Beauty Health Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 11 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Shift 4 Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer Thank you.

Operator

I would now like to turn the call over to Tom McCronin, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, good morning, everyone, and welcome to Shift4's Q2 2023 earnings conference call. With me on the call today are Jared Isaacman, Shift4's Chief Executive Officer Taylor Lauber, our President and Chief Strategy Officer and Nancy Dissmann, our Chief Financial Officer. This call is being webcast on the Investor Relations section of our website, which can be found at investors. Shiftforward.com. Today's call is also being simulcast on Twitter Spaces, which can be accessed through our corporate Twitter account shift4.

Speaker 1

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 the result of certain risks, uncertainties and many important factors. Additional information concerning those factors is available in our most Recent reports on Forms 10 ks and 10 Q, which you can find on the SEC's website in 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.

Speaker 1

With that, let me turn the call over to Jared. Jared?

Speaker 2

Hey, thanks, Tom. Good morning, everyone. So we are pleased with our 2nd quarter results, Including how we position how we're positioned heading into the back half of the year. So for the quarter, we posted 59% end to end volume growth driven by continued strength from our core of restaurants, hotels, specialty retail, along with an increasing contribution from our new verticals, especially in sports entertainment, ticketing Our growing base of large enterprise accounts. In addition to Q2 performance, we're especially happy with the setup for the second half of the year, thanks to investments that began years ago, Including international expansion along with July trends.

Speaker 2

To this end, we're raising our full year guidance across all our KPIs. So we feel very good about our year to date financial performance and remain on pace to deliver full year results in excess of what we assumed at the start of the year. We're generating margin expansion as we demonstrate the scalability of the business by maintaining a relatively flat headcount, streamlining operations by taking out the parts And adding incremental enterprise related volume with no corresponding operational expenses. We're implementing new internal systems. We are leveraging AI And other productivity tools that will further streamline our operations and drive additional margin and free cash flow improvements in the years ahead.

Speaker 2

In addition to the profitability and free cash flow improvements, we continue to grow very quickly. So for the first half of twenty twenty three, we generated 30% Growth in gross revenue, as well as gross revenue less network fees in line with our medium term targets established in the fall of 2021. The midpoint of our updated 2023 guidance implies that gross revenue less network fee revenue growth will average over 30% in the back half of the year as well and especially in the Q4, including strong visibility into enterprise and international opportunities. As I mentioned before, companies like Shift4 that are winning merchants and growing payment volumes are doing so because they're adding value to the commerce experience well beyond just We had thousands of new customers every month. We're talking very busy restaurants, some of the nicest resorts in the country, Demanding major league stadiums, theme parks, we've got a Fortune 500 customer this quarter and more.

Speaker 2

In fact, I believe the customer logos that we are featuring this quarter in our earnings material are the most impressive list yet And why we have so much visibility and confidence in the back half of the year. These customers didn't pick Shift 4 because we were a penny less per transaction, But rather for how we enable a complete commerce experience and in turn provide more value to our merchants. So consistent with past earnings, I'm going to provide some additional Color on our core, which as a reminder, consists mostly of restaurants and hotels, as well as our progress in new verticals and our global expansion initiatives. So starting with our core, our core remains the primary engine of our growth. And as you can see from the various logos in our quarterly shareholder letter, we continue to gain market Restaurants and Hospitality.

Speaker 2

And to be clear, we win a lot of net new customers, but we are also uniquely advantaged As we capture more wallet share by converting software and gateway merchants to our end to end offering. For example, net new wins this quarter include the Fontainebleau Resort in Las Vegas is scheduled to open this upcoming call, as well as the Virgin Hotels in Chicago, Dallas, Nashville, The Langham Hotel on Fifth Avenue in New York City. We also captured more wallet share by moving gateway customers like in town suites Uptown Suites, which are 2 extended stay hotel brands to our N10 platform. So we have always served a large and growing portion of the table service restaurants in this country, but we are especially proud of the growing momentum we're in this country, but we are especially proud of the growing momentum we're seeing with our new cloud based POS solution, which is called Skycap. So this past quarter, we installed nearly 6,500 Skycat POS systems, including installations at some large venues such as KC Live!

Speaker 2

In Kansas City, Texas Live in Arlington, Texas. These are all net new customers and we released a pretty cool sizzle reel on Sky Cab last week. I encourage you to take a look, so skycap.com. There's been a lot of news this quarter regarding competitors potentially introducing new fees on their restaurant customers. So more specifically, POS companies charging restaurant patrons directly for online orders.

Speaker 2

So we never considered implementing such fees, but we also don't have to charge more given our margin and profitability profile. I will say the events over the last month have created unexpected opportunities and boosted demand for Sky Cab that we are beginning to realize now. For those not familiar, our Skycap restaurant offering has a much lower total cost of ownership and lower cost of acquisition versus our peers. So for a typical restaurant processing $1,500,000 of annualized volume, our solution is less than a third the cost of our primary competitor, including 0 upfront costs. We believe restaurant operators are keenly focused on the total cost of ownership.

Speaker 2

And as we've said many times, there is nothing technologically cosmic about bringing up Cheeseburger. So we don't depend on pricing power to grow our restaurant business. And if the total cost of ownership and trust matter, ChiTabs looking extremely favorable in this regard. This past quarter, we added thousands of new restaurant customers, including Wides Restaurant Group, which operates 11 restaurants in the Washington DC area, including my personal favorite, the historic Old Epic Grille, which is Washington DC's oldest saloon. To summarize, our core focus on restaurants and hotels remains a reliable engine of growth for Shift4 and will continue to deliver fantastic results as we win net new merchants And take share of a large addressable market as well as gain more wallet share from those customers that move from our gateway and legacy software solutions.

Speaker 2

Despite balanced growth coming approximately fifty-fifty between net new customers and wallet share gains, We believe we remain a unique story in our ability to achieve growth targets without having to add a single new customer. Let's move on to new verticals. So we continue to crush it in the sports and entertainment vertical. This past quarter, we added the Carolina Panthers, the Texas Rangers, Charlotte Hornets, St. Louis Blues, Toronto Blue Jays, Philadelphia Phillies, Purdue University and the University of Maryland.

Speaker 2

And these are just the ones we received approval to disclose. We're having success across all professional sports, NFL, MLB, NHL, NBA, as well as college sports. We also renewed and expanded the scope of our agreement with The Happiest Place on Earth. Again, these incredible merchants are not Picking us because our service costs $0.01 less per transaction, but because our technology powers the entire guest experience from parking, retail purchases at Fanatics To the concession stands, to the VIP suites and the in mobile ordering, and it's obviously working well. It's also worth noting that our sports and entertainment wins typically start with mobile and seat ordering and then evolve into concession, merchandise, parking, But the big prize is ticketing.

Speaker 2

For example, this past quarter, we turned on key ticketing for the Florida Panthers. It takes a long time to win and complete a ticketing integration. And I think most of you know we already turned on SeatGeek and Packulist, We are really excited to announce that we've completed our Ticketmaster integration. So that rounds out the big three and this is a pretty big deal. So after investing in the vertical for nearly 2 years and learning from a signature customer in St.

Speaker 2

Jude Children's Research Hospital, We have signed a number of non profit organizations to our end to end platform this quarter, including the American Cancer Society, Cure Rare Diseases and the Health Wagon And our pipeline of cross sell opportunities remains very strong as the Giving Block continues to add new non profits to their platform and we continue to use this as an important pipeline for our end to end We also continue to build out key software and payment integrations with leading donation platforms like the Donorbox, Which currently serves over 50,000 organizations worldwide and given GAIN, a crowdfunding platform for nonprofits that helps raise funds for events like the upcoming Boston Marathon. These wins represent the most material update since we entered the non profit vertical, which as a reminder represents over $450,000,000,000 a year in payment donation line. Our ownership of the Giving Block has also opened up opportunities outside the non profit vertical. For example, we've helped several reputable crypto merchants with paying and pay requirements. For now, this volume is being handled exclusively by Finaro given their card not present expertise and international capabilities.

Speaker 2

We have learned that these merchants have been underserved and overcharged and received suboptimal approval rates. For example, we are finding that the Finaro approval rates are 8% to 12% better than competitors for e commerce transactions in this vertical. It further reinforces our decision in acquiring Finaro and their modern tech stack. So we're pleased with the results of our efforts thus far and with respect to crypto merchants, we do intend to proceed slowly. We're learning a lot and ideally We'll meet the demand of this fast growing underserved market.

Speaker 2

So in gaming, we completed an integration with GaN, the number one end to end payment Gaming platform for brick and mortar gaming operators. In SecuTek, we signed a multiyear agreement with a Fortune 500 software company to utilize our payments platform and enable their SMB merchants the ability to accept payments. Our partnership with Fanatics also continues to bring us new end to end volume As Fanatics grows, so do we. So Fanatics signed WWE, I think it's wrestling and by virtue of our growing partnership with Fanatics, We will serve as WWE's in venue payments provider for merchandising sales. Our relationship with Fanatics has also contributed to Being awarded the payment processing business for in venue merchandise sales for the Inter Miami Soccer Club, which is just in time for the massive spike in sales of Number 10, Messi Jersey.

Speaker 2

There are additional venues and interesting opportunities that we are exploring with Fanatics as well. In a very short period of time, our new verticals and several strategic enterprise accounts are driving meaningful portion of our growth in volume. The take rates are obviously very different when dealing with customers who process 100 of 1,000,000 and in some case 1,000,000,000 a year in volume. But these are profitable relationships that require far less overhead, almost no hardware or growth CapEx and are growing at much faster rates than our core markets. Let's turn to global expansion.

Speaker 2

For 24 years now Shift4 has been growing in the most competitive payments markets in the world. We've accumulated incredible customer relationships across restaurants, hotels, specialty retail, travel, gaming, non profit, e commerce, many of which locations all over the world. It obviously took an agreement with a strategic merchant to finally kick off global expansion initiative That we see is key to fueling the next 24 years of growth at ShiftWear. As many of you know, we signed an agreement with the European payment platform Finaro in March of 2022. We believe we're now on a path to close by the end of the current quarter.

Speaker 2

We are raising guidance to account for organic outperformance and visibility into the second half year opportunities, Especially in the Q4. Guidance also includes a Sonaro contribution in the Q4, but it's also important to note we would have been raising guidance Regardless of the state of this transaction. It's also possible we could close prior to the end of the current quarter, which would serve as further upside to our already increased guidance. In addition to the important FINAR update, we've been moving on to the next chapters of our international expansion strategy. It's very important.

Speaker 2

We've organically expanded into several Eastern European countries, Canada and into the Caribbean. We're very pleased with the progress and already have restaurants in Europe using Skytap on the Finaro platform. Additionally, we've begun testing several hotel property management As mentioned above, we believe the bulk of our growth over the next few decades will come from taking the same products and Services and integrations that made us successful in the USA and bringing them all over the world. To that end, international expansion remains our number one Allocation priorities both in terms of our M and A pipeline and organic investment initiatives. It's important to emphasize that we are not flying blind here.

Speaker 2

We have the best customer possible to learn from and we're going to follow them all over the world. I know I mentioned it last quarter, but despite how we sound on earnings We really spend very little time on what is clearly working and almost all of our energy on what is broken. We have a lot of parts to take out across our legacy gateway tech Next, Legacy POS software and we're leaning into the ship 4 ways, so we can become a better, more efficient and well executed organization. Each day that goes by, we become a better business. And with that, I'll turn the call over to our President

Speaker 3

and Chief Strategy Officer, Taylor Waback. Taylor? Thanks, Jared, and good morning, everyone. I'd like to provide an update on the operating environment, the status of Panera and then our capital allocation priorities for the remainder of this year. As Jared mentioned, our primary growth algorithm has been adding new merchants, coupled with the growing share of wallet within our existing installed base.

Speaker 3

We have a unique software and technology assets that not only afford us the ability to attract new merchants, but also convert existing customers to our end to end platform. The ability to gain share of wallet within our customers extends beyond our gateway as we have tens of thousands of software customers and restaurants We're already integrated with us, but using others for payment processing and the opportunity to add thickening volumes to our sports and entertainment installed base. For the quarter, our end to end volumes trended slightly better than we expected, largely due to strength in hotels, volume and enterprise accounts seasonal pattern heading into the summer holiday period with a step up in spending beginning Memorial Day weekend that accelerated as vacations kicked into high gear in June Through the July 4th weekend, we remain cautiously optimistic consumer spending will continue to remain resilient, Although our guidance does contemplate continued moderation in restaurant spending. Spending at restaurants has moderated slightly, but not in excess of our Early expectations. This moderation has been offset somewhat by better than expected trends in hotels, as Jared mentioned, sports and entertainment.

Speaker 3

Spreads in our core verticals remain stable, and we've begun to annualize the impact of some of our new large customers, which slow spread compression. We anticipate that our blended spreads will average 65 basis points for the full year, and we do see opportunity for upside through international alternative payments and other initiatives. Last quarter, we announced the acquisition of a restaurant POS partner of ours called Focus POS. And since closing Just a few months ago, we've successfully converted 10% of their customers to our end to end platform. While discussing restaurants, as Jared mentioned, we've added nearly 6,500 SkyPass systems this past quarter.

Speaker 3

As some of you may know, a few competitors have attracted attention with a price controversy that we fundamentally disagree with. We have recently launched a marketing promotion that is generating considerable interest and highlights our total cost of ownership advantages And the outsized value our products delivered to merchants. Importantly, with this campaign, our payback on customer acquisition cost is still within 18 months. We are confident this will attract increasing attention for the Skytap brand. After more than 15 months in signing an acquisition agreement with Panera, believe you're on a path to closing by the end of this quarter.

Speaker 3

And as a result, we are updating our full year guidance to include a portion of the expected Panera contribution. As a reminder, when we announced the deal, we estimated a full year EBITDA contribution of $30,000,000 or a single quarter of roughly 7.5 And while we did not include revenue guidance, we did say that we anticipated Panera to be a drag on margins as we executed against our integration plan. The upside of this prolonged regulatory review period is that we've been able to work in partnership against our largest deal objectives in the meantime. And as a result, the combined EBITDA margin profile is expected to be better than we originally anticipated. As Jared mentioned earlier, we have great visibility towards many growth Especially as we look into the Q4.

Speaker 3

We're excited to move on to our next chapter in the Panera story. We do have Skytap POS systems in Europe using Panera's processing platform and have begun working on our product distribution and support strategy. While we anticipate the typical seasonal increase in Q3 volumes relative to Q2, the timing of new integrations, commercial partners and international opportunities Opportunities that are largely focused on our international expansion. These range from adding restaurant distribution in Europe to accelerate the introduction of Skytap POS, well as several transformational opportunities that will extend our presence in other regions around the world. I would like to note that we view capital allocation as a core competency of Shift4.

Speaker 3

Our disciplined approach to capital deployment is a cornerstone of delivering shareholder value, whether it be Venue Next, Focus Paws, In sourcing distribution or even a small investment in SpaceX all serve to grow shareholder value meaningfully. Conversely, we raised capital when the market supported us the ability to do so attractively. As an example, our weighted cost of debt is currently 1.35%, and we do not have any maturities until December of 2025. Our balance sheet, cash generation and profitable growth has positioned us incredibly well for the current environment of uncertainty. We have the ability to move quickly in pursuit of businesses that possess capabilities that will enhance our offering and help us expand throughout the world.

Speaker 3

With that, I'd like to turn the call over to our CFO, Nancy.

Speaker 4

Thanks, Taylor, and good morning, everyone. I'll first review our financial performance for the Q2 And then review our outlook for fiscal year 2023. As a result of our consistent execution, we delivered another quarter of impressive results, Including quarterly records for volume and gross revenue less network fees, we continue to balance strong top line growth with disciplined investments As evidenced by the strength of our adjusted EBITDA margin and our adjusted free cash flow conversion. 2nd quarter volume grew 50 $800,000,000 year over year. Q2 gross revenue grew 26 percent to $637,000,000 and gross revenue less network fees grew 25 percent $228,000,000 year over year.

Speaker 4

Our quarterly results were driven by the continued strength of our high growth core, Momentum across our enterprise merchants, including new verticals and improved economics earned from our gateway customers. We also entered the year with Higher unit economics within our restaurant channel due to our strategic decision to in source a large portion of our go to market distribution last year In connection with the launch of Skytap. 2nd quarter gross profit was up 61% year over year to $159,000,000 And our gross profit margin was 70% for the quarter, representing over 1500 basis points of improvement year over year. The blended spread for the Q2 was 65.3 basis points, driven by massive volume growth, including growth from enterprise merchants at lower, Market appropriate take rates. As Taylor mentioned, we continue to expect our blended spreads to average around 65 basis points for full year 2023, With Q3 likely being the low point and then a strong rebound in Q4 as more international volume and APM opportunities are unlocked.

Speaker 4

I want to reiterate that the year over year spread compression is a function of rapid volume growth from our enterprise accounts. Spreads in our high growth core, including restaurants and hotels, remain stable. In Q2, total general and administrative distribution in sourcing and acquisitions we completed over the last 12 months. We are still fighting to finish the year with headcount flat to the start of the year. On that note, towards the end of the second quarter, we reduced headcount by 150 in line with our overall talent upgrade initiative, Which came with a $3,500,000 one time severance cost.

Speaker 4

We are also taking advantage of some of our outperformance to consolidate, upgrade and expand our facilities, replace legacy internal systems with Salesforce and other AI based applications That should further support our flat headcount goals. For the quarter, we reported adjusted EBITDA of 110,000,000 Which is up 68% over the same quarter last year. The resulting adjusted EBITDA margin for the quarter was 48%, Representing over 1200 basis points of year over year expansion. We remain highly committed to a disciplined approach to cost management, While continuing to balance investments to support our growth, including international expansion, new vertical expansion, The Skytap product launch and ongoing talent upgrades across the organization. Additional opportunities to further improve margins are still on the horizon As we harness the productivity of AI tools, implement new internal systems and continue to take out the parts across the business to further enhance the scalability.

Speaker 4

Our adjusted free cash flow in the quarter was $64,000,000 and our adjusted free cash flow conversion was nearly 59%, Well above our current full year guidance of 55% plus. It is worth noting that Q2 includes a semi annual interest payment of roughly $10,400,000 which can distort the quarter to quarter comparison. And then with respect to capital transactions, During the quarter, we repurchased approximately 1,500,000 shares. We have cumulatively deployed over $300,000,000 on buyback purchasing, 5,800,000 of shares at an average price of $52 since our IPO. Of note, the cumulative dilution in shares Count and share counts from our IPO has grown by less than 2% in over 3 years.

Speaker 4

As employees, we own over 36% of Shift4 And are very thoughtful about managing dilution. Our remaining buyback capacity is just over $150,000,000 We will continue to be opportunistic in repurchases. You can see a complete reconciliation of our shares in the back of our earnings materials. Net income was $36,800,000 for the 2nd quarter. Basic earnings per Class A and Class B share was $0.43 And diluted earnings per Class A and Class C share was $0.62 Adjusted net income for the quarter was $63,400,000.74 per AMC share on a diluted basis based on 85,700,000 average fully diluted shares outstanding.

Speaker 4

We are exiting the quarter with just over $725,000,000 of cash, dollars 1,750,000,000 of debt and $100,000,000 undrawn on our credit facility. Our net leverage at quarter end was approximately 2.8 times. Excluding the buyback, we would have ended the quarter at 2.5 times net leverage, Which reinforces the rapid deleveraging capability of the business and the capital deployment flexibility our cash flow generation affords us. Our strong balance sheet and free cash flow profile will continue to allow us to invest in the business, pursue our strategic priorities And opportunistically repurchase shares. Turning to full year 2023 guidance, we are Increasing the low end of the range for all 4 of the KPIs and the high end of the range for volumes, gross revenue less network fees and adjusted EBITDA.

Speaker 4

Our updated guidance for 2023 includes total end to end volumes of $108,000,000,000 to $114,000,000,000 Representing 51% to 59% year over year growth. Gross revenues of $2,600,000,000 to 2,700,000,000 Representing 30% to 35% year over year growth gross revenue less network fees of $945,000,000 to 980,000,000 Representing 30% to 35% year over year growth and adjusted EBITDA of $435,000,000 to $460,000,000 Representing 50% to 59% year over year growth. We anticipate adjusted EBITDA margins To continue to expand to over 650 basis points at the midpoint of our guidance ranges, up from our initial assumption of 50 basis points And adjusted free cash flow to be at least $240,000,000 up from initial guidance of $200,000,000 It is important to note that as the year progresses, we remain cautious about the macro environment and have reflected this in the entirety of our guidance ranges. The low and high estimates represent identified and quantified strategic initiatives such as the Funaro acquisition that cannot be precisely timed. Should these move more quickly, we expect financial impact sooner.

Speaker 4

Similar to last year, when you saw a sudden increase in As a result of all the work in our new verticals, you can expect some step function change and a heavier weighting to Q4 as we execute on our strategic plan. With that, let me now turn the call back to Jared.

Speaker 2

Thank you, Nancy. And before opening I first wanted to thank those that are tuned into our inaugural simulcast via Twitter Spaces. I don't think we had it perfectly dialed in this morning, but we'll get that right going into the next quarter. But I did want to respond to a question that was submitted via social media. Our question comes from Krishna Mohammed from Toronto, Canada, who's been ShipForce since our IPO.

Speaker 2

The question was, what do you believe is the most challenging aspect in growing the company to the levels of Stripe or an Adyen Of the world and what is the path to get there? And it's a great question. So look, our biggest challenge right now also represents our biggest which certainly is taking the same products and software integrations that did that has made us successful in the U. S. Over the last 24 years And bring them into markets all over the world.

Speaker 2

And probably the most challenging part of that is card present processing capabilities. I mean, Chip 4 strength unlike those names of Stripe and Adyen actually come from processing transactions face to face in venues, Which is so much harder to do on a global level than doing card not present processing. So really what we're after Has not been achieved yet, not even by those 2 great companies that you referenced in your question. So that again, it represents the biggest challenge. It's also what we're most Excited about because it represents the biggest opportunity.

Speaker 2

So thanks Krishna for that. And operator, we are ready to take questions.

Operator

We will pause just for a moment to compile the Q and A roster. Your first question comes from the line of Darrin Peller with Wolfe Research. You may go ahead.

Speaker 5

Hey, thanks guys. Nice job on the quarter. I just I want to just very quickly clarify. The Guidance rates came from a combination, it looks like, of organic and FENAR obviously being included for the quarter. So just if you could help Break that apart and just let us know what's contributing from what.

Speaker 5

But also, I guess, bigger question for me is just the magnitude of upside to EBITDA continues to And so when we break down whether it's gateway pricing or it's just operating leverage or and just how much visibility you have on that front to continue that Trajectory, it'd be great to hear. Thanks, guys.

Speaker 2

Yes. Hey, thanks, Darren. Jared here. So, copy on the first question. I think we fully anticipated that.

Speaker 2

So let's just talk about Finaro and guidance. So there was a positive development in the last couple of weeks that gave us a lot of confidence On our ability to bring that transaction to a close potentially rather soon, although we said by the end of the quarter. Given that consideration, it just felt prudent at this time to provide appropriate guidance, so we're not revisiting this With everyone in a couple of weeks. That said, we tried to be pretty clear that we included a good portion of Pannaro in our 4th quarter And that's meant to just give us a little wiggle room because it's still an international transaction here, right? So I think if you kind of like break down the that were originally set with the Finaro transaction, which Taylor reiterated on the call, assume a good portion of that.

Speaker 2

What that leaves you with is a very healthy organic outperformance, and that's the message everyone should be taking away from that transaction. It's also like it's also important to put it out there, so we can kind of move on to the next chapter because it's been 15, 16 months and we're doing an awful lot with international and we expect We'll be talking about an awful lot more and kind of the in the future ahead. So, and then kind of moving on to the next portion of your question, which is just continued profitability the continued strength and profitability profile of the business with margin expansion, free cash flow, EBITDA growth. I mean, we keep talking about these same themes of taking out the parts. We have a lot of For any of the negatives that have ever been said about Shift4, they got a lot of gateway connections, they got a lot of legacy software.

Speaker 2

We agree. That's why we're taking out those parts. I mean we supported like 7, 8 different legacy software solutions 2, 3 years ago. We've now Trade our resources and consolidate our brand on 1. Every quarter that goes by, we're going to have more business, more resources on our cloud based solution, less On our legacy solutions, we're doing the same thing on our gateway.

Speaker 2

We rolled out AI tools that can program a restaurant POS menu In 30 minutes instead of 5 hours. It's what we said before, almost every enterprise customer that we're chasing down right now Requires less overhead to support than the small restaurant customers of years ago. I mean, I think we talked about the Carolina Panthers this quarter adding ticketing volume. We didn't have to hire anyone to do that. We didn't have to deploy any hardware devices.

Speaker 2

We didn't have to issue any signing bonuses. So it's like we said at the end of Q4 Last year, literally every initiative that's underway in this organization right now is going to lead to better margins and better free cash flow And you're just seeing the results of it now halfway through the year.

Speaker 5

Progress to go. I guess my quick follow-up would just be, there's so many Areas that you're growing your volume and outperforming. And I guess if you could just help us understand the breakdown again of, again, whether it's gateway conversion or same store sales or last year's anniversary of big Big clients or even new business now. Any sense in directional terms of what drove the most or maybe rank it in some form? Thanks

Speaker 2

guys. Yes. I mean just high level and then I certainly open it up to Nancy or Taylor to fill in the blanks. But highlighted in my script like this past quarter was another fifty-fifty event. And that's it's an approximation, but if you just look at the reference wins, All the Virgin hotels were net new wins in this quarter.

Speaker 2

Obviously, Fontainebleau was a net new win. I think last quarter, there were 2 other big spherical Vegas resorts that we talked about, those were just constructed. So like you're getting Half that's coming from net new. Almost all of our Skytap is net new. I mean, we have no active upgrade campaign for our legacy customers right now on that.

Speaker 2

So you've got a lot of net new, but then you also have in town suites, that's 200 locations. It's still I'd say fifty-fifty. I mean if it's Maybe because we have so many new verticals that never represented a gateway conversion, it will trend more to net new over time, I'm sorry.

Speaker 3

Yes. So when you talk about customers joining, the stats Jared gave are perfect. It gets a little bit murkier when you think about volume growth because You do have really big customers annualizing over the course of the last year. You have a strong ability to gain share of wallet in places like And we mentioned this multiple times throughout our scripted remarks, but adding on ticketing to existing stadium customers of which we have a lot is Going to be a big driver of growth now that we have all of the requisite ticketing integrations completed. So the volume growth can get a little murky, but what we focus on is adding customers.

Speaker 3

That's really what drives the business. And then when you've got the right customers and you Focus on your integrations, share of wallet grows beyond that as long as you're delivering for good customers who are growing. So Hopefully, that gives you enough color. Maybe just one thing to add on, and we foreshadowed this. At the beginning of the year, restaurant volumes Moderate slightly, hotels have been a bright spot.

Speaker 3

I think we mentioned probably with you, Darren, in an investor meeting A few months ago that we were pleasantly surprised by hotel volumes, a little bit more pessimistic than most, I think, at the beginning of the year. They've continued to shine. People are out and traveling.

Speaker 5

That's great. Sounds like broad based strength guys. Thanks again.

Operator

Your next question comes from the line of Will Nance with Goldman Sachs. Your line is now open.

Speaker 6

Hey guys, good morning. I appreciate you taking the questions. Hopefully you can hear me. I wanted to ask a question on sort of the cadence in the back half of the year, Q3, Q4. I heard several comments throughout the Tripped that some of the growth this year will be back half rated.

Speaker 6

It sounds like that's more kind of incremental growth in the 4th quarter And that kind of weakness in the Q3, but maybe you could just help us think sequentially from second to third, what are your kind of expectations and how are you thinking about the ramp into 4th?

Speaker 4

Yes. I think that's the way you heard it is exactly right. Very similar to last year, we've got a couple of Data irons in the fire that are kind of step function. And so we're kind of doing our best to kind of schedule when we expect to see those ramps, Especially on the international and kind of some of the APM and exciting things we've got going on there. They're just a little bit Pushed.

Speaker 4

I think in our probably early guidance, we thought maybe we'd see those a little bit sooner. So guys kind of put some caution in there and we've kind of back A little bit more than maybe when we started out the year at our original guide point. So that's really the message. It's not that something is really Falling out of Q3, it's just kind of a step function of when some of that kind of higher take rate volume and some other new vertical initiatives are going to be kicking in.

Speaker 3

And this is important, Will. So for investors and analysts who followed us for a long time, C3 is traditionally the strongest quarter For the business, all of these new initiatives balance out the business in a really nice way and sort of create a slightly different seasonal profile. So you saw this last year, as Nancy mentioned, with Q4 delivering, I think, stronger than expectations. And it's largely because we're adding on all these new verticals that we've been talking about for 2 years now, and they just kind of fire on different cylinders. So It's great for the overall kind of visibility into the year.

Speaker 3

We just want to caution that Q4 will represent a stronger quarter relative to kind of a full year picture than it has in

Speaker 6

Got it. That's helpful. And then just as a follow-up, the SkyTabs 6,500 locations In the Q2, Jared, I know you're not a subscriber to kind of location counts overall, but it is a pretty robust number and pretty on par with The large competitor that you guys are referring to. So maybe you could just talk about the cadence there. Like is that kind of a level of location growth and maybe just talk through any issues of comparability with some of your peers?

Speaker 2

Yes. I mean, first of all, we've tried to be very specific and not getting into the location count game. Like I think even previous expectations set is that we are very content being 2nd place at the end of the year with Back to locations, if we're targeting more upmarket, higher take rate customers and nothing's changed in that regard. Other than I'd say, look, demand is good. Demand is really good right now.

Speaker 2

Whatever data that we've shared thus far was obviously prior to any Marketing campaigns or incentives that we've made available, which has only boosted demand. So I think we have pretty We've always been incredibly confident in our product in this vertical right now. We have awesome distribution and we have decades of Experience chasing down restaurants. And as I mentioned before, like this is there's nothing cosmic about bringing up a cheeseburger. Like I don't think you can necessarily compare the product In that space, Steve, some of the most sophisticated like AI systems in the world, it's a cloud based solution, brings up a Cheeseburger drives operational efficiencies in a restaurant.

Speaker 2

We know a lot about it, built a good product for it and good distribution. We expect to have very healthy demand throughout the year. I think we'll Again, we won't be in the location count game every quarter, but we'll try and give you some updates from time to time so you know that it's working.

Speaker 3

No, Will, I just the one thing I want to add on to that is, our merchant adds is not at all a surprise to us from where we sit in the business. I think it can be a little bit of a surprise externally because we're corralling those ads around a single brand in Skyfab. But keep in mind, we've been operating, as Jared mentioned, multiple Point of sale brands for a long period of time. And our ads have been very strong and steady. I think last published stat was over 50% volume growth Restaurants over a multiyear CAGR that included a pandemic.

Speaker 3

So I think the world is just getting around to seeing a consistent brand in the marketplace From Shift 4, but under the hood, we've been delivering this restaurant, merchant add cadence for quite a while.

Speaker 6

Really impressive. Appreciate you taking the questions.

Operator

Your next question comes from the line of Tim Chiodo with Credit Suisse. Your line is now open.

Speaker 3

Great. Thank you. I want to dig into the ticketing. So the Ticketmaster announcement, now you have Ticketmaster, Pacquiao and SeatGeek. So I want to talk about how differentiated this is.

Speaker 3

Maybe you could just talk about if anyone else even has this kind of setup when you go into a stadium or a team and you have the You have the restaurant and now you have the ticketing. So you can fully provide to them literally payments across all of their main venues, if you will. Can you just talk about if anyone else is in that ballpark or how differentiated that is? And then a minor just modeling follow-up on that. Is there any kind of a revenue share that goes back to the what is effectively the ISV in terms of the Ticketmaster's, the Pacquiao and the SeatGeek's?

Speaker 3

Thank you.

Speaker 2

Yes. Hey, Tim, thanks for that question. Now, of course, we always believe that it's a very robust competitive landscape, Especially with respect to sports and entertainment, but we do believe we've been investing very healthy into a category leading product that's only gotten better, Especially with respect to all three of those ticketing integrations. I can't speak to what anyone else out there has, but you can see the logos every quarter. Doing a great job there winning.

Speaker 2

Ticketing is huge. I think we really prioritized that like A couple of years ago, I mean, we knew in seat mobile ordering was going to be big, but it's not the lion's share of the volume. So using that as kind of The foot in the door to get what is the prize, which is ticketing volume was I think like a really smart tactic a few years ago And it's paying out very well now. So having all three ticketing integrations pretty important. In terms of the rev share to the ISVs, My understanding is deal by deal based.

Speaker 2

So, it's I think deal by deal, team by team. But, ticketing in general It's several times that in terms of from a volume contribution perspective than the actual stadium itself and the take rates are better Probably by several times as well. So even with the revenue share, it's still like it's still a nice contribution to the business, Especially since like again, there's no corresponding OpEx associated, no growth CapEx associated with it. It just kind of flows through.

Speaker 3

Excellent. Thank you, Jared.

Operator

Your next question comes from the line of Dan Perlin with RBC, your line is now

Speaker 2

open. Thanks. Good morning. I wanted to

Speaker 7

go back to The commentary around adding distribution in Europe and my question I guess is really can you just maybe flush out what that Specifically means, I mean, are you thinking about there's distribution assets there that you're already tethered to that you want to buy in, similar to what you've done with insourcing? Or are there Or is this kind of a footprint grab in a country? I'm just trying to understand when you talk about capital allocation to distribution in Europe, what that flavor really looks like?

Speaker 2

So that's like a really great question, Dan. So it varies based on product and service, right, just the same way it does here in the U. S. So we have 550 plus software integrations that all have these are some of the largest software companies in the world. They all have their own support Structure, they have their own distribution arms, in which case simply making available an end to end payment solution to them With that integration in Europe, the same as we do in the U.

Speaker 2

S. Is really straightforward. We don't have to we don't really have to buy anything in That's just organic investments and that's what we're doing when I said in my prepared remarks like we are working through Our hotel property management system integrations right now in Europe. So this is your micros, Agilisys, your Microsoft, these type of integration providers, in which case again, Very little we have to do in Europe because those ISVs themselves possess all the infrastructure and distribution capabilities. Now with respect to Sky Cab, That's a different story, right?

Speaker 2

That's our product, just like venue next or our sports entertainment product is our product. And in that regard, we are looking at a lot of different paths to distributing Sky Cab in Europe and then providing local service and support which is pretty important. That is a very high priority for us now that The product is in fact processing transactions at restaurants in Europe. So I mean Europe is I think many of you know like we spent a lot of time there It is from an integrated payments perspective at least 10 years behind the U. S.

Speaker 2

So this is a lot of opportunity. I mean there's going to be A really interesting land grab that I think is coming up and it's why it's a high priority for us to kind of open up a new front there with respect to our restaurant POS product. Awesome. Can I just ask a follow-up on that?

Speaker 7

You mentioned Micros, they used to have a lot of they still do have a lot of hotel payment systems out in Europe. So I'm wondering, Is there a parlay for Skytap to be put into those hotels for restaurants and things of that nature? Is that just a natural extension for you? Or is That not is contemplated today. Thank

Speaker 2

you. I mean, I have to believe that Shift 4 processes payments That originate from Microsystems more so than anyone else in the world and I would say by like maybe even in order of magnitude. So From our perspective, we are we have immense expertise with that product. And if the merchant is very happy using micros in Europe I want to process across our rails or using Opera, their property management, the Micro's property management system in Europe across our rails. That's very enticing to us.

Speaker 2

No reason necessarily to rock the boat by replacing it with Skytap itself, which is kind of our philosophy in the U. S. For restaurant customers like TAO, Hakkasan, I'll use micros in the U. S. Very well with Shifor.

Speaker 2

That said, look, the whole restaurant market in Europe right now is Using non integrated terminals, I mean even if they have an old Windows based POS system, they're using this like wireless handheld device to bring to the table, it's not integrated at all. Like that's what we're talking about in terms of prime opportunity to hit with Skytap. So in many respects, we're spending a lot of time in Europe. It really does Look like how it did in the U. S.

Speaker 2

Right at the early days of Mercury Payments, call it like 10, 15 years ago and that's going to create an awful lot of opportunity for

Operator

Your next question comes from the line of Rayna Kumar. Your line is now open.

Speaker 4

Good morning, Garrett and team. Nice results here. I find Slide 7 particularly interesting where you're And then I'll just ask my follow-up upfront. You highlighted that competitor fee Increased in the quarter that most of us have noted. Did you see a notable uptick in

Speaker 2

Rayna, hey, thanks for the questions. Jared, Jared, I'd definitely open up to everyone. I'd say like first in terms of are there pricing opportunities, I mean that's the farthest from our mind right now. As Taylor mentioned, even with this new incentive where we're offering $5,000 to Basically throw out your old system and pay the merchant $1 for every online order for I think the 1st 90 days. We're still inside of an 18 month payback period.

Speaker 2

We believe that there's trust has been broken with customers over the Couple of months. This is shaky ground. This isn't the time really to consider leaning in from a pricing perspective. This is the time to take share. So that's like entirely what we're focused on right now.

Speaker 2

I mean, it's kind of this is the advantage we have. Like we've been doing restaurants and payments for a really long Time in a profitable way. We don't have to price our way to profitability. So that is the farthest thing from our mind at this point in time. What I would say in terms of like demand, the results from this quarter were really prior to Any noise that was in the industry from like a competitive environment.

Speaker 2

I mean most of that noise happened in early July after the quarter had ended. But I will say like there is a lot of demand now. There's definitely like I said some trust has been broken and we've got a promotion out there that I think is going to be pretty enticing. We're expecting good results from it. It's more what you'll see in the second half of the year than what you saw in this last quarter.

Speaker 4

Great. Thank you.

Operator

Your next question comes from the line of Jason Kupferberg from Bank of America. You may now go ahead.

Speaker 8

Hey, thanks guys. So I just wanted to come back on the full year guidance and the increase that's related To Finaro, you talked about the EBITDA piece a bit. I think it's pretty clear you raised EBITDA guidance even ex Finaro Materially, but wanted to hone in, I guess, on the volume side. I think going back to when you originally announced Fonaro, you were Talking about $15,000,000,000 of volume, if I'm not mistaken. So if we take a quarter of that, it's almost 4.

Speaker 8

You raised The N10 volume guidance by 4. So just trying to parse out what's truly organic in the N10 volume raise versus Finaro? Thanks.

Speaker 3

Yes. So a few sort of disclaimer comments on that. We've never given any Seasonality profile of Panera. So I don't want anyone to just divide everything by 4. It's a very different business than Shift 4.

Speaker 3

With that being said, The volume guidance raise does include, obviously, a volume contribution from the organic business. All of the ticketing growth that we talked about, A handful of enterprise customers that are activating all that we expect kind of in the 3rd and into the 4th quarter. So there is both. I want to caution, we're kind of deliberate in not Giving like quarterly level financials of a business, and that I think is prudent, especially because we signed it 15 months ago. So while we included a portion of Q4, you can't simply divide the year by 4.

Speaker 2

Yes. I mean also just to reinforce that point, I mean, we said we gave we included a portion of Finaro in the 4th quarter. I think it's pretty healthy to fair to say that a haircut was applied. The volume growth trends in Shift 4 over, I mean, you look back at however many quarters you want Pretty strong. Nothing's changing about that going into the second half of the year.

Speaker 8

Yes. It seems like there's a lot of underlying momentum. For my follow-up, I wanted to ask about the M and A pipeline. Taylor, I know you talked about it. It sounds like it's maybe getting even fuller.

Speaker 8

I just wanted to take your temperature on what you're seeing in terms of valuations. I think you mentioned there was even some potential transformation opportunities in that pipeline and in theory how high of a leverage ratio would you be comfortable with if the right large deal came along?

Speaker 2

Yes. Well, I'll start by

Speaker 3

saying I don't get to pick our leverage ratio. That's Nancy's territory. So I'll let her comment on that. But I will say, This has been an increasing March since really the beginning of this year, maybe even the end of last year towards, I think I'm a more rationalized seller, right? So we all know what the SPAC praise did to private company seller expectations, Right.

Speaker 3

Even if deals didn't get done and a heck of a lot of deals did get done, seller expectations were elevated to, in our views, completely irrational levels. What you have now is a operating environment that despite some uncertainty is a lot more predictable and a capital markets environment that I think is Much more predictable for business operators to think about what the next 3 to 5 years is going to look like and we are an incredibly safe pair of pants For those operators, we're also inclined, which I think is somewhat unique to use equity to align partners, which is Not something many companies at valuations like we feel ours is are willing to do. But we will give equity like we did in the case of Panera Nickel buyback in the street to align the right shareholders to the objectives we want. So the number of conversations we're having are increasingly increasing and they're more productive, think it's the most important part where people are seeing the combined vision. Keep in mind though, when we sort of planted the seed for international, Your opportunity set is going to grow naturally, right?

Speaker 3

There are just tons of businesses all over the world doing really interesting things on the international front. And now with the completion of Panera, we've got a real proof point. And quite frankly, some champions are willing to tell the story about what it means Partner with us on this journey and that helps grow the pipeline as well.

Speaker 4

Yes. And I would just tack on to that. We We'll always say we don't have a target leverage, but certainly want to keep it well south of that 4 times. But I think you would see us plus us if we know that we could We synergize like Taylor said, there's a lot of good opportunities out there where we know we can quickly delever. And so you've seen us do that and That would be part of that thesis going forward.

Speaker 3

Yes. The thing to keep in mind there because I think a lot of people look at leverage ratios and say what's the impending cost of debt The what's the cost of debt that's been taken on to maintain that leverage ratio? Our cost of debt is 1.35%. Our nearest maturity, as I mentioned in the script, is December of $0.05 So, we've got cash on the balance sheet that we can deploy that can Test a leverage ratio, but at a very, very reasonable cost with an extensive maturity. So as Nancy mentioned, we're not going to do something Even on just a blended ratio that the public markets would seem unpalatable, we actually view capital allocation and M and A as a core competency.

Speaker 3

And so we always need to preserve Some dry powder, but our cost of debt factors into how we think about the cash we use in an M and A transaction as well and we'll be able to get those like Pretty best in class right now.

Speaker 8

Makes sense. Good stuff. Thanks.

Operator

Your next question comes from the line of Ashwin Shirvaikar from Citibank. You may now go ahead.

Speaker 2

Thanks.

Speaker 9

Hey, good quarter, guys. I wanted to

Speaker 1

ask about Yes, the point

Speaker 9

you made in your shareholder letter about expense discipline and maintaining flat headcount And so on. And so the scalability of those efforts, because I think you've said that for a few quarters now, The given the pace of growth, to what extent should we expect Scalability to continue and maybe you could provide more information about the Phoenix AI initiative as well?

Speaker 2

Sure, Ashwin. Yes, thanks for the question. I mean, I try to be like brutally honest about this in Q4 As I could, which is we grew an awful lot during the pandemic as you know and what a terrible environment to hire people in. There's Tons of remote hiring all over the place and nobody despite what they said had like their internal HR and hiring Systems and learning and development education systems super dialed in. And What that results in is like a super inefficient pool of talent like nobody was going to be As productive as if they were under a single roof.

Speaker 2

And I would say during the pandemic when you had like all that euphoria and craziness from a hiring perspective, Ship 4 probably wasn't First choice for a lot of people looking to get into FinTech and payment. So just being grounded in that reality at the end of last year, it was like, okay, We're back. We're putting investments in internal systems like we're bringing people back into our offices and like now is the time to demonstrate the Scalability of the business and if we brought on talent that is underperforming expectations there or not aligned with our strategic priorities then let's move on in a nice And bring in people that are difference makers that we couldn't get in 2020 2021 during all That madness. And that's exactly what we're doing now. So we spent the 1st quarter and a half, if you will, like evaluating our talent And making investments in internal systems like Project Phoenix, which is like pull up overhaul and replacement of many internal systems.

Speaker 2

We're adding sales force. We are using AI Like I said efficiency and productivity mean. And then we are upgrading the talent. And once we have some of the talent that can better contribute to our strategic priorities, We're again moving on very nicely from those that aren't. Nancy mentioned about 150 people at the end of the second quarter.

Speaker 2

And we're going to keep doing that throughout this year. We're going to fight like hell to end the year with same headcount that we began and be a much better and stronger company. If the growth profile continues the way we certainly expect it to and we do achieve even being remotely in the zip code Of that flat headcount then the results from a margin expansion perspective should be pretty strong.

Speaker 1

Hey, operator, I think we have time for any question. Do

Speaker 2

you have a follow-up management? Did we lose you Ashwin?

Speaker 1

Operator, are you there?

Operator

Yes, I'm here. I was going to ask you not sure if you had a follow-up, but I can return them to the queue if you like.

Speaker 2

Please. Sorry, Ashwin, are you still there?

Speaker 1

Ashwin? Operator, why don't we just take one final question?

Operator

Okay. With that being said, your next question will come from the line of Andrew Jeffrey with True Securities. Your line is now open.

Speaker 10

Good morning. I appreciate you squeezing me in. Jared, SkyTab POS It's super exciting given what's happening at the point of sale. Can you just comment on ultimately how scalable You see the solution being I know you have a very important partnership with Micros as you highlighted again today, but it just feels like You have this incredible opportunity to perhaps go up market with your own integrated point of sale solution. I wonder if that's something that over time Tom's a vision for this company.

Speaker 2

Yes. Thanks for the question. I mean, look, Sky, I mean in terms of the products that we've built, that we expect demand to exist for all over the world, I mean our restaurant POS product solution and our and entertainment solution are kind of the tip of the spear. So we're expecting a lot from both those products again all over the world. In terms of Where we're going to focus?

Speaker 2

I mean we said this many times like you never want to be in a market where you can download an app on an iPad and run your business like that's Square territory, PayPal, Clover, I think we're not going to be anywhere near that. We're going to be in the opposite end of the spectrum where like nobody wants to be the most Complicated and demanding customers. And we absolutely have Skytap going in those locations. For example, the live locations we highlighted, I think they have hundreds of systems in certain locations. Like they're they do a ton of volume.

Speaker 2

We have them at United Center and then a lot of stadium restaurants. The product itself is being battle tested in some really, really awesome locations. And I think like the next priority is to Take it all over the world, but there are so many elements to that roadmap that focus around enterprise menu management capabilities. Mean, if you go on our website and you look at our logos, there's some that we don't talk about that have been customers for like 20, 25 years that have thousands of locations In this country, like we learn a lot from customers like that and what they require, that's all part of the roadmap for Skytap. In terms of opportunity, yes, we like it and we especially like it because we think it's a competitive environment of like 2 or 3.

Speaker 2

That's always a good place to be in.

Speaker 10

All right. I appreciate it. I'll leave it at that.

Speaker 2

I

Operator

will now turn the call back over to Jerry Isaacman for closing remarks.

Speaker 2

No, so look, I really appreciate everyone, Everybody joining the call today. We have some good questions, and I'm sure we'll be chatting with many of you throughout the next couple of days, and hope you're all having a great summer. Take care.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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Earnings Conference Call
Beauty Health Q2 2023
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