Q3 2020 Shift4 Payments Inc Earnings Call

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Maybe the next man. Thank you for standing by and welcome to the ship for payments third quarter Twenty-twenty earnings Conference call. At this time I'll participant lines are on mute. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

To require any further assistance. Please press star here I would now like to turn the call over to your speaker today. So I'm born Investor Relations. Please go ahead.

On our Investor Relations website at investors Dot shift for dot coming through with that let me turn the call over to the Chief Executive Officer Jarrett Isaac.

Good morning, and thank you all for joining US today, we're pleased to report that shift for 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 spend at large year to date consumer credit card spend as tracked by visa is down 7%.

Including debit the overall spend trend is still at a modest 4% increase from the prior year.

While this marks improvement from the Deps 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 a proof point that shift for 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 have grown and then volume year over year, except for April and May at the onset of the cobot 90 crisis.

In the spirit of transparency and in line with the periodic shift for cares dotcom updates we have been releasing its worth highlighting that October was our highest month ever with and then volume up 28% year over year. This.

This performance is entirely attributable attributed both to the growth of our end to end merchant accounts from both gateway conversions and net new wins year to date, we've boarded 18% more merchant 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 and the world's best merchants.

Without grounding, let's turn our let's turn our attention to the results for this quarter.

As detailed in our release this morning ship for third quarter results were reasonably strong highlighted by our and 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 EBITDA margin of 32.7% for the quarter.

You know, we spent quite a bit of time during the quarter speaking with investors and I would like to now address a few questions or misperception that we've encountered in our discussions.

The first misperception is that shift four'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 to deliver as much as 500 million in annualized incremental gross profit.

That said, we think it's equally important to recognize that shift for solution set is highly competitive and is winning us new merchants and payment market share as well.

Selling 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 says a lot about the other two main misperceptions, we run into with our investors.

One is that shift or is really just about the restaurant and hospitality space. The second is that shift foreign our merchants operate on legacy technologies.

So this will first note.

At 40% or nearly 40% of our overall end to end volume is from merchants that fall outside of the restaurant and hospitality space.

As we've discussed previously the incredibly important and complex software integration that make shift for us. 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 education institutions specialty retailers golf courses entertainment venues and more.

To be clear, we love the advantage position, we have worked hard to build in the restaurant and hospitality verticals that 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 simplify commerce for the most basic merchants is not necessarily transferable or applicable to the more complex merchants. We serve the vast majority of shift for customers depend on multiple software.

It's 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 contact list in ordering products like Skyworks ERP. We've also developed enterprise grade business intelligence and analytics products.

These are examples of merchant pain point 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.

Years ago, we didn't own any difference.

Looking out opportunities and taking big evolutionary steps is core is core to the ship for DNA.

And we're pleased to announce the next milestone in our mission to deliver a unified commerce experience on a global level.

Spite, our continued growth in food and beverage and hospitality, we're adding lots of other merchant types as well another.

Another exciting trends in our merchant boards 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 wins is substantially larger than our book.

Over time, we see the possibility to take what is already great omnichannel offering an at 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.

The fact that many industry incumbents are only just catching up the payments gives us an opportunity and distinct advantage with that let me turn it over to Brad to review our financials for the court.

Taylor.

Similar to the last quarter I'll be referencing slides and the tailwind of our earnings material that will highlight many of the metrics I am going to speak to.

Mentioned in our release, we generated 87 $7 million and gross revenue less network fees and the quarter. This represents a 10% increase over the prior year and a 30% increase over two two.

The year over year variance was driven by a 25% increase in net processing revenue driven by continued sure wins and gateway conversion.

Net processing revenue now makes up 65% of our gross revenue S network fees.

From 57% for 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 a recurring into an solution is.

Is anticipated in the queue to earnings call net spreads return to a more normal level 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 change 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've been relatively flat year over year.

Similarly, if we'd applied our current accounting tree, but regarding equipment to the previous quarter. Adjusted EBITDA would have increased just over 50% from Q too.

Our third quarter results representative adjusted EBITDA margin of 32.7% against gross revenue less network. These.

On a consistent accounting basis. This represents a 300 basis point decline from prior year as we continue to make investments and top line growth initiatives come.

Yes.

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, and $30 million, which represents an increase of approximately 30% from our previous guidance of 20% to $23 million.

As we are all aware theres still a great deal of uncertainty, especially as it relates to the current pandemic.

And with that I'd like to turn it over to the operator for the Q&A portion of this session.

Thank you at this time, we will be conducting our question and answer session to allow for as many questions as possible. We ask that you. Please limit your questions to one question with one related follow up you May then re entered the queue for any additional questions. Your first question comes from the line of David target with Evercore ISI, David Your line is open.

Thank you good morning, 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 three D card versus the underlying growth of the business.

Sort of eight months or at times, even less you talked about potentially extending that a little bit via the var bonuses or better software more software hardware et cetera, maybe just expand upon that strategy to the extent that it's either been implemented or could be implemented over the future and how that could potentially drive growth.

Yes, sure Timothy Paradise Hickman here. Thanks for the good question. So I think we've been rather consistent whenever we really discuss our capital allocation strategy that theres definitely more room to go in terms of customer acquisition costs, just given the powerful unit economics, but that we also look at things like investing in research and development to make available additional cash.

Abilities to our customer.

Any discussions around these Chris growe.

The business.

A forecast of those were pretty draconian.

Only because.

You may know quite what to expect.

I would say we've been incredibly pleased as daring sort of mentioned on the call with the resiliency of.

Of our merchant 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. You look at the basket of merchants that are interacting with you are transacting with us.

During a given week 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 buys its probably a little bit soon to pass judgment on it so.

To the to the positive because we've got lots of things like hotels and restaurants in urban areas that are slow to open if they are highly dependent on business travel for example, and.

And to the negative you've got issues look stimulus funding that would make you want to keep an eye on that 5%, but 5% is is what we've seen at its peak and again, we've sort of more than eclipse that through our growth.

Jared Taylor. Thank you very much appreciate taking the question.

Thank you Sir.

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

All right. Thanks.

Guys. So when we look at the fourth quarter Diaper volume. Obviously show is really really good trends you had into October and then and then it shows that in 22% guide, which implies DHL for November December, which we assume is a macro uncertainty more than anything else, but first of all just making sure was there anything sort of onetime in the October trends.

Now as compared to I don't know you know 2018.

Or 2019, you know some of that is a little bit depressed because you've got hotels doing lots volume, although hotels have been a very fast growing vertical for us.

As well I think the key points to the message is that we have got almost as many software brands that.

That were there bread-and-butter merchandise outside of a hotel and a restaurant or a restaurant, but they have them to want to sell into that market and so they partner up with us and then they bring us in the main street and.

And it's working well so we just started an important to highlight that because I think we've seen pretty consistent.

Themes and questioning and it's just worth giving more clarity into our merchandise.

Alright, that's helpful data banks, just my quick follow ups around three D card.

I mean, it seems like you would be covid more on the pretty small side of the SMB. Although please correct me if I'm wrong on that I mean, maybe it's if it's medium medium size or whatnot and I'd be curious strategically you guys are always talked about moving more and more into larger enterprise and we should keep that in mind with yield and whatnot. But is this is this a little bit of a payment from.

That or is this really address both you know all ranges and sizes of merchants Thankfully I guess.

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 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 as we do currently in the U S.

But I look at three D card again is is 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 to kind of solve that.

That brought her opportunity set.

Understood.

If I could just decides to follow up on on the average volume per merchant up I think you said, 11% year on year.

And then the following statistic there was the merchants started joining today or I think he said, 70% larger than a than a year ago.

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

Thank you.

Hey, Dan Dan Brad.

Good solid quarter again congratulations.

I wanted to ask about the conversions.

I'm hesitant pace, a conversion sort of you know pick.

Picked up here even more than.

Yeah.

You know we call as a rip and replace where somebody has to physically come out on site, which is not this isn't the environment that super conducive to that and rip out what's already been established at the business installing new platform with new devices and bring in a multitude of other third parties to complete an experience like Q on Q, our payer or sky.

Tab or other contact was products that it's just not contracting environment to do that so without a doubt the gateway conversions and even our software only portion of our business. We benefited from pretty considerably just because it's already operational in there and that's a pretty distinct advantage separate from that.

Sonnetize like we talked about a lot of the cost synergies from that uhm, so the cost synergies or the costs associated with merchant going forward, obviously could look very different than they did in Q4 of last year.

The other component of that is.

We've kind of intentionally.

Worked on that revenue stream and merchant like as as we've converted it so you're obviously going to see the gateway trends continue to decline over time as we convert those to India and but another thing to consider is when we talked about this the the hospitality side I mentioned it in my early statements that hospitality has been hit a little bit harder than some of the food and.

Uhm with respect to the gateway revenue streams, so if you're thinking about modeling in the queue for this year at even if the first quarter of next year, that's something something also to consider with respect of seasonality just kind of generally speaking in volume.

You know, we do typically see a Taylor mentioned a bit of a fall off as you move into queue for you know as as weather changes some other dynamics.

Always historically been a little bit of a spike and the holiday season. This year, you know I I'm open to anybody as to how that seasonality Spike takes place the match with a driver of how we provided our guidance for queue for that volume declined typically continues a bit into Q1 as weather continues to kind of obvious.

[noise] influenced people's abilities, Uhm emergence abilities for people to get out the back you to a Q3, you'll see that seasonality kick back in again and that's a normal pattern in a business I mentioned in my early statements that you know a lot of you know normal patterns are being tested right now, but I do still see kind of the normal Q4 Q1.

Lower states Q3, Q for higher state patterns and continue going forward. It just might have a little different nuances going forward.

Understood. Thank you for all that Nick Carter.

Your next question comes from the light of my colonies can think of America My Kid I used that then.

Hi, good morning, Thank you've been taking my call guys. I know last quarter, you mentioned that sports and entertainment vertical has become more of a focus for Ya and you announced a nice one with the the Raiders last quarter can you share any additional wins that you've made this quarter and with the pipeline currently looks like and that is a follow up to that what are <unk>.

That's been how we delivered a lot of value over the last five years.

2017 was a very big year for US you know if you could go back to some of the comments we had in her prepared remarks, you know three years ago, we integrated to one piece of software and that was the extent of our integrated payment strategy and and it was in the restaurant space and now we integrate two 350 different software applications and.

And we pursue across food and bad 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 the synergize basis, I mean, they've been like deleveraging highly accretive and you should expect us to continue to do that because I think as a as an organization we're pretty good at it.

In terms of where we're setting our sights. We're 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 you know gateway customers to and then because that is a lay up as most of you modeled so.

I I wouldn't target anything in one any one thing specifically other than we're very active in this and you know we're actually probably I'd say I'm as excited as we've been you know in a long time in terms of the opportunities there in front of us.

Okay. Thanks, and then just on Gateway convergence I think the last quarter you guys gave a number representative volume that came from converted mcwhorter any update there are any other stat and give us to just track. Your progress you know about where you stand today versus where were you. When you thought you were gonna be at the beginning of the year from from a conversion standpoint.

Volume or Birch account next I'm, assuming volume is probably maybe not quite where you thought the merchant account, maybe just any commentary that'd be helpful.

So this is Taylor I'll address that we didn't update that that only because I think it was misinterpreted.

The last call her and just to reiterate what we gave at the time of the 17% of our total end to end volume was coming from gateway.

Migrations, but we didn't we didn't put a timeframe.

That wasn't migrations in the quarter that was migrations all time and it's a powerful staff. When you think about the fact that you had mentioned which is it three years ago, we didn't have a gateway at all.

So you would expect that number to hire in this quarter because we have had.

A healthy number of gateway migration and on average those merchants contribute more volume per site that.

Sort of a non gateway convergence, so to speak or in that new win but we have an.

Date of that site, what I would say is you're you're somewhat correct in your thesis that gateway migrations contribute.

Healthier to our mid count that 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 and should be given the pandemic, yeah, and hey, Jarrett here just to just to lay around a bit you know, it's a bit more spread.

Surface City, you know one of the one of the challenges we have and I am sure I mentioned this previously if not on the queue to call, but maybe on some of the non deal roadshows.

Is being able to accurately really score gateway conversions from net new wins D. U P. S store was a great example that was a net new win at the time they sign the contract and 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 minutes, which were not 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 and it can really like throw around a lot of the calculation you know what I would say it's like for anyone who has any question marks about where the volumes coming from you know look at work up 28% year over year.

And and and volume in October where we've already said you know a little bit better than 60% of our volume comes from restaurants, and hotels, which are highly impacted from the pandemic means on like a normalized basis, we're talking 50% plus and then volume growth from a company that has been doing payments for nearly 21 years.

Now that winning share and 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's there's 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.

Okay. That's helpful. Thanks, guys.

Your next question comes from the mind of Matthew O'neill with Goldman Sachs Smack in your diet is open.

Good morning, gentlemen, thanks for taking my questions here I don't mean to belabor suddenly consistent themes that people have been asking about but I was just hoping on the three D card acquisition makes a lotta sense to us you're getting.

Mix of faster growth E com as well as card not present volumes as far as some details around the opportunity that lies ahead is it safe to assume that you know the the volume today is being processed by by other sort of suppliers in the industry and and then this represents.

More or less an incremental kind of gateway to enter and opportunity for for shift for as as you guys take over and presumably kind of convert those payments onto your own filth type platform.

Yeah, Hey, sure so jaredite menhir happy to take this because I mean, we're all really excited about three D carpet I'm, especially excited if you. We actually included I think a graphic in our presentation, which shows all of the various growth trajectories in synergies that we see from.

From the three D card acquisition I I would encourage you to take a look at it no question. There is a ton of volume that's on that platform measured in the billions that does not hitting ship for today, which isn't surprising because up until this acquisition nobody would've ever tried.

Tried to stake a claim that were you know a strong E commerce web store payment provider. We certainly are now with this acquisition. So there's billions in volume, they're just within the existing base that we're gonna we're gonna certainly migrate over to ship for and you should absolutely think about that in the same respect as you would or other gateway to and then migration.

But really the opportunity has all the net net new business. So three card from a capability set perspective diligence. This really well is totally on par with some of the biggest players in this space.

But we're definitely an underdog here I mean, you know 15000, you know or a little under 15000 customers relative to a million plus.

Sites that you would expect from some of the bigger players I mean, we've got a lot to gain on this one and I think approaching it with the disruptive pricing strategy as we talked about previously I mean every one of these web store providers has these.

These escalating SaaS fees basically as the business grows they get punished even more.

You know for that growth and that that pay you know fees to unlock premium add.

Add onto another capabilities like we're looking at this right from the start saying, where an underdog in this and we can monetize that relationship entirely through payments and we might choose to forego all of those type of course in order to attract customers away from other platforms not to mention just a general <unk> businesses, establishing an ecommerce presence in order to sell their goods, especially in the current climate. So.

I mean, the potential for this is really extraordinary the game the migration of the existing customers over to our payment platform is meaningful but it's just kind of one part of what is it a pretty exciting acquisition opportunities.

That's really helpful. Thanks, a lot Jan I guess my my follow up I'll just be around you know I understand a lot of the complexities and sort of quantifying discussing the.

The existing opportunity of gateway to enter in conversion you gave the example of the U P. S store and just kind of how how multifaceted that that whole relationship was I'm. So absent kind of any numbers I was just hoping you can you know an absent any named I guess of of any hospitality merchants or otherwise maybe you can just share a couple of anecdotes around.

The the the pace of those conversions are they are they kind of voluntary or the merchants coming to you are you reaching out to them more aggressively and maybe what are the top kind of one two and three kind of reasons from their perspective that they're they're so eager to to do these conversions presumably around.

Cost and vendor simplification, but any commentary would be great. Thanks, so much.

Yeah sure. This is Taylor I'll address that you know I I think in terms of like the the cost savings and the benefits for vendor consolidation that is a very constant drumbeat from ship more out to our gateway population I think it it.

It resonates differently at different times for different work. So what it does it creates at least how we have to analyze the conversions as they happen it creates a pretty constant sort of leap blow into our organization with I've reacted to this idea that I can save money and tell me what that means.

It means that in a very passive way.

Automated email for example, you can sort of keep that thing going and it's going to resonate as I mentioned at different times, you can imagine and the population like the hotel base that would obviously resume really well in the middle of the pandemic, but if their staff is furloughed they might not be getting an email and then they start to get them when they come back and react to them. So I would say that is.

An underlying current that and and the reason that's an underlying current as it applies to every single merchant.

On our platform, where we spent a lotta time posts IPO is analyzing more specific nuances, whether it's a population of merchants be that a large hotel chain or read that onto a lot of hotels for example, or a particular software version that we believe a lotta merchants would be compelled to benefit from it off.

Great, but don't want to pay the costs associated with it will tackle those individually.

And then separately will will tackle software relationships, we're having really really strong success.

Is Jared mentioned in the sports and entertainment space a lot of interesting venues are already on our gateway. When you think about where that software mindset, Matt software company is seen a success, they're having partnering with us and bringing us back into gateway opportunities. So it happens a bunch of different ways I'd want us.

Say that there's any one theme that compels you know.

A pocket to move radically I'd say they happen all the time QR codes. Just another example, right we talked about it you're cute too. That's a feature set you push out that compels a bunch of different parties to see the benefit to migrate at that point in time.

Got it really helpful. If you don't mind squeezing one of my follow up in there on Darren question earlier, just around the implied growth for November and December were there any explicit monthly comp to call out or nothing particularly material on a monthly basis.

So I don't know what I think is what I think you'd find seasonally as you'd find that.

Q for seasonally slower and that's typically marked by a a meaningfully lower October and November with a higher December.

And so.

In the guidance that we provided I think we just sort of ignored.

Ignore the fact that October was a great month, because there's increased uncertainty, especially around something like December I think there's a lot of compelling reasons, why you'd you'd expect spending to be up but it's probably too soon to telegraph that so very consistent with the guidance. We provided really since being public. We're basically telling you all we're confident in our growth machine or.

Confident merchant boars were uncertain in the macro environment and so we're telling you there's going to be growth. There all you too, but we're muted and how you know how much any recovery would ever contribute to that.

Yeah, I'm, just terribly Microsoft Langer I.

I mean, if you go back to Q2, when we actually first provided guidance for Q3 and Q for.

You could probably read a lot into that based on the results. We were sharing especially I think we gave one month in of Q3 at the time and.

And the answer is really the same as we're a new management team as a new public company New management team operating in your public company and we're just gonna be pretty Conservatives as we approach. These things while still trying to give you as much information as possible as to our confidence around the business.

Thanks, so much.

Your next question comes from the line of James Faucet with Morgan Stanley James Your line is open.

Hi, this is.

James just wanted to touch base the T K I, probably could call got better things around 80 Bucks fizz corner, how much I want to make that how much of I bought me up left goodbye card not pegging trials or anything like that how much would be would be expecting that can go online and then a couple of quiet.

Hey, this is broke or so I'll I'll I'll take that there wasn't a significant shift a previous quarter for between present not present, so that 80 basis points us kind of stabilized coming out of cute too.

We've always talked about you know as this merchant Sars. The average merger size increases like Taylor kind of walk through a leather to go cause that happens, we're certainly going to see spreads start to come down.

To some degree, but it's certainly not going to fall off a cliff per se. So what we think is you know the 80 basis point number where we came out of cute three we look going forward that number will continue to drop and our expectations, but maybe one to two basis points a quarter until it starts to stabilize but that stabilization is not gonna be likely totally.

Well in the 21 would even to the 22.

No conversion site Glazer as we continue the <unk> or the the the new merchants that are coming on my lower right.

Perfect just wanted to touch base again on the capital allocation problem I'm very clear, how you're dealing with inorganic hagannah crash on.

<unk> that my payment side How's your <unk> as your strategy regarding the rain and the pieces that my payment changed at all since you've gone public.

Hi, This is Brad Oh isn't that what again I would say no.

Certainly looking at options to deploy capital.

Obviously reduced or the costs now like I mentioned in the mood fours in terms of an interest rate you.

When we play out what to do with our cash you know it's it's.

Paying down for 5% that makes sense for us we will certainly do so I don't feel good I see that in the foreseeable future. So the debt repayment plans are likely not changed from what we talked about appropriate Ikea road shows.

Perfect. Thank you.

Your next question comes from the line of anti Jeffrey the chest Andrew Your line is open.

Thank you. Good morning. Appreciate you can squeeze me in here.

Garrick color on numerous should ads is really helpful. I Wonder if you can get even a little bit more granular.

And and breakdown.

Growth between net new and the gateway and conversions as well as those merchants that are operating on or I'm, sorry, what's your sign are.

Partners and maybe does that are operating I'm more like I see your point of sale War shit forest, providing the technology enhancement.

Yeah. So thanks, Jerry here I'm just trying to.

To think that through so you know the question.

Just to make sure I understand it you know you ask for a breakdown in terms of new ads between gateway conversions and net new ads and then from there how many of them are using a legacy point of sale system versus.

That is complemented by ship for technology.

You wouldn't mind, just clarifying on that.

Yeah, exactly and I, just I'm trying to get a sense of as you add maybe the easy way to think about it is outside of gateway convert and if you split apart. The other 50% of your merchant growth how much of that is merchants running on you know more traditional point of sale system.

Yeah.

More like C. P O S. I guess simplest way to think about it.

Well I mean, I'd say right from the start just and this might not be totally where your question is going but I think it's a real healthy statement for everyone to understand like there is nothing about ship for story that screams like non integrated verifone or Ingenix terminal. So everything that were boarding under our platform is connecting into some piece of software I mean by and large you know it's like a 99%.

<unk> statement so.

Whether we're adding new customers on the gateway, which absolutely I mean or or I'm, sorry migrating customers from the gateway downturn, 100% those are integrated customers to some sort of software that could be point of sale systems in a restaurant or can be property management systems within a hotel or it could be an ERP system. No question, that's talking to us so that that's our platform connecting to software.

And that story is not really that different when it comes to net new ads, which is almost assuredly going to be some sort of software Michelle could be in partnership with the I S. B, who created the software could be in conjunction with the value added reseller, who implemented installed the software.

This story's entirely about software.

<unk> payments without question now you know how many how much was our.

Technology, like Sky tab, or QR pay or contactless or online ordering our business intelligence product like giving those away at no cost or you know and including it as part of the sales process, how much of that influence the payments decision from the the customer I'd say, it's nearly 100%.

So we're always solving some pain points for our partners and merchants in every in every example, when a customer board stockpot are and and platform I mean that is <unk>.

Consistent and every transaction, so I mean, even like greater stadium or hard rock or Virgin any of the recent wins with an ounce. There was some form of technology that would have otherwise been provided by a multitude of other vendors at the additional costs that we were able to bundle and include at little or no cost in order to be payments customer that's consistent.

Almost every deal what Barry what matters to a restaurant with QR code base payments might be entirely different than you know like a raiders stadium that may not have sit down dining, but cares a lot about handheld in mobile connectivity for sell.

Selling goods and see or something of that nature, but it's we're almost always bundling some form of our technology with the the integrated payment so.

Okay, that's helpful and I.

Safe to assume that.

Sort of a mix of those new merchants.

X.

Next changed.

<unk> climbed basic questions versus.

Software is.

Stay relatively concoction seen that shift as well.

So it's.

That's a great question. This is Taylor I think the way to to convict chalets. It is the gateway population as every flavor right. It's got merchants that were reluctant to upgrade software over the years. It's also got brand new integrations for the latest versions of those same software suites. So you have a wide.

Variety of it if you look at the moment I have like.

Let's call. It two three of 2020, you'd see a little bit less adoption of a brand new software suite.

Because like this isn't arrhythmic replace type environment in the middle of the pandemic and therefore, you'd see more gateway migration is Dario talked about where a merchant wants to take advantage of a feature set doesn't have the touch their software.

One thing to keep in mind is we've got by nature of sort of how the circle works very tight relationships with every one of these I S. D. So we.

That merchant, who migrates from gateway to end and to take advantage of a feature set the chip or provide will very often get an incentive or a benefit the upgrade to the later version of the software. They are using at some point in time. So I don't I don't want you to get too hung up on the concept of legacy versus next yet.

If you're a merchant in our environment, you probably operating more than one piece of software some of it might be.

An older piece of software that you are more reluctant to upgrade because of the headache involved with that some of it might be brand new.

Even in a case of something like like.

Like the stadium, you'll typically C. A T O S.

That is a little bit older next to something like Benny that's which is.

Are are really great Nextgen Uhm Sweet management software. So you'll see every flavor of it I think in the current environment meeting like this court.

C a little bit less.

Appetite to move to a completely new software suite and that helps accelerate gateway migrations, because we can take that that suite of software there on and give it a bunch more features.

Got it thank you very helpful.

Your next question comes from the line of Microtel garage. So this company's point Michael Your line is open.

Good morning. Thank you for taking my questions 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.

You know obviously transaction counts are are are lower than where they were pre covid. How much of that is due to just overall lower spending versus potential attrition in.

In the 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 free covid levels. Thank you.

Great questions Uhm, so with regard to sort of same store merchants L. I'll address that and then maybe fried and talk about the the reserve concept.

<unk>.

We disclosed in second quarter that are average same store merchant was doing about 75% of normal during queue to I think be looked at keesler, you'd see a little bit recruitment berrien, probably see around 80%.

Of normal so nothing.

Dark and the recovery, but I think merchants are operating at a level that we think is somewhat sustainable are very sustainable for the short term and we're optimistic about what you know our end it in volume looks like whenever returns to 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've expected to the transacting in February not transacting and a quarter like.

Like two three.

I think that's probably as bad as it is going to get I think there's room for improvement and that is things like hotels come back online. So I don't think that that's 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 you know call at 28 <unk>.

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 you know close to up 30 per cent and that entire differential is the merchants that a go into and even those merchants are not operating at their whole house. So it gives you the.

Sense to had a bill to that picture of you know what we would expect the month like October to be consistent with what we are seeing in February if there weren't a pandemic you would expect to see October is a plus 50.

5% or more end to end volume growth if all of our merchants were punching it their way class and Brad They are talking about are there.

Yeah, Hey, Margaret on reserve real quick you know, there's only two areas of rigor that I looked at one of reserved around our ability to collect fees and two.

Reserves around exposure chargeback et cetera, So uhm as we got into cute too we have a complete a lot of attention to those but by the time, we got through mid quarter for two three those it normalized back so I'll call them pre covid level. So keep him on also we have really limited exposure from from a prepay perspective.

So those are returned back to who I would call it a different level yeah and.

And he dared here just to kind of put down to the point that Brad just made.

You know we've been kinda fortunate too.

Living space that is like relatively immune to charge back risk and even credit exposure to our customers. There was a period is Brad mentioned you know like <unk>. The end of March April May where you had a lot of hotels running refunds.

Consumers, obviously canceling their trips and then that that was a point where it was possible that if there was a lot of insolvency among hotels.

That we could incur some charge back race and then proud of course, you know you've made appropriate reserved as a as a result, those windows passed long ago, I mean, you're you're back into like the totally normal realm that we live in virtually nonexistent credit or charged back related losses.

Okay. That's helpful color. Thank you and then if I just could I ask one follow up on the on the acquisition unrelated impacts. There have you have you clarified or provided any of the expectations around revenue accretion or or.

Anticipated cost impact in queue for from that.

Yeah, So Jared here I mean, Brad.

Thank you touch on that previously that embedded within our cute for.

Guidance, we've taken into consideration the cost and revenue associated with.

With the three D card acquisition, you know, what I'd say, which is actually pretty atypical among E. Commerce payment platforms does that this is a profitable business that required immediate on in LTM basis. It was that it it actually is very creative on it from from an EBIT 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 for going some SaaS. These in order to capture payments is is how much of the the profits of the business, we're willing to reinvest in queue for to drive growth. So I think we've taken some very conservative I mean, very conservative assumptions in terms of what we've been bad.

It in queue for as it relates to this acquisition.

Yeah, I don't know if Brad if there's anything else you Wanna.

I think I think that's got it.

Cause concludes that question and answer session I will now turn to cut back on for should check ice cream 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 ship or.

And by emphasizing again that while the backdrop does remain quite challenging ship for as many drivers of growth both organic and across a new market for the vertical we've never really been more excited about how the company's position right now to execute against those opportunities and we look forward to sharing more in the very near future I missed a lot going on so thank you I wish you all well say hell.

<unk> and have a good day.

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

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