Shift4 Payments, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2020, with comparisons to the respective 2019 periods. Shift4 provides integrated payment processing, gateway, point-of-sale, software, analytics and related technology solutions, with significant exposure to restaurant, lodging and leisure merchants.
The company completed its initial public offering on June 9, 2020, issuing 17.25 million Class A shares at $23.00 per share. It also completed a $100.0 million private placement of Class C shares. Net proceeds from the IPO and private placement totaled approximately $463.8 million. Following the reorganization, Shift4 Payments, Inc. owned 49.8% of Shift4 Payments, LLC economically and consolidated the LLC, with a 50.2% noncontrolling interest.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Gross revenue | $141.8 million | $180.5 million | $341.2 million | $335.5 million |
| Gross profit | $32.3 million | $43.6 million | $76.8 million | $82.2 million |
| Gross margin | 22.8% | 24.2% | 22.5% | 24.5% |
| Loss from operations | $(57.0) million | $4.2 million | $(48.5) million | $3.1 million |
| Net loss | $(75.0) million | $(8.2) million | $(80.2) million | $(21.7) million |
| Net loss attributable to Shift4 Payments, Inc. | $(74.0) million | Not separately presented | $(79.2) million | Not separately presented |
| Adjusted EBITDA | $14.8 million | $24.0 million | $32.3 million | $44.6 million |
| End-to-end payment volume | $4.24 billion | $5.50 billion | $10.39 billion | $10.16 billion |
Q2 gross revenue declined 21.4%, primarily because payment-based revenue fell 24.0% as end-to-end payment volume declined 22.9%. Subscription and other revenue declined 1.9%. Six-month revenue increased 1.7%, as the Merchant Link acquisition and pre-pandemic performance offset the second-quarter disruption.
Operating expenses included $50.0 million of equity-based compensation and approximately $11.0 million of change-of-control liabilities associated with the IPO. Q2 also included a $7.1 million non-cash loss on extinguishment of debt. Effective June 30, 2020, the company modified its SaaS arrangements and changed the accounting for hardware from sales-type leases to operating leases, resulting in a $12.4 million favorable operating adjustment.
Net cash provided by operating activities was $6.7 million for the six months, compared with $22.9 million in 2019. Investing cash use was $16.7 million, including $5.1 million of capitalized software development and $9.8 million of customer acquisition costs. Financing activities provided $250.3 million, primarily reflecting IPO and private-placement proceeds, partially offset by debt repayments.
Cash was $244.0 million at June 30, 2020, compared with $3.7 million at December 31, 2019. Total borrowings were $452.6 million, consisting primarily of a $450.0 million First Lien Term Loan Facility and $2.6 million of other financing arrangements. The $130.0 million Second Lien Term Loan and $89.5 million of revolving borrowings were repaid during June. The revolver had $89.5 million of remaining capacity, net of a $0.5 million letter of credit.
Material changes versus the prior comparable period
- COVID-19 materially reduced hospitality and restaurant transaction volumes beginning in mid-March; Q2 end-to-end payment volume fell 22.9% year over year, although six-month volume increased 2.0%.
- Management reported that trailing seven-day end-to-end volume at June 30 was approximately 90% of pre-COVID levels.
- Gross margin declined because of lower volume and higher other costs of sales, including equipment deployments, acquisition-cost amortization and Merchant Link-related costs.
- General and administrative expense increased 241.8% in Q2, mainly because of IPO-related equity compensation and change-of-control costs.
- Merchant Link contributed approximately $3.7 million of Q2 revenue and $7.3 million of six-month revenue.
- Debt was reduced by approximately $189.8 million in June using IPO and private-placement proceeds, eliminating the second-lien and revolver balances.
- Contingent liabilities declined substantially, from $32.3 million at December 31, 2019 to $0.6 million at June 30, 2020, primarily through settlement of change-of-control obligations with stock and RSUs.
Guidance, outlook, commentary and risks
The filing does not provide formal quantitative revenue or earnings guidance. Management expects the COVID-19 pandemic to remain a material source of uncertainty for the second half of 2020. Cost actions included furloughing approximately 25% of employees, accelerating approximately $30 million of annual acquisition-related expense reductions, reducing management salaries, freezing hiring and reprioritizing capital projects. Approximately 75% of furloughed employees had returned by June 30.
Management stated that the company believed it had sufficient liquidity and expected to remain in compliance with debt covenants for at least 12 months after issuance of the financial statements. However, $450.0 million of debt remained variable-rate and unhedged; a 100-basis-point increase in rates would increase annual interest expense by approximately $4.5 million.
- COVID-19 could cause renewed merchant closures, lower consumer spending, additional volume declines, higher chargebacks and merchant receivable losses.
- The company has substantial goodwill and intangible assets, totaling approximately 61% of total assets at June 30, 2020, creating impairment risk.
- The company relies on third-party processors, sponsor banks, payment networks, software providers and limited suppliers.
- Cybersecurity, privacy, data protection, fraud, chargebacks and payment-network compliance remain material operational and regulatory risks.
- The Tax Receivable Agreement generally requires payment of 85% of certain realized or deemed realized tax benefits to continuing equity owners and other parties. No liability was recognized at June 30 because payments were not considered probable; an early termination liability was estimated at approximately $383.5 million under stated assumptions.
- Founder Jared Isaacman and Searchlight controlled approximately 96.9% of voting power, creating concentrated control and related-party governance risks.
Important facts for investors to verify
- Whether payment volumes remain near or return to pre-COVID levels, particularly in lodging, leisure and food service.
- Whether cost reductions and the return of furloughed employees affect service quality, merchant retention and growth.
- The sustainability of positive adjusted EBITDA despite negative GAAP operating income and significant IPO-related adjustments.
- Debt maturity, variable-rate exposure, covenant compliance and available revolver capacity.
- The potential future cash cost of the Tax Receivable Agreement and distributions required to support the public-company structure.
- The effect of the SaaS lease-accounting modification on future revenue, earnings and cash-flow comparability.
- Potential goodwill or intangible-asset impairment if merchant volumes or expected cash flows deteriorate.