Thank you for joining us for the Shift4 Payments Third Quarter 2020 Earnings Conference Call. I will now hand the call over to Sloan Bohlen from Investor Relations. Please proceed.

Thank you, operator. I'd like to welcome everyone to Shift4's Third 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 on 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 potential annualized gross profit related to conversion of gateway-only merchants; our acquisitions and their ability to bring us into a high-growth vertical; the expected impact of COVID-19 on our business and industry; and anticipated financial performance, including our financial outlook for the fourth quarter of 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 the forward-looking statements. Factors discussed in the Risk Factors section of our quarterly report on Form 10-Q for the quarter ended September 30, 2020, and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by the 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 turn the call over to the Chief Executive Officer, Jared Isaacman.

Good morning and thank you all for joining us today. We're pleased to report that Shift4 had a reasonably strong quarter despite a market backdrop that remains challenging. COVID-19, along with other factors, continues to pressure the economy and consumer spending at large. Year-to-date, consumer credit card spending, as tracked by Visa, is down 7%. Including debit, the overall spending trend is still at a modest 4% increase from the prior year. While this marks improvement from the depths earlier in the year, the shape of the recovery remains uncertain. It's against that backdrop that our results stand out and, in our view, serves as proof that Shift4 provides a meaningfully differentiated solution, which ultimately creates demand for our services. In the third quarter, we grew end-to-end volume by just over 20%. In fact, every month this year, we've grown end-to-end volume year-over-year, except for April and May at the onset of the COVID-19 crisis. In the spirit of transparency and in line with the periodic Shift4Cares.com updates we have been releasing, it's worth highlighting that October was our highest month ever with end-to-end volume up 28% year-over-year. This performance is entirely attributable to the growth of our end-to-end merchant count from both gateway conversions and net new wins. Year-to-date, we've boarded 18% more merchants than the same period in 2019. Our passion for constant innovation drives this growth, whether that be via new technologies, bolt-on capabilities or disruptive go-to-market strategies. We don't sit still and are laser-focused on solving the pain points of the world's best merchants. With that grounding, let's turn our attention to the results for this quarter. As detailed in our release this morning, Shift4's third quarter results were reasonably strong, highlighted by our end-to-end payment volumes of $7.1 billion, which was up over 20% from last year, as I mentioned before. Our increased volumes drove 10% growth in gross revenues less network fees and resulted in an adjusted EBITDA of $28.7 million and an EBITDA margin of 32.7% for the quarter. We spent quite a bit of time during the quarter speaking with investors, and I would like to now address a few questions or misperceptions that we have encountered in our discussions. The first misperception is that Shift4's growth story is only about converting gateway-only merchants to our end-to-end solution. To be clear, that is a big part of our strategy, and we see huge opportunity in those conversions and believe, in aggregate, the opportunity could deliver as much as $500 million in annualized incremental gross profit. That said, we think it's equally important to recognize that Shift4's solution set is highly competitive and is winning us new merchants and payment market share as well. Solving pain points for merchants also means solving pain points for our software partners, and they, in turn, bring us more merchants. In a way, these new merchant wins say a lot about the other 2 main misperceptions we run into with our investors. One is that Shift4 is really just about the restaurant and hospitality space. The second is that Shift4 and our merchants operate on legacy technologies. To this, we first note that nearly 40% of our overall end-to-end volume is for merchants that fall outside of the restaurant and hospitality space. As we've discussed previously, the incredibly important and complex software integrations that make Shift4 so special in the hospitality market are used in a multitude of adjacent and entirely uncoupled verticals. For example, our customers can be found inside healthcare, educational institutions, specialty retailers, golf courses, entertainment venues, and more. To be clear, we love the advantaged position we have worked hard to build in the restaurant and hospitality verticals, but that is clearly not the limit of our capabilities. In fact, we are expanding our reach into many new domains, and we're going to talk about that in just a minute. Second, it's probably worth pointing out that there is innovation and disruption happening across the spectrum of commerce. The technological approach some of our peers are taking to simplify commerce for the most basic merchants is not necessarily transferable or applicable to the more complex merchants we serve. The vast majority of Shift4 customers depend on multiple software suites, ranging from emerging cloud solutions to enterprise on-premise servers. Our technology allows merchants to operate a diverse array of commerce-enabling software and take advantage of best-in-class payment solutions such as our contactless and ordering products like SkyTab or QR Pay. We've also developed enterprise-grade business intelligence and analytic products. These are examples of merchant pain points that our technology is solving, which is very much different than, say, crypto enablement and peer-to-peer payments that a different category of merchants may require. On our second quarter earnings call, we provided a detailed overview of how Shift4 is differentiated and why our model has so much success with a growing set of merchants. Instead of repeating that story, I'd encourage those that are new to the Shift4 story to listen to the second quarter earnings remarks. What I thought would be far more valuable today is to talk about where Shift4 is going, and this morning's M&A announcement is just one more step on that journey. In my IPO founder letter, I explained a lot about our history and our organizational philosophy towards seeking out problems and complexity and pain points and, ultimately, opportunities in order to further our grand payments ambitions. What began 2 decades ago with basic process improvements has, over the years, led to major pivots in technology and go-to-market strategy, and we've grown larger and more profitable each year as a result. For example, just 3 years ago, we operated largely as a payment provider for a single software brand and didn't work with a single hotel. During the last quarter, we powered payments for dozens of software brands and roughly 1/3 of the hotels in the U.S. We didn't have a single Major League stadium prior to our Raiders announcement last quarter and now are in discussions with many venues around the country. Our performance is sometimes incorrectly measured solely on gateway conversions, as I touched on before, but 3 years ago, we didn't own any gateways. Seeking out opportunities and taking big evolutionary steps is core to the Shift4 DNA. And we're pleased to announce the next milestone in our mission to deliver a unified commerce experience on a global level. Our acquisition of 3dcart is incredibly exciting as it brings us yet another high-growth vertical. For those not familiar, 3dcart is an e-commerce platform powering over 14,000 web stores across the globe. It's a textbook Shift4 acquisition in that it's a highly capable platform with a strong brand and attractive economics with a revenue model that's easily portable to payments. I wanted to highlight some high-level points that I think will be worthwhile to understand. First, the incumbents, like Shopify, BigCommerce, Wix, and Square, have really been doing an outstanding job. But this is a $2 trillion addressable market, and there's no such thing as a winner-take-all in business. Second, we spend a lot of time researching the landscape and believe the competitors' revenue models that penalize business owners with escalating SaaS fees and multiple premium plans and add-on services are exhausting and really unnecessary. We believe we can approach this enormous total addressable market with a more disruptive and, frankly, customer-friendly model, choosing to forego SaaS and premium services and other setup fees and instead monetize our relationship with our customers the same way we have for the last 2 decades, which is through an aligned payment relationship. And so when our merchants do well, so does Shift4. Beyond the above foundational points, I'm confident you will find this acquisition to be highly synergistic with an opportunity to move the needle materially. And with that, let me turn this call over to Taylor to provide more details on the quarter and the latest member of the Shift4 family, 3dcart.

Thanks, Jared, and good morning, everyone. We are very pleased to report that the third quarter was another strong quarter for every stat we focus on. Of our current end-to-end volume, 36% has come from new merchants. It's worth repeating because, as Jared noted, these wins validate the power of the Shift4 offering in a competitive payments market. And best of all, to Jared's last point about new markets, despite our continued growth in food and beverage and hospitality, we're adding lots of other merchant types as well. Another exciting trend in our merchant board is the continued lift in annual gross payment volume per merchant. Our average volume per merchant was up 11% year-over-year during Q3, and this includes the drag created as a result of the pandemic. What it tells you is that our average new win is substantially larger than our book. To put a finer point on it, a merchant joining Shift4 in 2020 is over 70% larger than a merchant who joined just 3 years ago. Again, that's in the middle of a global pandemic. Put very simply, our compelling offering, paired with an expanding ability to go to new market verticals and attract merchants, represents a huge amount of leverage and growth beyond the gateway conversion opportunity that we have within our current base. Merchants and partners come to Shift4 for a variety of reasons, but the common threads are needs for secure payment connectivity, some of the most desirable software integrations, constant feature enhancement to solve pain points, and an overall lower cost of ownership. We expect that trend to continue and accelerate as we further expand our e-commerce capabilities with the acquisition of 3dcart. Jared mentioned 3dcart as being textbook Shift4, but I'd like to explain that in more detail. 3dcart has been operating successfully in a very competitive market. Their platform has been built to handle dozens of industry use cases and supports web stores of basically every variety. Once you scroll past the Google ads, you'll find them objectively ranked among the best web store and e-commerce platforms in the industry. The ability to deliver this solution to our merchant base as part of our end-to-end offering is quite compelling and offers obvious revenue synergies. These synergies apply to 3dcart merchants who have been sending their payment volumes to multiple gateways and paying each vendor along the way. This is, of course, just scratching the surface of synergies that we have further highlighted on Slide 11 of the presentation. Over time, we see the possibility to take what is already a great omnichannel offering and add our deep vertical expertise in addition to other investments and deliver a category-leading capability. You've seen this playbook from us before. We can take a highly valuable product and disrupt the model for that industry by bundling in the payment processing these merchants are already using multiple vendors for. The fact that many industry incumbents are only just catching up to payments gives us an opportunity and distinct advantage. With that, let me turn it over to Brad to review our financials for the quarter.

Thanks, Taylor. Similar to last quarter, I'll be referencing slides in the tail end of our earnings material that will highlight many of the metrics I'm going to speak to. As mentioned in our release, we generated $87.7 million in gross revenue less network fees in the quarter. This represents a 10% increase over the prior year and a 30% increase over Q2. The year-over-year variance was driven by a 25% increase in net processing revenues, driven by continued share wins and gateway conversions. Net processing revenue now makes up 65% of our growth revenue less network fees, up from 57% for the full year 2019. Growth in net processing revenue was offset by modest declines in gateway and other revenue streams due to the impact of COVID-19 on our hospitality merchants and the continued execution of our strategy to convert gateway and one-time hardware and license sales to our recurring end-to-end solutions. As anticipated in the Q2 earnings call, net spreads returned to more normal levels and finished the quarter at approximately 80 basis points. We reported $28.7 million of adjusted EBITDA for the third quarter, an increase of 17% from the prior year. Recall that we changed the accounting treatment of our equipment leases at the beginning of Q3 of 2020. If we had applied our current accounting treatment related to equipment leases to the third quarter of 2019, adjusted EBITDA would have been relatively flat year-over-year. Similarly, if we'd applied our current accounting treatment regarding equipment to the previous quarter, adjusted EBITDA would have increased just over 50% from Q2. Our third quarter results represented adjusted EBITDA margin of 32.7% against gross revenue less network fees. On a consistent accounting basis, this represents a 300 basis point decline from the prior year as we continue to make investments in top-line growth initiatives. Compared to the prior quarter and, again, using the same consistent accounting basis, adjusted EBITDA margins expanded by 470 basis points due to the benefit of the cost actions that were implemented in May of 2020 and increased scale from higher volumes. Next, let me give you an update on our capitalization and liquidity. First, as we completed a successful secondary equity offering in September of this year, raising $91.8 million in net proceeds, which increased both our liquidity position as well as our ability to pursue capital investment in various growth vectors. Second, on October 29, we completed a successful $450 million offering of senior notes that are due 2026. These notes carry a coupon rate of 4.625% and were issued at par. The proceeds of the offering were used to pay off the entirety of our previous term loan facility of that same amount and for general corporate purposes. In addition to saving Shift4 approximately $4 million in annual interest expense, the newly issued notes establish Shift4's presence in the public debt markets and provide optionality for future capital raises. As a result of both actions, our liquidity position today is very strong, and Shift4 is positioned well to pursue a number of organic and inorganic growth opportunities. At quarter end, Shift4 had $328.9 million in cash and $89.5 million of capacity on our revolving credit facility. Finally, I'd like to discuss our outlook for the upcoming quarter. As we mentioned in our Q2 earnings call, we typically experience a seasonal downturn in Q4 coming out of Q3. While the COVID-19 impact on 2020 has distorted many of the normal industry patterns, we still anticipate a seasonal slowdown in same-store sales as we move into Q4 and summer travel comes to an end and students return back to school. Further, we are including in this outlook the impact of our recently discussed acquisition. That said, our revised guidance for Q4 is as follows. In terms of end-to-end volume, we now expect the fourth quarter to range between $7.2 billion and $7.6 billion. This revised guidance is up approximately 10% from our previously provided range of $6.5 billion to $6.9 billion. Consistent with Q3 results, this represents approximately 20% increase over the prior year with no significant volume attributed to inorganic sources. Turning to gross revenue less network fees, we now expect the fourth quarter to range from $88 million to $92 million, which is approximately 17% higher than the previous range of $75 million to $79 million, and reflects higher volumes mentioned previously and modest revenues related to the acquisitions. Lastly, we now expect Q4 adjusted EBITDA to be between $27 million and $30 million, which represents an increase of approximately 30% from our previous guidance of $20 million to $23 million. As we're all aware, there's still a great deal of uncertainty, especially as it relates to the current pandemic. The guidance we are providing is predicated on volumes and spreads continuing to perform as they did at the end of Q3 and does not contemplate unforeseen events, including, but not limited to, additional increases in COVID-19 cases or additional restrictions on dining, commerce, or travel that could be imposed by state governments or local municipalities. With that said, let me turn the conversation back over to Jared.

Thanks, Brad. Before we get to Q&A, I just want to make a few more closing comments, and some colors don't really stick around for that part after Q&A. Regarding our results, I want to reiterate that our customers are not immune to the real-world realities. Our performance may be up year-over-year, but we all know, on a merchant-by-merchant basis, it's not an easy time to conduct business. Our customers are overcoming unprecedented levels of adversity long after government stimulus programs have expired, and they're finding ways to persevere. And it's really quite impressive. I also want to acknowledge all of the Shift4 employees and partners that work tirelessly to deliver the best service and capabilities possible. I'm really fortunate to work with a team that really cares about our small but important contribution to commerce. We took extra time today to talk about not just where Shift4 is finding success in the present, but where we're going in the future. Shift4 shareholders should enjoy that we built a business with high walls and a nice growth engine, but we're not going to sit on our hands and just let the machine do its thing. Our ambitions have no geographic borders or industry-specific boundaries, and the acquisition of 3dcart is just one piece of that puzzle. We're excited to share more details and already have big plans for our Investor Day in early 2021. And with that, I'd like to turn it over to the operator for the Q&A portion of this session.

Your first question comes from the line of David Togut with Evercore ISI.

Good to see the increase in the fourth quarter guidance. Could you just talk through how much of the increase is driven by the inclusion of 3dcart versus the underlying growth of the business?

Yes. Hey, David, it's Brad. When we put out our guidance, and I mentioned in the statement, there's little to no volume attributable to 3dcart in Q4. So volume is insignificant. When we think about revenue, we did include that in the guidance. It's nominal. It's mid to low single digits, so it's not significant.

Got it. And just as a quick follow-up, when we look at the 18% growth in end-to-end merchant boards in the third quarter, can you dimension for us how much volume you might have gotten from those boards in the third quarter versus what's to come in Q4 and 2021?

Yes, sure. This is Taylor. What I think you should expect anytime we board a customer is that you tend to get basically double the contribution of a merchant that boards in one quarter in the following quarter. Now that's rough math. That's sort of an average, but there is a real seasonality effect. So if you just assume that all our merchants boarded us in the middle of a quarter, you get half the benefit, maybe even a little less when you think about the time to ramp and install. So usually, we expect a doubling. And I think maybe just to bring it back to our comments around the second quarter, right, we talked about June merchants that have joined in the quarter, contributing about 3% of volume in June and then about 7% just the following month in July. So hopefully, that's helpful.

Your next question comes from the line of Timothy Chiodo with Crédit Suisse.

I wanted to discuss our recent focus on capital allocation. We've mentioned that the most effective use of capital is reinvesting in our customer acquisition strategy, which has a very appealing payback period that could be as short as eight months or even less at times. You also suggested the potential to extend this payback period through FAR bonuses or enhanced software and hardware. Can you elaborate on this strategy, specifically regarding its current implementation or future plans, and how it could drive growth?

Yes, of course, Timothy. Jared Isaacman here. Thank you for the thoughtful question. We've consistently discussed our capital allocation strategy, and I believe there's considerable opportunity to enhance customer acquisition costs due to our strong unit economics. We are also focused on investing in research and development to provide additional capabilities to our customers, similar to our approach with QR Pay, offering these solutions at little to no cost to promote end-to-end volume growth. Additionally, we are exploring inorganic opportunities. Currently, we are actively working on all three strategies, and the acquisition of 3dcart aligns with this approach. As we mentioned in our prepared remarks, we may treat 3dcart in a similar way to our QR code strategy, offering a set of capabilities comparable to leading e-commerce players at no cost to enhance payment volume. While I previously suggested that we could directly incentivize every customer to transition to our end-to-end platform, that was an oversimplification. Our strategy involves judicious capital allocation across various areas to facilitate end-to-end volume growth. This includes increasing bonuses for our partners, which has shown positive results, leading to a noticeable production lift. Furthermore, we are applying disruptive go-to-market strategies with inorganic opportunities like 3dcart to drive our overall volume growth. That's likely the most significant takeaway from today's presentation.

Great. That really helps. And the somewhat related follow-up is just a quick one on attrition. So earlier in the year, I think you had some pretty conservative attrition assumptions just given the environment, which made sense at the time. Maybe you could just talk briefly about how things might have played out relative to those in terms of the resiliency of your underlying merchant base and perhaps how that attrition might have turned out a little bit better than had been expected at the time?

Yes, sure. So as you'd recall, even prior to our IPO, any discussions around the attrition profile of the business, a forecast of those were pretty draconian only because it was late May and you had no clue what to expect. I would say we've been incredibly pleased, as Jared sort of mentioned on the call, with the resiliency of our margin base. Just to put sort of a finer point on that, it can be difficult to disaggregate because we've got more merchants transacting with us in any given week now than we ever had in our history. But if you took a static pool, right, if you look at the basket of merchants that are interacting with you or transacting with us during a given week in February prior to the pandemic, and then you look at that exact same pool of merchants today, you'd see about 5% are inactive. And I think it remains to be seen what happens to that 5%. It's probably a little bit soon to pass judgment on it to the positive because we've got lots of things like hotels and restaurants in urban areas that are slow to open if they're highly dependent on business travel, for example. And to the negative, you've got issues like stimulus funding that would make you want to keep an eye on that 5%. But 5% is what we've seen at its peak. And again, we've sort of more than eclipsed that through our growth.

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

When we examine the fourth quarter guidance for volume, it clearly reflects positive trends observed in October. However, it suggests a 22% forecast, indicating a slowdown for November and December, which we attribute mainly to macroeconomic uncertainty. To clarify, were there any one-time factors in the October trends we should consider, such as seasonality or year-over-year comparisons? Additionally, it's noteworthy that you mentioned 60% of your volume is from restaurants and hospitality. I'm interested in how this compares to previous percentages from outside these two main areas, and where you expect it to go. I realize this is a topic we've discussed previously, but you've had significant success expanding beyond your traditional sectors.

Yes, absolutely. Thank you. This is Taylor. I'll respond to that. You will likely notice that we remain cautiously optimistic in the guidance we provide. Typically, in October, we expect a decline from September, even in a high-growth environment like that of 2019. November usually doesn't show much improvement either. However, this October exceeded our expectations, being not only higher year-over-year but also surpassing any other month we've experienced this year and throughout the Company's history. Thus, we are prepared to defend our guidance similarly to how we did during the Q2 call, as we have solid data points. Nevertheless, the surrounding news prompts us to be cautious about becoming overly enthusiastic about the very positive trends we observe daily. Regarding your question on mix shift, it is changing quite significantly. We are likely seeing about a 10% drop in the contribution from hotels and restaurants compared to 2018 or 2019. Some of this is slightly hindered due to reduced volume in hotels, although the hotel segment is one of our fastest-growing areas. The key takeaway is that we have nearly as many software brands that serve merchants outside of hotels and restaurants, who wish to enter that market, hence they partner with us and help us reach Main Street, which is proving effective. We felt it was essential to emphasize this point as we have noticed recurring themes in the questions and wanted to provide more clarity about our merchant base.

Yes. All right. That's helpful data. Just my quick follow-up is around 3dcart. I mean it seems like you'd be focused more on the pretty small side of the SMB, although please correct me if I'm wrong on that, I mean, maybe if it's medium-sized or what not. And I'd be curious, strategically, you guys have always talked about moving more and more into larger enterprise, and we should keep that in mind with yield and what not. But is this a little bit of a pivot from that? Or does this really address both all ranges and sizes of merchants?

Yes, that's a great question. Jared Isaacman here again. We've been conducting extensive research for quite some time regarding our entry into the e-commerce market, making a significant evolutionary leap for the business towards a unified global commerce platform. Concerning e-commerce, we created a competitive matrix comparing the top five dominant web store platforms, and 3dcart ranks highly in nearly every aspect, including B2B capabilities, which align with platforms like Shopify Plus, unlike some other providers such as Square Weebly. I wouldn't judge the current website too harshly based on its historical performance because the platform's capabilities are competitive across the board, serving small businesses needing an easy way to sell online as well as offering unique B2B capabilities within the e-commerce landscape.

Your next question comes from the line of Dan Perlin with RBC Capital Markets.

I also had a question around the acquisition. You talked about, I think, additional opportunities maybe from a geographic perspective. And I'm just wondering kind of where your head is there in terms of taking on more opportunities through this kind of funnel acquisition to get you into different geographies and, specifically, maybe where those geographies might be at this point.

Yes, so Jared Isaacman again here on this. So we shared an awful lot in our prepared remarks earlier. But if you go in there and kind of read between some of the lines, one of the statements I made was that 3dcart is one piece of the puzzle. So there's no question that if you look at the current customer base of 3dcart, you'd find a pretty diverse array of merchants all over the globe where there's already some international optimization to the platform. There is some cross-border payment capability. But again, it is just really one piece of the puzzle. So nothing has changed in terms of our ambition to have a global commerce platform. If you look at who our customers are, whether they're the hotels, the restaurants, the specialty retailers, those brands have planted their flags all over the world, and we have an obligation to follow them and deliver the same capabilities as we do currently in the U.S. But I'd look at 3dcart again as a key piece in that puzzle, but it's not the entirety of the story. You guys will have to kind of stay tuned in terms of the direction we're going in order to kind of solve that broader opportunity set.

Understood. If I could just ask a follow-up on the average volume per merchant, I think you said 11% year-on-year. And then the following statistic there was that merchants are joining today, I think you said 70% larger than a year ago. In keeping with this conversation around your mix shift that's changing, I mean, what are these merchants? Are these typically large-scale resorts that have multiple opportunities? Are these a play into some of the software aspects that you alluded to earlier? I just want to try and get a better sense of where that's coming from and just the sheer magnitude that size difference is pretty meaningful.

Yes, sure. This is Taylor. I'll address that. Just to actually clarify the 2 statistics. The 11% is that if you look at an average merchant in our book today, simply quarterly volume over merchants transacting, what you'd find is that the average merchant does 11% more in a year than you would have found a year ago in Q3. The 70% larger is actually just a different measurement period. It's looking over a 3-year period. And this is the story of Shift4's constant evolution, right? Back in 2017, we had one software company delivering us merchants. It was the brand that we founded. And fast forward to today, and you have dozens, in any given month or quarter, we're bringing us merchants. And typically, those merchants are adopting more sophisticated software and by definition, therefore, are more sophisticated merchants that do more volume. If you look at a hotel, it gets interesting because we capture every single revenue center in that hotel. It might be an independent restaurant operating in the lobby. It might be a golf course operating next to it. In any case, each of those revenue centers is 70% bigger than the average merchant we would have had from three years ago.

Your next question comes from the line of Ashwin Shirvaikar with Citi.

Jared, Taylor, Brad, good solid quarter again. Congratulations. I wanted to ask about the conversions. Has the pace of conversion sort of picked up here even more than you might have assumed before? And when you kind of look at that pace of conversions, does that have a seasonal pattern on it as well? I'm asking because do your clients, perhaps, not want to convert heading into year-end, so they're kind of pulling stuff forward? Might we see some kind of a lumpiness in that conversion? Or is that base still very, very underpenetrated, so you can continue to pull?

Yes. Great question. Jared Isaacman here. While we generally state that in any given month, half of our production comes from new wins and half from conversions, it’s clear that during the pandemic, we leaned more towards conversions. This highlights the strong incumbency advantage we have at Shift4. Once a customer is integrated with our gateway, it becomes an essential part of their business. All the necessary connections and devices are in place, so when they consider our complete value proposition, changing a merchant number is often all it takes for us to capture that business. For instance, when restaurants and hotels look into contactless payments or QR codes, being able to make that transition easily typically makes us the preferred option compared to a complete replacement of their existing systems, which is less feasible in the current environment. Therefore, we have greatly benefited from gateway conversions and even software-only segments, as they are already operational and that gives us a clear advantage. Additionally, there’s no need to interpret October's performance as customers accelerating their gateway migrations or new wins. These migrations are ongoing throughout the year. We finished the Merchant Link acquisition in Q4 last year, which was a strong period for conversions extending into December, and we expect that trend to continue in the upcoming months.

Got it. Got it. And to just kind of put a final point on the specific modeling of it as we peak at the quarters ahead. I'm not asking for '21 outlook or anything like that. But since you're a newly public company or relatively newly public company, can you talk a little bit about 4Q to 1Q seasonality and remind us of the sizing drop in March and the impact of Merchant Link? There were a lot of moving parts last year's 4Q and this year's 1Q. So I just want to get the modeling correct.

Yes, it's Brad. You're right, there are several factors to consider. Let's start with Merchant Link, as we had it for a full quarter in 2019, which will serve as a comparison. However, the business has changed significantly in a few ways. We've already realized a lot of the cost synergies, so the costs related to Merchant Link moving forward will look quite different than in Q4 of last year. Additionally, we've focused on improving the revenue stream from Merchant Link during the conversion process. You will see a continued decline in the gateway trends as we shift to an end-to-end model. It's worth noting that hospitality has faced more challenges compared to the food and beverage sector regarding the gateway revenue. As you model for Q4 this year and the first quarter of next year, keep that in mind. Regarding seasonality, as Taylor mentioned, we usually see a drop in volume as we approach Q4 due to weather changes and other factors. Historically, there's been a bit of a spike during the holiday season. This year, I'm uncertain how that seasonal spike will manifest, which influenced our guidance for Q4. The volume decline usually extends into Q1 as weather continues to impact people's activities and merchants' operations. However, by Q2 and Q3, expect to see the seasonal patterns return, which is typical for the business. I noted earlier that many expected patterns are being tested right now, but I still anticipate a regular sequence of lower volumes in Q1 and higher volumes in Q3 and Q4 moving forward, albeit with some slight variations.

Your next question comes from the line of Mike Colonies with Bank of America.

I know last quarter, you mentioned that the sports and entertainment vertical has become more of a focus for you. And you announced a nice win with the Raiders last quarter. Can you share any additional wins that you've made this quarter and what the pipeline currently looks like? And then as a follow-up to that, what are some of the key competitors in this space? And are you generally able to capture better spreads in this vertical relative to others?

Sure, this is Jared Isaacman. I believe our pipeline is quite strong. While we can't disclose the names of any additional wins, there have been some. Regarding the competition, it highlights the strengths of Shift4's value proposition, which focuses on reducing vendor complexity to provide a lower cost of service. In analyzing the competitive landscape, we could identify the major software players, leading contactless and handheld solution providers, the top player in gateways, and the top three in merchant acquiring, which together create multiple vendor layers that can drive up costs and lead to endless calls where vendors point fingers at each other. Shift4's approach of bundling solutions to simplify this process is well received in the market. As for the spreads, they vary, but they align with what we observe among enterprise hospitality customers with significant volume and various revenue centers. These are certainly profitable relationships, which explains our strong interest in the market. I hope that provides some clarity.

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

Jared, just wanted to hit on M&A a little bit. I think this is the first call, there's been more focus internationally, obviously, with the 3dcart acquisition. Going forward, should we expect more international M&A? Is it more opportunistic? Is there something in the U.S. that makes sense that you would do that? Or are you shifting focus outside the U.S.? And then are there any capabilities that you want or you think you need to help you expand outside the U.S.?

Yes, sure. Good question. Well, I'd say first, in general, you should expect us to be active with M&A. That's been how we delivered a lot of value over the last 5 years. 2017 was a very big year for us. If you go back to some of the comments we had in our prepared remarks, 3 years ago, we integrated to one piece of software. And that was the extent of our integrated payment strategy, and it was in the restaurant space. And now we integrate to 350 different software applications, and we pursue across food and beverage, hospitality, specialty retail, and a number of other adjacencies, including now our entry into a new domain entirely, which is with an e-commerce web store platform. So in every case that we've done these transactions on a synergized basis, I mean, they've been deleveraging, highly accretive. And you should expect us to continue to do that because I think as an organization, we're pretty good at it. In terms of where we're setting our sights, we're really looking at a number of opportunities. It's a very healthy pipeline. International capabilities could certainly be there. There's certainly areas that we could double down or triple down within our current verticals in order to accelerate the migration of gateway customers to end-to-end because that is a layup, as most of you have modeled. So I wouldn't target anything in any one thing specifically, other than we're very active in this. And we're actually probably, I'd say, as excited as we've been in a long time in terms of the opportunities there in front of us.

Okay. And then just on gateway conversions. I think last quarter, you guys gave a number or percentage of volume that came from conversions in the quarter. Any update there? Any other stat you can give us to just kind of track your progress, kind of where you stand today versus where you thought you were going to be at the beginning of the year from a conversion standpoint or from a volume or merchant count mix? I'm assuming volume is probably maybe not quite where you thought, and merchant count may be ahead. Just any commentary would be helpful.

So this is Taylor. I'll address that. We didn't update that stat only because I think it was misinterpreted during the last call. And just to reiterate what we gave at the time is that 17% of our total end-to-end volume was coming from gateway migrations, but we didn't put a time frame on that. That wasn't migrations in the quarter. That was migrations all time. It's a powerful stat when you think about the fact that Jared mentioned, which is that three years ago, we didn't have a gateway at all. So you would expect that number to be higher in this quarter because we have had a healthy number of daily migrations. And on average, those merchants contribute more volume per site than sort of a non-gateway conversion, so to speak, or a net new win. But we haven't updated that. But what I would say is you're somewhat correct in your thesis that gateway migrations contribute healthier to our mid-count at a time like now than they do to our volume only because we've had a ton of success with things like hotels, where the volume contribution just isn't at the level you would normally expect the gateway migration to contribute given the pandemic.

Yes. And hey, Jared here, just to layer on a bit with a bit more specificity. One of the challenges we have, and I'm sure I mentioned this previously, if not on the Q2 call, but maybe on some of the non-deal road shows, is being able to accurately really score gateway conversions from net new wins. The UPS Store was a great example. That was a net new win at the time they signed the contract. Then we acquired Merchant Link, which means they became a gateway conversion from our existing population of customers, and then they added several thousand e-commerce MIDs, which were net new wins because they were never on the gateway. You can imagine, especially when you're talking about thousands of customers and the volume associated with it, that can really like throw around a lot of the calculations. What I would say is like, for anyone who has any question marks about where the volume is coming from, look, if we're up 28% year-over-year in end-to-end volume in October, where we've already said a little bit better than 60% of our volume comes from restaurants and hotels, which are highly impacted from the pandemic, it means on like a normalized basis, we're talking 50%-plus end-to-end volume growth from a company that's been doing payments for nearly 21 years. Now winning share in the market is certainly a component of that. We think we have a pretty compelling value proposition, but you should definitely look towards the gateway conversions as being a major contributor just considering that incumbency factor I referenced previously. So I would say there is nothing we could ever say that would potentially signal that we are disappointed with the progress of our gateway conversions or the effectiveness of that strategy, all things considering when you look at the volumes.

Your next question comes from the line of Matthew O'Neill with Goldman Sachs.

I don't mean to belabor some of the consistent themes that people have been asking about, but I was just hoping on the 3dcart acquisition. Makes a lot of sense to us. You're getting a mix of faster growth e-com as well as card-not-present volumes. As far as some just details around the opportunity that lies ahead, is it safe to assume that the volume today is being processed by other sort of suppliers in the industry and, hence, this represents more or less an incremental kind of gateway to end-to-end opportunity for Shift4 as you guys take over and presumably kind of convert those payments onto your own full stack platform?

Yes, I'm happy to discuss this. We're all really excited about 3dcart, especially me. We included a graphic in our presentation showing the various growth trajectories and synergies we see from the 3dcart acquisition, and I encourage you to check it out. There is significant volume on that platform, measured in the billions, that is currently not being processed by Shift4. This isn't surprising because, until this acquisition, we hadn’t positioned ourselves as a strong ecommerce web store payment provider. Now, with this acquisition, we definitely are. We plan to migrate billions in volume from the existing base to Shift4, and you should see this in the same light as our other gateway-to-end-to-end migration. The real opportunity lies in the new business we can attract. 3dcart's capabilities are competitive with some of the largest players in this space. However, we are an underdog with just under 15,000 customers compared to over a million sites from larger competitors, so we have a lot to gain. By using a disruptive pricing strategy, we can attract customers away from other platforms. Many web store providers have escalating SaaS fees that penalize business growth. We are starting from a different angle, as we believe we can monetize the relationship entirely through payments and may opt to waive those costs to attract customers. Furthermore, there are strong trends of businesses wanting to establish an e-commerce presence, particularly in the current climate. The potential here is remarkable. While migrating existing customers to our payment platform is significant, it's just one aspect of this exciting acquisition opportunity.

That's really helpful. My follow-up would be about the complexities in quantifying and discussing the existing opportunity of gateway to end-to-end conversions. You provided the example of The UPS Store and the multifaceted nature of that relationship. Without mentioning specific numbers or names of hospitality merchants, could you share a few anecdotes regarding the pace of those conversions? Are they voluntary? Are merchants approaching you, or are you reaching out to them more aggressively? Additionally, what are the top reasons, from their perspective, that they are eager to pursue these conversions, likely related to cost and vendor simplification? Any insights would be appreciated.

Yes, this is Lauber. I'll address that. When it comes to cost savings and the advantages of vendor consolidation, this message is consistently communicated from Shift4 to our gateway users. It resonates differently with various merchants at different times. Based on our analysis, it generates a steady flow of interest in our organization as merchants respond to the possibility of saving money. This is facilitated through automated emails, which can maintain ongoing engagement, though the impact may vary. For instance, during the pandemic, hotel merchants might have found this particularly appealing, but if their staff was furloughed, they may not have received those communications until they returned. This consistent theme applies to all merchants on our platform. After our IPO, we focused on understanding specific nuances among different groups of merchants, like a large hotel chain or a real estate investment trust that owns multiple hotels, or those who may hesitate to upgrade due to associated costs. We will address each case individually. Moreover, we are making significant progress, especially in the sports and entertainment sector, where many notable venues are already utilizing our gateway. The software companies involved see the benefits of collaborating with us, leading to more opportunities for our gateway. There are various ways these conversions occur. There's no single factor driving drastic changes; they happen continually. QR codes are a recent example of a feature that encourages multiple merchants to consider migration.

Your next question comes from the line of Michael Del Grosso with Compass Point.

I have a question about kind of the overall volume level and merchants' kind of health as it relates to pre-COVID levels. If I look on your website, and by the way, it's great disclosure that you give, obviously, transaction counts are lower than where they were pre-COVID. How much of that is due to just overall lower spending versus potential attrition in the merchant base? And then the follow-up is on merchant reserves. Have you taken any action there? Or how does that compare to pre-COVID levels?

Great questions. So with regard to sort of same-store merchants and health, I'll address that and then maybe Brad can talk about the reserve concept, we disclosed in the second quarter that our average same-store merchant was doing about 75% of normal during Q2. I think if you look at Q3, you'd see a little bit of an improvement there. You'd probably see around 80% of normal. So nothing sort of marked in the recovery, but I think merchants are operating at a level that we think is somewhat sustainable or very sustainable for the short term. And we're optimistic about what our end-to-end volume looks like when that returns to normal levels for the merchant. If you want to put sort of another lens to it, you can take that statistic I gave, which is that we've seen about a 5% attrition rate, if you want to call it that, of the merchants that we would have expected to be transacting in February, not transacting in a quarter like Q3. I think that's probably as bad as it's going to get. I think there's room for improvement in that as things like hotels come back online. So I don't think that that's necessarily a stat that's going to remain at 5%. But when you look at our growth in a month like October of up, call it, 28%, you really see the benefit of the machine that we've created here, which is that even though merchants are down about 20% on average, in our verticals across our book, we're operating at close to up 30%. And that entire differential is the merchants that have joined. And even those merchants are not operating at their full health. So it gives you a sense to how to build to that picture of what we would expect a month like October to be consistent with what we were seeing in February. If there weren't a pandemic, you'd expect to see October as a plus 55% or more end-to-end volume growth if all of our merchants were punching at their weight class. And Brad, do you want to talk about the reserves?

Yes. Just on reserves real quick. There's always 2 areas of reserves that I look at: one is reserves around our ability to collect fees; and two is reserves around exposure and chargebacks, et cetera. So as we got into Q2, we obviously paid a lot of attention to those. But by the time we got through mid-quarter for Q3, those had normalized back to, I'll call them, pre-COVID levels. So keep in mind also, we have really limited exposure from a prepaid perspective. So those have returned back to, I would call it, significant levels.

Yes. And hey, Jared here, just to kind of touch on the point that Brad just made. We've been kind of fortunate to live in a space that is like relatively immune to chargeback risk and even credit exposure to our customers. There was a period, as Brad mentioned, like the end of March, April, May, where you had a lot of hotels running refunds, consumers obviously canceling their trips, and then that was a point where it was possible that if there was a lot of insolvency among hotels, that we could incur some chargeback risk. And then Brad, of course, made appropriate reserves as a result. Those windows passed long ago. I mean you're back into like the totally normal realm that we live in of virtually nonexisting credit or chargeback-related losses.

Okay. That's helpful color. And then if I just could ask one follow-up on the acquisition and related impacts there. Have you clarified or provided any of the expectations around revenue accretion or anticipated cost impacts in Q4 from that?

Yes. So Jared here. I mean, Brad, I think you touched on that previously that embedded within our Q4 guidance, we've taken in consideration the cost and revenue associated with the 3dcart acquisition. What I'd say, which is actually pretty atypical among e-commerce payment platforms, is that this is a profitable business that we acquired. I mean on an LTM basis, it actually is very accretive from an EBITDA perspective. I think what we're looking at now, and it kind of is in line with the statement we made before about maybe taking a little bit more of a disruptive go-to-market approach and foregoing some SaaS fees in order to drive growth. So I think we've taken some very conservative, I mean, very conservative assumptions in terms of what we've embedded in Q4 as it relates to this acquisition. Yes. I don't know, Brad, if there's anything else you want to add?

No, I think that's got it.

This concludes our question-and-answer session. I will now turn the call back over to Jared Isaacman for closing remarks.

Yes, thank you. I appreciate everyone joining the call today. I know there's a lot going on in the world. So thanks for giving us some of your time and your continued interest in Shift4. And by emphasizing again that while the backdrop does remain quite challenging, Shift4 has many drivers of growth, both organic and across new market verticals. We've never really been more excited about how the Company is positioned right now to execute against those opportunities, and we look forward to sharing more in the very near future. There's a lot going on. So thank you. I wish you all well, stay healthy, and have a good day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.