Shift4 Payments, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Shift4 Payments is an integrated payment processing and technology provider serving merchants through software partners across lodging, leisure, stadiums and arenas, food and beverage, ecommerce and other verticals. The filing covers the three months ended March 31, 2021, with comparative results for the three months ended March 31, 2020. The financial statements are unaudited and consolidate Shift4 Payments, LLC, including a noncontrolling interest held by continuing equity owners.
End-to-end payment volume was $8.0 billion, up 29.9% from $6.1 billion in the prior-year quarter. Management reported recovery from the COVID-19-related disruption that began in March 2020, although future effects remain uncertain.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Gross revenue | $239.3 million | $199.4 million | 20.0% |
| Payments-based revenue | $215.9 million | $176.4 million | 22.4% |
| Subscription and other revenue | $23.4 million | $23.0 million | 1.7% |
| Gross profit | $51.8 million | $43.4 million | 19.4% |
| Gross margin | 21.6% | 21.8% | Down approximately 20 basis points |
| Loss from operations | $(43.5) million | $8.6 million income | Material deterioration |
| Net loss | $(51.0) million | $(5.1) million | Increase in loss |
| Net loss attributable to Shift4 Payments, Inc. | $(32.8) million | — | Not comparable because of the post-IPO structure |
| Adjusted EBITDA | $22.2 million | $17.5 million | 26.9% |
| Net cash from operating activities | $(1.7) million | $9.7 million | Decline of $11.4 million |
Gross revenue less network fees increased to $97.5 million from $79.1 million. EBITDA was $(18.4) million versus $26.1 million, while Adjusted EBITDA benefited from the exclusion of acquisition, integration, equity compensation and other nonrecurring items.
Cash and cash equivalents were $844.9 million at March 31, 2021, compared with $927.8 million at December 31, 2020. Cash declined by $82.9 million during the quarter, primarily due to investing activities. Net cash used in investing activities was $77.5 million, including $40.6 million for VenueNext, $16.0 million for a SpaceX investment, $10.4 million for equipment to be leased and $3.6 million of capitalized software development costs.
Total debt principal was $1.14 billion, consisting of $690.0 million of convertible notes due 2025 and $450.0 million of 4.625% senior notes due 2026. The company had no borrowings under its $100.0 million revolving facility and approximately $99.5 million of availability, net of a letter of credit. Management stated that the company was in compliance with debt covenants and expected to remain compliant for at least 12 months following issuance of the financial statements.
Material changes versus the prior comparable period
- Revenue growth was driven principally by the 29.9% increase in end-to-end payment volume.
- Gross profit increased, but gross margin was broadly stable to slightly lower because other costs of sales grew faster than revenue.
- Operating expenses increased to $95.3 million from $34.8 million. Key drivers included $14.0 million of equity-based compensation, $20.1 million of advertising and marketing expense, higher acquisition-related costs, and $10.3 million of noncash adjustments for contingent liability valuations and deferred compensation arrangements.
- Advertising and marketing expense increased by $18.8 million, primarily for the Shift4Shop rebranding, integration and Inspiration4-related promotion. Management expects these expenses to be nonrecurring.
- Interest expense declined 51.1% to $6.5 million because of prior debt repayments and refinancing at a lower rate.
- Operating cash flow turned negative, largely reflecting the net loss and a $40.7 million increase in accounts receivable.
- Accounts receivable increased to $127.9 million from $92.7 million, while the allowance for doubtful accounts increased to $12.1 million from $5.7 million. The quarter included a $5.2 million allowance related to estimated unrecoverable chargebacks from one merchant.
Guidance, outlook, commentary, risks and unusual items
- No specific quantitative revenue or earnings guidance is provided in the filing.
- Management expects continued growth from software-integrated payments, expanded end-to-end payment adoption, product investment, software partnerships and strategic acquisitions.
- The March 3, 2021 VenueNext acquisition had total consideration of $68.5 million, including $42.2 million in cash, $24.5 million of Class A common stock and $1.8 million of assumed equity awards. It added $48.4 million of goodwill and $18.5 million of intangible assets on a preliminary basis.
- The company invested $16.0 million in SpaceX during the quarter. Subsequent to quarter-end, it invested an additional $11.5 million in SpaceX and $2.0 million in Sightline Payments.
- The company accepted a noncash contribution valued at $2.1 million representing the right to select a participant for an Inspiration4 seat; the amount was expensed in advertising and marketing. Certain related promotional costs were reimbursable by the Founder.
- COVID-19 remains a significant uncertainty, particularly for restaurant, hospitality, travel and leisure merchants. Management believes liquidity is sufficient for at least the next 12 months.
- Other principal risks include competition, reliance on third-party vendors and software partners, acquisition integration, goodwill and intangible-asset impairment, regulatory compliance, debt restrictions, tax distributions and Tax Receivable Agreement obligations, and significant voting influence by the Founder and Searchlight.
- The company revised the prior-year financial statements for an immaterial acquired-technology impairment and a cost-of-sales classification error. Q1 2020 net loss was revised to $(5.1) million; the revisions had no cash-flow impact.
- The company adopted ASU 2020-06 on January 1, 2021, increasing reported long-term debt by $109.9 million and reducing additional paid-in capital by $111.5 million.
Most important facts for investors to verify
- Whether payment volume recovery remains durable as COVID-19 effects, merchant reopenings and consumer spending patterns evolve.
- Whether the large increase in operating expenses, particularly marketing, equity compensation and acquisition-related costs, normalizes as management expects.
- The collectability of accounts receivable and the adequacy of the $12.1 million doubtful-account allowance following the $5.2 million merchant chargeback issue.
- VenueNext and Shift4Shop revenue contribution, integration progress and the realization of expected synergies.
- Cash conversion and working-capital requirements, given negative operating cash flow in Q1 2021 despite positive Adjusted EBITDA.
- Debt maturity, conversion and refinancing risks associated with the $690.0 million 2025 Notes and $450.0 million 2026 Notes.
- The impact of future acquisitions, investments, goodwill and intangible assets on leverage, liquidity and impairment exposure.
- Potential future tax distributions and Tax Receivable Agreement payments, which were not recognized as probable at March 31, 2021.