Shift4 Payments, Inc. (FOUR) Earnings Call Transcript & Summary

Okay. Good morning, everyone. Day 2 of our FinTech conference. Thank you all for being here. I'm Ashwin Shirvaikar, I'm Citi's payments processors and IT services analyst. And delighted to host our next company, Shift4. And from Shift4, we have Taylor Lauber, who is the Chief Strategy Officer and President. Taylor, thank you for being here. Thank you for doing this for us.

Thank you.

Yes. Absolutely. Don't have warm weather like you did couple days back for you, but at least weather review of Central Park if you get bored.

I'd like to start off with the level set question, typically, you've been around for a while as a public company now, but even so if you could just sort of talk a little bit about Shift4 and a very brief arc of a journey since IPO, 2, 3 minutes. And then we'll get deeper into all the pieces.

Yes, sure. So it's actually the right place to start because I think as we've watched at least in the 2.5 years since we've been public. You've seen lots of payments names enter the market. It's very difficult for, even us, to understand the points of differentiation among them. So we'll start with kind of where Shift4 has carved out its niche. Important to note that we're a 23-year-old business. I think at least at certain points over the last couple of years, the longevity of your business has been perceived as a detriment. We're immensely proud of the fact that we've been in business 23 years and grown revenue every one of those 23 years. And through that, I've learned a lot. I think the first is, Shift4 was one of the first businesses to recognize the convergence of payments and software. So while it's cliche now that merchants, by and large, make a software decision first and let the payments kind of ride along with it. Shift4 created back in the mid-2000s, a product line called Harbortouch which was the first of its kind. It was bundling restaurant software with a payments offering, going to market in a highly differentiated way, saying we're going to give you these tools to run your business. And by the way, the payments aren't even a debate. They just work. And monetize the relationship through both a modest amount of SaaS and also the traditional payments revenue stream. So when you think about all the decisions the company has to make around how do I want to monetize my SaaS product? How much do I want to charge on payments? How do I deliver a service offering for both in a uniform way, it's always important to realize Shift4's been doing this for nearly 20 years, meaning software-plus payments. And that history has taught us a lot about, number one, the markets we want to be in; and number two, exactly how to go to market with a software-plus payments value proposition. You hear from lots of companies in our space with almost like religious views of you need to build the software. And that's the only way you're going to be differentiated in your market. And then you hear other companies say, just buy a really good software asset, bundle the payments with it, and you'll be set. And then furthermore, other companies say, you can't buy everything to be dominant in the market. So partner. Partner with them, deliver a best-in-class partnership opportunity and go to market that way. Shift4 does all 3 of those. And at the time of our IPO, they were actually all equal contributors. So software we built was delivering 1/3 of our revenue and profitability, software we acquired was doing the same and software we partnered with was the last 1/3. So I think understanding kind of the role that the software has an emergent ecosystem, understanding the role the payment provider has alongside of that, has been a point that allows us to differentiate. Today, we have a massive point of differentiation that we own a gateway that has 500 different software integrations. Again, some of those are things that we built, and some of them are things that we've acquired over the years and some of them are software brands that we partner with because you couldn't possibly own all the things that, that merchant needs. Picking on this hotel, for example, you'd find a dozen or more different software suites around this hotel. You'd find a front desk, you'd find a lobby bar, you'd find a salon and spa, you'd find a retail gift shop. Every single one of those software suite has to be integrated into a common platform for this hotel to operate successfully. And if this hotel went out for RFP, it would be Shift4 and perhaps one other that could actually even respond to that RFP because they have the software integrations that this merchant needs to do business. So we take that massive point of differentiation in this really extensive library that would be incredibly cost prohibitive to try and go and build today, and use that to get success in the verticals we're in. So we support about 40% of hotels in the country. We serve about 1/3 of the table service restaurants. And then we increasingly look to verticals that have common characteristics like other verticals where merchants need a lot of software and try to deliver our solution there. Stadium is probably the most recent example where we weren't in a single stadium, I think, at the time of our IPO. And we're now in over 100 because they have this multi-software phenomenon that very few are well positioned to serve.

Great. Now, that's a really great overview. Before we jump into some of those components that you talked about, I just want to get this out of the way. You had a CFO change.

Yes.

You had some things that you said about accounting, just to kind of set the record straight, what should investors make of these?

Yes, sure. So I'd start with one was unrelated to the other. One of our strongest ambitions for quite a while, it's been to grow international. For anyone who stayed at a -- let's pick on Marriott or Hilton abroad, you generally make your reservation online at a place like hilton.com, that's our technology that helps power that. Then you show up at the hotel, and they swipe your card at a local bank terminal and then staple that little receipt. So we've had this ambition to be international for quite a while. We -- at the beginning of last -- or at the end of last year won our first kind of big global international customer and have since announced 2 acquisitions that are international. So as our footprint grew it became clear to us, we needed a CFO with international experience. I think at different points in your trajectory, this was very similar when I was at Blackstone. There's a CFO that gets you to 500 employees. It's the CFO that gets you to sort of 1,500 employees. And then once you get beyond that, you -- it's a totally different ball game in terms of what you need to be thinking about as a business. So we brought on Nancy Disman in August. It wasn't a top sell. She was actually the Chair of our Audit Committee. And so she knew the business reasonably well. We knew her immensely well and we said, we'd like your help for the next phase of growth for the business. Separately, we did have an 8-K that we issued, I want to say, about a month ago that we would be restating our financials, it's quite frustrating. It was a 5-month process with the SEC, where they issued a comment letter much in the way they do with every kind of newly public company and asked us to opine on a handful of different things. And one issue they took at the end of that whole 5-month thing was related to a classification in our cash flow statement. So I tried as little as possible in accounting in school. So bear with me as I give this explanation, but it was effectively that we had to move a line item in our cash flow statement from the investment line to the operating line. So I guess in some more big way, I can say that with a 5-month process, I'm thrilled with that was the consequence of the change. But in markets like this, it's not surprised that caused some consternation, especially with the idea that we had a CFO change as well. But that was the change.

Okay.

Wait. One more thing that's very important. There was no actual change to the numbers on either of the other 2 financial statements, nor in the footing of the cash flow statement. So the change was quite inconsequential, but I think in markets like this, when you say a restatement, it causes the right level of anxiety.

Absolutely. Understood. Let's dive into the business and kind of where you started with restaurants, lodging. Obviously, still a very big business for you. There are a lot of companies that are in that end market. It is competitive when you look at a 50,000 foot down. But when you get down to each of the levels, there's nuances. So maybe just kind of walk us through some of the nuances the way you see the lay of the land and the way you see competition.

Yes. So I'll start with something that's not vertically focused. It's got a lot more to do with the size of the merchant. And that is if you run the type of business whereby you could download a piece of software on an iPad, configure it yourself and go to market and operate your business, there's a fierce amount of competition. There's exceptionally good competitors, and it's a market we want very little to do with. So if you think about Square, you think about Clover, awesome products and what those merchants need is a really basic point-of-sale capabilities and a bunch of other run-your-business stuff that, quite frankly, we think there's really good competitors, and there will always be a really interesting competitor popping up. I think Stripe in many regards can serve that end of the market in an interesting way as well. As merchants grow, the need for vertically focused software to run their business becomes more and more important. And so you start to get restaurant point-of-sale software very specifically. And believe it or not, there's differences between fast casual, fast food and table service. And so as these merchants grow, the vertically focused software they need becomes more important. And then at some point, they hit a level of scale whereby the number of software suites they use starts to grow. If you think about a big restaurant here in Manhattan, pick any of the big night clubs that are doing $30-plus million in revenue. They have 6 different pieces of software running their business. Where Shift4 for endeavors to be is kind of at the lowest end in the bottom of that vertically focused stack, where suddenly you're a restaurant doing $500,000 to $750,000 a year you're distinctly a restaurant, you have very specific functions you need out of your software. The Square stuff doesn't work anymore. And then really we try to push as high up market as possible where the complexity has become something that are really significant for a merchant to navigate where they're operating a bunch of different best-in-class software suite. I mentioned kind of the mega restaurant nightclub in New York City, but also you'd find that phenomenon in stadiums and hotels, et cetera. And basically, the more software merchant needs, the thinner the air from a competitive landscape. We happen to be covering the widest portion of a single vertical in restaurants because we started in 2005 servicing restaurants. So we've got some brands that serve that bar and grill on the corner really, really well. We also have a suite of software integrations that served the Tao's and the Hakkasans really, really well.

Okay. That's very helpful. Now you introduced SkyTab recently. And let's talk about SkyTab the product, but if I can preface that by asking you to give us a view into sort of your innovation process? Because that, I think, broadly speaking is also important.

Yes. So I mentioned this brand we created called Harbortouch in the mid-2000s. It's been one of the most successful restaurant point-of-sale brands since then. So despite kind of the noise you see in the public markets around the competitive dynamic despite how confusing it may look, the reality is we've grown restaurant payment volume. I think our latest published CAGR was 52% over 4 years. Tom, you can keep me honest. So let's throw the pandemic in the garbage, and let's just look at a 4-year CAGR. We grew restaurant payment volume 52% over the last 4 years. We see interesting competitors pop up all the time, but it's a market we're going to be in because we've been successful for well over a decade in that market. And we see these competitors pop up. We've approached the vertical a few different ways. We built software, and that's the Harbortouch brand that I talked about. And what we learned is that, that software had a natural ceiling. It did really well in restaurants from sort of $400,000 a year to $750,000, but it struggled to break through that. And as we said, we're kind of limiting our TAM because of the sophistication of our software is really ideal to this market, let's widen our TAM. We went out and bought 3 other restaurant point-of-sale brands. And so since late 2017, and this again speaks to kind of our view on how software and payments can be interplay and our ability to tackle that, we're operating 4 restaurant point-of-sale brands. Each independent software companies, each with their own distribution networks, each very successful in kind of their swim lane of food and beverage, but also each running Windows-based there, I say, legacy software that over time was going to have less relevancy in the market. And so we -- has -- as part of our innovation cycle, have always had the next product kind of on deck, we've been creating a restaurant product called SkyTab, which is Android-based. It's all the benefits of a modern tech stack, but also built to address kind of each of those 4 swim lanes as opposed to one of them individually because now we've had this expertise of serving restaurants from the bar grill in the corner up to Cheesecake Factory all over the world, which uses our software today. So we released the software in September. It comes with lots of great benefits. First and foremost, it's that tech stack makes it much more easy for us to service the merchants remotely, which is really helpful. The cost of hardware and implementation is substantially lower than Windows. And every time a merchant gets frustrated with a Windows Workstation, they oftentimes call and the cost of replacing the entirety of the restaurant's technology footprint with an Android-based platform like SkyTab is neutral. So it's a very simple value proposition. It's -- we can replace that one piece of technology throughout the entirety of your restaurant at a cost-neutral basis and you get on a more modern product. This is, again, pretty natural in terms of the evolution of Shift4. We would have had a product like this at any point in time. It's particularly relevant now. I think what makes us different than some of the other competitors out there. is that we have over 100,000 restaurants already using some form of our technology and less than 15% of are actually paying SaaS today. So this kind of speaks to our philosophical views on how to grow. We can grow revenue and profitability and, quite frankly, payment volume really, really nicely without ever finding a single new customer. We can go back to this library of 100,000-plus customers using our technology and say, now is the time for you to upgrade. You pay a modest SaaS, you'll get all new or across your location. You get a bunch of different features that are more integrated than what you're used to today. And effectively doesn't cost too much. It gives you a lot of incremental benefit, but we suddenly are earning SaaS from that merchant. We're suddenly earning payments revenue from that merchant. So I'll be the first to say, I've been skittish on the macro economy, probably to the detriment of our stock price long before I think most, as far back as March. I've been skittish on kind of macroeconomic growth. Well, hopefully, you see that position in how we go to market. We can grow substantially without ever finding a single new restaurant. And in our vertical, that's really important because restaurants have high failure rate in the best of times. And so to be able to grow into proven merchants is something we're really excited about.

Okay. Any other benefits -- have you actually -- it's still a relatively new product, but have you experienced maybe lower churn or expect to do that? Or you kind of have now one software for swim lane as you call it your downstream operating costs and things like that. Has that been quantified is that in your numbers?

So it's not in our numbers yet because the product's relatively new. But what I would say is the benefits are myriad, literally taking customers already paying us some SaaS today and putting them on this product means we've got one less legacy product in the field to service, and we're a much better company for having done that. Obviously, the benefits only grow from there. The churn is an interesting one. We actually haven't had really meaningful churn in the restaurant vertical. And I think that's got more to do with the fact that we typically find ourselves in established restaurants than it does the software they're using. I mean, restaurants by and large, don't wake up every day and say, how do I get a much better point of sale. That's what like -- nerds like me think about. They think about how to deliver a phenomenal experience for their guests. And if the technology is working, they're kind of content. So churn -- the benefit should be -- it's a much easier product to service. You generally don't need a person there for about 75% or 80% of what could go wrong. You can do a remote update, for example, and you can guide people to things remotely. The cost of hardware is that much lower. I will say there's a there's a lot of feature set benefit that became much more relevant during the pandemic, that restaurants historically sort of tried to avoid. So automatic integrations to things like DoorDash, loyalty that comes out of the box working are things that restaurants have kind of been pulled into almost begrudgingly, integrations to things like OpenTable for reservations. This all comes out of the box, so it should make their lives easier. But I think the longevity we've had in the restaurant space suggests that churn has not really been a mega issue for us. The ability to replace their existing product with something that's relevant for tomorrow is probably much more...

Got it. Okay. Okay. Now the setup that you have in your financial model is interesting because you have gateway revenues and you try to convert them to end-to-end. Those gateway revenues, they've fluctuated between $150 million, a little north of $200 million depends on...

The volume.

Yes, the volume, sorry. $1 billion in terms of just the volume there. What causes that fluctuation? And then you guys have been talking more recently about sort of the gateway sunset. Could you kind of go into some details there?

Yes, sure. So for the benefit of those of you that are newer to the story, when I talk about a library of 500-plus software integrations, that library started getting built 30-plus years ago. So why are we so lucky? We're still lucky because we bought it. So this payment platform that has all these software integrations is an asset we identified at the middle of 2017, we saw how valuable it was in that, it had, I think, at the time, 30-odd percent of the hotels in the country using it, tons of specialty retailers, tons of big enterprise merchants. And yet, for all this connectivity, they were connecting the software to the payment rails. They were typically earning maybe $0.03 to $0.05 per transaction. And then they were routing those transactions to a merchant acquirer like a Chase or First Data, Global Payments, et cetera. We witnessed this phenomenon in kind of our never-ending course for interesting technology to own, and it made no fundamental sense to us. This is the core technology that a hotel like this is using. And then they do all of the hard work. They do all the encryption, all of the tokenization, all the analytics, all of the front-end integration when the hotel wants a new piece of salon and spa software, they do the work to work with that software provider. And then the transactions are being output into a bank to do an approval or decline and settle the funds. And the bank is making 40 or 50 basis points, while the gateway gets a nickel. It made no fundamental sense to us. The reason the model existed these gateways were terrified that if they decided to be anything but Switzerland that the banks would stop sending them customers. And so we did the math for them and said, you can actually lose 90% of your referrals, and this is still a phenomenal transaction we acquired. The gateway with the idea being we would be a bundled solution provider. We would be the merchant acquirer and the gateway provider. And in some cases, the software provider as well, all in a single stack solution. The value proposition is enormous. So since the pandemic began, we've added 10% of the hotels in the country to this platform. And as you can imagine, this isn't like the first thing hotel operators or hoteliers are waking up and thinking about. But what it also gave us was $200-plus billion in payment volume that was already on our rails and getting output into third-party financial institutions. And all we had to do was to talk to those merchants and say, why are you paying the bank the lion's share of the revenue when they're not doing anything that 10 other banks connected to this couldn't do or we couldn't do for you. And so converting this gateway-only volume to what we call end-to-end gave us a basically a 10x lift in revenue, a 3 to 4x lift in gross profit every time a customer moved over. And technically, there was nothing that changed at the merchant location. So when you think about an ability to grow payment volume double digits during 2020 when 90% of your business is restaurant and hotels, it's not the fact that we own this gateway, already had the volume captive to us and had a much better value proposition during the time. And so we've cited that at the time we acquired, it was about $200 billion in volume I think at the depths of the pandemic, it dropped below that. The latest number I think we officially disclosed is about $180 billion. And generally speaking, it doesn't really leave, it migrates over to end-to-end over time. It's immensely sticky as you can imagine, swapping out all of the integrations in a hotel like this would be painful. So it's very sticky volume. The thing that's caused it to fluctuate is, quite frankly, the toll the pandemic took on the hospitality industry, but it's kind of everything -- less what we've converted the bulk of it is all still there as a gateway customer, And it's great for us because every month, we get a handful of customers that suddenly say, wait a minute, why am I paying 2 providers when I could pay one, and they help fuel our end-to-end and revenue growth.

Okay. Okay. And the sunset program, if you could talk...

Yes, absolutely. So we made the decision in early 2022, so earlier this year that we were going to accelerate what we called our gateway sunset project. Basically, we're going to be less of the gateway. At the time we acquired the businesses, it was entirely about [indiscernible]. It was here's all the good reasons you should move to end-to-end. You save money. You get a better service experience times, if we could help upgrade their software, we would do that and help incur costs that they otherwise wanted to avoid. And we made the decision at the beginning of '22 that we were going to be a little bit more stick, a little bit less care on compelling merchants to move. It actually was born out of like out of a hiring challenge. We were growing so fast that we struggled to hire, and we said half of our employees are working on gateway stuff. And it drives less than 15% of our revenue. And so this just doesn't make sense. What's the best way to free up these employees? Well, to be less of a gateway, let's shut down gateway connections that we're not earning any money on, that aren't profitable for us and who cares whether the merchant's lever or not. We're a better business for having done it. But if our instincts tell us anything, merchants won't leave, they'll convert to end to end. We just need to sort of be a little bit more aggressive about putting the choice in front of those merchants. So we began a program. It's kicked off kind of in earnest in June, which was for noneconomic connections or customers. We're going to tell them to leave or join end to end, but we're no longer going to support them. Period full stop, your connection is going to stop working. For customers that are otherwise resistant to change, we're going to raise price. You can stay, but you're going to pay for staying. And then for big enterprises, we're going to have bespoke conversations about our role in the ecosystem and that our desire is not to be a gateway-only provider earning a nickel, and we know the value that we're providing. And so we have to have a more specific conversation about paying us more if you want to stay on gateway or joining end-to-end. So all of those kind of kicked off. We did raise price on a portion of our customers. I think in retrospect, it was probably too modest because we didn't get a lot of phone calls around it. So while it's nice because you hold a bunch of money straight to the bottom line. The reality is it didn't really affect much in terms of our service offering. We did shut down one connection, which was great. We got a really healthy portion of those merchants over to end-to-end as a result of that. And with the enterprise discussion, that's a rolling thing. I think this is the type of project that's going to go on for many quarters with each quarter us weighing kind of the population that's actionable at that point in time and what to do. I think there's been one sincere philosophical change since we IPO-ed. At the time of our IPO, it was end-to-end or the highway, and that's it. We've kind of since come to the conclusion that if you're willing to pay us as if you're end-to-end, do we really care that much? So we don't want to maintain connections that are noneconomic. But we want to be practical with a big enterprise that might want to keep the relationship with Chase, for example. We just also need to get paid for the services that we provide. So you've seen kind of revenue per gateway customer grow. You've seen an acceleration in gateway merchants moving over to end-to-end. And quite frankly, you've seen these large enterprises be quite constructive about understanding that the role we're playing is more significant than they've historically paid.

A couple of things. One is sort of the growth of your existing customer base, the increasing complexity, right? So your average customer size is increasing and presumably that complexity, is that something you're driving? Or is the market just becoming more complex, where it's just demanding more features, functionality?

It's a great question, and I think it's both. Number one, our position in the marketplace is to truly understand it's the software that wins the hearts and minds of the merchant and the payment provider. We joke we're all kind of like long distance providers in the 90s. So no one really loves us this kind of happy as a payment provider. So the software is what wins merchants' hearts and minds. And so you never want to have to be thinking about the next great software suite that's going to capture all the attention of the small merchant if I only need one. So focusing on large multi-software environments, has proven to be immensely successful for us. Again, I mentioned not being in a single stadium at the time of our IPO 2.5 years ago to be in well over 100. That's because it's a multi-software environment and virtually none can serve that environment as well as we can. Separate and distinct from that, though, is that if you look at your average big restaurant today, it's using as many software suites as a hotel was using a decade at the back. So if you believe that software is going to increasingly take on more functions inside of your average business, then the relevancy for us grows alongside of that. If you have any friends that run a small restaurant, talk to them about sort of some of the day-to-day challenges of running their business, and you'd be shocked at how manual certain process is. And your average small restaurant in Summit, New Jersey might have 20 different liquor suppliers, for example, or liquor and wine suppliers. Like that software is going to creep into that whole at some point in time, and they're going to have another software suite within which to manage. So I think we benefit from both of those . We benefit from the proliferation of software. And also the knowledge that the more software, the fewer the competitors, the center of the air, the more likely we are to win.

Okay, understood, understood. Let's talk about the path you've taken with the newer verticals, and quite honest, when you first did the stadium arena thing, it was kind of -- my initial thought was, well, you guys were already very discretionary focused. And here now you go into stadiums and arenas, but it has worked out very well. Can you just kind of walk us through maybe the way to do it is to kind of talk about the acquisitions that led you into these verticals and why?

Sure. So we're in 6 verticals that we weren't in at the time of our IPO. I'd be lying if I said despite the success, we didn't look around the room in March and April of 2020 and wished we were a little less levered to restaurants and hotels. So we made a pact that we were going to expand into multiple verticals. And we kind of laid out some basic criteria that we thought we would have a right to win. Jared, who is our founder, his mantra is always what makes the phone ring. And if you don't know what's making the phone ring, you don't know why you're successful and you don't belong being in that industry. We know what makes the phone rings for us is complexity and lots of software. And so we said, are there characteristics -- are those characteristics, things that we can find success in other verticals. Stadiums was obvious to us. Stadiums, we knew the software players. They also had, in some cases, a role in the restaurant vertical. We actually wanted to buy one because it was a partner integrated to us and went out in one of the busiest stadiums in the country, totally independent of us and bundled Shift4 payments along with it. We said, wow, if they can win through this partnership model, one of the best stadiums in the country, we want to own that software. So we acquired that brand and since have been in over 100-plus stations. It's worked out really well. But another example where we don't own the software, but I think it's quite relevant also is online gaming. So we support about half of the casino resorts in the country shouldn't come as any surprise. You think about all the software integrations they require. They typically require even more than your average hotel and about half of them work with us. As they were looking at this online gaming phenomenon and trying to figure out the right to win, they were pulling us in. They said we need a bunch of more software integrations to make this omnichannel experience work with our patrons. And so Shift4 can you help? We spent time analyzing the market, spend time kind of talking to the relevant players. We won a significant commitment from that BetMGM, without actually even the technology at the time, to support them in the way they need to be supported and starting to commit to build the integrations that they needed. What made them special, big merchant, lots of software integrations, not dissimilar to what we saw in other verticals. Kind of by accident, our founder made a significant commitment to St. Jude Children's Research Hospital. And through talking with them about how their business operates, we learned, they have 40-plus different software that they take donations from. And every one of them is bespoke. It's -- we use this for Gallus. We use this for online auctions. We use this for our mailers. We use this for the people that have already committed to giving us $100 a month. And none of it is integrated. It's all separate settlement, separate reconciliations, separate reporting. And we said, well, this makes no sense. And we found there isn't a Shift4 for the hospital -- I'm sorry, for the nonprofit vertical. Big merchants just have to deal with it themselves. And we said, wait a minute, there's a role for us here. So St. Jude's committed to giving us their payment volume, and we committed to building out all of the integrations to a single platform so they can better run their business. So I think announcing the verticals that we did back in November of last year should have been a head scratcher is wait a minute, there's 6 new verticals, and they don't naturally flow next to one another. But unpacking the idea that inside of each one was a big merchant with lots of software trying to understand how to better go to market and how to better run their business and seeking Shift4 as a partner in navigating that.

Okay. Okay. Understood. In terms of -- as you kind of look at the business overall today, and you think of -- you said you've been potentially just kind of talking about a downturn since March and things like that or weakness, give us your view on macro view as your view on how you're thinking of the 2023 setup? Again, not looking for guidance or anything, but how are you doing the planning process?

Yes, sure. So we're excited. I think I'll couple that with the statement that we've been a little bit more pessimistic about the macro than we've heard others. But that should serve us immensely well. And what I mean by that is like we had a tough time last year trying to figure out exactly how to navigate a market where any one of our competitors with a pitch fork and sometimes without a pitch fork could raise $1 billion in like a totally noneconomic business model. Like there are many competitors in our space that have not made profit in a decade, and yet were still able to raise lots of capital and be competitive. And that was like a little bit of an existential moment for us. It was like what's our role in this ecosystem as a founder-led business that needs to be profitable and generate capital every single year. What we found in 2022 was a market that were used to, it is capital doesn't fall from the sky. You need to run a profitable business. You need to be expanding that profitability and choose very thoughtfully where to invest. And so we think the environment is going to be tough for operators like us. We think that they're going to have to deploy every dollar in a way that's meaningfully accretive immediately. We think that customer appetite to choose new products is going to be relatively low. And we think same-store sales could be challenged in the verticals we're operating. But again, every one of those things makes us much more excited about the competitive dynamic that we're facing. If you've heard anything about how we go to market this morning, it is we much prefer to position ourselves inside of verticals where we can grow substantially without ever finding a new customer. And we can do that, whether it's through our Gateway Sunset initiative, whether it's now going to market with SkyTab, whether it's through cross-selling other products inside of these other verticals. We can grow meaningfully without ever adding a new customer, and we think that's going to be highly differentiated among our peer set. Like most of our great competitors have left money on fire for quite a while and still don't have profitable business models to show for it. We have a pretty meaningful amount of capital that was raised during more euphoric times. at an incredibly low cost of capital. We're going to deploy that thoughtfully, and we've got expanding EBITDA and free cash flow in the face of that. So long story short, troubled merchant environment really good operating environment for us.

Okay. Let me close out with -- on that note with a question on what you expect intermediate term profitability, cash flow -- cash flow conversion. And that is something investors are looking for?

Yes, sure. So numbers we published last week were EBITDA margins in the low to mid-40s. That, we think, is a reasonable floor for us. We've got a handful of initiatives that can expand margin. But we've also got a desire to invest in these new growth verticals. Free cash flow conversion is growing pretty rapidly, and that comes as a function of 2 things. Number one, every new vertical has lower customer acquisition cost than the legacy verticals that we've been in or kind of our high-growth core. And then even at high growth core, the cost of acquiring merchants has dropped. The hardware they require is much cheaper, as I mentioned, with our SkyTab product. So free cash flow conversion should expand pretty nicely. I think we -- Tom, keep me honest on the conversion rate that we discussed on our earnings call?

For free cash flow?

Yes.

45% plus.

Yes. So expanding from where we've been. Again, our customer acquisition model, we think is quite sound, but it does drag on free cash flow conversion a little bit. And yet, for all these new verticals it's expanding nicely. So in terms of, again, setting us up for 2023, we've got a really sound EBITDA margin that has room for expansion further while also reinvesting in the business and free cash flow conversion that is the best we've had in a long time. And I don't think many competitors are kind of putting up that kind of growth, coupled with expanding profit growth.

Awesome. Thank you.

Thank you.

On that note. Thank you very much.

Thanks.

Great insights.