Shift4 Payments, Inc. — Q3 2020 Form 10-Q Summary
Business context and reporting period
Shift4 provides integrated payment processing, merchant acquiring, gateway, point-of-sale, software and analytics solutions, primarily to lodging, leisure, food-and-beverage and other merchants in the United States. The filing covers the three and nine months ended September 30, 2020. Historical periods combine Shift4 Payments, LLC before the June 2020 reorganization and Shift4 Payments, Inc. after the IPO and reorganization, limiting direct comparability.
- End-to-end payment volume was $7.1 billion in the quarter and $17.5 billion year to date, compared with $5.9 billion and $16.1 billion, respectively, in the prior-year periods.
- The company completed its IPO and concurrent private placement in June 2020 and a follow-on offering in September 2020.
Financial results and key metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Gross revenue | $214.8 million | $193.8 million | $556.0 million | $529.3 million |
| Payments-based revenue | $196.8 million | $171.9 million | $494.4 million | $465.4 million |
| Gross profit | $51.5 million | $46.6 million | $128.3 million | $128.8 million |
| Gross margin | 24.0% | 24.0% | 23.1% | 24.3% |
| Loss from operations | $(4.0) million | $(9.3) million | $(52.5) million | $(6.2) million |
| Net loss | $(9.9) million | $(22.6) million | $(90.1) million | $(44.3) million |
| Net loss attributable to Shift4 Payments, Inc. | $(5.0) million | Not separately presented | $(84.2) million | Not separately presented |
| Adjusted EBITDA | $28.7 million | $24.5 million | $61.0 million | $69.1 million |
| Net cash provided by operating activities | Not separately presented | Not separately presented | $17.0 million | $33.1 million |
- Q3 gross revenue increased 10.8%, driven by a 14.5% increase in payments-based revenue. Subscription and other revenue declined 17.8%.
- Q3 gross profit increased 10.5%, while the gross margin was approximately unchanged. Nine-month gross profit declined slightly and margin contracted by approximately 120 basis points.
- Q3 operating loss improved primarily due to lower general and administrative, marketing and restructuring costs, lower interest expense and a $0.7 million tax benefit.
- Nine-month operating results were burdened by $56.2 million of equity-based compensation, $10.3 million of change-of-control liabilities related to the IPO, higher depreciation and amortization, and a $12.4 million one-time benefit from SaaS lease modifications.
- Adjusted EBITDA increased in Q3 but declined for the first nine months, partly reflecting COVID-19 fee waivers, IPO-related items and the lease-accounting change.
Liquidity, debt and capital resources
- Cash and cash equivalents were $328.9 million at September 30, 2020, compared with $3.7 million at December 31, 2019.
- Operating cash flow was $17.0 million for the first nine months, down from $33.1 million in 2019. Investing cash outflow was $31.9 million, and financing cash inflow was $340.1 million.
- Total borrowings were $451.8 million, consisting primarily of a $450.0 million First Lien Term Loan Facility. The Second Lien Term Loan and revolving credit facility were repaid in June 2020; revolving capacity was $89.5 million at quarter-end, net of a letter of credit.
- The company was in compliance with its debt covenants and stated that it expected to remain compliant for at least 12 months after issuance of the financial statements.
- On October 29, 2020, the company issued $450.0 million of 4.625% senior notes due 2026 and used the proceeds and cash on hand to repay the First Lien Term Loan Facility.
Material changes versus the prior comparable period
- COVID-19 materially reduced payment volumes beginning in mid-March, but volumes recovered to approximately 97% of pre-COVID levels for the seven days preceding September 30. Management reported that nine-month end-to-end volume exceeded the prior-year period.
- The company furloughed approximately 25% of its workforce, reduced management salaries, froze hiring and accelerated approximately $30.0 million of annual expense reductions. Substantially all furloughed employees had been reinstated by September 30, and the hiring freeze had been lifted.
- Effective June 30, hardware in SaaS arrangements was changed from sales-type lease accounting to operating-lease accounting. This moved equipment to the balance sheet, generated a one-time $12.4 million operating benefit, reduced subscription and other revenue, and increased depreciation.
- The June IPO generated approximately $362.6 million of net proceeds, and the concurrent private placement generated $100.0 million. The September follow-on offering generated $91.8 million of net proceeds for the company; proceeds from selling-stockholder shares went to those stockholders.
- Equity-based compensation became a significant expense following the IPO, with $56.2 million recognized in the first nine months.
- Subsequent acquisitions included a hospitality technology vendor for approximately $10.0 million and 3dcart for approximately $40.0 million in cash plus $19.6 million of Class A common stock.
Guidance, outlook, commentary and risks
The filing does not provide formal numerical revenue, earnings or EBITDA guidance. Management stated that liquidity was sufficient for expected cash needs over the following 12 months, while emphasizing that the full-year and fourth-quarter impact of COVID-19 remained uncertain.
- Key risks include renewed COVID-19 restrictions, merchant closures, reduced consumer spending, chargebacks and merchant credit losses, particularly in hospitality and restaurants.
- The company faces intense competition, reliance on third-party processors and sponsor banks, cybersecurity and data-privacy risks, payment-network requirements, and dependence on software partners and merchants.
- Goodwill and intangible assets represented a substantial portion of total assets and are subject to impairment risk.
- The company is subject to a Tax Receivable Agreement requiring payment of 85% of certain realized or deemed-realized tax benefits. No TRA liability was recognized as of September 30, 2020 because payments were not considered probable; the filing estimates a potential liability of approximately $439.0 million under specified full-exchange and early-termination assumptions.
- Founder Jared Isaacman and Searchlight controlled approximately 94.7% of voting power at September 30, 2020. The company is a controlled company under NYSE rules and relies on related governance exemptions.
- The company reported no material pending legal proceedings and concluded that disclosure controls were effective at the reasonable-assurance level.
Facts investors should verify
- Whether payment volumes remain near pre-COVID levels and whether hospitality and restaurant merchant health leads to higher chargebacks, bad debts or attrition.
- The post-refinancing interest expense, maturity profile and covenant terms of the 4.625% senior notes.
- The sustainability of adjusted EBITDA after excluding equity compensation, lease-accounting effects, IPO costs and other nonrecurring items.
- The effect of the SaaS lease-accounting change on recurring revenue, cash flow classification, equipment investment and depreciation.
- The timing and potential cash impact of future LLC-interest exchanges and the Tax Receivable Agreement.
- Integration results and purchase accounting for the October hospitality acquisition and 3dcart acquisition.