Q3 2021 Shift4 Payments Inc Earnings Call
Hello, and welcome to the ship for third quarter 2021 earnings call. My name is Emily and I'll be coordinating the call today. During the presentation you will have the opportunity to ask a question by pressing star followed by one on your telephone keypad I'll now turn the call over to our host Tom Macquarie and head of Investor Relations.
Please go ahead.
Thank you operator.
Welcome everyone to ship four earnings conference call for the three months ended September 32021.
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 bulk.
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 plan strategies goals and objectives. The expected impact of COVID-19 on our business and industry, including with respect to economic recovery.
<unk> and vaccination rates, the reopening of the country and any volume recovery by us.
<unk> penetration, it's been seen by our gateway merchants expectations regarding new customer 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 32021, 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 managements 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 caused 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 <unk> chip for Dot Com Lastly.
Lastly, we are hosting our Investor day event later today at Allegiant Stadium in Las Vegas, and as a reminder, the presentation portion of the event will be webcast and again at 12 noon Eastern time nine am Pacific the webcast link can be found under the events section of our Investor Relations website investors that ship for Dot Com. We encourage you to tune in at noon today to hear from our executive Matt.
<unk> 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 Jarrett Isaac.
Thank you Tom good morning, everyone.
Big day today wants to talk about as you may have seen this morning ship for reported solid results, including <unk> volume of $13 5 billion up 90% versus the third quarter, a year ago, and nearly 130% higher than the same period in 2019.
Our quarterly volume results represent record levels of volume production for the company. We also reported impressive revenue and adjusted EBITDA levels for the quarter with gross revenue less network fees up nearly 70% versus last year and adjusted EBITDA margins of 38%, our adjusted EBIT margins, representing nearly 500 basis point increase from <unk>.
Last year's third quarter, and about 450 basis points sequentially evidence of our scale and operating leverage. This expansion was also in the face of increased investment to pursue several new verticals that I'm really excited to talk about in a few minutes and share more details on later today during our investor field deck, while I believe our performance rivals that of our strongest.
There's no question our volumes in parts of August and throughout September moderated more than we would've expected, which we can only surmise was attributable to the Covid Delta variant there.
There were several well publicized comments by our airline and hotel executives that would also suggest fall travel fell below expectations from earlier in the summer.
I'd like to focus my comments. This morning on three areas our core integrated payment performance the amazing progress since our IPO and finally, the transformation that is about to take place. This will essentially be a summary overview of what we intend to expand upon during our Investor Field day later today, So first our core integrated payments business, which enables us to do.
Differentiate and compete in the complex restaurant hospitality and specialty retail verticals is performing incredibly well as a reminder, we go to market with our aligned software partners and win in near equal parts across a large addressable market and by converting customers from our gateway platform to our end to end platform over 99% of it.
Transactions processed that ship for our in fact integrated and successes in these verticals is defined by 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.
A 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 or gateway volume, specifically, 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 it's connected to virtually every legacy merchant acquirer that volume represents a significant economic opportunity with a four to five lift in gross profit from moving to our end to end platform.
The volume growth and resilient spreads at ship for 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 and chip for we are growing volumes. So quickly in a large more complex merchants.
The investors confused mix shift up market at higher revenues per merchant that spread compression in reality and as you will see during our investor field day presentation. Our spreads have either remained constant consistent or growing in our core vertical core verticals. Despite the perceived threat of competition.
And then add value through technology merchants are simply not signing up for non integrated solutions legacy merchant acquirers with large books of non integrated merchants are losing share and they are gravitating towards technology enabled platforms like ship or in others. We have developed technology that solves pinpoints like pay at table order a cable QR code based payments.
Our code ordering online ordering loyalty business intelligence and even a brand new full blown Pos platform that will talk about in a bit.
We shared with you previously and then our new carbohydrate, killing platforms Codenamed Edgewater and now I'm pleased to announce the platform has made in its called Skycap Pos.
And it's not Powerpoint, it's already in 2000, plus merchants, including the United Center.
This modern hybrid cloud software is feature rich and driven by a customer experience driven philosophy.
Skycap Pos will drive incremental Safford SaaS revenues as roughly 85% of the 125000 restaurants, we presently serve today pay little to nothing in tax fees. It will also unlock other revenue opportunities as we rollout 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 Skype pass product during our Investor Field day.
Our confidence in the competitive moat around our core integrated payment 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 do you.
And our Tam, while bringing our integrated payment expertise into three new verticals, which are gaming sports and entertainment and ecommerce along the way we've 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 2012.
One gross revenue less network the guidance.
On that note we've made considerable progress across all three of these new verticals. This includes successes within the stadium vertical with the addition of Toyota Stadium impressed in Frisco, Texas and T Mobile arena here in Las Vegas, We currently have over 80 venues in sports.
Teams adopting our shift towards software and payment services and could not be more pleased with our decision to enter this vertical through our acquisition earlier. This year a venue next we also signed several soccer teams during the quarter, including DC United in the Los Angeles Football Club, we are winning large books of business from our competitors, including industry verticals that were previously considered too difficult.
The switchover.
Additionally, through the three card acquisition in 2020 now called Chip for shop, We've increased site count over 72000 sites launched a crypto acceptance service with Bill pay and advanced several strategic partnerships, while booking notable wins like adventure near company commodity.
We're 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 eight gaming licenses in 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 bet MGM 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 and in venue gaming. So reminder, capital Las Vegas strip has it relationship with ship for coupled with our immense right to win and 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 three parts the core integrated payments business the progress since the IPO and the transformation that is about to take place.
While we are onto the transformation portion of the update and I am beyond excited to announce we are entering four new verticals and expanding the overall overall organizations Tam on the shoulders of the signature wins. This includes Allegiant Airlines, a multibillion dollar airline and hospitality providers that will expand and strengthen our capabilities across the broader travel and leisure market.
St. Jude Children's Research Hospital and organization with a vital mission that accept nearly $2 billion a year in donations and opens the door to both nonprofit and health care industries.
And finally, a company that I've, often said is most well run and innovative organization I've ever seen and I have an obvious bias, but spacex and their starlink broadband service.
Its five year strategic partnership will take our integrated payment service across the world with a specific sterling payment opportunity. Some analysts say could reach over $100 billion a year the.
The agreement includes a commitment to convert domestic volumes shipped were beginning in the first quarter of 2022 and.
And it's also worth noting that Spacex has a restaurant and a few bars and other hospitality venues in the works in Star base, Texas and you can count on those locations using our new Skycap powered.
Hospitality platform.
These wins have displaced payment companies, we immensely immensely respect like adient and stripe, though resulted in numerous new software integrations to our platform, which allow us to pursue other merchant in those new and exciting verticals and come with a stamp of approval that shift for 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 TC service outage, a rocket launch supply chain theories and then several disappointing weeks of share price performance hopefully.
Hopefully I've use IV. Some of these perceived concerns is clearly we've been quite busy in the results and outlook are quite bright.
But theres certainly a lot more to discuss including our multi year 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 the quarter on Saturday August 'twenty, one most of our merchants experienced the service disruption due to our platform outage of one of the industry backbones thesis.
This outage was caused by our vendor we took swift decisive action, including reimbursing those impacted merchants for loss revenue the financial impact from this thesis outage on our results for the quarter was approximately $25 million of which approximately $22 million was recorded as contra revenue.
Rob will review the financial impact from the <unk> outage in more detail later during this call, but we strongly believe this was the right action to take for our merchant 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 St. Jude Children's Research Hospital as you know we set lofty goals and this was one of our lawsuit yet. Thanks to you. The inspiration for event raised over $250 million for very worthwhile caused and I can assure you the St. Jude showed.
And their parents and their extended families are very grateful for your generosity and with that let me turn the call over to our Chief strategy Officer, Taylor Lager, who will highlight volume trends and thoughts on trends heading into the year end.
Thanks, Jared and good morning, everyone.
The net new merchant loans, we've signed imported 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 our larger whether that'd 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 and evolving mix shifts and the impact of all of this has on our seasonality cadence with that being said the monthly cadence was a record July in 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 <unk>.
Over 80% through much of the month with the months now being concluded we are happy to report that our full month's end.
And payment volumes ended up 86% year over year as 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.
<unk> 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-19 related restrictions.
Sequentially, we exited Q3 with roughly 5% more active merchants spend in Q2.
As Jerry 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 is 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 moderate our addressable opportunity has increased substantially over the past year as we entered gaming and e-commerce, expanding our hospitality client base substantially through a combination of gateway conversions.
Net new wins and now with Spacex Starlink, we're ready to take all of these verticals global.
The gateway opportunity remains extremely healthy with gateway volumes, increasing to $170 billion and we remain in the pole 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.
<unk> way 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 <unk> 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 enquiring about a hardware vendor and impacts of our security related concerns, while we use packs devices they represent less than 10% of our deployed terminals given our large multi.
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.
Our best in class of insulated us from challenges other processors appears to appear to have encountered.
We remain active in.
And the market evaluating M&A opportunities and remain disciplined on price, but a 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 hearing to review our financials.
Thanks, Tyler before I dive into the financials I want to make a few quick comments first when we talk about our Q3 results and comparisons to other periods.
Excluding the impact of the <unk> 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 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 with $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. The shipboard continues to board new merchants.
Consumer spending continues to recover.
In the current quarter net processing made up 67% of our gross revenue less network fees up two percentage points from the same quarter last year.
Additionally, 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 and entertainment.
We're also expanding penetration of our peripheral products and services such as pure software online order pay at the table order a table in our lighthouse business intelligence into our existing base of over 125000 restaurant merchants.
Specifically, our subscription and other revenue stream has grown 72% when comparing to the third quarter of the second quarter third quarter of last year.
Spread for the quarter came in at 74 basis points, which is four basis points lower than the spread we reported in Q2 the decline from previous quarter was slightly more than anticipated as we saw significant increase of hotel volumes.
<unk> down aggregate spreads in the quarter that shift in mix stabilize towards the end of Q3.
Summer travel season came to it is.
It's worth highlighting the 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 at 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 of 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, which is important to understand as we look to balance expanding margins in our existing integrated payments footprint, while continuing to grow revenues within the 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 the revolving credit facility.
As I mentioned in my opening remarks, I want to take a quick minute to describe how the impact of the <unk> 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 one time reduction of payment space revenue in accordance with applicable accounting guidance under ASC 606.
Second the $2 3 million of payments made to partners is reflected as a one time increase within other cost of sales.
Lastly, there were some additional one time costs totaling approximately $400000 that are embedded within various income statement lines, resulting in a total impact for the quarter of $25 1 billion.
This total amount is reflected as an add back in our reconciliation to adjusted EBITDA.
I also would like to point you to the appendix of our deck, where we presented 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. So at the end to end volumes.
Second we are increasing our full year guidance for gross revenue less network fees now to reflect a full year target of $520 to $525 million. This primarily represents outperformance of our non volume SaaS based revenue streams, mostly from our investment 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 were made.
To expand into new verticals exclude.
Excluding the impact of our merchants failure that we discussed in the first quarter of this year, our adjusted EBITDA would actually fall between 180 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 three years, we expect the CAGR and volume to be at least 50% and the CAGR of our gross revenue less network fees to be at least 30%.
We would ask that you hold the questions related to our medium term outlook until our Investor day, where we will 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.
Thanks, very much Brad if you'd like to ask a question. Please do so now quick question Star followed by one on your telephone keypad.
Your mind. Please press star followed by changed with Julia question from preparing to ask a question. Please ensure that your devices on muted lately.
Our first question comes from Darrin Peller from Wolfe Research your.
Your line is open.
Thanks, guys and thanks for all this updated information on the outlook in the new verticals, it's great to see.
Just touching on that permitted the.
<unk> that you are now, making 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 of your current verticals to allow you into those categories and whether it's St Jude's or it's.
Some of the other charges you mentioned in the slides or.
It seems like the complexity you service with all the different Ics is allowing for that so and how big could these opportunities really be relative to some of the verticals you're in today again with looking at some of the.
Some of the winter.
Yes garen.
Good question Gerrick here. Thank you.
Yes. This is this is what our payment platform does.
We are an integrated payments company, which means we connect into commerce, enabling software to encrypt and token eyes and drive secure payment transactions.
The fact that we've been in.
Predominantly restaurants hotels and specialty retailers is really more a factor of the merchant environment, requiring multiple different types of software that complexity is what is necessitate for but 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 retail they have multiple.
Software types in 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 two or three quarters. They use multiple different types of software applications for their various fund raising effort. So.
These industry 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 integration.
Whether it's in health care nonprofit.
Airline.
It's very safe to say that the Starlink payment platform is quite actually are software is actually quite proprietary it does open us up to all the other merchants that occupy the space in those verticals and with Sterling, specifically, which had global initiatives. 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 four four star link.
And then in terms of the opportunity they represent.
We put that in our presentation Allegiant Airlines does.
You can see they're a public company they do 2 billion plus.
Payment volume right now.
Research hospitals, and nonprofit debuted nearly $2 billion in donations and then in terms of Starlink Theyre already just in beta doing over a $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 you can probably guess why we're so excited about these esignature wins.
Alright, Thats really helpful. Just one quick follow up on the revenue yields just because I know you touched 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 are able to sustain.
Obviously strong yields given given the CAGR is that I guess, we'll wait for the Investor day discussion to go through but when we look at geography of yields for fourth quarter on a seasonal basis for a bit. If you can just remind us of that and then just when you talk about some of these new verticals and new larger categories I assume theyre going to come with lower yields, but obviously just bigger more broad opportunities.
Sure we are thinking about that right kind of great job overall, thanks again guys.
Youre exactly right. So Q4, if you think it's kind of normal seasonality, we would expect a slight dip in Q4.
Just related to the normal seasonal pattern I am going to highlight like we've talked about before we do expect that.
That continued kind of one to two basis point decline just with merchant mix, we're going to talk about some more of that later today and our investment discussion. If we're also going to talk a little bit more about the second point that you make which is very valid which is as you go up market 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 could generate off of these merchants. So if you look at our revenue per merchant basis, youre going to see some pretty staunch acceleration in that number as well we're going to cover both of those and more.
Detailed today, so look forward to diving into that.
Yes, and one thing I would just layer on Q.
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.
When you get into nonprofit charitable, giving theres opportunities to push cost back on the consumers, making the donations, which usually comment at pretty healthy spreads.
When you get into international markets that opens up cross border payment.
Opportunities, which also as you guys are aware usually come in at a pretty higher spreads so.
I think there's there's going to be.
A lot more to talk about for sure as we move into these new verticals.
I think we'll be we'll be pretty interesting.
Okay.
Thanks, guys.
Our next question comes from Jason <unk> from Bank of America, Jason Your line is open.
Hey, guys. This is Kathy on for Jason.
I just wanted to ask a little bit more about the cases added I appreciate all the disclosure and the transparency around that.
I just wanted to confirm.
Fully behind you.
Are you seeing any lingering effect with <unk> and can you just explain a little bit more about like what brought upon.
The situation.
Was it volume third and was there any kind of loss of data.
Carroty issues related to that.
Yes, sure no problem Garrett here I'm happy to take that Kathy So first.
You would really have to ask global payments.
To the ultimate root cause on that they really punished a lot of the industry with that situation, but it very much as onetime 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 <unk>.
Encryption on every one of those transactions.
Yes, I mean, ultimately <unk> is one of the call it four or five 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 of this behind US we're growing really fast.
We are 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, when we've had a lot of signature win more stadiums have come online more restaurants and hotels.
Two.
If we were taking similar acura action similar to other payment processors of which literally hundreds of banks financial institutions were caught up in this.
We would never be able to grow at the pace. We're doing it. So no. We don't expect any any lingering issues going forward in fact, it kind of became case closed back in August.
Ted 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 thesis 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. Thank you very helpful and I guess, if I could just.
Switching gears a little bit.
If you look at the rate at which volume.
Volume has been converted to end to end over the past couple of quarters I think even this quarter you kind of that 50%. If I believe I had that number correct is there any reason to believe that that pain.
<unk> or decelerate materially as we head into 2000 2010.
Great question. This is Taylor I'll cover it there is 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.
In 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.
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 months can you say about <unk> coming from these easy gateway conversions and about half is coming from a larger installed base of these integrations that makes.
<unk> to us and it's proven throughout really choppy periods to work.
Pretty consistently with that there's always nuances theres always a hotel chain that decides to do all in one 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 too.
50 50.
In terms of acceleration, we spend basically every week thinking through ways that we could accelerate it.
And Theres a bunch of things, we can do like Jerry always likes to say and it's a true statement, we don't have to be a gateway being the gateway and sending volume to our competitors just like an accommodation.
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.
<unk>.
The education on why it's a better solution for merchants and when about half those merchants via Gateway conversion and then get net new wins is a good compromise for that but yeah at any given time, we are evaluating do we want to maintain a legacy connection and we want to create a more unique partnership with one of those software integrations to help compelled them to migrate.
<unk> faster and I would say at the top level, while it looks like a very consistent mix of 50 50. These incentives drive one ISP 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 effective that has consistently been.
50 50.
Has it been to perhaps 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 this gateway migration process for customers.
Awesome, Thanks, guys and looking forward to the Investor day later today.
Thank you.
Our next question comes from Dan Perlin from RBC.
Please proceed.
Great.
Thanks, a lot of details it's fantastic.
I am not trying to steal Thunder from this afternoon, but I had a quick question on the Skycap Pos.
Just conceptually was it can you.
I feel like this was something you needed to do in order to control payment monetization longer term.
There is a cross selling opportunity and SaaS revenues that were I.
I guess here is kind of leaving on the table there so thats a huge opportunity, but as the industry continues to kind of pivot to more of control at the Pos.
I'm, just kind of a competitive necessity that you need to do or you feel like this.
<unk> unique and different tier.
Alex said.
Hey, Thanks, Dan.
So I mean, we didn't we didn't feel any any any pressure in the in the in the market to make our investments and build out the <unk>. POS you can probably see from some of the slides in the investor deck, we've been continuing to win in the restaurant vertical.
Despite the competitive environment for years and years now this was just the right thing to do for years ago, We acquired.
Software Pos companies from a different generation it had a ton of embedded integrated payment volume living inside at a lot of sophisticated distribution, we were able to unlock considerable value through those acquisition, but it was never to long term plan to support four different restaurant Pos platform. The idea was always to consolidate around a modern.
Cloud based architecture.
That one is just provide provides a lot of efficiency gains from a support perspective cloud hybrid hybrid cloud Android based operating systems, very very low maintenance easy to support easy to push out update but it also opens up another are a lot of other opportunities that we weren't as focused on with our with our prior strategy, which would monetizing through.
SaaS I mean, the reality is as you can see even this quarter as you can capture has revenue and meaningful payment volume.
As we discussed in our comments 85% of the.
125000 restaurants that we touched today don't have SaaS contribution we are a marketplace with integration too.
Door dash and Uber eats in postpaid.
Probably 50 existing.
Existing marketplace integration 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 rollout of capital and payroll offering when you have to make it work with four 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 named Sky Cab Pos.
Powerpoint Theres 2000 of them deployed out there, including most recently at United Center, and we've got a lot of Hungary distribution partners that are eager to go out in the marketplace.
And make an impact so that rationality has existed for years and was not the result of any new developments and frankly, you can't make this much progress on that on a completely new restaurant platform. If you just decided to do it yesterday I mean this was in the works for years.
Yes, that's it.
The exciting thing for that 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 that created some consternation during the period. So October was up 86% I think generally speaking at the midpoint of the guidance range suggests 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. Thank you.
Yes, absolutely what ill do first is all 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-19 related restrictions across the country I think New York City is a good example, in California, just simply shut off indoor dining right right when the weather it was getting cold.
And you had a handful of examples across other states.
That resulted in was a deceleration in growth.
In November and then a further deceleration in December so much so that December actually contracted modestly year over year. So you went from an up 28% October to a contraction in December that is not a normal seasonal cadence by any stretch the imagination that is.
A significantly impacted our quarter is.
As a result of.
The Covid restrictions now contrast that for 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 <unk>.
Travel restrictions do what 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 and 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.
We're going to we're going to stick with our guide given the relative uncertainty of those factors.
That's super helpful. Thank you.
Our next question comes from Ashwin <unk> from Citi Ashwin. Your line is open.
Thank you.
Hey, guys.
Good morning.
Hi.
I wanted to.
Alright bye.
Bye.
Yes.
More detail on the.
Let's say for example.
Jamie.
Design your floor.
Christine.
But you do already.
Pretty meaningful presence in Vegas so.
What's sort of the process.
For sure.
Going after that.
Competitive environment in London Tonight.
Would you need to make more acquisitions partnerships such as that.
And we would do so maybe start there.
Yes, Ashwin jaret 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.
<unk> opportunity it kind of.
It was shut down years and years ago. It reappeared became taxi and then ship for and obviously to other payment companies really began 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 it.
Separate us as one of the logical players that these gaming organization should partner with because if you have insight into.
Our patrons gaming and other hospitality business and a card present environment and when Youre 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 three of these organizations that are sprinting towards that have to accumulate integration and they have to accumulate gaming licenses. So we as I mentioned in our remarks had eight gaming licenses and we have completed integrations to providers. We didn't have previously like.
We've released every NRT out there there is a sideline.
That MGM requires a number of different software integration. So that's what we've been doing for call. It the last six 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 underway and I think I've mentioned in my comments, we expect the first.
<unk> gaming transactions to flow across our rail.
This year in the quarter.
Got it got it Okay and then on your medium term outlook.
By the end of 2024, so is that sort of a.
Annualized.
For Q4, I mean can you sort of.
Granular.
What the actual expectations are and hopefully maybe even the guidance update thanks.
Thank you Victor organic is it does it include acquisitions are there any things like that.
I think that one's 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 Jerry 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.
I do want to clarify we're not getting cute on any sort of like 2024 exit rate.
China's sneak another year on year Ashwin there.
We are 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 three new verticals that we started in six months ago, which is gaming sports and entertainment and E Commerce and these four signature new wins that are taking us across the world, where we're dealing with now is immense demand lots of demand.
And you look at our existing core business as growth rate.
That remained stable within our verticals that are very very hard to encroach. Upon our space. On then there's not a whole lot of what you have to believe in those seven new verticals that we shared with you, but we will count as Kevin mentioned will go into more specifics investor fielding.
Okay. Thank you.
Our next question comes from Tom <unk>.
Tom Please go ahead.
Great. Thank you. Good morning, everyone. My question is related to Scott Scott Pos in a way, but also specific to the 7000 expert distribution partners.
You talked about earlier and prior and also in the slides today on slide 25.
When we think about the 7000 expert distribution partners.
You mentioned that they are 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 are currently selling how does shift or begin to take more of their mind share and sort of what is their status quo in terms of.
Yes.
<unk> that theyre most focused on at the moment that their attention will shift over to the new Skype Pls.
Yes, Tom it's a good question. The answer is they are all of them I mean, they're all representing some shift for.
Integrated product or another whether that.
<unk>, our focus pause or future positive 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 ship our products. So they are very aware of how.
In integrated payments fueled value prop and can help them differentiate and win in the market.
Ready for the next the next wave of technology. This next sexy product so.
We've obviously been communicating with them for some time. If you have 2000 of these devices that are already 2000, Skype <unk> 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 are pretty pretty big expectations.
What they can what they can deliver because if theyre 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 with a great cross sell and what does it really sexy addressable market I don't know if you have more.
Later on.
I think that's well said.
And 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.
Some really differentiated edge, if you look at the restaurant industry, specifically over the years you've had losses.
Of different Pos providers gain success in particular swim lanes because of how they built the product.
And yet we have a dozen or more of these products under one roof and a lot of internal expertise. So.
The Sky type products really designed to help them widen the net.
And address more of their own markets and then also upgrade what are undoubtedly some legacy systems within certain certain stacks, we don't want to pick on any one software provider, but we all know.
That there are there are big providers with a loyal brand following in a huge legacy base, but have been slow to migrate to the cloud. This allows those distribution partners take advantage of that.
Thank you 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 they have options in terms of what your Pos system, they could sell into the restaurants.
And maybe the new Skype POF helps you gain some mind share with them in terms of where they allocate their time.
Yes, well it actually to be clear. These are partners that are using ship for the vast majority of their business. If they are not using ship for for a segment of its because they service a vertical that we don't happen to be in grocery stores. For example, being serviced by the same group that does restaurants in a local geography, so they're using shift.
For 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, then they are setting up new locations. This gives them all.
<unk> to go introduce a new product with a familiar face.
And a bunch of new features that are really attractive price points. So it's much more about augmenting their go to market and giving them. Another tool in their toolkit as I think you know well and we don't try to be heavy ended 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 Sky Fab would have a lot of success doing both helping them win net new locations and helping them address some of the concerns that their merchant staff across their base I don't want to get too.
Two overarching with the comments because.
7000 partners. They all have different needs. Some service hotels entirely for example in the Sky to have its just something that they can offer to the extent there is 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 shift for for a long time that have deep integrations with us when we go to market in a pretty lockstep way with each other and now we're giving them. Another tool they can rely on and Jaret here just to layer on.
Should we expect our partners to be even more kind of energized.
Prioritize more of their time around this new product and of course, I mean, everybody likes the next new version of an iPhone.
And right now Scott that Pos has got a vaccine or face it.
Got a lot of capabilities embedded in it free loyalty embedded online ordering clean integration into our marketplace with third party providers, we have a roadmap right now thats not far out with capital and payroll offerings hardware it looks good.
They're going to be excited to go out and win with it so.
Yes.
I mean, it's not hard to see.
Host is doing very well in the marketplace I think the two fastest growing players at least within the restaurant vertical would be us and tell us 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 distributed not just to our existing customers, which for sure. There is a nice SaaS lift in other revenue opportunities that come from it which is going out and continuing to win in what is a very large addressable market.
Excellent. Thank you both for all of that context I appreciate it.
Yeah.
Our next.
Question comes from Andrew Jeffrey from Cherish Securities Angie Your line is open.
Yeah.
Hi, Good morning, I appreciate you taking the time this morning.
I'm intrigued by the SaaS comments, and the opportunity Jarrod and I Wonder if you could talk a little bit about <unk>.
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 <unk>.
I'm just trying to think about how we're going to track that and where you are most excited about the opportunity.
Yes, Andrew there is some good questions there and I think Brad should should weigh in and 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'd like to move boldly forward. We did a number of acquisitions back in 2017 on 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.
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 monetize net 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 lot of restaurants, using our restaurant software out there driving a lot of payments volume and paying.
Little denotes app.
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 R. R.
<unk> network of distribution partners, selling new customers as well as upgrade our base of existing customers SaaS will be a component of the product I don't think thats going to be surprising or there's any pushback from the customers I think they're going to they're going to love to upgrade to a sexier new platform with cool hardware and a lot of features I think we'd be happy to pay for SaaS.
Fees, along the way and we're going to continue.