Q2 2022 Shift4 Payments Inc Earnings Call

Abilities at a lower cost because they no longer need to depend on a multitude of other costly vendors to attempt to achieve a comparable solution.

Throughout the quarter, we signed a number of new resort properties and high end restaurants, including the soon to be opened Nobu hotel in Atlanta, The New Orleans based hotel month loaning, the Langham Hotel in Chicago, Manhattan, Gazzam Gored Hotel.

And Feld Entertainment, which operates Disney on ice Monster Jam, Ringling Brothers, and Sesame Street live among others.

As a result during the second quarter, we again organically grew our end to end payment volumes faster than any of our peers and faster than visa and Mastercard, one proof point would be our nearly 42% for year volume CAGR, including 52% volume CAGR in restaurants, and 170% volume CAGR in lodging.

As a reminder, this four year volume CAGR occurred during an unprecedented pandemic when our end markets have been quite impacted for the quarter. Our volume growth is 307% of pre pandemic 2019 levels, along with gross revenue less network fees at 243% and adjusted EBITDA at two.

272% over the same period, it's worthwhile, calling out that this growth took place without the benefit of our new markets and verticals, which are now just beginning to ramp.

As discussed in the prior quarters, we have just begun removing complexity, the leading parts and increasing organizational efficiencies by executing on our gateway sunsetting initiatives and are very confident in our ability to successfully convert gateway only merchants to our end to end platform or get paid more in line with the value our payment technology.

<unk> provides while it's really early the results are very promising and Taylor's going to go into that in just a few minutes.

I did want to highlight a case study on the gateway Sunset strategy that I believe is emblematic of why we are so confident in this approach during.

During the quarter, we signed a world renowned motorcycle franchise that we had.

Historically been unsuccessful converting to our end to end platform. We had been soliciting this merchant for nearly five years and despite our efforts. It was ultimately our gateway Sunset initiative that entice this merchant to engage with us to discuss the merits of switching to our <unk> platform. We are in the process of migrating this motorcycle franchise to our platform.

And we are having hundreds of similar conversations with other gateway only customers. So I could not be more excited about the pipeline the gateway Sunset and this initiative is the right strategy at the right time and for all the right reasons, while contribution from our Gateway Sunset initiative was minimal this quarter. We're highly confident the initiatives will result in <unk>.

It's getting paid fairly regardless of clients pay us more to remain gateway only or elect to convert to our end to end platform. We expect that it will contribute incremental adjusted EBITDA and adjusted free cash flow and is one of the factors driving our increase to our full year guidance.

In restaurants, we reached an agreement with enterprise, operator, Bj's restaurant and brewhouse, a southern California headquartered National restaurant chain with over 200 restaurants in 29 States, we signed a multiyear agreement with BJ to provide Pos software as a service for all their restaurants across the U S. We also reached a similar agreement with one of the worlds.

Largest restaurant groups these opportunities represent a meaningful recurring revenue and EBITDA contribution that we expect to be realized more towards the latter part of 'twenty two and into 2023. This represents the first of several notable restaurant opportunities. We are in discussions with on our restaurant Tos offering.

It's moving the Skycap Pos I would like to update you on the progress of our next generation Pos product that will serve the restaurant market restaurants remain a key market for us and that is why we have invested over the last few years and a new cloud based restaurant Pos offering called Sky tab, we are getting ready to release Skycap Pos from <unk>.

Later at the end of this month and it's already installed in thousands of locations.

<unk> is not just designed for restaurants as we are also having early success installing sky that at theme parks and resorts, where also intend to bring this product into international markets recall, we are uniquely advantaged to pursue over 125000 restaurants that are already customers using some form of ship for technology and.

Many of them are not on our end to end platform and even lesser paying any SaaS charges, we expect that sky tab Pos will represent the migration path for this existing base of restaurants, many of whom are seeking out new capabilities to better serve their patrons. In addition to the large addressable market of just new restaurants Sky cab services the mid to high.

And restaurant customer based on our cloud based Android technology stack built from the ground up and equipped with very modern and purpose built space age hardware.

We have been going to market with Skycap through our historic third party distribution channels, but have recently begun pivoting towards direct sales in the same way we go to market in many of our new verticals. We have found some initial successes selectively in sourcing some of our third party distribution partners in the most desirable markets as the opportunity in <unk>.

Distribution becomes an increasingly viable with the cloud based solution. We believe we can improve the customer experience alongside margins without compromising the same high touch support our customers have grown accustomed to receiving.

So to summarize our high growth core we're excited about the combination of our accelerated accelerated gateway conversion plan the launch of our new <unk> offering and the momentum our high growth core supported by our unique integrations with over 450 mission critical software suites. All of this gives us confidence in our outlook and supports our decision to increase.

<unk>, our gross revenue less network fees are adjusted EBITDA and adjusted free cash flow guidance for the full year.

So moving on to new verticals as I mentioned previously our impressive volume growth has been without significant benefit from our new verticals for clarity, we consider our new verticals to be sports and entertainment gaming travel nonprofit and what we refer to as just sexy Tech this should not be <unk>.

Uprising, it should be challenging to get the attention of software companies and enterprise merchants to complete a payment integration, we often see that software companies and merchants tend to want to invest their time in anything but additional payment integration, which is why they becomes so valuable once you've achieved it we're really.

With the progress we made in the second quarter, though much of the progress was literally made in the last week of June when the Starlink integration went live so while our new verticals contributed throughout the year and into June they have only really begun to scale meaningfully in July and Allegiant Airlines is not expected to go live until late August so we.

<unk> added a chart on page eight of our quarterly shareholder letter depicting the year to date ramp in monthly volumes for our new markets and while it has taken a bit longer for a new verticals to contribute to our volumes. We feel really good about how that ramp is progressing the contributions they can make in the second half of the year and how these strategic relationships in verticals.

With our global expansion aspirations.

To emphasize these points, we do expect to see a much stronger contribution from these verticals as the year progresses. For example, we are in the process of implementing a number of large NCWA an NFL stadium clients in time for this football season, we're adding more states and capturing more volume from bet MGM.

Turning on more integrations from our non profit customers and we're more than halfway through the Allegiant Airlines integration and of course Starlink volumes are on an impressive trajectory as they continue to populate their satellite constellation I am biased, but I believe that we have never had a merchant in our history that is ramping as quickly or has so.

Much upside that's startling.

In gaming, we continue to add new commercial and tribal gaming supplier licenses and bet MGM volume has more than tripled since our last earnings call in May.

We continue to build upon our early success with that MGM and added several states. This past week alone as a result, we expect to see a further significant and sustainable spike in volume before the end of the third quarter, given the seasonally strong sports wagering tied to the football season.

And nonprofits, we get we began processing for St. Jude's in January of this year and overall volume continues to ramp with our acquisition of the giving block we've seen impressive results across multiple kpis. The Taylor will talk through in just a minute.

Given the nature of nonprofit we do expect the fourth quarter to represent the peak season for donation volumes.

We are scheduled to complete in integration of Allegiant Airlines by September one and we have signed a European travel agency Kiwi Dot com as a customer and expect to begin processing shortly as well.

Turning back to stadiums, we signed a number of new professional and college sports stadiums, including the University of Alabama University of Wisconsin University of Notre Dame and professional sports teams, including the New Orleans Saints and Pelicans, where we also provide ticketing.

Our venue next mobile Commerce technology as the category leader in sports and entertainment venues and our software is now installed in well over 100 stadiums in the U S. Our new business pipeline in this space remains very strong including International Stadium discussions.

Perhaps the most important competitive win this quarter came from sports focused retailer fanatics.

We are.

We will process all of fanatics in venue payment processing, and approximately 50, sporting and entertainment venues, including PGA tour events and NASCAR racers races.

As a leading manufacturer and distributor of sports related merchandize fanatics will be a tremendous partner as we mutually expand our footprint in the sports and entertainment space.

Our performance across these new verticals alongside alongside our stated international expansion plans has attracted the interest of many notable customers. Some are in the negotiation phase others. We have one and in some cases, we're not permitted to announce publicly and in others like fanatics in time, we have recently selected shipboard power they are paying.

Strategies.

It's worth reinforcing that ship for wins because of our ability to solve our clients' problems merchants are not switching to ship more to save a basis point or pennies per transaction, even though in our experience. They usually benefit from an overall lower effective cost of service instead, they switch because we offer complete commerce solutions that enable them.

To better engage with their customers and patrons such as QR codes online ordering mobile and contactless payments business intelligence and more this is why despite our continued move upmarket or net spreads have remained stable over a multiyear period and our move upmarket has been at an unprecedented pace, we've effectively doubled that.

Size of our average merchant since 2019.

So before passing things off to Taylor I wanted to provide you with an update on our recently completed acquisition of giving block and the pending acquisition of <unk>.

But given box crypto donation platform continues to sign up new nonprofit customers. Despite the drop in value in most in crypto assets as I write. This is single bitcoin is still valued at over 20000 and nonprofits are still interested in accepting crypto currencies such as bitcoin.

Since we closed the deal back in March, but given block has signed up over 400, new nonprofit customers, including the world's largest humanitarian organization the world food program as well as many other highlighted in our quarterly shareholder letter.

But giving block has introduced a card widget for nonprofit so they can accept traditional card based donations and the growth in their client base has resulted in a nearly six fold increase in their SaaS revenue SaaS revenues versus a year ago.

The team continues to execute on the significant 45 billion cross sell opportunity and successfully converted several giving block customers to our end to end platform. We believe our go to market offering remains unique in the nonprofit sector and remain highly attracted to what we view as a 450 billion payment opportunity.

Where we now have a unique right to win while on the subject to be giving block I would like to personally. Thank those of you that participated in our carrying with Crypto fund raising campaign. We launched this fundraiser in mid March to raise awareness within the crypto community and I agreed to personally matched dollar for dollar every crypto donation made on the giving block marketplace up to $10 million.

Parts of this fundraising campaign are still underway and I encourage all of you to check out the giving block dot com website for more information.

We're also making progress receiving all the necessary European regulatory approvals to close on our acquisition of Monroe. Later this year as a reminder, we announced the acquisition of <unk> back in March in conjunction with our year end results and for those unfamiliar Funaro's, a European cross border E Commerce platform with processing capability.

<unk> capabilities and licenses in Europe and parts of APAC.

Two sides.

Two of us are making great progress connecting the payment platform via arm's length partnerships. During the regulatory review period, and we have successfully tested transactions between the us and Europe , we intentionally structured the earn out portion of this transaction to encourage both sides to pursue commercial opportunities up until closing and the teams are working together nicely on a number of ines.

<unk>.

For example, we are beginning to refer each other merchants funaro services made.

Services, many e-commerce merchants in Europe, but also have U S operations supported by U S payment processor I am pleased to announce that Denmark based online sporting goods retailers gate pro as one of the first wins alongside <unk> Dot Com <unk>, an e-commerce customer <unk> grew light on funaro further European ecommerce processing, but outsourcing.

U S payment processing to a U S competitor going forward <unk> will switch to the U S payment processing to ship for effectively consolidating all their global ecommerce payment processing business into a shift orphan <unk> solution.

There are many other merchants we are currently in discussion with regarding a joint U S. EU offering and are pleased that our planned acquisition is yielding synergies in advance of the planned closing date.

We do retain significant firepower to pursue additional acquisitions and remain focused on building out our global technology capabilities in the markets to support our signature multinational customer.

We have a low pro forma leverage ratio and a ton of conviction around our strategic plan.

Internally, we remain very focused on operational improvements to make us a much more efficient company can shift.

Consistent with the shift for way. This includes the investments we have made in our payment platform that have delivered 100% uptime during the quarter. Despite immense growth and something few of our competitors were able to achieve over a comparable time period. In addition to the executive transition mentioned at the outset of the call. This past quarter, we promoted some.

Two weeks to the Chief transformation officer role to better align our human resources learning and development transformation project management and mission assurance pumps assurance functions under single Department.

Her team will identify and execute on various productivity improvements and we are confident our initiatives will drive productivity excellence and further margin expansion in excess of what we have already communicated earlier this year.

I would be remiss, if I did not comment on the current market environment adversely impacting financial technology companies, including ship work.

We strongly believe that there remains a disconnect between our growth and our valuation in the public markets. We have generated superior growth and are on track to deliver over 30% revenue growth and over 50% adjusted EBITDA growth this year and expect to generate over $100 million of adjusted free cash flow. Despite these results and.

<unk> performance during a completely unforeseen pandemic, we still trade well below what I believe to be our intrinsic value.

Some will view these comments, it's self serving but I've challenged our company to thoroughly evaluate the cost of being a public company against this backdrop, we view, our strategic initiatives customer wins and operational tactics as highly valuable and even more so during times of economic uncertainty.

Sharing them regularly is just one example of the unnecessary headwinds we face so with that let me turn this call over to our President and Chief Strategy Officer Taylor Lager Taylor.

Jared and good morning, everyone I will focus my prepared remarks on how we see our volumes trending for the balance of the year and update on our acquisitions and then some additional color on our major major strategic initiatives, which is primarily our gateway Sunset initiative.

Our previously provided volume guidance for this year assumed a modest recovery in international and business travel and $3 billion of contribution from the new verticals, such as nonprofits Starlink gaming and sports and entertainment venues. We are benefiting from the ongoing resumption of travel evidenced by the sequential improvement in our lodging volume CAGR.

Although the volume contribution from our new verticals had initially been slower to ramp than we would have predicted this is both a benefit and a detriment a detriment because we would always like to see the volumes sooner than a benefit because of the work is complex and with complexity comes barriers to entry for our competition said more simply the longer it takes the more confident we are.

R&R competitive positioning this is all to say that we are optimistic for our success in new verticals, but still somewhat cautious of the macro environment.

We did witness the typical seasonal uptick in volumes throughout the quarter and into the month of July our hotel volumes continued to grow meaningfully month over month, and we continue to add new hotels at a decent clip our volume trends throughout July were consistent with our expectations, but we remain cautious on predicting volume trends for the balance of the year given the.

Certainty around consumer's reaction to persistent inflation and rising interest rates, we do believe that consumers will ultimately pull back on discretionary spending is food and fuel prices remain high, but predicting how and when behaviors change.

It remains something we believe everyone is struggling with.

We are leaving our volume forecast unchanged for 2022, and despite the delay in new verticals, we find it very encouraging that the contribution from these verticals is starting to ramp up nicely.

Turning to acquisitions, we closed on the acquisition of giving block on February 28 of this year and are working through the necessary European regulatory approvals for a fourth quarter close of <unk> and.

In regards to the giving block the ongoing volatility in the crypto space has not altered our initial view that our right to win in the nonprofit space has improved by owning the giving block.

And going to market with a differentiated offering that includes crypto acceptance provides us with a unique advantage as you recall, we intentionally structured the transaction with a significant portion being tied to revenue targets in order to insulate from any shocks in the crypto markets in short we believe that we're very well protected on our initial investment in the business continues to operate at breakeven.

Evan.

Nonprofits continue to get added to the giving box platform all of whom are paying SaaS revenues. The customer count is growing and we remain cautiously optimistic heading into the end of the year as the majority of donations occurred during the fourth quarter.

And then December more specifically.

In the meantime, we continue to execute on the $45 billion cross sell opportunity and are improving the product everyday including adding the online which is as Jerry mentioned earlier.

For <unk>, we are pleased with our ability to deliver across border solution for global ecommerce merchants and have successfully completed testing.

Transactions between the U S and Europe as Gerry highlighted we will begin processing U S e-commerce transactions for <unk> Dot com as well as European transactions for Starlink later, this year and are in discussions with many more.

As a reminder, we are not including any contribution from the acquisitions in our guidance, but do anticipate a positive contribution in 2023.

We are leaving our expected 2023, adjusted EBITDA and volume contribution for both scenario and giving block unchanged. As a reminder, for narrow we anticipate 15 billion of end to end payment volume and roughly $30 million of adjusted EBITDA contribution for the giving block, we anticipate roughly $5 million of adjusted EBITDA contribution.

As mentioned in May we embarked on our gateway Sunset strategy. During Q2, you will recall that this strategy is comprised of numerous short and long term benefits to the company.

It is designed to grow revenues.

And to end merchants and reduce operational inefficiencies the pandemic slowed our business in many ways not the least of which was delaying the implementation of these plans until just now are.

Our plan involves limiting our gateway only offering deprecating legacy connections and accelerating end to end convergent convergence. Our process has been good having identified roughly $4 billion on such connections and already converted approximately $700 million of that $4 billion.

We have also increased pricing, which more appropriately a science value for the critical services, we are providing as a gateway.

Another notable event during the quarter as the increased opportunities with regard to M&A, we've been patient with our capital and suspect that this patients will be well rewarded as we look to execute.

Interesting growth catalysts.

As Nancy who is in the process of.

Onboarding to become our new CFO effective tomorrow, I will review the financial performance for the quarter.

Q2, gross revenues were $507 million up 44% from the same quarter last year gross revenues less network fees were $183 million, an increase of 34% over the last year.

Our revenue growth breaks down as follows first a 43% year over year increase in net processing revenues driven by year over year growth in end to end volume second a 25% increase in our SaaS and other revenue stream driven by higher merchant accounts in our high growth core and expansion into new verticals and finally, our gateway revenue stream.

Was roughly flat year over year as a function of decreased transaction accounts from the gateway conversion I mentioned earlier offset by a partial quarter of our recently launched gateway Sunset strategy.

Spreads for the quarter came in at 78 basis points.

Consistent with what we reported for the same period last year similar to our discussion last quarter Q2 of 'twenty. One spreads were depressed approximately two basis points because of higher debit mix from the issuance of last year's government stimulus.

This is evidenced by our interchange rate, which has increased.

From 182 basis points in Q2 last year to a more typical 192 basis points this quarter.

When adjusting for card mix spreads in the second quarter of this year declined by approximately two basis points year over year. This was expected as we continue to expand as the larger merchants in new verticals.

For the quarter, we reported adjusted EBITDA of $66 million, which is up 45% over the same quarter last year, the resulting adjusted EBITDA margin for the quarter was 36%, which represents a 270 point base 270 basis points of margin expansion over the same period last year I wanted to note that we're continuing to invest in.

<unk> into our growth strategy, while delivering this margin expansion.

Adjusted free cash flow in the quarter was $16 4 million, which compares to a nearly neutral free cash flow position for the same period last year. It's worth noting that Q2 also includes a semiannual interest payment of roughly $10 4 million, which can distort the quarterly comparisons and in that regard mixed Q2 look even more favorable.

Well for this quarter.

The current quarter result brings year to date cash flow to just over $30 million, which equates to a free cash flow conversion percentage of roughly 27% a full reconciliation of the adjusted free cash flow is available in the appendix of our earnings materials.

With respect to capital transactions within the quarter between April one and June 30th.

Repurchased approximately three 6 million shares our buyback program has cumulative lead purchased four 3 million shares and as Jared mentioned, we continue to believe the stock is meaningfully below the intrinsic value of the company. You can also see a reconciliation of our shares in the back of our earnings materials.

You will note that our guidance reflects both a cautious outlook on the consumer but also a significant optimism and the performance of our business. During the second half of the year, we believe that the gateway Sunset It strategy and early indicators for Sky tab, and new verticals warrant a modest increase in our gross revenue less network fee outlook and are increasing our guidance range to 600.

Third $90 million to $710 million up from $675 million to $705 million. Previously we are also increasing our full year guidance on adjusted EBITDA to $255 million to $265 million up from $240 million to $250 million. Previously finally, we are reaffirming our previously.

<unk> free cash flow conversion rate of 35% to 40%.

But do you expect full year free cash flow conversion to land towards the upper end of that range.

Lastly, I'd like to welcome Nancy to her first earnings call. Thanks, Taylor I've had the privilege of watching ship for from my seat as a board member and couldn't be more excited to join and expands on the Great Foundation, Brad Brad is delta in the Finance organization I also look forward to getting to spend time with our shareholders and analysts in the coming week.

<unk>.

And with that Alex we can turn into question.

Okay.

Thank you.

If you'd like to ask a question that you can press star one on just kind of thing can you patent issuance was truly a question that you May press star two please ensure you Amit locally when asking your question.

First question for today comes from Ashwin <unk>.

From city Ashwin that your line is now open.

Sorry, Ashwin, we're not receiving any old Jagan line is now open.

Hey, sorry.

Sorry about that.

Can you hear me now.

Yes, we got you.

Oh, okay.

I wanted to ask with regards to.

<unk> gateway conversions.

<unk> success, maybe in any particular end markets now obviously you've had this antonio.

<unk>.

For some time.

Maybe can you could you review what's different now in terms of client activity.

Instead, as economic weakness would gateway conversions accelerate.

Yes, it's a great question and I think.

You for asking it because I think it's worth kind of reemphasize exactly where we are in this trajectory right.

While we've had a ton of success, adding end to end payment volume from restaurants and hotels through the pandemic. The reality is this is not at the cost of those restaurant and hotel operators mines. During the pandemic. So I think our actions on the gateway of kind of increase the mind share that we have within these merchants.

Mines during the quarter and I think it's appropriate given where we are towards.

The end of this pandemic cycle that we have been realizing in terms of.

Of success no. We highlighted a few examples just to show how diversified. It is we won some interesting health care opportunities we.

We had our board meeting at the Langham in Chicago, which is a beautiful hotel that we won as a result of these efforts, it's really a function of which connections we've been prioritizing and how we're attacking those.

The case study I cited in my remarks was identifying roughly $4 billion on connections that quite frankly have been around very long time and need to be deprecated.

And winning $700 million of annualized volume through just targeting those connections for discussions.

In the course of about a month and a half so we feel good about our success rate we are approaching it methodically given kind of exactly.

Exactly where we are in the economic cycle and in terms of.

The receptivity I don't think a downturn in kind of the broader economic cycle diminishes. This and in fact, I think it increases our merchants' desire to seek out kind of the most cost effective solutions I think every business operator, we talked to you right now is thinking longer and harder about.

Expenses and this is a more efficient solution economically. So so we don't think that while the consumer.

A slowdown in consumer spending and good obviously decreased volume per merchant, we don't think it would slow down this initiative, yeah, and hey, Ashwin Jaret here just to kind of hone in on the specifics.

Kind of what verticals and the gateway, we are getting traction with.

You can really see it in terms of lodging REIT and that makes sense, because I think and I'm just going to give some approximate tier.

At one point in time, we communicated that we believe across our gateways that we touch approximately 40% of the hotel lodging volume in this country, but from an end to end perspective, we've also communicated in the last quarter that were approximately 10%.

So there's a big gap between 10% and 40% that we think is it.

It's easily accessible for us since we're already driving that commerce experience and Taylor's point when they move over to our <unk> platform. They are generally getting a lower cost of service now.

Hotel customers were not easy to pursue during the pandemic.

Many of them furloughed their it departments.

They had a lot of other priorities they needed to think about other than migrating their kind of commerce provider. So.

Long way of saying right now that we're having a lot of success in winning larger customers. We have a long way to go customers that are again very easily accessible very easy for us to address so even in the event. There was there were to be some sort of a slowdown in travel and hospitality the lift from the gross profit lift from that gateway customer moving to <unk>.

And then is what's going to enable us to grow even in circumstances economic circumstances were to change this year, which is completely consistent with how we were able to grow during the pandemic. When every one of our end markets was incredibly depressed and we still grew end to end payment volume by double digits.

So I think lodging is definitely within our high growth core in area, where we're going to continue to have a ton of traction.

Throughout this year and in two years ahead.

Got it. Thank you for that the other question was volume contribution from new new work to close as we think of modeling the rest of the.

The year and maybe a.

Question on one specific client Allegiant.

It's one client, but it is a measurable client.

Yes.

In your outlook previously.

The specific timing and that timing also it changed.

Well.

We never gave any real specific customer targets in terms of volume I mean, we might have given some approximations of what we thought they could represent at the Investor day last year, we generally in our bridge said in 2022, we're expecting.

Contribution of about $3 billion, and then volume from our new verticals.

So sure I mean, if you were to look up what the Legion Airlines represents as a standalone customer relative to that $3 billion you could say, it's a big portion of it at the same time there is a lot of other customers in there that are monsters.

The idea was always at $3 billion.

Target for 2022 and new verticals.

To be viewed as conservative no matter, which direction you looked at it from the stadium side from the Starlink side from Allegiant side.

So I guess, probably the real message that we're trying to communicate this quarter is that integration to take a long time, it's largely dependent on.

Third party software.

Companies that are powering ecommerce solution or.

Or the the time that an enterprise customer is willing to commit to work through an integration.

It did take a little bit longer, but they have essentially all come online with the exception of Allegiant in literally the last week of the second quarter and it's now ramping pretty quickly as you can see from July so whether whether allegiant has delayed a week or not whether it weather starlink is more than people would have expected or whether it's NCAA or NFL.

Like they're all going to be pretty meaningful contributor. If you kind of just choose your own adventure, which one kind of carries the bulk of the weight in the second half of the year.

Alright, great, thanks, but basically the 10 million.

Decent number.

I'll take that.

Section into next year.

For sure Allegiant as Allegiant as big number, but I would say geez I mean, you look at the.

The NCWA stadiums the NFL the NFL stadiums, we now have that we didn't have before starlink. Even we said bet MGM is ramping up significantly we added several states shifts this week alone So I guess, what I'm, saying.

In terms of that $3 million 3 billion bridge in new verticals, and certainly whatever though represent going into 2023 Allegiant is a nice part of it so as everything else like Theyre, all really beginning to fire.

Understood got.

Got it thank you guys.

Thank you.

Thank you. Our next question comes from Tim <unk> from Credit Suisse. Tim Your line is now open.

Great. Thanks, a lot good morning, everyone. So I think Jared really hit on it in terms of <unk> ability to have an idiosyncratic driver essentially despite the macro given all the macro uncertainty I think that investors are even more focused on the gateway of conversion opportunity for shift for than ever so to that point I think ashwin question really hit on it but maybe as a fall.

So maybe you could just recap again the various approaches that you can take so there's some costs that you have to maintain those connections of course, one is the sunset approach, but theres also been a sort of the quicker price increase there is the slower price increase and maybe some other initiatives that you're doing to help better monetize overall, even if it's not a full conversion.

Maybe you could just provide some additional context on maybe the mix of those approaches.

Yes sure.

Hopefully you also picked up on gerry's comments around us being slightly hesitant to explain our detailed strategy in environments like this but I'll give you the broad brushes and you captured the essence of it right which is that.

There are significant operational efficiencies to our organization for simply being less of the gateway and then there are significant revenue opportunities for us converting merchants and we balance those two approaches all the time so.

The first thing I would say softness of the approaches that we limited a series of activities that were related to our gateway only customers. These are services that independent gateways with traditionally provide like moving from one processor to another we limited those functions and save several hundred cycles for our operations team every single month.

That's an immediate win and quite frankly pretty low friction.

All of our existing customers, we also identified roughly $4 billion of.

Connections that quite frankly should have been sunset as longer longer we have identified these connections and the end of 2019, when we acquired merchant link and it would have been inappropriate in our view to do so during during the peak of the pandemic, so that compelled to really nice wave of merchants to move over.

And it's simply providing them notice these connections.

Stick around for a period of time I think we spoke about them.

At a lunch you hosted as well.

Separate from that we have identified.

Categories of merchants that are non economic and we just won't maintain that relationship in that context.

In almost every case that's resulted in a <unk>.

This meaningful revenue lift from that basket of customers and we'll continue to do that as the initiatives.

Yes, Jared here I mean, there is so much to talk about with respect to the gateway Sunset initiative.

And just the gateway conversion strategy in general, which really affords us a pretty unique right to win relative to others that kind of happy with they kill out there I'd say first.

Part of Gateway Sunset, it's probably worthwhile to reinforce that one of our gateways that we acquired in late 2019. It was it was a joint venture between two of the largest payment companies in the world and they intentionally underpriced many of the customers on that platform.

In order to kind of capture the economics upstream of the gateway at one of those two financial institutions, I mean, almost to a ridiculous level.

So just the fact that those agreements some of them are dated 10 to 15 years old but they are absolutely enormous customers are coming up for renewal.

It's kind of a time to have a reset of what what actually is the kind of fair value for the service that's being provided and what it's doing is it's it's stimulating conversations on our end to end platform that had we not taken this approach would never would never have happened.

Also want to go to the complete other end of the spectrum, which is not to kind of stick base, but carrier base.

The PCI counsel out there does a great service for US every four or five years, they pretty much declare that every E&P contactless device. That's deployed in the country is no longer compliant and which case.

Every one of the customers is forced to consider a pretty large capital outlay.

We've always leaned in heavy in terms of the inventory we are willing to carry four.

For <unk> devices, we have our own PCI validated key injection facility. So we maintain chain of custody of those devices. Because we know at any given time you could have a very large several hundred location customer decided to move to our end to end platform and we want to light them up rather quick so constantly hotels large restaurants.

Specialty retailers on our platform are coming up on decision points you replace those devices, we become the easy button. We can just encrypt them. We can deploy them as you know we provide them at no cost as an inducement to move to our end to end platform. So it winds of saving that customer the initial capital outlay, plus the ongoing cost of services less by moving down our <unk> platform.

I want to reinforce that the tariffs that have helped us win and convert gateway customers for five years now are still driving a lot of the still driving a ton of the action thats going on in our gateway to end to end conversion process.

Thank you for that Jodi Taylor and congratulations to Nancy.

Thank you. Our next question comes from Andrew bulk of SMB CLEC, Nick of Americas, Andrew Your line is now open.

Hey, good morning, guys and thanks for taking my question wanted to touch upon some of the guidance here.

Adjusting.

Gross profit.

Margins for the full year being at 65% of net revenues.

It implies a pretty steep ramp in the back half of the year. So can you just give us additional color on how we should think about that and what are the key drivers there and the line items.

Yes sure. This is Taylor I'll cover the I think the.

The bulk of it comes from what we've witnessed in the early days of our gateway Sunset initiatives.

As Jerry mentioned in his scripted remarks were also.

Incrementally positive and quite frankly, notably so on what we've got going with Skype Pos as well. So those are the two most significant drivers of those two we've got some contribution from.

New verticals as well, so that's going to ramp and I would I would stick to those first producing larger stores.

Is that is that exit rates.

Level that we should be modeling kind of in the out years.

I don't I think it's too soon to predict that I think that we feel highly confident in the end of the year as you know our success in new verticals can blend down our spread.

And quite frankly that can be augmented by SaaS success, and Skype Pls. So I think it's just a little bit early to predict what kind of the outer year impact of this is but coming into the back half of this year, we feel really good about margins.

Got it and if I could just ask one more follow up for Gerry.

Getting a lot of questions around some of your comments on your evaluation being a public company you could can you just give us.

Additional detail on how youre thinking about that.

Okay.

Yes, and in fact, let me just also throw a pile on.

<unk> tailored point to adjust what these new verticals represent so.

It's hard for me not to draw on like the history back to the basement days of the company but for.

18 years, we serve incredibly small customers youre corner restaurants on main street.

Every one of those customers contribute.

This amount of volume, but also a healthy service burden too.

2000, plus employees now are very close to it in the company.

You look at an organization like <unk>, which is a company we are in many respects aspire to be.

Their margins are very very high free cash flow conversion is very very high the volumes are very high theyre, serving customers like Facebook and Microsoft.

And Amazon, where you're actually getting a considerable amount of volume, but your overhead to support that customer is next to nothing in fact like every bit of incremental volume can potentially fall to the bottom line will look at the direction in our new verticals are going.

We said time magazine in their digital subscription business that we announced I mean, obviously starlink is enormous stadiums are enormous these represent sometimes hundreds or thousands of small and mid sized customers and the support burden associated with them is just so so much less.

It's actually surprising how many employees we needed for our first $50 billion of end to end volume and how many we expect to need for the next 50 event then.

<unk> volume so I just wanted to make that point in terms of also as we start to look at the margin profile of the business and its free cash flow conversion going forward.

My point on valuation.

Mike.

I don't want to why I'm in an environment, where all asset classes had been absolutely pummelled.

But when you look at one point and say.

The Street is now valued I said potentially inside of 10 times next year's EBITDA.

Actually effectively even less than that when you take into account now our guidance rate raise again this was.

Week, or so ago, and we're assembling our materials on this you are saying.

Is the cost of being public company worth it right now and there's obviously the hard cost that we all know and understand.

When you make a commitment to be a public company, but then there is kind of a.

Harder to quantify cost that comes with just essentially radical transparency.

As a private company, we certainly wouldn't want to <unk>, our competitors into our Gateway Center strategy right I mean that you have.

Youre basically revealing how you how you are going to.

Convert up to potentially $200 billion of NK volume every success, we have on the gateway conversion strategy.

As a pain, it's paying to every one of our competitors right. So at some point when value.

Drops to such an extent you do ask a question.

Is this a cost we're willing to pay especially with respect to the transparency obligations that come with being a public company. So I think that was what we were.

I'm trying to communicate.

No really appreciate the insight.

Congrats on solid quarter.

Yes.

Thank you next question comes from Scott <unk> of.

Research Your line is now open.

Hey, guys, it's Scott on for Darrin here. Thanks for taking my questions first one I wanted to touch on was just on the net yields even accounting for some of the normalized sort of debit.

You're still.

Assuming the down two basis points year over year, which I guess is a little bit better than what we had expected historically so I was just wondering if.

There was any sort of change to your outlook on the trajectory of yields even as you continue to penetrate larger merchants.

I'm just going to beat the same drum, which is that we continue to grow into larger and larger merchants and so this is something that the degradation of a blended spread.

That debt.

Our investors should continue to expect a little bit delayed in part because I think we were slower in the new verticals than we would hope to be in the first half of the year. It hasnt changed our optimism as it changed our long term view in fact, our optimism has kind of been bolstered seeing kind of the last week in June and some contribution from those verticals.

But.

If anything it's probably the reason that you've seen kind of spreads stay a little bit elevated is that new vertical contribution.

Yes.

Okay.

Got it thanks, guys and then just a follow up just on the on the digital media vertical is interesting to see that win win with time magazine. Just wondering if you could give a little color on sort of how you entered that vertical is the one that we should expect the company to continue to go after going forward.

If I was the artist behind.

And the materials I, probably would've just lumped that into sexy tech.

So I think that well.

Let me.

Expand on this a little bit right now so we've announced some really I think exciting wins some.

Our industry day last year, we didn't deserve but became a great opportunity for us to make investments in international expansion to build out our payment platform capabilities beyond what would just be expected for a restaurant or a hotel or specialty retail beyond where we've been historically.

We've started to get Rfps for.

Surprising customers and.

I wanted to come back towards Satcom to total end to end.

Volume growth, 43% year over year and Im hearing obviously, there is still a lot of puts and takes and macro impacts that are going on some recovery from the pandemic, some new kind of macro uncertainty and so I'm wondering can you give us.

Hopefully quantitative but it is not qualitative.

Dave mentioned on how much is that right.

But we've seen this quarter correct bye bye bye the macro uncertainty headwinds versus what's been normalized trends could be.

Great question, Eugene and I think.

We haven't gotten too much better at answering it but what I would suggest is that we feel like our average merchant is quite healthy.

And let's let's ignore Q2, and let's talk about July where we were up nearly double digits over June .

As you know.

At the most.

Significant ramp we've seen in recent years between the two months. So I think consumer spending is quite healthy this will be supported by.

Card brand data all over the place it would be supported by travel data. So we feel like the consumer is healthy. We just we also feel cautious as we have for kind of two quarters now about how that translates into the back half of the year when back to school happens people more and more people go back into the office et cetera. So we're just increasing.

Cautious on that regard and a ballast thing.

Our caution is what we know we've got going on in new verticals, which as Jeff had mentioned, we're installing a ton of stadium as we did in July and preparation for August . So we feel really good about the contribution from that vertical as well as all the other verticals that really began to ramp and we haven't wrapped up our allegiant integration yet so we're kind of balancing.

All of those but I think our view on kind of our average merchant and the consumers that they are quite healthy.

Up and through this morning.

Got it got it okay.

And then my quick follow up you called out I think in your prepared remarks.

On the M&A additional M&A that you're looking at.

Closely given given where valuations have come down can you give us a little bit more color on that what would be the examples of assets or <unk>.

Capabilities or market.

To enter with.

With any potential new malls.

Yes, it does.

Probably such as Jared point about like a reluctance to want to convey sensitive information.

Very comfortable saying that our priorities are quite consistent with what we laid out back in November so valuations aside international expansion and capabilities that help deliver some of the things that <unk> talked about to support these new verticals is a heavy emphasis of ours, yes, I mean just.

This is Jared again to really put stopped the point the number one priority is expanding our reach and our rails to.

To the world.

People all over the world want fast Internet and and we want to make sure we're able to power their their payments, there's subscription payments literally anywhere else in the world and if we can do that then we can bring all of the products and integrations that have made us really successful in the U S to every other part of the world where they should also find success.

That is the number one capital allocation priority for US right now is to deliver on one of the best customers any payments company could ask for that has ambitions to play at the same level as in adient or striking the number two priority is if along the way we find anything that is consistent with our past playbook that will allow us to.

Celebrate our kind of end to end growth within pretty much the verticals. We're already in today I wouldn't expect it to surprise you with any new verticals, where we think we applied some creativity, we might be able to win I think it's about international expansion in support of an awesome customer.

And I think it's about.

Finding ways that are consistent with our playbook to accelerate growth in our current verticals.

Yes.

Got it thank you very much.

Thank you. Our next question comes from Chris <unk> of da Davidson, Chris Your line is now open.

Hi, Thanks, good morning, and congrats on a nice results.

Just had a quick clarification question, if you don't mind.

When you're talking to new verticals and the ramp we're seeing in July certainly pretty exciting stuff.

Is the July more the sexy tech.

And then just from your comments it seems like sports Entertainment may be the.

Opportunity of all of these at least in 2022 I just wanted to confirm that was the case.

I'm just not sure.

For the football season, it sounds like so just wanted to see.

Thoughts were on how this ramps in the second half.

Yes, so I don't want to get too specific on the contribution within each one but one thing I would say about sports and entertainment is it's not as significant a contributor in July and that seasonality.

Of the merchants that we cover so there just aren't as many events.

At the locations that were installed that.

Contrast that.

The fall is typically a much better time, and we're adding a lot of big name brands, where there's a lot of volume so we.

We feel good about it but I don't want to sort of comment on the relative contribution and if I, let jarrett.

Comment on it you won't stop talking.

This exit.

Thats right.

Just on the sports side like.

It feels like the like the opportunity that youre capitalizing on there is happening faster than.

I would expect like these are big large deals and you continue to sign up stadiums. One after the other is is it is there something different about that business. It makes it easier to convert.

Or is it the strength of your product or it seems like it's a pretty big undertaking for a sports and I need to do this and they keep seeing announced that their announcements.

So this is Jerry here I can take that one.

This was a very specific product that we made if you recall I don't know a little over a year ago, maybe maybe 14 15 months ago based on our observations of what was going on in the sports and entertainment landscape. So if you think about restaurants for example.

If you have a non integrated terminal or a cash register youre going to move to a point of sale system. Once you move to a point of sale system.

There has been no like radical changes in terms of how you bring up a cheeseburger, so you're probably going to use it for a really long time until maybe the cost of a windows based system.

<unk>.

<unk> point, where youre ready to reinvest in a new system.

Stadiums were different.

We definitely saw from our early experiences in sports and entertainment stadiums again call. It two years ago that theres going to be a massive shift.

Towards mobile ordering that everything is going to be run from the phone you're going to order your burger in your beer in your seat and Youre not going to have to wait on a concession line. Stan you wanted jersey or some other merchandise youre going to order that from your seat or your mobile phone or youre going to walk in and Youre going to pick up New Jersey, and you're going to walk out youre not going to wait in the line you want to make a bet.

First half bad second half gets real time betting whatever you can do at all from your phone.

That sports entertainment stadiums are going to introduce their loyalty rewards programs through mobile application. So recognizing that we didnt bet on a refresh cycle in stadiums that eventually they're going to stadiums are going move from a micro system or an agility. This into a shift where it was no. We've got to get in there with a mobile application that is going to do all of this.

And like really.

Pivot away from kind of a prior generation of tech and that is paying off every stadium want. This it's not an optional thing I mean once you go to a stadium once and you've got everything run off your phone. It is going to feel like Youre going back in time to go to a stadium that doesn't so every new kind of press release that comes out just becomes.

An additional form of motivation for the next stadium to want to get on board now there is a kind of an interesting on season off season thing that goes on you know one switching during when their league is an action, but as soon as the league season, and they kind of all want to sign up and there really is no. There is no. One that's in close second at all in terms of the product capabilities we have.

Provide with venue. So yes, I mean, we're excited about the traction I am personally very pumped about the football season coming up we've got some of the most exciting teams to watch on television are now shipped for customers, even more reason to tune in on Saturday.

Great and just one more quickly.

<unk>.

Any.

Mike.

Guide posts or milestones on the Punaro regulatory approvals.

Close.

Because it seems like that would be a little bit more difficult just given the international nature.

Factors that plants in Ireland. It sounds like once you get that regulatory approval youre going to flip the switch in Europe does it.

Happen that quickly.

Yes sure. So there are three jurisdictions that we require approval from and we have it in two of them.

I suspect it's.

Two to three more.

Four months, maybe four I don't like to bet on the productivity.

In the weeks ahead.

Thanks again.

Thank you for joining todays call.

Now disconnect.

Yes.