Shift4 Payments, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2020. Shift4 provides integrated payment processing, merchant acquiring, gateway services, point-of-sale, ecommerce, business intelligence, security and related technology solutions, primarily in the United States. It distributes products through more than 7,000 software partners and serves more than 185,000 small and medium-sized businesses.
The company completed its initial public offering and related reorganization in June 2020. Accordingly, pre-IPO results principally reflect Shift4 Payments, LLC, while post-IPO results reflect Shift4 Payments, Inc. and its consolidated subsidiaries, including noncontrolling interests.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Gross revenue | $766.9 million | $731.4 million | 4.9% increase |
| Payments-based revenue | $684.2 million | $643.6 million | 6.3% increase |
| Subscription and other revenue | $82.7 million | $87.8 million | 5.8% decrease |
| Gross profit | $177.8 million | $173.4 million | 2.5% increase |
| Gross revenue less network fees | $323.0 million | $305.5 million | 5.7% increase |
| Loss from operations | $57.6 million | $4.4 million | Loss increased |
| Net loss | $111.4 million | $56.6 million | Loss increased 96.8% |
| Adjusted EBITDA | $87.7 million | $89.8 million | 2.3% decrease |
| End-to-end payment volume | $24.3 billion | $22.1 billion | 9.8% increase |
| Net cash from operating activities | $23.4 million | $26.7 million | Decrease |
Gross margin was approximately 23.2%, compared with 23.7% in 2019. The filing does not present a separate adjusted EBITDA margin, but adjusted EBITDA was approximately 11.4% of gross revenue in 2020 versus 12.3% in 2019.
Fourth-quarter 2020 gross revenue was $210.9 million, gross profit was $51.3 million and net loss was $21.7 million. Fourth-quarter end-to-end payment volume was more than 12% above the fourth quarter of 2019, despite continued COVID-19 effects.
Liquidity, capital resources and debt
- Cash and cash equivalents totaled $927.8 million at December 31, 2020, compared with $3.7 million at December 31, 2019.
- Net cash used in investing activities was $102.1 million, including acquisitions, capitalized software, customer acquisition costs and $14.5 million of equipment purchased for lease.
- Net cash provided by financing activities was $1.0 billion, primarily from the IPO, follow-on offering, senior notes and convertible notes, partly offset by debt repayments.
- Total debt principal outstanding was $1.14 billion, consisting of $450.0 million of 4.625% senior notes due 2026 and $690.0 million of zero-coupon convertible senior notes due 2025. The balance sheet carried the 2025 Notes at $577.5 million before related financing adjustments.
- The prior first-lien term loan, second-lien term loan and revolving credit borrowings were repaid during 2020. No revolving borrowings were outstanding at year-end; available capacity was $89.5 million, net of a $0.5 million letter of credit.
- On January 29, 2021, the revolving facility was amended and its capacity increased to $100.0 million.
- Management stated that the company expected sufficient liquidity for at least the next twelve months and was in compliance with applicable financial covenants.
Material changes versus the prior comparable period
- COVID-19 caused end-to-end payment volume to decline approximately 70% beginning in mid-March 2020, with particularly severe effects on hospitality and restaurant merchants. Volumes subsequently recovered, and full-year 2020 volume exceeded 2019.
- Management furloughed approximately 25% of employees, accelerated approximately $30.0 million of annual expense reductions, deferred selected capital projects, froze hiring temporarily and reduced management salaries. Substantially all furloughed employees were reinstated by the third quarter, the hiring freeze was lifted in August, and salary reductions were fully reinstated by October.
- Payments-based revenue and payment volume increased, while subscription and other revenue declined primarily because hardware arrangements changed from sales-type lease accounting to operating-lease accounting effective June 30, 2020.
- General and administrative expense increased 53.7% to $180.0 million, primarily because of $66.2 million of equity-based compensation and acquisition-related costs.
- The company recorded a $16.6 million loss on extinguishment of debt and a $12.4 million favorable one-time adjustment related to the SaaS lease modification.
- The company acquired 3dcart for $39.9 million in cash plus $19.2 million of Class A stock and acquired a hospitality technology vendor for approximately $9.9 million in cash. 3dcart was subsequently rebranded as Shift4Shop.
- The filing revises previously issued 2018 and 2019 financial statements for an acquired-technology impairment and expense classification errors. Management stated the errors were not material to the previously issued statements.
Guidance, outlook, commentary and risks
- The filing does not provide formal 2021 revenue, EBITDA or earnings guidance.
- Management expects continued investment in integrated payments, mobile point-of-sale, ecommerce, software integrations, distribution and operational support. It also expects strategic acquisitions to support long-term growth, while acknowledging possible short-term integration costs.
- The company expects significant, nonrecurring first-quarter 2021 expenses related to integrating and rebranding 3dcart as Shift4Shop.
- Subsequent events include the March 2021 acquisition of VenueNext for approximately $41.5 million in cash and $30.5 million of Class A stock, a commitment of up to $27.5 million to purchase SpaceX shares and acceptance of a donated Inspiration4 spaceflight seat, for which any financial impact was still being evaluated.
- Principal risks include the continuing effects of COVID-19, exposure to hospitality and restaurant spending, intense competition, reliance on a single third-party processor and sponsor bank, cybersecurity and data privacy obligations, chargebacks and merchant credit risk, regulatory changes, acquisition integration, goodwill and intangible-asset impairment, and substantial leverage.
- The company is a holding company dependent on distributions from Shift4 Payments, LLC. It has a tax receivable agreement requiring payments generally equal to 85% of certain realized or deemed tax benefits. No TRA liability was recorded at year-end because management concluded payments were not probable, but the filing describes potentially substantial future obligations.
- Searchlight and the founder controlled approximately 91.2% of voting power at December 31, 2020. The dual- and triple-class structure, controlled-company status and related-party arrangements limit public stockholder influence.
Most important facts for investors to verify
- Reconcile reported revenue growth and payment-volume recovery with underlying trends by merchant vertical, especially hospitality and restaurants.
- Assess sustainable operating profitability separately from the $66.2 million equity-compensation expense, lease-accounting adjustment, debt-extinguishment loss and other adjusted EBITDA add-backs.
- Review debt maturities, conversion conditions and potential cash settlement or dilution associated with the $690.0 million 2025 Notes.
- Evaluate liquidity after acquisitions, equipment leasing, working-capital requirements and any expansion of accelerated merchant-funding programs.
- Monitor the unrecorded TRA exposure, including the disclosed estimated liability of approximately $624.8 million if remaining LLC interests were exchanged and the potential early-termination amount of approximately $690.8 million.
- Verify the impact of the revised prior-period financial statements and the accounting change for SaaS hardware leases.
- Track COVID-19 developments, merchant closures, chargebacks, consumer spending, cybersecurity incidents and payment-network or regulatory changes.
- Review governance and dilution implications of founder and Searchlight control, outstanding LLC interests, restricted stock units and potential conversion of the 2025 Notes.