkyTab installed at standalone restaurants, but you’re seeing them SkyTab deployed within very large high volume environments, such as the Cordish is companies live branded entertainment districts, many professional sporting arenas, and other entertainment venues.

And as mentioned earlier in the fourth quarter, we did begin rolling out SkyTab in the U.K. as we prepare for wider distribution throughout Europe. We do continue to invest in the platform and recently completed development on significant features targeting multi-unit operators, as well as an AI website builder that Taylor is going to touch on shortly. For those that are curious, I would encourage you to search on X or Twitter, just Shift4, you can do it every day and see the dozens of SkyTab installs that are taking place again every day. Now turning to hotels, we had another stellar quarter of hotel and resort signings, including a material expansion with one of our valued Las Vegas relationships. We signed Carter Hospitality, a family-owned hospitality company with four luxury hotels and resorts, including three wineries across California, Texas, and Florida.

We signed Destination Residences Hawaii, which is a collection of 17 luxury vacation rental properties located in the Hawaiian Islands. We signed Kaiya Beach Resort in Seacrest, Florida. We signed Westmont Hospitality Group, which is one of the largest privately held hospitality organizations in the world with over 500 properties. Old Edwards Hospitality Group, owner of several hotels, including Old Edwards Inn in North Carolina, which is consistently recognized as one of the leading resorts in the South, and the Cliffs Hotel and Spa located on California’s Central Coast. All five of these hotels were gateway conversion wins. Additional wins include the Sonnenalp resorts of Vail, Jiri Hotels, The Lenox Collection, the Beach House, Hermosa Beach, Ojo Caliente and more.

And as you can tell, this was especially busy quarter for us with our hotel resorts and gateway conversion wins. Now, in specialty retail, we signed notable merchants including Big Y, which is an operator of over 100 grocery stores throughout New England an online jewelry retailer James Allen Diamonds, Daniel’s Jewelers, which is an operator of over 100 jewelry stores in California, Arizona, Texas and Nevada, a longtime Detroit area business, which is MANS Lumber and Wilson Creek Winery in Southern California. Now with that, let’s move to new verticals, sports, entertainment and ticketing. So in sports and entertainment, we have made tremendous strides integrating Appetize and we’re executing well on converting the 600 plus legacy Appetize customers onto our VenueNext platform.

And as I mentioned earlier, Yankee Stadium is converting over to our VenueNext platform in time for Major League Baseball spring season. And we added several new ticketing deals during the quarter, including the Los Angeles Rams, the New York Giants, New York Jets, San Diego Padres, St. Louis Blues and the Florida Gators. We also entered into agreements to provide ticketing for eight minor league baseball teams, including concessions, and we will be processing all retail purchases at LA Dodger Stadium. We also signed a comprehensive payment processing relationship with MetLife Stadium. The Ultimate Fighting Championship, Cirque du Soleil, Kia Forum and a fast growing chain of dine in movie theaters currently located in eight states called CMX Cinemas.

Finally, on February 11, we powered the payments for the fans that attended Super Bowl 58, held at Allegiant Stadium in Las Vegas. So congrats to the Kansas City Chiefs and the San Francisco 49ers on a great game. I think it is worth pointing out that you can’t visit or wouldn’t want to visit many of the customers of payment companies we are often compared to each quarter. But at Shift4, we power some of the coolest venues and experiences you could ever want to attend, including the Super Bowl just a few weekends ago. Now moving to new verticals. Our donation platform, the Giving Block, which serves the non-profit vertical, continues to add marquee clients around the world and recently added nonprofits like the Association for Autism and Neurodiversity, Cure Cancer Australia, Children’s Medical Research Institute, Vision Australia, the Earthlight Foundation, Bay Area Services and Hillsdale College.

And we are successfully cross-selling our card processing capabilities into the installed base of these Giving Block customers. For example, this quarter we signed an agreement with GivenGain to power its card transactions following GivenGain’s joining the Giving Block platform back in Q3. And as a reminder, GivenGain is a leading nonprofit known for its relationship with other leading nonprofits such as the Boston Marathon and UNICEF, among others. The integrations with Donorbox and Ministry Brands, two leading online donation platforms were completed this past fourth quarter. We will support their full customer base of over 50,000 nonprofits. This sector remains an important growth vertical for Shift4 and the Giving Block remains the category leader in noncash giving.

Now in SEXY TECH, we continue to innovate in the area of autonomous retail and recently joined forces with Portugal Sensei to deliver a more streamlined shopping experience without the hassle of waiting on a checkout line. We announced the partnership with softPOS provider MagicCube to offer their unique tap and pay technology to our merchant base and partnered with MobilePay, one of the most popular payment methods in the Nordics. In gaming, we’re in the process of rolling out 100s of our SkyTab mobile devices throughout the BetMGM sportsbook locations, including all 24 sportsbook locations across nine states. And our SkyTab devices are also being integrated with Passport Technology, which is one of our technology partners in the gaming industry to enable various cashless gaming experiences on the casino floor.

We are introducing this Passport Technology and the SkyTab experience at casinos such as Morongo Casino outside of Palm Springs. Lastly, we signed several new online gaming clients during the quarter, including Rivals.com, an online gaming site targeting the interactive competitive gaming community. Prime Sports betting, an online betting platform currently in Ohio with plans to expand in other states. [HefaBet] (ph), an online betting platform customized exclusively for the underserved latino community. HefaBet is owned by Las Vegas hospitality operator Fifth Street Gaming and Rolling Riches, which is an online gaming site blending social media with slot and casino type games. Now touching a little bit more on international. I did previously mention some of our early success with SkyTab and our hotel integrations in Europe and Canada.

To provide a bit more specifics, our relationship with online delivery platform Wolt is ramping up extremely quickly, and for those unfamiliar, Wolt is a global leader in home delivery of essential items from food to home goods that was acquired by Doordash a couple years ago. We’ve also developed relationships with several European fintechs who enable unattended payments for European’s EV charging and fuel stations, including NAICS, a European PSP focused on unintended use cases, including EV charging stations with customers in over 80 countries, and Fortech, an Italian fintech providing customized solutions for EV charging and fuel stations as well as convenience stores. Lastly, we partnered with TOMRA, the world leader in waste collection and sorting to power payments for their innovative reverse vending machines across the Nordics and leading Swedish neobank Northmill to provide their 6,000 plus merchants and 800,000 end users with a complete payment solution.

Okay, so there’s a lot there. We really ended 2023 positioned well for the year ahead. Our priorities in 2024 include installing over 30,000 new SkyTab systems domestically and an additional 10,000 new hotels and restaurants and numerous stadiums in Europe and Canada. And we’re going to continue to execute on the integration of Appetize, signing up dozens of additional ticketing wins here in the U.S. and supporting the go-live of many major hospitality operators. We will continue to follow our signature customer, our strategic customer, into new markets and then bring the rest of the products and services to follow. Now through the lens of a still uncertain economic environment and an ongoing strategic review, we have introduced 2024 guidance, and as you will see, we have contemplated a range of outcomes that Nancy will go into in just a minute.

Most importantly, we see strong profitable growth, especially in the back half of the year ahead. Additionally, we have provided a progress update on our mid-term outlook in the shareholder letter, which I’m sure you will find useful. We’ve been marching steadily and convincingly towards the achievement of this mid-term outlook and have converted many skeptics to believers as evidenced by the upward revisions to consensus estimates, since we introduced our outlook in the fall of 2021. Now before handing the call over to Taylor, I am sure many of our investors would like to know the status of our ongoing strategic review. I will simply summarize what I wrote in my Q4 shareholder [Technical Difficulty] this morning. Our board of directors formal review of alternatives is still active and ongoing and we will provide updates as soon as they are available, but in the interim, please know we do remain focused on running the business and executing on our game plan.

And with that let me turn the call over to Taylor.

Taylor Lauber: Thanks Jared. As on prior calls I thought it helpful to provide you with a bit of additional color on the trends we experienced in the prior quarter and what we’re seeing in the early days of Q1. Volume across our verticals was largely as expected in the quarter with table service restaurants exhibiting slightly negative same-store sales growth offset by hotels having modest growth. Jared mentioned a few enterprise hospitality delays, but we are incredibly proud of the pace at which we’ve met demand for new installations, as evidenced by the successful opening of Fountain Blue in Las Vegas during the quarter and many others. As our long-term investors will know, Q1 represents a seasonally lower volume quarter for us, even when adjusted for growth.

The consumer tends to dine out and travel less immediately after the holidays, with activities typically increasing in March with warmer weather and spring break travel. We expect this trend to be the case in 2024, although we are pleased with the diversification that the merchants across our new verticals and geographies bring. Previous M&A transactions continue to bring us capability enhancements, excellent talent, and a large group of merchants for which we can offer more services. Jared mentioned the recent successes at Appetize and Finaro. We also introduced a new AI powered restaurant website generator from our Shift4 shop team that can create a full featured and personalized restaurant website, including reservations, online ordering, gift and loyalty in less than a minute and at no additional cost.

It was launched a couple of weeks ago and 100s of SkyTab restaurants now have a beautiful and functional web presence that uniquely represents their business. As Jared mentioned, it was also a good quarter with respect to our Gateway Sunset initiative, but despite this success, we still have over $120 billion of annualized gateway volume that is currently paying us less than 3 basis points, for which we expect to earn several multiples of in the years ahead. This ability to identify and execute against highly synergistic opportunities with a rigid price discipline is just one of the reasons we can execute against our strategic objectives at the pace that we do. Of course, the uncertain economic and interest rate environment makes predicting consumer behavior difficult.

Despite that, we are incredibly pleased with the operating environment. Our record-free cash flow and strong balance sheet provide us with the ability to hire talent, while competitors are shrinking, invest in product capabilities, expand in new geographies, and also maintain an increasingly attractive pipeline of M&A targets. This is the Shift4 way. Nancy will now walk you through our financial results.

Nancy Disman: Thanks, Taylor, and good morning, everyone. We delivered another quarter of strong and consistent results. Total [Technical Difficulty] volume of $32.1 billion grew 55% year-over-year. Q4 gross revenues were $705.4 million, up 31% from the same quarter last year. Gross revenue less network fees grew 35% to $269.3 million. Our adjusted EBITDA for the quarter was $136.1 million, up 44%, and adjusted EBITDA margins were [Technical Difficulty] businesses. Margins actually expanded more than 250 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 and capturing better economics from our gateway only customers in line with our gateway sunset initiative.

The blended spread for the fourth quarter was 64 basis points and averaged 65 bps for the full-year in line with our expectations. These blended spreads benefited from higher spread international volume and ticketing offset by the ongoing mix shift as we add and scale into enterprise accounts and optimize and convert our legacy gateway customers. Spreads across our core business of restaurant, hospitality and specialty retail remain stable. We expect spreads will blend down modestly in 2024 as we progress on the path we have been on in 2023. We will continue to successfully move up market and board large enterprise merchants, resulting in some downward pressure on spreads which will be positively offset by international ticketing, SMB growth, including SkyTab acceleration and revenue expansion from the recent conversions Jared referenced earlier, that will allow us to move from a single corporate arrangement to individual franchise deals.

To that end, for the year ahead, we are approaching a floor of 60 basis points. Any deviation from this will likely be a function of volume outperformance. Gateway revenue decreased in the quarter reflecting the success of our gateway sunset initiative. The remaining gateway conversion population, as Taylor mentioned, currently represents less than 3 basis points of spread, which highlights the magnitude of the remaining opportunity ahead of us. Subscription and other revenue in Q4 was up 64%, compared to the same period last year, evidence in part to the progress we are making with SkyTab and our overall pursuit of the restaurant vertical. Restaurant SaaS was up 69% year-over-year in the fourth quarter. In Q4, total general and administrative expenses increased 24% year-over-year to $85.2 million.