Q4 2022 Shift4 Payments Inc Earnings Call
Speaker 1: the shift for 4th quarter and 4th year 2022 earnings conference call will begin in approximately 1 minute.
Speaker 1: Hello and welcome to the shift 444 quarter and 42022 earnings conference call. My name is Lauren and I'll be coordinating your call today. There will be an opportunity for questions at the end of the presentation. If you would like to ask a question, please press start with one on your telephone keypad.
Speaker 2: Please note that this call along with the Q&A will be for duration of 60 minutes. I will now hand you over to host Tom McCrohan, head of Investor Relations to begin. Tom, please go ahead. Thank you operator and good morning everyone. Welcome to SHIFT 4's fourth quarter earnings conference call. With me on the call today, I would like to mention SHIFT 4's Chief Executive Officer, Taylor Lover, a President and Chief Strategy Officer and Nancy Dismann, a Chief Financial Officer. This call is being webcast on the Investor Relations section of our website which can be found at investors.shift 4.com. I've quarterly shareholder letter, quarterly financial results and other materials related to our quarterly results that all been posted to our IOL website. Our call and earnings materials today includes forward looking statements. These statements are not guarantees of future performance and our actual results could differ materially as result of many important factors. Additional information concerning those factors is the fact that we are available in our most recent reports on forms 10K and thank you which you can find on the FEC's website and the Investor Relations section of our corporate website. For any non-gaft financial information discussed on this call that related GAAP measures and reconciliation are available in today's quarterly shareholder letter. With that, let me turn the call over to Jack.
Speaker 2: Jared? Thank you Tom. Good morning everyone. We are very pleased with the record results we deliver this year in the face of ongoing economic uncertainty. We ended full year 2022 with record levels of volume, gross revenue, gross revenue, but network fees adjusted e-dup and adjusted free cash flow all in excess of our midterm outlook. Our 2022 results were predominantly driven through organic initiatives, including the release of new products and well-time to entry into new verticals. Our high growth core, which represented the totality of our business at the time of our 2020 IPO, was still the primary driver of our growth last year with an ever-increasing contribution from our new verticals. Chip 4 continues to live the intersection of payments and commerce enabling software, and we are well on our way to delivering that capability globally. On that note, this past year included several important company milestones. In March, the beginning of our European and international expansion, the successful launch of our next generation restaurant point itself, Lucent, SkyCAP, the OS, including a pivot toward more direct distribution. And we also cemented our position as the preferred technology provider for sporting arena and entertainment venues across the country.
Speaker 2: Our entire management team is extremely proud of our employees embracing the shift four ways, which embodies the core principles and beliefs driving our success. As we enter 23, our team is very excited about the abundance of opportunities we see ahead of us. Our excitement to the future is used as one of the cautious optimism and light of the uncertain climate we currently operate in. Industry-wide payment volumes monitor it during the December quarter, and as such, this informed our internal planning process, including how we constructed our 2023 guidance. That is this day that while we remain confident in our ability to deliver profitable growth, well in excess of our peers, the range of potential outcomes is wider this year as you expect. Nancy will go into more detailed assumptions surrounding our guidance later in the call. Regardless, we will respond accordingly to changes in the market conditions, and our confidence, our growth model, forces, a higher degree of relative visibility or stability, otherwise unavailable to our peers.
Speaker 2: For those that have been newer to the story, Shifuor Possessed is significant competitive advantage, given the embedded opportunity that lives within our gateway, as well as our software products. This was best demonstrated in 2020 when we delivered double-pitch of growth despite the overwhelming majority of our customers comprised of restaurants and hotels that were highly impacted by the pandemic. Our ability to take share and grow has only accelerated and that confidence remains as we look to the year ahead. So, on our quarterly performance results, for the fourth quarter we generated 55% year-over-year growth in our N10 payment volumes and 36% year-over-year growth in our growth revenue-less network fees, both quarterly records. In fact, we achieved quarterly records across all our APIs, including growth profit, adjusted EBITDA, and adjusted pre-CASQ. The cornerstone of our performance remained our high-growth core with an increasing contribution from our new verticals, particularly sports and entertainment, gaming, travel, leisure, and technical effects. Our gateway conversion strategy continues to be a reliable source of incremental volumes, and we continue to renew additional enterprise gateway customers on economic terms, comparable to our N10's offering as part of our gateway sunset initiative. As a reminder, our gateway sunset is a multi-year initiative that remains to its early earnings, and there are new actions on the table for 2023 that are also in the works. The fourth quarter represented the first time we participated in cross-border and European payments, and despite early success, the needle will really begin to move only after the closing of the FNARL acquisition. Intellar will provide a more detailed update on FNARL, including expected contribution and synergies during this prepared remark.
Speaker 2: Not only do these entertainment related venues provide a natural extension of our growing presence in professional sports and entertainment, they also validate the capabilities of our SkyCat DOS offerings and marketplace overall. Other notable SkyCat DOS wins this quarter include LA Music Center and FedEx Field, home of the Washington Commanders' Professional Football Team. SkyCat DOS is also making amazing progress with traditional restaurants. It's disruptive price to value proposition is resonating as we get expected, and we have a highly motivated and energized direct sales team called SkyCourse that has already signed thousands of new restaurants. It's important to know and our success has been without much marketing or promotional efforts. By offering an unmatched customer experience with leading edge technology to disrupt the price point, SkyCat DOS represents a compelling migration path for our existing base of restaurants.
Speaker 2: who are seeking new capabilities and key integrations to better serve the patients. We expected to represent meaningful cost savings and drive operational efficiencies in the year ahead. Additionally, when serving such a large existing basic customer, we can generate substantial referrals, which also contributes to our low customer acquisition costs, and as a result, very attractive unit economic model. Moving to our other organic initiatives within high growth core, we signed numerous hotels and resorts during the quarter, including Manhattan Club, luxury hotel located in New York City, Charleston Harbor Resort outside Charleston, South Carolina, the cliffs at Princeville located on the quiet north shore. I'm also really pleased to announce that we signed a strategic enterprise agreement with a major hospitality operator that we are unable to disclose, but that we expect to contribute billions in additional payment volumes in the year ahead.
We signed has taken any agreements with premier production and the space Center in Houston.
Last month, we also began processing technique for several professional fees, including the New Orleans.
New Orleans, Pelican, and Arizona Cardinals, we also signed payment processing in stickney agreements with the Baltimore Orioles, the Baltimore Ravens, The Florida Panthers, Cleveland Cavaliers, and the University of Minnesota, We will see much more ticketing volume in 2023 now the integration with <unk> is complete and in college sports we expect to begin.
Crossing Stickney for college sports through our integration with <unk> in the coming weeks, we will look back on 2022 as the year ship for cementing its position as the preferred payments and technology partner for sports and entertainment venues, including ticketing, our pipeline remains very healthy and sports and entertainment vertical.
In gaming we signed.
Saucon Casino resort in Southern California, one of the top 10 largest casinos in California as well as the <unk> casino one of the largest casinos in the state of Washington, We also signed a partnership with password technology, a leading gaming technology provider for cash advance and ATM services were shipped four is assisting in the development of a cashless gaming.
We continue to add eight and travel gaming licenses, including the district of Columbia and added additional states with bet MGM, we anticipate being live in every online state with bet MGM by the end of this first quarter.
We are constantly adding critical integration within our online gaming ecosystem and are currently testing multiple BV integration that combined operating more than it doesn't jurisdiction. We are also incorporating scenarios European gaming capabilities within our U S payment platform.
Moving to nonprofits.
Nonprofit vertical continues to grow and during 2022, we added over 1000, new nonprofits to the platform, giving block has expanded outside of crypto enhancing their product suite to include stock donations. In addition to the ability to access traditional card based payments beginning block has evolved from its position as the leading crypto donation platform to the leading non.
Cash fund raising platform that supports all forms of digital assets, but giving block.
We'll continue adding new payment methods and product capabilities as we pursue the $450 billion payment opportunity living with inside the nonprofit vertical.
In travel the integration of Allegiant Airlines is now complete and were now processing all of the leases taking volume we signed another U S Airlines during the quarter, which we look forward to disclosing next quarter.
With respect to you take the fact, we continue to serve an increasingly exciting mix of next generation E. Commerce customers. As you are aware, one very fast growing customers driving the next evolution of <unk> and our global expansion strategy. Additionally, we entered into partnerships with Fitbit Maskin two next generation retail concepts that allow customers.
<unk> to checkout without it without having to interact with the cashier because if it is already in use in several retail locations in the Dallas Fort Worth Airport and masking is deployed at more than 2300 locations across the U S.
Additionally, in this category and processing for payments and completed a bridge or pay integration.
All of our success importing much larger merchants in a variety of new verticals has garnered interest from other large multinational merchants. We are evaluating several exciting rfps across all lending verticals, which we believe will only accelerate as we expand internationally.
On that note I also would like to provide you with an update on our global expansion progress International expansion remains our number one capital allocation priority. Both in terms of our M&A pipeline and organic investment initiatives, we expect to receive final regulatory approval on <unk> shortly and our 2023 guidance does not include any contra.
And we will update our guidance accordingly, following the deal closing.
In the interim we are integrating our payments platform in arm site partnership and continue to refer merchants to each other.
As you recall, we announced last quarter that we acquired a highly capable European payment service provider or PSP that now of course that strike like integration capabilities to offer our European in your U S. Merchant. These capabilities include the ability to optimize conversion and authorization rates sophisticated fraud protection and best in class recurring billing payment technology.
We now offer these capabilities in over 40 countries.
We are also expanding organically in Canada, and the Caribbean and in partnership with Denaro, we're already expanding into eastern Europe in the year ahead I firmly believe we will begin processing payments across Europe for many hotels restaurants and statements.
Before handing the call over to Taylor I wanted to provide a few more comments on 2022 and how we're thinking about 2023.
In the beginning of 2020, we were one of the first payment companies to express concern about the deteriorating macroeconomic conditions.
Commented that this is the type of climate the ship for performance tested.
Unlike many of our peers that grew up in a zero interest rate environment and a growth at all cost mentality, we self funded ship for through the first 15 years of our existence. We grew through every economic downturn, including the great recession, and the challenging pandemic conditions of 2020.
Based on past experience I stated, we would reduce spending and focus our resources in 2022 on the true needle movers as a result, we generated growth rate in line with our midterm outlook into 2022 and expect to continue driving real growth across our core and new verticals. We are accomplishing this while expanding internationally.
Expanding our margins and free cash flow.
As we look ahead to 2023, we've assembled guidance that we feel confident we were able to deliver upon and assuming consumer spending remains reasonably stable. We are poised to deliver another year of similar performance.
Andy will go into this in just a minute, but I want to speak a bit about expenses I've expressed a very strong position to the leadership team is here for that we will meet our growth targets. This year, while striving to keep expenses and head count as flattish possible exiting Q4, I fully expect we will be upgrading talent throughout the year as competitors, we admire continue to shed person.
Enel, but I will resist to the greatest extent possible increasing spending I believe this is the responsible way to navigate the year ahead and will demonstrate the scalability of the ship or platform last before has a strong record of unlocking value through accretive M&A, our balance sheet remains strong and we are reducing leverage now at an accelerated pace.
Our adjusted net leverage on a trailing 12 month basis is now two seven times, giving us ample capacity to pursue other strategic priorities.
With that I'll turn the call over to our President and Chief Strategy Officer Kelly Robert.
Thanks, Jared and good morning, everyone I'd like to provide a bit more detail on some of the more interesting trends we saw in the fourth quarter early views on 2023, and how we are positioning ourselves strategically for the year ahead as.
As Jared mentioned, we approach 2022 with a deliberate caution given what we viewed as the potential for a slowdown in consumer spending in the face of rising interest rates and broader economic pessimism.
While we believe that approach to be highly prudent it has not manifested itself in our processing volumes merchants largely exhibited a normal seasonal cadence with restaurants moderating from the summer highs in our sports and entertainment and other new verticals filling the gap nicely.
Hotels performed stronger than usual as travel was not impacted by the large waves of COVID-19 that we had experienced in prior years as.
As we mentioned during our Q3 call in November we also began to see some benefits from our international expansion and alternative payment methods during the fourth quarter, which helped contribute to spread expansion versus Q3 early indications for 'twenty. Three are positive we saw record volume days as travel resume during President's day weekend and suspect.
The spring break and Easter travel will create strong month over month growth as it has in prior years as you may recall, we typically experience our slowest period during January and early February .
While that was true we have benefited from some easier comps when considering the impact of Amazon in January of last year.
Sometimes compared to payment companies operating in a single industry vertical and I think our performance in Q4 highlights the advantages that our vertical expansion strategy has created we have large and fast growing franchises in restaurants hotels sports and entertainment gaming nonprofit travel and of course, <unk> all of which serve to bolster our performance.
On a single sector experienced this moderation.
Most importantly, we've been able to deliver these strong results and expand our margins and free cash flow as we've mentioned before many of our competitors in the Fintech arena have not been required to operate with a focus on profitability and positive cash flow shift for us approached our growth with a very disciplined and consistent process constantly balancing the desire for.
Growth with a realistic payback assumptions.
This means that we generally deploy capital with an expectation for positive returns within 12 to 18 months or less.
As investors justifiably put demands.
But higher demands for results in free cash flow, we believe that many of our competitors will be forced to dramatically change their behavior as.
As Jerry mentioned this type of an operating environment is typically where ship or thrives.
And we are leaning into the current environment, which positions us well to continue to grow and take share.
As well as to continue to operate the same fiscally responsible manner that we have since our founding <unk> four years ago. So.
To that point stock based compensation and the dilutive effects on shareholder returns has been a significant focus in the investment community of late since long before our IPO, we have been prudent in balancing the benefits of broad based employee equity ownership with the dilution that causes to existing shareholders. We have had average dilution of about 1% a year for 'twenty one 'twenty two.
And this includes the impact of equity used for acquisitions or adjusted EBIT grew by nearly 75% during that same timeframe.
Our strong early mover understanding of integrated payments alongside of M&A, there's been a significant driver of our ability to rapidly gain share in numerous verticals and geographies in the current climate, our balance sheet positions us well to continue to execute in that regard.
We did not have any M&A transactions during the fourth quarter and have not included the impact of potential M&A in our guidance, but do you suspect that will present upside opportunities in the quarters ahead.
On that note, we're nearing what we believe to be the final stages of regulatory review for our acquisition of Panera Bear in mind. These regulatory approvals can typically take up to 18 months.
The timing is by its nature uncertain, we believe a closing during Q2 as likely you will recall that we announced when we announced the transaction. We estimated the full year contribution to volume and adjusted EBITDA of $15 billion and $30 million, respectively. We will continue to update you on the closing progress in pro forma economic contribution as we.
Sports closing.
Before turning the call over to Nancy I would like to say our appraises for just a moment during a short time as CFO . She has made meaningful contributions to help enhance our operating performance free cash flow and forecasting abilities.
Our approach to expense discipline is also particularly helpful. As we strive to maintain both best in class growth and are very strong margins Nancy.
Thanks, Thanks, so much Taylor and good morning, everyone.
Fourth quarter, we delivered record results and ended the year exceeding the top end of our previously provided guidance ranges.
Volume gross revenue less network fees and adjusted EBITDAX and we also have meaningfully exceeded our adjusted free cash flow guidance.
Total Q4 volume at $20 7 billion grew 55% compared to the same period last year Q4, gross revenues were $537 7 million up 35% from the same quarter last year and gross revenue less network.
$199 4 million, an increase of 36% over last year.
Our adjusted EBITDA for the quarter was $94 4 million and our adjusted EBITDA margins were strong for the quarter at 47%.
Quarterly results were driven by the continued strength of our high growth quarter improved economics earnings from our gateway customers and higher unit economics, resulting from our decision to enter a large portion of our go to market distribution in connection with the launch of Sky cab in the third quarter shifting from third party.
Distribution direct and major market.
As expected, we continued to add and ramp.
Very large enterprise merchant, which is resulting in lower blended spreads.
Latest spread for the fourth quarter was 71 basis points, Firstly 74 basis points, a year ago, and 60 basis points last quarter. We anticipate the ongoing mix shift will continue into 2023, and then I went blended spreads will continue to decline as we successfully into that market as we mentioned last quarter.
We are not further breaking down the components of the blended spread given disclosure limitations in competitive sensitivity. However.
The sequential improvement in both our hybrid corn and nine non high crack spreads in Q4 as compared to Q3, driven by volume mix Newport and international Grad.
Having an early look at Q1 spread remained strong and in line with Q4.
<unk> declined modestly to the impact of the newly signed strategic enterprise agreement with a major hospitality operator.
Jared previously mentioned.
We are very pleased with the margin expansion we delivered this year.
$57.2 million adjusted free cash flow conversion was 60% for the quarter and 51% for the full year a complete reconciliation of adjusted free cash flow is available in the appendix of our earnings materials and reviewing these materials you will see that as of year end, we settled the outstanding receive.
<unk>, we have with our sponsor bank. We did not include the benefit of this settlement cash inflow and are adjusted free cash flow balances.
We are exiting the quarter with just over $776 million of cash 1.8 billion of debt and $100 million Undrawn on our credit facility.
Net leverage at year end with 3.5 times and approximately 2.7 times is Jared mentioned when adjusted for the contribution of recent initiatives based on the trailing four quarters of adjusted EBITDA.
Our strong balance sheet and free cash flow profile will continue to allow us to invest in the business and our strategic gross priority, while we remain disciplined an arrow capital allocation approach.
For the full year of 2023, we are introducing guidance ranges for each of our key performance indicators our guidance range attempt to account for a variety of business and economic scenarios.
Demonstrated last year, the Onboarding of multi billion dollar enterprise merchant can have significant waiting on volume in a particular particular quarter and it's difficult to predict. Additionally, the persistent uncertainty of the macroeconomic climate compels us to be cautious.
The low and to verify contemplate modest headwinds and consumer spending during which we are confident we can deliver best in class growth among our peers pet.
The high end of our guide by a continuation of recent trends in both our growth in consumer spending is Taylor mentioned funaro is not included in either scenario and we will be adjusting our guidance on the closing date become certain.
Garlic, both the high and low end of our ranges represents strong profitable growth, including margin expansion and improved free cash flow converging for 2023, we expect to deliver a total editor and volumes of $100 billion to 109 billion, representing 40% to 52% year over.
A year growth.
Revenues of $2.5 billion to 2.7 billion, representing 25% to 35% year over year growth.
Gross revenue less network fees of 915 million to 965 million, representing 26% to 31% year over year growth and adjusted EBITDA $410 million to $435 million, representing 42 per cent to 50% year over year growth.
We anticipate adjusted EBITDA margins to expand approximately 500 basis points at the midpoint of our guidance ranges and adjusted free cashflow conversion to expand to 52 per cent plus.
As a reminder, one more time this guy does not include Bernero or any other contemplated M&A in 2023 with that let me now turn the call back to get it.
And thank you Nancy to the operator.
The questions.
Thank you.
If you would you like to ask a question and please <unk> when you're trying to think he passed.
If you change your mind, please <unk> when preparing to ask you a question. Please be sure to fight you some muted 19 <unk>.
Our first question comes from <unk> from <unk>. Please go ahead.
Thanks, Good morning, and I wanted to to get results today I wanted to just.
Just wanted to ask a question around.
Embedded expectation.
Within guidance and <unk> I. Appreciate the fact, you don't Wanna give like the vertical numbers, specifically, but I was just wondering kind of direction. We how do we think about.
How much contributions ultimately the becoming some kind of net new business some of that being <unk> being other opportunities versus just high grade core.
And how that May target you know give me some of the <unk> scenarios would you still continue to your assumptions. Thanks.
Again, thank you so much and I'm I'm looking around a little just to see if you Taylor Nancy wants to add on <unk>.
If we were trying to put a a 2023 volume bridge in place. It would look very similar approximately similar to what we did last year. He just took it on a on a percentage basis with current volume.
Much as coming from the annualized impact of 2022, how much the extent of net new from Hydro core and then and then the balance beam or else, which is predominantly new verticals and to some extent.
Very small portion I've taken like a natural extension.
That's exactly right. So it's one thing to keep in mind. This.
Is very much an annualized in our bourgeois appears always the largest contributor inside of the year, we gotta happier or on average contribution most merchants and I'm just getting a full years really nice.
<unk> benefits that'd be one thing to keep in mind with a lot of these big merchants did not contribute.
Q, so while we surprise I think investors with the contribution of new verticals conserving eighty-three and expanding further before you can expect that grow over benefit to help the one thing I would just sort of maybe <unk> Jared stayed with US we were more pessimistic same store sales.
Broke.
In our guidance this year than we were last year. So if you recall, we had a a.
Portion of our bridge that was.
Same store sales growth and travel recovery I think we're more cautious on that front.
Because I think it's prudent to be so.
Yeah, No that's great and then just a quick follow up just any initial commentary around the success, you're having an sourcing strategy you know to get a mortgage strategy here is a lot more direct distribution than than what you've had obviously you had a quarter now to to kind of see how that's going so I would just love to hear any any kind of initial phases there.
Thank you.
Yeah sure Dan So we're really pleased I mean.
I don't know if it how many people really follow us on them.
Like on any of our digital marketing or social media spend but we we really spent virtually zero.
Arms, we generate a need for our sky for scheme.
And the reason is we wanted to spend you know really the first two quarters just dialing in you know our operational process.
One area of focus is are you.
Literally five day turnaround time from when a new customer resigned to having a fully operational QR system in a restaurant. So we wanted to really get that dialed in and working very very well before we kind of turned on the market. The reason we've had so much production is because the night and I don't know how many people picked up on this nuance and last quarter, we spoke of.
<unk> a lot of the the partners that we acquired in stores to pad portfolios with customers on many of our competitors have you call. It like Hartland are spot on some of the former toe Steelers.
So they already have what we refer to as kind of low hanging fruit list to be able to go out and knock on doors now that they were part of our Keith and sign up customers. The sky cab without any real marketing support and and that was part of the plan was to.
Do you use the first three quarters kind of burned down some of the low hanging fruit dialing the process before kind of wrapping marketing I think as a result, you want I'm, having like just a ridiculously low customer acquisition costs over the last couple of quarters, but really pleased with how things are coming along great balance between our direct email filling in the gaps with some authorized partners.
And we're really happy with the results of the product.
Extraordinarily high volume locations right now.
Thank you.
Thank you.
Next question comes from Timothy <unk>, Some credit Suisse. Timothy Please go ahead.
Alright. Thank you good morning, everyone I Wanna talk a little bit about the ticketing opportunity. So you have <unk> you have tickets socket you recently got the packing on integration, which opens up a lot of college sports stadiums. There maybe you could just expand upon what <unk> actually does for you in terms of the opportunity and then also if there's any.
Thoughts around the potential to integrate with Ticketmaster, which I believe remains the the only large integration that you have yet to make.
<unk> I'll cover that in.
I don't want to talk about any of the names specifically, we are trying to be pretty deliberate and walking dotcom specific customer names specific partner, but the way you should think about.
Getting opportunity the way investors should is it's an integration give a software platform that lots of other merchandise use.
So pick any of those names that you mentioned getting an integration to the platform.
It means that you are now technically capable of serving.
<unk> that is substantially wider than the day before Hugh completed that.
That integration and so how long the integration means that you can light up a customer that's using it very very quickly but that integration is what it takes a lot of time to get it done so we announced kind of <unk>.
The sports and entertainment in a meaningful way with the acquisition.
A venue next in March of 21, we started to win.
Stadiums and started as ticketing conversations throughout the under 21 22 completed the bulk of that ticketing integration work and now it's much faster for us the light up customers much in the same way.
Using a hotel property management software integration that we already have uhm, and obviously being able to deliver for that and the really high demand environment. Other stadiums do some confidence that we can handle their ticketing volume as well. So you should think about each integration of instant way to expand our tan and that the volume.
It's much faster as a result of Academy integration is basically a customer, saying, yes, and signing an agreement that allows you to surface.
Excellent really helpful [noise].
And congratulations on those integration the quick follow up is around inorganic contributions I realize they're small from the European TSP, a little bit for giving Buck, but could you just recap what was included in queue for that was in organic and the small portion. That's included for the 2000 twenty-three guide for both volumes and ribs.
Yeah sure.
So if I could say and I think we had these times in November we were not terribly optimistic around giving environment.
At the time.
This is probably pretty somebody other you know.
Top news in the crypto community. So the contribution from the giving block largely came in the form of sauce from.
Customers they signed up it was not particularly meaningful although when you think about that customer base being double what it was when we bought it is the giving environment starts to start to improve the donation extra down very quickly thereafter.
Constructed.
That platform despite the Charles.
Community about the lower didn't issue volume.
And I think we have commented.
Saint Paul November that'd be expected the contribution.
Of our international PSP to be less than 1% of our.
And then that revenue for the here and I think it's landed regularly expected it to be so reasonably inconsequential order all the really really strong technical capabilities yeah.
Just to lay on that.
Consistent.
It's important to keep all investors understand it's not uncommon for us at all to acquire assets that we can give us some E right to women that are specific vertical and then just totally hindered the revenue model around payments.
Great example of that into the next acquisition you know at the time, we purchase your enemies fantastic software or was it wasn't a cash generating business at all pivoted from predominantly staff at that point and now being like real real contributor from a volume perspective, which is driving a lot on the net revenue not dimensions opened up doors for.
For taking opportunities as well when you think about the Gimme one I mean right now.
The overwhelming majority of the revenue that we've taken from nonprofit who's coming from major non-profit brands like Saint <unk>, others that are giving a traditional card payment volumes and many of which we were able to solicit from the 2200 or so existing giving block customers.
With respect to the European PSP.
We bought that asset to put volume that we knew we had already with with respect to some of our strategic customers into the European market.
So like I know, it's been a question we've been asking at the time of the Ico you know what contributions are are coming organically versus inorganically. It's almost always organically and then some because you are oftentimes devastating the revenue model of the business you're required to pivoted.
Towards our organic strategy I think that that <unk> with the <unk>.
We actually 2022.
Perfect great. Thanks, a lot <unk> Taylor.
Thank you next question comes from William <unk> William Please go ahead.
Hey, guys good morning, and thanks for taking the question.
I think the company benefited a lot from some of the aggressive actions you guys took distribute distribution endorsing the rolling out a sky tab gateway Sunset.
What kind of a big needle move or in your mind for 2023, and what are the main two or three things that investors should be focused on to kind of track. The next leg of growth Smith's here.
Yeah, what an awesome question. So I mean, I think we set the table incredibly well in 2022, but actually it all kind of launches off of the Investor Day. We had it you know in November of 2021, where we basically.
Told our investors that we're moving.
We're diversifying from outside.
Outside of just restaurants and hotels into all these exciting new verticals gaming non-profit sports entertainment. They were all kind of E Commerce International they were all anchored off of like.
Michigan merchant that was going to give us more than a foot in the door within those those specific vertical.
We moved into 2022 building on every one of those initiatives.
We certainly saw or at least we're concerned enough that there would be a deteriorating economic climate in 2022. So much. So that we we decided to move a little bit faster on things like our gateway Sunset initiative Rolling out Skycap D O S with a balanced direct and indirect distribution and we made some real meaningful progress between <unk>.
Which as soon as commercial capacity and then in the north.
Ganic acquisition in Europe to set the stage, while so I think we really have to say, it's really well in 2022 volumes of 2023 and where the needle move is right now.
Start with Hydro Court Gateway Sunset is still deliver.
Indicant results in the years ahead.
Like an enormous amount of volume on our gateway business. So I know everybody like after we'd like middle innings later and it is still early innings with gateway Sunset. So I expect that can be by finding part of the largest contributor to our growth in 2023, all the new verticals, we built upon and you've got real traction there.
We made our investments were really well timed in late 2021, so I expect that spilled the crushing it in sports entertainment, except now you're gonna have kidney, which is huge and comes in and higher pay grade can we had previously you've got like almost every sport you know like real decent presence in almost every one of the major sports leagues. So.
Like seasonal trends that we saw in prior years in sports entertainment won't be there anymore and I think what's most exciting for us as we were making real progress internationally inorganically organically and that's not just for the benefit of you know what.
One or two really strategic customers, but it allows us to bring restaurants and hotels and all these new markets too as I mentioned <unk>. So I'd look at hydro core continuing to live with the majority of new verticals, moving very quickly and real progress in the international market in 2023.
Got it that's super helpful and maybe if I could just follow up on some of the comments say out on the Gateway Sunsetting strategy, you mentioned being in middle innings, I know, it's kind of back of the basic bullshit four but could you may be provided an update on kind of just general expectations of the pace of conversions going forward I think he'd previously talked about something in the ballpark of $8 billion a year.
It sounds like that's accelerated as a result of the sunsetting strategy. So whether it's full on conversions or repricing to better economic terms, you know how much of the kind of growth in the near term do you expect somebody to come from that opportunity.
Yeah, I mean, just to clarify did they were still early early eighties. So maybe maybe we're in the the the second any I dunno late bottom of the second.
I I still expect game, we've done that to contribute a substantial amount of volume like I didn't we didn't pretty discuss what our.
Current gateway only volume is mostly cause we don't actually look at it that.
That often but you are still talking like you know.
Well in excess of 100 billion like well in excess of that number and volume there like even if we're working 24 seven so a lot of mine to move over and we did say that we're trying to take our gateway Sunday initiatives remove the parts unlock a lot of efficiency and make it not a tenure initiative.
You know like trying to pull that into three years.
It's a lot of money to deliver in that period of time, so but could I say it felt like a pretty substantial focus for us and in terms of like repricing.
Getting properly rewarded for the the capabilities that word delivery, which is the heart of the integrated payment solutions customers benefit from.
City Super early innings like like I think we mentioned last year like.
We effectively added a net netflix subscription to hotels and restaurants $2 million a year in volume. So I I'd say that that's that's still pretty early on as well.
The one thing I'd add on this just to help contextualize digits.
For smaller versions on the gateway and it needs to be merchants doing a million 2 million 3 million a year in volume. These decisions are typically made by genre operator, they happen quite quickly they have to break it of course, when we get hundreds of these a month and it's really just a function of getting a good time with that owner operator to have the conversation on the benefits.
And obviously the pricing actions Jared mentions do like slightly nuts.
You know the the conversation in our direction larger operators and there are many multi node multibillion dollar. So the companies that are using the gateway take longer naturally to make these decisions they happen over multiple quarters. So the one thing that you know and as you mentioned it or script.
All of this.
We've had a lot more time to have these big conversations with big merchants and so as a a.
Agree to move over and increasingly they are it creates a little bit of lumpiness and sort of the volume growth and an order in the corresponding spread that we deliver in that quarter. So we wanted to be cautious that you know we have a good enterprise level conversations that can make the volume growth in this effective spread a little bit more volatile all for very good reasons, but that's.
Sort of some color behind the scenes on the nature of the really big merchants and their decision right.
Got it I appreciate you taking the questions very helpful.
Thank you next question comes from <unk>.
Hey, guys nice resolved today listen I wanted to touch on the international build a little more of the opportunity there.
Obviously, when you close the deal the minority little help but if you can give us a sense of the past and what you see is the opportunity in terms of vertical expansion I know you have to obviously your large customers at anchor it's helping.
But what kind of opportunity do you really see that being both.
Twenty-three there may be a little bit longer term dirt and then.
Just a quick follow up on the financial side.
Really it's cause you're gonna have to spend time and money building that out I imagine so when we think about the margin implications [noise] of something like that.
And I guess, if we back out of the residuals benefit you have in their last year of this here. It looks like your margins are basically stable, whether you're expansion coming from those initiatives. So what's happening under the hood in terms of investment and what you can do on the border.
As your building up.
Yes.
He might be Sir okay start starting on the American side, I would say you're right apparently interest distribution help the margin last night.
And of course, right and so I think English strategically located at at where we want to wait that's frequently.
From an international perspective, a lot of the kind of tuck in four small technology and product feels that but what can you provide us a lot of opportunity to create that.
That will need kind of outside of Iraq, right. So we don't really need to kind of be like platform necessarily core investments.
Samson and when I look at <unk> and kind of security, except for I think that they would.
The plans.
<unk> here without really cutting into any kind of muscle or or we only have it say, we're just that like I'm very like first layer of fat level, and just really putting that a process in place that will generate a lot of that margin expansion somebody has not worried that you're looking at no for sure we're going to get an annual nation benefit for things like from there forward.
There's just a lot of February at my Christ every piece of the business to to kind of optimize it is the way that.
<unk> I think will come alongside how.
How can acquisitions are partnerships that will that are the ones that we've announced that we don't want her to come in.
Yeah. So.
I'm very confident.
You could help them to keep it a guy that we see all pretty solid about that and let <unk> way that we only by <unk> expectations sandwiches would just say, there's there's room that crashed.
And.
Yes, you said just to lay around a little bit on that that point you know.
With every initiative I was trying to make this point in Q4 last year when we were.
Interacting with a lot of investors like virtually everything we're doing right now.
It has a margin and hasn't efficiency benefit, which then translates into margin at free cash flow. So just give me. An example, right now it's actually more labor intense for us to support a gateway customer that in Denmark. So when we're.
Every day that goes by that we move more customers from our gateway to our index platform. It makes things easier on our support resources. It is so much different than what you can handle a situation and then versus trying to get a conference call billing with I Dunno Bank of America first data to try and troubleshoot of situations every skycap tos within that goes out.
Right now is like three or four at easier to support because it's cloud base than all of our legacy assistance you know actually we caught fair criticism for the first couple of years public company Oh don't they have a lot of windows based software isn't that previous generations, yeah, and they're like more labor intensive support so like every.
Day that goes by more Scott kept you assistance come in like where you are able to more efficiently support probably the most labor intensive portion of our customer base, which is small restaurants last or diversification into new vertical stadium Clooney Ah single stadium that maybe hundreds of millions of your volume can be covered by let's just take one person with half their time versus.
That same person might have to cover thousands.
Potentially of restaurants that are calling multiple times you need a lot of people in order to manage that.
The number of inbound calls so so the appointment if there's like there's area of the business that will you be able to operate more efficiently and that frees up resources for us to make investments in areas like product of RMB finance for sure as we continued to expand internationally.
Moving on to the the first part of your question did like just general excitement how big the opportunity for internationally. It's huge I mean, I think you know I hope most people took a look at some of the some of the numbers that got released on strike Holy Hell, I mean, you're talking about like 800 billion in volume growing at an extraordinary rate and you can even add numbers take margin aside that's a lot of volume.
What that is right. There is integrated payments three point out that a towering commerce, enabling software anywhere in the world and making like easier on some of the largest enterprise in the world. Yeah were gunning for that heavily we're gonna follow an incredible customer on that theory will do it.
Organically in some parts of the world like we announced with we can in the Caribbean. We're looking at other markets now will be some one to many partnerships in some parts of the world is will will deploy capital effectively to on <unk> and other parts of the world.
Doing so like we're gonna, we're gonna first being able to compete so it's not just adding a new strike going for some of those huge multinational corporations, but we're gonna take everything that made us special in the U S. But one of the most competitive markets in the world.
And bring it into those new markets.
Incredibly exciting like you know this is this is our journey to like a $1 billion plus and even though I mean, that's that's the marks were on right now so.
I think it's one you can't ignore.
That's really helpful. Thanks, guys. Just very last quick follow up is on Sky cab and the progress you're making some really strong or the location ads.
Just maybe a quick update on the on the expectations for the your head.
Yeah.
Thought it was fair to <unk> to give me some standard of of how Skycap. This movie because I think it's such an important part of the distribution sourcing story.
Yeah, the expectation is like.
You know I think Photoscan shipboard are gonna have continued to have great ears, and I'm sure both those kinship or will take our products into international markets.
And we'll go and clean up all those legacy terminals and you know windows based P. O S system and I think both enjoy a lot of success, what I don't think we'll do I mean.
We'll certainly give you insight and spreads in volume is I I don't think we're gonna every quarter gave you know give updates on on location count I I don't think.
You know kind of <unk>.
We tend to be way more up market.
You know you'd rather have hypothetically 4000, 2 million of your customers and 5800 out to your customers or something to that effect, but yeah. I I think it's like looking at the competitive landscape.
It's a it's a two horse race for sure and there won't be a winner take off those both coasts and ship or are gonna have a lot of success with our five based products in the U S and in other markets.
That's great guys. Thanks again.
Thank you next question comes from <unk>. Please go ahead.
Hey, guys nice set of results and thanks for taking my question I just wanted to tell Darren International question. There in in the context of the regulatory approvals needed for from here I know that yeah sure cause considering anything from bernero in the sky, but given how inborn be international.
[noise] expansion roadmap is too.
<unk> story right now is there any kind of changes to how results would shake out one way or another if the regulatory approvals were signed off today versus you know bleeding, the third third quarter or even beyond.
I don't believe so.
<unk> Stared mentioned various is scripted remarks, we have an arm's length partnerships with a lot of them to complete a lot of the technical work to service. So we I think there's been some sort of comments around this previously.
Successfully beta transactions on Scott that throughout Europe .
<unk> next as well, we do share a handful of customers today, some others, there's modest improvement and.
Economics for having a one quarter versus the <unk>, we're not really thinking about it in those terms. So we want to close it as soon as we're allowed to just because it helps both companies operate any clearer land sports in the future but.
A lot of time together.
The maximum extent appropriate on working through the solutions. So it's not having the patient.
Pace of progress in side of our business.
The answering the international acquisition of the T. S. P that you mentioned last four of your system. Other examples so what kind of operating strategically with this full speed ahead mentality.
The opportunity of owning a bank in Europe is really quite high the opportunity cost of that is it that these regulatory approvals can take update me much as I mentioned in my apartment. So we're we're pleased with the progress of Tomatoes far we do expect.
Dash.
Just a slightly opaque nature, which is I I'd say nothing more than mildly frustrating I don't think it has a significant impact on performance one quarter of the night.
Oh, that's good to hear in the morning.
Do a little bit more color around you know the the the investment philosophy here and what is the key kind of macro indicators that you guys are looking forward to give you more confidence is unsay stepping down the gas regarding investments I mean, it really appreciate the commentary and the Cheryl the letter that said no focusing on upgrading talent versus.
Says no outright, adding adding head. So maybe if you could just kind of gives a sense of investment versus the macro and and maybe how what areas of the upgraded talent you really focused on.
You know stepping on the gas is an interesting way to phrase it cause I think we kind of always feel like our foot pretty pretty heavy down on the <unk>. The.
The reality is we think about kind of capital appointment or M&A hefty bill through the land do a couple of hours just number one is there a capability that we need that we don't have the physician accelerates are facing too and I'd say, that's been a a portion of our M&A, but not the entirety of it.
Another portion is just is this a customer acquisition cost one all that is substantially lower than finding it but I think if you look at things like the acquisition of merchandise gateway like the acquisition of the restaurant icy brands that we had before that that was always to accumulate really really nice groups of Catholic customer.
<unk> at a at a very attractive customer acquisition costs, we've monitor for that all the time I don't think you know market valuations have a huge bearing on that and we execute when and where it's appropriate I think the tougher one is the the the first thing I mentioned, there which is capability enhancements you do typically have to pay more for her you might not get.
The instant margin accretion from a transaction like that so you have to be very disciplined at what you're going to pay for it we've seen the opportunity continually progress.
Throughout this.
So I feel I mean, you've seen you've seen multiples in our industry get get pretty bad or to see good opportunity for expansion, but you also want to really disciplined we don't just want to buy a capability to answer we want to make sure. We're buying what was inherently good company before we approached it needs to be you know.
Able to operate at a reasonable profit on its own right before we can get confidence that plugging it in to our business is the right thing to do.
Garrett anything else and.
I think I'd just say this is an area to maybe look a little bit towards our past you know prior to the idea of going back to two.
2015 timeframe, we had a feast sponsoring that kept US you know and.
Comfortable six times leverage.
Predominantly to support periodic dividend recaps and throughout that time period, we were reasonably active with with M&A, which meant you know a lot of the acquisition.
You know on a synergize basis, essentially deleveraging virtually instantly Fortunately current levels profile, we don't necessarily have to find those gems.
But what I will say right now is that we are looking at deal with it you know essentially on a on a pulley synergize basis would be deleveraging email like a side of 12 to 18 months.
Taylor references.
His prepared remarks, so continuing to remain discipline, just giving me the uncertain Road ahead. That's it I think in terms of capital prioritization stellar mentioned international is very important like I said I'm very big believer in just three point O evolution of a visa credit for any swelling and <unk>.
Really so there's opportunity to acquire rails and track the terms to help build at R. E R.
Port our global expansion do that first I just need the top of the list, but the other thing I think he was just an organic investments.
I mentioned earlier there are a lot of reasons why we should continue to become more and more efficient. So we're able to later on that following and keep you know head count. It you know try endeavored to really keep it as flat as possible like getting off a few for and it turns out that the you know the economic climate is not.
Some people fear, then and there should be room for us to make some investments and some organic issues with their internal systems or other things to better support.
<unk>.
Got it thanks for your and congrats on I'm really impressed severe.
Thank you final question comes from <unk> from G. P. S. Right now please go ahead.
Right now.
Hey, Hey, sorry. This is Anthony at the end of a trillion for arena. Thanks for taking the question I know you commented on it a little bit or but.
I was hoping you could kind of talk about kind of the drivers of the really strong EBITDA margin in the corner I know you mentioned, the and source distribution, but.
Can you kind of help us better understand you know if there's anything unusual to call out.
Kind of the sustainability of that.
Yeah, Hi, Nancy I'll I'll take that anyone else can jump in here, but for for sure were incredibly confident about it.
Sustaining that Martinez 23, as the Guy indicated you know I think there is.
The benefits, we've already talked about which is apparently the anthrax they should be ashamed the changing madam.
And service delivery.
<unk>, it's just that service.
[noise] livery model is my kitchen.
Supporting you know <unk>.
All kind of hybrid Claire and marches in coin cloud, so that kind of overrides.
That goes through and playing.
Laying around can you think of that probably notice company head count compensation and things like that fee.
The biggest driver that C. N N. When you look at our <unk> <unk> on our according to your S. S N on and adjusted data very confident that that that kept me going.
<unk> <unk> <unk> <unk> <unk> <unk> <unk>.
<unk> yeah.
Ending.
Really thinking about how every dollars being allocated that that's really that I need to lie to the company.
Heard about that <unk>.
Really.
Kind of white glad to enterprise approach.
<unk> type models to get some delivered efficiently.
And I think that flowed through is what you're saying that <unk>. So just fill that branch of every dollar at this point in time period at a higher conversion rate.
And really I'm, just someone to repeat everything character spend that kind of <unk> kind of exiting T. Four will contain the link for tiny thing.
Got it that telephone just a quick follow up you know I was just wondering if you think there's the macro conditions are impacting restaurant demand for for the contact P. O S. How is it how is it impacting demand for assess based solutions, our willingness to pay with that.
Thank you.
So a few things in there.
I don't think like the restaurant at least if we look at Q for the restaurant vertical spelt.
Felt very normal bright specifically does moderate off of the summer Q3, that's what we saw it outside a bar restaurant, but it did not have any bearing on our ability to add customers. Now is Jared mentioned earlier, we try to stack the deck in that regard.
The the entirety of already sourcing of distribution was not about gross margin economic expansion. It was also about really addressed attracted customer acquisition cost and also about any fruit that.
That that comes with the project so our ability to gain share is you know.
Hopefully somewhat dislocated from any macroeconomic impact we'd like to have a cap the base of customers that we can sell into it was driven our success in the past. So so I point that out with regard to the restaurant.
Something that we've said now as we look ahead I think we've been <unk>.
Publicly probably too cautious on same store sales inside of that vertical and the impact it could have that Boston has been represented in kind of everything that we pulled the street I think it continues to be and yet we haven't seen it yet so we're happy to be proven wrong to the extent, there's like more resiliency inside of one of our verticals then we anticipate.
But we plan for their based on adversity and almost all of our articles. It just serves our entire operating model for the business well to be a little bit.
Thanks for taking the question.
Thank you.
Well I appreciate everyone join.
Joining a call this week.
Have a good day.
Thank you Mr. <unk> today's cool. Thank you for joining you may now disconnect your lines.
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