Shift4 Payments, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Shift4 provides integrated payment processing, gateway, point-of-sale, e-commerce and related technology solutions through software partners and serves merchants across lodging, leisure, stadiums and arenas, food and beverage, and other verticals. This unaudited Form 10-Q covers the three and six months ended June 30, 2021. Comparisons with 2020 are affected by COVID-19 disruption and the June 2020 IPO and reorganization, which resulted in only partial post-IPO public-company results in the comparable 2020 quarterly period.
Financial performance and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Gross revenue | $351.0 million, up 147.5% | $590.3 million, up 73.0% |
| Payments-based revenue | $324.8 million, up 168.0% | $540.7 million, up 81.7% |
| Gross profit | $78.1 million; 22.3% margin | $129.9 million; 22.0% margin |
| Income (loss) from operations | $4.9 million; 1.4% margin | $(38.6) million; (6.5)% margin |
| Net income (loss) | $4.5 million; 1.3% margin | $(46.5) million; (7.9)% margin |
| Net income (loss) attributable to Shift4 | $3.2 million | $(29.6) million |
| Adjusted EBITDA | $45.2 million | $67.4 million |
| End-to-end payment volume | $11.8 billion, up approximately 180% | $19.8 billion, up approximately 91% |
| Net cash provided by operating activities | Not separately provided | $5.0 million |
Gross revenue less network fees was $136.3 million in the second quarter and $233.8 million for the first six months. Second-quarter EBITDA was $30.6 million, compared with $(45.8) million in the prior-year period; six-month EBITDA was $12.2 million, compared with $(19.7) million.
Liquidity, cash flow and debt
- Cash and cash equivalents were $699.7 million at June 30, 2021, compared with $927.8 million at December 31, 2020.
- Total debt principal was $1.140 billion, consisting of $690.0 million of 2025 Convertible Notes and $450.0 million of 4.625% 2026 Senior Notes. Reported long-term debt, net of financing costs, was $1.118 billion.
- The company had no borrowings under its revolving credit facility and had $99.5 million of available capacity, net of a $0.5 million letter of credit.
- Six-month investing cash outflow was $115.5 million, including the VenueNext acquisition, investments in SpaceX and Sightline Payments, equipment for lease, software development and other capital expenditures.
- Six-month financing cash outflow was $117.6 million, including $116.3 million of employee withholding taxes related to vested restricted stock units.
- Cash decreased by $228.1 million during the six months, ending at $699.7 million. Management stated that liquidity was sufficient for at least the next twelve months and that the company was in compliance with debt covenants.
Material changes versus the prior comparable period
- Payment volume and revenue recovered substantially from the COVID-19-affected second quarter of 2020, supported by merchant reopenings, new merchant onboarding and gateway conversions to the end-to-end offering.
- Second-quarter gross profit increased $46.5 million, while operating expenses declined $15.2 million. The improvement included a $49.9 million reduction in equity-based compensation versus the prior-year quarter, which included IPO-related change-of-control compensation.
- Interest expense declined to $6.3 million from $11.7 million in the second quarter and to $12.8 million from $25.0 million for the six-month period, reflecting debt repayments and refinancing.
- Six-month operating income remained negative despite revenue growth because of higher depreciation and amortization, professional fees, advertising and marketing costs, acquisition-related expenses, and integration and rebranding spending.
- The company acquired VenueNext on March 3, 2021 for $68.5 million of total consideration, net of cash acquired, including $42.2 million of cash, $24.5 million of Class A stock and $1.8 million of assumed equity awards.
- Advertising and marketing expense increased to $22.6 million for the six-month period, principally due to integrating and rebranding 3dcart as Shift4Shop and promoting the Inspiration4 mission. Management characterized related integration and promotional spending as largely nonrecurring.
- The company revised prior-year financial statements for an intangible-asset impairment error and a cost classification error. The revisions did not affect cash flows or reported 2020 per-share loss.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal quantitative revenue or earnings guidance. Management expects continued recovery in payment volumes but noted that international travel, corporate travel and stadium occupancy remained below pre-pandemic levels. COVID-19 and potential variants remain material uncertainties.
- Key risks include intense competition, reliance on third-party vendors and software partners, acquisition integration, merchant and industry concentration, technology interoperability, regulatory compliance, goodwill and intangible-asset impairment, and restrictions on distributions from Shift4 Payments, LLC.
- The company recorded a $5.5 million allowance for estimated unrecoverable chargebacks related to the failure of a single merchant during the six months.
- Nonmarketable investments totaled $29.5 million at June 30, 2021, comprising $27.5 million invested in SpaceX and $2.0 million in Sightline Payments.
- The company adopted ASU 2020-06 for convertible debt on January 1, 2021. Adoption increased reported long-term debt by $109.9 million and reduced additional paid-in capital by $111.5 million.
- On July 26, 2021, after quarter-end, the company issued $632.5 million of convertible senior notes due 2027 and received approximately $617.6 million of net proceeds for general corporate purposes.
- Management expected to cease qualifying as an emerging growth company as of December 31, 2021 because the market value of shares held by non-affiliates exceeded $700 million.
- The company reported effective disclosure controls as of June 30, 2021, no material changes in internal control over financial reporting, and no known legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- Assess the sustainability of payment-volume recovery after COVID-19-related comparisons normalize, including exposure to travel, hospitality and stadium activity.
- Reconcile GAAP net income and cash flow with Adjusted EBITDA, particularly the treatment of equity compensation, acquisition costs, integration spending and other nonrecurring items.
- Review leverage, refinancing and conversion risks associated with the $690.0 million 2025 Convertible Notes, $450.0 million 2026 Senior Notes and post-quarter-end 2027 notes issuance.
- Monitor working-capital requirements, merchant settlement balances, chargebacks and the allowance for doubtful accounts, which increased to $12.8 million.
- Evaluate the strategic and financial contribution of VenueNext, Shift4Shop and other acquisitions, including goodwill of $525.2 million at June 30, 2021.
- Consider the effect of noncontrolling interests, LLC-interest redemptions, the Tax Receivable Agreement and the founder and Searchlight voting control on common-stock investors.