Hello and welcome to the Shift4 Third Quarter 2021 Earnings Call. My name is Emily, and I will be coordinating your call today. [Operator instructions]. I'll now turn the call over to our host, Tom McCrohan, Head of Investor Relations. Please go ahead..

Thank you, operator. I'd like to welcome everyone to Shift4's earnings conference call for the three months ended September 30, 2021. Before we begin, I'd like to remind everyone that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

All statements made on this call that do not relate to matters of historical fact, should be considered forward-looking statements, including statements regarding management's plans, strategies, goals, and objectives; the expected impact of COVID-19 on our business and industry, including with respect to economic recovery, increases in vaccination rates, the reopening of the country, and any volume recovery by us; gateway penetration and spend seen by our gateway merchants; expectations regarding new customers, acquisitions, and other transactions; and anticipated financial performance including our financial outlook for the year ended December 31, 2021; and any other comments regarding future operating performance.

These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance or achievements to be materially different from any future results. Performance or achievements expressed or implied by the forward-looking statements.

Factors discussed in the Risk Factors section of our annual report on Form 10-K for the year ended December 31, 2020, as updated by our quarterly report on Form 10-Q for the nine months ended September 30, 2021 and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the forward-looking statements made on this call.

Any such forward-looking statements represent management's estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change.

In addition, we may also reference certain non-GAAP measures on this call, which are reconciled to the nearest GAAP measures in the company's earnings release, which can be found on our Investor Relations website at investors.shift4.com. Lastly, we're hosting our Investor Field Day event later today at Allegiant Stadium in Las Vegas.

And as a reminder, the presentation portion of the event will be webcast and begin at 12:00 noon, Eastern Time, 9:00 AM Pacific. The webcast link can be found under the Events section of our Investor Relations website, investors.shift4.com.

We encourage you to tune in at noon today to hear from our executive management team regarding how the company is positioned to deliver superior results in the months and years ahead. And with that, let me turn the call over to our Founder and Chief Executive, Jared Isaacman. .

First, software integrations. At the time of the IPO, we possessed approximately 350 unique software integrations. Over the last 18 months that number has grown to over 425 with most of the recent additions representing modern cloud based solutions.

Many of our merchants require multiple software integrations across multiple years of version history, which makes replication of our integration library nearly impossible. Our gateway volume specifically is so defensible that it has actually grown to nearly 170 billion in volume since the prior quarter.

Our integrations connected to our gateway and representing such volume is connected to virtually every legacy merchant acquirer. That volume represents a significant economic opportunity with a fortified lift in gross profit from moving to our end to end platform. The volume growth and resilience spreads.

At Shift4 we've been growing so fast, investors sometimes lose sight of how hard it is to actually differentiate through technology, grow volume and capture meaningful spread. This is probably why many of our competitors don't even report volume growth.

At Shift4, we're growing volumes so quickly and in large more complex merchants that investors confuse mix shift upmarket at higher revenues per merchant at spread compression.

In reality and as you will see during our Investor Field Day presentation, our spreads have either remained constant, consistent, or grown in our core verticals despite the perceived threat of competition. And then add value through technology. Merchants are simply not signing up for nonintegrated solutions.

Legacy merchant acquirers with large books of nonintegrated merchants are losing share and they are gravitating towards technology enabled platforms like Shift4 and others.

We've developed technology that solves pain points, like pay-at-table, order-at-table, QR code-based payments, QR code ordering, online ordering, loyalty, business intelligence, and even a brand new full blown POS platform that we will talk about in a bit. We shared with you previously that our new carbohydrate killing platform, codenamed Edgewater.

And now I'm pleased to announce the platform has name and it’s called SkyTab POS. And it's not PowerPoint, it's already in 2,000 plus merchants, including the United Center. This modern hybrid cloud software is feature rich and driven by customer experience-driven philosophy.

SkyTab POS will drive incremental SaaS revenues as roughly 85% of the 125,000 restaurants we presently serve today pay little to nothing in SaaS fees. It will also unlock other revenue opportunities as we roll out payroll, capital, and look to monetize our marketplace platform.

Further, we expect our thousands of distribution partners to find success in what is an exciting addressable market, while also improving margins as customers migrate to a single modern and highly supportable platform. We're excited to share a lot more details on our SkyTab POS product during our Investor Field Day.

Our confidence in the competitive moat around our core integrated payment business is what has given us the confidence since the IPO to move into several new and fast-growing verticals.

And on that note, we've deployed since the IPO some $200 million of capital between organic and inorganic initiatives to strengthen our core, but primarily to expand our TAM, while bringing our integrated payment expertise into 3 new verticals, which are gaming, sports and entertainment, and e-commerce.

Along the way, we have generated $45 million in additional revenue, which barely -- while barely scratching the payments opportunity that is embedded within these products and their associated markets. This is primarily why we are raising our 2021 gross revenue less network fee guidance.

On that note, we've made considerable progress across all 3 of these new verticals. This includes successes within the stadium vertical with the addition of Toyota Stadium in Frisco, Texas and T-Mobile Arena here in Las Vegas.

We currently have over 80 venues in sports teams adopting our Shift4 software and payment services and cannot be more pleased with our decision to enter this vertical through our acquisition earlier this year of VenueNext. We also signed several soccer teams during the quarter, including D.C. United and the Los Angeles Football Club.

We are winning large books of business from our competitors, including industry verticals that were previously considered too difficult to switch over.

Additionally, through the 3dcart acquisition in 2020, now called Shift4Shop, we've increased site count to over 72,000 sites, launched a crypto acceptance service with BitPay and advanced several strategic partnerships while booking notable wins like adventure gear company, HIMALI.

We are also still investing in the product by improving user experience, adding templates and interfacing with our restaurant products to eventually have in part a Shopify for restaurants capability.

Last, as a perpetual underdog in the gaming industry, we now have 8 gaming licenses and several integrations with gaming software companies, gaming merchants and alternative payment methods, all of which are necessary to compete and win in this exciting new vertical.

We've already announced preferred payment relationships with BetMGM and expect to have multiple relationships processing payments with us before the end of the year. We've built out our gaming specialty through entirely organic means by leveraging our expertise in in-venue gaming.

As a reminder, Capital Las Vegas Strip has a relationship with Shift4; coupled with our immense right to win in stadiums. We made these investments while still expanding margins nearly 500 basis points for the overall business. I mentioned that I wanted to take this update in 3 parts.

The core integrated payments business, the progress since the IPO and the transformation that is about to take place. While we're on to the transformation portion of the update, and I'm beyond excited to announce we are entering 4 new verticals and expanding the overall organization's TAM on the shoulders of these signature wins.

This includes Allegiant Airlines, a multibillion-dollar airline and hospitality provider that will expand and strengthen our capabilities across the broader travel and leisure market; St.

Jude Children's Research Hospital, an organization with a vital mission that access nearly $2 billion a year in donations and opens the door to both nonprofit and healthcare industries; and finally, a company that I've often said is most well run, an innovative organization I've ever seen, and I have an obvious bias, with SpaceX and their Starlink broadband service.

This 5-year strategic partnership will take our integrated payment service across the world. With a specific Starlink payment opportunity, some analysts say it could reach over $100 billion a year. The agreement includes a commitment to convert domestic volume to Shift4 beginning in the first quarter of 2022.

And it's also worth noting that SpaceX has a restaurant and a few bars and other hospitality venues in the works in Starbase, Texas, and you can count on those locations using our new SkyTab powered hospitality platform.

These wins have displaced payment companies we immensely respect like Adyen and Stripe, though results in numerous new software integrations to our platform, which allow us to pursue other merchants in those new and exciting verticals and come with the stamp or approval that Shift4 can play in a lot of new verticals around the world, including what I would refer to as [sexy tech].

As mentioned in my shareholder letter, this quarter was quite interesting. We began with record volume in July. We definitely felt the impact of the COVID Delta variant.

We had a confusing secondary offering from our former sponsor, the TSYS service outage, a rocket launch, supply chain fears and then several disappointing weeks in share price performance. Hopefully, I view some of these perceived concerns is clearly we've been quite busy and the results and outlook are quite bright.

But there's certainly a lot more to discuss, including our multiyear outlook, and that's why we are hosting our Investor Field Day this afternoon. We look forward to sharing our vision in a forum that allows more time and interaction with each of you.

Before I turn the call over to Taylor and Brad, let me touch on a service disruption that occurred during this quarter. On Saturday, August 21, most of our merchants experienced a service disruption due to a platform outage of one of the industry backbones, TSYS.

While this outage was caused by our vendor, we took swift decisive action, including reimbursing those impacted merchants for lost revenue. The financial impact from the TSYS outage on our results for the quarter was approximately $25 million, of which approximately $22 million was recorded as contra revenue.

Brad will review the financial impact from the TSYS outage in more detail later during this call, but we strongly believe this was the right action to take for our merchants since the feedback we've received from them has been overwhelmingly positive. And we still are very confident on our recovery through the appropriate parties.

And lastly, I simply want to thank you all for those that were inspired to donate to the St. Jude Children's Research Hospital. As you know, we set lofty goals and this was one of our loftiest yet. Thanks to you the inspiration for event raised over $250 million for a very worthwhile cause. And I can assure you the St.

Jude Children, their parents and their extended families they're very grateful for your generosity. And with that, let me turn the call over to our Chief Strategy Officer, Taylor Lauber, who will highlight volume trends and thoughts on trends heading into the year-end.

Taylor?.

Thanks, Jared, and good morning, everyone. The net new merchant wins we've signed and boarded over the past year have set us up well for sustained volume growth throughout the balance of the year and into 2022. As you all know, many of the merchants we've signed are larger, whether that be hotels or more recently large stadium and event venues.

Each of these contributes to our increasingly diversified volume mix and delivers higher average volumes and revenues per merchant. Forecasting volume remains difficult in the context of an uneven pandemic recovery, an evolving mix shift and the impact all of this has on our seasonality cadence.

With that being said, the monthly cadence was a record July and a reasonably strong August, followed by a moderation in September. As we called out in our late October business update, we saw volume growth of over 80% through much of the month.

With the months now being concluded, we're happy to report that our full month end to end payment volumes ended up 86% year-over-year. This strong volume growth is on top of what had also been a very strong October of 2020, which was up 28% year-over-year despite the pandemic.

All else being equal, we anticipate the fourth quarter year-over-year volumes growth to benefit from easier comparisons and a continued increase in travel as we finish out the year. We also called out our active merchant growth of 25% for the same October period versus a year ago.

We anticipate our fourth quarter active merchant growth to also benefit from more favorable comparisons as merchant growth in November and December last year was weaker due to increased COVID-related restrictions. Sequentially, we exited Q3 with roughly 5% more active merchants spend in Q2.

As Jared noted, we continue to sign new stadiums within the sports and entertainment market and remain excited to see a return to capacity crowds. Outside of stadiums, we entered the nonprofit charitable giving market with the signing of St. Jude's Children's Research Hospital.

We view the nonprofit charitable giving market as both growing and large with an estimated $795 billion of addressable volume in the U.S. alone. We believe we have a unique value proposition to offer charitable fundraising organizations, including the ability to integrate a wide variety of point of giving systems, both legacy and modern.

Our addressable opportunity has increased substantially over the past year as we enter gaming and e-commerce, expanding our hospitality client base substantially through a combination of gateway conversions and net new wins. And now with SpaceX Starlink, we are ready to take all these verticals global.

The gateway opportunity remains extremely healthy, with gateway volumes increasing to $170 billion, and we remain in a pull position to continue gaining market share in large complex hospitality environments as a result of our 425 software integrations.

As a reminder, roughly 50% of our ongoing production continues to be generated from gateway to end-to-end conversions. Over the past year, we estimate that through both organic and inorganic initiatives, we've increased our addressable market by a factor of 3x from our IPO roughly 18 months ago.

More importantly, we have marquee wins within each vertical, which validate our strategic positioning, guide our capital allocation and diversify our revenue streams. Over the quarter, some of you reached out to us inquiring about a hardware vendor named PAX of our security-related concerns.

While we use PAX devices, they represent less than 10% of our deployed terminals. Given our larger multi-vertical presence, it's always been important to support a robust family of device manufacturers. Those myriad device certifications pay dividends because supply chains can sometimes be constrained.

It's also worth noting that we encrypt all our terminals with our proprietary encryption keys regardless of the device manufacturer. The security protocols we use are best-in-class and have insulated us from challenges other processors to appear to have encountered.

We remain active in the market evaluating M&A opportunities and remain disciplined on price, but have more strategic rationale than ever before to continue building and fortify around our recent customer wins. With that, let me turn the call over to Brad Herring to review our financials..

Thanks, Taylor. Before I dive into the financials, I want to make a few quick comments. First, when we talk about our Q3 results and compare to other periods, we're excluding the impact of the TSYS outage on the current quarter. I'm going to cover the details of that more in just a minute.

Second, it remains relevant to highlight our performance to 2019 pre-pandemic levels to highlight our growth trajectory without the noise created in 2020 by COVID-19. Similar to last quarter, we are proud to report record performance across our KPIs.

Gross revenue in the quarter was $400 million, up 86% from the prior year, while gross revenue less network fees was $148 million, up 69% from the prior year and up 86% when compared to Q3 of 2019. This continued growth was fueled by a 73% year-over-year increase in net processing revenue.

Shift4 continues to board new end-to-end merchants and consumer spending continues to recover. In the current quarter, net processing made up 67% of our gross revenue less network fees, up 2 percentage points from the same quarter last year.

In addition, we've seen continued growth in our SaaS revenues as we continue to expand our TAM via acquisitions and organic investments into new verticals, such as gaming, e-commerce and sports entertainment.

We're also expanding penetration of our peripheral products and services such as POS software online order, pay at the table, order at table and our Lighthouse business intelligence into our existing base of over 125,000 restaurant merchants.

Specifically, our subscription and other revenue stream has grown 72% when comparing to the third quarter of the same quarter -- third quarter of last year. Spreads for the quarter came in at 74 basis points, which is 4 basis points lower than the spread we reported in Q2.

The decline from previous quarter was slightly more than anticipated as we saw a significant increase in hotel volumes that blended down aggregate spreads in the quarter. That shift in mix stabilized towards the end of Q3 as the summer travel season came to an end.

It's worth highlighting that spreads within our restaurant and hotel verticals have actually increased over Q3 of 2020 by approximately 8%, further supporting the pricing power of our differentiated end-to-end solution.

For the quarter, we reported an adjusted EBITDA of $55.8 million, which represents an increase of 94% over prior year and a 128% increase over Q3 2019 pre-pandemic levels.

Our third quarter results produced an EBITDA margin of 38%, which represents nearly 500 basis points of margin expansion over Q3 2020 as we continue to benefit from the scalability of our cost structure.

Keep in mind, our margins would have expanded even faster had we not elected to make several organic and inorganic investments to expand into new and fast-growing verticals.

While these investments have already resulted in meaningful contributions to our SaaS revenue streams, we are still in the early days of monetizing the natural payments opportunity.

This is important to understand as we look to balance expanding margins in our existing integrated payments footprint while continuing to grow revenues within new verticals. With respect to capital transactions within the quarter, we completed a successful convertible bond offering that raised approximately $618 million in July.

With that offering, we exited Q3 with approximately $1.3 billion in cash and still retain approximately $100 million of borrowing capacity against our revolving credit facility. As I mentioned in my opening remarks, I want to take a quick minute to describe how the impact of the TSYS outage is reflected in our financial statements.

While our 10-Q will include more detailed information, I want to summarize the impact on this call.

First, the $22.4 million of payments made to merchants is reflected as a onetime reduction of payments based revenue in accordance with applicable accounting guidance under ASC 606; second, the $2.3 million of payments made to partners is reflected as a onetime increase within other cost of sales; lastly, there were some additional onetime costs totaling approximately $400,000 that are embedded within various income statement lines, resulting in a total impact for the quarter of $25.1 million.

This total amount is reflected as an add-back in our reconciliation to adjusted EBITDA. Also I'd like to point you to the appendix of our deck where we present adjusted gross revenue, gross profit, net income and net income per share, each adjusted for the impact of the outage.

Now I want to spend a few minutes on some small updates and commentary on our guidance. First, we are reaffirming our latest full year guidance on end-to-end volumes; second, we are increasing our full year guidance for gross revenue less network fees now to reflect the full year target of $520 million to $525 million.

This primarily represents outperformance of our non-volume SaaS-based revenue streams, mostly from our investments in new verticals. With respect to adjusted EBITDA, we are also reaffirming our latest guidance of $175 million to $180 million.

The reason we have not chosen to raise adjusted EBITDA guidance despite our increases to revenue are related to the previous discussion regarding the minimal impact on adjusted EBITDA in the early quarters of our acquisitions and investments we are making to expand into new verticals.

Excluding the impact of the merchant failure that we discussed in the first quarter of this year, our adjusted EBITDA would actually fall between $180 million and $185 million. Finally, while we do not want to steal any thunder away from our Investor Field Day event later this afternoon, we would like to set some expectations over the medium term.

That said, over the next 3 years, we expect the CAGR on end-to-end volume to be at least 50% and the CAGR on gross revenue less network fees to be at least 30%.

We would ask that you hold questions related to our medium-term outlook until our Investor Field Day where we'll have the opportunity to discuss some of the exciting developments within our business to support our medium-term outlook. With that, I will turn the call back over to the operator for your questions..

[Operator Instructions]. Our first question comes from Darrin Peller from Wolfe Research..

Thanks, guys, and thanks for all this updated information on the outlook of the new verticals. It’s great to see. Just touching on that for a minute.

The progress that you're now making in these incremental verticals looking at charity and some of the airlines, can you just touch on the leverage that you're basing your technology differentiation in your current verticals to allow you into those categories? I mean whether it's St.

Jude's or it's some of the other charities you mentioned in the slides or it seems like the complexity you service with all the different ISPs is allowing for that. And how big could these opportunities be relative to some of the verticals you're in today? Again, when looking at some of the wins you're having..

Yes, Darren. Good question, Jared here. Thank you. This is what our payment platform does. We're an integrated payments company, which means we connect into commerce-enabling software to encrypt and tokenize and drive secure payment transactions, the fact that we've been in predominantly restaurants, software.

That complexity is what has necessitated Shift4. There was never a platform limitation that could take us into these other verticals. In fact, these other verticals share a lot of similarities to restaurants, hotels and specialty retailers. They have multiple different software types in these verticals in order to deliver a commerce experience.

I mean, in fact, nonprofit has been eye-opening for us. As I think we've mentioned this over the last probably 2 or 3 quarters, they use multiple different types of software applications for their various fundraising efforts. So these industries share a lot of the characteristics that have made us successful today.

But when it all comes down to it, we drive transactions in commerce-enabling software and we do it really well. So I'd say that's one.

And I think it's also important to know when we do capture those software integrations, whether it's been health care, nonprofit, airline, it's very safe to say that the Starlink payment platform is quite actually -- or software is actually quite proprietary. It does open us up to all the other merchants that occupy the space in those verticals.

And with Starlink specifically, which is a global initiative, it takes our restaurant business, our hotel business, our stadium business, our gaming business, our e-com business, into all the same geographies that we're following for Starlink.

And then in terms of the opportunity they represent, we put that in our presentation, Allegion airline does -- I mean, you can see that they're a public company, they do $2 billion-plus in payment volume right now. Thank you to our research hospitals and nonprofit. They do nearly $2 billion in donations.

And then in terms of Starlink, they are already just in beta, doing over $1 billion of payment volume, and you can see a number of different analysts out there that believe that just Starlink alone could be $100 billion a year payment opportunity going forward. So you can probably guess why we're so excited about these signature wins..

All right. That's really helpful. Just one quick follow-up on the revenue yields just because I know you touched on -- I think, Brad, you touched on it being around SaaS revenue upside, which is great to see, especially just given some of the questions on and off through the year about yields here.

Clearly, as you grow, you're able to sustain obviously strong yields given the CAGR is, I guess, we'll wait for the Investor Day discussion to go into. But when we look at geography of yields for the fourth quarter on a seasonal basis for a minute, if you could just remind us of that.

And then just when you talk about some of these new verticals and new larger categories, I assume they're going to come with lower yields, but obviously just bigger, more broad opportunities. Just to make sure we're thinking about that right. And a great job overall..

Darrin, you're exactly right. So for Q4, if you think of kind of normal seasonality, we'd expect a slight dip in Q4 just related to the normal seasonal pattern. I'm going to highlight, like we talked about before, we do expect that continued kind of 1 basis point to 2 basis point decline just with merchant mix.

We're going to talk about some more of that later today in our investment discussions.

And we're also going to talk a little bit more about the second point you made, which is very valid, which is as you go upmarket, you will see the economics play out that the spreads on larger merchants is slightly less than what we're seeing now on our average merchant size and we're going to talk about that.

But what's really important to understand is the quantum of revenue that we can generate off of these merchants. So if you look at a revenue per merchant basis, you're going to see some pretty staunch acceleration in that number as well. We're going to cover both of those in more detail today. So I look forward to diving into that..

Yes. And one thing I would just layer on to. Obviously, we provide a lot of detail, and we'll talk a little bit later today on how different verticals have an impact on spread, but overall, your average revenue per merchant goes up. But these new verticals that we've announced have a lot of opportunities into them.

First, they are priced with margin; but second, -- When you get into nonprofit, charitable giving, there's opportunities to push costs back on the consumers making the donations, which usually come at a pretty healthy spread.

When you get into international markets, it opens up cross-border payment opportunities, which also, as you guys are aware, usually coming in pretty higher spreads. So I think there's going to be a lot more to talk about for sure as we move into these new verticals that I think will be pretty interesting..

Our next question comes from Jason Kupferberg from Bank of America..

This is Kathy on for Jason. First, I just wanted to ask a little bit more about the TSYS outed. I appreciate all the disclosure and the transparency on that.

I just wanted to confirm, are those impacts fully behind you in 3Q? Or are you kind of expecting any lingering effects in -- And can you just explain a little bit more about like what brought upon the situation? What's like an unexpected volume incurred? And was there any kind of loss of data or security issues related to it?.

Yes, sure. No problem, Jared here. I'm happy to take that, Kathy. So first, you'd really have to ask Global Payments as to the ultimate root cause on that. They really punished a lot of the industry with that situation. But it very much is one-time in nature. It happened back in August. We put out disclosure to it.

There was never any issues at all with security or cardholder data. That's all our technology, which works very well, PCI-validated point-to-point encryption on every one of those transactions. Yes, I mean, ultimately, TSYS is one of the, call it, 4 or 5 backbones in the industry, and they haven't put out a lot of specifics as to what the cause was.

But on a Saturday night, you can imagine the impact of restaurants and hotels. We did the right thing and just issued these credits per the discussion today, specifically with the goal of putting all this behind us. I mean we're growing really fast. We're obviously entering a lot of new verticals. We don't want to spend time arguing with our customers.

We don't want to wind up in litigation. We've had no customer complaints, no litigation coming out of this issue.

In fact, what we've had is a lot of signature wins, more stadiums have come online, more restaurants and hotels to -- if we were taking similar actions or similar to other payment processors of which literally hundreds of banks, financial institutions were caught up in this. We'd never be able to grow at the pace we're doing it.

So no, we don't expect any lingering issues going forward. In fact, this kind of became case closed back in August.

That said, we have been talking with you, with our investors since the IPO about our own final piece to the payment rails that we brought in-house, which we call [Project Everest] that will remove any dependency on the TSYS backbone starting in early 2022 to make sure that we have complete control of this and never be in a situation of recurrence..

Okay. That's great to hear. Very helpful. And I guess, if I could just ask, switching gears a little bit. If you look at the rate at which gateway volume has been converted to end-to-end of the past couple of quarters. I think even this quarter, you kind of said 50%, if I believe I had that number correct.

Is there any reason to believe that, that pace would accelerate or decelerate materially as we head into 2022?.

Great question. This is Taylor. I'll cover it. There's absolutely no reason it would decelerate. In fact, that's a trend we've seen very consistently over the past several years, even throughout the pandemic.

And the right way to think about it is we've got this $170-odd billion in volume, 425 software integrations that are naturally inclined to continue to consolidate business with us via that gateway conversion mechanism.

But when you think about those 425 software integrations, their installed base goes far beyond that $170 billion that's on the gateway.

So if you put yourself in our shoes and you look at production on our end-to-end platform in any given month, and you say about half coming from these easy gateway conversions and about half is coming from a larger installed base of these integrations, that makes sense to us.

And it's proven throughout really choppy periods to work pretty consistently with that. There's always nuances. There's always a hotel chain that decides to do all in 1 quarter where you might get some outsized net new wins versus gateway conversion.

But generally speaking, you have a lot of shots on goal against that $170 billion, but a much larger installed base outside of that and it blends around to 50-50. In terms of acceleration, we spend basically every week thinking through ways that we could accelerate it. And there's a bunch of things we can do.

Like Jared always likes to say, and it's a true statement. We don't have to be a gateway. Being a gateway and sending volume to our competitors is like an accommodation that we're making because of the way the industry evolved over the past decade. We don't have to do that.

I think the stance we've taken, which is provide incentives to migrate, provide the education on why it's a better solution for merchants and win about half of those merchants via a gateway conversion and then get net new wins is a good compromise to that.

But yes, at any given time, we're evaluating, do we want to maintain a legacy connection? Do we want to create a more unique partnership with one of those software integrations to help compel them to migrate faster -- and I would say, at the top level, while it looks like a very consistent mix of 50-50, these incentives drive on ISV versus another to either convert a lot more gateway merchants or bring us a bunch of net new wins in any particular quarter.

So we're doing things all the time. I think the blended effect of that has consistently been 50-50. And we're hesitant to press some of the more aggressive layers that would undoubtedly accelerate that migration because of all the net new win success we're having.

It's built a lot of goodwill the way we've approached kind of this gateway migration process for customers..

Our next question comes from Dan Perlin from RBC..

Great. And thanks for all the details. It's fantastic. I'm not trying to steal thunder from this afternoon, but I did have a quick question on the SkyTab POS.

Just conceptually, was this -- do you guys feel like this was something you needed to do in order to control payment monetization longer term? Obviously, there's a cross-selling opportunity in SaaS revenues that were -- I guess you're just kind of leaving on the table there. So that's a huge opportunity.

But as the industry continues to kind of pivot to more of controlled POS, was this kind of a competitive necessity that you need to do? Or do you feel like this is unique and different to your product set?.

one, it just provides a lot of efficiency gains from a support perspective, hybrid cloud Android-based operating systems, very, very low maintenance, easy to support, easy to push out updates. But yes, it also opens up another -- a lot of other opportunities that we weren't as focused on with our prior strategy, which was monetizing through SaaS.

I mean the reality is, as you can see, even this quarter is you can capture SaaS revenue and meaningful payment volume. As we discussed in our comments, 85% of the 125,000 restaurants that we touch today don't have a SaaS contribution. We have a marketplace with integration to DoorDash and Uber Eats and Postmates.

There's probably 50 existing marketplace integrations, hundreds more. We don't charge any fee for use of that marketplace despite virtually every one of our competitors doing so. It would have been a lot harder to roll out a capital and payroll offering when you have to make it work with 4 different POS platforms versus one.

So we embarked on this journey years and years ago. As mentioned, we called it Project Edgewater, now as a name SkyTab POS, not PowerPoint, there's 2,000 of them deployed out there, including most recently at United Center. And we've got a lot of hungry distribution partners that are eager to go out in the marketplace and make an impact.

So that rationale has existed for years and was not the result of any new developments. And frankly, you can't make this much progress on a completely new restaurant platform. If you just decide to do it yesterday, I mean this was in the works for years..

Yes. No, that's super exciting. And then just quickly on the quarter, Taylor, you mentioned some of the stuff around the October volumes and kind of the cadence I just want to make sure we're clear because that created some consternation during the period. So October was up 86%.

I think generally speaking, at the midpoint of the guidance range, it's just maybe 110%. And I know there's some seasonality that typically takes place, I think, in and around November, but the numbers are suggesting an acceleration. So can you just again kind of walk through the cadence of that so that we understand your conviction level there..

Yes, absolutely. That's super exciting. What I'll do first is I'll convey the cadence of last year because I think that's very important. So last year, we had a downright strong October, up 28% year-over-year despite a pandemic.

And then as we all recall, starting in kind of the middle of November and throughout December, we had a significant increase in COVID-related restrictions across the country. I think New York City is a good example, in California just simply shut off indoor dining right when the weather was getting cold.

And you had a handful of examples across other states. What that resulted in was a decelerization in growth in November and then a further decelerization in December so much so that December actually contracted modestly year-over-year. And so you went from an up 28% October to a contraction in December.

That is not a normal seasonal cadence by any stretch of the imagination. That is a significantly impacted quarter as a result of the COVID restrictions. Now contrast that to this year, what we have is, again, a very strong October, up 86% year-over-year on a tough comp. We're very proud of that.

But we expect that given the deceleration in November and December of last year, that it continues to improve. And I think the X factor is what exactly does this lifting of travel restrictions to exactly does the significantly larger number of hotels in our base versus last year, due to November and December as travel increases across the country.

I think we're of the opinion in the room that it will undoubtedly increase. It's just exactly the magnitude of that, and that's sort of where we're at today, which is October looks great, and we're going to stick with our guide given the relative uncertainty of those factors..

Our next question comes from Ashwin Shirvaikar from Citi..

I wanted to -- hey -- I want to start by asking for some more details on the new verticals, say, for example, gaming, right? And you just signed your first -- recently first gaming plan, but you do already have a pretty meaningful presence in Vegas.

So what's sort of the process for actually going after that? What's the competitive environment like? Would you need to make more acquisitions or partnerships, such as Sightline and Everi would do? So let me start there..

Yes. Ashwin, Jared here. I can take that. So it is true. I mean, first, just really no one -- there were no payment companies that were equipped out of the box to pursue the domestic gaming opportunity.

It kind of -- it was shut down years and years ago, it reappeared, became sexy and then Shift4 and obviously, 2 other payment companies really sprinting towards it. What do you have to do in order to accommodate this vertical? You need integration.

And the integration that we possess in the card-present gaming environment are very different than the ones you need in card not present.

But this is -- what it does help us do is separate us as one of the logical players that these gaming organizations should partner with because if you have insight into a patron gaming and other hospitality business in a card-present environment, and then you're able to link that in a card-not-present environment for mobile gaming, that can provide some valuable insight into some of the partners that we're working with.

So that's how -- that is one of our rights to win on top of, we believe that our presence in stadiums is actually pretty relevant as well. But again, all 3 of these organizations that are spreading towards that have to accumulate integrations and they have to accumulate gaming licenses.

So we, as I mentioned in our remarks, had 8 gaming licenses, and we've completed integrations to providers we didn't have previously like -- you see we've released Everi, I think there's [NRT] out there, there's Sightline. BetMGM requires a number of different software integration.

So that's what we've been doing for, call it, the last 6 months, accumulating all these integrations, these alternative payment methods so that when the switch gets turned on, we're able to satisfy all the requirements for our customers. And that's well under the way.

And I think as mentioned in my comments, we expect the first mobile gaming transactions to flow across our rails this year in the quarter ahead..

Got it. Got it. Okay. And then on your medium-term outlook, which is by the end of 2024.

So is that sort of an annualized 4Q '24? I mean can you sort of granularize what the actual expectations are and hopefully, maybe even the cadence of it, effects like is it organic? Is it -- does it include acquisitions already and things like that?.

I think that one is appropriate at the table for the day because we spent a lot of time sort of structuring out what the core business should be expected to contribute over time. Exactly what -- where we've invested this capital that Jared talked about, the roughly $200 million in organic and inorganic.

And then exactly where these new wins will take us. So if you don't mind, I'd prefer we just table that towards a few hours from now..

Yes. That said, I do want to clarify, we're not getting queued on any sort of like 2024 exit rate making another year on Ashwin there.

What we're saying is between the core business, which is highly stable and growing very quickly, as you can see in the presentation materials on top of the 3 new verticals that we started in 6 months ago, which is gaming, sports and entertainment and e-commerce; and these 4 signature new wins that are taking us across the world.

What we're dealing with now is immense demand, lots of demand. And if you look at our verticals that we shared with you. But as mentioned, we'll go into more specifics in our Invest Field Day..

Our next question comes from Tim Chiodo of Credit Suisse..

My question is related to SkyTab POS in a way, but also specific to the 7,000 expert distribution partners talked about earlier and prior and also in the slides today on Slide 25. When we think about those 7,000 expert distribution partners, you mentioned that they're hungry to be able to sell the software.

Can you just give us some context on what are some of the other platforms that they're currently selling? How does Shift4 begin to take more of their mindshare? And sort of what is their status quo in terms of the platforms that they're most focused on at the moment that their attention will shift over to the new SkyTab POS?.

Yes. I mean, Tom, it's a good question. The answer is, they're all -- I mean they're all representing some Shift4 integrated product or another, whether that's Oracle or Focus POS or Future POS or Restaurant Manager, I mean, keep in mind, we have 425 software integrations.

So we're not implying we're going to win these over from other software solutions. We're saying they're already supporting existing Shift4 products. They're very aware of how an integrated payments fuel value proposition can help them differentiate and win in the market. That is ready for the next wave of technology, this next sexy product.

So we've obviously been communicating with them for some time, if you have [3,000] of these devices that are already -- 2,000 SkyTab POS is already deployed means that we've already been working with a select group of our kind of our best integrated partners that are out there.

And we have pretty big expectations of what they can deliver because if they're finding as much success as they are with our current products, which are very good, and that's demonstrated in the volume growth, they should be able to only improve upon, both within our existing base of customers and a great cross-sell and what is a really sexy addressable market.

Taylor, I don't know if you have more on that to layer on..

No. I think that's well said. Important to note, highly diversified group. I think within the restaurant vertical specifically, support a myriad of different software applications. And what we're going to talk about later today is that's a really differentiated edge.

If you look at the restaurant industry specifically over the years, you've had lots of different POS providers gain success in particular swim lanes because of how they've built the product. And yet we have a dozen or more of these products under 1 roof and a lot of internal expertise.

So the SkyTab products really designed to help them widen the debt and address more of their own markets and then also upgrade what are undoubtedly some legacy systems within certain stocks.

We don't want to pick on any one software provider but we all know that there are big providers with a loyal brand following and a huge legacy base, but have been slow to migrate to the cloud. This allows those distribution partners take advantage of that, Tim..

I appreciate that. I'm sorry.

What I was trying to get at is my understanding is that the distribution partners have choice in which -- who they partner with, what they sell, it's not necessarily exclusive and that they have options in terms of which POS systems they could sell into the restaurants and maybe the new SkyTab POS helps you gain some mindshare with them in terms of where they allocate their time..

Yes. Well, actually, to be clear, these are partners that are using Shift4 for the vast majority of their business. If they're not using ship for segment, it's because they service a vertical that we don't happen to be in. You might find grocery stores, for example, being serviced by the same group that does restaurants in a local geography.

So they're using Shift4 the majority of their business, but they may be either installing a Windows-based software more often than not, or they might be supporting more restaurants that they've installed over the past decade than they are setting up new locations.

This gives them all a reason to go introduce a new product with a familiar face and a bunch of new features at a really attractive price point. So it's much more about augmenting their go-to-market and giving them another tool in their tool kit.

As I think you know well, Tim, we don't try to be heavy-handed about the product from a software perspective that our distribution partners go to market with. All we care about is that they deliver the payments to us.

What we've heard from that group is that a product like SkyTab would have a lot of success doing both helping them win that new locations and helping them address some of the concerns that their merchants have across their base. I don't want to get too overarching with the comments because again, 7,000 partners, they all have different needs.

Some service hotels entirely, for example, and SkyTab is just something that they can offer to the extent there's a restaurant in the hotel. So there's a bunch of different diversity inside that base. We're going to spend a lot more time on that later today.

I think the point is that these are partners that have been loyal to Shift4 a long time that have deep integrations with us, and we go to market in a pretty lockstep way with each other, and now we're giving them another tool they can rely on..

Yes. And Jared here, just to layer on, I mean, the idea is, should we expect our partners to be even more kind of energized, prioritize more of their time around this new product? Of course, I mean everybody likes the next new version of an iPhone. And right now, SkyTab POS has got a sexy interface.

It's got a lot of capabilities embedded in it, free loyalty, embedded online ordering, a clean integration into a marketplace of third-party providers. We have a road map right now that's not far out with capital and payroll offering. Hardware looks good. They're going to be excited to go out and win with it. So I mean, it's not hard to see.

Toast is doing very well in the marketplace. I think they're the 2 fastest-growing players, at least within the restaurant vertical would be us and Toast.

If we're introducing sexier, better hardware, with new software interface with more capabilities embedded into it, of course, our partners are going to be charged up to get out there and distribute it, not just to our existing customers, which, for sure, there is a nice SaaS lift and other revenue opportunities that have come from it.

We're just going out and continuing to win in what is a very large addressable market..

Our next question comes from Andrew Jeffrey from Truist Securities..

I appreciate you taking the time this morning. I'm intrigued by the SaaS comments and the opportunity, Jared. And I wonder if you could talk a little bit about perhaps some of the areas where you think you have the greatest opportunity to drive attach.

And how you might help us think about that over time? Do you start to talk about something akin to an ARPU? I'm just trying to think about how we're going to track that and where you're most excited about the opportunity..

Yes. Andrew, there's some good questions there. And I think Brad should weigh in a part of it on how we're thinking about reporting our progress going forward. But I think what we're sharing today is we're pretty -- we're an aggressive organization. We like to move boldly forward.

We did a number of acquisitions back in 2017 on restaurant POS software companies that had no SaaS revenue, but they also had no payment revenue. We've been a payments company for 22 years. We know how to find success leading with payments.

And we went after all those customers plus a lot of new customers using that software, primarily monetizing that relationship through payments, and it worked incredibly well.

As a result though, here we are at the end of 2021, where we have a lot of restaurants using our restaurant software out there, driving a lot of payments volume and paying a little to no SaaS. And that doesn't seem like very reflective of the time.

So as we go back out there to the market -- in the market with our immense network of distribution partners, sell new customers as well as upgrade our base of existing customers, SaaS will be a component of the product. I don't think that's like going to be surprising or there's any pushback from the customers.

I think they're going to love to upgrade to a sexy new platform with cool hardware and a lot of features and we're going to be happy to pay some SaaS fees along the way, and we're going to continue to capture the same payment economics we already have plus some new levers from capital, payroll and marketplace.

And we're going to pick up a lot of operational efficiencies because it's a lot easier to just support 1 software type than 4 or 5. And it's certainly a lot easier to support an Android-based environment than it is a Windows base. So a lot of opportunity there. I don't think it's a big reach at all.

But I'll kick it over to Brad on how best we're going to keep you informed of that progress..

Andrew, it is a great question. And just to kind of drill a little bit on what Jared was saying. It used to be -- we would try to migrate completely out of SaaS in the payments. We found there's some really good SaaS revenue in there.

There's really good revenue that's growing and it's recurring, and it creates a lot of really good sticky behavior with your customers.

So as we evolve into some of these new verticals, we are spending a lot of attention to how we're reassessing our pricing models and our pricing programs to make sure that we have a right balance between that SaaS element and the payment element.

So what we're going to be looking at is, to your point, some type of an ARPU measure, but we're also looking at what is an average monthly fee for the different services we provide.

And if you think about what generates SaaS, it's not only the software, but it's also some of those peripheral things I mentioned a minute ago, whether it's analytics, whether it's pay at the table, online payments, all of these different elements.

So a big thing for us was to make sure we can kind of recast our pricing models to capture anywhere we can. So we are going to start talking more about SaaS, what's generating SaaS, how it's behaving and how it's growing. So we will -- more to come on how we're actually going to deliver that..

Okay. Yes, I look forward to that.

And then just as we come out of pandemic and things start to normalize for restaurants and they start to assess installed technology, and as Shift4 becomes more of a software company, how do you address those merchants that might be running on closed systems even as end-to-end Shift4 customers? I'm thinking about MICROS and Radiant, for example..

Yes. So, hey, Jared here. I'm going to kind of emphasize this a little bit in the Investor Field Day, but customers who are migrating to Shift4, they're not dumb. They're not making bad decisions going from like one nonintegrated solution to another or something. I mean Shift4 is an integrated payments company.

We connect into software, and we make a lot of connections besides just payments. So even Oracle MICROS customers that use our technology can tap into handheld pay-at-table, order-at-table, QR code-based payments, QR code-based online ordering, right? We make available to them our loyalty application.

We -- our marketplace does connect into a number of different software applications besides just SkyTab POS. So when customers like Tao and Hakkasan have moved over to Shift4 in the last year, they're not doing it at a great expense to the organization from a technology or software perspective. They're making really informed decisions.

So I think that when you see the restaurant payment volume growth that we've outlined in the slides and the spreads associated with it is because smart merchants are making good choices. It's just there just happens to be more than one choice out there than Toast. It's not a winner-take-all environment.

So we love all the software integrations we have already out in the field and the capabilities associated with it. But we're also looking at the future, which is why we built SkyTab POS.

And that will be appropriate for a lot of customers to migrate to, it will be appropriate to win a lot of share away from, say, [NCR] and other players that are not partnered with Shift4. And then there will be a lot of software that we currently support today that will be very appropriate for the long term for our customers. Hopefully, that helps..

Yes. I just want to pile on there a comment. There's 1 comment you made that we're more of a software company. We've been a software company for a very long time, and we operate several brands underneath. We've clearly deemphasized that for the public market because payments we say is our north star.

But if you look at a product like Harbortouch, it's been payments plus SaaS for an incredibly long time. So we're really just augmenting the go-to-market on a product level, a little bit within the restaurant space.

And I think the fact that we deemphasized an ability to grow SaaS revenue during a pandemic wasn't because outside of the pandemic we don't have a lot of leverage in that. It was just our assessment of the market at the time of our IPO was this isn't the right time to push customers towards new product and incremental fees.

Now we feel that there is an increased demand in that. Now behind the scenes, you see that we've added 2,000 restaurants to this platform over about the same time period. So clearly, a very capable product. Clearly, there's some demand in the marketplace.

Our assessment is that demand is going to be outsized as a result of exiting the pandemic as compared to where it was and tons of software talent inside of Shift4 that had been less product loyal than we're kind of pushing them towards now, which is actually we do want you to go forward with this product. We think it's the right time.

We think it's going to win more than some of the other products inside of our stack. And so now it's the time to go..

Our next question comes from Chris Donat from Piper Sandler..

Taylor, I just wanted to maybe approach the issue of fourth quarter expectations from a historical perspective, if that's even valid. You gave us nice comparisons with 2020 in October, November, December.

Can you talk about what cadence you saw in like 2018 or 2019? Or is that even fair given how the business mix has changed for you over the last couple of years?.

I don't know that -- it's fair to the extent you can take sort of a business that was predominantly restaurant and specialty retail focus back then with a much smaller average merchant and correlate that to a lot of hotels in the stadiums.

And I think there are certain trends that are consistent, meaning the times of the year that people like to go out and celebrate and go to events and travel, and there's others that are less consistent. So I don't necessarily think, and trust me if I thought we could give a good seasonality profile we would.

It's not lost on us that we deliver a very confusing message in that regard. It's just the reality of winning much, much, much higher quality merchants in segments that are adjacent to what our core verticals have been back then. We don't expect that the shift is going to be radical as like kind of COVID disappears.

But you do expect some of the months that have been peak are your second best month or your third best month or something like that. How it translates to this quarter, again, we feel good about our guide. We feel like it's appropriate based on what we've seen one month into the quarter.

And there's some uncertainty within really decent pockets of our merchant-based hotels specifically that we're just not clear on exactly how that's going to play through. Yet, we think that if it plays through in a modest way, our guide is a great guide..

Our next question comes from John Davis from Raymond James..

Hey, John, you’re there?.

John has our e-mail. So we can hop to the next question or I think we might be through the queue. So let us know what you'd like us to do, Emily..

We currently have no further questions. So I'll now hand back to Jared to conclude today's call..

Thank you very much. I appreciate everyone dialing in. Just as a reminder, we have an Investor Field Day that's kicking off shortly, and we've put an awful lot of slides out this morning, and there's quite a bit to talk about.

So we invite all of you that have dialed in to join us during the Investor Field Day, either on site or through the virtual connection, and we have a lot more exciting things to talk about. Thank you very much for dialing in..

Thank you, everyone, for joining today's call. This now concludes our conference. So please disconnect your lines..