Shift4 Payments, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
Shift4 provides integrated payment processing, merchant acquiring, gateway services, point-of-sale software, eCommerce tools and related technology. Its platform serves more than 7,000 software partners and merchants across hospitality, food and beverage, gaming, stadiums, specialty retail, nonprofits and eCommerce. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the same periods in 2021.
Financial performance and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Gross revenue | $506.7 million | $351.0 million | $908.6 million | $590.3 million |
| Payments-based revenue | $473.9 million | $324.8 million | $845.4 million | $540.7 million |
| Gross profit | $105.8 million | $78.1 million | $190.4 million | $129.9 million |
| Income from operations | $22.9 million | $4.9 million | $11.2 million | $(38.6) million |
| Net income attributable to Shift4 | $10.3 million | $3.2 million | $2.8 million | $(29.6) million |
| Operating cash flow | Not separately provided | Not separately provided | $85.0 million | $5.0 million |
| Adjusted EBITDA | $65.6 million | $45.2 million | $109.9 million | $67.4 million |
| End-to-end payment volume | $16.9 billion | $11.8 billion | $30.3 billion | $19.8 billion |
Q2 gross revenue increased 44.4%, payments-based revenue increased 45.9%, gross profit increased 35.5%, and net income attributable to Shift4 increased 221.9%. Six-month gross revenue increased 53.9%, while payments-based revenue increased 56.4%. Six-month end-to-end payment volume increased 52.8%.
Q2 gross margin was approximately 20.9%, compared with 22.3% in the prior-year quarter. Six-month gross margin was approximately 21.0%, compared with 22.0% in the prior-year period. Operating margin was approximately 4.5% in Q2 2022 versus 1.4% in Q2 2021, and approximately 1.2% for the six months versus negative 6.5% in the prior-year period.
Gross revenue less network fees, a non-GAAP performance measure, was $182.6 million in Q2 and $331.4 million for the six months, compared with $136.3 million and $233.8 million, respectively, in the comparable 2021 periods. Adjusted EBITDA margins were approximately 12.9% in Q2 and 12.1% for the six months.
Cash, liquidity and debt
- Cash and cash equivalents were $1.018 billion at June 30, 2022, down from $1.232 billion at December 31, 2021.
- Operating activities generated $85.0 million of cash during the first six months. Investing activities used $87.1 million and financing activities used $211.0 million, producing a net cash decrease of $213.3 million.
- Cash uses included $185.9 million for share repurchases, $24.9 million for equipment to be leased, $20.3 million for capitalized software development and $12.6 million for acquisitions, net of cash acquired.
- Total debt principal was $1.7725 billion, consisting of $690.0 million of 2025 convertible notes, $632.5 million of 2027 convertible notes and $450.0 million of 2026 senior notes. The notes are fixed-rate obligations with principal maturities beginning in 2025.
- The debt carrying value was $1.738 billion, while estimated fair value was $1.411 billion. The company had $99.5 million of available revolving credit capacity, net of a $0.5 million letter of credit, with no revolver borrowings outstanding.
- Management stated that the company was in compliance with debt covenants and expected to remain compliant for at least 12 months after issuance of the financial statements.
Material changes versus the prior comparable period
- Revenue and payment volume accelerated substantially, driven primarily by higher end-to-end payment volume and continued adoption of integrated payments.
- Operating results improved from a prior-year operating loss for the six-month period to operating income, although interest expense rose 27.3% to $16.3 million because of the 2027 convertible notes and a special interest payment.
- Advertising and marketing expense declined 75.2% for the six months to $5.6 million because 2021 included nonrecurring 3dcart integration and Shift4Shop rebranding costs.
- Operating cash generation improved to $85.0 million from $5.0 million, despite increased accounts receivable and funds deposited in a sponsor-bank merchant settlement account.
- The company repurchased 3.887 million Class A shares for $184.4 million during the first six months at an average price of $47.40 per share. Approximately $44.5 million remained available under the repurchase programs at June 30.
- On May 24, 2022, Searchlight redeemed all remaining LLC interests and ceased to be a continuing equity owner. Shift4 Payments, Inc. owned 67.8% of Shift4 Payments, LLC at June 30, compared with 68.2% at year-end.
Acquisitions, outlook, risks and unusual items
- The company acquired The Giving Block, a cryptocurrency donation marketplace, on February 28, 2022, for $106.9 million net of cash acquired. The transaction included a contingent earnout with a maximum payment of $246.0 million; its June 30 fair value was $57.5 million, plus $1.4 million of post-acquisition compensation expense.
- Shift4 agreed to acquire Finaro for $200.0 million in cash, approximately $325.0 million in Class A stock based on the transaction-date valuation, and a performance-based earnout of up to $50.0 million in stock. Regulatory approval was expected in the fourth quarter of 2022.
- Subsequent to June 30, the company acquired three technology vendors for approximately $56.8 million and committed approximately $120.0 million for merchant relationships and nonsolicitation rights. The filing states that purchase accounting for the acquisitions was incomplete.
- The filing does not provide formal financial guidance for 2022. Management expects growth from integrated payments, conversion of gateway-only merchants, larger merchants, new verticals and strategic acquisitions, but notes that results are affected by seasonality, consumer spending, competition and macroeconomic conditions.
- The company adopted SEC Staff Accounting Bulletin 121, recognizing $1.2 million of crypto settlement assets and an equal liability related to The Giving Block. Cryptocurrency activities expose the company to regulatory, custody, counterparty, cybersecurity and asset-volatility risks.
- Other notable risks include dependence on third-party vendors and software partners, payment-network disruptions, privacy and data-security regulation, goodwill and intangible-asset impairment, acquisition integration, inflation, the Russia-Ukraine conflict, and restrictions on distributions from Shift4 Payments, LLC.
- The company has not recognized a potential $248.3 million Tax Receivable Agreement liability because management concluded payment was not probable based on estimated future taxable income.
- On August 3, 2022, Bradley Herring agreed to leave as Chief Financial Officer effective August 5, and Nancy Disman was appointed CFO effective that date. Disclosure controls were assessed as effective at June 30, 2022.
Most important facts for investors to verify
- Whether strong payment-volume growth translates into sustained gross revenue less network fees and Adjusted EBITDA growth after network costs, residual commissions and other variable expenses.
- The cash impact and funding plan for the Finaro transaction, subsequent acquisitions, merchant-relationship commitments and remaining share repurchase authorization.
- Debt maturity and refinancing risk beginning with the $690.0 million of 2025 convertible notes, including potential equity dilution or cash repayment.
- The ultimate value and settlement mix of The Giving Block earnout, which can be paid partly in stock and partly in cash and is subject to revenue performance.
- The regulatory, custody and counterparty exposures associated with The Giving Block’s cryptocurrency platform.
- Whether the company can maintain liquidity while operating under debt covenants and distribution restrictions applicable to Shift4 Payments, LLC.