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

Ladies and gentlemen, the program is about to begin. [Operator Instructions] At this time, it is my pleasure to turn the program over to your host, Jason Kupferberg. You may begin.

Thank you, everybody, for joining us here on day 2 of our Annual Payments Symposium, fully in virtual mode this year. And we do have with us from Shift4, we have Taylor Lauber. He is President and Chief Strategy Officer, and always does a great job with these events. So really happy to have him. Thanks, Taylor, for taking the time with us this morning.

Yes, of course, happy to do it.

We're starting off pretty much with everybody asking, I guess, the obvious question in the last couple of weeks since we've had the regional bank crisis. Have you guys seen any discernible change in trajectory of payment volumes?

It's a great question, and we haven't. We've actually been postured reasonably defensively for quite a while now seeing -- prepared for a pullback in consumer spending, but haven't. Even as recently as this past weekend, we had records. Now some of that can be St. Patrick's Day for a business like ours, some of that can just be the warm weather, encouraging people to go out and spend. But even in the face of some pretty serious banking issues going on, we haven't seen it impact the consumer just yet.

Good to hear. Good to hear. So far that's consistent with what we've heard from others. So hopefully, it stays that way for everybody's sake. So maybe let's just take a step back. You've obviously been at the company a long time and would just love if you can give your perspective on how Shift4's business model and strategy have evolved over time, and then we'll go into a bunch more detail on the business.

Yes, sure. So -- well, believe it or not, it's been 5 years on this version of my time at Shift4, but I date back to as far as our founders parent's basement when he started the business, I worked summers there for the earliest days. And what I'd say is a common thread throughout this 24 years of history, 24 years of revenue growth, is that there's just an obsession inside of Shift4 for finding the technology solutions that really attract the hearts and minds of merchants, and it is not an approval or a decline. So whether that was electronic cash registers back in 2000 or our Harbortouch point-of-sale brand that we created in 2005, or what we've done in the hospitality space and recently the stadium space nonprofits, it's really about taking the technology solutions that merchants have the most challenge with, addressing them, delivering them and bundling them with the payment services that they typically need to source regardless of the industry that they're in. I will say -- we do this in a pretty unique way. It often feels like the company is kind of reinventing itself a little bit every 3 to 5 years, adding on an entirely new capability to let us attack a vertical. And it served us well for many years of the company's history, we weren't in any restaurants. Now we're in roughly 1/3 of the table service restaurants in the United States. We weren't in any hotels 5 years ago. We're in 40% of the hotels in the U.S. today. We weren't in any stadiums 2 years ago and we're in over 100 right now. So this all boils down to the theme of identifying technology solutions that really attract merchants that they see a ton of value in and bundling the payment services that have typically been pretty disparate and don't add a lot of value in their own right as just an approval or decline.

Right. Right. You definitely have a track record in that regard. So if you fast forward to today, based on where the model is, I mean who do you really see as your primary competitors, recognizing that could certainly vary by vertical? And then maybe just go a little deeper. I know you touched on it a little bit in your response to the first question, but just the true points of differentiation and maybe illustrate that through an example or two, if you would.

Yes, absolutely. So we've been doing software plus payments a very long time. So while it's a foregone conclusion, I think, in today's world that a software company is going to as tightly as possible bundle the payment experience into their offering for their merchants. We, in many ways, pioneered that back in 2005. And understanding what it means to go to market with software-to-bundle payments to create a merchant experience that is seamless and drives a lot of value is something we think we're uniquely good at. Despite how much software plus payments is kind of, as I said, a mainstay in business today. One thing that makes us unique is that we take a pretty, in our view, pragmatic approach to whether we build software, we buy software or we partner with software brands, and I do think that's unique in the marketplace. You have pretty almost religious level, philosophical views, about I need to build the software. That's the only way I'm going to address the vertical. Or I need to buy software companies to defend my turf as a payments company. Or I'm just going to partner with everyone and hope it works out well. Each of those strategies is incredibly important, but you need to address them on a vertical-specific basis and determine for that vertical, what's most appropriate. So in the restaurant vertical, for example, we have built our own software for many, many years. We've acquired brands selectively where it gave us access to a portion of the market that our software might not have been competitive in. Right now, in that vertical, in particular, we really see Toast as kind of the only good competitor out there, and we love that. They're a phenomenal company, and we think we have a ton of value to deliver. And competing alongside of one great competitor is like a really nice spot for us to be in. And we try to differentiate within that vertical to focus on the higher end of the market, the locations that you typically see inside of a hotel or inside of a stadium, for example, where we're uniquely positioned to address them. The hotel vertical is actually quite unique. And this is an example where that partnership model is really relevant, because a hotel is going to use somewhere between 10 and, in extreme cases, 60 different point-of-sale software suites. There is no chance that any payments company is going to own all of them, let alone the best-in-class player in salon spa, golf course, parking garage, ticketing, restaurants, front desk, et cetera. And so by having a payment platform that is compatible with over 500 software suites, we have very, very unique access to the market. It's why we have the kind of share we -- I mentioned earlier, in 40% of the hotels in the U.S. is because the payment platforms that can support all of their needs and how disparate they are at the point of sale is -- are really few and far between. And then I would say in other verticals like stadiums, it's a combination of these things. We own best-in-class software that really attracts stadiums to work with us in the form of VenueNext. But we know that we're going to need things like a fanatics integration to their retail store that might be in the stadium. You're going to need parking integrations, et cetera, much like a hotel. So we do a combination of things in that vertical. So I would say the competitive landscape varies a bit, but our approach to how we bundle software plus payments to make a really seamless margin experience is really tailored to the vertical we're trying to address.

Understood. And look, I know at the time of the earnings call, you seem to express some optimism around just overall trends for Q1, the way things were tracking at the time. We just talked about the fact that despite all the macro headlines, you haven't seen any discernible change since then. And obviously, now we're drawing fairly close to the end of the quarter. So just would love your take on what do you think is really driving the consumers' underlying resilience? We were -- you and I were talking a year ago about how inflation was going to maybe upset the apple cart. It never happened in '22. And at least the last couple of weeks, the data would suggest so far, it's not really happening to any significant extent in '23. So we just love your guys' take on what you think explains that.

Yes, sure. I'm going to try to be less of an economist than I maybe was last year in predicting a moderation in consumer spending, because I wasn't very good at it. It didn't happen in a significant way last year.

Most of the economists were wrong too, by the way, so don't feel bad.

Well, what I would say is this, I think in our business, in particular, this is the inflection point for the year, for us, right? You go from January and February where it's typically pretty anemic. People are have the holiday hangover. They're not going out and spending necessarily. They're not certainly eating at restaurants when the weather is as cold as it is. And the weather starts to moderate, you start to have things like President's Day weekend, Valentine's Day, spring break season just heating up. All of those trends really benefit the verticals we're in. And one thing to have a casual knock on some of the verticals we serve, they don't grow massively on a same-store basis. So we need to grow by adding customers. And so we can feel pretty confident coming into a year like this that simply the customers we've added over the past year are going to really grow volume nicely when seasonality returns and people start going out to eat and people start traveling again. I think we're seeing that right now. So a record weekend, for example, like we just had, is not a surprise to us by any stretch of the imagination. We've added a lot of customers over the last year. And sometimes, it can be actually difficult to predict, to really unpack the same-store trends inside of a particular merchant. Although I would say they're healthy. They're not exuberant. They're not diminished. They're just like modestly healthy. And we've added a ton of customers, so that obviously helps our business a lot. One thing that we made a pledge on -- when we went public is roughly 90% of our business was restaurants and hotels. At the time we went public in June of 2020, and we said we're going to use our really fortunate position to raise capital at this time to diversify the business into verticals where we think we can have just as much of an edge as we've had in the restaurant and hotel vertical, but are, in some ways, diversified. And we started down a path really at the beginning of last year to diversify into 6 new verticals and have pretty meaningful customer wins in each one of those. And those customers have gone live over the course of the last year. So one thing that helps our business at a time like this, is I probably wouldn't have the confidence that I do if we were just in restaurants or just in hotels. There's a lot of reasons you can be concerned about any one of them. But we've added these 6 new verticals. We've got meaningful merchants in each one. They've all started producing volume in the back half of the year, and literally just annualizing those merchants creates really, really nice growth trends for our business. I'll tell you, in our sports and entertainment franchise, we have seen record weeks of volume as well, which is kind of interesting. This isn't a time seasonally where you'd expect that. And the reason for that is that we're starting to see ticketing revenue for the first time inside of that, which is really nice and countercyclical to when the actual events happen for a particular team or league. All of these serve to really underpin our growth, give us a nice path that we can underwrite for the year ahead. And quite frankly, diversifies a little bit. I don't want to be too extreme on the stadium front, but diversify us a little bit from the really large franchises that have kind of brought the business to where it is today.

Okay. Yes, that's kind of a good segue to my next question, which is around your 2024 guidance that was presented back at the November 2021 Analyst Day. And I think at the time, a lot of people felt like that was kind of a "show me" part of the story. Here we are a quarter through 2023, and you guys certainly seem to be on track. I think mathematically, your end-to-end volume growth would maybe need to accelerate, to some extent, next year to get to that $160 billion target for 2024. So maybe just talk about some of the primary drivers of that. I suspect it's related to a lot of the dynamics you just started to touch on in the last question.

Yes, sure. So well, let's sort of remind everyone of what that -- that medium-term guide was, right? It was set November of '21 and it was this idea that we grow payment volume about 50% per year, and that would translate to 30% net revenue growth over the next 3 years. And what I would say is the confidence we had at the time was the high-growth core of our business, which is really our restaurant and hotel verticals in our gateway, had contributed well over 40% CAGR of annualized volume growth from like 2018 to 2021. So through a pandemic that ravaged those industries, we've grown quite nicely and above 40% in our high-growth core. That we have real high confidence we can continue to do that. We still have over $150 billion of volume on our gateway, for example, that can move over end-to-end. And we've got very strong win rates of net new customers joining that platform. We've got a brand-new restaurant point-of-sale platform, and SkyTab that we're going to market with just at the end of last year. So the high-growth core gives us really good confidence that we can deliver a healthy portion of that guide over the next 3 years, again, growing at over 40% in its own right. And as I mentioned before, we announced our entry into 6 new verticals, which each was underpinned with an anchor customer that really acts as a beacon within their own vertical to attract other customers. So we feel good about that. And I would say the other thing in our back pocket was that we had about $1.3 billion in capital that we raised during kind of heavier times in the capital markets that we knew we have the ability to deploy into choppier times. And that was, quite frankly, really exciting as well. So what the first year was about, was about getting the work done in all of those new verticals. So obviously, our high-growth core continued to do what it does. It grew quite nicely. We added lots of customers as it's the -- it's the anchor of our business. It's pretty predictable in how many customers are going to join us each year. We completed over the course of 2022, critical integrations to all of the software suites that are relevant for those verticals that I mentioned earlier. And we started to see volume just in the back half of the year. So I would say it's never mission accomplished, but we certainly got the technical work done to really address the TAM that is each one of these verticals. I mentioned ticketing, for example, we completed integrations to Paciolan and [ CP ] and suddenly any customer using those platforms are now part of our TAM and we can go and address. So as we think about 2023 and then on to 2024, a lot of the technical work has been done. The annualization of these big customers that joined us, really in the last year, is going to create really nice growth through 2023. And 2024 is about more of the same and adding customers in these verticals that we really haven't had a right to up until the last few quarters of the year.

Yes. So I mean, it's almost not completely independent of the macro, but you do have these idiosyncratic growth drivers that sound like are driving what continues to be a high degree of confidence, if not, I don't know, maybe even a higher degree of confidence in the '24 outlook than you would have when you first gave it, just given where you are.

Yes. Well, I'd say if Jared were here, you'd say absolutely a higher degree of confidence because we needed to get the work done in terms of creating these integrations that would -- that the customers could follow. And we got that work done. It actually happened a little later than we had hoped, and yet the volume contribution from these customers is greater than we would have hoped. So it's offset itself really nicely. So with that work being done, we feel like we've got a much wider TAM than we started last year with, for example. We've got annualization of the customers that I mentioned. And one of the -- probably the boldest ambitions of our medium-term guidance was being able to deliver our capabilities internationally, which for 24 years we've been entirely U.S.-based. And through the acquisition of Finaro that we announced just a year ago, we now have the capabilities to support many of our merchants in -- throughout Europe. So what I would expect is that 2024 is really a year of bringing all of the success that we've had in the U.S. internationally.

Last month on the earnings call, you guys called out a new win, a unnamed global hospitality client. So would like to hear a little bit about what enabled you to win that customer? When does it start moving the needle on end-to-end volumes and revenue?

Yes, sure. So what I'd say is this customer would be reasonably unremarkable in the Shift4 story, right? So while we're not discussing the customer individually, they're very typical of the verticals that we serve. And bringing it back to our payment platform with those 500 software integrations that I mentioned, we are a natural home for a big hospitality brand that's got lots of locations all over the U.S. and the world, and has lots of point of sales software that they need integrated through these platforms. So we're a pretty natural home. We know the company exceptionally well. And what they are looking for is, in many hospitality operators, is they're looking for simplicity in what is a pretty complex web of software integrated payments across their franchise. They need to manage both corporate and franchisee locations. They need to manage software integrations that sit all across their estate. They need to manage the hardware and encryption associated with getting payment devices that safely accept payment. And they need to have analytics that help inform them as to what's working and what's not working inside of their own business. We deliver all of that under one roof. And so that is really what makes us, special as we are in the hospitality vertical, this operator historically had worked with many different vendors to fulfill that value chain. And we are -- whether it's one hand to shake at times or one throat to choke at times, we are uniquely positioned to support them in a pretty complex environment. And I think they appreciate that.

Okay. Anything in the '23 guide for that? Or is that more of a '24 event?

No, no, we expect it will contribute pretty meaningfully in '23.

Okay. Okay, great. So let's talk about the new in-sourcing distribution strategy. You announced that on your Q3 earnings call. What really drove that decision? And just touch a little bit on maybe the opportunities as well as any potential risks that it may present.

Yes, sure. So I'd say a handful of things drove this. But the core was us coming to market with SkyTab, which is our latest generation restaurant point-of-sale. It's entirely built on Android. It's cloud-based. The -- whether it's the hardware footprint, the service and support, the upgradability of the platform. It's all really, really modern. And the service delivery model can be much more modern as a result of that. Just to give you a sense, historically, restaurants as point of sale have operated in Windows-based workstations with software physically installed on there may not necessarily be cloud-enabled. So things like DoorDash and Grubhub and Uber Eats or an iPad hanging on the wall next to this Windows Workstation. With SkyTab, it is an incredibly modern approach to solving both their historic needs, but also integrating and helping them adapt into the future. So with this product, we saw an opportunity to in-source what had historically been third-party distribution for us. We looked across our distribution partners and said, who are the best, who have the library of customers that we want to be part of the Shift4 family for many years into the future, and brought them in-house to help us deliver this product in a really seamless way. So in many ways, these are folks that have worked with Shift4 for 10, sometimes 20 years already, really close to the family anyway, and getting them to rally around this new product was a pretty natural and foregone conclusion. There's some great unit economic benefits to it as well, which is that we don't necessarily have a third party with its own overhead and all that stuff to support. And so the cost of bringing the product to market and the cost of goods sold reduces dramatically. And it's offset by roughly 400 employees that we hired to come work for Shift4 on a direct basis. So now we've got a presence that's really nicely dispersed across the country of Shift4 employees that are all sort of marching to the same drum and delivering this best-in-class product out to the market in a way that we think our merchants are really going to see a lot of value in.

Okay. Yes. That all makes sense. So since you mentioned SkyTab, why don't we talk a little bit more about that because it's obviously an exciting new product introduction for the company. And I guess it's been, what, maybe 6 months or so since it was rolled out 10,000 units, I believe, it was the metric you gave on the last earnings call as far as how many have been rolled out so far. So just wanted to understand, has this mostly been for upgrades of existing Shift4 customers? Or is this all -- or a lot of this net-net new for you guys?

Yes, it's mostly net new. So part of in-sourcing distribution was that we did expect that out of the gates, we'd have a lot of low-hanging fruit among our resellers that had customers that weren't necessarily using a Shift4 product before and we're really right for it. So we did kind of have the deck stacked in our favor, so to speak, as a result of this in-sourcing. Demand for the product was, quite frankly, a little bit in excess of what we expected. We had some logistical challenges getting that much inventory out the door. But I would say all good problems to have. Again, this is a marketplace that we are exceptionally well informed about. So whether it was the Harbortouch brand that was created in 2005, whether it was restaurant manager, POSitouch or Future, which were restaurant acquisitions that we completed, or even our technology team coming from the likes of MICROS, where our CTO and our Chief Development Officer and our Chief Product Officer, [all hailed from], it's a marketplace that we sort of consider ours in a really big way. And getting this product into a position where we could distribute it kind of widely and quickly is something we're really proud of. And I think our distribution partners are excited by it because, in many cases, a lot of these restaurants are operating some pretty legacy platforms. And giving them the opportunity to upgrade their entire technology footprint at a reasonable cost, quite frankly, very reasonable cost compared to some of others out there is something that everyone kind of jumped at.

What kind of volume should we think about SkyTab being capable of this year?

All of the sort of toeholds I mentioned within the restaurant industry, whether it's the brands that we own, whether it's our expertise from great companies like MICROS, whether it's our hospitality gateway and understanding what the restaurants inside of those locations look like, kind of help us determine the path we want to take in the market. So you should not be expecting to see us in kind of the fast food or fast casual segment of the restaurant vertical. You should not necessarily be expecting a lot of coffee shops and bakeries. These are really good territory for the likes of Square and Clover. We focus on table service, and we try to focus up market. And one thing we've tried to impress on investors is you can listen to what folks like us say in investor conferences, in a one-on-one meeting. You can pay attention to the features that get developed by our product team, because that's what determines the success we're going to have in the market. We don't -- we have integrations to payroll platforms. We have integrations to all the third-party delivery applications. We really focus on kind of the higher end of the market where we think there isn't necessarily a great modern solution for merchants to adopt. So I would expect volumes, 1.5 million and up per site is something that we hope to be in. And we're going to focus on feature sets that attract those quality merchants. You're not going to find us jumping into capital offerings, for example, because by and large, our restaurants don't want capital from us, and we're quite content with that. So we're going to focus on feature sets that bring us upmarket in that table service vertical, and also that have a lot of applicability in these multi-software environments, whether it's room charges to your hotel or whether it's sitting inside of a stadium where you're going to have dinner before a game. All of those, we think, is pretty thin air from a competitive standpoint for us.

Okay. And just going back to the in-sourcing piece for a second. I mean, just talk about maybe a little bit more mathematically how some of the different pieces of the cost head against each other, because you guys are guiding to adjusted EBITDA margin expansion pretty significant this year. I think upwards of about 500 basis points at the midpoint, right, in 2023. So how much of that is coming from the in-sourcing initiative? I mean you've got some expense control initiatives as well. But any way to kind of break that down for us? And then is 45 kind of then a baseline you build off of beyond '23.

Yes, of course. So 45 is, in our opinion, the floor on margins for the business as it exists today. The most expensive component in our unit economic model was the cost of third-party distribution. Quite necessary and a cost we were happy to bear in a more complex delivery model where the feet on the street mattered quite a bit in this new model where we're rallying folks around a single product. And quite frankly, in all of those new verticals I mentioned, that residual share that we would pay a partner is just not really a component of how we do business. We're going to market direct increasingly in these new verticals. And stadiums, it's obvious. We know where they are. So having third parties doesn't make sense. In hotels, again, we're uniquely positioned to deliver a value prop. So as we continue to march towards a business model that is direct distribution by and large, we're saving that residual expense in a pretty significant way. I don't want to make it too myopic on the concept of in-sourcing our restaurant distribution because we had about 400 basis points of year-over-year margin expansion in the first half of '22, which is before we ever started this. So margin expansion as a result of these new verticals and scaling in the payments business delivers a margin benefit anyway was happening. This did step function accelerate it in some cases. And what it also did was it meant that the average customer who joins us today has far less cost of goods sold associated with them than they do in the future. Now keep in mind, we increased our head count roughly 15% to fulfill this model, so it's not all flow through. We actually do need more talent and more localized talent to achieve this objective. But even with that, it offered some margin expansion benefits. I think the most important thing to focus on is we like to kind of look at Q4 and annualize it as we're planning for the year ahead. Because Q4 is kind of a mediocre quarter for us. It's seasonally not the best, and yet it's also not the worst. And so -- and there was nothing really idiosyncratic about that quarter, and we delivered margins of 47%. So as we think about that being a really fair baseline, we padded it slightly in our full year guide because you never know what's ahead. But the book ends for our business are that we've increasingly got customers that look very much like that of Adyen, who's been able to deliver, I think, 65% margins in certain cases. And then we've also got this SMB portion of our business that's always a little bit more labor intensive, but we get paid a decent spread to support it. So whether it's the 45 floor that we keep marching up from or the 65, which we consider kind of best-in-class for global e-commerce, for example, we're going to live within this range for a period of time.

Okay. I wanted to come back to Europe for a second. You referenced Finaro. It's supposed to close in Q2. You did a tuck-in acquisition of a payment service provider, maybe about 6 months ago. So just talk about the European growth strategy, go-to-market approach, how big of a business could Europe become over the next few years?

So this is the #1 capital allocation and growth priority for the business today. We never take our eye off the high-growth core and things like our gateway sunset objective can deliver to the near term on the business. But -- the international expansion is sort of where we believe the business needs to be to continue to dominate in the way we have continued the growth trajectory we've had for the last 24 years. And let's talk about kind of things that we have to make us successful and the things that we don't have that we need to expand internationally. We have 500 software suites integrated to Shift4 that are installed all over the world. The front desk software at the Hilton in Madrid is the same software by and large, as the Hilton in Times Square. And it's compatible with Shift4. We also have lots of big global customers that see value in what we do in the U.S. and want that solution elsewhere in the world. What we don't have are all the local connections that -- and local connections and local payment methods that consumers want to use in these corners around the world. So this has been a multiyear mission for us. What's been particularly fortunate is that we won a handful of big global e-commerce customers in the last 18 months that are helping us on this journey, meaning that they've contractually pledged to give us payment volume wherever we can support them anywhere in the world. So the Finaro acquisition, we were able to approach with some pretty instant revenue synergies in the form of big global e-commerce customers that we know we could light up upon closing. And then we follow through with all of these things that have made us really successful in the U.S., like our 500 software suite integrations, like SkyTab like, our VenueNext product inside of stadiums. And it's been a little over a year going through regulatory approval. But all progressing, I think, in line with how these things progress. And we've already proven e-commerce transactions through both platforms connected together with a single integration from the customer. We've already proven SkyTab transactions in Europe. We've already proven VenueNext transactions in Europe. So the technical plumbing has all been laid out really nicely through our partnership that we've had in the interim. And when we close it, we're really excited to be able to deliver at least one incremental continent to our customers.

Okay. I guess where does that leave us from an M&A pipeline perspective, once you close Finaro? Do you feel like you go kind of into digestion mode of it as it relates to international? Or is there still kind of an active hunt for more deals outside the U.S.?

We feel a slight sense of urgency here with regard to our international expansion priorities. And what I mean by that is it's been pretty clear to us the large evolutions in payments over the past kind of 15, 20 years. We like to talk about Integrated Payments 1.0 back in the mid-2000s, about as clearly as possible making software work with payments through a series of whatever middleware it took. And then Integrated 2.0, the likes of Strike being born, where every software company is integrating payments from the start in a very seamless and nice vertically integrated way. Integrated Payments 3.0 is about taking those same software-enabled merchants and letting them sell all over the world through whatever payment methods those consumers want to use, and whether it's iDEAL in the Netherlands or it's PIX in Brazil or it's Amex in the U.S. Consumers know how to engage with your brand and on their terms, anywhere in the world. And so it's a trend we believe really strongly and we see it clearly. If you look at the likes of an Adyen or a Stripe and you see how fast they're growing, it's because they're at the forefront of this kind of enablement, and we want to be there, too. So it's a really important capital allocation priority. I would expect that we look to unlock another continent, much in the way Finaro enabled us to deliver Europe. And I would say from just a balance sheet and mathematics standpoint, we feel well positioned to do it. We've got a decent cash balance still from the capital we raised during heavier times. It's low cost of capital. So we don't feel any urgency in spending it immediately. We don't feel any urgency in paying it back before it's due. It's at, I think, a blended 25 basis points cost of carry, so that's really attractive for us. And again, if we can deliver on this in a meaningful way, the competitive error is really quite thin. And we think it's what's going to position the continued growth of the business over the next decade.

So could we see, I guess, I'll call it a deal of size, I mean, I guess depending on how much you guys are willing to lever up? I mean multibillion dollar kind of deal? Is that feasible? Or is that kind of unlikely?

I don't like to speculate on the size of a transaction only because we look at everything across the gamut constantly. We've historically done smaller transactions that deliver a heck of a lot of value. That Merchant Link transaction that we made in 2019, roughly $60 million, is probably a healthy portion of our market cap today. So we try to be exceptionally disciplined in looking at a wide variety of things. And quite frankly, the larger the transaction, the more you have to handicap an ability to get it done. But we do challenge ourselves to look at everything from transformational to small ball tuck-ins to keep the sales funnel full all the time. And I would say in this particular environment, meaning the last kind of month or 2, we've seen more opportunity of every size than we've seen in probably half a decade. So it's a very exciting time to be positioned where we are. I think I have to remind the audience that many of our best competitors were fintechs that had a license to light money on fire for a decade. And that license has been revoked. And we, as like a really nice grower, that also has really nice profitability and free cash flow, are uniquely positioned to kind of lean into an environment where many competitors are hobbled a little bit, or quite frankly just have to change the way they've done business and adapt to an environment where there might not be another series XYZ around the corner. So we're in a highly advantaged position from sort of a unit economic model standpoint. We've got a good balance sheet. We're not too meaningfully levered. I think we're about 2.7x, and we're de-leveraging really, really quickly. And we've got a target environment for M&A that looks as good as it's looked in a long time. So balancing kind of the moderate to sober views we have about consumer spending is this real euphoria we have for our ability to be competitive in what's going to be, I think, a tough environment for many.

Okay. I wanted to talk about take rates a bit. I mean we've never been a fan of kind of just looking at take rates or take rate's sake, right? But there are mix differences and a lot of different payments businesses that can impact take rates over time. Yours is no different. You've touched on a whole bunch of larger wins that you guys have been successful with in the past 12 to 18 months. So just I guess any way to help people sort of conceptualize where take rates maybe migrate to over time? Are there any offsets to some of that pressure, i.e., international expansion, maybe drive some more cross-border volume at some point?

Yes, sure. So it's a great question. What I would say is take rate is a function of the size of the merchant that you're serving and the complexity of managing that relationship. So typically, the bigger the merchant, the lower the take rate. It's kind of the laws of physics inside of our industry. And we're not afraid of that as long as we are commanding best-in-class take rates for the size of the merchant that we're working with. And that, that merchant is seeing best-in-class value in working with us and is comfortable paying that take rate. So you can see everything from the bar and grill on the corner at 80 to 90 basis points, getting a heck of a lot of value of the software we deliver to them, up to the mega multibillion-dollar enterprise that we're trying to enable globally around the world, paying us a fraction of that, call it, 20 basis points as just an example. We're very comfortable with a blended take rate that compresses modestly to the extent we keep adding bigger merchants. Because the air is thin, as I mentioned, in these environments, there's really only a handful of very good competitors, and we think we can be one of them in the not-too-distant future. So I think investors who have a little bit of gray hair are used to payments businesses that maybe aren't as innovative that don't grow as fast, then take rate kind of modestly compresses in order to maintain relevancy. What I would stress is if you look at the company's winning today, and those are the companies reporting payment, reporting location counts, they are all premium products. And what that tells you is merchants are willing to pay for a premium service. And quite frankly, if you're not delivering a premium service, they're extracting a hell of a lot of margin out of their relationship with you down to a couple of pennies of transaction. And we -- that's just simply an environment we don't want to be in. So take rate compression is healthy to the extent we continue to grow up market. We continue to maintain really nice volume growth, 50-plus percent on a book that's getting bigger and bigger every single year. We're very happy with that. It means we're adding bigger customers, quite frankly. We pay really close attention to take rate by size cohort, to make sure that it's not behaving abnormally or negatively in a particular size cohort. And yes, we constantly seek out things that we can embed into our offering, whether that's the restaurant software itself, whether that's capabilities of our payment gateway in the U.S., whether it's international features like fraud scrubbing, FX, all these things have become increasingly relevant for an international merchant. And we hope to monetize them through, to your point, just a higher effective take rate on the relationship.

You mentioned earlier, you still have $150 billion gateway-only volume that, over time, could be converted to end-to-end. You introduced the Gateway Sunset initiative last year. Just give us an update on how that's going? Do you think the pace of these end-to-end conversions over, let's say, the next 2 to 3 years will be accelerated versus what you've seen over the past 2 to 3 years?

So I think there's certainly opportunity for acceleration. One thing that can get lost a little bit on -- in the Shift4 story is that -- we acquired 2 payment gateways. And the second and much larger of the 2 was just before the pandemic hit. It was in late 2019 that we acquired it. So I think a lot of people look at our volume growth and our success thus far, and they say, wow, they really crushed the objective. We don't feel that way. We feel like we were actually pretty disadvantaged to execute on our business plan in 2020 and 2021 when a large base of hotels were shuttered and restaurants were struggling to survive. So I would say, zooming out with stability in our underlying verticals, that should naturally advantage us. And there's a little bit of a reality that the bigger the customer, the longer the conversation takes. They don't make decisions quickly. They make them, quite frankly, intelligently and methodically and over time. And we've just had the time now to do that. So our conversations with enterprise level, by any definition, the highest scaled enterprises within our gateway are increasingly productive and thoughtful. And we mutually see ways to add a lot of value to the relationship. And yes, these are easier times for our merchants despite kind of the fears on CMBC. These are much better times than they've experienced over the last 2 years. So it should give us a lot more opportunity. And I would say we've just had -- we had time to get better at it. It's -- we do try to get better at our tactics with age.

Okay. Have you been pleased with the progress of the Gateway Sunset Initiative?

Yes, unequivocally.

Yes. Okay, good. Just briefly on the new verticals, the new 6 verticals, which generate the most volumes today -- do you think those will still be the ones generating the most volumes if you look out a few years from now? Any kind of dark horse sleepers in the mix there?

So what I'd suggest is that they're all quite different for one another. Sports and entertainment is a really, really compelling one only because our competitive positioning is so nice in that vertical that we've had incredibly high win rates. The solution is quite frankly, best-in-class. And our ability to deliver a common payment experience across these teams, venues, theme parks, et cetera, is so unique that we're winning a lot of that vertical. And as seasons play out, it builds on itself. And so this is something that we got a little bit wrong when we announced the transaction. We didn't quite understand the sales cycle, which is actually during the season, the installation cycle is in the off-season. And then you got to wait for the season to begin again before you see the volume. And ticketing, which we've only just unlocked in the last quarter, in any consequential way, is countercyclical to that whole cycle. So sports and entertainment, despite all the wins that we've talked about over the last kind of 24 months, is really starting to contribute meaningfully in the last quarter, which is awesome as ticketing volume layers against what are becoming seasoned venues. That's really exciting. And I would put at the other end of the spectrum, I would put nonprofits. And -- so nonprofits are -- they're us seeing a vertical that is quite frankly, really, really disparate in how it approaches revenue collection or donation collection. Nonprofits that we've had the privilege of getting to know look like, in many ways, like any big multibillion dollar business. They're collecting their donations to lots of different software suites, but none of them are integrated together. They're all separate deposits, separate CRMs, separate reconciliation, and it's a nightmare. And we sort of look at that and say, why is this vertical operating in the way it is? And can we deliver a Shift4 like solution that doesn't exist by and large, for it? So I contrasted to stadiums because I think the TAM is actually substantially larger. And the opportunity is just as good for us to build a solution that has no rivals. It takes a long time. It takes a long time to amass the -- all of the software integrations relevant to our nonprofits. And we're beginning in earnest, but I think it can be as large as any vertical over the next decade.

Well said. Well, we're out of time, another great conversation, Taylor, always great having you at the conference, and I appreciate everyone who tuned in for the session. Our next session will be at 10:15 with Flywire. Thank you, everybody.

Awesome. Thanks very much.

All right. Have a good one. Take care.