Shift4 Payments, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Shift4 provides integrated payment processing, merchant acquiring, proprietary gateway, point-of-sale, eCommerce, software and related technology solutions across industries including food and beverage, hospitality, gaming, retail, nonprofit and enterprise commerce. The unaudited report covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Gross revenue | $547.0 million | $401.9 million | Up 36.1% |
| Payments-based revenue | $511.0 million | $371.5 million | Up 37.6% |
| End-to-end payment volume | $22.3 billion | $13.4 billion | Up 65.8% |
| Income from operations | $8.8 million | $(11.7) million | Improved $20.5 million |
| Net income | $20.4 million | $(13.2) million | Improved $33.6 million |
| Net income attributable to Shift4 | $14.8 million | $(7.5) million | Improved $22.3 million |
| Diluted EPS | $0.24 | $(0.13) | Improved |
| Adjusted EBITDA | $89.3 million | $44.3 million | Up 101.6% |
| Net cash from operating activities | $79.4 million | $30.8 million | Up $48.6 million |
Payments-based revenue represented approximately 93% of gross revenue. Gross revenue less network fees, a non-GAAP measure, was $200.0 million, or approximately 36.6% of gross revenue, compared with $148.8 million, or approximately 37.0%, in the prior-year quarter. GAAP gross profit was $138.2 million, approximately 25.3% of revenue, versus $77.6 million, or approximately 19.3%, previously. GAAP operating margin was approximately 1.6%, compared with negative 2.9% in Q1 2022. Adjusted EBITDA margin was approximately 16.3%, compared with 11.0%.
Cash and cash equivalents were $743.9 million at March 31, 2023, with an additional $74.0 million of restricted cash. Total cash and cash equivalents plus restricted cash increased to $817.9 million from $776.5 million at December 31, 2022. Accounts receivable was $209.3 million, and total assets were $2.6 billion.
Total debt principal was $1.7725 billion, consisting of $690.0 million of 2025 convertible notes, $450.0 million of 2026 senior notes and $632.5 million of 2027 convertible notes. The revolving credit facility had $100.0 million of available capacity and no borrowings outstanding. Management stated that the Company was in compliance with its debt covenants and expected to remain compliant for at least the next 12 months.
Material changes versus the prior comparable period
- End-to-end payment volume increased 65.8%, driving the increase in payments-based revenue and operating leverage.
- Network fees increased 37.1% to $347.0 million, while other costs of sales declined 15.0% to $54.6 million, primarily due to lower residual commissions following the 2022 strategic buyout program and a longer amortization period for customer acquisition costs.
- General and administrative expense increased 29.5% to $85.7 million, reflecting acquisitions, business expansion and higher employee-related costs.
- Depreciation and amortization expense more than doubled to $35.3 million, primarily due to amortization of residual commission buyouts completed in 2022.
- The Company recorded a $7.0 million expense from revaluation of acquisition-related contingent liabilities, primarily related to Online Payments Group.
- Interest income increased to $7.6 million from an immaterial amount, reflecting higher cash balances and interest rates. The Company also recorded an $8.9 million non-cash unrealized gain on investments in securities.
- Operating cash flow increased to $79.4 million from $30.8 million. Investing cash use declined to $31.4 million from $37.6 million, while financing cash use declined to $7.0 million from $35.7 million, principally because Q1 2022 included $18.7 million of share repurchases and higher equity-award tax withholding payments.
Outlook, commentary, risks and unusual items
Management stated that cash and cash flows from operations are expected to fund operating expenses and capital expenditures for at least the next 12 months and into the foreseeable future under the current operating plan. The filing does not provide a specific quantitative revenue, earnings or EBITDA guidance range.
The planned acquisition of Finaro remained pending, subject to regulatory approvals expected by management in 2023. The agreed consideration includes $200.0 million of cash, 6,439,316 Class A shares valued at approximately $325.0 million at signing, and a performance-based earnout of up to $50.0 million in Class A shares.
Subsequent to quarter-end, Shift4 acquired Focus POS Systems for $45.0 million, consisting of $35.0 million of cash and $10.0 million of Class A shares. The initial purchase-price allocation was incomplete at the filing date. The Company also authorized a new share repurchase program of up to $250.0 million through December 31, 2023.
Material cash obligations include $1.7725 billion of debt principal, $97.5 million of future debt interest payments, and $27.0 million of future operating lease payments. The fair value of contingent liabilities potentially payable in cash was $31.7 million, with $31.4 million payable within 12 months; the maximum potential cash amount was $58.0 million.
Key risks include intense payments-industry competition, macroeconomic and consumer-spending weakness, inflation, dependence on third-party vendors and sponsor banks, cybersecurity and data-security threats, execution and integration risks from acquisitions, international expansion and foreign exchange exposure, merchant and software-partner retention, and the Founder’s significant voting influence. The filing states that there were no material changes to previously disclosed risk factors and no known legal proceedings expected to materially affect the Company.
Important facts for investors to verify
- Confirm the sustainability of the 65.8% payment-volume growth and whether growth reflects organic performance, acquisitions, or changes in merchant mix.
- Reconcile GAAP earnings with Adjusted EBITDA, particularly the effects of equity-based compensation, acquisition costs, contingent-liability revaluations and the $8.9 million investment gain.
- Monitor the $40.2 million Online Payments Group earnout, other acquisition earnouts and the timing of related cash and equity settlements.
- Assess debt-refinancing and liquidity requirements ahead of the $690.0 million 2025 maturity, $450.0 million 2026 maturity and $632.5 million 2027 maturity.
- Evaluate the pending Finaro acquisition, including regulatory timing, final consideration and integration requirements.
- Review the potential Tax Receivable Agreement exposure: only $2.2 million was recognized as probable at March 31, 2023, while the filing states that an additional $291.6 million liability was not recognized because realization of the related tax benefits was not considered probable.
- Track restricted cash requirements under the amended sponsor-bank agreement, which generally require the greater of $25.0 million or 110% of the highest merchant-settlement overdraft balance over a rolling 90-day period.