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.