Shift4 Payments, Inc. annual report, FY2022

Shift4 Payments, Inc. 2022 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2022. The filing is an annual Form 10-K, not a standalone fourth-quarter filing; quarterly Q4 results are not separately presented in the supplied text.

Business context

Shift4 provides integrated payment processing, merchant acquiring, gateway services, point-of-sale software, eCommerce tools, business intelligence, security, and related technology solutions. Its customers range from small businesses to multinational enterprises across hospitality, food and beverage, stadiums, gaming, specialty retail, nonprofits, eCommerce, and other verticals. The company operates as one reportable segment and derives the majority of revenue from payment-processing fees.

End-to-end payment volume was $71.6 billion, up from $46.7 billion in 2021.
The company had more than 500 software integrations and approximately 2,300 employees at year-end.
No individual merchant represented more than 2% of end-to-end payment volume, and no software-partner relationship represented more than 10% of such volume.

Key financial metrics

Metric	2022	2021	Change
Gross revenue	$1,993.6 million	$1,367.5 million	Up 45.8%
Payments-based revenue	$1,857.1 million	$1,258.0 million	Up 47.6%
Subscription and other revenue	$136.5 million	$109.5 million	Up 24.7%
Gross revenue less network fees	$727.5 million	$529.0 million	Up 37.5%
Gross revenue less network fees margin	36.5%	38.7%	Down approximately 220 bps
Income from operations	$94.7 million	$(49.2) million	Improved $143.9 million
Operating margin	4.7%	(3.6%)	Improved
Net income	$86.7 million	$(74.0) million	Improved $160.7 million
Net income attributable to Shift4	$75.1 million	$(48.2) million	Improved $123.3 million
Diluted earnings per share	$1.05	$(0.89)	Improved
Adjusted EBITDA	$289.7 million	$167.2 million	Up 73.3%
Adjusted EBITDA margin	14.5%	12.2%	Up approximately 230 bps

2022 net income benefited from a $36.6 million favorable revaluation of contingent liabilities and a $15.1 million unrealized gain on investments in securities. The 2021 results included $26.3 million of expenses related to the TSYS processing outage, including $23.1 million of merchant payments and $2.8 million of partner payments.

Cash flow, liquidity, and debt

Net cash provided by operating activities was $275.4 million, compared with $3.0 million in 2021.
Net cash used in investing activities was $516.8 million, driven by $275.5 million of residual commission buyouts, $135.3 million of acquisitions, $53.8 million of equipment purchases for lease, and $42.7 million of capitalized software development.
Net cash used in financing activities was $214.6 million, primarily reflecting $185.9 million of stock repurchases.
Cash and cash equivalents were $776.5 million at December 31, 2022, down from $1,231.5 million at year-end 2021.
Total principal debt was $1,772.5 million: $690.0 million of 2025 convertible notes, $450.0 million of 2026 senior notes, and $632.5 million of 2027 convertible notes. All were fixed-rate obligations.
The company had no borrowings under its $100.0 million revolving credit facility, leaving the full stated capacity available at year-end.
Future interest payments on outstanding debt totaled $99.1 million, including $24.0 million payable within twelve months.
Management stated that 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.

Material changes versus 2021

End-to-end payment volume increased 53.4%, supporting strong growth in payments-based revenue.
The company launched SkyTab POS and continued converting gateway-only merchants to its higher-value end-to-end offering.
Shift4 completed $318.9 million of residual commission buyouts, including $305.4 million under its strategic distribution-insourcing program. These transactions increased near-term investment and future amortization expense.
Acquisitions included The Giving Block for $106.9 million, Online Payments Group for $125.9 million, and several restaurant technology partners for $80.3 million, in each case net of cash acquired.
The company repurchased 3.9 million Class A shares for $184.4 million at an average price of $47.40 per share and retired all repurchased shares outstanding at year-end.
General and administrative expense increased 21.8%, depreciation and amortization increased 55.1%, and professional fees increased 98.2%, primarily due to growth, acquisitions, and buyout activity.
Advertising and marketing expense declined 48.4% as 2021 rebranding and Inspiration4-related costs did not recur.
The previously reported material weakness concerning classification of customer acquisition costs in the cash-flow statements was reported as fully remediated as of December 31, 2022. The auditor gave an unqualified opinion on both the financial statements and internal control over financial reporting.

Outlook, commentary, risks, and unusual items

Management expects continued growth from integrated payments, expansion into international markets, conversion of gateway-only merchants, larger and more sophisticated merchants, technology investments, and acquisitions. The pending Finaro acquisition was expected to close in the second quarter of 2023, subject to regulatory approvals, for $200.0 million in cash, approximately $325.0 million of Class A stock based on the agreement-date valuation, and a potential stock-based earnout of up to $50.0 million.

The filing does not provide a clear numerical revenue, earnings, or payment-volume guidance range. Management expects seasonal fluctuations, with revenue historically strongest in the second and third quarters and weakest in the first quarter.

Acquisition and earnout exposure: Contingent consideration was material and valued using Level 3 assumptions. The Giving Block earnout had a maximum potential payment of $246.0 million, while Online Payments Group had a maximum potential earnout of $60.0 million.
Leverage and liquidity: Significant debt maturities begin in 2025, including $690.0 million of convertible notes, followed by $450.0 million of senior notes in 2026 and $632.5 million of convertible notes in 2027.
Processing concentration: The company relies on a single third-party processor for important authorization, processing, risk, chargeback, clearing, and settlement functions, and relies on a sponsor bank for access to certain payment networks.
Cybersecurity and outages: The company reported frequent phishing and distributed denial-of-service attempts in 2022 and remains exposed to system failures, cyberattacks, fraud, chargebacks, and third-party disruptions.
Macro and regulatory risks: Inflation, weaker consumer spending, COVID-19 effects, geopolitical developments, payment-network fee changes, privacy regulation, cryptocurrency regulation, and international expansion could affect revenue, costs, and margins.
Tax Receivable Agreement: Shift4 recognized a $1.7 million TRA liability but had not recognized an additional estimated $260.7 million liability because realization of the related tax benefits was not considered probable. The TRA generally requires payment of 85% of realized or deemed-realized tax benefits to specified equity holders.
Ownership and governance: Founder Jared Isaacman controlled approximately 84.2% of voting power at year-end through the multi-class structure, giving him significant influence over stockholder matters.
Unusual accounting items: The company changed useful lives for certain residual commission buyouts, equipment under lease, and customer acquisition costs effective October 1, 2022, reducing expense and increasing 2022 earnings per share.

Most important facts for investors to verify

Whether payment-volume growth and the 36.5% gross revenue less network fees margin are sustainable after the 2022 expansion and acquisition activity.
The cash requirements and refinancing or conversion strategy for the $690.0 million of 2025 convertible notes and subsequent debt maturities.
The actual cash and stock payments required under acquisition and residual commission buyout earnouts.
Progress, regulatory approval, purchase accounting, and integration results for the Finaro acquisition.
Whether the distribution-insourcing strategy produces expected merchant retention, revenue growth, and return on invested capital.
The status of the sponsor-bank arrangement, including the $33.0 million deposited in January 2023 to cover merchant-settlement overdrafts until an amendment is finalized.
Whether the remediated internal-control weakness remains effective and whether controls over the two 2022 acquisitions, which were excluded from the year-end assessment, are fully integrated.
The potential future impact of the unrecognized TRA liability, tax valuation allowances, and acquired uncertain tax positions.
Exposure to cybersecurity incidents, chargebacks, payment-network changes, third-party processor disruption, and regulatory requirements affecting payments and cryptocurrency services.