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spk02: Hello and welcome to the Shift4 fourth quarter and full year 2022 earnings conference call. My name is Lauren and I'll be coordinating your call today. There'll be an opportunity for questions at the end of the presentation. If you would like to ask a question, then please press star voted by one on your telephone keypad. Please note that this call, along with the Q&A, will be for a duration of 60 minutes. I will now hand you over to your host, Tom McCrohan, Head of Investor Relations to begin. Tom, please go ahead.
spk06: Thank you, Operator, and good morning, everyone, and welcome to Shift4's fourth quarter earnings conference call. With me on the call today are Jared Isaacman, Shift4's Chief Executive Officer, Taylor Barber, our President and Chief Strategy Officer, and Nancy Disman, our Chief Financial Officer. This call is being webcast on the investor relations section of our website, which can be found at investors.shift4.com. Our quarterly shareholder letter, quarterly financial results, and other materials related to our quarterly results have all been posted to our IALL website. Our call and earnings materials today include forward-looking statements. These statements are not guarantees of future performance, and our actual results could differ materially as a result of many important factors. Additional information concerning those factors is available in our most recent report on Forms 10-K and 10-Q, which you can find on the SEC's website in the Investor Relations section of our corporate website. For any non-GAAP financial information discussed on this call, the related GAAP measures and reconciliations are available in today's quarterly shareholder letter. With that, let me call the, let me turn the call over to Jared.
spk07: Jared? Thank you, Tom. Good morning, everyone. We are very pleased with the record results we delivered this year in the face of ongoing economic uncertainty. We ended full year 2022 with record levels of volume, gross revenue, gross revenue left network fees, adjusted EBITDA, 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-timed 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. Chip4 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. It marked the beginning of our European and international expansion, the successful launch of our next generation restaurant point of sale solution, SkyTap POS, including a pivot towards more direct distribution, And we also cemented our position as the preferred technology provider for sporting arenas and entertainment venues across the country. Our entire management team is extremely proud of our employees embracing the Shift4Way, which embodies the core principles and beliefs driving our success. As we enter 2023, our team is very excited about the abundance of opportunities we see ahead of us. Our excitement for the future is used in the lens of cautious optimism in light of the uncertain climate we currently operate in. Industry-wide payment volume was moderated during the December quarter, and as such, this informed our internal planning process, including how we constructed our 2023 guidance. That is to say 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 would expect. Nancy will go into our more detailed assumptions surrounding our guidance later in the call. Regardless, we will respond accordingly to changes in market conditions and are confident our growth model affords us a higher degree of relative visibility or stability, otherwise unavailable to our peers. For those that are a bit newer to the story, SharePoint possesses 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-digit 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 since, and that confidence remains as we look to the year ahead. So onto our quarterly performance and results. For the fourth quarter, we generated 55% year-over-year growth in our end-to-end payment volume and 36% year-over-year growth in our gross revenue less network fees, both quarterly records. In fact, we achieved quarterly records across all our KPIs, including gross profit, adjusted EBITDA, and adjusted free cash flow. The cornerstone of our performance remained our high growth core, with an increasing contribution from our new verticals, particularly sports and entertainment, gaming, travel and leisure, and tech-to-tech. 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 end-to-end offering as part of our Gateway Sunset initiative. As a reminder, our Gateway Sunset is a multi-year initiative that remains in its early innings. 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 payment. And despite early success, the needle will really begin to move only after the closing of the FNARO acquisition. and Taylor will provide a more detailed update on Finara, including expected contribution and synergies during his prepared remarks. I will focus the rest of my comments on three areas, so our high-growth core, new verticals, and global expansion. On the high-growth core, the foundation of our high-growth core remains the over 500-plus software integration that allows us to go to market and service the needs of merchants, especially complex merchants operating in a multi-software environment. We added over 100 new software integrations during 2022 and continue to identify new ways to incentivize our gateway-only customers to convert to our end-to-end offering. As we highlighted in our recent investor event this past November, we officially launched our new restaurant point of sale system in September of 2022. We now have over 10,000 SkyCat POS systems deployed and are highly encouraged with our overall sales pipeline. And keep in mind, we have yet to turn on the marketing engine and continue to enjoy an industry-leading customer acquisition cost. We are pleased to announce a chain of major entertainment venues called Live, signed up to install SkyTab POS at restaurants operating across all of their U.S. venues. This includes venues such as Xfinity Live near Wells Fargo Arena in Philadelphia, Texas Live, located between the Texas Rangers Globe Life Baseball Stadium and the AT&T Stadium, home of the Dallas Cowboys, and the Power and Light District located in Kansas City. We anticipate just live locations, contributing hundreds of millions in SkyCap POS payment volume in the year ahead. It also includes sports and social and PBR Cowboy Bar, two of the fastest growing concepts in the country. 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 SkyCab POS offering to the marketplace overall. Other notable SkyCab POS wins this quarter include LA Music Center and FedEx Field, home of the Washington Commanders professional football team. SkyCab POS is also making amazing progress with traditional restaurants. Its disruptive price-to-value proposition is resonating as we had expected, and we have a highly motivated and energized direct sales team called SkyForce that has already signed thousands of new restaurants. It's important to note our success has been without much marketing or promotional efforts. By offering an unmatched customer experience with leading-edge technology at disruptive price points, SkyCap TOS represents a compelling migration path for our existing base of restaurants who are seeking new capabilities and key integrations to better serve their patrons. We expect this to represent meaningful cost savings and drive operational efficiencies in the year ahead. Additionally, when serving such a large existing base of customers, We can generate substantial referrals, which also contribute to our low customer acquisition costs, and as a result, a very attractive unit economic model. Moving to our other organic initiatives within High Growth Corps, we signed numerous hotels and resorts during the quarter, including Manhattan Club, luxury hotel located in New York City, Charleston Harbor Resort outside of Charleston, South Carolina, The Cliffs at Princeville, located on Kauai's 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 will contribute billions in additional payment volume in the year ahead. All of these organic initiatives are driving our performance. When viewed on a four-year volume CAGR growth basis, our volumes grew 45% in 2018 compared to low double-digit growth at the two major card networks. our average volume per merchant continues to increase, and with 200% of pre-pandemic 2019 levels for the most recent quarter. Our quarterly volume growth is 342% of our pre-pandemic levels, along with gross revenue less network fees at 237%, and adjusted EBITDA at 456% over the same period. Our mix continues to shift towards higher-end merchants, Although it's important to highlight that spreads within our restaurant and hotel verticals remain very stable. On to new verticals. We consider new verticals to consist of all the verticals we entered into post our IPO, including sports and entertainment, sexy facts, travel, nonprofits, and gaming, as well as volume contributions from various alternative payment methods or APMs we currently support as a result of our international expansion. Consistent with our commentary from last quarter, we're not breaking out volumes or spreads between our new verticals, including our strategic enterprise relationship and our high-growth core due to confidentiality and competitive sensitivity with certain strategic customers. That stated, and as we expected and previously communicated, we did witness a sequential improvement in our spreads during the fourth quarter as a result of new customer boards alongside processing of international and ATM volumes. It's worth highlighting, as we continue to expand internationally and partner with international gateways and alternative payment methods, like our recently announced PayPal partnership, we may not be directly settling funds for those transactions, the impact of which is that our gross revenue and gross revenue-less network fees will essentially be the same. For the quarter, volume contribution across all our new verticals continued to ramp, as expected, as we benefited from the fall NFL football season, including ticketing sales, the nonprofit donation season, volume contribution from large strategic customers, and contributions from Allegiant Airlines, whom we are now processing all of their U.S. ticketing volume. As mentioned above, we also signed a partnership agreement with PayPal to enable PayPal checkout, including PayPal Pay Later, as well as Venmo, to our enterprise clients. We will also more prominently promote PayPal as a checkout option to ship for shop merchants and QR Pay customers, in return for an expanded revenue share wherever PayPal is selected at checkout. In sports and entertainment, we signed picketing agreements with Premier Productions and the Space Center in Houston. Last month, we also began processing picketing for several professional teams, including the New Orleans Saints, New Orleans Pelicans, and Arizona Cardinals. We also signed payment processing and picketing 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 that the integration with SeatGeek is complete. And in college sports, we expect to begin processing ticketing for college sports through our integration with Paculin in the coming weeks. We will look back on 2022 as the year shift for cementing its position as the preferred payments and technology partner for sports and entertainment venues, including ticketing. Our pipeline remains very healthy in 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 Tulap Casino, one of the largest casinos in the state of Washington. We also signed a partnership with Passport Technology, a leading gaming technology provider for cash advance and ATM services, where Shift4 is assisting in the development of a cashless gaming experience. We continue to add state and tribal gaming licenses, including the District of Columbia, and added additional states with that MGM. We anticipate being live in every online state with that MGM by the end of this first quarter. We are constantly adding critical integrations within our online gaming ecosystem and are currently testing multiple B2B integrations that combined operate in more than a dozen jurisdictions. We're also incorporating Sonaro's European gaming capabilities within our US payment platform. Moving to nonprofits, Our nonprofit vertical continues to grow, and during 2022, we added over 1,000 new nonprofits to the platform. The Giving Block has expanded outside of crypto, enhancing their product suite to include stock donations in addition to the ability to accept traditional card-based payments. The Giving Block has evolved from its position as the leading crypto donation platform to the leading non-cash fundraising platform that supports all forms of digital assets. The giving block will 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 we are now processing all of Allegiant's ticketing volume. We signed another U.S. airline during the quarter, which we look forward to disclosing next quarter. With respect to SexyTech, we continue to serve an increasingly exciting mix of next-generation e-commerce customers. As you are aware, one very fast-growing customer is driving the next evolution of SIP4 and our global expansion strategy. Additionally, we've entered into partnerships with Zip-In, Mask-In, two next-generation retail concepts that allow customers to check out without having to interact with a cashier. Zip-In is already in use at several retail locations in the Dallas-Fort Worth Airport, and Mask-In is deployed at more than 2,300 locations across the U.S. Additionally, in this category, we began processing for PayBiz and completed a Bridger Pay integration. All of our success supporting 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 our new 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 Panara shortly, and our 2023 guidance does not include any contribution from Panara. We will update our guidance accordingly following the deal closing. In the interim, we are integrating our payment platform, the EnormScience 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 PSB, that now affords us strike-like integration capabilities to offer our European and U.S. merchants. 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 into Canada and the Caribbean, and in partnership with Tenaro, 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 stadiums. 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 2022, we were one of the first payment companies to express concern about the deteriorating macroeconomic conditions. I commented that this is the type of climate that SHIFT4 performs best in. Unlike many of our peers that grew up in a zero interest rate environment and a growth at all costs mentality, we self-funded SHIFT4 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 needlework. As a result, we generated growth rates in line with our midterm outlook in 2022 and expect to continue driving real growth across our core and new verticals. We are accomplishing this while expanding internationally and expanding our margins and free fast flow. As we look ahead to 2023, we have 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. Nancy 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 at CHIP4 that we will meet our growth targets this year while striving to keep expenses and headcount as flat as possible exiting Q4. I fully expect we will be upgrading talent throughout the year as competitors we admire continue to shed personnel, 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 SHIP4 platform. Last, SHIP4 is a strong record of unlocking value through creative 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 2.7 times, giving us ample capacity to pursue other strategic priorities. And with that, I'll turn the call over to our President and Chief Strategy Officer, Taylor Lover. Taylor? 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 Jared mentioned, we approached 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 and 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 that we had experienced in prior years. As we mentioned during our Q3 call in November, we also began to see some benefit from market international expansion and alternative payment methods during the fourth quarter, which helped contribute to spread expansion versus Q3. Early indications for 23 are positive. We saw record volume days as travel resumed during President's Day weekend and suspect that 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 Omicron in January of last year. We are 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, sexy tech, all of which serve to bolster our performance when a single sector experiences moderation. Most importantly, we've been able to deliver these strong results and expand our margins and free cash flows. 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. Shipboard has approached our growth with a very disciplined and consistent process, constantly balancing a desire for growth with a realistic payback assumption. This means that we generally deploy capital with an expectation for positive returns within 12 to 18 months or less. As investors justify if they put higher demands for results in free cash flow, we believe that many of our competitors will be forced to dramatically change their behavior. As Jared mentioned, this type of an operating environment is typically where Shipboard 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 in the same fiscally responsible manner that we have since our founding 24 years ago. 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've been prudent in balancing the benefits of broad-based employee equity ownership with the dilution it causes to existing shareholders. We have had average dilution of about 1% a year for 21 and 22, and this includes the impact of equity used for acquisitions. Our adjusted EBITDA grew by nearly 75% during that same timeframe. A strong early mover understanding of integrated payments alongside of M&A has been a significant driver of our ability to rapidly gain share in numerous verticals and geographies. And the current climate in 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 suspect it will present upside opportunities in the quarters ahead. On that note, we are nearing what we believe to be the final stages of regulatory review for our acquisition of Finera. Bear in mind, these regulatory approvals can typically take up to 18 months. And while the timing is by its nature uncertain, we believe a closing during Q2 is likely. You will recall that when we announced the transaction, we estimated a 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 and pro forma economic contribution as we progress towards closing. Before turning the call over to Nancy, I'd like to sing her praises 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. Her approach to expense discipline is also particularly helpful as we strive to maintain both best in class growth and our very strong margins. Nancy?
spk03: Thanks so much, Taylor, and good morning, everyone. In the fourth quarter, we delivered record results and ended the year exceeding the top end of our previously provided guidance ranges for volume, gross revenue, less network fees, and adjusted EBITDA. And we also meaningfully exceeded our adjusted free cash flow guidance. Total Q4 volume of 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 fees were $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%. Our quarterly results were driven by the continued strength of our high-growth quarter, improved economics earned from our gateway customers, and higher unit economics resulting from our decision to insert a large portion of our go-to-market distribution in connection with the launch of SkyTab in the third quarter, shifting from third-party distribution to direct in major markets. As expected, we continue to add and ramp very large enterprise merchants, which is resulting in lower blended spreads. the blended spread for the fourth quarter with 71 basis points versus 74 basis points a year ago and 68 basis points last quarter. We anticipate the ongoing NIC shift will continue into 2023 and that our blended spread will continue to decline as we successfully move our market. As we mentioned last quarter, we are not further breaking down the components of the blended spread given disclosure limitations and competitive sensitivities. However, We did see sequential improvement in both our hybrid core and non-hybrid core spreads in Q4 as compared to Q3, driven by volume mix, new boards, and international growth. Having an early look at Q1, spreads remain strong and in line with Q4, but will decline modestly due to the impact of the newly signed strategic enterprise agreement with a major hospitality operator that Jared previously mentioned. We are very pleased with the margin expansion we delivered this year. For the full year 2022, our adjusted EBITDA margins were 39.8%, representing over 800 basis points of expansion compared to full year 2021. We delivered this margin expansion despite ongoing growth-related investments, including international expansion, new vertical expansion, and the SkyCap product launch. We are very confident in our ability to deliver further margin expansion in 2023 and are committed to remaining disciplined in our cost management while continuing to support and invest in growth. Net income was 38.5 million for the quarter. Net income per share was 51 cents and 46 cents per share on a basic and diluted basis, respectively. Adjusted net income for the quarter was 40.5 million, or 47 cents per share on a diluted basis. Adjusted free cash flow in the quarter was 56.7 million, bringing full year total adjusted free cash flow to 147.2 million. Adjusted free cash flow conversion was 60% to the quarter and 51% to the full year. A complete reconciliation of adjusted free cash flow is available in the appendix of our earnings materials. In reviewing these materials, you will see that as of year end, we settled the outstanding receivable we had with our sponsor bank. We did not include the benefit of this settlement cash inflow in our 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. Our net leverage at year end was 3.5 times, and approximately 2.7 times, as 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 profiles will continue to allow us to invest in the business and our strategic growth priorities while we remain disciplined in our capital allocation approach. For the full year of 2023, we are introducing guidance ranges for each of our key performance indicators. Our guidance range attempts to account for a variety of business and economic scenarios. As demonstrated last year, the onboarding of multibillion-dollar enterprise merchants can have significant weighting on volume in a particular quarter and is difficult to predict. Additionally, the persistent uncertainty of the macroeconomic climate compels us to be cautious. The low end of our guide contemplates modest headwinds in consumer spending, during which we are confident we can deliver best-in-class growth among our peer set. The high end of our guide implies a continuation of recent trends in both our growth and consumer spending. As Taylor mentioned, FNARO is not included in either scenario, and we will be adjusting our guidance when the closing date becomes certain. Both the high and low end of our ranges represent strong profitable growth, including margin expansion and improved free cash flow conversion. For 2023, we expect to deliver total end-to-end volumes of $100 billion to $109 billion, representing 40% to 52% year-over-year growth. Gross 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 $955 million, representing 26% to 31% year-over-year growth, and adjusted EBITDA of $410 million to $435 million, representing 42% 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 cash flow conversions to expand to 52% plus. As a reminder, one more time, this guidance does not include Finara or any other contemplated M&A in 2023. With that, let me now turn the call back to Jared.
spk07: And thank you, Nancy. So, operator, we're ready to take questions.
spk02: Thank you. If you would like to ask a question, please press star plus 1 on your telephone keypad. If you change your mind, please press start and lose by two. While preparing to ask your question, please ensure that your phone is unmuted locally. Our first question comes from Dan Perlow from RBC. Dan, please go ahead.
spk08: Thanks. Good morning, and a lot of good stuff in the results today. I wanted to just, I just wanted to ask a question around kind of the embedded expectations, you know, within guidance. And, Jared, I appreciate the fact that you don't want to give, like, the vertical numbers specifically, but I was just wondering kind of directionally, how do we think about how much contributions ultimately are going to be coming from kind of net new business, some of that being vertical, some of that being other opportunities versus just high growth core, and how that may toggle, you know, given some of the macro scenarios that you've built into your assumptions. Thanks.
spk07: Hey, Dan, thank you so much. And I'm looking around the room just to see if – if taylor nancy wants to add on what i would say is that if we were trying to put a 2023 volume bridge in place it would look very similar um approximately similar to what we did last year if you just took it on a on a percentage basis of current volume how much is coming from the annualized impact of 2022 How much is kind of net new from high growth core, and then the balance being all else, which is predominantly new verticals, and to some extent, a very small portion, I'd say, from like international expansion. Yeah, that's exactly right. So the one thing to keep in mind is, as Gary mentioned, annualizing our boards from last year is always the largest contributor inside of the year. We got a half a year for on average contribution from those merchants, and just getting a full year is really nice. grow over benefits that we get. One thing to keep in mind is a lot of these big merchants did not contribute a full year last year. So while we surprised, I think, investors with the contribution of new verticals kind of surging in Q3 and expanding further in Q4, you can expect that grow over benefit to help. The one thing I would just sort of maybe caveat Jared's statement with is we were more pessimistic on same-store sales growth in our guidance this year than we were last year. So if you recall, we had a portion of our bridge that was, you know, same-store sales growth and travel recovery. I think we're more cautious on that front because I think it's proven to be so.
spk08: Yep. No, that's great. And then just a quick follow-up. Just any initial commentary around the success you're having in sourcing strategy, you know, the go-to-market strategy here is a lot more direct distribution than what you've had. Obviously, you had a quarter now to kind of see how that's going. So I would just love to hear any kind of initial phases there. Thank you.
spk07: Yeah, sure, Dan. So we're really pleased. I mean, you know, I don't know how many people really follow us on, like, on any of our digital marketing or social media spend, but we really spend, you know, virtually zero in terms of generating leads for our Skyforce team. And the reason is we wanted to spend, you know, really the first kind of, you know, two quarters just dialing in, you know, our operational process. You know, one area of focus is our, you know, like literally five-day turnaround time from when a new customer is signed to having a fully operational POS system in the restaurant. So we wanted to really get that dialed in and working very, very well before we kind of turned on the marketing engine. The reason we've had so much production is because, and I don't know how many people picked up on this nuance last quarter when we spoke about it, a lot of the partners that we acquired in-source have had portfolios of customers on many of our competitors, whether you call it like Heartland or SpotOn, some of them even former toast dealers. So they already had 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 team and sign up customers to SkyTab without any real marketing support. And that was part of the plan by design, was to use the first two quarters, kind of burn down some of that low-hanging fruit, dial in the process before kind of ramping marketing. And I think as a result, you wind up having, like, just a ridiculously low customer acquisition cost over the last couple quarters. But really pleased with how things are coming along. Great balance between our direct team and filling in the gaps with some authorized partners. And we're really happy with the results of the product. It's in some extraordinarily high-volume locations right now. Thank you.
spk02: Thank you. Our next question comes from Timothy Chiodo from Credit Suisse. Timothy, please go ahead.
spk04: Great. Thank you. Good morning, everyone. I want to talk a little bit about the ticketing opportunities.
spk07: So you have SeatGeek. You have TicketSocket. You recently got the Pacquiao integration, which opens up a lot of college sports and stadiums there. Maybe you could just expand upon what Pacquiao 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 only large integration that you have yet to make. Hey, Sam, I'll cover that one. I don't want to talk about any of the names specifically. We are trying to be pretty deliberate in walking back from, you know, specific customer names, specific partner names. But the way you should think about a ticketing opportunity the way investors should is it's an integration to a software platform that lots of other merchants use. So pick any of those names that you mentioned. Getting an integration to the platform means that you're now technically capable of serving a TAM that is substantially wider than the day before you completed that integration. And so having the integration means that you can light up a customer that's using it very, very quickly, but that integration is what takes a lot of time to get done. So we announced kind of our foray into sports and entertainment in a meaningful way with the acquisition of a venue next in March of 21. We started to win full-stack stadiums and started to have ticketing conversations throughout the end of 21 and into 22. We kind of completed the bulk of that ticketing integration work And now it's much faster for us to light up customers, much in the same way we can light up a customer who's using a hotel property management software integration that we already have. And obviously being able to deliver for them in the really high demand environment of their stadium gives them confidence that we can handle their ticketing volume as well. So you should think about each integration as an instant way to expand our TAM and that the volume comes much faster as a result saying yes and signing an agreement that allows you to serve them. Excellent. Really helpful. And congratulations on those integrations. A quick follow-up is around inorganic contributions.
spk04: I realize they're small from the European CSB, a little bit from GivingBlock, but could you just recap what was included in Q4 that was inorganic and the small portion that's included for the 2023 guide for both volumes and revs?
spk07: Yeah, sure. Suffice it to say, and I think we had these comments in November, we were not terribly optimistic around the giving environment at the time. And this is probably pre some of the other, you know, tough news in the crypto community. So the contribution from the giving block largely came in the form of SaaS from the incremental customers they signed up. It was not particularly meaningful, although when you think about that, But as the giving environment starts to improve, you know, the donation volume should come very quickly thereafter. So we're quite constructive on that platform, despite the troubles in the crypto community and the lower donation volume. And I think we had commented in that same fall, November, that we expected the contribution of our international TSP to be less than 1% of our volume in that revenue for the year. And I think it's landed right where we expected it to be. So reasonably inconsequential in the quarter, although really, really strong technical capabilities. Yeah, I think just to layer on that, you know, pretty consistent with – this is just important, I think, for all investors to understand. It's not uncommon for us at all to – acquire assets that we think give us some unique right to win within a specific vertical, and then just totally pivot the revenue model around payments. Great example of that is the Venue Next acquisition. You know, at the time we purchased it, I mean, fantastic software. I mean, it wasn't a cash-generating business at all. Pivoted it, you know, from, you know, predominantly SaaS at that point to now being, you know, a real contributor from a volume perspective, which is driving a lot of the debt revenue. not to mention it's opened up doors for ticketing opportunities as well. When you think about the giving block, I mean, right now, you know, the overwhelming majority of the revenue that we take in from nonprofits is coming from major nonprofit brands like St. Jude and others that are giving us traditional car payment volume, and many of which we were able to solicit from the 2,200 or so existing giving block customers. You know, with respect to the European, you know, PSPs, You know, we bought that asset to put volume that we knew we had already with respect to some of our strategic customers into the European market. So I know it's been a question we've been asked since the time of the IPO, you know, what contributions are coming organically versus inorganically. It's almost always organically and then some because you're oftentimes devastating the revenue model of the existing business you acquired to pivot it. towards our organic strategy. I think that holds the same with the deals that we actually did in 2022. Perfect. Great points. Thanks a lot, Jared and Taylor.
spk02: Thank you. Our next question comes from William Nance from Goldman Sachs. William, please go ahead.
spk04: Hey, guys. Good morning. Thanks for taking the question. Jared, I think the company benefited a lot from some of the aggressive actions you guys took, distribution insourcing, the rolling out of SkyTab, Gateway Sunset. What's kind of the big needle mover in your mind for 2023? What are the main two or three things that investors should be focused on to kind of track the next leg of growth this year?
spk07: Yeah, what an awesome question. 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, you know, in November of 2021, where we basically, you know, told our investors that we're moving, you know, we're diversifying from, you know, outside of just restaurants and hotels into all these exciting new verticals, gaming, nonprofits, sports entertainment. They were all, you know, kind of, you know, e-commerce, international. They were all anchored off of like a, a significant merchant that was going to give us more than a foot in the door within those specific verticals. We moved into 2022 building on every one of those initiatives. We certainly saw, or at least were 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 TOS with a balanced direct and indirect distribution. And we made some real meaningful progress between Pinaro, which is still in a commercial capacity, and then, you know, an inorganic acquisition in Europe to set the stage well. So I think we really set the stage really well in 2022 going into 2023. And where are the needle movers right now? Let's start with HydroCorp. Gateway sunset is going to still deliver significant results in the years ahead, years ahead. There's still like an enormous amount of volume on our gateway business. So I know everybody likes to ask, are we in like, you know, middle innings, later innings, it's still early innings with gateway sunset. So I expect that to be by and far the largest contributor to our growth in 2023. All the new verticals we've built upon, and you've got real traction there. We made our investments were really well timed in late 2021. So I expect us still to crush it in sports and entertainment, except now you're going to have Pygmy, which is huge, and comes in at higher take rates than we've had previously. You've got, like, almost every sport, you know, like real decent presence in almost every one of the major sport leagues. So, you know, some of the, like, seasonal, you know, trends that we saw in prior years in sports and entertainment won't be there anymore. And I think, you know, what's most exciting for us is we're making real progress internationally, both inorganically and organically. And that's not just for the benefit of, you know, you know, one or two really strategic customers, but it allows us to bring restaurants and hotels and all these new markets too, as I mentioned in our remarks. So I look at high growth core, continuing to deliver the majority, new verticals moving very quickly, and real progress in international markets in 2023.
spk04: Got it. That's super helpful. And maybe if I could just follow up on some of the comments that you had on the gateway sunsetting strategy, you mentioned being in middle innings. I know it's kind of back to the basics with shift four, but Could you maybe provide an update on kind of just general expectations of the pace of conversions going forward? I think you 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, how much of the kind of growth in the near term do you expect solely to come from that opportunity?
spk07: Yeah, I mean, just to clarify, I did say we're still early in it. So maybe we're in the second inning. I don't know, late, you know, bottom of the second.
spk06: I don't know.
spk07: I still expect Gateway Sunset to contribute a substantial amount of volume. Like, we didn't, you know, pre-discuss what our, you know, current Gateway-only volume is. Most things, we don't actually look at it, you know, that often. But you're still talking, like, you know, well in excess of $100 billion, like, well in excess of that in volume there, like even if we're working 24 seven, it's still a lot of volume to move over. And we did say that we're trying to take our gateway sunset initiative, remove the parts, unlock a lot of efficiency, and make it you know, not a 10 year initiative, you know, or a five year like trying to pull that into three years. It's a lot of volume to deliver in that period of time. So but but I'd say it's still like a pretty substantial focus for us. And in terms of like repricing you know, getting properly rewarded for the capabilities that we're delivering, which is the heart of the integrated payment solution these customers benefit from, super early innings. Like I think we mentioned last year, like, you know, we effectively added a Netflix subscription to, you know, hotels and restaurants doing, you know, millions a year in volume. So I'd say that that's still pretty early on as well. You know, the one thing I'd add on just to help contextualize it is, you know, for smaller merchants on the gateway, and it used to be merchants doing a million, two million, three million a year in volume, these decisions are typically made by the owner-operator. They happen quite quickly. They happen regular course, and we get, you know, hundreds of these a month. And it's really just a function of getting the time with that owner-operator to have the conversation on the benefits. And obviously the pricing actions that Jared mentioned do like slightly nudge, you know, the conversation in our direction. Larger operators, and there are many multi-billion dollar sort of 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, Nancy mentioned in her script that we want to be mindful of is we've had a lot more time to have these big conversations with big merchants. And so as they agree to move over, and increasingly they are, it creates a little bit of lumpiness in sort of the volume growth in a quarter and the corresponding spread that we deliver in that quarter. So we want to be cautious that, you know, we have a good enterprise-level conversation that can make the volume growth and the 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-making.
spk00: Got it. Appreciate you taking the questions. Very helpful.
spk02: Thank you. Our next question comes from Darren Peller from Wolf Research. Darren, please go ahead.
spk05: Hey, guys. Nice results. Thanks. Listen, I wanted to touch on the international build a little more and the opportunity there. obviously when you close the deal, the FNARA deal, it'll help. But if you can give us a sense of the past and what you see as the opportunity in terms of vertical expansion. I know you obviously are a large customer as an anchor and it's helping. But what kind of opportunity do you really see that being both in 23 and maybe a little bit longer term, Jared? And then, Nancy, just a quick follow-up on the financial side. That kind of relates because you're going to have to spend time and money building that out, I imagine. And so when we think about the margin implications of something like that, And I guess if we back out the residuals benefit you have in either last year or this year, it looks like your margins are basically stable with the expansion coming from those initiatives. So what's happening under the hood in terms of investment and what you can do on the margin front end as you're building out? Thanks, guys. Which one? Mike, you start.
spk03: Okay. Starting on the margin side, I would say you're right. Certainly the answer. distribution held the margin list, but by design, of course, right? And so I think as we're strategically looking at where we want to invest for growth, from an international perspective, a lot of these kind of tuck-in or small technology and product fields that we're looking at provide us a lot of opportunity to to create the investments that we need kind of outside of the U.S., right? So we don't really need to use kind of the U.S. platform necessarily to make core investments for that expansion. And when I look at, you know, SHIFOR and kind of the history of SHIFOR, I think there was some discipline, but the opportunity here without really cutting into any kind of muscle Really, I would say we're just at like a very like first layer of that level of just really putting better process in place that will generate a lot of that margin expansion from here forward that you're looking at. So for sure, we're going to get an annualization benefit of the insourcing. But from there forward, there's just lots of room across every piece of the business to kind of optimize is the way that I would say it. And the investment for growth, I think, will come alongside. these tuck-in acquisitions or partnerships that we – the ones that we've announced and the ones that are coming in the coming year. So, feel very confident. I mean, you could tell from the EBITDA guys that we feel pretty solid about that. And, look, you know, it's the shift for a way that we always like to kind of beat these expectations. So, we'll just say there's room there for us to make the investments that we need.
spk07: Yeah. And I guess just to layer on a little bit on that point, You know, with every initiative, I was kind of trying to make this point in Q4 of last year when we were, you know, interacting with a lot of investors. It's like virtually everything we are doing right now, you know, has a margin and has an efficiency benefit, which then translates into margin and free cash flow. So just to give you an example, right, it's actually more labor intense for us to support a gateway customer than an end-to-end one. So every day that goes by that we move more customers from our gateway to our end-to-end platform, it makes things easier on our support resources. It's so much different than where we can handle a situation end-to-end versus trying to get a conference call going with, I don't know, Bank of America, First Data to try and troubleshoot a situation. Every SkyTab POS system that goes out right now is like three or four X easier to support because it's cloud-based than all of our legacy POS systems. You know, actually, we caught fair criticism for the first couple of years, public companies. Oh, don't they have a lot of Windows-based POS software? Isn't that previous generation? Yeah. And they're, like, more labor-intensive to support. So, like, every day that goes by, more ScottCat POS systems come in. Like, we are able to more efficiently support probably the most labor-intensive portion of our customer base, which is small restaurants. Last, our diversification into new verticals, stadiums. I mean, a single stadium that may be hundreds of millions a year in volume, can be covered by, let's just say, one person with half their time versus that same person might have to cover thousands, you know, potentially of restaurants that are calling multiple times. You need a lot of people in order to manage that, you know, the number of inbound calls on that. So the point is, is, like, there's areas of business that are going to be able to operate more efficiently, and that frees up resources for us to make investments in areas like product dev, R&D, finance, for sure, as we continue to expand internationally. Moving on to the first part of your question of just general excitement and how big the opportunity for international is, it's huge. I hope most people took a look at some of the numbers that got released on Stripe. Holy hell. You're talking about $800 billion in volume growing at an extraordinary rate. Even adding numbers, take margin aside, that's a lot of volume. What that is right there is integrated paying 3.0. That is powering commerce-enabling software anywhere in the world and making life easier on some of the largest enterprises in the world. Yeah, we're gunning for that heavily. We're going to follow an incredible customer on that journey. We'll do it organically in some parts of the world, like we announced with Canada and the Caribbean. We're looking at other markets now. We'll do some one-to-many partnerships in some parts of the world, and we'll deploy capital effectively to own rails in other parts of the world. And in doing so, we're going to first be able to compete So it's not just Adi and Stripe going for some of those huge multinational corporations, but we're going to take everything that made us special in the U.S., like one of the most competitive markets in the world, and bring it into those new markets. It's incredibly exciting. Like, you know, this is our journey to like a billion dollars plus in EBITDA. I mean, that's the march we're on right now. Right. So I think it's one you can't ignore.
spk05: That's really helpful. Thanks. Guys, just very last. Quick follow-up is on SkyTab and the progress you're making seem really strong on the location ads. Just maybe a quick update on the expectations for the year ahead.
spk07: Yeah. We thought it was fair to give you some sense of how SkyTab is moving because I think it's such an important part of, you know, the distribution and sourcing story. You know, the expectation is like, you know, I think, both Toast and Shift4 are going to continue to have great years. And I'm sure both Toast and Shift4 will take our products into international markets, and we'll go and clean up all those legacy terminals and Windows-based POS systems, and I think both enjoy a lot of success. What I don't think we'll do, I mean, we'll certainly give you insights into spreads and volumes. I don't think we're going to every quarter give – know give updates on on location count i i don't think you know kind of we we tend to be way you know more up market than that um you know you'd rather have hypothetically four thousand you know two million a year customers than five thousand you know eight hundred thousand your customers or something of that effect but yeah i think it's like looking at the competitive landscape It's a two-horse race for sure. And there won't be a winner-take-all. Both Toast and Shipboard are going to have a lot of success with our cloud-based products in the U.S. and other markets.
spk05: That's great, guys. Thanks again.
spk02: Thank you. Our next question comes from Andrew Boyce from SMBC. Andrew, please go ahead.
spk08: Hey, guys. Nice set of results, and thanks for taking my question. I just want to tail Darren's international question there. And in the context of the regulatory approvals needed for Finero, I know that you're not considering anything from Finero in this guide, but given how important the international expansion and roadmap is to the Shift 4 story right now, is there any kind of changes to how, you know, results would shake out one way or another? if the regulatory approvals were, you know, signed off today versus, you know, bleeding the third quarter or even beyond? I don't believe so.
spk07: The, as Jared mentioned during his descriptive remarks, we have an arm's length partnership that's allowed us to complete a lot of the technical work to service customers. So, we have, I think there's been some comments around this previously. successfully vetted transactions on Skype app throughout Europe via a combination of platforms on Venue Next as well. We do share a handful of customers today. So while there's modest improvement in economics from having it one quarter versus the next, we're not really thinking about it in those terms. We want to close it as soon as we're allowed to just because it helps both companies operate with a clearer lens towards the future. But we've spent a lot of time together to the maximum extent appropriate on working through these solutions. So it's not hitting the pace of progress inside of our business. And the international acquisition of the PSP that we mentioned last quarter is just another example. So we're 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 the fact that these regulatory approvals can be, you know, up to 18 months, as I mentioned in my comments. So, we're pleased with the progress that's been made thus far. We do expect that the reports of this process is just a slightly opaque nature, which is, I'd say, nothing more than mildly frustrating. I don't think it has a significant impact on performance one quarter of the next. That's good to hear. And then I wanted to get a little bit more color around the investment philosophy here. And what are the key kind of macro indicators that you guys are looking for to give you more confidence of, say, stepping on the gas regarding investments?
spk08: I mean, I really appreciate the commentary in the shareholder letter that said, you know, focusing on upgrading talent versus, you know, outright adding heads. So maybe if you could just kind of give the sense of the investment versus the macro and
spk07: maybe what areas of the upgrading talent you're really focused on? You know, stepping on the gas is an interesting way to phrase it because I think we kind of always feel like our foot's pretty heavy down on the gas. The reality is we think about kind of capital employment or M&A, if you will, through a couple of lenses. Number one, is there a capability that we have need that we don't have that an acquisition accelerates our pace into. And I would say that's been a portion of our M&A, but not the entirety of it. Another portion is just, is this a customer acquisition cost funnel that is substantially lower than finding them? And I think if you look at things like the acquisition of MerchantLink Gateway, like the acquisition of the restaurant ice cream brands that we have before that, that was always to accumulate really, really nice groups of captive customers at a very attractive customer acquisition cost. We monitor for that all the time. I don't think market valuations have a huge bearing on that, and we execute when and where it's appropriate. I think the tougher one is the first thing I mentioned there, which is capability enhancements you do typically have to pay more for. You might not get the instant margin accretion from a transaction like that, so you have to be very disciplined in what you're willing to pay for it. We've seen the opportunity continually progress throughout this cycle. I mean, you've seen multiples in our industry get pretty battered and just see good opportunity for expansion. But you also want to be really disciplined. We don't just want to buy a capability enhancer. We want to make sure we're buying what was inherently a good company before we approached it. It needs to be, you know, able to operate at a reasonable profit on its own. that plugging it into our business is the right thing to do. Jared, anything else for Clarence? Yeah, I think I'd just say this is an area that maybe look a little bit towards our past. You know, prior to the IPO, going back to really, you know, 2015 timeframe, you know, we had a PE sponsoring that kept us, you know, at a comfortable six times leverage You know, predominantly to support, you know, periodic dividend recaps. And throughout that time period, we were reasonably active with M&A, which meant, you know, a lot of the acquisitions had to be, you know, on a synergized basis, essentially deleveraging virtually instantly. Fortunately, with our current leverage profile, we don't necessarily have to find those gems. But what I will say right now is that, you know, we are looking at deals that, you know, essentially on a fully synergized basis would be deleveraging, you know, inside of, you know, 12 to 18 months, which I think, you know, Taylor referenced in his prepared remarks. So continuing to remain disciplined just given the, you know, the uncertain road ahead. That said, I think in terms of capital prioritization, as Taylor mentioned, international is very important. Like I said, I'm a very big believer in this, you know, 3.0 evolution of the integrated finance world. And rails are scarce. really scarce. So there's opportunity to acquire rails in attractive terms to help build out our, you know, support our global expansion endeavors. It's going to be top of the list. But the other thing I'd say, too, is just do organic investment. You know, I mentioned earlier, there are a lot of reasons why we should continue to become more and more efficient. So if we're able to layer on that volume, you know, headcount at a, you know, endeavor to really keep it as flat as possible, like getting off of Q4, and it turns out that the you know, the economic climate is not, you know, as some people fear, then there should be room for us to make some investments in some organic initiatives, whether internal systems or other things to better support our launch profiles.
spk08: Got it.
spk00: Thanks, Jared, and congrats on a really impressive year.
spk02: Thank you. Our final question comes from Raina Kumar from UBS. Raina, please go ahead.
spk00: Raina? Hey, sorry. This is Anthony Sianovich filling in for Raina.
spk07: Thanks for taking the question. I know you commented on it a little bit before, but let's hope we can kind of talk about kind of the drivers of the really strong EBITDA margin in the quarter.
spk08: I know you mentioned the in-source distribution, but can you kind of help us better understand, you know, if there's anything unusual to call out or, you know, kind of the sustainability of that?
spk03: Yeah, hi, it's Nancy. I'll take that first, and anyone else can jump in here. But for sure, we're incredibly confident about, you know, kind of sustaining that margin into 23, as the guide indicates. You know, I think there is the benefits we've already talked about, which is certainly the in-source distribution, the changing model for new vertical support and service delivery. The model and the diversification as the book moves, it's just that service delivery model is more efficient than when we were supporting, you know, lots of small kind of hybrid core merchants and clientele. So that kind of overrides, you know, the flow through. And our discipline around, you know, you think about probably most companies, headcount, compensation, things like that, being the biggest driver of SG&A. When you look at our SG&A friends, both on a reported basis and on an adjusted basis, you know, very confident that those exit rates can be sustained going into 23. And it really just comes from disciplined approach across the board being implemented. You know, this whole idea of descending the spend, really thinking about how every dollar is being allocated, that's really the underlying focus of the company. And the new verticals as they forge, we're really taking a kind of white glove enterprise approach approach. surge-type models to get them delivered efficiently and onboarded as quickly as possible. And I think that flow-through is what you're seeing with Q4 and will continue into 23 and beyond. So just the leverage of every dollar at this point is flowing through at a higher conversion rate. And really, I just don't want to repeat everything Jared just said, but kind of exiting Q4 will continue into 23. Got it. That's helpful.
spk08: Just a quick follow-up. You know, I was just wondering if you think there's, you know, the macro conditions are impacting, you know, restaurant demand for the, you know, SkyTab POS, and how is it impacting demand for SaaS-based solutions or willingness to pay SaaS fees? Thank you.
spk07: So, a few things in there. I don't think, like, the restaurant, at least if you look at Q4, the restaurant vertical felt very normal, right? It typically does moderate off of the summer of Q3. That's what we saw inside of our restaurant base. It did not have any bearing on our ability to add customers. Now, as Jared mentioned earlier, we try to stack the deck in that regard. The entirety of our insourcing of distribution was not about gross margin economic expansion. It was also about really attractive customer acquisition costs and all the loaning fruit that that comes with the project. So our ability to gain share is, you know, hopefully somewhat dislocated for many macroeconomic impact. We like to have a captive base of customers that we can sell into is what's driven our success in the past. So I point that out with regard to the restaurant vertical is something that we've said. Now, as we look ahead, I think we've been, you know, publicly probably too cautious on same-store sales inside of that vertical and the impact it could have. That caution has been represented in kind of everything that we've 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 than we anticipate, but we plan for there being some adversity in almost all of our verticals. It just serves our entire operating model for the business well to be a little bit cautious.
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