Shift4 Payments, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Shift4 provides integrated payment processing, merchant acquiring, gateway, point-of-sale, e-commerce and related technology solutions through a network of more than 7,000 software partners. Its primary verticals include lodging, leisure, stadiums and arenas, food and beverage, and other hospitality-related businesses.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons primarily to the three and nine months ended September 30, 2020. Comparability is affected by the June 2020 IPO and reorganization, acquisitions, the COVID-19 recovery and revisions to prior-period financial statements.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Gross revenue | $377.8 million | $214.8 million | $968.1 million | $556.0 million |
| Gross revenue growth | 75.9% | — | 74.1% | — |
| End-to-end payment volume | $13.5 billion | $7.1 billion | $33.3 billion | $17.5 billion |
| Gross profit | $64.4 million | $51.5 million | $194.3 million | $126.5 million |
| Gross margin | 17.0% | 24.0% | 20.1% | 22.8% |
| Loss from operations | $(5.6) million | $(3.9) million | $(44.2) million | $(52.1) million |
| Net loss | $(13.8) million | $(9.8) million | $(60.3) million | $(89.7) million |
| Net loss attributable to Shift4 | $(9.2) million | $(5.0) million | $(38.8) million | $(6.0) million |
| Adjusted EBITDA | $55.8 million | $28.7 million | $123.2 million | $61.0 million |
| Net cash from operating activities | — | — | $25.6 million | $17.0 million |
Payments-based revenue increased 76.3% in Q3 and 79.5% for the nine-month period, primarily reflecting higher payment volumes. Subscription and other revenue increased 71.7% in Q3 and 30.7% year to date, aided by the 3dcart/Shift4Shop, VenueNext, hospitality technology vendor and Postec acquisitions.
Gross profit increased year over year, but gross margin declined because network fees and other costs of sales grew faster than revenue. Q3 gross profit and net loss included the effects of the TSYS outage and related payments to merchants and partners.
Q3 EBITDA was $20.4 million versus $20.8 million in the prior-year quarter. Adjusted EBITDA increased to $55.8 million from $28.7 million. Year-to-date EBITDA was $32.6 million versus $1.1 million, while adjusted EBITDA was $123.2 million versus $61.0 million.
Liquidity, cash flow and debt
- Cash and cash equivalents were $1.288 billion at September 30, 2021, compared with $927.8 million at December 31, 2020.
- Operating cash flow was $25.6 million for the nine months, compared with $17.0 million in the prior-year period.
- Investing cash outflow was $162.0 million, including acquisitions, equipment for lease, software development, customer acquisition costs and a $27.5 million investment in SpaceX.
- Financing cash inflow was $496.7 million, primarily reflecting $617.7 million of net proceeds from the July 2021 2027 Convertible Notes offering, partially offset by $119.7 million of employee tax payments related to vested restricted stock units.
- Total debt principal was $1.7725 billion, consisting of $690.0 million of 2025 Convertible Notes, $632.5 million of 2027 Convertible Notes and $450.0 million of 2026 Senior Notes. The carrying value of long-term debt was $1.7368 billion after financing costs.
- The company had no borrowings under its $100.0 million revolving credit facility and approximately $99.5 million of available capacity, net of a letter of credit. Management reported compliance with debt covenants and expects compliance for at least 12 months following issuance of the financial statements.
Material changes versus the prior comparable period
- End-to-end payment volume increased approximately 90% in both Q3 and the nine-month period; management attributed the recovery to merchant reopenings, new merchant onboarding and gateway conversions. Q3 volume was also approximately 14% above Q2 2021.
- The company acquired VenueNext in March 2021 for $66.9 million net of cash acquired and Postec in September 2021 for $14.0 million net of cash acquired.
- Debt increased materially following the July 2021 issuance of $632.5 million of 2027 Convertible Notes.
- General and administrative expense increased 35.9% in Q3, while year-to-date growth was 5.9%. Year-to-date professional fees and advertising and marketing expenses increased substantially due to acquisitions, public-company costs, Shift4Shop integration and the Inspiration4 marketing initiative.
- Interest expense declined 37.1% year to date because of prior debt repayments and refinancing, partially offset by interest from the 2027 Convertible Notes.
- The company adopted ASU 2021-08 for acquired revenue contracts, increasing deferred revenue by $5.7 million and increasing 2021 gross revenue by $1.8 million. Adoption of ASU 2020-06 increased reported long-term debt by $109.9 million and reduced additional paid-in capital by $111.5 million.
- Prior-period 2020 financial statements were revised for an intangible-asset impairment and expense classification corrections; the revisions had no impact on cash flows.
Guidance, outlook, commentary and risks
The filing does not provide explicit quantitative revenue or earnings guidance. Management expects continued growth from software-integrated payments, end-to-end payment adoption, new products, software partners and strategic acquisitions. It also expects continued investment in product development, distribution and operating support.
Management stated that it believes available liquidity is sufficient for at least the next 12 months, while continuing to monitor the effects of COVID-19 and its variants. International and corporate travel volumes remained below pre-pandemic levels, although overall payment volumes had recovered significantly.
On August 21, 2021, TSYS experienced a significant processing outage. Shift4 paid $22.4 million to merchants and $2.3 million to partners, plus approximately $0.4 million of related expenses. These items reduced reported gross profit by $24.9 million and net loss by $25.1 million and were excluded from adjusted EBITDA. Shift4 is seeking compensation through various channels, but the filing does not provide a clear expected recovery amount.
Other notable items include a $5.5 million allowance for estimated unrecoverable chargebacks associated with one merchant, approximately $20.4 million of year-to-date costs related to Shift4Shop integration and rebranding, and $3.7 million of Inspiration4-related costs. The company maintains a full valuation allowance against deferred tax assets at Shift4 Payments, Inc. and has not recognized a Tax Receivable Agreement liability because payments were not considered probable.
Principal risks include COVID-19-related volume volatility, competition, reliance on third-party processors and vendors, payment outages, chargebacks, acquisition integration, goodwill and intangible-asset impairment, regulatory compliance, debt obligations, restrictions on distributions from Shift4 Payments, LLC, and significant influence held by the founder and Searchlight. The company reported no material changes to the risk factors in its 2020 Form 10-K.
Important facts for investors to verify
- Assess recurring operating performance excluding the TSYS outage, acquisition and integration costs, equity compensation and other management-defined adjustments.
- Reconcile the reported gross revenue and gross margin trends with payment volume growth, network fees, residual commissions and merchant mix.
- Evaluate the company’s ability to generate sustainable positive operating cash flow while funding acquisitions, leased equipment and software development.
- Review the $1.7725 billion debt balance, 2025 and 2027 convertible-note settlement provisions, refinancing risks and covenant restrictions.
- Monitor COVID-19 effects on hospitality, travel and corporate-related payment volumes and the company’s exposure to third-party processing outages.
- Review the potential impact of chargebacks, merchant failures, the TSYS compensation process and other contingencies.
- Consider dilution from convertible notes, LLC-interest exchanges, restricted stock units and the multi-class ownership structure.
- Confirm the effect of the 2021 acquisitions and whether their expected revenue synergies and integration benefits are materializing.
- Verify the company’s expected transition from emerging growth company status to large accelerated filer as of December 31, 2021.