Earnings Call
Shift4 Payments, Inc. (FOUR)
Earnings Call Transcript - FOUR Q2 2020
Sloan Bohlen, Investor Relations
Thank you. I'd like to welcome everyone to Shift4's second-quarter 2020 earnings conference call. Before we begin, I'd like to remind everyone that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made in this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding management's plans, strategies, goals, and objectives, the expected impact of COVID-19 on our business and industry and anticipated financial performance, including our financial outlook for the third and fourth quarters of 2020 and the full year 2020. These statements are neither promises nor guarantees but involve known and unknown risks, uncertainties, and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by our forward-looking statements. Factors discussed in the risk factors section of our quarterly report on Form 10-Q for the quarter ended June 30, 2020, and our other filings with the Securities and Exchange Commission could cause actual results to differ materially from those indicated by forward-looking statements made on this call. Any such forward-looking statements represent management's estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so even if subsequent events cause our views to change. In addition, we may also reference certain non-GAAP measures on this call, which are reconciled to the nearest GAAP measured in the Company's earnings release, which can be found on our investor relations website at investors.shift4.com. And with that, let me please turn the call over to our founder and Chief Executive Officer, Jared Isaacman.
Jared Isaacman, CEO
Thank you, Sloan. Good morning, everyone. This is Jared Isaacman, CEO of Shift4 Payments. Thank you for joining us on our first conference call as a public company. Before we discuss our business in the second quarter, I'd like to take a second to acknowledge really how proud I am to be part of such a talented, resilient, and innovative organization. We have all been living in really unprecedented times that pose numerous challenges to us as individuals, as families, professionally, and as a society. I am impressed beyond words with how we have navigated through these realities to become a better and stronger organization. In so many respects, there is still so much left to do. But for this moment, thank you from the bottom of my heart to all Shift4 employees as well as our valued merchants and software partners. Thank you for all that we have achieved thus far and for your focus towards everything we still aim to accomplish as this journey continues. So clearly as the founder, I have a bias, because this Company and its evolution have been my focal priority for the majority of my life. That disclaimer aside, Shift4 really is an incredible business with over 1,000 dedicated employees, 7,000 software partners, and over 200,000 business customers, all of which have been battling incredibly challenging circumstances. And in many cases, overcoming the odds and persevering. So Shift4 has been at the forefront of integrated payments since before that was really a thing. We have strategically positioned ourselves to benefit from long-term secular trends as commerce-enabling software continues its grand convergence with payments. We have anticipated on several occasions where the puck is going to go. And that has been a great benefit, especially of late, when it comes to things like 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 are a passionate and ambitious organization that aims to be one of the largest integrated payment companies in the world and June 5 was a major milestone in that ongoing endeavor. So getting down to business, as you saw from our release this morning, Shift4 drove very strong results despite a market backdrop that clearly impacted our merchant base, particularly those in the restaurant and hospitality space. Specifically, Shift4 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 a COVID-19 environment where the average industry restaurant and hospitality volumes were down an estimated 60% to 90%. Perhaps more notable is our June volume, which was actually ahead of June 2019. So this year-over-year volume growth trend has continued and in fact increased into July. It is worth noting that July was actually the second-highest month of end-to-end volume in our Company's history. Our out-performance was driven across both new merchant wins as well as continued conversion 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, Shift4 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 and 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 actions that 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 volume. In the early days, it was all about helping small businesses 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 Raiders Stadium in Las Vegas, which we are excited to talk about a bit later. Most merchants have to manage a confusing set of vendors and 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 gift 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 to meet the operational requirements of the business. The problem gets exacerbated 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 multivendor model results in pain, cost, and service challenges and leaves so much opportunity for improvement, which means it leaves a lot of opportunity for Shift4. Shift4 is vertically integrated and bundles 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-saving value proposition. This is really important because we believe we are the first in our industry to really do this and it is 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 payments 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 happen 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, omnichannel 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-handshake service model. I think it is 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 US, a rolodex of high-quality merchants, and a highly scalable service model. Merchants can subscribe to Shift4 via our gateway-only channel or, as increasingly becoming the case, through our full end-to-end payment solution. 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 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 is 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 will 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 mergers and acquisitions, many of our customers are legacy-gateway-only, and we expect many of them to convert to our full end-to-end 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.
Taylor Lauber, Chief Strategy Officer
Thank you, Jared, and good morning, everyone. I will begin by speaking a little bit about our merchants and what we have seen regarding payment volumes as the environment in the COVID-19 pandemic has evolved. First, I will reiterate Jared's comments about how Shift4 thinks about our merchants. And what I mean by that is we take a lot of pride in aligning ourselves with their success. Never has that been more evident than in the past 100 days. For those of you that don't know, Shift4 acted very early in the pandemic to launch shift4cares.com in order to provide insights into the toll the pandemic was having on the economy by sharing in a very transparent way the payment transactions we were seeing each day. Before I speak to these data, I'd like to emphasize that shift4cares won't be a good proxy for thinking about our Company's revenues, particularly on a year-over-year basis. Our rapid growth coupled with the incredibly high gateway volume we support means that these data points, while helpful for understanding a particular state or industry, don't really tell the story of our profitability. Brad will give more detail on our revenue drivers, but you will see in a second they are quite a bit different than what you see in the gateway transaction on shift4cares. With that said, let me provide some detail on what we have seen over the quarter. As Jared mentioned, Q2 end-to-end payment volume was $4.2 billion, with $2 billion of that occurring in June. These June levels were ahead of June from last year but roughly 10% below what we were seeing pre-COVID. Much of that recovery can be attributed to high-quality gateway conversions, which contributed approximately 17% of our end-to-end volume for the quarter. And also new merchant adds, which happen every day. Jared mentioned this, but I do think it is worth restating. July payment volumes have continued June's trends and are in fact the second-highest month in our Company's history. That's something we are 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 have highlighted a couple of new end-to-end merchants, including a casino and resort that is very typical of a high-quality gateway conversion. They not only benefited from consolidating a multivendor 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 technologies - contactless 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 is 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 is 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 merchants' 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. Shift4 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.
Brad Herring, CFO
Thanks, Taylor, and good morning, everyone. Before I begin, I'd like to note for those on the call that there are a number of slides in the latter part of our presentation that will highlight a number of the metrics that I am about to speak to. Now to get to our financial results. As we reported in our press release, Shift4 generated $67.4 million in gross revenues less network fees in the second quarter of 2020. This represents a 10% decline over the prior year despite a 23% reduction in end-to-end processing volumes during the same period. The key differences in the decline between the two figures is the continued onboarding of new merchants, both from winning share and converting gateway-only merchants, and the addition of revenue streams from the Merchant Link acquisition. Let me give a quick refresher on the economics of the gateway conversion. As Jared and Taylor mentioned, approximately 89% of our volume is generated from merchants that only use our gateway service. Shift4's revenue from this merchant base is generated at approximately $0.03 to $0.05 per transaction. As these merchants migrate to our end-to-end solution, we shift from transaction fees to a spread of approximately 40 basis points to 60 basis points. The result is a step-up in gross profits of four times or more when we compare that to our gateway-only merchants. These gateway conversions, in addition to share gains through the new merchant wins that Jared and Taylor mentioned previously, both play a significant part in our overall growth. Moving to adjusted EBITDA, Shift4 earned $14.8 million in the second quarter, which compares to $24.0 million for the same period in 2019. Our second-quarter results represent an adjusted EBITDA margin of 22% against gross revenues less network fees, which is down approximately 10 points from the same period a year ago. The drop in margin was due to the sudden 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 5.3x on a gross basis and 2.5x 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 where states and municipalities further restrict dining, travel, or other forms of commerce. That said, we exited the second quarter processing approximately $2 billion in the month of June. We anticipate volumes to increase off of Q2 levels to between $6.2 billion and $6.5 billion for Q3 and to between $6.5 billion 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 levels, and we continue to see steady recovery in our SaaS and gateway revenue streams, we anticipate gross revenues less network fees to be between $74 million and $78 million for Q3, growing to between $75 million 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 million to $23 million per quarter for each of Q3 and Q4. I want to highlight a few other topics that will manifest themselves 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 operating expense investments in our guidance to support what we are seeing as 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.
Sloan Bohlen, Investor Relations
Thanks, Brad. We are going to turn it to Marcela to go through the instructions for Q&A. Given the time constraints, we'd ask that everybody limit themselves to one question and a follow-up. All right, thanks. Marcela.
Operator, Operator
Your first question comes from Timothy Chiodo from Credit Suisse. Your line is open.
Timothy Chiodo, Analyst
Thanks a lot, guys. Good morning. Thanks for taking my question. I wanted to get into a little bit around the gateway opportunity. It is clearly large at $185 billion in volumes last year. I was hoping you could talk about the lack of alternatives in your core verticals in terms of the breadth and the depth of the software integrations that you have, many of those having been built up over years and years into some - into the software platforms, again, in your core verticals. Maybe you could just bring that to life a little bit and talk about the extent of those and what that means for your business.
Jared Isaacman, CEO
Sure, Tim. Thanks for the great question. Jared Isaacman here. So as described during my opening commentary of this call, we live in - we intentionally position ourselves in a world of complexity. Almost every one of the merchants that is using Shift4 as a payment platform has a multitude of different software applications installed to deliver an experience. Now, that could be a hotel property management system, that could be a restaurant point-of-sale system, that could be a retail point-of-sale system in a gift shop. It could even be a golf course software system that is powering the golf course at a resort. And they all need to connect together, network together for an encrypted and secure payment experience, for tokenization analytics, and then, again, the full payment processing service. Now, not every merchant is on the exact same version of software. In fact, in our deck - I think we highlight Pebble Beach; it's one of our great signature locations at Shift4 - you will find probably a dozen different software applications at that property using versions of software that could date back 15 years. And that is really not uncommon at all in the verticals we play in. So when trying to assess the competitive landscape that Shift4 plays in, you have to realize that not only do you need potentially hundreds of different software applications certified to your platform in order to compete, you also need like potentially decades of version history behind it. Because a customer isn't going to transition from one payment platform to the next and have to wait years in order to accumulate the integrations necessary to provide that experience I just described. So when you take all that into account, the actual landscape that exists that's capable of addressing those unique requirements and the complex verticals we play in is really like three payment platforms out there. And Shift4 is obviously one of them.
Timothy Chiodo, Analyst
That's excellent. Thank you for that color. The quick follow-up is on the Las Vegas Raiders, an organic new win, not a gateway conversion. Maybe just provide some context. I know you had a good press release and mentioned earlier and it's in the slides, but was that a competitive process? And also maybe just touch on the sponsorship element there as well.
Jared Isaacman, CEO
Yes, so again, Jared here, and happy to answer the question. So we have never historically played in the sports and entertainment arena, though it's quickly becoming an important focus for us now at Shift4. We have a business development team that's assembled to really dedicate a lot of resources towards it. And we were capable of addressing it because of those software integrations that I described previously. The same software integrations you would find in big resorts or arenas in resorts happens to be the same software that is capable of powering some very large stadiums. And that is, by the way, not an uncommon story to a lot of other verticals that Shift4 is able to play in. Just to go off track for a second, a lot of people know us within the hospitality and restaurant space, but the same software that powers retail shops and resorts is the same software at UPS stores, which is one of our signature accounts too. And that is pretty far from hospitality and restaurants. But back to your Raiders question, as Taylor mentioned during his remarks, that is kind of the home team for us. Our second-largest office in terms of our workforce is in Las Vegas. A lot of very important customers for Shift4 are in Las Vegas. So naturally when they were building a new stadium, we did approach them not about a payments conversation at all. Just could we get a suite at the stadium for some of our employees as well as entertaining some of our customers who happen to be in the Las Vegas area anyway. And in those conversations, they brought up the payments conversation. To be really honest, they were a couple days away from signing with one of our competitors, who happened to sponsor another stadium on the West Coast and that created a conflict. So they approached us on this whole conversation. I mean, sponsorship is a component of that. I would say that the relationship for us is a profitable one. This is not a loss leader. We were going to get a suite anyway and probably hang our logo up in a few spots. But the net result is that it is a signature win that is going to showcase our best technology, including contactless and QR payments in the most demanding hospitality environment in the world. So it is exactly where we wanted to be, and that won't be our last stadium, I'm pretty sure.
Operator, Operator
Your next question comes from the line of David Togut, Evercore. Your line is open.
David Togut, Analyst
Thank you. Good morning. Could you walk through the third-quarter guidance on end-to-end payment volumes? It looks like you are guiding to about a 51% sequential increase at the midpoint of the $6.2 billion to $6.5 billion volume range. What are the underlying assumptions in terms of gateway conversion versus kind of a return of the underlying business to grow throughout the quarter?
Taylor Lauber, Chief Strategy Officer
Sure, this is Taylor. I will address that. What I think we aim to do in providing the guidance was, give a more relevant jumping-off point, given the growth we had seen out of Q2. So just to put a finer point on it, in June, we had just shy - that's like a couple thousand dollars shy of $2 billion in payment volume. And then in July, we saw that recovery continue. We mentioned this in our deck and I mentioned this in my remarks. July was actually the second-highest month in our Company's history in terms of end-to-end payment volume. One thing I would say is that there does remain a lot of uncertainty out there. So carrying the growth forward that we experienced in June and July into August and September didn't seem particularly prudent. We break that down into a more conservative growth for existing locations than what new locations contribute. So new locations do tend to contribute the majority of the growth you'd see in a quarter just because it wouldn't be prudent to assume that an existing location can grow really quickly when there is as much uncertainty in the commerce environment as there is. If it helps people calibrate, one stat worth mentioning is that our July payment volume, roughly 7% of that near-record month was from customers who joined us during Q2. So it gives you a sense as to what, even in a muted growth environment for our merchants, our onboarding mechanism can do.
David Togut, Analyst
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?
Jared Isaacman, CEO
It's really an excellent question. And I think I can give you - and again, Jared Isaacman here. I think I can give you a pretty fair answer; not getting down directly to specifics. SkyTab was originally a pay-at-table order-at-table program that we launched at the National Restaurant Association in early 2019. Pay-at-table order-at-table has never really taken off in the US market compared to the international market, but have been doing it for essentially decades. So we felt - when we released the program, we had a ton of interest and traction in it. Now obviously during the COVID crisis, no one is going to go in - I mean, the idea of in-venue commerce ground to a halt, especially with restrictions in virtually every state on in-venue dining. We were able to push out a software update to all of those devices that were in the field that enabled curbside, delivery, takeout capabilities so to help our merchants pivot to what was becoming the new norm of the crisis. From the late March through I'd say early June time period, we deployed three times the number of devices to restaurants, existing customers as well as completely net new customers as well as gateway and end-to-end migrations than we had in pretty much the year prior when we initially released it as a pay-at-table order-at-table product. So well over I'd say like 10,000 devices, but I don't want to get too specific because I don't have the exact number there. But it is about a threefold increase in utilization during the crisis than it was prior.
David Togut, Analyst
Understood. Thank you very much.
Operator, Operator
Your next question comes from the line of Dan Perlin, from RBC Capital. Your line is open.
Dan Perlin, Analyst
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 of questions. One is when we think about the Merchant Link portfolio, where are we in regards - I know it is a little bit early days, but where are we in regards to the beginnings of converting some of those clients? I know they tend to tilt towards larger kind of hotel and resort properties, but can certainly be meaningful to this conversion story. So I would just like an update there, please.
Jared Isaacman, CEO
Yes, so thanks, Dan. Jared Isaacman here again. I would say we are still incredibly early on in the overall gateway to end-to-end migration effort. That said - and actually, I want Taylor to kind of fact check me a little bit on that. In fact, why don't you just give the specifics of our piece?
Taylor Lauber, Chief Strategy Officer
Sure. So in the quarter following our acquisition, we had an incredibly strong migration of customers. So just to give a little bit of backdrop for folks that might not be as familiar, the Merchant Link platform lacked a handful of really critical security features and best-in-class commerce features, tokenization things that customers really wanted. And their revenue model struggled because they were just paying a gateway. So they couldn't implement a lot of the services for customers at price points that were 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 roughly 4,000 merchants in that first quarter. I would say in terms of our contribution in Q2, it is a meaningful contributor, but I wouldn't say it outweighs sort of the other two big pillars we have, which is that we've got the software brands we own in Harbortouch, Restaurant Manager, Future POS, and POSitouch. Those can usually - we can count on them for about a third of our production. And then also, the Shift4 gateway itself, which we acquired two years prior. So each of them can contribute about a third. It bounces around. That example of moving 4,000 merchants in the few months following the acquisition is certainly an outsized contribution. I would say it is more normalized in the second quarter. One thing that is particularly interesting, and it makes the data a little bit hard to dissect, to be candid with you, is that once you've ingrained yourself in these channels, these merchant communities, and with the software brands themselves, you start to win new share. And what I mean by that is you've converted a restaurant over that was using the gateway, but they have also got another restaurant that was using a different piece of software and a different gateway. But they like the value prop and they want to consolidate everything under you. So I would say Merchant Link is a great contributor to our production. It's very meaningful in that concept of about - it is one of the three pillars. But whether it is a conversion that we had in our Rolodex or just simply a new site that we got as a result of the relationships built tends to get a little bit more opaque. And that's when we've got to dive down into more granular data.
Dan Perlin, Analyst
That's great. The quick follow-up is the July volumes being the second-highest in the Company's history is pretty amazing, given the current context of the backdrop. And so - and by the way, giving guidance for 3Q and 4Q is pretty unique amongst a lot of the payment companies, so we appreciate that. I'm wondering how should we be thinking about that level of visibility over the next couple of quarters. I know you said there is a lot of uncertainties in the world. But the fact that you are giving it and the amount of visibility that you may have in terms of some of these conversions and new wins, maybe you can just help us put that in context. Thank you.
Jared Isaacman, CEO
Yes, certainly. I mentioned this earlier, but to put it in perspective, in July, we experienced a 14% increase compared to the same period last year. About 7% of the volume in that month came from merchants who joined us or our end-to-end platform in the previous quarter. While we are seeing nice growth from new merchant boards, we are also witnessing a significant recovery within our existing customer base. We prefer not to be overly precise, as attempting to pinpoint exact figures would be unwise. However, we are confident that growth will continue. We don't believe the growth rates observed in June and July can be assumed to persist over the next six to nine months due to the uncertainty involved. Nevertheless, considering the boards we've had in the second quarter and that many merchants typically onboard in the month or two following their application, along with the onboarding of customers in July, we are optimistic. Even if there are some challenges in the near term, we have a clear outlook on the end-to-end volume range that we feel comfortable discussing.
Operator, Operator
Your next question comes from the line of Matthew O'Neill, from Goldman Sachs. Your line is open.
Matthew O'Neill, Analyst
Yes, hi. Thanks so much for taking my question. Jared, one thing you said in your prepared remarks that I found particularly interesting I don't think I have heard before is that as far as the cadence of the gateway conversion to end-to-end, you indicated that in some cases it can actually be as quick and easy as being completed within 24 hours. And so as sort of a two-part question, I was hoping you could maybe give us a little bit more of an understanding of the process of contacting a gateway customer today, explaining to them the virtues of vendor consolidation and moving not only gateway but also end-to-end to you guys. And how the cadence of that is probably progressing as a result of the pandemic. Are inbound volumes picking up significantly? And is the prospect for converting the gateway pool of customer base potentially on an accelerated schedule at this point? Thank you.
Jared Isaacman, CEO
Yes, Matt, really excellent question. So hitting the two parts, the first really being about the technical means to migrate a gateway customer to end-to-end. And then the second part, just the rate of conversion and how that has trended in Q2. So on the first part, what I said in the prepared remarks is absolutely correct. And to be honest, it can be less than 24 hours. So this really just goes to an incumbency advantage we have as a result of the gateway in that all of the complex hooks that are in place with our payment platform in an establishment like a hotel or restaurant or resort environment, they are already there. So all of the connection points to the front desk and the central reservation area and the restaurant and the lobby bar, so on and so forth, it is already in place. We are already driving those transactions. All we are doing is outputting them on the other end of our platform to one of our competitors. A FIS, a Fiserv, so on and so forth. So when a merchant makes a choice to leave that multivendor environment, and that comes with obviously cost and a lot of pain, as I described in my opening remarks, it can be as simple as just turning off the valve, changing the merchant identification number in our system, not our competitor's system. Because again, it is important that all of the intelligence that is driving that transaction, all of the capability is resident within our platform. So in many instances, that advantage of already being installed in just a very large portion of the hotel, restaurant, specialty retail market gives us just a great advantage for migrating customers over. So again, it can be very, very simple. Then the second point in terms of the speed of the conversion, what I'd say is a value proposition that does revolve around collapsing unnecessary layers of expense and complexity was obviously fueling considerable growth before the crisis. I mean, Shift4 was growing our end-to-end payment volume north of 40%-plus before we went into the COVID crisis. Now, that kind of value proposition absolutely continues to ring true in an environment where virtually every one of our customers is going through some sort of a cost rationalization exercise. So I don't want to say that the rate of conversions from gateway to end-to-end somehow accelerated even more because it was already on a great track. What I'd say is it definitely didn't slow down.
Matthew O'Neill, Analyst
That's very helpful. And just from a kind of go-to-market perspective and an education for us, when you are now in contact with a gateway customer who has presumably been - could have been a gateway customer of Shift4, the payments gateway on a standalone basis for a number of years at this point, how do you approach them? Are they approaching you more? Is it still primarily an outbound kind of sales and educational effort to say to a hospitality gateway customer, by the way now, we can do all this for you and consolidate you? Is that the right way to think about it?
Jared Isaacman, CEO
It's a multipronged effort between what we can do at Shift4 as an organization and what our 7,000 software partners can do out in the field. We are all totally aligned around this concept of eliminating this multivendor environment down to one. I mean, especially in the COVID climate, where it is not as easy to get six or seven different parties on a conference call and come to some sort of an agreement on a technology solution or a service-related challenge. I mean, throughout a lot of different industries, there were furloughs. I mean, points of contact were gone. So keep in mind, even our software partners in the field, the software companies that deliver the property management system or the restaurant point-of-sale, they want to collapse down a lot of the vendors in order to simplify their lives. So I do want to emphasize that our software partners had just as much of an incentive during this time period to go out and promote our solution as we do. Now, Shift4, this is where innovation comes into play in our strategy. It is our job to identify pain points that live in the market, pain points for our target customers, and solve them through technology innovation. And then we deliver that at little to no cost, present it to those customers in order to induce them to move to our end-to-end platform. Now, the pain point of the last four months should not be a surprise. It is all about contactless payments. It is all about our SkyTab-based products or our QR-code-based payments that really we put together almost six years ago to help our customers in their reopening effort and deliver a safe commerce experience with their consumers. So sending a blast email out, for example, to 60,000 gateway customers that say would you like to enable contactless payment or QR-code-based payment or get ready to re-open and trying to be helpful in that regard, well, that certainly makes the phone ring. And that, in combination with our partner effort, is how we drove a lot of gateway conversions to end-to-end and how we continue to do so.
Ashwin Shirvaikar, Analyst
Hey, Jared; hey, Taylor, Brad. 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 are kind of suggesting that increasing end-to-end. But the EBITDA margin seems to stay roughly consistent. So is there a specific investment that is contemplated in the very back end of the year that keeps it that way? Or are you just saying Q3 is going to be towards the lower end of the range and Q4 towards the higher? Any color there would be helpful.
Brad Herring, CFO
Hey, Ashwin this is Brad. Appreciate the question. You are exactly right in what you see in the guidance. There is a couple of things driving that. One is when we think about Q3, obviously we have a little more visibility with one quarter in. By the time you get to Q4, it does open up kind of the realm of possibilities. So we tried to range that one open a little bit more. But there are some additional investments that we have included as we get through Q3 and Q4, mainly driven by the fact that July was our second-highest volume month in history. We are seeing considerable growth in our merchant production, in our merchant onboardings, and we want to make sure we have enough OpEx in order to get those customers boarded and meet our operational fulfillments for that. So we have included a portion of investment into Q3 and Q4. The other part that we have learned a little bit: in a COVID environment, we've had to deploy a little bit of extra OpEx just in the near term to shore up some of the challenges we are all finding in the business world of dealing in a COVID environment, whether it is work from home or work remote and different ways of working. So we are making sure we shore those up by Q3 into Q4. But we see those as very temporary investments likely through the end of this year and the margin should return to our previous guidance by the time we get into 2021.
Jared Isaacman, CEO
Hey, Ashwin, Jared here. If I can just layer on to Brad's commentary a little bit. I think probably you as well as most of the analysts know that our starting place with the model that we discussed a couple months ago versus where we are at today is pretty night and day. So as a new public company management team, we felt we had an obligation and it was the responsible thing to do to kind of re-calibrate expectations in light of the pretty significant departure, to the upside, in our Q2 performance. That doesn't mean we still haven't taken a conservative look to the quarters ahead. And to Brad's point, a month deep into Q3 and an idea of what our productions and pipeline is like, we can put more confidence together around that. In Q4, we are going to certainly take some discounts because of the uncertainty, especially considering that time period, may or may not be more impactful when it comes to COVID. So hopefully that kind of helps with some context as to the outlook.
Darrin Peller, Analyst
Thanks, guys, and nice job. Look, when we look at the growth profile you are calling for on the end-to-end volume the next couple of quarters and what we are seeing in June and July, it is pretty apparent that despite your verticals and even beyond the end-to-end - the gateway conversion, there is something that is differentiating on a tech standpoint. I know you just touched on that on restaurants, but I guess number one, I would be curious to hear what percentage you are seeing of your volume that is card not present, what percentages may be buy online pick up in store. If you can give us any color around that and where that compares to versus perhaps a year ago and how you guys can show those percentages versus the industry averages. And then I also want to know how the trends are in your non-hotel and restaurant verticals. You have done I think a good job building out about 25% or 30% of your volume that is not in those two categories, which seems to be I think winning a lot of new business for you as well. And why are you winning there and how is it going? Thanks, guys.
Taylor Lauber, Chief Strategy Officer
Sure. I will comment on the card present, card not present trends. We have always been a very card present business. I think just restaurants, hotels, in-venue experiences that sort of translates to that. If I were to bring you in February, we would have been 85% card present and 15% card not present. That troughed out from a card present perspective in April, as you’d expect, with about 40% of our transactions being card not present. That is that big shift to online ordering, even just calling in and giving a credit card number over the phone to a restaurant for take-out. It's not back to February levels, but it's about 80/20 today and it's stayed relatively stable through June and July. So we are not seeing the level of in-venue commerce with your card that you'd expect out of our business profile. But to be fair, a QR code payment is a card not present because it is paid through a website. So I think the encouraging sign is that you are seeing more cards used at or around a venue, but we are not back to what you would have expected from our business prior to COVID. And sorry, just remind me of your sort of follow-on question there? Oh, okay, yes. Jared reminded me. If you think about the other segments we serve, this is a good point to emphasize that if you look at the software integrations we have, they tend to start with a hotel or a restaurant, but they quickly sort of spider web out from there. And a good example of that would be a Caesar's Palace, where, yes, we handle the online reservation integration into the property management system, but there is a shopping mall there with lots of other software being used to power that venue. As our value proposition gets disseminated out to those software brands, we start to diversify away from hotels and restaurants. And it's not necessarily deliberate. We love - even in a 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 core verticals of first restaurants and then hotels. It is really just an expansion of those other software companies bringing us to their wins on Main Street 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 shift4cares pretty cleanly. You would see a faster recovery in those, although they haven't gotten a pop over the last couple months that restaurants have as suddenly outdoor dining is opening up in the Northeast and other places across the country. So they recovered a little faster, but they are not growing as fast in July as restaurants would.
Jared Isaacman, CEO
Yes, I can just - Darrin, if I may layer on just a little bit on the technology side of things and one closeout point just on the kind of specialty retail or non-core restaurant and hotels to layer on to what Taylor said. You had golf courses there that were operational throughout most of the COVID crisis. You had UPS stores that were still open, facilitating commerce to. Both of which, to Taylor's point, originated from our hospitality business but obviously categorized differently. What I'd say in terms of adopting technology, and I think this is a really important point to understand our business and it goes back to that whole incumbency thing. As we estimated during the roadshow process, potentially 35% or more of the restaurants and hotels in the country use some form of Shift4 payment technology, but only a very small percentage use our end-to-end offering. And that is the big opportunity we all know we are chasing. And it is not just on the gateway. It is absolutely on the software side because we have a lot of point-of-sale system software out there. That incumbency advantage coupled with 7,000 software partners that are essentially local provide awesome coverage and an ability to introduce new technology, to your question, very, very quickly. So things like SkyTab, for example, which facilitates contactless payments and delivery and take-out and such, it's a lot easier for a merchant who is battling through a crisis, who is trying to implement new ways to do business with their customers a solution, when it is just an additional extension to their current product versus having to rip everything out and do a brand-new installation. That's very hard to do in a crisis. And when you think about some of maybe the fast-growing restaurant software players who have largely like a direct model where they are remotely implementing solutions, that is very hard to effect a rip-and-replace, to introduce a new form of technology versus you already have a customer using your software. They are already being supported by somebody who is in the geographic area. And all you need to do is hand them over a contactless type solution like our SkyTab product. So it makes it very easy. I mean, the distribution relationships we have with our software partners have always been a huge asset. The large installed base that we have is a huge asset and it makes it very easy for us to implement new types of technology that became very vital during these challenging times.
Operator, Operator
Your next question comes from the line of John Davis, from Raymond James. Your line is open.
John Davis, Analyst
Hey, good morning, guys. I just wanted to touch on capital allocation for a second. Obviously post-IPO, the balance sheet is in good shape. So I guess first, how soon would you be willing to do a deal and what is your leverage comfort level? And then second, what would you be interested in? Any product gaps or specific areas of interest? Any color there would be helpful.
Jared Isaacman, CEO
Yes, sure. Happy to answer that. So again, Jared here. You know, to just answer the first question in terms of the comfort of leverage ratios, obviously when you look at it on a net basis, our leverage ratios are incredibly low right now. For the last five years of our Company history pre-IPO, we operated at almost continuously six turns of leverage on a net basis, just given our great private equity partner and the efficiency of our capital structure. And during that time period, I mean, we tripled the EBITDA of the business. We deployed capital effectively towards organic initiatives that ultimately yielded really strong unit economics. And we completed a number of acquisitions that unlocked what was to become a great organic opportunity with our integrated payment strategy. So I wanted to just set the stage in that. Of course, we will never see those leverage ratios again that existed when we were a private business. But it lets you know how comfortable the management team can be and how effective we can be even in a pretty levered-up environment. Okay, so all that aside, we are looking at the same things now in terms of our capital allocation that we were previously, which is we have really strong unit economics. Our customer acquisition cost relative to the lifetime value of our customer has an incredibly quick payback period. And I think you will find in the quarter and really in the year ahead, we are going to allocate more capital towards customer acquisition cost to accelerate growth, especially migrating customers from our gateway to our end-to-end platform. Because the returns on it are just phenomenal. That goes right back to the 4x uplift in gross profit per customer, at least 4x uplift. And second, we are going to continue to look at opportunities that may exist in the market where we can unlock an enormous integrated payments opportunity. And that could be in the verticals we are already in as a double down or triple down or it could be in adjacent verticals or it could be in new geographies. And I'd say we have a pretty healthy pipeline in that regard, but I'd say nothing - we are just obviously constantly evaluating them. But yes, I'd say it's the same thing we did before; it's the same thing we are doing now. And we are just going to be real disciplined about it.
John Davis, Analyst
Okay, thanks. And then maybe just a quick clarification on the implied take rate. Brad, in the guide, obviously it steps down pretty materially from 2Q, I think. It implies like 120 basis points or so. So maybe just help us frame that and exactly what is driving that and how we should think about that as we go into kind of 2021 and beyond. Thanks.
Brad Herring, CFO
Yes, sure, John. Appreciate the question. We did discuss the Q2 take rate, and I want to make sure it is clear that Q2 take rates, or spreads as we call them, were pretty inflated. We talked about when you get into monthly minimums and you get into some fixed fees applied to lower volumes. So when you calc our spreads for Q2, you are going to get north of 90 basis points. What we tried to do in the guidance is essentially step that back to more normal levels. We are not going to provide guidance on spreads, but I would revert you back to some of our history when you look back into 2019 as a good benchmark to kind of think about spreads. And as we did talk about, you will see some slight declines. They are not significant. They are not declines that are going to look in the 5 basis points to 10 basis points per quarter range. They are going to be much smaller than that simply due to these mix conversations we have. As we move down the merchant curve into larger merchants, they do have slightly lower spreads and that will over time drive our spreads down. But you are not going to see that wildly significant over the next couple of quarters.
Michael Grosso, Analyst
Hey, guys. Thanks for taking my question. A question on the gateway volume. You disclosed 17% of that was converted from - I'm sorry, end-to-end volume. 17% of your end-to-end volume was converted from gateway this quarter. Is that correct and what was the total gateway number this quarter?
Taylor Lauber, Chief Strategy Officer
So we don't disclose the gateway volume, not the least of which is because this would be a wacky quarter to even try to unpack it, given how many hotels we support within our gateway and the trends that they have been experiencing. With regard to the specific you mentioned, the way we broke it down for everyone is that if you looked at our end-to-end volume in the quarter, 17% of that came from a conversion. Meaning a customer that was sort of on our books but not an end-to-end customer. So that was the contribution. You would see it a little larger if you looked in July, but hopefully that gives context that when we convert one of these customers, you don't get one-for-one value for it. When you convert one of the customers, they typically contribute more volume than the average customer in our book. So you get more end-to-end impact per conversion than the average customer in the base.
Operator, Operator
There are no further questions at this time. I will turn the call back over to Mr. Isaacman for closing remarks.
Jared Isaacman, CEO
Yes, thank you so much. Thanks, everyone, for really joining our first call right now. Really big moment for us. Thanks for your time and interest in Shift4. As we said at the top, despite some of the chaos in the world, we are really excited about this Company's potential for a long list of reasons. I'd like to close out by expressing my appreciation once again to all our employees, our valued customers, and our partners for helping us achieve this very important milestone. Thank you.
Operator, Operator
This concludes today's conference call. You may now disconnect.