Shift4 Payments Inc
NYSE:FOUR
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Shift4 Payments Inc
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Ladies and gentlemen, thank you for standing by and welcome to the Shift4 Payments fourth quarter 2020 earnings call at this time, all participants on a listen only mode. After the speakers presentation, there will be a question and answer session to ask a question. During the session, you will need to press star one on your telephone keypad. If you require any further assistance, please. Press Star zero.
I would now like to hand the conference over to your speaker today. Sloan Bohlen, Investor Relations. Thank you. Please go ahead.
Thank you. I’d like to welcome everyone to Schiff for his fourth quarter 2020 earnings conference call. Before we begin, I’d like to remind everyone on this call that it will contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward looking statements, including statements regarding management’s plans, strategies, goals and objectives, the potential annualized gross profit related to the conversion of gateway merchants or acquisitions, and their ability to bring us into a high growth vertical. The expected impact of covid-19 on our business and industry and anticipated financial performance, including our financial outlook for the first quarter of 2020 one and the full year 2021. These statements are neither promises nor guarantees, but involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward looking statements. Factors discussed in the risk factors section of our financial prospectus filed with the Securities and Exchange Commission pursuant to rule four twenty four B four on December four. 2020. And our other filings with the FCC could cause actual results to differ materially from those indicated by the forward looking statements made on this call. Any such forward looking statements represent management’s estimates as of the date of this call. While we may like to update such forward looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. In addition, we may also reference certain non-GAAP measures on this call which are reconciled to the nearest gap measure and the company’s earnings release, which can be found on our investor relations website at investors dot shift for dot com.
And with that, let me turn the call to our Chief Executive Officer, Jared.
Thank you and good morning and thank you all for joining us today for our agenda this morning, we will take you through the business performance payment and merchant trends and strategic initiatives. And we’re going to save a bit of time for the fun stuff at the end, which is the road ahead to begin. And as I mentioned, some of these points in my shareholder letter, we just concluded a very challenging year. The economic, social and political issues did not spare anyone.
Despite these extraordinary circumstances and having exposure to highly impacted verticals like restaurants and hotels, the team is shipped for performed incredibly well. And I’d like to highlight some of our 2020 accomplishments. So for the year, we grew every material KPI, including number of merchants using our platform, the volume, the process and the revenue it generated. This marks our 21st consecutive year of year over year revenue growth, but mostly it reinforces the shift towards value. Proposition is compelling and it’s a winning share during the best and during the most challenging of economic circumstances.
We also completed multiple capital market transactions to strengthen our balance sheet, diversify our base of shareholders and provide capital to fund organic and inorganic growth initiatives. We also completed two great acquisitions, including the three card e-commerce platform, which we now call Ship Workshop, which has greatly expanded our e-commerce capabilities and significantly expanded our team. We also released several products like our new generation online ordering products, mobile payments for takeout delivery and curbside ordering and QR code based ordering and payments, all of which were quite timely given the pandemic. And we think we’ll continue to fuel growth in a post pandemic environment.
We owe our 2020 performance not just to these reasons, but also the dedication of our employees, the support of our software partners and the perseverance of our customers, it’s during these challenging times that they make me most proud about. The fourth quarter specifically, we delivered another reasonably strong quarter. Given the circumstances as previously shared.
We celebrate the highest volume month at the time in October, which slowed in November and then significantly so in December. We attribute this entirely to covid requirements on social distancing and cold weather that was not conducive to travel and outdoor dining. Despite these realities, Q4 and end payment volume grew 12 percent from the previous year to six point eight billion. Our ability to grow merchant account and volume while serving some of the hardest hit industries is a testament to our technology, our business model, most importantly, our people.
So make no mistake, this quarter that included some really rough business conditions while volume growth is nice to see during a tough quarter. We also look at active end to end merchant count, which grew four percent quarter over quarter. This continued growth in our merchant base makes us incredibly optimistic as we look forward into 2021, one end to end volume growth drove five percent growth in gross revenue, less network fees, which resulted in adjusted EBITDA of twenty six point seven million for the quarter, which is up 10 percent from the prior year when normalized for our change in accounting for leased equipment. It’s also worth reinforcing that virtually all shippers, merchants and all those that we have been adding throughout 2020 are operating at substantially below normal levels, which we anticipate is becoming quite the coiled spring as previously announced.
We also acquired two businesses in the latter part of 2020, each very unique and serving different verticals and increasing both our capabilities and our team. The ship for shop acquisition has significantly expanded our capabilities to serve online merchants and dramatically expanded the market we are capable of addressing with our services. Taylor will provide some additional color on our month trends.
But as I noted at the onset of the call, December volumes declined meaningfully as weather became colder and cold cases accelerated, resulting in stricter social distancing requirements across the country. And we’ll speak to the uncertainty that still exists from covid. But what is clear to us is that our nonstop innovation and unique value proposition continues to win across a growing range of merchants and market segments. For those of you who are new to the story, we hope Q4 as a perfect example of our business model. We offer innovative solutions to merchants across a broad range of industry categories.
Our technologies go far beyond traditional payment acceptance and often give us an incumbency advantage versus other payment providers. We use these advantages to offer a vertically integrated solution at a lower, total cost of ownership than the competition.
And lastly, we don’t sit still and are constantly looking for new industries and geographies, as evidenced by our acquisition of Venue Next, which is going to talk about shortly, as we spoke about on our last quarter’s call, and I described in my initial letter to shareholders at the IPO, our philosophy is to drive change where we see inefficiency and incremental value for our merchants and to ensure Shipborough is always positioned in the direction the puck is going.
So, as you may recall, during 2020 four became the official payment partner for the Las Vegas Raiders, the first sports and entertainment venue in our history. Within a few months, we have found significant successes across what was a pretty neglected vertical supported by multiple expensive vendors and lots of legacy technology.
We have found that our strength in serving some of the most complex and demanding environments in commerce has made us well suited to solve problems and deliver a better fan experience in sports stadiums, theme parks and other similar venues. This is why we’re so excited to talk about our most recent acquisition of Bennion, which again, Taylor will discuss shortly. On the same note, we just announced today that Staples Center will be using SIFF for payment technology.
We believe stadiums and theme parks will contribute meaningful, incremental and volume in the months and years ahead. It was just a few months ago that we announced the acquisition of 3-D card e-commerce platform, which again we now call shift shop. Our entry into e-commerce came as a surprise to some, but I think it’s worth reiterating this is textbooks. Before we observe an industry category like e-commerce that is massive and growing quickly, yet unnecessarily complex and with multiple layers of fees, Taylor will speak about our go to market strategy with regard to ship.
We’re shopping a few minutes, which I also believe will drive the new layer of growth for a business. These are two new markets that are quite meaningful from a team perspective and were largely foreign to support at the time of our IPO just nine months ago. Despite having operated this business for over 20 years, I can’t recall a time when I was more optimistic about the road ahead. Our merchants are back to experiencing healthy volume growth with a very strong start to 2020 one.
We continue to win share in our core markets and also find new, exciting verticals to enter. We also have an impressive capital position right now that affords us the ability to invest in growth accelerates for which I thank all of you again. And while I have the mike, I feel compelled to share a personal project and a call to action. As some of you may know, I am fortunate to command the first all civilian mission to space later this year, which will be a personal achievement beyond my wildest childhood dreams.
And in reflecting on the significance of it, I couldn’t help but think about all the children who don’t get a chance to live out their dreams. It’s for that reason that may seem to Children’s Research Hospital my copilot on this mission. We’ve begun a very ambitious, even for US fundraising campaign. And I would urge you all to consider a donation and you can still visit inspiration for Dotcom to learn more. And with that, let me turn the call over to Taylor to discuss our fourth quarter operating results in more detail. Taylor.
Thank you, Daryn. And good morning, I’m going to take a minute to give some additional detail on volumes through the fourth quarter and then also provide an update on what we’ve seen to date in 2021. First, we included a monthly snapshot of the quarter to give you all a sense for the reasonably pronounced impact the pandemic had on end to end volume throughout the holiday season.
We are pleased to report that this deceleration was isolated to December January, for example, represented by nearly 10 percent increase and end to end volume from the prior year. Seven of our eight highest volume days in our history occurred during just the last two weeks of February. These volume trends are quite positive when considering many of our merchants in large states like New York and California are operating at less than 50 percent capacity and several states, including Texas, were without power during this time period.
This ability to grow at a pace exceeding many famous leaders, despite a merchant base that continues to be heavily impacted by covid and occupancy and travel restrictions, reinforces the power of our value proposition and a clear competitive advantages we have in our core markets. Garrett mentioned the four percent sequential growth and active merchant count during the quarter. Hotels represented a larger than typical percentage as we won several large hotel groups, including Cimetidine or acquired brands to our platform.
I do want to note that this Q4 activity does not reflect the impact of our 3D card acquisitions now branded a chip or shop, as we use the majority of the time since acquisition to reposition the business for what we believe is a highly disruptive go to market strategy. If you recall, the 3D card platform was a mature, feature rich Web store builder largely reliant on SAS revenue. The platform was the driving force behind billions of dollars in payment volume and yet sending this volume to third parties for which merchants were paying yet another vendor for.
We’ve recently launched a ship for shop, a platform that is entirely free for any merchant using ship or payments, competitive platforms charge as much as three hundred per month and actually more for enterprise and B2B features and still rely on third party payment processing. This investment isn’t simply a branding and marketing exercise. We also repackage the platform to make it highly intuitive and creative to payments enablement process that is second to none. We also introduce Facebook and Instagram integrations and count fraud detection at no extra cost for our merchants.
On that note, in the brief time we’ve owned and operated ship workshop, we’ve accomplished many of the integration and branding goals for our first year of ownership. We’ve also increased the number of Web stores by roughly 8000 or fifty four percent since acquisition, which we think is the appropriate way to measure success this early in the integration process.
We also have an exciting roadmap for Borshoff that we believe will continue to impress merchants and help them grow. Make no mistake, we believe this platform will compete successfully among the best e-commerce businesses in the world and believe we can double the pre-acquisition site count by the end of this year. Well, the depressed volumes are real in the fourth quarter, what is mass is the upside potential. That ship arrives across a broader set of merchants than when the quarter began. Well, there’s uncertainty on the pace of economic recovery and consumer spending. Twenty one hour growth should compound is that activity recovers given our expanded share.
Before I turn it over to Brad, I wanted to close with providing you an overview of our acquisition of venue next. Then you next is a best in class provider, mobile ordering and point of sale solutions for sports and entertainment events. Their technology began as an instant ordering app Invision and seated by the San Francisco 49ers and has evolved into a full stack solution, including point of sale for concessions.
Their applications have been proven in every major sporting category, including the NBA, MLB, NFL, NHL and MLS and also power mobile order at some of the nation’s largest theme parks. And a story that should be familiar to you by now. Venue Next was competing very successfully to win these marquee clients. But the integration of payment providers included a web of gateways, merchant acquirers and hardware providers.
We took an approach and partnering with venue next to offer a more streamlined solution and quickly won several world class merchants, including the Staples Center in Los Angeles. We discussed our enthusiasm towards this channel and previous calls, but now own the entirety of the stock and believe our solution will be incredibly competitive. The mobile technology is also has an application in adjacent verticals, and we’ll have applications far beyond savings.
We believe that then your next best in class technology will attract two and a half to three billion dollars in incremental volume by the end of 2023. We published a summary of the transaction on our website that included a chart to illustrate how these two transactions are. Growth has doubled since our IPO, which was just nine months ago.
Now I’ll hand the call over to Brad to walk you through our financials.
Like failure, as mentioned in our release, we generated eighty eight point eight dollars billion of gross revenue, less network fees in the quarter. This represents a five percent increase over the prior year. It was up just one percent compared to last quarter for the reasons Jared and Taylor spoke to. The year over year, variance was driven by a 23 percent increase in net processing revenues driven by continued share wins and gateway conversions.
Net processing revenue now makes up 63 percent of our gross revenue, less network fees, up from 54 percent for the same period last year. Growth in net processing revenue is offset by modest declines in Gateway and SACE, other revenue streams due to the impact of covid-19 on our hospitality merchants and our continued efforts to convert Gateway and non-recurring revenue sources to our ongoing spread based monetization model. Our net spread to the quarter was approximately eighty basis points, while the spread on interchange remains at lower than normal levels due to shifts in card mix, specifically, the spread on interchange for the quarter was approximately one hundred and seventy nine basis points, eight percent lower than prior year.
We reported twenty six point seven million and adjusted EBITDA for the fourth quarter. If we apply consistent accounting treatment to our equipment leases in 2019, this represents a comparable increase of 10 percent over prior year. Our fourth quarter results represent an adjusted even the margin of 30 percent against gross revenue, with network fees again applying consistent treatment of equipment leases. This represents a 110 basis points increase from prior years.
We continue to benefit from additional scale compared to the third quarter adjusted EBITDA margins declined by two hundred and seventy basis points due to covid related volume slowdowns in the back portion of the quarter, as well as the impact of our recently announced acquisitions. Next, let me give you an update on our capitalization and liquidity as we had a very busy quarter.
First, at the end of October, we completed a successful offering of four hundred and fifty dollars million of senior notes that are due in 2020 six A. coupon rate of four point six to five percent, the proceeds of the offering were used to pay off the entirety of our previous term loan facility, which saves us approximately four million dollars in annual interest expense.
Additionally, that offering establishes shipper’s participation in the public debt markets, which will offer us an additional source of capital going forward. Second, in December, we completed a highly successful offering of six hundred nine million dollars of convertible notes that are due in 2020 five. The deal was upsized from an original offer amount of four hundred million and price with zero coupon and a conversion rate so effectively eighty dollars and forty eight cents per share.
Finally, in December, we completed a nine point two million share secondary equity offering priced at fifty five dollars and fifty cents per share, these shares were sold exclusively by search partners. As a result of these Kufor activities in our previous capital raises, we ended 20 2020 with nine hundred and twenty seven point eight million dollars in cash and eighty nine point five dollars million of available capacity on our revolving credit facility.
Subsequent to the end of the quarter, we restructured our revolver and increased its capacity to an even one hundred dollars million. I want to take a minute to mention some financial provisions that will be disclosed in our 10K filing, these revisions primarily impact 2018 and 19 and reflect non-cash balance sheet adjustments and geography changes within the PNL. But there is immaterial net income impact, which should be noted that these revisions have zero effect on our reported revenues, those for net cash flows.
Finally, I’d like to discuss our outlooks during 2020. We provided quarterly guidance because of the significant variability in volume patterns driven by covered with volume trends, returning to more normal levels of variability in the back half of 2020 four, 2020 one, we’ll be shifting to annual guidance.
Let me first make a few comments about the first quarter, as you’ve certainly seen through our activities across various media channels, we have recently initiated a major rebranding effort related to the integration of 3D. These investments will place our new e-commerce solutions for shop as a leader of the e-commerce market to drive additional merchant boarding to significantly increase our TAM. The impact. This effort will largely be isolated in Q1 and will be treated as the non-recurring integration expense in our financials. That said, here’s our guidance for 2021.
We expect full year 2020 one in volumes to be between 36 and thirty eight billion dollars. Gross revenues are expected to be between one point one and one point two dollars billion, while gross revenue less network fees are expected to be between four hundred and fifty and four hundred and sixty million dollars adjusted EBITDA is expected to be between one hundred and fifty five and one hundred and sixty million dollars. Note that this EBITDA guidance excludes the impact of the Q1 integration investments I mentioned previously, as well as any inorganic sources outside what has already been disclosed.
Similar to my outlook comments for the last few quarters, though, still remains a lot of uncertainty related to the recovery curve. While the numbers for the first two months of 2020 one suggest the slowdown in Q4 was largely temporary. There are still a number of moving parts related to Kobe that could impact our volume and results in the near term.
With that, let me turn the call back to the operator for questions.
As a reminder to ask a question, you need to press star one on your telephone. Again, that is Starwind. Please limit your questions to one question and one follow up to withdraw your question. Press the pound key. We will pause for just a moment to compile the Q&A roster. Your first question is from the line of Darrin Peller with Wolfe Research.
Bay, guys, thanks for the question and congrats on a good year in a tough environment. When we look at the strategic investments you’re making, clearly it’s much further into shift. Borshoff, you know, Ekom and obviously now stadiums as well as we as we see these moves, probably more so than a lot of us even expected at this point after the IPO.
So when you talk about, first of all, if you have the right now for some on the economic side, you know, where are you in terms of your strategic build out there? Is there enough done that you can actually run with it? How material can this be for you guys through this year or next and maybe just touch a little more of the differentiation you guys offer besides pricing that can really help that succeed?
Yeah. Good morning. Thank you. Appreciate the question. So I guess first, just to say, I don’t think it should be that surprising that we continue to seek out industries that, you know, are challenged by multiple different software vendors, adding complexity and cost that we think we can do a better job providing more vertically integrated solution, you know, as we were saying towards the end of, you know, last year, we get an awful lot of questions about our gateway conversion strategy.
But, you know, we’ve been in business 21 years, growing in payments and gateway for only part of our story for the last three and a half, almost four years. So, you know, you should expect us to continue to kind of find these interesting opportunities with, you know, a lot of growth behind him, a substantial payments opportunity to unlock and a big TAM to win share from going forward.
You know, e-commerce, if you look at kind of the spectrum that we’re able to address, if you go back six months ago, we were able to do kind of the ultra enterprise version of e-commerce that complemented some of our hospitality and type of customers. And then Ship Borshoff has added a very, you know, SMB, you know, kind of at the, you know, entry point into e-commerce type capabilities. There’s an awful lot that lives in between that I would expect us to continue to invest in both organically and inorganically in order to cover the full spectrum of card, not present commerce. So that can be a pretty big focus for us just when you consider how much opportunity lives in that market and then talking a little bit about venue next.
We love the stadium space. Our exposure to it is actually rather recently with Raiders Stadium, as we mentioned in our in our remarks. But what we learned there is, wow, this is this is not that dissimilar to the hospitality environments that we do exceptionally well. You’ve got a restaurant inside your ticketing, you’ve got merchandise sales, you bars. Some of these newer, not newer stadiums have nightclubs. And it’s like, wow, this is very similar to the hospitality environment we’re good at. And it’s got multiple different software applications that are all coming together.
This is an area that we should put more attention to. And our journey began mostly with collaboration with venue next. And then it was just clear, based on early successes, as we mentioned, Staples Center was a big win. We announced today that we could take this a lot farther and not just any sports and entertainment, but bring it into theme parks and other large entertainment venues. And I’d say towards this general question is, is it done?
No, no, it’s not done because commerce is huge and there’s a lot of opportunity as commerce enabling software and payments come together, both in new verticals in the US market as accelerants to the current verticals we’re already in and then in new geographies that we think could benefit from an integrated payment solution like we’re capable of offering.
All right. That’s really helpful, Jared. Just a quick one on margins and I’ll turn back to the queue. But you guys guided towards numbers on revenues that were above us. On the margin side, it seemed more in line. I’m just curious. I think you mentioned something about an expansion in the beginning of the year. I mean, this, but just investments versus any one time items. Thanks again, guys. Hey, Daryn.
So there are a couple of things. One is, you know, we do have some investments teed up next year to shore up some of the things we talked about in some previous calls. And, you know, there’s also a near-term impact of some of the acquisitions that will flow through over time as well. So you’ll see that in the near term. But over time, the margins driven by those acquisitions are going to get us back to those numbers that we previously guided to. But you’ll see a little bit of compression here in the next couple of quarters as we absorb and kind of digest as acquisitions that.
Your next question is from the line of Tim Chiodo with Credit Suisse.
Great, thanks a lot, and that context on the margins is really helpful. So the data you gave around the number of merchants being up your ear super helpful, as well as the up four percent quarter over quarter. It really gets to your point earlier on the coiled spring in terms of a lot of these volumes in this year’s cohort coming on at a very covid, depressed level. If there’s any context you could give us around maybe the average size of the merchant base now, maybe relative to 2019 levels. And I guess further context there, you mentioned that some of those more recent additions were in the hotel vertical, which would also be supportive of a larger size merchant.
Good morning to you, Mrs. Taylor, thanks for the question. You know, as we look at our average merchant size, we try not to spend too much time on 20, 20, over 20, 19, only because the covid impact. To answer your question and sort of a pointed way we see across the gambit, usually merchants coming out of the tail end of 20 were down between 30 and 60 percent. And then there’s lots beyond that, quite frankly. Hotels that were flat out closed. A lot of the hotels, we bought it during the quarter, you know, use that time, that downtime to implement systems like our own. So we would say that the average size of the merchant we bought it in a normalized state is substantially higher. But you can’t really discern that from their 2020 levels.
Yeah, completely, that’s exactly what I was getting at, more of the more normalized level, not on the Kogure depressed type level, so we follow you there, Centage. OK, great, and then a minor follow up on three D cards so that 8000 incremental Web stores pretty quickly. Pretty impressive. Could you just get a little more context on those 8000 Web stores? Were some of them from existing ship or merchants adding this capability with a fully net new that type of context?
Yes, sir, Jared here, I’m happy to answer that. So this is almost all just Sherwin’s and largely related to the rebranding and promotion effort that that we undertook over the last really five weeks or so. So we spent the first two months after the acquisition really just getting 3D Kaat ready for its big debut as shit for shop. There are a lot of things we had to do internally in terms of, you know, having a more frictionless onboarding that’s, you know, hyper appropriate for sure for shop type customer, but not really typical for, say, a Hyatt or a Hilton that, you know, the type of customers we typically interact with. So there is a lot to get ready for internally. And then obviously around February 1st, we really highlighted the platform in a big way. And that’s where all of that growth really came from. And it’s continued to maintain a very healthy state of production, even since we actually only just began enabling our 7000 plus software partners with a means to sign up for shop customers in the last probably week and a half to two weeks.
So one of the areas that we’re most excited about with the acquisition is enabling third party distribution, because that is not very typical at all. You know, call it the other shop that’s out there were the other Web or e-commerce players. So we’re really kind of in the early innings of that. And again, we actually haven’t even really begun the cross-sell to the existing base of customers either. This was really just highlighting the platform and with a with a pretty disruptive pricing model and making available an awful lot of features and capabilities that the other players charge quite a lot of premium fees for and seeing how the market reacts. And then, you know, as you can tell, I mean, we’ve really increased the size of sites by about nearly 50 percent in a pretty short period of time. Yeah, definitely.
Thank you, Jared. So sounds like all new and now third party distribution is enabled, so very good. Thanks a lot for taking both of those questions.
Thank you.
Ashwin Shirvaikar with Citi.
Thank you. Hey, Taylor, good to speak with you guys again. And good job and a very tough, tough environment, I guess.
Let me start with asking about the cadence of quarterly expectations for 2021, particularly net revenues and EBITDA. You know, what are you assuming with regards to an economic recovery?
Hey, Ashwin, it’s Brad, I’ll take that. So, you know, we put together our guidance, that’s probably where we spent the majority of our time as the leadership team kind of looking at patterns. In fact, we were looking at patterns up until the last couple of days. You know, some of the numbers Taylor mentioned is starting to come in pretty well since January. February kicked off at of 2020. You know, the recovery curve is going to be a big question. You know, we think there’s certainly signs that we are seeing recovery.
We talked about the cold spring as merchants start to get back to more normal processing levels. We still think that’s probably a year to a year plus before that full recovery really starts to kind of get us back to what we would consider, you know, quote unquote, normal, you know, the pace of which you’re going to see some seasonality. Right. We always see seasonality in this business. Q2 and Q3 are going to boost because of weather, a lot of advertising, et cetera. But I still think twenty, twenty one is still going to be, you know, a recovery year. It’s been a bit different than a normal pattern, but I would expect year plus for, you know, getting us back to normal and expect some seasonality boost between Q2 and Q3, just like we would normally see in a more normal environment.
Got it. Ok, and then the other question, I just want to dig in a little bit into sort of, you know, net revenue out, of course, is end to end on the net revenue outlook was a bit higher than our estimates of how much, you know, from a contribution perspective yield inorganic contribution subscription other than Gateway, maybe some kind of a big cut like that, if you could if you could provide that be great. And before I get off, I also want to say to Sujata, just on a personal note, I really appreciate what you’re doing for S.A.
Yes, sure. And so kind of talking about, you know, we’ve always had this ongoing. Premising it goes back to, you know, the IPO road, talking about how we’re shifting our revenue streams into the net processing revenue. One of the stats I mentioned in my previous readings was around shifting that from 54 percent last year. You know, in the quarter now we’re over 60 percent. So there is an ongoing, you know, movement on our behalf. Very intentional to make sure that that net processing becomes bigger and bigger as a proportion of our revenue streams. We will be looking at the gateways for conversions.
We’re always, you know, targeting different ways of driving those merchants to convert from the gateway to the solution. And then we still have some staff and other revenue streams. Now, those have been boosted a little bit lately because some of the acquisitions that have more staff model than what we are exploring is how do we how do we morph those back into our existing revenue model where we convert the SAS and other fees back into the payment model? So I think you’re going to see a continued trend, right.
You can see continued trend that the net processing revenue becomes more and more of our revenue streams, which is also going to be very helpful for us as soon as these recoveries do kick in. That’s where those recoveries are going to monetize. So I think, you know, we positioned ourselves really well, and that’s part of our ongoing model, whether that’s, you know, the back look, if you think of the gateway or the forward. But if you think about our recent acquisition of a 3D Kaat and the next.
Thank you.
Thanks to you and thanks.
Your next question is from the line of Matthew O’Neill with the Goldman Sachs and Company.
Yeah, hi, good morning, gentlemen, thanks for taking my questions, hoping we could take a bit more on the acquisition. So on then you next, for example, I appreciate the guidance in these in the out years, but I was curious if there is any way to frame either what you’re expecting for this year for its continued or maybe what twenty nineteen was like and kind of a pre covid more normal environment. And then similarly I was just curious on three D card now just four shots. Is, is that back end completely converted. So is it all accruing as end to end volume kind of following the rebranding. And I guess the same question for, for the next if it is now or will it be at some point soon?
Yeah. Hey, Matthew Taylor, thanks for the questions. I’ll answer your second question first, which is from a, you know, payments compatibility standpoint. Yes. Both platforms are able to take, you know, payments via biochip for it was actually relatively easy. You know, as we mentioned, I think on an earlier call, the ship Borshoff platform, it integrated to numerous payment gateways. So this was like a, you know, a week long effort. And from about the midpoint of November forward, that was the preferred payment method for any of the new shops that were boarding.
Then you next, as we mentioned, this is a phenomenal transaction that we’re thrilled about. I mean, this is a partner that we would have considered one of our top partners coming in to the end of 2020. It’s a software application that was winning in its own right with its full pricing in some of the most demanding venues in the United States that gave us all the confidence in the world to partner up with them and, you know, through an acquisition, make the value process much clearer to customers. And so in terms of expectations, we sort of laid out, you know, a three billion dollar by year end. Twenty 23 target. I think the reality is that’s, you know, not a terribly significant portion of the sports and entertainment market.
And yet this tool has been able to win, share an incredibly rapid rate with a, you know, a sales model that’s somewhat disjointed, meaning, you know, you got to bring in a famous partner, you got to bring in a gateway. Sometimes you’re integrating to other software suites. So we think we’ll be able to, you know, far surpassed that. We like to set, you know, conservative goals for our shareholders. We put out guidance, but we’re incredibly optimistic about the past and also the adjacent verticals. Right.
This is a mobile first technology that has performed incredibly well in stadiums. But it is it is a demand that merchants and a lot of different categories have. It already exists. And the largest theme parks in the country. And you can see its application across lots of resorts and other events. So we are incredibly excited, not just for the ability to cross-sell into a vertical that was, you know, an emerging vertical for us, but also the ability to deliver best in class technology across multiple verticals. And do departments work with support?
Yeah, that’s how we went out and won the Staples Center, you know, last year, and Jared here just to just to lay her on the semitrailers comments and go into some of the specifics, you know, we wanted to set expectations, which is why we gave a sense of where we thought we would be in terms of end and volume contribution from venue next in the next couple of years. But really didn’t want to drill down into any more specifics because there’s a lot going on here first. This business, again, is growing very, very fast. You know, if you look at their presentation we put out, there’s a lot of obviously, you know, recognizable sports team and entertainment venue logos. Those were accumulated essentially over the last 18 months. So the detailers point, this is technology that’s doing incredibly well in its own right, kind of charging full freight for everything.
So, you know, we just have a lot of past experience that when you combine those type of models with, you know, our integrated payments approach and eliminate some of those pain points, you’re only going to accelerate growth. So we have to see what that looks like. And then second like to tell point on some of the adjacencies. And I think this is probably just a bullet point that may get overlooked in the presentation. So we see venue next is providing our right to win within know, kind of regulated gaming environment.
So, you know, if you look at whether it’s fantasy or some of the other sports betting type opportunities that are happening in app, it’s our relationship with Zenimax that’s already made some of these conversations come together. And that in itself is very, very hard to predict because it is also growing at a really wicked fast rate. So we want to at least just kind of set some initial expectations with the idea that we’re going to refine it in the quarters ahead as we kind of bring together that, you know, vertically integrated value profits. That’s done well for us in the past. So I would expect more updates in the future.
All right, understood, thanks, everyone.
Your next question is from the line of John Davis with Raymond James.
Hey, good morning, guys. I just want to hit on four key revenue for a minute, obviously, with the covid spike in cases and to in the corresponding lockdown’s volume. So quite a bit short of your initial expectations, yet you were still able to hit the revenue outlook. So just curious kind of what came in better and for to from a revenue perspective than your initial expectations.
Hey, John. Brad, I’ll take that. You know, we’ve talked previously about kind of spread expectations, right? We’ve talked about, you know, as the average merchant size grows, we expect to see that that spread starts to decline just based on purely mix from the larger merchants. You know, when the when the volumes pull back, you know, it certainly had an impact on those larger merchants as well. So what we did see is spread come in over overexpectation for the quarter. That’s why I mentioned 81 basis points for the quarter, which is slightly ahead of what we were expecting to see given the pattern we would have expected to see with a larger merchant base coming on board.
Ok, great. And then, you know, as we think about year to date trends, I think in up turns encouraging. Can you give us a sense on what February was on a year over year basis or even the exit rate just to help us with one key modeling?
Yeah, sure. February was a really interesting month and the exact rate we really wanted to highlight because the back half of February in particular was incredibly strong. You know, we sort of phrased it with the idea that seven of eight best days in our history were during that second two weeks. And that’s really what drove it. February on a year over year basis was up just shy of six percent. And that’s coming off a really strong February pretty pandemic.
But if you look at that exit rate, you get pretty exponential growth and even into the early days of March, this is an area where you’re starting to be incredibly optimistic. I think, you know, as you heard from Brad, our long term guidance suggests about the same recovery out of the pandemic that we would have told you pre-IPO right. Takes about 18 months.
And yet we’re seeing we’re seeing incredibly positive trends in just the last few weeks. And I think what’s important to understand is there’s really no seasonality that should drive that. So it’s really just merchants across the country. And it’s also, as was mentioned, occurring at a time when significant portions of the country like Texas had no power. So there was no contribution of volume. So we’re incredibly optimistic. I can’t say enough about where we’re where we’re exiting February and early March looks like.
Ok, great. And then one final one, Brad, just capex outlook for twenty one.
Yeah, I think what you’re going to see, you know, we typically run excuse me about, you know, five million, a quarter in CapEx per acquisition cost, which is obviously one of the biggest things that we focus our capital deployment on. I think you’re going to see some gradual creep in that we’ve talked about, increasing our customer acquisition costs as we shorten the payback periods, we think we have such a significant opportunity to board the merchants. But, you know, I’m thinking of probably a five to 10 percent increase over the exit rate of 2020.
Look at a great success.
Your next question is from the line of Andrew Jeffrey with the truest securities.
Hi, good morning. Appreciate you taking the questions. Jared, I wonder if you could comment a little bit about a little bit on the on the growth you’re seeing by channel? You know, my inference from the update you gave in January on fourth quarter volumes with 20 percent growth and the end channel suggests that that that’s really outperforming, which I assume is a function of conversions. Maybe you could elaborate a little bit there and just a sense of how you’re doing in the ISV channel versus your direct channel. As I assume some of that contributes to the comments about the leverage to recovery on the other side of covid.
Well, I mean, first, I’d say almost all of our customer production, whether it’s gateway conversions or just pure net new wins, originate through, you know, an aligned software partner. So, I mean, that is our model. We do have, you know, we you know, we do have a direct team, but they work, you know, and they work in collaboration with our software partners. So virtually everything is in the channel for us because ninety nine percent of all of our transactions are connected into software.
I would say in terms of the performance that we’ve been sharing over the last few quarters and even the update as of today, it’s almost all coming from the core elements of the business, which is our focus on, you know, hospitality, restaurants and more complex retail. So the production mix between Gateway conversions and that new net new wins is still rather consistent at about 50 percent in each direction. I think what you have here is just a lot of continued caretaking.
Merchants are continuing to migrate to a single vendor solution and cutting out the cost and complexity of a multi-vendor environments, you know, the acquisition of ship or shop, which has taken us more into e-commerce. It was a recent event and we spent literally the last three months in like, you know, accelerated integration, client focus to be able to board customers of that size and the impact of which we’ve only started to really see in terms of the insurgents, I think in February and even our interests and Canadians, which certainly there was Raiders Stadium and what we’ve recently announced was Staples that contributed virtually zero volume at this point, given the realities of the pandemic.
So all of the growth that we’re seeing, the numbers that the Taylors shared that have already been rather eye watering in the last couple of weeks of February and early March is all a result of our focus on hospitality and restaurant.
Ok, that’s helpful color, so it sounds like a vertical driven growth and then, you know, for you, Jared, you’ve done a lot of things that are pretty innovative and groundbreaking in the industry. And now when I think about Photoshop and the pricing model, can you talk a little bit about the economics around that and how over time you drive good, good returns as you subsidize, I guess, the maybe the front end of e-commerce selling after.
Yeah, I mean, it’s certainly a good question, right, you know, how a ship where the ship was not going to go to market, you know, and completely forgo a lot of sass and premium things that it seems some of the largest, you know, giants in the industry are heavily dependent on. And how are we going to be able to monetize entirely through payments? Well, I think there’s a couple of factors there. First, we were very fortunate to buy an asset that had already invested quite heavily over the years and a lot of capabilities and features that we don’t need to invest quite as much in in the road ahead. So that’s one factor to the fact that we own all of our own payments.
Infrastructure is pretty important because it means we’re going to be able to capture greater spreads off payments, which will contribute more meaningfully to the bottom line. It allows us to monetize the relationship with that customer in a way that’s a little bit different, even from the super behemoths that are out there that do depend on other third parties, which does eat into some of their payment related margins.
So we are pretty focused on this. I think what else is important is that, you know, the story doesn’t end with just buying, you know, 3D Khatun and rebranding it and then having a disruptive pricing model. You know, there is an ongoing investment, you know, to fund various internal and, you know, through inorganic initiatives. We look at year for shop as a, you know, kind of as is a means to serve customers that are very different from our core. I fully expect it to turn into something that has a lot more, you know, direct to merchant self-help type capability for even card president, retail shops, smaller restaurants. We will absolutely incorporate as part of our road map capital offerings and, you know, certain things we’re looking at with crypto acceptance because you’re dealing with a different audience than our traditional, you know, kind of upmarket enterprise restaurants and hotels where some of those features wouldn’t necessarily be of, you know, of greatest utility. And these are all things we’re taking into account for the long term and how we’re going to move the needle with the.
Super helpful. Thanks.
Your next question is from the line of Jason Kupferberg with Bank of America.
Hi, good morning, guys. This is Mike filling in for Jason, just a quick follow up on margins. So if we look at the implied adjusted EBITDA margins at the midpoint of the guide of around thirty four point five percent, I believe you’ve been expecting margins to approach the upper 30s by the end of 2020 one. Now, is this still the case or should margins be slightly lower than this exiting the year, perhaps due to step up in both investments you talked about? It sounds like there could be some pressure in the first quarter to as you integrate recent acquisitions, but how should we think about margins in the back half of the year? Thanks.
Yeah, sure, my head is spread now. Very good observation, and you’re exactly right, we are expecting, you know, the full year guide, this point in the mid-30s. But think about how that’s going to evolve over the course of the year. Right. The first quarter to as we digest some of these acquisitions we mentioned, you know, those make, you know, a little bit lower and they will certainly accelerate as we get into the back half of the year. So the guy for the back half of the year, the high 30s, is not is not, Jake.
Great. Thank you.
Your next question is from the line of Chris Bennett with Piper Sandler.
Good morning, gentlemen. Thanks for taking my questions. I wanted to ask one on the end to end volume guidance for 2020 one just to confirm, is there any material volume coming from shift for shop in venue next in your twenty one guidance. Or is immaterial at this point from the acquisitions.
It’s largely immaterial. I mean, what we’re signaling and sort of coming in on a little bit with the first quarter second quarter margins is we’re signaling, you know, really strong assets and desire to invest in these businesses and incredibly strong potential, you know, over the back half of next year and into the.
Ok, and then, Jared, in the shareholder letter, you comment that you’re pursuing several strategic opportunities, just curious where you’re allocating your time with the shift for shop acquisition and you’ve got a lot of plans there. And then Venu next. And then you had an incredibly busy 20, 20. I imagine you’re going to have an incredibly busy 2020 one with some other activities. Also, just trying to understand where you’re putting your focus this year.
Well, the answer is we’re doing all of the above and you just don’t need an awful lot of sleep, so we spent an awful lot of time in. Well, first, I have to say, like, we have an incredible team. Just to be clear. I think if you know, you replay some of our discussions, probably our Q2 and Q3 earnings calls, we said we’re going to be investing in talent, you know, as some of our competitors are going through their own, you know, big merger integration plans and talents becoming available on the market. We’re going to get it because we do intend to do take advantage of a lot of these opportunities we see in the market at the same time.
So there’s a great team here and we have some really talented people focused very much on the ship or shop roadmap and what that’s going to look like. And I gave some hints as to some of the things that we are, you know, that are in works right now. And we obviously have a lot of good things going on from a day to day perspective, because that is what’s moving the needle.
You know, as I mentioned, all the performance we’re seeing in a very, very depressed market is coming largely from the hospitality restaurant and specialty retail customers we have today. And that will continue to win share from the, you know, in the journey ahead. But there are also other strategic opportunities we’re pursuing and in a couple of very interesting directions, actually. So, you know, I think the answer is it’s certainly worth our time to pursue all these opportunities while they’re available and do the other day to day things that are pretty exceptional rate. So, yeah, I think that’s the philosophy right now is we’re not going to pass up anything.
Ok, got it. Thanks very much.
Your next question is from the line of Michael Del Grosso with the Compass Point.
Gloria, thanks for taking my questions. I want to ask about some of the legacy Gateway platforms, merchant link, et cetera. I know you’re a little bit over a year into those integrations, but how much of that gateway volume has been converted and then, you know, some of a lot of I guess a longer term question is just around your expectations for conversion in 2020 one.
I mean, twenty was really a transformative, transformative year in terms of tech investments for merchants. I think a pretty significant opportunity for those merchants to shift if they wanted to. So what are your expectations around twenty, twenty one and what are you thinking it’s going to take to get those merchants, you know, across the line if they haven’t converted already? Thank you.
Yeah. So really good question. You know, as I mentioned, our production still is rather consistent on average that 50 percent of the customers that are joining our platform of pure net new wins. Just share taking in the market. And then 50 percent continues to come from the existing gateway customers who are shedding all that complexity and cost from the multi-vendor environment and adopting our end solution that that’s consistent even through today.
You know, largely as we think through our planning for the years ahead, we continue to make very consistent type of assumptions. You know, there’s a lot that goes on in that in that gateway world. You have 350 plus ISV. You have a lot of enterprise customers. And, you know, as we’ve always said, that the carrots, the incentives that we make available to our partners and customers, you know, they kind of click at different times. And the problems that we solve for our customers two years ago that influenced a lot of gateway migrations are different than the problems we saw today.
You know, in the last call it two weeks, I’d say, you know, Radisson, which is one of our Gateway customers, big hospitality brand, you know, actively started endorsing all of their customers, all of their locations on our gateway to move to our end and platform. And that created a nice surge. Similarly, Jonas Club, which is another ISP that’s more and like, you know, golf and membership clubs, if you will, there an existing Gateway customer, Gateway ISP that we’ve had for a long time. They just started actively endorsing.
So this type of thing just continues to happen and will continue to happen as it goes forward. I think one of the questions that we’re going to start asking ourselves, and this is not in the next year or two years or three year type thing, but, you know, is being a gateway, if you will, and making available connectivity to what are essentially our competitors. Is that even a good strategy anymore or is it just a legacy model that you go away and we just no longer even offer that service? And I mention that because if you look at some of the really fastest growing, you know, type integrated payment solutions that are on the market, they don’t offer a gateway at all for state or Fyssas. Clover product does not have a gateway option to ship or global payments or anyone else out there, you know, toast, fast growing. Obviously, restaurant player does not have a gateway.
Hoxton Square does not have a gateway option. You know, Shopify has some very punitive costs if a merchant used another provider. So right now, we love the kind of carrot incentive first approach that’s been serving us really well with it, with the gateway migration. But certainly at some point in time, we might want to ask ourselves, that is the product and features that we’re making available to our customers of such value that it no longer is really even required. And in doing so, we would certainly expect that would also put forward a lot of volume from that gateway to our end and platform.
You know, Jared did a good job about commenting on the future there, but I do think it’s worth revisiting the parcel a little bit. I think it’s important to note not a single merchant who’s joined our end to end platform from the merchant acquisition has given us a normalized, like month worth of volume. There is still tons of growth potential inside of the merchants that have already migrated. And I think that’s worth emphasizing because, you know, we acquired that business towards the end of twenty nineteen. We bought it, you know, merchants pretty steadily throughout. But, you know, the pandemic hit very shortly thereafter. So we tried to sort of allude to this during our comments, but the volume potential inside of all those merchants had already joined us is pretty phenomenal as well.
Ok, thanks, that’s helpful color, my follow up is on his own cap allocation. I mean, I think, you know, the elephant in the room, so to speak, is, you know, nearly billion in dry powder that you guys have and you just completed, you know, 70 million or so acquisition. You know, is that the is not the size of deals that we should expect going forward. And how are you thinking about some of the options for strategic M&A going forward?
Yeah, and certainly Taylor should weigh in on this, too. But one, I mean, obviously, we feel very fortunate to have such a significant cash position that really affords us a lot of options that we can look at in the market. One thing, and we said this before even, you know, in the fourth quarter when people were expecting us to do something rather large, it’s like we’re not going to feel pressured to do anything that we don’t want to do right now. Is it playing small ball works for us really well.
And we can continue to find just total gems like then and three D card where we know we can unlock a lot of value. That’s what we’re going to do. I’d say that, you know, Taylor has a very full pipeline right now. And in terms of like deals of size, you know, that could be rather transformative. You know, you’re talking about at least three that we’ve been investing a fair amount of time in. And then if you’re looking at smaller deals that kind of similarly have a profile like and then Eunuch’s or like a three card, there’s an awful lot of them there, too.
So I think, like throughout our whole history, we’ve really been rather disciplined allocators of capital. You know, we tend to think about all the things that can go wrong and not get excited about necessarily that, you know, the shiny thing in the moment. And that’s going to continue to, you know, influence our decision making. I’m not on the road ahead, Taylor.
Yeah, well said. I think, you know, Jared summarized it pretty well, the bookends, or that there’s always a handful of really transformative transactions that we’d love to get done. But they’re complicated. They require, you know, a party on the other side. And we’d like to keep optionality with those. I can tell you, there’s more than one that helped us grow exponentially in completely opposite directions. And we keep those both on the table as long as we can. And we’d love to do both to the extent the environment affords that.
There is also an incredibly long line of the venue next to the three car parts of the world that, you know, have just watched our ability to help a business like theirs grow through a vertically integrated customer model. And so they’re, quite frankly, more of those than we can handle a plug for the strategy department or taking resumes. We’ll do as many of those as we possibly can. And to the extent they give us access to new verticals like both those transactions, that we love it. So, yeah, we keep we keep a really open pipeline on the small end. They’re coming to us, quite frankly.
Yeah. You know, one thing I’d add in terms of, you know, an area that we’ve kind of taken, you know, new interest in as of the last really quarter is in charitable giving. You know, I think the exposure that we’ve had, you know, collaborating with St. Jude Children’s Research Hospital on inspiration for has really, you know, enlighten us as to, you know, the payment industries that that kind of support, you know, philanthropic and charitable giving.
And there’s an actually an awful lot there. You know, there’s technology now that enables, you know, donations in live stream video games. And it actually, you know, has quite the following. So there’s actually quite a few things as we turn our attention a little bit more towards that that have been, you know, rather enlightening to us. I think, you know, just will be something that we’ll probably get some focus on in in the months ahead.
Understood. Thank you. I appreciate you taking my questions.
Your next question is from the line of James Fosset with Morgan Stanley.
Hi, this is Priscilla was on for James, two quick questions. So you’ve talked about the a number of hotel deals coming on the platform. Can you talk about the art piece of competitive dynamics so far in 2021 as their particular verticals or merchants that have that have decided to look for alternative payment providers such as yourself early on this year?
But, you know, as we mentioned before, there’s been we actually aborted quite a few hotels over the last two quarters, you know, some pretty, you know, sizable actual properties that would be in, you know, areas that were more impacted by the pandemic, which really afforded them the opportunity to have the conversation, look at their infrastructure from a technology perspective and use that downtime to make good decisions which for certainly has benefited from. And that’s just kind of reinforces the point the tellers made a few times. Every single one of the customers that we have for today and every single one of the customers we bought it essentially over the last years is operating at a pretty depressed state.
So that’s that, you know, like hyper coiled spring effect that we’re going to be paying attention to. But that’s your question. And specifically, you know, we bought twenty five thousand plus plus customers and that’s please don’t you know, it doesn’t take into account any of the bishop or shop numbers that we shared before just in the last year. And I think maybe, you know, less than five of those relationships came from an RFP. So and that’s really consistent throughout our entire history.
We try and position ourselves so that, you know, there’s no one else who can really compete from an RPG perspective, because certainly, you know, it was the thing in the past, you know, prior to shift for strategy really being developed over the last four years where hospitality merchants would have an RFP for, you know, payment hardware and they would have an hour fee for, you know, secure payment gateway. They might even do an hour fee for tokenization or PCI validated encryption. And then they do in our fee for merchant acquiring. And that’s because that that industry was essentially served by four or five different vendors to complete a payment experience.
Now, with our M&A strategy and how we’ve kind of bundled together our services and really created that vertically integrated solution for the market, we’re able to eliminate all those vendors and all the costs associated with it to really have a differentiated solution. And as a result, a lot of the merchants that we bought it have migrated to our platform without ever really needing to do an RFP because the solution we were able to provide was so unique. And I actually can’t recall a single RFP we’ve seen in 2020 one so far.
Perfect. And then just one quick follow up. Jared, congratulations on the inspiration for a mission announcement. Should we actually be thinking about the day to day operations in the management of that as that as you proceed with that endeavor, is there going to be any change to SHEFER and if not any clarification that would be helpful?
No, as soon as I mentioned before, we really benefit by having a rock star team that we’ve actually been investing in quite a bit over the last few quarters and adding talent to the organization, we actually have, as Taylor was kind of joking before, we actually have quite a few open positions do that we’re continuing to look to fill. But, you know, I did shed quite a bit of responsibility prior to the IPO. You know, I was one of the co-founders and CEO, you know, reasonably the size the defense aerospace company for a decade. I did, you know, give up my CEO position.
And I resigned my board position just to free up bandwidth so that we could you know, I could focus on all the things that are very important to ship for, as well as some of the other things of interest, like inspiration for. I am lucky that I’m able to structure an awful lot of things on nights and weekends. So it doesn’t impact any of my day to day responsibilities. But, you know, of course, this is something these are conversations that have been well discussed with our with our board of directors, you know, all of the various, you know, appropriate governance and contingency things have been discussed. But I don’t expect it to be impacting any of my day to day responsibilities.
Perfect. Congratulations again. Thank you.
Your final question is from the line of Dan Perlin with RBC Capital Markets.
Thanks, guys, and thanks for coming in today. You know, I had a question about embedded in guidance is this gross profit margin at 60 percent? And I fully appreciate the mix shift that goes along with, you know, in the end, that’s been a big part of the story. But 60 percent margins, that’s even better than I think we would have all expected even in the out years, you know, at the time of the IPO. And so I’m just wondering, what are some of the other incremental drivers to that? Because obviously that cost the sales number at 40 percent is also a lot lower. So is there a bigger mix shift that’s occurring because of all these other solutions that you’ve rolled in? And then how do we think about the cadence of that that gross profit margin throughout the year? Thank you.
Hey, sorry, hey, then, Brad, I’ll take that, you know, we’re really proud of that of that gross margin rate. I mean, I think, you know, a big part of that is going to be, you know what we think our performance looks like, you know, this all comes back to this this underlying strategy of how we’re monetizing different products and services we offer. And this is why when you monetize those items through spreads, you’re actually able to get some spread expansion. So, you know, that’s why we you know, we reported a spread of fee for just around 80 basis points. And we’ve seen that historically. Know, if you look around our competitive landscape, you’re not going to see those kinds of numbers.
So as we shift these, you know, these monetization models out of, you know, lower gross margin type items of equipment sales, a bunch of our competitors are going to see that is a very thin margin business. So the way we monetize, you know, our equipment deployments, the way we monetize encryption and all the different components of our solution through the spreads allows us to maintain, you know, gross margins that we’re really proud of and are going to be, you know, in that 60 percent range.
Great, now, how do we think about that as an exit rate when we go into the back half of the year, since you’re going to be chopped off in a materially lower rate, it seems like, in the first half? Thank you, Peg. You’re right out of 20, 20. 2020 one, 2020 one. You know, I’ve been thinking I’m thinking about second versus first half the margin profile with quite a bit different.
Yeah, and I think you’re going to see that you’re going to see, you know, the first the first quarter is going to be, you know, first and fourth quarter, typically our lowest margin quarters just because there’s some seasonality factors in there. You go through margin expansion in Q1 to Q2 and Q3. So as we get to the back half, I think you can at the factory and kind of that normal seasonality, you know, focus of Q1 and Q4 are going to be a little thinner. Q2 and Q3 are going to be a little bit heavier, but we still should see some expansion from Q1 into Q4.
We’ve talked about this recovery curve and, you know, as we get back to normal, you know, the increased scale with us, with the really high passing rates is certainly going to flow through his margins. So I think you’ve got a little bit of abnormal abnormality related to the recovery curve. But, you know, exit numbers out of twenty, twenty one are going to be slightly higher than they’re going to be in Q1. And then, you know, the objective is by the time we get the twenty, twenty two, we’re going to be a much more normal seasonality.
Thank you guys very much.
Well, thanks, everyone, really appreciate the great questions, so just to close things out here, you know, obviously really appreciate everyone giving us some time this morning here, some of the updates that we have going on that ship or bowl and by emphasizing again, that 2020 for all these challenges is a year that everyone to chip for can take a lot of pride in. We not only operate the business through turmoil and volatility, but we grew rapidly because of our unique approach and value proposition for merchants. In addition, we applied the ambition and force DNA to lay the groundwork for growth in new and large markets like e-commerce. And most importantly, our commitment to our customers has never been more evident through community engagement like ship workers. So appreciate again everyone’s time for joining in. Thank you and have a great day.
This concludes Shift4 Payments fourth quarter 2020 earnings call. Thank you for participating. You may now disconnect.