Shift4 Payments, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Shift 4 Payments Second Quarter 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during the session, please press star 1 on your telephone. If you require further assistance, please press star 0. I would now like to turn the conference over to your speaker today, Sloan Bowen, 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 measure 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've all been living in really unprecedented time period that poses numerous challenges to us as individuals, as families, professionally, and as a society. I'm impressed beyond words with how we have navigated through these realities to become a better and stronger organization. In so many respects, there's 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 a 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, Ship4 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 Ship4 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's been a great benefit, especially of late when it comes to things like contactless forms of payment, like our SkyTab and our QR code-based payment products. I can also say with some sense of objectivity that despite our 21 years of history, I think the most interesting and exciting opportunities still lie on the road ahead. We're a passionate and ambitious organization that aims to be one of the largest integrated payment companies in the world, and June 5th was a major milestone in that ongoing endeavor. So getting down to business, as you saw from our release this morning, shift four drove very strong results despite a market backdrop that clearly impacted our merchant base, particularly those in the restaurant and hospitality space. Specifically, shipboard generated end-to-end volume of $4.2 billion for the second quarter of 2020, which drove gross revenue less network fees of $67.4 million. While these figures represent a decline of 23% and 10% respectively from the prior year period, keep in mind this is against the COVID-19 environment where the average industry restaurant and hospitality volumes were down an estimated 60% to 90%. Perhaps more notable is our June bond, which was actually ahead of June 2019. So this year-over-year volume growth trend has continued and, in fact, increased into July. It's worth noting that July was actually the second highest month of end-to-end volume in our company's history. Our outperformance was driven across both new merchant wins as well as continued conversions of merchants from our gateway platform to our end-to-end solution, which I will profile in just a minute. As a result of our strong execution, CHIP4 generated adjusted EBITDA of $14.8 million for the second quarter, which represents a margin of 22% against gross revenues less network fees. Lastly, we reported a net loss for the second quarter of $75 million, or $0.03 per share, When adjusted for stock-based compensation and one-time events, a net loss of $14.4 million. On the topic of broader volume in COVID-19, our Chief Strategy Officer, Taylor Lauber, will provide additional color on trends in the second quarter, as well as some detail on proactive steps Shift4 took to help our merchants and also manage our expenses and optimize our profitability. Brad Herring, our Chief Financial Officer, will provide more detail on our financials later in the call, but right now I'd like to provide a brief overview of Shift4 and our differentiated approach to payments. So for those of you that are looking at Shift4 the first time, we began the company in 1999 from my parents' basement with the goal of helping smaller merchants solve their payment needs. Our initial focus was and continues to be simplifying complex problems for our merchants with the aim of capturing payments bonds. In the early days, it was all about helping small business with payment acceptance and onboarding, but that has evolved into supporting some of the largest and most complex merchants in the country, including the new Raider Stadium in Las Vegas, which we're excited to talk about a bit later. Most merchants have to manage a confusing set of vendors. This includes companies supplying point-of-sale software, point-of-sale hardware, security, analytics, a payment gateway, merchant acquiring, and more. Of course, this web of vendors can grow even further when you start thinking about gifts and loyalty cards, online ordering, contactless payments, and so on. In many cases, these services aren't optional. They are required to make a payment solution work securely as well as meet the operational requirements of the business. The problem gets exasperated when a merchant has multiple revenue centers and multiple locations. So if you think about the number of software solutions a hotel, for example, might be using and the version history behind each of them, you can quickly understand why this multi-vendor model results in pain, cost, and service challenges and leaves so much opportunity for improvement, which means it leaves a lot of opportunity for shift four. Shift four is vertically integrated and bundled. Many of the capabilities a merchant would otherwise have to pay a multitude of different vendors to implement. These critical links in the payments value chain and the ability to support over 350 different software integrations that most merchants in our target verticals are already using ultimately translates into a very large addressable market that is well served by a very differentiated and cost savings value proposition. This is really important because we believe we are the first in our industry to really do this, and it's what has fueled so much of our year-over-year growth. If you are getting the sense that a typical Shift4 merchant is not a food truck, you would be correct. We love food trucks, but serving their payment needs is not what really makes Shift4 special. Many payments companies offer easy-to-use end-to-end solutions for very small merchants. We take that exact philosophy and deliver it to larger and more complex merchants. That happens to be some of the most recognizable brands in the world. In summary, Shift4 is built to tackle the complex problems of multiple software solutions, omni-channel payment acceptance, enterprise-grade reporting and analytics, and solve a number of other pain points through a single vendor solution. As we phrase it to our customers, it's a one-hand-to-shake service model. I think it's worth taking a minute to describe how we grow. Shift4 has built a partner-centric distribution network of over 7,000 different software partners. These partners specialize in implementing and supporting software for merchants and range from small local resellers to global software giants like Oracle and Microsoft. Our partners provide us three things, massive coverage across the U.S., a Rolodex of high-quality merchants, and a highly scalable service model. Merchants can subscribe to Shipboard via our gateway-only channel or, as is increasingly becoming the case, through our full end-to-end payment solutions. The key difference between the two paths is that our gateway-only customers rely on Shift4 for software integration and payment security, but also several third parties for things like merchant acquiring, payment devices themselves, reporting. Our end-to-end solution, on the other hand, collapses all of these functions with Shift4 as a single-vendor solution. This saves merchants money, allows for better service, and speeds up time to market for their business. Because we can fulfill the role of multiple vendors at scale, we can charge the merchant less than they were paying before and still generate four times the gross profit of a gateway-only customer or more. Roughly 11% of our overall volume is driven through our end-to-end solution, but that volume represents over 80% of our total revenue. The exciting growth dynamic that is unique to Shift4 is is our opportunity to convert the remaining 89% of our volumes from Gateway to our end-to-end platform. This is not a heavy lift. And in many cases, moving a merchant from a Gateway-only subscription to an end-to-end offering can be completed in less than 24 hours. And Taylor will give an update on our progress there in just a minute. Despite the enormity of the gateway-only to end-to-end opportunity, it's important to reinforce that our growth is not limited to merchants already on our gateway. In fact, a large portion of our growth comes from empowering our 7,000 software partners with a compelling value proposition fueled by our integrated payments offering so they can seek out and win share of what is a very large addressable market. Before I turn it over to Taylor and Brad, I'll end with a summary of our value proposition to investors as we see it. First, we operate in an industry with long-term secular growth trends, including the digitization of payments. Second, our one-of-a-kind payment platform attracts high-quality merchants and the thousands of software brands that serve them. Third, because of our history of highly strategic M&A, many of our customers are legacy gateway only, and we expect many of them to convert to our full N10 solution over time, which will further augment our growth. Lastly, our solutions can be applied in new market segments and geographies. So with that, let me turn it over to Taylor to give some color on volumes over the quarter and some unique initiatives we launched in the midst of the pandemic. Thank you, Jared, and good morning, everyone. I'll begin by speaking a little bit about our merchants and what we've seen regarding payment volumes as the environment and the COVID-19 pandemic has evolved. First, I'll 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 Shift4 Cares 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'll see in a second they're quite a bit different than what you see in the gateway transaction on Shook Core Cares. With that said, let me provide some detail on what we've 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 ads, which happen every day. Jared mentioned this, but I do think it's worth restating. July payment volume's have continued June's trends and are in fact the second highest month in our company's history. That's something we're really proud of. Overall, we observed a lot of resiliency across our base of merchants over the past few months.

And while there remains uncertainty and variability due to the pandemic across the country, we feel confident that the industries we serve can largely withstand the pressures of COVID-19.

Our boarding of new merchants never really slowed during the quarter, which is also highly encouraging. We can attribute this to a couple of things. First, our core value proposition, it being one of savings and simplification, those resonate during hard times. Second, we are fanatical about innovation and released four different products to help our merchants and software partners adapt to the rapidly changing landscape. With that, let's turn our attention briefly to some case studies of new end-to-end merchants. In our presentation, which you can find on our investors' website, We've highlighted a couple of new end-to-end merchants, including a casino and resort that is very typical of high-quality gateway conversion. They not only benefited from consolidating the multi-vendor payment solution that Jared mentioned earlier, but also saved significant money in the process. For this particular resort, they saved over $17,000 in upfront equipment expense. Beyond equipment, we will also save this merchant roughly $8,500 per year by eliminating gateway and other vendor fees. They were also able to take advantage of contact list technologies like SkyTab or QR code-based payments at no additional charge. This is clearly a compelling value proposition, perhaps even more compelling during times like these when economic hardship is prevalent. It's important to remember that gateway conversions are only a portion of our growth story. We also win share. As Jared mentioned, we announced our partnership with the Las Vegas Raiders in mid-July. As a company that handles payments for nearly half of the hotels and casinos across the Las Vegas Strip, it's great to be partnered with the home team. More importantly, we view this partnership as validation of our value and growth potential for merchants beyond our core restaurant and hospitality base. Before I turn the call to Brad, it's worth mentioning how Shift4 continues to innovate across all parts of our business, and the introduction of QR Pay is the latest example of how we put ourselves in our merchant shoes and work to solve pain points. As consumer behavior changes due to COVID-19, it was clear to us early on that contactless payment options would be a critical option for merchants.

Shift4Act actually already possessed this technology dating back to 2014 and was able to quickly roll it out across the software brands we own and also make it available to hundreds of partner integrations. With that, let me turn it over to Brad for a review of our financials for the quarter.

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'm about to speak to. Now to get to our financial results. As we reported in our press release, CHIP 4 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 MerchantLink acquisition. Let me give a quick refresher on the economics of a gateway conversion. As Jared and Taylor mentioned, approximately 89% of our volume is generated from merchants that only use our gateway service. Chipboard's revenue from this merchant base is generated at approximately 3 to 5 cents per transaction. As these merchants migrate to our end-to-end solution, we shift from transaction fees to a spread of approximately 40 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 points from the same period a year ago. The drop in margin was due to the sudden and sharp declines in revenues seen in April and May as a result of COVID-19. Significant cost reductions that were implemented in May improved margins by the end of the quarter. Next, I would like to highlight a few key points regarding capitalization and liquidity. We used aggregate IPO proceeds of $464 million to repay $280 million of debt within the quarter, entirely eliminating our second lien facility, repaying the entire balance on our outstanding revolver, and reducing our first lien facility to a balance of $450 million. As a result, our current leverage stands at 5.3 times on a gross basis and 2.5 times on a net basis as a multiple of our LTM trailing adjusted EBITDA. With regard to liquidity, we ended the quarter with $244 million in cash and $89.5 million of capacity on our revolving credit facility. Finally, given the amount of volatility within Q2 and the challenges to extrapolate these results into the back half of 2020, we wanted to provide some guidance on a few key measures. This guidance is predicated on volume and spread trends continuing to perform as they did at the end of Q2. Our guidance is based on our current expectations and is subject to change based on many factors, including but not limited to the possibility of a second wave of COVID-19, or if states and municipalities further restrict dining, travel, or other forms of commerce. That said, we exit the second quarter processing approximately $2 billion in the month of June. We anticipate volume to increase off of Q2 levels to between 6.2 and 6.5 billion for Q3, and to between 6.5 and 6.9 billion for Q4. Our expectations regarding this volume growth are a function of continued strength in merchant production, as well as slow and steady recovery of same-store sales within the merchant base. As typical in our industry, we do expect to see a slowing of growth related to same-store sales in Q4. Net spreads saw significant volatility in Q2 and ended the quarter at over 90 basis points. The higher than normal spreads in Q2 were the result of certain merchants reaching monthly minimums and certain fixed fees being charged against reduced volumes. By the end of the quarter, net spreads began to return to more normal levels. Assuming volumes continue to recover, net spreads remain at more normalized level, and we continue to see steady recovery in our SAF and Gateway revenue streams. We anticipate gross revenues less network fees to be between 74 and 78 million for Q3, growing to between 75 and 79 million by Q4. We anticipate net processing spreads to continue to decline slightly. as we continue to execute on our strategy of attracting larger, more complex merchants with higher volumes. Finally, we expect adjusted EBITDA to return to more normalized levels by Q3. That said, our guidance for Q3 and Q4 would be to anticipate adjusted EBITDA of approximately $20 to $23 million per quarter for each of Q3 and Q4. I want to highlight a few other topics that will manifest itself in our financials going forward. Beginning in Q3 of 2020, we will be accounting for our POS and terminal equipment deployments as operating leases. The result will be a shift from an expense and cost of sale to a leased asset that will be depreciated. Second, as Taylor mentioned previously, July volumes are up meaningfully year over year. As such, we have included additional OPEX investments and our guidance to support what we are seeing as a strong interest in our end-to-end offering. I want to reinforce again this guidance is being given because of our strong Q2 financial performance and our belief that recalibrating expectations is appropriate. There is still considerable uncertainty, in particular as a result of the current COVID-19 pandemic. And one thing. Hey, one thing I wanted to add, this is Brad, before we get into 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. So now I will turn it back over.

Great. Thanks, Brad. We're going to turn it to Marcella 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, Marcella.

At this time, I'd like to remind everyone, in order to ask a question, please press star and the number one on your telephone keypad. Your first question comes from the line of Timothy Chido from Credit Chris. 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's 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 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, you know, as described during my opening commentary of this call, you know, we intentionally position ourselves in a world of complexity. Almost every one of the merchants that is using ShiftForce payment platform has a multitude of different software applications installed to deliver an experience. And 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 and a gift shop. It could even be a golf course software system that's powering the golf course at a resort. And they all need to connect together, network together for a 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'll find probably a dozen different software applications at that property using versions of software that could date back 15 years. And that's 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, you know, 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 play in is really like three payment platforms out there, and Shift4 is obviously one of them.

That's excellent. Thank you for that, Kohler. 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 it earlier in the slides, but was that a competitive process? And also maybe just touch on the sponsorship element there as well.

Yeah. So again, Jared here, I'm 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's capable of powering some very large stadiums. And that's, by the way, not an uncommon story to a lot of other verticals that Shift4 is able to play in. You know, 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 resort is the same software at UPS stores, which is one of our signature accounts, too. And that's pretty far from from hospitality and restaurants. But back to your Raiders question, you know, as Taylor mentioned during his remarks, that's 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're 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, you know, 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. Yeah, I mean, sponsorship is a component of that. I would say that the relationship for us is a profitable one. This is not a lost leader. You know, we were going to get a sweep anyway and probably hang our logo up in a few spots. But the net result is that it's a signature win that's going to showcase our best technology, including contactless and QR payments, in the most demanding hospitality environment in the world. So it's exactly where we wanted to be. And that won't be our last stadium, I'm pretty sure.

Thanks a lot. Appreciate you taking the questions.

Your next question comes from the line of David Taggett from 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're guiding to about a 51% sequential increase at the midpoint of the $6.2 to $6.5 billion volume range. What are the underlying assumptions in terms of gateway conversion versus kind of return of the underlying, you know, business to grow throughout the quarter?

Sure. This is Taylor. I'll address that. You know, what I think we aim to do in providing the guidance was give a more relevant jumping off point given the growth we'd seen out of Q2. So, you know, just to put a finer point on it, June we had just shy, that's like, you know, a couple thousand dollars shy of $2 billion in payment volumes. And then in July, we saw that recovery continue. And we mentioned this in our deck, and I mentioned this in our March. July is 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 per existing site 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's 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?

That's a really excellent question, and I think I can give you, again, Jared, I think I can give you a pretty fair answer, not getting down directly to the 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 U.S. market compared to the international markets that 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 new customers, as well as gateway to end-to-end migrations than we had in pretty much the year prior. when we initially released it as a pay-a-table, order-a-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 three-fold increase in utilization during the crisis than it was prior to the crisis.

Understood. Thank you very much.

Our 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 MerchantLink portfolio, where are we in regards – I know it's 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, you know, to this conversion story. So I would just like an update there, please.

Yeah, so thanks, Dan. Jared, Isaac, been here again. I would say we're 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. We've – In fact, why don't you just give? So in the quarter following our acquisition, we had incredibly strong migration of customers. So just to give a little bit of backdrop for folks that might not be as familiar, the MerchantLink platform lacked a handful of really critical um, security features and, um, best in class, um, you know, commerce features, tokenization, things that, that customers really wanted and their revenue model struggled because they were just the payment gateway. So they couldn't implement a lot of these services for customers at price point. That was, uh, that was rational. So 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, um, roughly 4,000 merchants in that first quarter. I would say in terms of our contribution in Q2, it's 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 Harbor Touch, 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 shipboard gateway itself, which we acquired, you know, 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's more normalized in the second quarter. One thing that's 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, um, it, you start to win new share. Um, and what I mean by that is you converted a restaurant over that was using the gateway, but they've also got another restaurant that was using, you know, a different piece of software in a different gateway, but they liked 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, you know, it's one of the three pillars. But whether it's 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 got to dive down into the more granular data.

Yep. No, that's great. The quick follow-up is, you know, the July volumes being the second highest in the company's history is pretty amazing. given the current context of the backdrop. And by the way, giving guidance for 3 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, you know, that level of visibility over the next couple of quarters? I know you said there's a lot of uncertainties in the world, but the fact that you're 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, you know, put that in context. Thank you.

Yeah, 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, you know, 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're getting nice growth from merchant boards, you're also getting almost an equal way to 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 the guidance we were comfortable saying, you know, 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's just too much uncertainty inside of that but you know given the boards that we've had in the second quarter and the fact that a lot of them on board in the month or two following you know them executing the merchant application and the fact that you know we're still boarding customers in july gives us good line of sight that even if there's a little bit of rockiness in the near term um we had a we had an end volume range that we felt comfortable you know 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.

Yeah, 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've 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, you know, being completed within 24 hours. And so it's 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, you know, contacting a Gateway customer today, you know, 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.

Yeah, 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's 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 a restaurant or resort environment, they're 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's already in place. We're already driving those transactions. All we're 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 multi-vendor 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 system, because again, it's important that all of the intelligence that's 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 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 is What I'd say is, you know, a value proposition that does revolve around collapsing unnecessary layers of expense and complexity was obviously fueling considerable growth before the crisis. I mean, shift four was growing, you know, our end-to-end payment volume, you know, north of 40 plus percent 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 was 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, you know, in contact with a gateway customer who's presumably been, you know, could have been a gateway customer of TIFT for the payments gateway on a standalone basis for a number of years at this point. You know, how do you approach them? Are they approaching you more? Is it still primarily an outbound kind of sales and educational effort to say to a hospitality gateway customer, you know, by the way, now we can do all of this for you and consolidate you? And is that the right way to think about it?

It's a multi-pronged 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're all totally aligned around this concept of eliminating this multi-vendor environment down to one. I mean, especially in the COVID climate where it's not as easy to you know, 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, you know, 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 of 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, shift four, this is where innovation comes into play in our strategy. It's 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 MDEM platform. Now, the pain point of the last four months should not be a surprise. It's all about contactless payments. It's all about our Skycap-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, you know, 60,000 gateway customers that say, would you like to enable contactless payment or QR code based payment or get ready to reopen 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 and then and how we continue to do so.

That's exceptionally helpful. Thank you very much.

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

Hey, Jared. Hey, Taylor, Fred. Thanks for all the details. And I was kind of fading in and out, so I apologize if this was covered. But as I look at your Q3 and Q4, obviously you're kind of suggesting increasing end-to-end, but the EBITDA margin seems to stay roughly consistent. So is there a specific investment that's 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're exactly right in what you see in the guidance. There's 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 possibility, so we try 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. 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've 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're all finding in the business world of dealing in a COVID environment, whether it's work from home or work remote and different ways of working. So we're making sure we shore those up by Q3 and Q4. But we see those as very temporary investments, likely through the end of this year. And the margins should return to our previous guidance by the time we get into 2021.

Yeah, and 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're at today is pretty night and day. As a new public company management team, we felt we had an obligation and it was the responsible thing to do to kind of recalibrate expectations in light of the pretty significant departure to the upside in our Q2 performance. That doesn't mean we still haven't, you know, 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. And Q4, we're 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, you know, helps with, you know, some context as to the outlook.

Yeah, absolutely does. Can I ask you guys to perhaps comment on sort of the nuances in and out of the industry? You guys have a very major 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've kind of seen reopening, patios, bars, things like that. What's the next stage your customers are looking for and any incremental color on the hotel front as well?

Yeah, sure. This is Taylor. I'll address that. I would say it's all evolving very quickly. So we caution that when you look at a trend that's 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're in a spot like New York City, you probably take for granted um is that you know every restaurant does online order and and online delivery that is not the case you look across the vast majority of the country and lots of merchants i like to say picture your favorite old italian restaurant that's 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 the cost is 30 percent of your revenue. So we saw a rapid adoption of technology first, that was in relation to online ordering and streamlining the, you know, whether it's 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, you know, something that was prevalent. And just to break that down, right, QR codes are incredibly easy for a restaurant to implement because they've already got their website, their menu on their website. They'll just print 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 restaurant POS brands out there, implementing a QR code solution is 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, you know, the micros of the world to take advantage of was something that restaurants reacted to incredibly favorably, but it couldn't be disruptive to their, you know, 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 work 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's 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're ahead of the curve on technology adoption. The contact list is just as big of a theme for them. But, you know, you're 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 Darren Peller from Wolf Research. Your line is open.

hey thanks guys a nice job um look when we look at the growth profile you're calling for in the end-to-end volume the next couple of quarters and what we're seeing in june and july it's pretty apparent that despite your verticals uh and even beyond the end-to-end convert the gateway conversion there's something that's differentiating on a tech standpoint i know you just touched on that on restaurants but i guess number one i'd be curious to hear what percentage you're seeing of your volume that's cardinal present What percentage is, you know, maybe 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've done, I think, a good job building out, oh, 25% or 30% of your volume. That's not in those two categories, which seems to be, you know, I think winning a lot of new business for you as well. And why are you winning there and how's it going? Thanks, guys.

Sure. I'll comment on the card present, card not present trends. We've always been a very card present business. I think just, you know, restaurants, hotels, you know, in-venue experiences, that sort of translates to that. If I were to bring you in, you know, 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's that big shift to online ordering, even just calling in and giving your credit card number over the phone to a restaurant for takeout. It's not back to February levels, but it's about 80-20 today, and it stayed relatively stable through June and July. We're 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's paid through a website. So I think the encouraging sign is that you're seeing more cards used at or around a venue, but we're not back to what you would have expected from our business prior to Prior to COVID.

And sorry, just remind me of your sort of follow-on question there.

Oh, okay. Yeah. So, Jared reminded me. You know, 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 a spider web out from there. And a good example of that would be, you know, a Caesar's Palace, right? Where, yeah, we handle the online reservation integrations into the property management system, but there's a shopping mall there with lots of other software being used to power that venue. As our value prop gets disseminated out to those software brands, we start to diversify away from hotels and restaurants. And it's not necessarily deliberate. Even in the COVID environment, we love those merchant categories. But when you enable a software company that powers great retail software to go win more share and deliver a better customer experience, you start to win more retail locations that have nothing to do with the hotel. So we've seen growth in our merchant mix. outside of those two uh those you know core verticals of first restaurants and then hotels it's really just an expansion of those other um other software companies bringing us you know to their wins on mainstream uh outside of just what they want in a hotel i would say you saw a faster recovery inside of those non-hotel restaurant industries earlier on. And this you'd see in shift for cares pretty, pretty cleanly. You'd see a faster recovery in those, although they haven't, um, they haven't gotten a pop over the last couple months that, that, that restaurants have, right. As suddenly outdoor dining is opening up in the Northeast and other places across the country. So they recovered a little faster, but they're not growing as fast in, in July, um, as, uh, as restaurants would. Yeah, I can, uh, just, uh, Darren, if I may layer on just a little bit on the technology side of things, um, and, and one, you know, close that point just on the, on the, uh, kind of specialty retail or non-core restaurant hotels to layer onto what Taylor said, you know, you had golf courses there that were, uh, operational, um, throughout most of the COVID crisis. Um, you had UPS stores that were still open facilitating commerce to, uh, both of which to Taylor's point originated from our hospitality business, but obviously categorized differently. Um, 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. You know, as we estimated during the roadshow process, potentially 35% or more of the restaurants and hotels in the country use some form of shipboard payment technology, but only a very small percentage, right, use our end-to-end offering. And that's the big opportunity we all know we're chasing. And it's not just on the gateway. It's 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 provides awesome coverage and an ability to introduce new technology to your question very, very quickly. So things like SkyTab, for example, which facilitate contactless payments and delivery and takeout and such, it's a lot easier for a merchant who's battling through a crisis, who's trying to implement new ways to do business with their customers, a solution when it's just an additional extension to their current product versus having to like 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're remotely implementing solutions That's very hard to affect a rip and replace to introduce a new form of technology versus you already have a customer using your software. They're already being supported by somebody who's in the geographic area and all you need to do is hand them over, you know, a contactless type solution like our SkyTap 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 install 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.

Our next question comes from the line of John Davis from Raymond James. Your line is open.

Hey, good morning, guys. Just wanted to touch on capital allocation for a second. Obviously, post-IPO, the balance sheet's in good shape. So I guess first, how soon would you be willing to do a deal and what's 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.

Yeah, sure. Happy to answer that. So again, Jared here. 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, you know, we operated at almost continuously six terms of leverage on a net basis, just given the, you know, 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 as 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, You know, 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 costs relative to the lifetime value of our customer has an incredibly quick payback period. And I think you'll find. you know, in the quarter and really in the year ahead, we're going to allocate more capital towards customer acquisition costs to accelerate growth, especially migrating customers from our gateway to our MN 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're 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, you know, we're just obviously constantly evaluating them. But yeah, I'd say it's the same thing we did before is the same thing we're doing now, and we're just going to be real disciplined about it.

Okay, thanks.

And then maybe some quick clarification on the implied takery. 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's driving that and how we should think about that as we go into kind of 2021 and beyond. Thanks.

Yeah, sure, John.

Appreciate the question.

You know, we did discuss the Q2 take rate, and I want to make sure it's clear that Q2 take rates or spreads, as we call them, where we're 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're going to get north of 90 basis points. What we try to do in the guidance is essentially step that back to more normal levels. We're not going to provide guidance on spreads, but I would revert you back to some of our history when you look back into 19, you know, as a good benchmark to kind of think about spreads. And as we did talk about, you will see some slight declines. They're not significant. You know, they're not, you know, declines that are going to look in the 5 to 10 basis points per quarter range. They're going to be much smaller than that simply due to these mixed conversations we have, right? As we move down The merchant curve into large emergence they do have slightly lower spreads and that will over time Drive our spreads down, but you're not going to see that wildly significant over the next couple of quarters All right, thanks guys Your next question comes from the line of James process from Morgan Stanley your line is open I

Great. Thank you very much, and great to talk to you guys, especially given the rapid recovery that we've seen, even just in the last few months since you came 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 company. Are they all like this, or are they in other verticals as well? Just kind of trying to get a little more color on what's happening and how you're being able to execute that, particularly in a pretty volatile period.

Yeah, so thanks, James. Jared Eisenman here. The type of merchants that you would find on our gateway are those using the 350 different software applications I described previously in 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's 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's on a different end of complexity. and those 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's definitely some even larger casinos and resorts so i'd say that 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?

Yeah, I'm 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?

Yeah, I think, you know, if I were to try and rank in terms of priorities right now, number one is going to be to continue to pour, you know, gasoline on just the organic growth engine. So if I were to look back over the last few years and say, you know, 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 in order to accelerate growth. I mean, you know, being in the leveraged 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 costs relative to lifetime value of the customer, there is, there isn't a little bit of room. There is a ton of room there. I mean, we've been living in a world of six to eight month paybacks, which I think, you know, would be pretty best in class. So I think that's priority number one. There's 185 billion in volume on our gateways right now. It's connected into our payment platform. They're highly dependent on our service right now. And they're paying four or five different vendors to deliver an experience that we can do as a single vendor offering. And that's 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're going to be able to accelerate that by deploying capital efficiently. So that's number one. I think number two is We're going to draw in the playbook that has worked out very effectively for us again over the last five years to find, you know, undervalued, underappreciated assets that live in the market. And that could be in the U.S. market or 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'd say that balances with you is we build a lot of software to unlock integrated payment opportunities. I mean, SkyTab is a great example. Couldn't have been more timely to have a solution that quickly enabled contactless and QR-based payments and takeout and delivery. So we build a lot of software, and we're going to want to keep building software to solve pain points that we know exist within our basic customers to accelerate adoption of our end-to-end payment offering. So I think that would be kind of the you know, where we'd be prioritizing our capital allocation, especially over the next couple quarters.

I appreciate that, Jordan. Thanks a lot.

Our next question comes from the line of Andrew Jeffries from STRH. Your line is open.

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

Yeah, so Jared here again. I'll take that one. You know, this is very, very hard to quantify. You're definitely not the first who've asked us, you know, really how compelling is the savings value proposition for these merchants. And the answer is a lot of times it's unknown because there are four or five or more, you know, eight, you know, plus vendors that can exist in a situation where we are eliminating, you know, 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're not always like completely aware as to all those other cost layers. You know, 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, you know, that could add up to hundreds of thousands of dollars. And that's not necessarily a one-time event because the PCI Security Council makes sure that we all replace devices every four or five years. So it almost becomes a recurring form of savings. But that's 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 there are hundreds of dollars a month for location. And they require you to contract with another company, you know, 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's driving transaction volume, which is, which is our, our, our number one revenue stream. So we can just give that away free. You know, the analogy I like to use in this a lot is to when Apple released Apple pay and during their announcement, and this was in 2014, they said, you know, do you know why every digital wallet has essentially failed prior to us? And it's because everybody was trying to have a business model for it to make sense. Whereas for us, We can just build it into the phone because we sell phones and we want to have the best phone out there. And that's really no different to shift for strategy. We want to capture end-to-end payments volume. We are going to build out a lot of different solutions that have in our mind little to no organizational costs and we can make available at little to no costs in order to achieve our number one KPI. On the other end, from the merchant's perspective, the savings is just untold in many cases. One of an incredibly large enterprise restaurant customer. I mean, thousands of locations in the U.S. is one of our gateway customers. And we're in, you know, really advanced negotiations to move them to end to end. And it all revolves around QR code based payments. And I guarantee you that has millions in hard cost implications for that business in terms of savings. But really, you're bringing revenue back into the restaurant. You're helping your customers feel comfortable coming in and reengaging commerce in venue. And that can be priceless during these times. So I know this wasn't super specific, and it varies from restaurant to hotel to golf course and specialty retailer, but it's just numerous components to our value proposition that deliver really meaningful savings, and it's hard for us always to quantify them.

That's very helpful, and I appreciate the analog on Apple Pay. As a segue maybe there, a loosely one, you know, new merchants, you know, from the color of the call, great growth there and understanding some of – you know, Shift Forward's unique positioning with some of the legacy VAR channel providers. I was wondering if you could just maybe provide some color in terms of the health of the legacy VAR channel during this recent, you know, pandemic disruption and, you know, what this kind of mix will look like going forward, you know, in terms of you guys signing up new merchants and converting, you know, merchants over to your platform going forward.

Yeah, 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 businesses. 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, you know, the largest relationships with would be the likes of like an Oracle or those using Microsoft software such where, you know, stability was kind of always assured, you know, even during the more darker points.

That's a great update, and thank you very much for the call.

Our last question comes from the line of Michael DeGrasso from CompassPoint. Your line is open.

Hey, guys. Thanks for taking my question. 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've been experiencing. With regard to the statistic 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'd see it a little larger if you looked in July. But hopefully that gives context that, you know, 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, you know, 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 is, and I think the most helpful way to think about it in as uncertain of a world as we're 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'd probably see that we're counting more on merchant production than we're counting on recovery. of our base, but I think we're being pretty sober in the impact of both, just given the uncertainty of the environment.

Thanks, and sorry, one last one, if I could. On the gateway conversions, which platform are those coming from predominantly? Is that mainly from MerchantLink, or is that from kind of a legacy Shift4 platform?

So in this quarter, it was not dominated by either one. It was sort of both were contributing to that. If you were to look at the first quarter, you were to look at the fourth quarter of 2019, you'd see more merchant links 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. Yeah, and if I may just to layer on an example to help you understand, you know, just even some of the complexity and arriving at these numbers, you know, even COVID aside. So at the time, UPS store committed their 5500 physical locations to ship for we did not own MerchantLink and they were a MerchantLink customer. They began their migration after we had acquired MerchantLink. So that kind of muddies 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 MerchantLink that they committed and actually boarded the entire deal 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'll turn the call back over to Mr. Isaac for closing remarks.

Yeah, 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 CHIP4. You know, as we stated 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.