Ladies and gentlemen, thank you for standing by, and welcome to the Shift4 Payments second-quarter 2020 earnings conference call. At this time, all participants in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to your speaker today, Sloan Bohlen, Investor Relations. Please go ahead.

Thank you. I'd like to welcome everyone to Shift4's second-quarter 2020 earnings conference call. Before we begin, I'd like to remind everyone that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made in this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding management's plans, strategies, goals, and objectives, the expected impact of COVID-19 on our business and industry and anticipated financial performance, including our financial outlook for the third and fourth quarters of 2020 and the full year 2020. These statements are neither promises nor guarantees but involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by our forward-looking statements. Factors discussed in the risk factors section of our quarterly report on Form 10-Q for the quarter ended June 30, 2020, and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by forward-looking statements made on this call. Any such forward-looking statements represent management's estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so even if subsequent events cause our views to change. In addition, we may also reference certain non-GAAP measures on this call, which are reconciled to the nearest GAAP measured in the Company's earnings release, which can be found on our investor relations website at investors.shift4.com. And with that, let me please turn the call over to our founder and Chief Executive Officer, Jared Isaacman.

Thank you, Sloan. Good morning, everyone. This is Jared Isaacman, CEO of Shift4 Payments. Thank you for joining us on our first conference call as a public company. Before we discuss our business in the second quarter, I'd like to take a second to acknowledge really how proud I am to be part of such a talented, resilient, and innovative organization. We have all been living in really unprecedented time period that poses numerous challenges to us as individuals, as families, professionally, and as a society. I am impressed beyond words with how we have navigated through these realities to become a better and stronger organization. In so many respects, there is still so much left to do. But for this moment, thank you from the bottom of my heart to all Shift4 employees as well as our valued merchants and software partners. Thank you for all that we have achieved thus far and for your focus towards everything we still aim to accomplish as this journey continues. So clearly as the founder, I have bias, because this Company and its evolution have been my focal priority for the majority of my life. So that disclaimer aside, Shift4 really is an incredible business with over 1,000 dedicated employees, 7,000 software partners, and over 200,000 business customers, all of which have been battling incredibly challenging circumstances. And in many cases, overcoming the odds and persevering. So Shift4 has been at the forefront of integrated payments since before that was really a thing. We have strategically positioned ourselves to benefit from long-term secular trends as commerce-enabling software continues its grand convergence with payments. We have anticipated on several occasions where the puck is going to go. And that has been a great benefit, especially of late, when it comes to things like…

Thank you, Jared, and good morning, everyone. I will begin by speaking a little bit about our merchants and what we have seen regarding payment volumes as the environment in the COVID-19 pandemic has evolved. First, I will reiterate Jared's comments about how Shift4 thinks about our merchants. And what I mean by that is we take a lot of pride in aligning ourselves with their success. Never has that been more evident than in the past 100 days. For those of you that don't know, Shift4 acted very early in the pandemic to launch shift4cares.com in order to provide insights into the toll the pandemic was having on the economy by sharing in a very transparent way the payment transactions we were seeing each day. Before I speak to these data, I'd like to emphasize that shift4cares won't be a good proxy for thinking about our Company's revenues, particularly on a year-over-year basis. Our rapid growth coupled with the incredibly high gateway volume we support means that these data points, while helpful for understanding a particular state or industry, don't really tell the story of our profitability. Brad will give more detail on our revenue drivers, but you will see in a second they are quite a bit different than what you see in the gateway transaction on shift4cares. With that said, let me provide some detail on what we have seen over the quarter. As Jared mentioned, Q2 end-to-end payment volume was $4.2 billion, with $2 billion of that occurring in June. These June levels were ahead of June from last year but roughly 10% below what we were seeing pre-COVID. Much of that recovery can be attributed to high-quality gateway conversions, which contributed approximately 17% of our end-to-end volume for the quarter. And also new merchant adds,…

Thanks, Taylor, and good morning, everyone. Before I begin, I'd like to note for those on the call that there are a number of slides in the latter part of our presentation that will highlight a number of the metrics that I am about to speak to. Now to get to our financial results. As we reported in our press release, Shift4 generated $67.4 million in gross revenues less network fees in the second quarter of 2020. This represents a 10% decline over the prior year despite a 23% reduction in end-to-end processing volumes during the same period. The key differences in the decline between the two figures is the continued onboarding of new merchants, both from winning share and converting gateway-only merchants, and the addition of revenue streams from the Merchant Link acquisition. Let me give a quick refresher on the economics of the gateway conversion. As Jared and Taylor mentioned, approximately 89% of our volume is generated from merchants that only use our gateway service. Shift4's revenue from this merchant base is generated at approximately $0.03 to $0.05 per transaction. As these merchants migrate to our end-to-end solution, we shift from transaction fees to a spread of approximately 40 basis points to 60 basis points. The result is a step-up in gross profits of four times or more when we compare that to our gateway-only merchants. These gateway conversions, in addition to share gains through the new merchant wins that Jared and Taylor mentioned previously, both play a significant part in our overall growth. Moving to adjusted EBITDA, Shift4 earned $14.8 million in the second quarter, which compares to $24.0 million for the same period in 2019. Our second-quarter results represent an adjusted EBITDA margin of 22% against gross revenues less network fees, which is down approximately 10…

Thanks -

Hey, one thing I wanted to add - this is Brad - before we get into the financial results is, I wanted to provide the share counts that are being used. So for the A class shares, we are using 19.0 million shares and for the C class, it is 20.1 million shares. Now I will turn it back over.

Great. Thanks, Brad. We are going to turn it to Marcela to go through the instructions for Q&A. Given the time constraints, we'd ask that everybody limit themselves to one question and a follow-up. All right, thanks. Marcela.

[Operator Instructions]. Your first question comes from the line of Timothy Chiodo from Credit Suisse. Your line is open.

Thanks a lot, guys. Good morning. Thanks for taking my question. I wanted to get into a little bit around the gateway opportunity. It is clearly large at $185 billion in volumes last year. I was hoping you could talk about the lack of alternatives in your core verticals in terms of the breadth and the depth of the software integrations that you have, many of those having been built up over years and years and years into some - into the software platforms, again, in your core verticals. Maybe you could just bring that to life a little bit and talk about the extent of those and what that means for your business.

Sure, Tim. Thanks for the great question. Jared Isaacman here. So as described during our - or during my opening commentary of this call, we live in - we intentionally position ourselves in a world of complexity. Almost every one of the merchants that is using Shift4 as a payment platform has a multitude of different software applications installed to deliver an experience. Now, that could be a hotel property management system, that could be restaurant point-of-sale system, that could be a retail point-of-sale system in a gift shop. It could even be a golf course software system that is powering the golf course at a resort. And they all need to connect together, network together for an encrypted and secure payment experience, for tokenization analytics, and then, again, the full payment processing service. Now, not every merchant is on the exact same version of software. In fact, in our deck - I think we highlight Pebble Beach; it's one of our great signature locations at Shift4 - you will find probably a dozen different software applications at that property using versions of software that could date back 15 years. And that is really not uncommon at all in the verticals we play in. So when trying to assess the competitive landscape that Shift4 plays in, you have to realize that not only do you need potentially hundreds of different software applications certified to your platform in order to compete, you also need like potentially decades of version history behind it. Because a customer isn't going to transition from one payment platform to the next and have to wait years in order to accumulate the integrations necessary to provide that experience I just described. So when you take all that into account, the actual landscape that exists that's capable of addressing those unique requirements and the complex verticals we plan is really like three payment platforms out there. And Shift4 is obviously one of them.

That's excellent. Thank you for that color. The quick follow-up is on the Las Vegas Raiders, an organic new win, not a gateway conversion. Maybe just provide some context. I know you had a good press release and mentioned earlier and it's in the slides, but was that a competitive process? And also maybe just touch on the sponsorship element there as well.

Yes, so again, Jared here, and happy to answer the question. So we have never historically played in the sports and entertainment arena, though it's quickly becoming an important focus for us now at Shift4. We have a BD team that's assembled to really dedicate a lot of resources towards it. And we were capable of addressing it because of those software integrations that I described previously. The same software integrations you would find in big resorts or arenas in resorts happens to be the same software that is capable of powering some very large stadiums. And that is by the way not an uncommon story to a lot of other verticals that Shift4 is able to play in. Just to go off track for a second, a lot of people know us within the hospitality and restaurant space, but the same software that powers retail shops and resorts is the same software at UPS stores, which is one of our signature accounts, too. And that is pretty far from hospitality and restaurants. But back to your Raiders question, as Taylor mentioned during his remarks, that is kind of the home team for us. Our second-largest office in terms of our workforce is in Las Vegas. A lot of very important customers for Shift4 are in Las Vegas. So naturally when they were building a new stadium, we did approach them not about a payments conversation at all. Just could we get a suite at the stadium for some of our employees as well as entertaining some of our customers who happen to be in the Las Vegas area anyway. And in those conversations, they brought up the payments conversation. To be really honest, they were a couple days away from signing with one of our competitors, who happened to sponsor another stadium on the West Coast and that created a conflict. So they approached us on this whole conversation. I mean, sponsorship is a component of that. I would say that the relationship for us is a profitable one. This is not a loss leader. We were going to get a suite anyway and probably hang our logo up in a few spots. But the net result is that it is a signature win that is going to showcase our best technology, including contactless and QR payments in the most demanding hospitality environment in the world. So it is exactly where we wanted to be, and that won't be our last stadium, I'm pretty sure.

Thanks a lot. I appreciate you taking the questions.

Your next question comes from the line of David Togut, Evercore. Your line is open.

Thank you. Good morning. Could you walk through the third-quarter guide on end-to-end payment volumes? It looks like you are guiding to about a 51% sequential increase at the midpoint of the $6.2 billion to $6.5 billion volume range. What are the underlying assumptions in terms of gateway conversion versus kind of return of the underlying business to grow throughout the quarter?

Sure, this is Taylor. I will address that. What I think we aim to do in providing the guidance was, give a more relevant jumping-off point, given the growth we had seen out of Q2. So just to put a finer point on it, June, we had just shy - that's like a couple thousand dollars shy of $2 billion in payment volume. And then in July, we saw that recovery continue. We mentioned this in our deck and I mentioned this in my remarks. July was actually the second-highest month in our Company's history in terms of end-to-end payment volume. One thing I would say is that there does remain a lot of uncertainty out there. So carrying the growth forward that we experienced in June and July into August and September didn't seem particularly prudent. We break that down into a more conservative growth for existing sites than what new sites contribute. So new sites do tend to contribute the majority of the growth you'd see in a quarter just because it wouldn't be prudent to assume that an existing location can grow really quickly when there is as much uncertainty in the commerce environment as there is. If it helps people calibrate, one stat worth mentioning is that our July payment volume, roughly 7% of that near-record month was from customers who joined us during Q2. So it gives you a sense as to what, even in a muted growth environment for our merchants, our boarding mechanism can do.

Got it. Just as a quick follow-up, to what extent is the SkyTab Product helping you win business in the restaurant space, as restaurants have moved more to a takeout framework in the COVID era?

It's really excellent question. And I think I can give you - and again, Jared Isaacman here. I think I can give you a pretty fair answer; not getting down directly to specifics. SkyTab was originally a pay-at-table order-at-table program that we launched at the National Restaurant Association in early 2019. Pay-at-table order-at-table has never really taken off in the US market compared to the international market, but have been doing it for essentially decades. So we felt - when we released the program, we had a ton of interest and traction in it. Now obviously during the COVID crisis, no one is going to go in - I mean, the idea of in-venue commerce ground to a halt, especially with restrictions in virtually every state on in-venue dining. We were able to push out a software update to all of those devices that were in the field that enabled curbside, delivery, takeout capabilities so to help our merchants pivot to what was becoming the new norm of the crisis. From the late March through I'd say early June time period, we deployed three times the number of devices to restaurants, existing customers as well as completely net new customers as well as gateway and end-to-end migrations than we had in pretty much the year prior when we initially released it as a pay-at-table order-at-table product. So well over I'd say like 10,000 devices, but I don't want to get too specific because I don't have the exact number there. But it is about a threefold increase in utilization prior - during the crisis than it was prior to the crisis.

Understood. Thank you very much.

Your next question comes from the line of Dan Perlin, from RBC Capital. Your line is open.

Thanks. Good morning, everyone, and congratulations on the quarter right out-of-the-box. You make our lives easy when you do this kind of stuff, so appreciate it. I have a couple questions. One is when we think about the Merchant Link portfolio, where are we in regards - I know it is a little bit early days, but where are we in regards to the beginnings of converting some of those clients? I know they tend to tilt towards larger kind of hotel and resort properties, but can certainly be meaningful to this conversion story. So I would just like an update there, please.

Yes, so thanks, Dan. Jared Isaacman here again. I would say we are still incredibly early on in the overall gateway to end-to-end migration effort. That said - and actually, I want Taylor to kind of fact check me a little bit on that. In fact, why don't you just give the specifics of our piece?

Sure. So in the quarter following our acquisition, we had an incredibly strong migration of customers. So just to give a little bit of backdrop for folks that might not be as familiar, the Merchant Link platform lacked a handful of really critical security features and best-in-class commerce features, tokenization things that customers really wanted. And their revenue model struggled because they were just paying a gateway. So they couldn't implement a lot of the services for customers at price points that was rational. So on a lot of our thesis was by acquiring this business, we can simply tell all these customers it's free if you switch to our end-to-end platform. That was incredibly well received. We migrated roughly 4,000 merchants in that first quarter. I would say in terms of our contribution in Q2, it is a meaningful contributor, but I wouldn't say it outweighs sort of the other two big pillars we have, which is that we've got the software brands we own in Harbortouch, Restaurant Manager, Future POS, and POSitouch. Those can usually - we can count on them for about a third of our production. And then also, the Shift4 gateway itself, which we acquired two years prior. So each of them can contribute about a third. It bounces around. That example of moving 4,000 merchants in the few months following the acquisition is certainly an outsized contribution. I would say it is more normalized in the second quarter. One thing that is particularly interesting, and it makes the data a little bit hard to dissect, to be candid with you, is that once you've sort of ingrained yourself in these channels, these merchant communities, and with the software brands themselves, you start to win new share. And what I mean by that is you've converted a restaurant over that was using the gateway, but they have also got another restaurant that was using a different piece of software and a different gateway. But they like the value prop and they want to consolidate everything under you. So I would say Merchant Link is a great contributor to our production. It's very meaningful in that concept of about - it is one of the three pillars. But whether it is a conversion that we had in our Rolodex or just simply a new site that we got as a result of the relationships built tends to get a little bit more opaque. And that's when we've got to dive down into more granular data.

That's great. The quick follow-up is the July volumes being the second-highest in the Company's history is pretty amazing, given the current context of the backdrop. And so - and by the way, giving guidance for 3Q and 4Q is pretty unique amongst a lot of the payment companies, so we appreciate that. I'm wondering how should we be thinking about that level of visibility over the next couple of quarters. I know you said there is a lot of uncertainties in the world. But the fact that you are giving it and the amount of visibility that you may have in terms of some of these conversions and new wins, maybe you can just help us put that in context. Thank you.

Yes, sure. So I think I mentioned this earlier, but the way I like to sort of contextualize it is that if you look at that month, 14% up over the same period in the prior year - and I'm talking about July specifically - you had about 7% of the volume in that month was from merchants who joined us or joined our end-to-end platform in the prior quarter. And so while you are getting nice growth from merchant boards, you are also getting almost an equal weight of recovery inside of your existing base. We don't want to be too precise. It would be a fool's errand to try to pick exactly [Technical Difficulty] in the guidance we were comfortable saying, growth will continue. We don't think that the pace of growth experienced in June and July is something that you want to extrapolate out over the next six to nine months. There is just too much uncertainty inside of that. But given the boards that we've had in the second quarter and the fact that a lot of them onboard in the month or two following them executing the merchant application and the fact that we are still boarding customers in July gives us good line of sight that even if there is a little bit of rockiness in the near term, we had an end-to-end volume range that we felt comfortable conveying.

That's great. Thank you, guys.

Your next question comes from the line of Matthew O'Neill, from Goldman Sachs. Your line is open.

Yes, hi. Thanks so much for taking my question. Jared, one thing you said in your prepared remarks that I found particularly interesting I don't think I have heard before is that as far as the cadence of the gateway conversion to end-to-end, you indicated that in some cases it can actually be as quick and easy as being completed within 24 hours. And so as sort of a two-part question, I was hoping you could maybe give us a little bit more of an understanding of the process of contacting a gateway customer today, explaining to them the virtues of vendor consolidation and moving not only gateway but also end-to-end to you guys. And how the cadence of that is probably progressing as a result of the pandemic. Are inbound volumes picking up significantly? And is the prospect for converting the gateway pool of customer base potentially on an accelerated schedule at this point? Thank you.

Yes, Matt, really excellent question. So hitting the two parts, the first really being about the technical means to migrate a gateway customer to end-to-end. And then the second part, just the rate of conversion and how that has trended in Q2. So on the first part, what I said in the prepared remarks is absolutely correct. And to be honest, it can be less than 24 hours. So this really just goes to an incumbency advantage we have as a result of the gateway in that all of the complex hooks that are in place with our payment platform in an establishment like a hotel or restaurant or resort environment, they are already there. So all of the connection points to the front desk and the central reservation area and the restaurant and the lobby bar, so on and so forth, it is already in place. We are already driving those transactions. All we are doing is outputting them on the other end of our platform to one of our competitors. A FIS, a Fiserv, so on and so forth. So when a merchant makes a choice to leave that multivendor environment, and that comes with obviously cost and a lot of pain, as I described in my opening remarks, it can be as simple as just turning off the valve, changing the merchant identification number in our system, not our competitor's system. Because again, it is important that all of the intelligence that is driving that transaction, all of the capability is resident within our platform. So in many instances, that advantage of already being installed in just a very large portion of the hotel, restaurant, specialty retail market gives us just a great advantage for migrating customers over. So again, it can be very, very simple. Then the second point in terms of the speed of the conversion, what I'd say is a value proposition that does revolve around collapsing unnecessary layers of expense and complexity was obviously fueling considerable growth before the crisis. I mean, Shift4 was growing our end-to-end payment volume north of 40%-plus before we went into - year over year before we went into the COVID crisis. Now, that kind of a value proposition absolutely continues to ring true in an environment where virtually every one of our customers is going through some sort of a cost rationalization exercise. So I don't want to say that the rate of conversions from gateway to end-to-end somehow accelerated even more because it was already on a great track. What I'd say is it definitely didn't slow down.

That's very helpful. And just from a kind of go-to-market perspective and an education for us, when you are now in contact with a gateway customer who has presumably been - could have been a gateway customer of Shift4, the payments gateway on a standalone basis for a number of years at this point, how do you approach them? Are they are approaching you more? Is it still primarily an outbound kind of sales and educational effort to say to a hospitality gateway customer, by the way now, we can do all this for you and consolidate you? Is that the right way to think about it?

It's a multipronged effort between what we can do at Shift4 as an organization and what our 7,000 software partners can do out in the field. We are all totally aligned around this concept of eliminating this multivendor environment down to one. I mean, especially in the COVID climate, where it is not as easy to get six or seven different parties on a conference call and come to some sort of an agreement on a technology solution or a service-related challenge. I mean, throughout a lot of different industries, there were furloughs. I mean, points of contact were gone. So keep in mind, even our software partners in the field, the software companies that deliver the property management system or the restaurant point-of-sale, they want to collapse down a lot of the vendors in order to simplify their lives. So I do want to emphasize that our software partners had just as much of an incentive during this time period to go out and promote our solution as we do. Now, Shift4, this is where innovation comes into play in our strategy. It is our job to identify pain points that live in the market, pain points for our target customers, and solve them through technology innovation. And then we deliver that at little to no cost, present it to those customers in order to induce them to move to our end-to-end platform. Now, the pain point of the last four months should not be a surprise. It is all about contactless payments. It is all about our SkyTab-based products or our QR-code-based payments that really we put together almost six years ago to help our customers in their reopening effort and deliver a safe commerce experience with their consumers. So sending a blast email out, for example, to 60,000 gateway customers that say would you like to enable contactless payment or QR-code-based payment or get ready to re-open and trying to be helpful in that regard, well, that certainly makes the phone ring. And that, in combination with our partner effort, is how we drove a lot of gateway conversions to end-to-end and how we continue to do so.

That's exceptionally helpful. Thank you very much.

Your next question comes from the line of Ashwin Shirvaikar, Citi. Your line is open.

Hey, Jared; hey, Taylor, Brad. Thanks for all the details. And I was kind of fading in and out, so apologize if this was covered. But as I look at your Q3 and Q4, obviously you are kind of suggesting that increasing end-to-end. But the EBITDA margin seems to stay roughly consistent. So is there a specific investment that is contemplated in the very back end of the year that keeps it that way? Or are you just saying Q3 is going to be towards the lower end of the range and Q4 towards the higher? Any color there?

Hey, Ashwin this is Brad. Appreciate the question. You are exactly right in what you see in the guidance. There is a couple of things driving that. One is when we think about Q3, obviously we have a little more visibility with one quarter in. By the time you get to Q4, it does open up kind of the realm of possibilities. So we tried to range that one open a little bit more. But there are some additional investments that we have included as we get through Q3 and Q4, mainly driven by the fact that July was our second-highest volume month in history. We are seeing considerable growth in our merchant production, in our merchant onboardings, and we want to make sure we have enough OpEx in order to get those customers boarded and meet our operational fulfillments for that. So we have included a portion of investment into Q3 and Q4. The other part that we have learned a little bit: in a COVID environment, we've had to deploy a little bit of extra OpEx just in the near term to shore up some of the challenges we are all finding in the business world of dealing in a COVID environment, whether it is work from home or work remote and different ways of working. So we are making sure we shore those up by Q3 into Q4. But we see those as very temporary investments likely through the end of this year and the margin should return to our previous guidance by the time we get into 2021.

Hey, Ashwin, Jared here. If I can just layer on to Brad's commentary a little bit. I think probably you as well as most of the analysts know that our starting place with the model that we discussed a couple months ago versus where we are at today is pretty night and day. So as a new public company management team, we felt we had an obligation and it was the responsible thing to do to kind of re-calibrate expectations in light of the pretty significant departure, to the upside, in our Q2 performance. That doesn't mean we still haven't taken a conservative look to the quarters ahead. And to Brad's point, a month deep into Q3 and an idea of what our productions and pipeline is like, we can put more confidence together around that. In Q4, we are going to certainly take some discounts because of the uncertainty, especially considering that time period, may or may not be a more impactful period when it comes to COVID. So hopefully that kind of helps with some context as to the outlook.

Yes, it absolutely does. Can I ask you guys to perhaps comment on sort of the nuances, ins and outs of the industry? You guys have already made a look into restaurants as well as hotels. We get a bunch of external data as well, but in your conversations, can you talk a little bit about sort of the next stage, what's that next stage going to be? We have kind of seen reopenings: patios, bars, things like that. What is the next stage your customers are looking for? And any incremental color on the hotel front as well?

Yes, sure. This is Taylor. I will address that. I would say it's all evolving very quickly. So we cautioned that when you look at a trend that is exhibiting itself with regard to maybe merchant behavior, you have to look at it as something that is a flavor of the moment. But what I would say, if you sort of step back and you piece a handful of these things together, technology adoption inside of restaurants has accelerated dramatically. One of the things that I think if you are in a spotlight like New York City, you probably take for granted that every restaurant does online orders and online delivery. That is not the case. You look across the vast majority of the country at lots of merchants, I like to say picture your favorite old Italian restaurant that has been there 25 years that didn't have a robust online ordering infrastructure. And quite frankly at a time like now is not when you want to implement solutions that cost you 30% of your revenue. So we saw a rapid adoption of technology first that was in relation to online ordering and streamlining, whether it is the delivery via a SkyTab device at your door or the pickup at a restaurant. And then very quickly, when more restaurants started to open up, QR codes became something that was prevalent. And just to break that down, QR codes are incredibly easy for a restaurant to implement because they have already got their website - their menu on their website. They will turn a QR code for it and you can look at their menu. But when it comes to payment, it's very challenging. When you think about the number of different restaurants, US brands out there, implementing a QR code solution is just challenging. So the idea that we were able to take our own solution that we built for one of our own brands and push it out to all of these other software brands, the Microses of the world, to take advantage of was something that restaurants reacted to incredibly favorably. But it couldn't be disruptive to their core service model. And by that, I mean you couldn't really break the original process of them bringing out a check. So we worked with them to make sure the QR code could get on the check on their existing software in a really seamless way and it worked with their existing printer, et cetera. So that is a nuanced example, but I would say technology adoption in the sit-down restaurant has accelerated dramatically over the past few months. Hotels, I would say we are ahead of the curve on technology adoption. The contactless is just as big of a theme for them. But you are just not seeing the level of commerce there that you are in the restaurant space. So it's probably premature to comment.

Understood. Thank you.

Your next question comes from the line of Darrin Peller, from Wolfe Research.

Thanks, guys, and nice job. Look, when we look at the growth profile you are calling for on the end-to-end volume the next couple of quarters and what we are seeing in June and July, it is pretty apparent that despite your verticals and even beyond the end-to-end - the gateway conversion, there is something that is differentiating on a tech standpoint. I know you just touched on that on restaurants, but I guess number one, I would be curious to hear what percentage you are seeing of your volume that is card not present, what percentages may be buy online pick up in store. If you can give us any color around that and where that compares to versus perhaps a year ago and how you guys can show those percentages versus the industry averages. And then I also want to know how the trends are in your non-hotel and restaurant verticals. You have done I think a good job building out about 25% or 30% of your volume that is not in those two categories, which seems to be I think winning a lot of new business for you as well. And why are you winning there and how is it going? Thanks, guys.

Sure. I will comment on the card present, card not present trends. We have always been a very card present business. I think just restaurants, hotels, in-venue experiences that sort of translates to that. If I were to bring you in February, we would have been 85% card present and 15% card not present. That troughed out from a card present perspective in April, as you'd expect, with about 40% of our transactions being card not present. That is that big shift to online ordering, even just calling in and giving a credit card number over the phone to a restaurant for take-out. It's not back to February levels, but it's about 80/20 today and it's stayed relatively stable through June and July. So we are not seeing the level of in-venue commerce with your card that you'd expect out of our business profile. But to be fair, a QR code payment is a card not present because it is paid through a website. So I think the encouraging sign is that you are seeing more cards used at or around a venue, but we are not back to what you would have expected from our business prior to COVID. And sorry, just remind me of your sort of follow-on question there? Oh, okay, yes. Jared reminded me. If you think about the other segments we serve, this is a good point to emphasize that if you look at the software integrations we have, they tend to start with a hotel or a restaurant, but they quickly sort of spider web out from there. And a good example of that would be a Caesar's Palace, where, yes, we handle the online reservation integration into the property management system, but there is a shopping mall there with lots of other software…

Yes, I can just - Darrin, if I may layer on just a little bit on the technology side of things and one closeout point just on the kind of specialty retail or non-core restaurant and hotels to layer on to what Taylor said. You had golf courses there that were operational throughout most of the COVID crisis. You had UPS stores that were still open, facilitating commerce to. Both of which, to Taylor's point, originated from our hospitality business but obviously categorized differently. What I'd say in terms of adopting technology, and I think this is a really important point to understand our business and it goes back to that whole incumbency thing. As we estimated during the roadshow process, potentially 35% or more of the restaurants and hotels in the country use some form of Shift4 payment technology, but only a very small percentage use our end-to-end offering. And that is the big opportunity we all know we are chasing. And it is not just on the gateway. It is absolutely on the software side because we have a lot of point-of-sale system software out there. That incumbency advantage coupled with 7,000 software partners that are essentially local provide awesome coverage and an ability to introduce new technology, to your question, very, very quickly. So things like SkyTab, for example, which facilitates contactless payments and delivery and take-out and such, it's a lot easier for a merchant who is battling through a crisis, who is trying to implement new ways to do business with their customers a solution, when it is just an additional extension to their current product versus having to rip everything out and do a brand-new installation. That's very hard to do in a crisis. And when you think about some of maybe the fast-growing restaurant software players who have largely like a direct model where they are remotely implementing solutions, that is very hard to effect a rip-and-replace, to introduce a new form of technology versus you already have a customer using your software. They are already being supported by somebody who is in the geographic area. And all you need to do is hand them over a contactless type solution like our SkyTab product. So it makes it very easy. I mean, the distribution relationships we have with our software partners has always been a huge asset. The large installed base that we have is a huge asset and it makes it very easy for us to implement new types of technology that became very vital during these challenging times.

Your next question comes from the line of John Davis, from Raymond James.

Hey, good morning, guys. I just wanted to touch on capital allocation for a second. Obviously post-IPO, the balance sheet is in good shape. So I guess first, how soon would you be willing to do a deal and what is your leverage comfort level? And then second, what would you be interested in? Any product gaps or specific areas of interest? Any color there would be helpful.

Yes, sure. Happy to answer that. So again, Jared here. You know, to just answer the first question in terms of the comfort of leverage ratios, obviously when you look at it on a net basis, our leverage ratios are incredibly low right now. For the last five years of our Company history pre-IPO, we operated at almost continuously six turns of leverage on a net basis, just given our great private equity partner and the efficiency of our capital structure. And during that time period, I mean, we tripled the EBITDA of the business. We deployed capital effectively towards organic initiatives that ultimately yielded really strong unit economics. And we completed a number of acquisitions that unlocked what was to become a great organic opportunity with our integrated payment strategy. So I wanted to just set the stage in that. Of course, we will never see those leverage ratios again that existed when we were a private business. But it lets you know how comfortable the management team can be and how effective we can be even in a pretty levered-up environment. Okay, so all that aside, we are looking at the same things now in terms of our capital allocation that we were previously, which is we have really strong unit economics. Our customer acquisition cost relative to the lifetime value of our customer has an incredibly quick payback period. And I think you will find in the quarter and really in the year ahead, we are going to allocate more capital towards customer acquisition cost to accelerate growth, especially migrating customers from our gateway to our end-to-end platform. Because the returns on it are just phenomenal. That goes right back to the 4x uplift in gross profit per customer, at least 4x uplift. And second, we are going to continue to look at opportunities that may exist in the market where we can unlock an enormous integrated payments opportunity. And that could be in the verticals we are already in as a double down or triple down or it could be in adjacent verticals or it could be in new geographies. And I'd say we have a pretty healthy pipeline in that regard, but I'd say nothing - we are just obviously constantly evaluating them. But yes, I'd say it's the same thing we did before; it's the same thing we are doing now. And we are just going to be real disciplined about it.

Okay, thanks. And then maybe just a quick clarification on the implied take rate. Brad, in the guide, obviously it steps down pretty materially from 2Q, I think. It implies like 120 basis points or so. So maybe just help us frame that and exactly what is driving that and how we should think about that as we go into kind of 2021 and beyond. Thanks.

Yes, sure, John. Appreciate the question. We did discuss the Q2 take rate, and I want to make sure it is clear that Q2 take rates, or spreads as we call them, were pretty inflated. We talked about when you get into monthly minimums and you get into some fixed fees applied to lower volumes. So when you calc our spreads for Q2, you are going to get north of 90 basis points. What we tried to do in the guidance is essentially step that back to more normal levels. We are not going to provide guidance on spreads, but I would revert you back to some of our history when you look back into 2019 as a good benchmark to kind of think about spreads. And as we did talk about, you will see some slight declines. They are not significant. They are not declines that are going to look in the 5 basis points to 10 basis points per quarter range. They are going to be much smaller than that simply due to these mix conversations we have. As we move down the merchant curve into larger merchants, they do have slightly lower spreads and that will over time drive our spreads down. But you are not going to see that wildly significant over the next couple of quarters.

Okay. Thanks guys.

Your next question comes from the line of James Faucette, from Morgan Stanley. Your line is open.

Great. Thank you very much and great to talk to you guys, especially given the rapid recovery that we have seen even just in the last few months since you became public. I wanted to ask you a couple of things. First, what kind of gateway businesses have you been able to convert over? You called out a casino conversion. Are they all like this or are they in other verticals as well? Just trying to get a little more color on like what is happening and how you are being able to execute that, particularly in a pretty volatile period.

Yes, so, thanks, James. Jared Isaacman here. The type of merchant that you would find on our gateway are those using the 350 different software applications I described previously and decades of version history. And almost in all cases using at least two or three different types of software in order to power their environment. That is again like a big distinction for where we live on one end of the complexity spectrum versus some of our really awesome peers in the space like a Square, who is on a different end of complexity. And so those type of merchants that could be using those software integrations and versions could be golf courses that are in a resort environment. They could be golf courses that have nothing to do with the resort environment but use the same software. They could be some of the most well-known restaurant brands that you would think about there that have dozens of locations. And certainly there's a lot of hotels and resorts and there is definitely some even larger casinos and resorts. So I'd say that is the typical profile of the customers that you would find on our gateway platform. And I'm sorry, was there a second component to the question?

Yes, just - that's helpful. And the second thing I was going to ask was just around - you've already touched a little bit on investment strategy. But given the faster-than-expected improvement in the business overall, how are you thinking about capital allocation priorities, especially as it relates to debt, buybacks, M&A, et cetera.?

I think if I were to try and rank in terms of priorities right now, number one is going to be to continue to pour gasoline on just the organic growth engine. So if I were to look back over the last few years and say where did I think and really where did we think as a management team could we have done more, it would have been in inducing our customer acquisition costs more to accelerate growth. I mean, being in the leverage environment that we were in previously, there was only just so much capital we could allocate to that, despite the growth success we were experiencing. And again, if you go to customer acquisition cost relative to lifetime value of the customer, there isn't a little bit of room; there is a ton of room there. I mean, we have been living in a world of six- to eight-month paybacks, which I think would be pretty best in class. So I think that is priority number one. There is $185 billion of volume on our gateways right now that's connected into our payment platform. They are highly dependent on our service right now, and they are paying four or five different vendors to deliver an experience that we can do as a single vendor offering. And that is going to deliver a lower effective cost of service. That is just like hands-down number one priority to continue that migration and there are ways that we are going to be able to accelerate that by deploying capital efficiently. So that is number one. I think number two is we are going to draw on the playbook that has worked out very effectively for us again over the last five years to find undervalued, underappreciated assets that live in the market. And that could be in the U.S. market or it could be in international markets, where we know based on experience that we can unlock a lot of value through our integrated payment strategy. And I think that's going to be number two. And the only thing I would say that balances with two is we build a lot of software to unlock integrated payment opportunities. I mean, SkyTab is a great example. It couldn't have been more timely to have a solution that quickly enabled contactless and QR-based payments in takeout and delivery. So we build a lot of software and we are going to want to keep building software to solve pain points that we know exist within our base of customers to accelerate adoption of our end-to-end payment offering. So I think that would be kind of where we would be prioritizing our capital allocation, especially over the next couple quarters.

Appreciate that, Jared. Thanks a lot.

Your next question comes from the line of Andrew Jeffrey, from STRH. Your line is open.

Hi, guys. Thanks for taking our question. This is Tom Blakey on for Andrew. You have given some great color on these savings, especially with regard to the casino, the specific casino. I was wondering if you could give these savings as a percentage of card acceptance cost or some other relative measure to help us, especially as we look out to Shift4 taking some share from larger merchants who have more volume in the future? Thank you.

Yes, so Jared here again. I will take that one. You know, this is very, very hard to quantify. You are definitely not the first who have asked us really how compelling is the savings value proposition for these merchants. And the answer is a lot of times, it is unknown. Because there are four or five or more, eight-plus vendors that can exist in a situation where we are eliminating seven of them and providing solutions at little or no cost from our perspective in order to capture an end-to-end payments customer. And we are not always like completely aware as to all those other costs layers. We provide contactless and chip card devices at no charge. People charge for those devices. And if you're talking about a large enough hotel or resort environment, that could add up to hundreds of thousands of dollars. And that is not necessarily a one-time event because the PCI security council make sure that we all replace devices every four or five years. So it almost becomes a recurring form of savings. But that is just on the hardware side. I mean, right now in the world of QR codes for QR code payment acceptance, there are probably like 50 companies out there right now who have some sort of a QR code enablement solution for restaurants. And they are hundreds of dollars a month per location. And they require you to contract with another company to - as a middleware to make it talk to the point-of-sale system. We don't have to make money at all on the QR code technology because it is driving transaction volume, which is our number one revenue stream. So we can just give that away free. The analogy I like to use in this a lot…

No, that's very helpful. And I appreciate the analog on Apple Pay. As a segue maybe there or a loosely one, new merchants, from the color on the call, great growth there. And understanding some of Shift4's unique positioning with some of the legacy VAR channel providers, I was wondering if you could maybe just provide some color in terms of the health of the legacy VAR channel during this distribution pandemic disruption. And what this kind of mix will look like going forward in terms of you guys signing up new merchants and converting merchants over to your platform going forward.

It's really an excellent question. So as you know, I mean, we go to market 100% through third party and very aligned software partners. So the health of our partners is essential to our entire distribution strategy. What I'd say is that production throughout the crisis never diminished. So in terms of just new customers that were entering our platform from our partners, it stayed rather consistent. So they were able to continue to go out and generate business from their customers for sure. We did do various surveys, especially in April, late April, to figure out what percentage of our partners were able to access PPP funds under the CARES Act because the health of our partners was very important to us as well. And the majority had. So our partners in large part are small value-added resellers or software companies around the country that qualified as much for the benefits as our restaurant customers. So that certainly helped I think a large portion of them weather the storm. And then on the other end of the spectrum, I mean, some of the partners that we have the largest relationships with would be the likes of like an Oracle or those using Microsoft software such where stability was kind of always assured even during the more darker points.

That's a great update. Thank you very much for the color.

Your last question comes from the line Michael Del Grosso, from Compass Point. Your line is open.

Hey, guys. Thanks for taking my question. A question on the gateway volume. You disclosed 17% of that was converted from - I'm sorry, end-to-end volume. 17% of your end-to-end volume was converted from gateway this quarter. Is that correct and what was the total gateway number this quarter?

So we don't disclose the gateway volume, not the least of which is because this would be a wacky quarter to even try to unpack it, given how many hotels we support within our gateway and the trends that they have been experiencing. With regard to the specific you mentioned, the way we broke it down for everyone is that if you looked at our end-to-end volume in the quarter, 17% of that came from a conversion. Meaning a customer that was sort of on our books but not an end-to-end customer. So that was the contribution. You would see it a little larger if you looked in July, but hopefully that gives context that when we convert one of these customers, you don't get one-for-one value for it. When you convert one of the customers, they typically contribute more volume than the average customer in our book. So you get more end-to-end impact per conversion than the average customer in the base.

Okay, thanks. And then on the end-to-end volume guide for 3Q and 4Q, I know you touched on this earlier, but how much of that is from conversion and how much of that is from reopening?

So we don't break it down that specifically in our guidance. What I would tell you, and I think the most helpful way to think about it in as uncertain of a world as we are dealing with, is that about 7% of our volume in July came from a customer that boarded our end-to-end platform in the second quarter. And we don't care whether that was a gateway conversion, whether it was a new end-to-end customer, but 7% of our total volume in July was from end-to-end growth as opposed to volume resurgence. And we think that's a healthy metric. I think if you sort of tried to decipher guidance, you would probably see it that we are counting more on merchant production than we are counting on recovery of our base. But I think we are being pretty sober in the impact of both, just given the uncertainty of the environment.

Sorry, one last one if I could. On the gateway conversions, which platform are those coming from predominantly? Is that mainly from Merchant Link or is that from kind of the legacy Shift4 platform?

So in this quarter, it was not dominated by either one. It was sort of both were contributing to that. And if you were to look at the first quarter, you were to look at the fourth quarter of 2019, you would see more Merchant Link simply because we had just acquired the platform. But nowadays, it's more regular course for sort of both platforms to be contributing to the end-to-end production.

And if I may, just to layer on an example to help you understand just even some of the complexity in arriving at these numbers, even COVID aside. So at the time UPS Store committed their 5,500 physical locations to Shift4, we did not own Merchant Link and they were a Merchant Link customer. They began their migration after we had acquired Merchant Link, so that kind of muddied the net new versus gateway conversion. And then if you want to layer in even more confusion to it, each location had an e-commerce relationship on a platform that had nothing to do with Shift4 or Merchant Link that they committed and actually boarded the entirety of to the Shift4 platform. So a lot of stuff moving around, it becomes really challenging. You almost have to look at these on a deal-by-deal basis and try and determine if it was a totally net new, if it was a conversion, and which direction it came from.

Thanks.

There are no further questions at this time. I will turn the call back over to Mr. Isaacman for closing remarks.

Yes, thank you so much. Thanks, everyone, for really joining our first call right now. Really big moment for us. Thanks for your time and interest in Shift4. As we said at the top, despite some of the chaos in the world, we are really excited about this Company's potential for a long list of reasons. I'd like to close out by expressing my appreciation once again to all our employees, our valued customers, and our partners for helping us achieve this very important milestone. Thank you.

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