FOUR - NYSE

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 Shift4 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 session. [Operator Instructions] I would now like to turn the call over to Tom McCrohan, Head of Investor Relations. Please go ahead.

Thank you, operator and good morning everyone, and welcome to Shift4's second quarter 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 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 Twitter Spaces, which can be accessed through our corporate Twitter account @Shift4. Our quarterly shareholder letter quarterly financial results and other materials related to our quarterly results have all been posted to our IR website. I'll call on earnings material 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-K 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. With that, let me call -- turn the call over to Jared. Jared?

Thanks Tom. Good morning everyone. So, we are pleased with our second 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 and 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. 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 head count, 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. In addition to the profitability and free cash flow improvements, we continue to grow very quickly. So for the first half of 2023, we generated a 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 fourth quarter, including strong visibility into enterprise and international opportunities. As I've 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 the credit card transaction. We had thousands of new customers every month. We're talking very busy restaurants, some of the nicest resorts in the country, demanding major lease stadiums, theme parks. We've got a Fortune 500 customer this quarter and more. 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 Shift4 because we were $0.01 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 share in restaurants and hospitality. 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 through our end-to-end offering. For example, net new wins this quarter include the Fountain Blue Resort in Las Vegas that 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 and Uptown suites, which are two extended stay hotel brands to our end-to-end 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 seeing with our new cloud-based POS solution, which is called SkyTab. For this past quarter, we installed nearly 6,500 SkyTab POS systems, including installations of some large venues such as KC Live in Kansas City, Texas Live and Arlington, Texas, these are all net new customers, and we released a pretty cool sizzle reel on SkyTab last week, and I encourage you to take a look. So skytab.com. There's been a lot of news this quarter regarding competitors potentially introducing new fees on the restaurant customers. So more specifically, POS companies charging restaurant patrons directly for online orders. 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 months have created unexpected opportunities and boosted demand for SkyTab that we are beginning to realize now. For those not familiar, our SkyTab restaurant offering has a much lower total cost of ownership and lower cost of acquisition versus our peers. So for a cyclical restaurant processing, $1.5 million 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 cleanly focused on the total cost of ownership. And as we've said many times, there is nothing technologically cosmic about ringing up a cheeseburger. So we don't depend on pricing power to grow our restaurant business. And if the total cost of ownership and trust matter, SkyTab's looking extremely favorable in this regard. For this past quarter, we added thousands of new restaurant customers, including Clyde's Restaurant Group, which operates 11 restaurants in the Washington, D.C. area, including my personal favorite, the historic Old Debby Grill is watching DC's oldest saloon. To summarize, our core focus on restaurants and hotels remains a reliable engine of the growth for Shift4 and we'll 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. Despite balance growth coming approximately 50-50 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, Star Lake Hornets, St. Louis Blues, Toronto Blue Jays, Philadelphia Phillies, Purdue University, and the University of Maryland. And these are just the ones we see approval to disclose, but 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 up because our service costs a $0.01 less per transaction. But because our technology powers the entire guest experience from parking, retail purchases at fanatics, to the concession stand to the VIP suite 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 in-seat ordering and then evolve into concessions, merchandise parking, but the big prize is ticking. For example, this past quarter, we turned on SeatGeek 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. 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 two years, and learning from a signature customer in St. Jude Children's Research Hospital, we have signed a number of nonprofit 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 remain very strong as The Giving Block continues to add new non-profit to their platform, and we continue to use this as an important pipeline for our end-to-end payment line. We also continue to build out key software and payment integrations with leading donation platforms like the donor box which currently serves over 50,000 organizations worldwide and Giving Game, a crowd funding platform for non-profit that helps raise funds for events like the upcoming Boston Marathon. These wins represent the most material update since we entered the nonprofit vertical, which, as a reminder, represents over $450 billion a year in payment donation line. Our ownership of The Giving Block has also opened up opportunities outside the nonprofit vertical. For example, we've helped several reputable crypto merchants with pay-in and payout requirements. For now, this volume is being handled exclusively by Finaro given their card-not-present expertise and international capabilities. 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 and underserved market. So in gaming, we completed an integration with GaN, the number one end-to-end gaming platform for brick-and-mortar gaming operators. In sexy tech, 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 continued to bring us new end-to-end volume as Fanatics grows, so do we. So Fanatic signed WWE, I think it's wrestling and by virtue of our growing partnership with Fanatics, we will service WWE's in-venue payments provider for merchandising sales. Our relationship with Fanatics has also contributed to us 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. They are additional venues and interesting opportunities that we are exploring with Fanatics as well. So in a very short period of time, our new verticals and several strategic enterprise accounts are driving a meaningful portion of our growth in volume. The take rates are obviously very different when dealing with customers who process hundreds of millions and, in some cases, billions 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. So let's turn to global expansion. 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-property, commerce, many of which have locations all over the world. It obviously took an agreement with a strategic merchant to finally kick off global expansion initiative that we see as key to fueling the next 24 years of growth at Shift4. As many of you know, we signed an agreement with the European payment platform Finaro, in March of 2022, and we believe we're now on a path to close by the end of the current quarter. We are raising guidance to account for organic outperformance and visibility into the second half year opportunities, especially in the fourth quarter. Guidance also includes a Finaro contribution in the fourth quarter, 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 service further upside for our already increased guidance. In addition to the important Finaro update, we've been moving on to the next chapters of our international expansion strategy. It's very important. We've been organically -- 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 SkyTab on the Finaro platform. Additionally, we've begun testing several hotel property management system integrations in Europe. 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 capital allocation priority both in terms of our M&A pipeline and organic investment initiatives. It's important to emphasize that we are not flying blind here. 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 found on earnings calls, we really spend very little time on what is clearly working in almost all of our entity and what is broken. We have a lot of parts to take out across our legacy gateway connections, legacy POS software, and we're leaning into the Shift4 way so we can become a better, more efficient and well-executing organization. Each day that goes by, we become a better business. And with that, I will turn the call over to our President and Chief Strategy Officer, Taylor Lauber. Taylor?

Thanks Jared and good morning everyone. I'd like to provide an update on the operating environment, the status of Finaro 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. We have a unique software and technology assets that not only afford us the ability to attract net 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 who are already integrated with us but using others for payment processing. And the opportunity to add ticketing volumes to our sports and entertainment install 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, continuing to ramp to their full capacity. And adding incremental ticketing volumes within sports and entertainment. We experienced a typical 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. Spreads in our core verticals remained stable, and we've begun to annualize the impact of some of our new large customers with 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 have successfully converted 10% of their customers to our end-to-end platform. While discussing restaurants, as Jared mentioned, we've added nearly 6,500 SkyTab systems this past quarter. As some of you may know, a few competitors have attractive attention with a pricing 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 deliver to margin. Importantly, with this campaign, our payback on customer acquisition cost is still within 18 months. We are confident this will attract increasing attention towards the SkyTab brand. After more than 15 months in signing an acquisition agreement with Finaro, we believe we are on a path to closing by the end of this quarter. And as a result, we are updating our full year guidance to include a portion of the expected Finaro contribution. As a reminder, when we announced the deal, we estimated a full year EBITDA contribution of $30 million for a single quarter of roughly 7.5%. And while we did not include revenue guidance, we did say that we anticipated Finaro 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 opportunities, especially as we look into the fourth quarter. We are excited to move on to our next chapter in the Finaro story. We do have SkyTab POS systems in Europe using Finaro'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 will result in Q4 representing our strongest quarter. In terms of capital allocation priorities, we're pursuing several M&A opportunities that are largely focused on our international expansion. These range from adding restaurant distribution in Europe to accelerate the introduction of SkyTab POS, as 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. Our disciplined approach to capital deployment is a cornerstone of delivering shareholder value, whether it be VenueNext, Focus POS, in-sourcing distribution or even a small investment in SpaceX, all have served to grow shareholder value meaningfully. Conversely, we raised capital when the markets afforded 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. And with that, I'd like to turn the call over to our CFO, Nancy.

Thanks Taylor and good morning everyone. I'll first review our financial performance for the second quarter 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. Second quarter volume grew 59% to $26.8 billion year-over-year. Q2 gross revenue grew 26% to $637 million and gross revenue less network fees grew 25% to $228 million year-over-year. 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 SkyTab. Second quarter gross profit was up 61% year-over-year to $159 million, and our gross profit margin was 70% for the quarter, representing over 1,500 basis points of improvement year-over-year. The blended spread for the second quarter was 65.3 basis points, driven by massive volume growth, including growth from enterprise merchants at lower but 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. 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 expenses increased 41% year-over-year to $82 million, primarily driven by head count growth from the distribution in-sourcing and acquisitions we completed over the last 12 months. We are still fighting to finish the year with head count flat to the start of the year. On that note, towards the end of the second quarter, we reduced head count by 150, in line with our overall talent upgrade initiative, which came with a $3.5 million onetime severance cost. 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 head count goals. For the quarter, we reported adjusted EBITDA of $110 million, which is up 68% over the same quarter last year. The resulting adjusted EBITDA margin for the quarter was 48%, representing over 1,200 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 SkyTab 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. Our adjusted free cash flow in the quarter was $64 million, 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 semiannual interest payment of roughly $10.4 million, which can distort the quarter-to-quarter comparisons. And then with respect to capital transactions, during the quarter, we repurchased approximately 1.5 million shares. We have cumulatively deployed over $300 million on buybacks purchasing, $5.8 million of shares at an average price of $52 since our IPO. Of note, cumulative dilution and share counts from our IPO has grown by less than 2% in over three years. As employees, we own over 36% of Shift4 and are very thoughtful about managing dilution. Our remaining buyback capacity is just over $150 million, and we will continue to be opportunistic in repurchases. You can see a complete reconciliation of our shares on the back of our earnings materials. Net income was $36.8 million for the second quarter. Basic earnings per Class A and Class B share was $0.43 and diluted earnings for Class A and Class C share was $0.62. Adjusted net income for the quarter was $63.4 million or $0.74 per AMC share on a diluted basis based on 85.7 million average share -- fully diluted shares outstanding. We are exiting the quarter with just over $725 million of cash, $1.75 billion of debt and $100 million 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 four of the KPIs and the high end of the range for volumes, gross revenue less network fees and adjusted EBITDA. Our updated guidance for 2023 includes total end-to-end volumes of $108 billion to $114 billion, representing 51% to 59% year-over-year growth. Gross revenues of $2.6 billion to $2.7 billion, representing 30% to 35% year-over-year growth. Gross revenue less network fees of $945 million to $980 million, representing 30% to 35% year-over-year growth and adjusted EBITDA of $435 million to $460 million, 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 million, up from initial guidance of $200 million. 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 Finaro acquisition that cannot be precisely timed. Should these move more quickly, we expect financial impact sooner. Similar to last year, when you saw a sudden increase in activity 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.

Thank you, Nancy. And before opening up the call to your questions, I first wanted to thank those that tuned in to 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 do want to respond to a question that was submitted via social media. Our question comes from Krishna Mohamed from Toronto, Canada, who's been an investor in Shift4 since our IPO. The question was, what do you believe is the most challenging aspect in growing the company to the levels of a 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 opportunity, which certainly is taking the same products and software integrations that has made us successful in the US over the last 24 years and bring them into markets all over the world. And probably the most challenging part of that is card-present processing capabilities. I mean tip 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 two 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. So thanks, Krishna, for that. And operator, we are ready to take questions.

[Operator Instructions] Your first question comes from the line of Darrin Peller with Wolfe Research. You may go ahead.

Hey thanks guys. Nice job on the quarter. I just -- I want to just very quickly clarify the guidance raise came from a combination, it looks like organic and Finaro, 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? But also, I guess, bigger question for me is just the magnitude of upside to EBITDA continues to impress. 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? Would be great to hear. Thanks guys.

Yes. Thanks Darrin, Jared here. So copy on the first question, I think we fully anticipated that. 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 conversation with everyone in a couple of weeks. That said, we try to be pretty clear that we included a good portion of Finaro on our fourth 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 expectations that were originally set with the Finaro transaction, which Taylor reiterated on the call, I assume a good portion of that, what that leaves you with is a very healthy organic outperformance. And that's the message everyone should be taking away from that transaction. But 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 to be talking about an awful lot more and kind of the -- in the future ahead. So and then kind of moving on to next portion of your question, which is just continued -- the continued strength in the 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've got a lot of gateway connections. They've got a lot of legacy software. We agree. That's why we're taking out those parts. I mean we supported like seven, eight different legacy software solutions two, three years ago. We've now concentrate our resources and consolidated our brand on one. 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. We rolled out AI tools that can program a restaurant POS menu in 30 minutes instead of five 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. 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.

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 clients or even new business now, any sense and directional in terms of what drove the most or maybe rank it in some form? Thanks guys.

Yes, I mean, just high level, and then I certainly open it up to Nancy or Taylor to fill in the blanks. But I highlighted in my script, like this past quarter, there was another 50/50 event. And that's -- it's an approximation, but if you just look at the reference win, all the Virgin Hotels were net new wins in this quarter. Obviously, [Indiscernible] was net new win. I think last quarter, there were two 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 SkyTab is net new. I mean, we have no active upgrade campaign for our legacy customers right now on that. ,So you've got a lot of net new. But then you also have InTown Suites, that's 200 locations. It's still, I'd say, 50-50. I mean, if it's maybe because we have so many new verticals that never represented a gateway conversion, it will trend more than net new over time. I don't tell...

Yes. So when you talk about customers joining, this 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 stadiums. Now we mentioned this multiple times through our scripted remarks, but adding on ticketing to existing stadium customers in 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. That's really what drives the business. And then when you've got the right customers and you focus on your integration, 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. I think we mentioned probably with you, Darrin, 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 and people are out and traveling.

That's great. It sounds like a broad-based [Indiscernible] guys. Thanks again.

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

Hey guys. Good morning. Appreciate taking the questions. Hope 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 scrip some of the growth this year will be back-half weighted. It sounds like that's more kind of incremental growth in the fourth quarter. And that kind of weakness in the third quarter. But maybe you can just help us think sequentially from second to third, what are your kind of expectations? And how are you thinking about the ramp into fourth?

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. 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 backloaded those 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.

And this is important, Will. So for investors and analysts who followed us for a long time, in Q3 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 end of the year. We just want to caution that Q4 will represent a stronger quarter relative to kind of a full year picture than it has in prior years.

Got it. That's helpful. And then just as a follow-up, the SkyTab 6,500 locations installed in the second quarter. 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 sustainable level of location growth? And maybe just talk through any issues of comparability with some of your peers?

Yes, I mean, first of all, we've tried to be very specific at not getting into the location count game. Like -- I think even previous expectations set is that we are very content being second place at the end of the year with respect to locations if we're targeting more upmarket, higher take rate customers and nothing has changed in that regard. Other than -- I'd say, look, demand is good. Demand is really good right now. 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 ringing up a cheeseburger. I don't think you can necessarily compare the products in that space to some of the most sophisticated-like AI systems in the world. It's a cloud-based solution, rings up a cheeseburger, drives operational efficiencies in a restaurant. We know a lot about it, built a good product for it and it's good distribution, and 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 will try and give you some updates from time to time, so you know that it's working.

Will, 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 SkyTab. But keep in mind, we've been operating, as Jared mentioned, multiple restaurant point-of-sale brands for a long period of time. And our ads have been very strong and steady. I think last published ad was over 50% volume growth in restaurants over a multiyear CAGR that included a pandemic. So, I think the world is just getting around is seeing a consistent brand in the marketplace from Shift4. But under the hood, we've been delivering this restaurant merchant ad cadence for quite a while.

Very impressive. Appreciate you taking the questions.

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

Great. Thank you. I want to dig into the ticketing. So the Ticketmaster announcement, now you have Ticketmaster, Paciolan, SeatGeek. So I want to talk about how differentiated this is. Maybe you could just talk about if anyone else even has this kind of set up when you go into a stadium or a team and you have the concessions, 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, the Paciolan and the SeatGeek's?

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 integration. I can't speak to what anyone else out there has, but you can see the logos every quarter, like we're doing a great job there winning. 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 integration is pretty important. In terms of the rev share to the ISVs, my understanding is deal-by-deal based. So it's, I think, deal-by-deal, team-by-team, but ticketing in general is 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, just kind of flows through.

Excellent. Thank you, Jared.

Your next question comes from the line of Dan Perlin with RBC. Your line is now open.

Thanks. Good morning. I wanted to go back to the commentary around adding distribution in Europe. And my question, I guess, is really -- can you just maybe flesh 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.

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 US 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 infrastructure. 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.S. is really straightforward. We don't have to -- we don't really have to buy anything in that regard. 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 microgliosis, 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 SkyTab, that's a different story, right? That's our product, just like VenueNext or our sports entertainment product is our product. And in that regard, we are looking at a lot of different paths to distributing SkyTab 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, as I think many of you know, like we spent a lot of time there of late. It is from an integrated payments perspective, at least 10 years behind the US. 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 the new front there with respect to our restaurant to US product.

Awesome. Can I ask a follow-up on that? You mentioned micro used to have a lot of -- or they still do have a lot of hotel payment systems out in Europe. So I'm wondering, is there a parlay for SkyTab 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 as contemplated today? Thank you.

I mean, I have to believe that Shift4 processes payments that originate from Micro's systems more so than anyone else in the world. And I would say by like maybe even an 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 and want to process across our rails or using Opera, their property management, the Micro property management system in Europe across our rails, that's very enticing to us. No reason necessarily to rock the boat by replacing it with SkyTab itself, which is kind of our philosophy in the US curve, restaurant customers like [Indiscernible] all use Micros in the US very well with Shift4. That said, Look, the whole restaurant market in Europe right now is basically using nonintegrated 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 a kit with SkyTab. So in many respects, we're spending a lot of time in Europe. It really does look like how it did in the US, 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 a payments company that really knows integrated payments well.

Excellent. Thank you.

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

Good morning Jared and team. Nice [Indiscernible]. I find slide seven, particularly interesting, where you're comparing SkyTab versus competitor pricing. Do you see this as an opportunity to nudge pricing up some and so remain below competitor pricing? And then I'll just ask my follow-up on -- you highlighted that competitor fee increased in the quarter that most of us have noted. Did you see a notable uptick in SkyTab sales as a result?

Rayna, hey, thanks for the questions, Jared here, and I 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 to basically throw out your old system and pay the merchant $1 for every online order for, I think, the first 90 days. We're still inside of an 18-month payback period. We believe that there's trust has been broken with restaurant customers over the last 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. 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. I mean, most of that noise happened in early July after the quarter it ended. What I will say is 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. So if we're expecting good results from it, it's more of what you'll see in the second half of the year than what you saw in this last quarter.

Great. Thank you.

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

Hey thanks guys. 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 Finaro. You were talking about $15 billion of volume, if I'm not mistaken. So if we take a quarter of that, it's almost $4 million. You raised the end-to-end volume guidance by 4%. So just trying to parse out what's truly organic in the end-to-end volume raise versus Finaro? Thanks.

Yes. So a few sort of disclaimer comments on that. We've never given any season -- seasonality profile of Finaro. So I don't want anyone to just divide everything by four, it's a very difficult business than Shift4. With that being said, the volume guidance raise does include, obviously, a volume contribution from the organic business. all the ticketing growth that we talked about, a handful of enterprise customers that are activating all that we expect kind of in the third and into the fourth quarter. So there is both. I want to caution, we're kind of deliberate and not giving like quarterly level financials of a business. And that, I think, is prudent, especially as we signed it 15 months ago. So while we included a portion of Q4, you can't simply divide the year by four.

Yes. I mean, also just to reinforce that point, we said we gave -- we included a portion of Finaro in the fourth quarter. I think it's pretty healthy. It's fair to say that a haircut was applied. The volume growth trends in Shift4 -- you look back at however many quarters you want are pretty strong. Nothing is changing about that going into the second half of the year.

Yes, it seems like there's a lot of underlying momentum. For my follow-up, I wanted to ask about the M&A pipeline. Taylor. I know you talked about it. It sounds like it's maybe getting even fuller. And just wanted to take your temperature on what you're seeing in terms of valuations. I think you mentioned there was even some potential transformational 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?

Yes. Well, I'll start by saying I don't get to pick our leverage ratio. Nancy, [Indiscernible] for you 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, a more rationalized seller, right? So we all know what the SPAC craze did to private company seller expectations, right? Even 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 an 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 three to five years is going to look like, and we are an incredibly safe pair of hands 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 are willing to do. But we will view the equity like we did in the case of Finaro and then go buy it back in the Street to align the right shareholders the objectives we want. So the number of conversations we're having are increasingly increasing and they're more productive. I think is 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? There are just tons of businesses all over the world doing really interesting things on the international front. And now with the completion of Finaro, we've got a real proof point and quite frankly, some champions are willing to tell the story about what it means to partner with us on this journey and that helps grow the pipeline as well.

Yes. And I would just tack on to that, we'll always say we don't have a target leverage, but certainly want to keep it well south as, that four times. But I think you would see us pop off. If we know that we could quickly synergize like Taylor said, there's a lot of good opportunities out there where we know we could quickly de-lever. And so you've seen us do that, and that would be part of the thesis going forward.

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 on the -- or what 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 25. 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 the blended ratio that the public markets would seem unpalatable. We actually view capital allocation and M&A as a core competency. 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&A transaction as well. And New York is like pretty best in class right now.

Makes sense. Good stuff. Thanks.

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

Hey good quarter guys. I wanted to ask about the point you made in your shareholder letter about expense discipline and maintaining flat head count and so on. And so the scalability of those efforts because I think you said that for a few quarters now, 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?

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 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 is going to be as productive as if they were under a single roof. And I would say during the pandemic, when you had like all that euphoria and craziness from a hiring perspective, Shift4 probably wasn't the first choice for a lot of people looking to get into fintech and payments. 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 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 way and bring in people that are difference makers that we couldn't get in 2020 and 2021 during all that madness. And that's exactly what we're doing now. So, we spent the first 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. We're adding Salesforce. We are using AI for -- I guess, that efficiency and productivity means. And then we are upgrading 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. And we're going to keep doing that throughout this year. Like we're going to fight like hell to end the year with the same head count that we began and be a much better and stronger company. And if the growth profile continues the way we certainly expect it to, and we do achieve even being remotely in the hip code of that flat headcount, then the results from a margin expansion perspective should be pretty strong.

Hey, operator. I think we have time. Sorry, do you have any follow-up Ashwin? Did we lose you Ashwin?

Operator, are you there?

Yes, I'm here. Ashwin, I'm not sure if you had a follow-up, but I can return it to the queue if you like.

Please. Sorry, Ashwin, are you still there? Ashwin? Operator, why don't we just take one final question.

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

Good morning. I appreciate you squeezing me in. Jared, SkyTab POS is super exciting, given what's happening at the point of sale. Can you just comment on ultimately how scalable you see this 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 upmarket with your own integrated point-of-sale solution. I wonder if that's something that over time becomes a vision for this company.

Yes. Thanks for the question. I mean, look, 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 sports and entertainment solutions 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, we've 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. Like, 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 SkyTab going in those locations. For example, the live locations we highlighted, I think they have hundreds of systems in certain locations, like they are -- they do a ton of volume. We have them at United Center and in a lot of stadium restaurants. So, 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 road map that focus around enterprise menu management capabilities. I mean, if you -- 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 road map for SkyTab. So in terms of opportunity, yes, we like it and we especially like it because we think it's a competitive environment of like two or three. That's always a good place to be in.

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

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

No. So, look, I really appreciate 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 I hope you're all having a great summer.