Shift4 Payments, Inc. (FOUR) Q2 2023 Earnings Call Aug. 03, 2023

Here is a summary of the FOUR earnings call.

Jared Isaacman - CEO

Shift4 Payments reported robust second quarter results, showcasing a 59% end-to-end volume growth, predominantly powered by

• the core sectors: restaurants, hotels, specialty retail, and

• the increasing contributions from newer verticals like sports entertainment and ticketing.
  The significant growth in these sectors is also supplemented by a growing clientele of large enterprise accounts.

Highlighting the Q2 achievements, the company reported positive growth trends moving into the second half of the year, buoyed by strategic investments initiated years ago.
This includes international expansion and notable trends from July.
Based on this momentum, the full year guidance across all Key Performance Indicators (KPIs) has been adjusted upwards.

The company has successfully managed margin expansion by leveraging scalability.

• There is a conscious effort to maintain operational costs, resulting in improved margins.

• Integration of new internal systems, along with AI and other productivity tools, are in place to refine operations and optimize margin and cash flow in forthcoming years.

The first half of 2023 marked a 30% growth in gross revenue and equivalent growth in gross revenue less network fees.

• This growth trajectory aligns with the company's medium-term targets set in 2021.

• Updated 2023 guidance projects a consistent growth pattern into the second half of the year, especially in Q4.

• This includes high visibility into enterprise and international opportunities.

Shift4's distinct value proposition lies in its comprehensive commerce experience rather than just transactional efficiency.

• This quarter, the client portfolio expanded to include premium establishments, emphasizing the brand's appeal to top-tier enterprises.

An in-depth review of core verticals reveals that restaurants and hotels remain the primary growth drivers.

• Market share in these sectors has consistently increased.
  Notably, significant net new customer acquisitions include prominent establishments like the Fountain Blue Resort, Virgin Hotels, and the Langham Hotel.
  The company also increased its share by converting gateway customers to its comprehensive platform.

A point of pride is the new cloud-based Point of Sale (POS) solution, SkyTab.

• Approximately 6,500 SkyTab POS systems were installed in the past quarter.

• Shift4's decision against introducing fees on restaurant customers, unlike some competitors, has resulted in an uptick in demand for SkyTab.

• SkyTab stands out in the market with its affordability and comprehensive service offerings.

Exploring new verticals, the sports and entertainment sector has seen a surge in growth.

• Contracts with top-tier teams and entities in various sports and leagues have been secured.

• Moreover, key integrations with ticketing giants have been accomplished, fortifying the company's stronghold in this vertical.

The non-profit sector also emerged as a growth area, with prominent organizations joining the client roster.

• Collaborations with major donation platforms further boost Shift4's reach and potential in this space.

Gaming and tech sectors have also witnessed considerable traction.

• Strategic partnerships with major players in these industries, including a Fortune 500 software company, highlight Shift4's diversified growth approach.

New verticals and strategic enterprise accounts now significantly contribute to Shift4's growth.
These sectors offer profitable relationships, demanding minimal overhead costs, and exhibit growth rates surpassing core markets.

On the global front, after 24 years of growth in competitive payment markets, Shift4 is diving deep into international waters.

• With acquisitions like the European payment platform, Finaro, the company is gearing up for global dominance. International expansion, both through M&A and organic investments, tops the capital allocation priority list.

• With a reliable customer base to learn from, the company is set to replicate its success on a global scale.

In conclusion, the company remains committed to refining operations, enhancing efficiencies, and expanding its global footprint, ensuring consistent growth and unparalleled service delivery.

Taylor Lauber - President and CSO

Operating Environment

• Main growth has been achieved through acquiring new merchants and increasing the share of wallet within the existing customer base.

• Unique software and technology assets facilitate attracting new merchants and converting existing customers to the complete platform.

• The strategy also involves capitalizing on existing software customers and restaurant clients, who use different payment processing systems.

Performance Overview for the Quarter

• Volumes for the quarter surpassed expectations primarily due to increased strength in hotels and enterprise accounts.

• A notable surge in spending began from the Memorial Day weekend, intensifying through the July 4th weekend.

• Consumer spending is expected to stay robust; however, there might be a slight moderation in restaurant spending.
  This decline is compensated for by positive trends in hotels, sports, and entertainment sectors.

Financial Insights

• Core vertical spreads remain consistent.

• The forecasted average for blended spreads is 65 basis points for the year.

• Potential growth areas include international alternative payments and other ventures.

• The acquisition of Focus POS, a restaurant Point Of Sale partner, has resulted in 10% of their clientele converting to the complete platform.

SkyTab Systems

• Approximately 6,500 SkyTab systems were added in the past quarter.

• A new marketing campaign, addressing a pricing controversy with competitors, underscores the cost-efficiency and value of SkyTab products.

• The campaign anticipates a payback on customer acquisition cost within 18 months.

Finaro Acquisition Update

• Anticipation of the acquisition agreement with Finaro to conclude by the end of this quarter.

• Initial projections estimated a full year EBITDA contribution of $30 million for a single quarter at roughly 7.5%.

• Despite not offering revenue guidance, it was conveyed that Finaro might impact margins during the integration phase.

• Due to an extended regulatory review, the combined EBITDA margin profile is predicted to surpass original expectations.

• There's a focus on maximizing growth opportunities, particularly in the fourth quarter.

SkyTab POS and Finaro Collaboration

• SkyTab POS systems are operational in Europe, utilizing Finaro's processing platform.

• Product distribution and support strategies are under development.

Forecast

• Expectation of a seasonal increase in Q3 volumes as compared to Q2.

• The strongest performance is anticipated in Q4 due to new integrations, commercial partnerships, and international prospects.

Capital Allocation Priorities

• A focus on Merger and Acquisition (M&A) opportunities primarily targeting international expansion.

• Plans include introducing SkyTab POS in Europe and exploring transformational opportunities in other global regions.

• Emphasis on the company's methodical approach to capital deployment as a key factor in enhancing shareholder value.

• Investments in ventures like VenueNext, Focus POS, and even SpaceX have substantially boosted shareholder value.

• Having raised capital favourably, the current weighted cost of debt stands at 1.35% with no maturities till December 2025.

• The strong balance sheet and profitable growth equip the company to swiftly capitalize on businesses that complement and bolster its global outreach.

Nancy Disman - CFO

Q2 Financial Performance and 2023 Outlook

Q2 Financial Highlights:

• Volume growth of 59%, amounting to $26.8 billion year-over-year.

• Q2 gross revenue rose by 26% to reach $637 million.

• Gross profit surged by 61% from the previous year, reaching $159 million with a profit margin of 70%.

• Second quarter's blended spread stood at 65.3 basis points.

• General and administrative expenses increased by 41% year-over-year to $82 million.

• Adjusted EBITDA for the quarter was $110 million, showing a 68% increase year-over-year.

• Adjusted free cash flow in the quarter stood at $64 million.

Strategic Decisions and Impacts:

• Successful decision to in-source a significant part of the go-to-market distribution in the previous year, aligning with SkyTab’s launch.

• A reduction in headcount by 150 towards the end of Q2 as part of a talent upgrade initiative.

• Investments made in consolidating, upgrading, and expanding facilities, and adopting AI-based applications like Salesforce.

Capital Transactions:

• Repurchased around 1.5 million shares during Q2.

• Cumulatively, over $300 million has been spent on buybacks since the IPO.

• Net income for Q2 was $36.8 million, with diluted earnings per Class A and Class C share at $0.62.

Balance Sheet and Cash Position:

• End of quarter cash position stood at over $725 million.

• Debt at the end of the quarter was $1.75 billion.

• Net leverage at the end of the quarter was approximately 2.8 times.

Guidance for 2023:

• End-to-end volumes expected to be between $108 billion to $114 billion, showcasing a growth of 51% to 59% year-over-year.

• Gross revenues predicted to range between $2.6 billion to $2.7 billion, reflecting a 30% to 35% growth year-over-year.

• Anticipated adjusted EBITDA margins to expand over 650 basis points.

• Adjusted free cash flow expected to be a minimum of $240 million.

• A cautious approach adopted for the macro environment for the entire year’s guidance.

Final Thoughts:

• Strategic initiatives, such as the Finaro acquisition, may impact the timing of financial gains.

• As the year progresses, expect a significant change with a heavy leaning towards Q4 due to strategic plan execution.

Closing comments and Q&A followed.