Q1 2023 Shift4 Payments Inc Earnings Call

Thank you. Thank you.

My name is brianna and I will be a conference operator today.

At this time I would like to welcome everyone to shift for first quarter 2023 earnings Conference call.

All lines has been placed on mute to prevent any background noise.

After the speaker's remarks, there'll be a question and answer session.

If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

If you would like to withdraw your question again pressed Darwin.

Thank you.

I will now turn the call over to Tom Macaulay you may begin your confidence.

Thank you operator, and good morning, everyone and welcome to shift for the first quarter of 2023 earnings Conference call.

With me on the call today are Jarrett Isaac mentioned shift force Chief Executive Officer, Taylor, Laver, President and Chief Strategy Officer, Nancy <unk>, Chief Financial Officer. This call is being webcast on the Investor Relations section.

Our website, which can be found in investors dot <unk> dot com.

Oh quarterly shareholder letter quarterly financial results and other materials related to a quarterly results have all been posted to our I R Web site.

Our call in earnings materials today include forward looking statements.

Payments are not guarantee that future performance in our actual results could differ materially as the result that certain risks uncertainties in many important factors additional information concerning those factors is available.

You know most recent reports on forms 10-K, and 10-Q, which you can find on the SEC's website and the investors relations section of our corporate website for any non-GAAP financial information discussed on this call the related cap ventures reconciliations are available on today's quarterly shareholders better with that let me call turn the call over to Jared.

Jarrett.

Thanks, Tom Good morning, everyone. So we are pleased to report a reasonably strong start to the year, including including quarterly results that we believe will put us on pace to meet or exceed our previously provided guidance range as we.

We sat quarterly records for <unk> volume gross revenue less network fees and free cash flow.

Our performance was driven by momentum within our high growth core contribution from new verticals and ongoing success converting gateway volume to our service.

R 2023 plan assumed a likely pullback in consumer spending for the most part we did not observe any concerning spending trends in the quarter January and February exhibited typical spending patterns, but we did see spending moderate towards the end of the quarter.

Early March wasn't back strong, including record weekends around Saint Patrick's day, but there was some softness in the last week of March This does seem consistent with commentary provided by others.

We are cautiously optimistic on April data, but the real test will be in May and June where we would typically expect to see seasonal strength.

So while we have positively revised our guidance for the quarter, we are taking in account and watching closely this data.

It is important to emphasize that today restaurants represent approximately 40% of our total and 10 volume compared to around 55% of our volume back in early 2019. This percentage shift occurred despite growing restaurant volumes and is due to a rapid growth in hotels, new verticals and larger enterprise merchants to our <unk>.

<unk>.

On that note. We currently have roughly 50 merchants processing more than 100 million of annualize volumes on our end 10 platform and an additional 70 that are in the address book Gateway only population. We expect this trend of adding large enterprise merchants either through us converting a gateway customer or simply winning in net new.

Merchant to continue and only accelerate as we expand internationally.

This diversification is what gives us the confidence to raise guidance even in the face of what it is still an uncertain economic environment. So.

So now on to our quarterly performance and results for.

For the first quarter, we generated 66% year over year growth in our end to end payment volume, 36% year over year growth in gross revenues and 34% year over year growth in our gross revenue less network fees, which were all quarterly records.

Our high growth core continue to be the primary driver of our growth with an increasing contribution drive from newer vertical as such as sports and entertainment Sexy Tech travel and leisure and gaming.

We're very proud of our overall profitability, which is dry from the following four factors a continued momentum serving high growth enterprise accounts, which required less overhead.

Growth in new in predominantly card in our present vertical which require less hardware.

Our gateway Sunset initiative, where we are deleting unnecessary parts and properly monetizing the value of our gateway services D. Consolidating legacy pass brands and a direct sales model in support of our Sky Tap pass program. All of these initiatives have either reduced or eliminated growth capex requirements relative to prior years and and.

Hence the overall unit economic model of our services.

I will focus the rest of my comments on three areas are high growth core new verticals and our global expansion initiatives.

So it's starting with high growth Corp. At ship for our Hydro core does continue to be the primary engine of growth.

And as a reminder, or hydro score includes the entirety of our business at the time of the IPO and as our core integrated payments offerings built on a library of over 500 mission critical software integrations and over 150 billion of gateway volume available for conversion as of March.

With many years of success executing on this strategy. We are still clearly in the early innings of our gateway conversion Sunset and further monetization strategy.

Or when rates between net new merchants and gateway conversions, along with their associated take rates all remain consistent and stable.

A component of our high growth core also includes our new restaurant pass system names Skycap like last quarter. We've added thousands of new systems with R and R Q1 volume growing in over 300% on an annualized growth rates.

We are uniquely positioned in our ability to offer our sky cab pass across multiple verticals, we serve including stadiums theme parks and hotels.

So for example, this past quarter, we successfully renewed and expanded agreements with two major hotel clients, which also includes them promoting skycap in their restaurant locations throughout their franchise.

Considering our strong presence in hotels and our close relationship with software companies that serve hotels. We believe this new business pipeline for Sky tab is very promising. Additionally.

Additionally, skycap tos capabilities are evolving quickly. We recently entered into partnership agreements with open table and restaurant 365, the two leading providers of online reservation in accounting software for the restaurant industry.

As a reminder, the in sourcing of our restaurant distribution late last year was timed to coincide with the launch of our new cloud base Sky Cab pass product offering. This important initiative served two purposes.

First it is substantially improve the margin cash flow and unit economic model of our pass offering by pivoting to a more direct sales model. So this initiative not only eliminated a recurring commission expense from existing accounts, but also from all new accounts going forward since we essentially hired 400 of our best partners as a.

And at the in sourcing initiative. So we basically acquired a costly variable expense and took an additional overhead in markets that we know we're going to have a lot of demand for skyjack. The results of which we believe are working out very very well. So far second it also allowed us to gradually sunset several of our legacy Pos software, but.

Brands.

So as a reminder that includes future pause pause you touch restaurant manager in harbour touch and basically unify and energize our development engineering sales and service efforts to a single product strategy, which is Skycap P O S.

So this represents a significant efficiency gain that we believe will play out over many many years and enable us to continue to grow rapidly without having to add head count and also free up resources and capacity to run the playbook of acquiring another legacy Pos software company cross sell their customers payments and eventually migrate there.

Customers to our modern Sky tab software solution. This is very textbook shift for.

So we are back at it again.

We completed an acquisition that is interested us for more than five years. So this quarter, we acquired a pure software company called focus paused, which supports over 10000 restaurants, representing up to a 15 billion payment opportunity better not on shift for.

Focus pause does not have a direct payment processing capability and instead relies on several other vendors, including an existing software integration with shift for which allows us to work very very quickly.

Acquiring focus pause we've added a major talent in the form of my Cam and together we are executing on a playbook that we know very very well, which is by owning the software we plan to bundled payment processing capabilities and overtime convert the installed base of 10000, plus focus pause merchant to you shift for payments and eventually migrate.

To Sky tab like we have shown in the past. We believe this approach represents a very low cost way to acquire established high quality integrated payment restaurant customers.

And as Taylor will talk about in a minute. We believe that focus pause acquisition will ultimately prove to be an organic revenue in volume contributor in 2024, as we wind down the existing revenue model of the business. So moving away from their historic hardware and software license sales model and instead, we will pivot them towards a payments and fast strategy.

Insistent with the comparable deals we've done in the past so in short we expect minimal revenue in volume volume contribution in 2023, and our guidance raise can be attributed entirely to Q1 outperformance and a slightly more optimistic view of the 2000 twenty-three macro picture.

So moving onto hotels.

We signed numerous signature resorts during the quarter, including the brand New 60 acre resort property named VII, which is now Arizona's largest resort. Additionally, we signed two large Las Vegas properties, one being and especially new and notable Entertainment Center. We also signed woodlock Spa retreat located in pencil.

Dania the Lutheran hotel on the upper West side of Manhattan. These signature wins represent a nice balance between gateway conversions and simply net new wins, leveraging the power of our 500 plus unique software integration.

So moving on a new verticals.

Or Indian volumes continue to benefit from incremental contributions from articles within from merchants within our new vertical which overall still have a long runway before reaching steady state levels, we defined new verticals as consisting of all the new and markets, we entered into post or IPO, including sports and entertainment sexy tact travel.

<unk> nonprofits in gaming as well as volume contributions from international expansion Atm's, which is R alternative payment methods and crypto donations.

It's worth reiterating that as we continue to expand internationally and partner with international gateways and Apm's like Paypal, we may not be directly settling funds for those payment transactions the impact of which is that our gross revenue and gross revenue less network fees will essentially be the same bringing this to your attention. So you can take that into consideration when.

Modeling future gross revenue in the context of international and APM volumes, becoming an increasing portion of our mix.

The overall ramp and new verticals witnessed late last year continued into this quarter with a nice uptick in volumes from our stadium in entertainment vertical including incremental ticketing volumes travel gaming and of course, our strategic enterprise relationships are.

Ah recently announced partnership with Paypal also began begin to ramp throughout the quarter.

And sports and entertainment will process, all food and beverage volume for the Washington commanders, a Fedex field as well as the Chicago White Sox, where we will process not just concessions at guarantee field, but all their parking and retail too and.

In College Sports, we signed an agreement to processed food and beverage with the University of Arkansas, and Oregon State University outside of Sports. We also signed all the six flag locations in the U S for their food and beverage operations, along with a ticketing and payment processing agreement with popular water Park in Denver called Waterworld, and all food and beverage Prof.

Assessing for Chicago's Lincoln Park Zoo.

And ticketing, we're live with <unk> and we are processing all ticketing for the Wells Fargo Fargo Center in Philadelphia, including advance sales for Nonsupport for Nonsupport performances, including the recently announced Alicia Keys Summer tour.

Now the <unk> in his life, we will now begin pursuing ticketing for college athletics as well, which includes advanced season ticket sales.

And gaming, we went live last week and seven additional states throughout our partnership with Bette MGM and are currently operating in 14 online jurisdictions.

Four also added Octu as a product offering which is highly desired in the gaming market.

Two online traders currently in integration or adding octu, but they're go live which is anticipated later this quarter.

<unk> four signed agreement with lightened Wonder the leading cross platform Global games company in the digital in brick and mortar casino verticals, specifically shift or will provide processing for lightened wanders Adam product, which is a cashless gaming solution for table games, Adam enables players to access funds via debit card transaction without leaving the tail.

<unk> initial support will be in the <unk> in the U S. But we are also adding Canada.

Moving on to nonprofits.

We entered 2000 twenty-three following a year of remarkable growth in the number of nonprofit joining the giving block marketplace, despite and otherwise really challenging year for crypto in general we added over 1000 nonprofit clients last year bring our current roster of non-profits connected to our donation platform to over 2000 the <unk>.

I find the cross sell card processing to this space has grown considerably, especially when you consider over 150 non-profit currently on our platform process more than $100 million of annual donation volume.

As a result, the initial 45 billion plus cross-sell opportunity we size for you when we initially announced the giving block a year ago is now well over 50 billion of cross-sell.

The 50 billion represents just the donation volume associated with our existing non-profit customers. The total charitable giving opportunity we're pursuing is over $450 billion.

We are still investing in capabilities, including smart donation forums recurring billing HTH and integrations too important third party donor management software.

We've recently added key enhancements to our products such as stock donations peer to peer fund raising and donor accounts all of which we believe will increase our right to win the traditional card self card cross-sell, which is why we pursued the giving block in the first place I would highly recommend you to check out the giving box 2023 and.

Will report on charitable, giving which can be found at the giving block dot com for more key stats on the industry.

Moving onto global expansion as I've mentioned, many times over the last 18 months, we're on a payment 3.0 journey we.

We are expanding organically and and organically all over the world. Following a signature strategic merchant relationship and then bringing all the products services and integrations that made us successful in the U S into those new markets to that and international expansion remains our number one capital allocation priority both in terms of our M&A pipeline and.

Organic investment initiatives.

We're still waiting regulatory approval from bank regulators in Europe regarding our acquisition of <unk>, which remains the final obstacle to get this deal closed.

We recently met with different Aro team in Europe , as well as the regulators and believe the deal will close in approximately 90 days or less Unfortunately European banking regulators have had some high profile and high priority matters that have captured their attention the last few months.

We have made great use of this time, though between signing in closing so over the last year, we've completed technical integrations between shift for in the Menorah platform. We have begun processing lifeguarding at present transactions and now card present transactions. We have collaborated on commercial opportunities international expansion priorities Mark.

Getting and go to market strategy and the consolidated organization an operating plan, we are ready to hit the ground running after closing in fact, we feel so prepared that we've been able to shift a fair amount of attention to other opportunities in support of our payments 3.0 priority.

As a reminder, or 2000 twenty-three guidance does not include any contribution from from the Arrow, which we will update accordingly. Following the deal closing we are currently processing international volume in connection with the PSP, We acquired last quarter and also benefiting from their striped like offering.

Which which is focused on developers and online card accepted tools for our enterprise customers. We currently offer these online capabilities now in over 40 countries.

Or organic expansion into Canada, the Caribbean in Eastern Europe is on track to be completed this year and we are exploring a number of M&A opportunities that will expand our reach into Latam Africa and APAC.

Before handing the call over to Taylor I wanted to provide some additional comments on how we are currently thinking about 2023 are capital allocation priorities and our general attitudes towards success.

We have been consistently forthcoming and expressing our concerns about the operating environment, including highlighting our concerns as early as March of 2022.

As a result, our guidance an entire budgeting process has been informed by our view the current market conditions will test the sustainability of consumers' willingness to spend.

Are upwardly revised guidance assumes consumer spending remains reasonably stable with the low and assuming a mild recession.

Given this uncertain climate, we've been laser focused on controlling expenses and continued to plan for our head count head count to remain as flat as possible for the year, our preferences to take advantage of the recent tech layoffs, including at several companies, we admire to upgrade talent, where appropriate I believe that is the responsible way to navigate the year ahead.

Consistent with prior quarters are top capital allocation priority is delivering on our payments 3.0 global expansion requirements. We have a strong pipeline of opportunities ranging from completely transformational to strategically significant and smaller tactical tactically beneficial transactions.

We are generating a lot of cash ending the quarter with an adjusted net leverage ratio of 2.5 times considering are stronger cash position, we have elected to make some small investments and facility upgrades while at the same time closing and consolidating a number of our operating locations. We also began making investments in internal system replacement.

<unk> to include a new Salesforce, CRM, which we believe will improve the efficiency and productivity of our workforce.

Considering our strong balance sheet, and our president EV EBITDA evaluation being below prior buyback levels are board has authorized up to $250 million and share buybacks.

While we are prepared to be opportunistic with this authorization. We are admittedly excited about a variety of other avenues available to create shareholder value.

You know as a public company, it's pretty pretty typical to spend earnings calls patting ourselves on the back and celebrating successes.

I do want you know this isn't the real shift for attitude, though I.

I can assure you as a management team, we pretty much only talk about the things we don't do well at all.

To that end, we are constantly improving our products customer experience an internal processes to ensure we are always in a position to win no matter how challenging the operating environment. We believe that even small incremental improvements can have a powerful compounding effect over time and.

And we will get there by following the ship for way, which is all about embracing radical ownership staying flat taking out all the parts being procedurally, driven and executing with urgency.

This is the way.

With that I'll turn the call over to our President and Chief Strategy Officer Taylor lover Taylor. Thanks Jared.

Good morning, everyone.

I would like to provide some context around <unk> remarks regarding the operating environment and update entrepreneurial and then R capital allocation priorities for the remainder of the year.

As a reminder, we have multiple avenues for growth that are unique to ship for $150 billion of gateway volume tens of thousands of software customers, who are technically integrated to us, but using others for payment processing and emerging franchise, several new verticals and very little presence internationally in pursuit of all of these we tend to <unk>.

Throw in roughly equal proportions, with 50% coming from gateway conversions, and 50% being net new customers and unlike other payments companies virtually virtually all of our volume growth comes from customer additions as opposed to industry growth. Although are are growing presence in e-commerce and international payments should be a nice tailwind for us.

To give you just another way of thinking about the embedded opportunity it's half of our incremental volume growth this year, where to come from gateway conversions, we would only need to convert roughly a third of that to exceed our medium term guidance and still have nearly $100 billion remaining on the gateway. This is without adding a single new customer.

For the quarter or volumes came in better than our internal expectations. Despite the modest softening Jared mentioned in late March.

A notable contributor in the quarter was.

From our first transactions in.

Which we've been discussing with you all for several quarters now we.

We are still getting familiar with the volume cadence from our new verticals, including the timing for such things as season ticket sales or the total time in enterprise merchant takes to fully ramp their volumes after integrating to our platform. Fortunately we have several enterprise level merchants that we now know are still in the ramp stage of their full volume potential.

Are blended spreads are a reflection of a growing contribution from new verticals and enterprise accounts international expansion and alternative payment methods will help balance this spread moderation as we pursue our payments 3.0 strategy.

But you should expect Lumpiness as large merchants activate the ramp based on our updated guidance. We would anticipate are blended spreads to average around 65 basis points for the full year.

It is important to note that several factors may influence our spreads from quarter to quarter I pointed out. One example in large merchants, but.

Involving seasonality international business and Apm's, all have an impact on the blended spread within a quarter to the extent volume exceeds our guidance. It is likely that incremental spread may be a little bit lower during one quarter or another.

In terms of our trends within high growth core we witness the expected benefits from increased travel this quarter from spring break through the Easter holiday and had an easier comps in January in light of bomb across impact.

Year ago <unk>.

Spreads across our various cohorts in the high growth core remain very stable.

In regards to <unk>, our team is fresh off a European trip and meeting with the bank regulators. This as a final step and closing the final step in closing is for our regulators to notify us that our application is complete which triggers a 30 to 60 day clock for final approval to date, we have yet to be notified that our application is complete.

<unk> and our plans are to notify investors either be a press release or 8-K upon hearing.

About this status.

Our advisers believe we're still on track to close monero by the end of June despite some unanticipated delays.

I'd also like to mention that we have been very impressed with the team. It's minero and are excited to have this acquisition close once the deal closes we anticipate providing an update on the expected financial contribution from scenario for calendar year, 2003, and updating our guidance accordingly.

Turning the capital allocation in early April we acquired focused pause for $45 million. This is a restaurant software point of sale provider with an installed base of over 10000 restaurants that are not using shift for.

The company is profitable generating roughly $75 million in revenue and 4.7 million and EBITDA in 2022. However.

The card payment volume associated with it installed base of restaurants running focus pause is roughly $15 billion. We anticipate this acquisition. We believe this acquisition was completed at reasonable valueless valuations for a standalone business, but actually represent highly attractive customer acquisition costs. We also believable.

Further bolster our tech talent and distribution capabilities and provide downside protection due to the existing revenue and profitability.

We do not place any waiting to the existing economics in our guidance because our plan will mean pivoting the existing revenue model towards payments as we convert customers over time. This population will have the opportunity to upgrade the sky cab as well, which is what Jarod mentioned earlier.

As we've been mentioning for a few quarters now we continue to put distance between ourselves and the competition. We believe our discipline discipline growth strategy massive opportunity to convert existing customers balance sheet and strong cash flow generation puts us in rarified air Despite the uncertain climate. This attracts both talented candidates and <unk>.

Acquisition targets, who see an opportunity to join ship or and win at an accelerated pace. We are investing a significant amount of resources towards M&A as a result, the environment for both tuck ins like focus spas and transformational deals as as ripe as we've seen in the last decade with that I'd like to turn the call over to our CFO Nancy Thanks Taylor.

Good morning, everyone in the first quarter, we delivered impressive results, including quietly records for volume and gross revenue, let's network fees. We also delivered meaningful year over year in prison and are adjusted free cash flow consistent with trends witnessed over the past several <unk>.

For the quarter total Q1 volume of 22.3 billion grew 66% compared to the same period last year <unk>.

Q1, gross revenues for 547 million up 36% from the same quite that last year and gross revenue less network fees for $200 million, an increase of 34% over last year, our adjusted EBITDA for the quarter was $89.3 million and our adjusted EBITDA margins for the quiet about 45%.

TGF decision to gradually sunset and consolidated legacy Pls software brands and establish a direct sales team to promote sky pass and many major markets.

As expected we continue to add in Ram very large enterprise merchants, which is resulting in lower blend it spreads to.

Blended spread for the first quarter with $66 five basis points versus 76 basis points of erectile and $71 one basis points last quarter.

We expect the ongoing next shift towards larger enterprise accounts to average down spreads and is Taylor mentioned, we would anticipate are blended spreads to average around 65 basis points for the full year, though can vary quite a pointer again to spread compassion is entirely a function of rapid volume growth from our street.

We continue to be pleased with our margin expansion for the first quarter.

Our nearly 45 at nearly 45% of adjusted EBITDA margins represented roughly 1500 basis points of expansion compared to first quarter of 2022 levels. We deliver this margin expansion despite ongoing growth related investments, including international expansion new vertical expansion the sky.

K a product launch an ongoing talent upgrades across the organization.

Remain highly committed to a disciplined approach to cost management, while continuing to balance investments to support at grass.

Average fully diluted shares outstanding we are added exiting the coordinate with just over $817 million of cash $1.8 billion of debt and $100 million Undrawn on our credit facility.

Net leverage it quite around with 2.9 times and approximately two and a half to five times when adjusted for the contribution of all recent initiatives based on the trailing four quarters of adjusted EBITDA our.

Our strong balance sheet and free cash flow profile will continue to allow us to invest in the business pursue our strategic priority and opportunistically repurchase shares as Jarod mentioned earlier.

Turning to full year 2023 guidance, we are increasing the low end of the range for our Kpis and high end of the range as well for volume adjusted.

Hindsight, given the events of the first quarter since introducing the guidance. We believe the macroeconomic climate has only become more uncertain and the low end of our guy continues to contemplate modest headwinds in consumer spending.

The high end of our guidance implies a continuation of recent trends.

<unk> of the operating environment, we remain confident in our ability to deliver our best in class growth and profitability among our peers as Taylor mentioned for narrow is not included and will be adjusting our guidance when the closing date become certain.

Our updated guidance for 2023 includes total end to end volumes of $104 billion to 110 billion, representing 45% to 54% year over year growth gross revenues of 2.55 billion to $2.7 billion, representing 28% to 35% year over year growth.

Gross gross revenue less network fees at 920 $920 million to $955 million, representing 26% to 31% year over year growth and adjusted EBITDA at $420 million to $440 million, representing 45% to 52% year over year growth.

Anticipate adjusted EBITDA margins to expand approximately 600 basis points at the midpoint of our guidance ranges from.

From Iowa prior assumption of approximately 500 basis points and adjusted Creat free cash flow to be at least $225 million versus $200 million previously as a reminder, this guidance does not include <unk> or any other contemplated M&A in 2023 with that let me now turn the call back to Jared.

In the interest of time, we ask that you. Please let me know.

One question with one follow up question. Thank you.

Your first question.

Hey, sure <unk>, Thanks for the question and yeah.

Yeah, I think this really just comes down to timing of existing agreements. These sports teams or leagues have with existing providers. So it's actually contemplated in our agreements with many of the sports and entertainment venues that we previously announced as well as the ones going forward to get all of the processing. So.

As we mentioned this quarter I mean, we have examples where we picked up parking and retail merchandise sales of course ticketing is the prize. So the idea is is going forward, we'll try and capture ticketing upfront, which should be a lot easier now that we have integrations to pretty much everyone, but ticketmaster, but as well as our existing.

Customers that we previously announced over the last couple of years when their agreements roll off with their current provider as it should be an easy switch to flip. So I mean I can already think of one other major NFL stadium that we announced probably 18 months ago that since that time, they're taken any agreement has expired and is moving over to shift for so.

That should be the pace going forward is really just contractual timing.

Alright very helpful. And then you have 24.

Customers over 100 million logins.

Can you provide what that number was a year ago and what do you think the timeline will be to come back to her meaning 70 plus onto the complaint.

Sure.

Sure and all had that this is taylor.

The remainder of the year, but that's not our plan right. Our plan is that we target that customer base, we deliver them sort of a much more cohesive and bundled software plus payments solution to the extent the plan works well we'd expected that.

Like you you pretty much annihilate their current net revenue model to put them in a path that we know works really well from running this three times previously so yeah for sure. If we're successful confirm it converting 15 billion in payment volume 10000 accounts over the next handful of years that will play out in our in our results, but it is not factored into our 2023 guy because we're actually going to take the.

So we'll all hit the first point and then Jared can walk through the playbook because as you mentioned this is something we've done in time.

Part of sequencing a transaction like this is.

One half of negotiation, so I want to point out. This is one and Jared mentioned as we've been working on for for many years and discussion with them. So.

A total focus for the executive team or even the senior senior leadership team. What it is is a lot of people who were here in 2017 that no. The playbook know how to run it perfectly well in our in our Middle management team are going to run with the ball on this one.

Got it I appreciate that color Jared and just maybe a follow up on that last time, you mentioned around and kind of management team priorities and capital allocation you have got a lot of initiatives going on distributors and focused on Sky tab International Funaro.

So I think you've got to organic international expansion into eastern Europe that we're collaborating with <unk> to support a very big customer you have got <unk>.

I do have to point out that business perform nicely over the year, which helps as well and that that shouldn't be a given given the fact that they are largely cross border ecommerce. It 2022 is a tough year for that right.

Now that we've had some of the initiatives kind of it seems like they are in the run right now I mean I'm just curious how we should think about going forward other more levers, we should be able to see you over the next year or two and.

Is it just that operating leverage story now, albeit offsetting larger enterprise yields maybe a little more color on that'd be great yeah.

Yeah, I think it's I think it's all of those things.

The opportunity ahead of us obviously cause at the biggest one in the scrap lynch's around processing right opportunity there to still bring that in house is is certainly on a road map scale. So that that's the largest one but I think generally that operating leverage and as we continue to go that market and I know he talked about this a lot last quarter, but the service model right just a much more efficient.

Can't model as we're servicing larger customers.

That is still playing out in the next so I think there's still room and we are making some investments as needed for for in house. So some of the non-recurring stuff you'll see that we called that added kind of one time, but I think as we look of Capex run right first is kind of the ongoing kind of spread opportunity. We think there is still a little bit more ramsey see that in the <unk>.

I'd improvement in.

We always like to keep a little bit close to the vet and I think that just comes from continuing to improve the operating internal leverage nightline defending this band.

I think we have a little bit of a joke right. The cherry keeps pushing for kind of keeping everything flat and we're probably not quite there, but there's still room to improve where we're at.

Okay.

Okay.

Thank you.

Your next question comes from <unk>, What city your line is open.

Uhm, Thank you and good morning folks.

<unk> congratulations.

Okay.

Hey, so within the restaurants can you speak to the sort of the breakout between C.

Q as stars, maybe mom-and-pop diner type places nausea places put down an extra resort things like that and what time was it appropriate.

I guess the.

What I'm trying to get to is just sort of dissect the impact of the downturn across your portfolio.

You know, it's becoming a smaller part of total but it's still.

Large.

Stadium largest.

And market so.

Yeah sure I'll start and say that we are largely in table service restaurant. So they.

They can vary from a single location owner operated.

You have a diner example, all the way up to large multinational so there is pretty broad diversification around that weakness of.

Recent years, we've been winning more and more in the upmarket space you mentioned kind of hospitality I think it's worth noting that a handful of our large hospitality wins over the last year involved the opportunity to.

Market Scott tap into their restaurant location. So I think we've got unique pockets to win in hospitality, specifically for the food and beverage vertical but you want to start with cable service and then <unk>.

Expect that it's pretty diversified across that table service.

Given the number of brands that we have operated historically in the space.

Understood I understood.

Sky cab.

Is it <unk>.

<unk> in fees penetration.

You know what if if you could break out the sort of the.

<unk> benefits that you get from say maybe concentration of the sales have for worse is winding down other brands <unk> benefits of the radius pieces and roughly speaking how do you expect <unk> cadence perspective to kind of <unk>.

He needs to hit your numbers I know I know, it's a multi it benefits, but would would have to understand the cadence of tomato pizza.

Yeah I mean.

I'm just gonna throw it in like a general approximation so.

Nancy Taylor, Tom jump into correct me, but if I had to like.

Just give a relatively educated guess I would think nearly 50% of our workforce support restaurants.

I've said it many times before like your most labor intense customer.

A small restaurant. It's also the most costly customer for us to acquire lots of hardware you know in the past. There were you know commissions third party distribution, we've largely in source that but I mean, you get all sorts of phone calls every month, new tax codes various counties changing the price of menu items managers quit you've got to retrain new manager so very labor.

Very labor intense now imagine that Ah.

Across four or five different legacy pass brand. So now you have to know four or five different software solutions really well you have to develop on them make them support online ordering handheld devices, new <unk> standards like it's not super efficient at all so like when I've been pounding the table for the last couple of quarters like we can go into this year staying flat on head count upped.

Grading talent and still do more it's because of all the parts that were able to take out of the business, which are outside of those legacy base system. So the ideas, we should be able to add lots and lots of new customers and you're gonna be able to leverage the capacity you're already in the organization because you're not having to support so many different software applications anymore. So that's like one.

To the actual cost of the hardware to support someone on Sky cab is considerably less windows based Pos systems are very bloated very expensive sky tab hybrid cloud solution, It's Android base, but the hardware is better it's sexier looking and costs us less to deploy it also fails less not not to mention like the support.

[noise] ability of the product since it's cloud based we don't need to use like third party remote access tools to go in and see what's going on we can just log into our own cloud based tools and make update so like everything is amazing as you migrate to a cloud based solution and these are benefits that are just going to carry us every single quarter going forward. In addition to that fact.

That the addressable market the customers, we don't even have yet all Wanna use a cloud based solutions just more again, it's more labor intense more maintenance intense to use windows based solution. There are two cloud based solutions with lots of distribution and good feature set on the market right now and it it's us and toast and both are going to have a lot of success because the addressable market is monster.

Okay. Thanks.

Operator will take one more question.

In the interest of time your final question comes from Andrew Jeffrey.

Alrighty Your line is now open.

Andrew.

Jared.

Loved the description of of Sky Tab pass and the advantages you just.

Discussed can you talk a little bit about how you see the evolution path for Sky tab, and I'm thinking about potentially being able to go after some of these bigger enterprise customers with Sky tab as a means of further vertically integrating your solutions.

Against what are mostly legacy installed point of sale systems.

Yeah, there's there's so much to talk about there so.

So, let's just let's start with just like what is our game plan for winning net net new customers that are out there knowing that the addressable market is pretty huge right. So I think there's really only to.

There's only two players and the time and both are Gonna do really just fine.

And that's that's toast and us and we certainly overlap a little bit in the middle of the market, where we're going to differentiate a little bit more is just our access to hotel operators prop and teeming with with hotel property management system providers and stadiums. So like a lot of our stadiums that were doing all the mobile ordering the merchandising the tick.

Eating their restaurants have Sky Avenue, and we've announced those previously in the past. So that's also like a natural bundled cross sell for us, but the other is hotels. So I mentioned in my prepared remarks, and I wish we could have disclose who they are two major hotel operators that we have really strong relationships with we renewed multiyear agreements with them and then expanded.

The scope of those agreements to promote sky tab into all their hotel properties. That's like a huge advantage we have because we have the hotel property management system integrations already it's already using our tokens and business intelligence product and they're probably using an older costly like they're assuredly using an older costly windows based pass system. So so.

That's a big advantage for us. The other is just simply we have lots of distribution coverage. We we in source of a lot of our best partners all over the country that are in markets. We know based on the data we've had for years, we're going to be successful with sky tab on so that's how we're going to kind of go out and conquer in the US both Towson us are certainly going to take a.

Vantage the opportunity to exist globally, we will definitely be distributing sky tab tos in Europe . This year.

I think they're already doing it as well and then with respect to the existing installed base. So we can unlock lots and lots of operational efficiencies by like deleting all those parts I mentioned.

In the previous question, that's going to be a journey right. I mean, we are being very mindful of free cash flow you start deploying a lot of sky cab pass systems to your existing customers you might get a little bit of a revenue lift from some sash revenue we didn't capture previously when you're deploying hardware. So like that's how you know by the way when we talk about.

The results were having every quarter that sky tab is going well and that we're not just upgrading existing customers.

Is where we're at with free cash flow because if you are trying to upgrade you know tens of thousands of customers from their legacy solution is sky tab like it's going to be costly. It's also something you can't ignore you Gonna just gonna Wanna be responsible about it over the next two to three years get everybody on a single product unlock a ton of operational efficiencies within the organization.

That's super helpful. Thanks I'll.

Get back to your day I appreciate it with all the info.

Thanks, and appreciate everyone joining us on the call today.

And we'll talk to you soon thank you.

This concludes today's conference call you may now disconnect.

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