Shift4 Payments, Inc. — Q3 2023 Form 10-Q Summary
Business context and reporting period
Shift4 provides integrated payment processing, merchant acquiring, proprietary gateway, point-of-sale software, eCommerce, hardware leasing, analytics and related technology solutions across hospitality, food and beverage, stadiums and arenas, gaming, specialty retail, nonprofits and other verticals. The unaudited Form 10-Q covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Financial performance and key metrics
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Gross revenue | $675.4 million | $547.3 million | +23% |
| Payments-based revenue | $626.9 million | $509.0 million | +23% |
| Subscription and other revenue | $48.5 million | $38.3 million | +27% |
| End-to-end payment volume | $27.9 billion | $20.6 billion | +36% |
| Gross revenue less network fees | $243.0 million | $196.7 million | +24% |
| Income from operations | $44.7 million | $53.5 million | -16% |
| Net income | $46.5 million | $46.4 million | Flat |
| Net income attributable to Shift4 | $32.6 million | $43.1 million | -24% |
| Adjusted EBITDA | $124.5 million | $85.4 million | +46% |
| Diluted Class A EPS | $0.55 | $0.57 | -4% |
Q3 operating margin was approximately 6.6%, compared with 9.8% in the prior-year quarter. Adjusted EBITDA margin was approximately 18.4%, compared with 15.6%. The decline in operating income reflected an $8.9 million contingent-liability revaluation expense versus $36.9 million of income in Q3 2022, higher depreciation and amortization, and modestly higher general and administrative expense. Interest income increased to $9.6 million from $3.5 million due primarily to higher cash yields.
| Metric | Nine months 2023 | Nine months 2022 | Change |
|---|---|---|---|
| Gross revenue | $1,859.4 million | $1,455.9 million | +28% |
| End-to-end payment volume | $77.0 billion | $50.9 billion | +51% |
| Gross revenue less network fees | $671.1 million | $528.1 million | +27% |
| Income from operations | $87.4 million | $64.7 million | +35% |
| Net income | $103.7 million | $48.2 million | +115% |
| Net income attributable to Shift4 | $72.5 million | $45.9 million | +58% |
| Adjusted EBITDA | $323.8 million | $195.3 million | +66% |
| Diluted Class A EPS | $1.22 | $0.58 | +110% |
Nine-month operating margin was approximately 4.7%, compared with 4.4% in 2022, while adjusted EBITDA margin was approximately 17.4%, compared with 13.4%. Management attributed revenue growth primarily to higher payment volume, SaaS revenue and acquisitions. Payment-volume growth exceeded revenue growth because of continued onboarding of larger, lower-priced merchants.
Cash flow, liquidity and capital structure
- Operating cash flow was $283.0 million for the first nine months of 2023, compared with $135.9 million in 2022.
- Investing cash outflow was $151.1 million, including $62.7 million for equipment to be leased, $36.3 million for acquisitions, $29.3 million for capitalized software development and $11.3 million for property and equipment.
- Financing cash outflow was $124.3 million, including $96.8 million for Class A share repurchases and $20.5 million for tax withholding on vested equity awards.
- Cash, cash equivalents and restricted cash totaled $783.3 million at September 30, 2023, including $692.3 million of cash and cash equivalents and $91.0 million of restricted cash. Cash and cash equivalents declined from $702.5 million at December 31, 2022, while restricted cash increased from $74.0 million.
- Total debt principal was $1,772.5 million: $690.0 million of 2025 Convertible Notes, $632.5 million of 2027 Convertible Notes and $450.0 million of 2026 Senior Notes. The carrying value of long-term debt was $1,748.1 million and estimated fair value was $1,647.1 million.
- The revolving credit facility had $100.0 million of capacity and no borrowings outstanding. The company reported compliance with all financial covenants and expects compliance for at least the next twelve months.
- The May 2023 share-repurchase authorization totaled $250.0 million through December 31, 2023; $153.2 million remained available at September 30, 2023.
Material changes and unusual items
- Q3 2023 included an $8.9 million expense from remeasurement of acquisition-related contingent liabilities, compared with $36.9 million of income in Q3 2022. Nine-month expense was $21.5 million versus $37.2 million of income in the prior-year period.
- Depreciation and amortization increased 38% in Q3 and 77% for the nine-month period, primarily from residual commission buyouts and acquired intangible assets.
- Nine-month results included an $11.5 million unrealized gain on investments in securities and $6.0 million of income-tax benefit. The tax benefit included valuation-allowance releases related to a legal-entity restructuring and the Focus acquisition.
- Shift4 completed the Focus POS Systems acquisition on April 3, 2023, for $46.2 million of consideration, including cash and Class A shares.
- After quarter-end, Shift4 acquired SpotOn’s sports and entertainment division, formerly Appetize, for $100.0 million cash on October 2, 2023, and acquired Finaro for $200.0 million cash, $287.6 million of Class A shares and a potential $50.0 million stock earnout on October 26, 2023. Purchase accounting was incomplete at the filing date.
Outlook, risks and contingencies
Management stated that existing cash and expected operating cash flow should fund operating expenses and capital expenditures for at least the next twelve months and into the foreseeable future under its current operating plan. The filing does not provide formal revenue or earnings guidance.
- Acquisition-related contingent liabilities had a fair value of $54.9 million at September 30, 2023. Cash-payable contingent liabilities had a fair value of $41.2 million, with $40.9 million payable within twelve months.
- The company recognized a $4.5 million Tax Receivable Agreement liability but did not recognize an additional estimated $296.0 million because realization of the related tax benefits was not considered probable.
- Two putative securities class actions were filed in 2023 alleging misleading statements concerning the company’s business, operations and compliance policies. The company disputes the claims; loss probability and damages were not estimable, and no reserves were recorded.
- Key operating risks include payment-network and processing disruptions, dependence on third-party processors and sponsor banks, cybersecurity and fraud, merchant and software-partner retention, integration of acquisitions, contingent earnouts, leverage and debt maturities, foreign-exchange exposure, regulatory changes and litigation.
- The company’s disclosure controls and procedures were assessed as effective as of September 30, 2023, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile strong payment-volume and Adjusted EBITDA growth with lower Q3 GAAP operating income and lower income attributable to Shift4.
- Review the timing, funding sources and accounting impact of the Finaro and Appetize acquisitions, including incomplete purchase-price allocations and potential earnouts.
- Assess debt repayment capacity ahead of the $690.0 million 2025 Convertible Notes maturity and subsequent 2026 and 2027 maturities.
- Monitor contingent liabilities, the unrecognized TRA exposure and the effect of future tax-allowance releases on earnings and cash obligations.
- Follow developments in the O’Meara and Baer securities litigation and any resulting reserves or settlements.
- Evaluate the sustainability of payment-volume growth, pricing pressure from larger merchants, and the increasing amortization burden from acquisitions and residual commission buyouts.