Q3 2023 Shift4 Payments Inc Earnings Call
[music].
Greetings welcome to shift for third quarter 2023 earnings conference call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now.
Now I'll turn the time at the conference over to Tom Mccallum SVP Investor Relations. Thank you you may begin.
Thank you operator, good morning, everyone and welcome to ship for its third quarter 2023 earnings Conference call with me on the call today are Jerry Isaacson chip for its Chief Executive Officer, <unk>, Our President and Chief strategy Officer, and Nancy discipline, our Chief Financial Officer.
This call is being webcast on the Investor Relations section of our website, which can be found at investors that ship for Dot Com. Today's call is also being simulcast on X, formerly known as Twitter.
Which can be accessed through our corporate Twitter account at ship for.
Our quarterly shareholder letter quarterly financial results and other materials related to our quarterly results have all been posted to our IR website I'll call in the earnings materials. Today include forward looking statements. These statements are not guarantees of future performance and our actual results could differ materially as a result of certain risks uncertainties and many empty.
What factors.
Additional information concerning those factors is available in our most recent reports on forms 10-K, and 10-Q, which you can find on the Sec's website in the Investor Relations section of our corporate web site for.
For any non-GAAP financial information discussed discussed on this call the related GAAP measures and reconciliations are available in todays quarterly shareholder letter with that let me turn the call over to Jared Jared.
Thank you Tom.
I open my shareholder letter with some thoughts on the complex the suffering in the humanitarian crisis that are taking place around the world and I'd be remiss not to mention again, how saddened we are a chip for for the loss of innocent lives.
We're a global company now and while we are small we will certainly play our part in trying to make this world a better and healthier place.
With that turning to the quarter its been busy so once again, we've delivered reasonably strong quarterly results that represented records across all of our Kpis, including and 10 volume gross revenue gross profit gross revenue less network fees and adjusted EBITDA, our margins and cash flow continued to improve as.
We benefited from spread stabilization and disciplined expense control.
I'm, especially pleased with Q3, we achieved.
These results without the help of all of our previously announced stadium and resorts that really didn't begin processing until essentially Q4, where did we have any of the revenue synergies that we've been accumulating over the last 20 months inside a scenario, we still generated 36% growth in end to end payment volume, 23% growth in gross revenue.
The 4% growth in gross profit and 24% growth in gross revenue less network fees. We also generated $124 5 million of adjusted EBITDA, representing 46% year over year growth as our margins expanded 780 basis points to 51, 2% versus the corresponding year.
Ara go quarter.
Adjusted free cash flow also improved to $75 5 million up 69% versus a year ago. Our blended spreads also stabilized at $64 five basis points.
It can be incredibly clear Q3 did not have any contribution from scenario or appetite.
This is unfortunate as we've spent the last 20 months working closely with Monroe and some one third of their net revenue is generated from existing ship for customers.
If you were to overlay and approximately $7 million and achieved revenue synergies from <unk> in the Q3 gross revenue less network fee growth would've been over 27% with a very strong Q4 ahead as our numerous enterprise accounts have begun processing as expected.
Additionally, our sky tab P. O S installs are resulting in higher subscription and other fees in Q3, and that's a real positive trend that we're excited to build upon.
Continuing on as many of you know we're thrilled to have received the final regulatory approval on our European acquisition up in Aro and the deal officially closed on October 26, as mentioned above we've already unlocked material revenue synergies that scenario during the extended regulatory approval process. We are thrilled to finally move onto the next chapter of our international expansion plan.
Especially with so much of the integration work already having been completed over the last 20 months.
Before going into some of the specifics and despite some of the unanticipated delays. We're obviously really pleased with the results. This quarter. We're excited about the opportunities in front of US which is why we made some positive revisions to our guidance with respect to EBITDA and free cash flow and we've also provided a 2020 for volume bridge alongside reaffirming the third year of our mid term out.
<unk>.
On that note. We are are we are often asked how are we able to how are we able to sustained growth rates well in excess of industry averages.
Our successful capital allocation strategy alongside bold execution keep.
In mind. This is not always an M&A story, we have grown revenue double digits year over year for 24 consecutive years, even through several downturns, we had no outside capital nor have we completed any acquisitions throughout our first 15 years in business.
Examples of organic investments include building, our flagship pass products Sky cab or back in 2021, when asset prices were out of control, we elected to invest organically in new verticals that are now driving substantial growth in e-commerce and travel and gaming in parts of the nonprofit vertical we continue to make sound investments.
We organically expand into Canada and other parts of the World. This is part of our IPO promise to try and always be where the puck is going well.
We are also quite good at M&A and I understand there is some rightful skepticism around M&A I don't think many of our peers have executed as well as we have and now there is a general distaste for acquisitions that that is a mistake, we're not going to make a chip for for starters, the convergence of software and payments into a broader stickier more valuable com.
Enabling experience is still very much early days there has only been one public scaled payments company to get there without M&A and as recent events have shown it does not guarantee limitless growth.
We're going to play to our strengths and we have an excellent track record. We're very good at identifying differentiated technology assets, where we believe we have a unique ability to unlock and embedded payments opportunity. We can then confidently underwrite those cross sell synergies and ensure there is a path to leverage those assets to accelerate net new wins.
And be financially deleveraging inside of 24 months the acquisition of Schiff four and the merchant link gateways. Many years ago are great. Examples of this as well as our acquisition of venue next and focus pause.
We remain highly disciplined disciplined in the prices, we pay and sellers are increasingly viewing shift for us having unique skills are the unique skill set to maximize payment related synergies.
And I want to also be clear we've never won a banker auction process. If you do your diligence you won't find a banker that says shift for us at the top of the bid list, we have our own proprietary pipeline of our own process and often time bank Oftentime bankers are just as surprised by our announcements as the street.
The recent acquisition of advertising in the sports and entertainment vertical was really a case in point now.
Now there are some that believe we possess a degree of sorcery that enables us to compel a major competitor to sell their assets at an incredible discount just in time to fill a hypothetical quarterly hall and if you believe that then you should be just as bullish on ship for US you would be for the truth, which is we don't control the timing of when deals happen.
Well, we do ensure the outcome is solid.
In the case of advertise we already had the best mobile technology and venue next that sports teams and venues wanted and we also demonstrated an ability to monetize the embedded payments opportunity within this vertical by bundling the software and payments are leading fan first mobile technology is the true point of difference that opens the door.
To provide payments throughout the entire menu and we are unique in our ability to unlock ticketing volumes through our integrations with major providers, such as Ticketmaster and seeking and similar to how we win in hotels, we own more links now in the sports and entertainment value chain than any other competitor. This provided more ways to profitably differentiate and win.
And ultimately that's what compelled appetite to seek out a deal.
We're very excited now about the prospect to pursue the significant embedded payments opportunity as we migrate 600, plus appetizer customers over to our venue next platform and as Taylor will go into shortly we're taking appetite, which is a business that is hemorrhage cash since its inception has overlooked payments and adjacent opportunities.
Like ticketing and turn it even a positive by the end of this year and in fact, we expect to exit 2024 with $15 million of run rate EBITDA on a $100 million purchase price with a lot of room to grow from there.
Our capital allocation strategy supplements, our growth algorithm algorithm our growth algorithm is very straightforward. It comes down to two things land and expand and add new merchants land and expand involves capturing the existing embedded payments opportunity that already exists in our installed base of merchants such as converting a gateway only merchant.
And then we're capturing say the ticketing opportunity associated with one of our sports and entertainment clients. You can think about this as really just our pool expansion and every merchant is using our software or a unique software integration. This strategy has been working very well for many years and it represents approximately 50% of our production each.
We have tens of thousands of software only customers and additionally over 150 billion of Gateway volume to continue this land and expand approach and you can be sure we're going to continue to find ways to keep this funnel topped off.
Now as to the other half of our growth algorithm, which is adding net new merchants. That's simply at merchants that are attracted to both our library or software integrations and the various differentiated technology offerings. We offer in the end markets. We serve so great. Examples venue next software Sky type software. The result is that we.
We win net new merchants every single day, which represents the other 50% of our production and we're going to be spending a lot more time in the months ahead educating investors on our growth algorithm and the sustainable growth rates.
As mentioned above we're very confident in our organic growth rate and reaffirmed the third year of our midterm outlook.
This quarter, we provided a volume bridge to our 2024 medium term volume growth target, which Nancy will highlight later in her prepared remarks, but first let's review highlights from our core business and new verticals.
So starting with restaurants.
We have been winning at restaurants for nearly two gate decades with strong double digit growth.
Our product offerings have evolved from software we've built to those that we've purchased and now we are in the midst of a very successful consolidation into our new cloud products Sky tab.
We have made tremendous progress signing new Sky tab P. O S restaurants, as our lower total cost of ownership continues to resonate with restaurant operators, coupled with our recent promotional activity.
We've installed over 8250 Sky Ted Pos systems during the third quarter, which is not necessarily one for one with a location and over 23000 total installations. Since we officially came out of beta with Sky tab, just a year ago.
If you search on Twitter or ex ship for where Sky time, Youre going to see pictures and posts of installs that are taking place every single day.
We are now installing sky cab Pos in restaurants, located within stadiums, including Amway Center, which is home of the Orlando Magic and pay Com Center, which is home of the Oklahoma City Thunder.
We also signed an agreement with Beth M. G M to install Sky tab mobile our mobile solution and there are over two dozen sports book locations across the country and we are in skull installing sky tab in the paper Mill pub, which is located inside truest Arena home of the Charlotte Nights Minor League baseball team.
Other restaurant wins include Pinstripes, which is a fast growing chain the combined experience of eating out with Boeing and playing a game of bacci and stone fired grill, which is a southern California chain of family casual restaurants, and several other restaurant chains, such as the Great American restaurants, and heart Hyde Park Prime Steakhouse.
It is worth re emphasizing our cost advantages as a reminder, for our restaurant processing $1 5 million of annualized volume our Sky tab Pos solution is less than a third the cost of our primary competitor, including zero upfront cost.
Restaurant operators are extremely focused on cost, especially in this environment and we're also seeing benefit from our recent promotions. They took advantage of the actions taken by one of our competitors over the summer months to push through an online ordering fee that caused a great deal of consternation among their restaurant clients. We also benefited from one of our competitors that experienced a very prolonged outage.
As mentioned above this past quarter, we added thousands of new restaurants. Our shareholder letter includes just a sampling of those restaurants that have selected sky tap Pos, but I really encourage you to search on Twitter or ask for many many more examples.
Let's turn to hotels, so we had a blowout quarter, signing new hotels as well as extending relationships with existing clients, we renewed and dramatically expanded our relationship with Pebble Beach resorts. We also renewed and expanded our relationship with Sonesta hotels, who has agreed to make skyjack pass their preferred restaurant Pos across all sonesta managed locations.
And we have partnered with Sky touch technology, which is a property management system company to promote Sky tab P. O S. So all the restaurant venues across their 7000 hotel properties.
We also signed a European inspired chain of boutique hotels Aries that is based primarily in southern California, and several hotels on Nantucket Island, including the historic White Elephant Harborside hotel, but wawa.
And Jared coffee Jared coffeehouse.
Other hospitality wins. This quarter include the Ocean House Hotel in beautiful watch he'll, Rhode Island, the timber and golf club and resort in Naples, Florida. The host of several PGA tour events and spinnaker resorts operator of a dozen separated hotels, primarily primarily in Hilton head South Carolina as well as other states.
So as you can see from our shareholder letter our success in hospitality is a combination of adding net new merchants and converting gateway only merchants over to our end to end platform, our land and expand approach affords us the ability to grow our intend volumes without ever having to add a single new hospitality customer.
Moving on to new verticals.
Sports and entertainment, where we're obviously very excited to announce the acquisition of appetite, where we more than tripled our market share within professional sports, but before getting even into appetite I want to highlight some of the other progress we've made in the verticals. This quarter. So we expanded our relationship with the Orlando Magic NBA team, where we're now installing skycap throughout the arena.
We're handling all of their mobile ordering the retail and kiosk sales as well and we will begin processing primary ticket sales for the Orlando Magic through our recently completed integration with Ticketmaster for the San Francisco 40, Niners. We also added primary ticket sales through Ticketmaster and expanded our relationship to add food and beverage payment beverage payments as well and.
For the Miami Dolphins, we will begin now begin processing primary ticket sales also through our integration with Ticketmaster. We have only just recently completed this ticketmaster integration and we've already announced three ticketing wins this quarter the dolphins, the Orlando Magic and the San Francisco 40 Niners.
Now in college sports, we added the University of Georgia will be implementing our venue next technology solution for mobile ordering and point of sale. We also signed up music Fest, a large annual music festival here in hometown Bethlehem, Pennsylvania.
Which takes place every summer and the Palm Springs aerial tramway, so the world's largest rotating tram car the transports visitors along the desert cliffs Chino Canyon, which is part of the sand, while Sito mountains located in Riverside County, California.
Now with the acquisition of appetite.
We're adding some really awesome venues such as Fenway Park Yankee Stadium Madison Square Garden Dodgers Stadium Busch Stadium Globe life field, and Progressive field, we will be transitioning legacy appetite venues onto the venue next platform and begin the process of unlocking the embedded payments opportunity across their entire portfolio of customers. So this includes.
Mobile payments concessions retail parking and as you could guess, especially ticketing.
Legacy Appetizers revenue model was highly dependent on selling hardware and software with very little payments revenue. We're pivoting that model immediately to payments and expect a material portion of their revenue to go away as we will no longer be selling hardware and any other payment referral revenue that they were generating will likely also go away as our competitors turn off those Rev share.
Programs, despite that transition, it's a playbook, we know really well and this is a very synergy rich deal both from a cost and revenue perspective.
We also had an integration to ticket return, which is a leading provider of minor league baseball ticketing in the United States and Canada to get return is it relationship with over 300 venues and facilitates more than $55 million ticket sales annually. They also serve minor League hockey Minor League soccer basketball and lacrosse.
And the nonprofit vertical our momentum continues to build at the end of September we announced a partnership with give lively which powers donations for nearly 9000 nonprofits and is our most important I S V integration in this sector to date.
But giving block remains the category king of noncash noncash, giving in the nonprofit sector.
The focus of the give lively integration is to add shoe form as a preferred a traditional credit card processor and we were able to win this deal because of our unique ability to offer other donation methods, such as crypto and stock that other competitors, including stripes.
You can't offer.
But giving block also security integrations with Ministry brands and endowment both of which are expected to go live in Q4 ahead of a very busy giving season.
In addition to new platform integrations to power card crypto and stopped donations of giving block continues to sign additional marquee clients such as global citizens habitat for humanity International Easter seals and many more.
We were successfully cross selling our card processing capabilities into the install base of giving block customers. This quarter. We added cutoffs for class pediatric cancer, almost swim Foundation, Laaco Foundation, and Purple Heart Foundation, the cross sell opportunity within the nonprofit vertical remains very large and remains one of our exciting land and.
<unk> opportunities going forward.
And in retail we also signed the landmark boards retail store in Philadelphia.
As mentioned above we did finally complete the long awaited funaro acquisition and this is a much better business as we've said many times than it was at the time of our announcement with considerable card processing.
Capabilities broader geographic coverage in eastern Europe, and approximately one third of their net revenue coming from existing ship for customers. We've already unlocked considerable revenue synergies and now we're really just getting started Nancy Taylor will go into more specifics shortly but we are enthusiastic about the potential the board 10000, plus restaurants and hotels in Europe and Canada.
In the year ahead. This is really what we've been waiting for.
Before handing it off I want to reiterate that for more than two decades, we've consistently demonstrated an ability to gain share in the end markets we serve.
Our initial guidance guidance ranges for 2023 volumes were 100 to 109 billion. This.
This range contemplated everything from business as usual with same store sales growth on the high end to a mild recession on the low end, we expect to finish this year in excess of the high end of our previous range with minimal same store sales growth in our core verticals and two months benefited from our organic and inorganic.
International initiatives.
The midpoint would imply 2023 full year volume growth of 52% what was far more in our control was fighting for flat head count investing in automation and AI tools and as a result, we've continued to beat expectations, especially on margin and free cash flow raising the midpoint even for Q4.
We have further provided a very helpful table on page 15 of our investor deck that shows how we as management think about a normalized Q4 growth taking into account the legacy contributions of denaro, an appetizer and focus faas the expected synergies that we anticipate we expect to realize.
And then normalized Q4 growth rates, assuming a full quarter of anoro.
As mentioned a large part of our success is our understanding of the ongoing integrated payments evolution, the competitive landscape and how that informs our capital allocation of investments. It's also about identifying talent and creating a culture that ensures we have the most motivated athletes on the field competing to win business every day, while also keeping our existing.
Customer satisfied.
Our employees embrace this shift we're way, including radical ownership and accountability and I believe this culture of ownership starts at the top of the house our entire executive team leads by this example.
And boldly fourth and with that let me turn the call over to Taylor.
Thank you Jared and good morning, everyone I'd like to provide a brief update on the current operating environment, our thoughts regarding the upcoming fourth quarter and how we were thinking about our capital allocation priorities.
Our third quarter volumes trended in line with our expectation patients despite the.
The later than expected closing infinera through that lens. We are reasonably pleased with our results same store volumes were roughly flat across the portfolio, but with variances among merchant groups, which is a benefit of the diversification we've pursued since IPO.
Hotels continued to see modestly higher same store volumes with restaurants flat and retail moderately negative Jared mentioned this but it is worth repeating we did not receive any volume or revenue benefits from the bulk of our international expansion efforts until a few weeks ago Infinera closed. It is with this backdrop that we are very encouraged.
Q4.
Many of others in our industry, we have known projects and customers that will deliver volume and allow for growth in the face of any economic headwinds. Some examples of this.
Are the numerous football stadiums, the MSG sphere fountain, Bleu, intown suites, and others that began processing during Q4.
As we round out the second year of our Gateway Sunset initiative I thought it important to highlight all the puts and takes that are happening in any given quarter.
Our preferred outcome and what happens the majority of the time is that gateway customers migrate to our end to end offering this represents roughly 50% of our production and volume growth in any given quarter.
In this case gateway revenue declines, but end to end revenue grows meaningfully and the customer gets a better.
Experienced an overall lower cost of service.
The rest of gateway only volume will eventually be repriced over a multi year period. So the point, we feel like we were receiving a proper share of the payment economics for the value we are providing or in some cases the merchant can choose to move on it is worth highlighting that under our watch theres been very little attrition to the gateway only population and a few examples where.
We have experienced where very low revenue enterprise customers that made decisions before we owned the platform.
When we announced the acquisition of scenario 20 months ago, we size the business at $30 million of EBITDA.
That would likely step backwards as we separated from certain customers presently the run rate EBITDA for <unk> was over $45 million more.
More important than the financial performance is the underlying business, which is roughly 13% card present and growing quickly. This compares to 3% card present prior to our signing Additionally, about one third of their revenue is derived from merchants of ship for.
We will provide a more detailed scenario contribution for the full year 24, when we provided yearend results, but as you can see in the 'twenty 'twenty four volume bridge, we provided in our shareholder letter, we anticipate legacy scenario to contribute 15 billion of total volume in 2024. Additionally, we anticipate roughly $9 billion in payment volume from <unk>.
A national restaurant hospitality and e-commerce opportunities.
In regards to advertise please keep in mind. This was a business that has overlooked payments and burn cash extensively since inception, we fully expect to take a step backwards as competitors get discontinued revenue share programs and we intentionally step away from legacy C revenue streams like hardware sales.
That stated we are confident in our integration plan and have already had very productive conversations with advertise customers who are eager to adopt the venue next platform and the numerous other benefits like ticketing integration.
We also expect the margin drag associated with the transaction to be short lived and to achieve a run rate EBITDA of $15 million by 2024.
The macro uncertainty we've been cautious about for over a year has not become any clear for investors thinking about the potential impact of various macro headwinds in 'twenty four I would like to offer the following two examples first annualizing, our current adjusted EBITDA and the expected $15 million contribution from appetizers.
You will find us to be already within the vicinity of analysts' consensus for 'twenty for <unk>.
Second if you annualize our Q3 adjusted non-GAAP EPS of <unk> 82 cents a share you were essentially in line with next year's consensus for non-GAAP EPS keep in mind. This is with zero growth. Despite our expectations to continue delivering best in class volume and revenue growth.
Turning to the immediate future. We continue to expect a strong Q4 in light of many in your enterprise initiatives in stadiums and resorts that will come online in this quarter.
In terms of capital allocation priorities, we are prioritizing smaller M&A that could act as an accelerant to our go to market strategy for restaurants hotels and stadiums throughout Europe.
The discipline, we exhibited waiting for selling multiples to come back to Earth has resulted in us currently being in a great position to deploy capital at attractive returns. Additionally, our own stock has been punished alongside of the broader fintech market. Although a few peers have such strong financial performance as such we remain committed to opportunistic buys.
Backs of our stock with excess free cash flow.
As Jared mentioned in his letter given our track record we are not compelled to apologize for smart investments that focus P. O S venue next appetizer or even our smaller investments in opportunities like Spacex that've been both contrarian and deliver attractive returns for our shareholders and with that I'd like to turn the call over to our CFO Nancy.
Nancy.
Thanks, Taylor and good morning, everyone. We delivered another quarter of strong results, including quarterly records for volume and gross revenue less network fees, we continue to balance strong topline growth with disciplined investments as evidenced by the strength of our adjusted EBITDA margin and our adjusted free cash flow conversion.
Third quarter volume grew 36% to 27 9 billion year over year Q3, gross gross revenue grew 23% to 675 million and gross revenue less network fees grew 24% to $243 million year over year consistent with our expectations. Our quarterly results were driven.
And by the continued strength of our core momentum across our enterprise merchants, including news articles and capturing better economics from our gateway only customers.
Also entered the year with improved unit economics, with our restaurant channel due to our strategic decision last year to in source a significant portion of our go to market distribution in connection with the launch of Sky Cab P O S.
Third quarter gross profit was up 34% year over year to $171 million and our gross profit margin was strong at 70% for the quarter, representing over 550 basis <unk> basis points of improvement year over year.
The blended spread for the third quarter was 64.5 basis points. We continue to expect our blended spreads to average around 65 basis points for the full year 2023, and anticipate Q4 blended spreads will benefit from higher spread international volume and ticketing as a reminder.
<unk> year to date spread compression versus a year ago is a function of rapid volume growth from new enterprise accounts blended spreads within our core including restaurants and hotels continue to remain stable in.
In Q3, total general and administrative expenses increased 3% year over year to $76 3 million.
Continue managing toward our goal of keeping headcount flat, while investing in talent upgrades driving further efficiency across our operating model and demonstrating the scalability of our platform.
For the quarter, we reported adjusted EBITDA of about $124 million, which is up 46% over the same quarter last year, the resulting adjusted EBITDA margin for the quarter was 51% representing over 780 basis points of year over year expansion, we remain highly committed to a disciplined approach to cost management.
While continuing to balance investments to support our growth.
Many opportunities to further improve margins are still on the horizon as we harnessed the productivity of AI tools implement new internal systems and continue to take out the parts across the business to further enhance scalability.
We are monitoring the FET updates on the potential reduction of debit interchange, which would also be positive to our business and our overall margin profile.
Our adjusted free cash flow in the quarter was 76 million, bringing year to date adjusted free cash flow to nearly 200 million Q3 and year to date adjusted free cash flow conversion is 61% well above our current full year guidance of 55% plus.
Net income was $46 5 million for the third quarter basic earnings per class, a and class C share with 56 cents diluted earnings per class, a and class C share with 55 cents adjusted.
Adjusted net income for the quarter of $69 5 million or <unk> 82 cents for ANC, Sharon a diluted basis based on $85 1 million average fully diluted shares outstanding we are exiting the quarter with just over $690 million of cash $1 75 billion of debt and 100 million.
Undrawn on our credit facility, our net leverage at quarter end was approximately 2.2 0.4 times, our strong balance sheet and free cash flow profile will continue to allow us to invest in the business pursue our strategic priorities and opportunistically repurchase shares.
Our board previously approved $250 million buyback capacity of which just over $150 million of capacity is remaining.
As a reminder, we raised capital in the market supported us to do so attractively.
Weighted average cost of debt is currently 135% and we do not have any maturities until December 2025.
Turning to guidance, we are tightening the ranges for all of our Kpis and raising both the low end and high end of the range of adjusted EBITDA and adjusted free cash flow our guidance for the upcoming fourth quarter includes end to end volumes at 32 billion to 33 billion gross revenue of 741 million.
Dollars to $766 million gross revenue less network fees of 274 million to 289 million adjusted EBITDA of 132 million to $140 million and adjusted free cash flow conversion should be at least 57% up 500 basis points from our initial guidance.
There were several things to consider for the fourth quarter. While October trends are in line with the third quarter. It is important to note we remain cautious about the macro environment and have reflected this in our guidance ranges.
The closing of FINRA has removed a major uncertainty surrounds and surrounding the timing of our international expansion efforts. After 20 months of working closely together, we will immediately realize the benefit of the synergies from scenario in the quarter in.
In total we anticipate that legacy M&A will contribute a total of $25 6 million of gross revenue less network fees to the fourth quarter and $5 8 million to adjusted EBITDA. A complete reconciliation can be found in our earnings materials.
These acquisitions will cause a short term drag on adjusted EBITDA margin, but base margins remained strong at over 50% with further room for expansion as.
As we discussed last quarter, the fourth quarter will benefit from higher SaaS revenue from the acceleration of Sky tab.
P O S inflation increased contribution from ticketing and the implementation of several large hospitality in stadium wins, we announced previously that are scheduled to go live this quarter as we are.
We're quickly approaching 2024, we thought it would also be helpful to provide a bridge to show the building blocks to get to where our medium term guidance, we anticipate a material portion of our incremental volume to be derived and annualizing merchants already boarded during 2023 as well as continued land and expand execution.
And across all of our verticals, we have a total embedded payments opportunity of over 180 billion of which about 80% is represented by our gateway only merchants and the balance is represented by converting Saar for only restaurants in stadiums to our end to end platform. We also expect approximately 15 billion of volume.
<unk> contribution from legacy IFF in or out.
Before turning the call back to Jared I want to reiterate that our balance sheet cash generation and profitable growth position us incredibly well for the current environment of macro uncertainty.
With that let me now turn the call back to Jerry.
Okay. Thank you. Thank you Nancy.
Before going to Q&A and I know this is a long call, but we had a we had a lot to talk about we didn't want to take a question from.
That was submitted over X or Twitter.
So from Krishna on Muhammad shipped four has grown volumes every year, including in previous economic downturns I E 2000, 2008, given their fears about potential global recession, what areas our management focus on the continued sustainable growth in uncertain economic conditions.
So first of all thanks for the question I mean first of all we're starting from a pretty good place you know I don't know if everyone caught it and Taylor's remarks, but.
If you if you essentially annualize our 2023.
non-GAAP adjusted EPS and you're also.
2024 analyst EPS estimates, so I guess, what I would tell you if you're starting from a good place and essentially a no growth scenario from here that we can get there obviously like we have grown through downturns. Many times throughout our history I can't imagine any could be worse than what we encountered in 2020 and when we were.
And we don't get a payment volumes double digit in that environment I do think like people people don't appreciate our advantages in that.
150 billion bought the gateway volume that's already like we're already providing the commerce experience, we're just not getting paid for it.
We also have tens of thousands of restaurants, using our software and not just in the U S and Canada and parts of Europe, and we're now able to pursue and provide and then Kevin perspective, So we have more than our foot in the door in a lot of opportunities.
Massive cross sell with our nonprofit customers I'll be giving block we had positive ticketing opportunities Stadium cross sells over appetizing right I, just think that gives us the advantage that we can win and obviously, great economic climates, but even in even in down even in downturns as well. Thanks.
Thanks for the question.
That will go into our general Q&A.
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Our first question is from will Nance with Goldman Sachs. Please proceed.
Hey, guys I appreciate you taking the question and I appreciate all the great detail in the release today Super helpful on the organic and inorganic stuff.
On the on the volume bridge I found that very helpful. Nice to see the confidence and sort of where street expectations are aligned on next year I guess when I'm looking at each of these buckets of volumes I know you guys have had lots of commentary in the past about the move up market and the expansion into new verticals and now new geographies and <unk>.
It's probably worth talking a little bit about the take rates on some of these geographies obviously.
Very different from a you know a core win versus like a hospitality win but I think when we put it.
Rates across each of these buckets, you can get to some pretty exciting numbers, but just kind of curious how you would kind of contextualize some of the take rates.
In these different verticals relative to kind of where the aggregate is and maybe help us think a little bit about what the flow through into our retro revenue next year might be.
Yeah, Hey, well Hi, this is Jared I'll start and I think this is a question that you know Nancy Ann Taylor can also weigh in on it.
As well first I think we're starting from like a very very stable place within our core vertical so restaurants and hotels have continued to do what they've been doing for the last couple of years. So theres no pressure, there, which I think it just really speaks to the strength of the <unk>.
<unk> proposition, we wouldn't expect anything to change within those core verticals, which if you look at the volume bridge is a pretty healthy chunk of.
2020 for now when you turn to some of the newer verticals, that's where you can have some real monsters from from a volume perspective, and we've said this from you know from the get go that you can't compare the take rates of like a hypothetical of Dallas Cowboys or New York Yankees doing massive volume to the to the Irish problem on the corner that debt.
Got ticketing firing on all cylinders now I mean, you know last quarter. We were talking you were saying Hey, we were almost there was our last major ticketing integration, which is ticketmaster. This quarter, we come out and we say we've got the Orlando Magic, San Francisco, 40, Niners and and Miami Dolphins, all undertaken faster integration big because those take rates are good.
<unk> north of what like a concession stand would be which would should have low take rates because there's like no risk in a in a concession stand purchase. So so I think you'll continue to have that dynamic as we move up markets in our new verticals and now we gotta like we got to talk about about international and that's where like our research you know I'd say over the last more than years.
We start to look at restaurants and hotels.
It's really starting to come into place you do have a spectrum.
Surprisingly more in Central Europe, you actually had take rating in the restaurant environment. There that can be upwards of 100 basis point, which would be nice because that is somewhat in line with the smaller restaurant that we board here in the U S. Hotels are certainly last which is also in line with what we see here in the U S, but I think in some markets.
Les when you see card present take rates in Europe, and that's where you have to compensate with SaaS.
And that's fine I mean, we're already getting pretty good it's actually if you look at the numbers this quarter from just our skies have products. So you know.
In Canada for sure you've got a lot of interact there are lot of pin based debit, which is lower take rate the SaaS pricing will be higher in that market you get some different parts of Europe, it's going to be all over the place and youre going up and Youre going to have to very SaaS in order for that to make sense I don't know if pillar and Matthew I wanted some more specifics yeah, I just feel like doing a shout out to the strategy.
Looking at international for three years now.
Beyond that you mentioned.
Reasonably educated on the overall market what I would say makes us most encouraged is not necessarily the take rate that you see.
Existing in those markets today is the fact that.
The opportunity for value added services and software integrated payments, it's just a mess all over the landscape. So to Joe's point, you make bundle things slightly differently.
And are those markets, but the reality of the take rates are reasonable in our opinion and that's before all the value add that we intend to deliver.
Tell integrations to our software every stadium. So we're immensely encouraged I think we've mentioned this for the past several months now we are all systems go on deploying Skype out in Europe, and it's a major strategic priority for us, but I do think as you we probably owe just kind of what land of all this means as we think about the next few months.
For sure and obviously, where we're at.
I'm a little cautious here of course, they leave me in Alaska, that's very common.
<unk>.
We're not looking to guide on really farther than the volume bridge into 'twenty for it but I think you heard us talk about stabilization, it's Brad I think the takeaway from the commentary you just heard.
Our mix and distribution of <unk> 20.
23 was really the transition year, where we really moved away from what was traditionally largely restaurant in lodging.
Core growth kind of business that the blended mix of our business now and kind of where the blended sitting right now on spread is more representative of what we will look like living into 'twenty four with obviously continues in that market with that benefit whether its ticketing in the new verticals or are those international higher spreads.
And so I, certainly think where we're sitting now is a good place for you guys to use as kind of a stable spread launching into the into next year.
Got it sounds like Theres, a lot more balance.
Great dynamics. So it's good to hear and then just.
Look I think it's a I think I think we kind of understand what's going on but maybe bears kind of double clicking are emphasizing a bit I mean, the communication on organic and inorganic this quarter was great and I think it is.
It's a nice balance of kind of saying, here's what we bought and here's what we did with it.
But just to kind of put a finer point on it I think you originally said scenario would add roughly $15 billion of volume. That's what you have in the volume bridge for legacy scenario. It sounds like the legacy part of Anoro. It's only about two thirds of the business today. So it sounds like by your own doing you've kind of contributed something 7 billion or something like that to do the volume.
And that's kind of what we're seeing in the 9 billion just wanted to kind of confirm that we're thinking about that the right way and do you think you could use this as a blueprint for maybe future communications around inorganic growth.
Yes, so well I guess I'll I'll.
I'll start with that one and it's like I mean, clearly in this climate everybody wants to know.
The doubleclick transparency on what the inorganic and organic contribution was from these deals and we provided that quarter and I think should there be.
Future transactions, we'll do the same I think were like.
We own with gross revenue less network the sensitivity to give you a picture of Hey, a third of these represent existing customers I don't think were going to go down and breakout volume, especially when some people can predict who those customers are and associated sensitivities with that but I think going forward like you should expect similar to the table. We provided that we would continue.
Especially if it's alongside a new transaction set expect appropriate expectations and contributions.
Got it it makes a lot of sense I appreciate it and thanks for taking the questions guys nice job.
Albert.
Our next question is from Darrin Peller. Please proceed.
Guys.
Nice results here I think when adjusting out you're just kind of following on to that point, when you're drunk driving organic contribution.
Fourth quarter, it looks like organic growth for net revenues of 28% in the fourth quarter up from the $23 24 per cent range. We just saw so it's great to see.
Maybe you could just help us understand what you are gaining more beds about sequentially.
And especially in the backdrop of the macro and it's not all of them were seeing that and also just the macro conservative assumptions, you're implying you're building into that outlook.
Yeah, I'll start and then I'm sure Jared Nashville chime and.
Good morning Darren.
So a handful of things number one the.
Framework or our.
Our Q4 guidance is largely taking what we're seeing in the business today.
During the quarter, which is as you recall, we've now got.
The narrow closed we had advertised close to beginning of the quarter and we have much more visibility into a lot of the big installations that we had expected throughout the year.
<unk> going to happen until Q4, so it's really just the ability to visualize and see the start dates on a ton of initiatives that we've been working on for a very long time. You also are getting some incremental benefit from growth in SaaS, which I think is quite encouraging that as a byproduct.
A handful of things, but not the least of which is our our skies have success. So it's.
I wouldn't say, there's a lot of guesswork inside of Q4 to Nancy's point, we give ranges for a deliberate reason and especially in times, where where the climate is volatile I would say we've been calling out the 100 dollar stakes probably longer than any of our peers, we're always cautious about that.
The further you get into the year the less cautious you have to be like a knee jerk reaction to anything, especially when our guidance really ever since Nancy joined us increasingly hinged on known activities as opposed to.
Guess, what the macro is gonna be Nancy you, one way or another.
I think that's a fair point and and look we've gotten a very good look at October at this point and where we're seeing you know consistency with what we saw in Q3, and so that just gave us further confidence and what to expect for Q4, I think I like to point out is the one I would double click on you know a lot of things are coming together.
We've been talking about all year.
Got it very good balance of.
Disciplined when it comes to managing kind of cost.
Balancing that with investments that are really.
Almost all focused on margin expansion opportunities throughout the year.
Obviously Q.
Q4, we're seeing a lot of benefit have you done work just done earlier in this year that are coming to fruition.
When you look at Q4 and kind of tightening the ranges that we did it because we've got a lot of line of sight and I didn't think I was still cautious around the macro we're listening to what everyone else is saying, but right now where we're not really seeing any kind of step change at that point.
Darren.
You can pile on them.
One point here I mean, it was I don't think I mean, clearly we didn't get the right. The right advice very early on in the scenario process had we known that would take 20 months I mean look even even the information we had at the time of Q2's earnings was not was not perfect. I mean, we did have a couple of different options to get there which is why we included in guidance, but I'd say all this because.
If we could rewrite history on this one we would've worked out a revenue share during an extended and pushing extended Reg.
Our regulatory approval process in doing so like we would've been receiving volume and revenue in prior.
Comparison of like 24% to 20% to 28% looking like a big leap. The reality is as prior quarters has essentially been understated because a lot of effort that we've been putting into our global expansion was not reflected in our financials.
A really fair point, Gerard I guess to add onto that and congrats on closing scenario, but really more importantly, looking forward now I mean theres been exciting opportunities we've been talking about for a while on what the Oregon bring for you guys internationally. So jarrod just remind us what the what you see is I don't know if low hanging fruit is the right term because it's never easy, but what are the first opportunity.
You see beyond what you've already added whether it's hotels or stadiums that you can leverage your relationships with them start moving internationally.
Darrin, it's all three of those things like I think we're we are less than like a couple of weeks away from announcing our first European Stadium win.
Were like very charged up on restaurants, and hotels I mean, we've been saying.
You know really from the start that we have an awesome customer and we will follow them all over the world, but not with the aim of winning like the next Uber Netflix.
The aim of taking the products and services that have worked for us in the U S into those markets and I'll tell you like the amount of time, we spent a nice tailwind quite right. We spent several years looking internationally, but like the last year, we've been very on site in Europe, a lot and I can tell you like what I'm seeing in the restaurant and hotel space in Europe. It is exactly what we saw in the U S. You know in light.
The days of Mercury payments I mean, you still have most of the Pos systems aren't having a standalone non integrated bank terminal next to them you know like any like like an emo terminal and that is just as applicable in the hotels as well. So it's like this is a total desktop the playbook of what we know we crushed it within 2017 here in the U S and bring it in.
Bring it into Europe. So that's why we put out there like we're going to get to 10000 restaurants and hotels in Europe, and Canada next year, we're going to light up a lot of international stadiums like that.
That was always supposed to be the next move once we moved into that market. It's what we're doing.
Thanks, a lot guys congrats.
Okay.
Our next question is from Timothy Chiodo with UBS. Please proceed.
Great. Thank you one on Gateway and then a quick numbers one is a follow up so firstly also loved the bridge on slide 16 with the the volume contribution is getting to the 175 I wanted to see if we could just recap or update on the gateway conversion. So when we look at the 17 billion that includes net new and conversion safe too.
I assume that some portion of that is from the gateway conversions clearly the absolute number of converted would be higher because it would roll in over the course of the year, but still really small in the context of the 180.
Totally appreciate that earlier, you mentioned that some of these merchants will convert some of them will be repriced and some of them well, we'll depart, but maybe just recap the the go to market approach there how much of that is being done by third party resellers is it your internal teams that are reaching out to them and really the progress being made there on gateway.
And Virgin and how hard you can push it this year.
Yes sure.
I'll cover that one.
The game plan and continues to be refined and so we're two years into a really deliberate push which we began sort of when we saw it starting to see the pandemic in the rear view mirror, we starting to see the health of our hospitality merchants b be restored and so we said all right now is the time to sort of press on this effort.
More deliberately.
The effort is going well and our tactics.
Refined modestly, but it's producing kind of.
It's something that we're happy with which is a blend of production on end to end that results in about 50% being net new and 50% being.
Being conversion from the Gateway I would say, it's having incremental success with larger and larger merchants I mean, this past year, we've talked about multibillion dollar gateway merchants converting over so that's really encouraging that there isn't a population inside the gateway that is not willing to have the conversation.
And.
As I mentioned in my scripted remarks large enterprises to take a long time to make decisions. So the fact that they are willing to make the centers. At this point means are our tenacity has paid off in terms of our approach we slice it a handful of different ways. We look at the segments, meaning hotels versus restaurant versus retail we look at the software that merchants using.
We look at the acquirer, they're connected to a particular means for opportunities. So we approach it a bunch of different ways and all three of them kind of how people equal measures of success I would say the majority of those efforts, though our direct.
And why you should care about that is because the vast majority of these conversions that don't come with the residual share that would typically.
We would be involved in a third party.
Bringing us in merchant.
Oh, well that's really helpful.
It seems like that's a little bit different than a few years ago. So that's that's really good to know alright. Thank you tailor. The follow up is on numbers. So when we take the Q4 volume guidance and also appreciating that some of the legacy Funaro is not fully in there for the full quarter. If we just take that I know the seasonality of the business has shifted a little bit with new verticals coming on.
On et cetera is it still fair to think about the Q1 volumes should be up quarter over quarter. As they were last year is there anything else that you would call out that would in terms of the changing seasonality clearly the scenario a full quarter contribution helps but beyond that.
Yeah, No I don't think so I think that's a good that's a good proxy.
So I think that's just the carload from having a full quarter of <unk> and then the seasonality that you're seeing from a first quarter perspective, I'm just thinking we will have obviously the benefit of all the Q4 implementations coming in so but nothing that would go the other way.
Great. Thank you for taking those I appreciate it.
Our next question is from Jason Kupferberg with Bank of America. Please proceed.
Thanks, guys.
Two wanted to compliment you on the volume Bridge chart, and just ask a little bit more on it specifically of those pieces of the bridge.
Which potentially.
So I'll start and what I wanted to maybe set tone relative to the volume bridge is.
We wanted to show a commitment to our medium term outlook that we set out back in November of 'twenty, one or multiple wars and a lot of <unk>.
Macro concerns across kind of global economies, we still feel like it's highly achievable and I think it's important to set the framework in everyone's mind, because we werent, reaching for full potential across any one of these verticals. We are simply saying, what's the what's an incredibly reasonable way to slice up the remainder we ought to go.
I think international is one I'm personally most excited about the momentum we've had with them to narrow business signing you get us a healthy portion of the way there and I think we'll kind of related to that.
And then the annualized <unk> is obviously something we can rely on.
Pretty comfortably obviously yesterday.
Cautious about macro, but just getting a full year of merchants that join me to prior year.
Only contributed partial is something we can we can underwrite heavily Jared I mean, you've always got great insights onto the world. They had any comments yeah, I mean look the.
The layoffs are obviously the annual rotation of 2023 I would also say like Hey, Joe.
<unk> been taking is going to be pretty easy I mean, that's a I mean I hope people really dig into how awesome of a deal appetite really was I mean, we are we are offering them right over.
Venue next product and the venue next product comes with payments.
Our restaurant product suite for that matter, So Morgan and move them over will capture payments on that and ticketing, we're having a lot of success and so I feel really I feel really good there in terms of like our core additions that would you.
You were asking about previously which is conversions and net new accounts. The actual population of like targeted independent hotels and such is it.
It is more than double what we've actually plugged in for 2023 that we call would consider like are prime targets for the for the year ahead. So it really comes back to Taylor's answer that where would be the risk side as well youre going into a.
New continent going after restaurants and hotels I just feel like we have a lot of confidence in it.
Already have sky cab that are operational we have our offer in Oracle integrations already operational in Europe right. Now so we feel really good about that but that obviously is you got to you got to go out and you got to win restaurants hotels in Europe.
But we'll welcome to challenge.
Right right. Okay. So we've got comfort in the 'twenty four volume outlook. It sounds like based on the take rate commentary, we've got comfort with the 'twenty 'twenty four targets on revenue as well so maybe Nancy just turning to margins just as we think about the moving pieces for 2024 can you just go a little bit deeper into some of the <unk>.
Areas of improvement you touched on them briefly.
Because I know you're going to potentially have some drag from the recent M&A also although maybe some cost synergies you'll be kicking in and just I'm just trying to think how that nets out because I do think directionally, you're expecting EBITDA margins to be up next year.
Yeah, I'll start with like you have your last one first which is yes I think.
The way that you framed it is right that synergy opportunity will be deliver pretty quickly and that's why we put out the advertising in that number right. So really just watching that turn from a drag to pretty quickly turning into an EBITDA opportunity, which is both sides of that equation that Sharon talked about it a cross sell opportunity, but then of course, there's always expense synergies with any of these.
Acquisitions that come together and I'd first say I guess I first want to start with like look I think the margins are delivering our best in class.
Wanted to be cautious again, I'm, not putting out too much yet on where we'll be on a 24 guide, but we absolutely think there is margin enhancement in the near term that you'll see while you come out with that Guy.
<unk>.
Growth trajectory, it's insurance I would say I know I've been a little bit of a broken record about that.
Union economic model right now that we're operating under every single dollar of revenue is coming through at a higher margin.
And that is what has caused the sequential margin improvement quarter over quarter that you've seen on here and so and I think if you look at where the margins are exiting certainly that should be your starting point when you think about 'twenty four and beyond.
The opportunity to continue to kind of manage a relatively flat SG&A base. Like you saw this quarter is really a reflection of every part of the operating model.
I kind of come customer each one again, but it starts with things that are like Anthony where we're adding on ticketing, we're not adding in SG&A.
All in that market.
Much like the idea that we.
David on your one Sky cab brand right that takes out just so much infrastructure and customer support. So it's just really ever every kind of aspect of the growth model right now is producing a higher margin than where we started the year and that will continue going into 'twenty.
So I would say best in class today with.
Room for improvement that you'll see coming out with 25.
Well said.
And our final question will be from Jamie Friedman with Susquehanna. Please proceed.
Hi.
Thank you for the detailed results and commentary in this Immaculate shareholder letter I wanted to ask.
So it looks to me like the math is that the implied blended spread for the fourth quarter at 68 basis points is up.
Both sequentially and year over year rates. So 66 in the Q4 'twenty two from calculating that right. So.
But more generally maybe you could help unpack either.
Nancy or our jewelry retailer.
How we should be thinking about why it is that the blended spreads would be rising again after they did fall in the third quarter.
Yeah, I'll, let Nancy kind of almost like I would just say, we didnt set inexplicit spread expectation, we do expect.
Our SaaS and other line to grow sequentially quarter over quarter. So.
I don't know that the pull through on 68.
Isn't explicitly good read them I also don't want to get one on the fly so Nancy I mean any more color you can give there yeah I would I wouldn't think about Q4 as you know right now our expectation going into the quarter.
Excluding the acquisition was certainly that Q4 would be a strong blended quarter Q3 actually came in better than our initial expectation. So I expect Q4 to look similarly to what you saw in Q3 and I've been 65 basis points.
You know you heard us call it out as kind of a stabilizing of the spread.
Unfortunately.
Ultimately ends up being a positive is as we bring on large enterprise margins quarter to quarter, there will be some movement, but I think if you use 65 is kind of an exit rate into Q4 and to beat a dead spot and <unk>.
One thing I want to call out because we mentioned this in passing but it's an important consideration as we do have to pay attention to the exchange rates now with scenario being a part of the business. So the impact on the dollar versus euro is going to be something that can play a role and obviously there can be some volatility associated with that but we're not seeing any meaningful.
Spread changes on a customer by customer vertical by vertical or even geography by geography basis.
Right.
Okay, and then for my follow up just to try and advance the conversation to 2024. So I realize we don't have the revenue we got the volume in the guidance, but in terms of maybe qualitatively how to think about the inputs for the blended spread for next year because it sounds like you.
Your boarding a lot a lot of enterprise activity I mean, jud was specific and articulate enthusiastic about how much going on there.
Same time till you're saying, you've got international which I would assume is a higher blended spread.
So any way to think about the blended spread trends for next year would be helpful. Thank you.
Yeah, and what we're really being careful to not put too far into giving anything on 24 Guy you know we'll talk obviously the next time, we're together about that in great detail, but I would just answer it similarly to the earlier question, which is using 65 is kind of an exit rate right now from a modeling perspective, it certainly reasonable there will be puts and takes and exactly what you said.
Summarized which is continuing and going up market, obviously comes at lower spreads, but with all of the international expansion that will be coming in at higher spreads. We also you know.
Well, what we're saying and and and our new verticals as we expand and Anthony with Chicken Ang, which also brings that kind of a vertical line up from a spread perspective. So I think the blend that we're at now if we're putting a stake in the ground, but I would not take this as a guide point I think 65 or is it fairly stabilized.
Blended spreads right now for the business.
Got it. Thank you. Thank you both.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
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