Shift4 Payments, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Shift4 provides integrated payment processing, merchant acquiring, gateway, point-of-sale, eCommerce, analytics and related technology solutions through more than 7,000 software partners and over 425 software integrations. The filing covers the unaudited three months ended March 31, 2022, compared with the three months ended March 31, 2021.
End-to-end payment volume was $13.4 billion, up 68.0% from $8.0 billion. Management stated that March 2022 volumes recovered from Omicron-related pressure and exceeded the prior-year period, although international and corporate travel remained below pre-pandemic levels.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Gross revenue | $401.9 million | $239.3 million | +67.9% |
| Payments-based revenue | $371.5 million | $215.9 million | +72.1% |
| Subscription and other revenue | $30.4 million | $23.4 million | +29.9% |
| Gross profit | $84.6 million | $51.8 million | +63.3% |
| Gross margin | 21.0% | 21.6% | Down approximately 60 bps |
| Loss from operations | $(11.7) million | $(43.5) million | Improved $31.8 million |
| Net loss | $(13.2) million | $(51.0) million | Improved $37.8 million |
| Net loss attributable to Shift4 | $(7.5) million | $(32.8) million | Improved $25.3 million |
| Loss per Class A and Class C share | $(0.13) | $(0.62) | Improved $0.49 |
| Adjusted EBITDA | $44.3 million | $22.2 million | +99.5% |
| Adjusted EBITDA margin on gross revenue | 11.0% | 9.3% | Up approximately 175 bps |
| Net cash provided by operating activities | $37.1 million | $(1.7) million | Improved $38.8 million |
Gross revenue less network fees was $148.8 million, up 52.6% year over year. EBITDA was $17.6 million versus negative $18.4 million in the prior-year period. Management uses gross revenue less network fees and Adjusted EBITDA as non-GAAP measures; these should not be viewed as substitutes for GAAP results.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $1.189 billion at March 31, 2022, compared with $1.232 billion at December 31, 2021.
- Total debt principal was $1.773 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. Debt maturities begin in 2025.
- Revolving Credit Facility availability was $99.5 million, net of a $0.5 million letter of credit; there were no revolver borrowings.
- The company reported compliance with its debt covenants and expected compliance for at least 12 months after issuance of the financial statements.
- Operating cash flow was $37.1 million, while investing cash outflows were $43.9 million and financing cash outflows were $35.7 million. Cash declined $42.5 million during the quarter.
- In the first quarter, the company repurchased 301,510 Class A shares for $17.2 million. Approximately $61.8 million remained available under the repurchase authorization at March 31, 2022. In April 2022, it repurchased an additional 1,126,277 shares for $61.3 million.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by a $5.4 billion increase in end-to-end payment volume, with additional subscription revenue from the VenueNext, Postec and The Giving Block acquisitions.
- Gross profit increased, but network fees grew faster than revenue, contributing to a modest decline in gross margin.
- Operating expenses were broadly stable at $96.3 million versus $95.3 million. Lower advertising and marketing costs, primarily because Q1 2021 included nonrecurring Shift4Shop rebranding costs, offset higher general and administrative, depreciation and amortization, professional and transaction-related expenses.
- Interest expense increased to $7.9 million from $6.5 million, primarily due to the 2027 Convertible Notes issued in July 2021.
- The company recorded a $6.2 million income tax benefit, including a $6.4 million benefit from releasing a valuation allowance related to deferred tax liabilities acquired with The Giving Block. The effective tax rate was negative 32.0% versus 1.6% in Q1 2021.
- Operating cash flow improved substantially, helped by the lower net loss and noncash items, despite a $20.0 million increase in accounts receivable.
Acquisitions, outlook and unusual items
- On February 28, 2022, Shift4 acquired The Giving Block, a cryptocurrency donation marketplace, for $106.9 million net of cash acquired. The purchase included $36.4 million of Class A shares and a contingent earnout with a fair value of $57.8 million at March 31, 2022. The earnout may reach $246.0 million, with 75% payable in equity and 25% in cash.
- On March 1, 2022, Shift4 agreed to acquire Finaro for approximately $200.0 million in cash, $325.0 million of Class A shares and a performance-based earnout of up to $50.0 million in Class A shares. Closing remains subject to regulatory approval, which management expected in the fourth quarter of 2022.
- The first quarter included $6.3 million of acquisition-related costs and $1.4 million of expenses associated with the 2026 Senior Notes consent solicitation. Adjusted EBITDA also excluded $17.1 million of equity-based compensation and $1.8 million of other nonrecurring items.
- Management expects continued growth from software-integrated payments, conversion of gateway-only merchants to end-to-end processing, larger merchants, product investment and strategic acquisitions. The filing does not provide specific quantitative revenue or Adjusted EBITDA guidance.
- COVID-19 remains a risk, particularly for international and corporate travel. Other highlighted risks include competition, reliance on third-party vendors and software partners, acquisition integration, cryptocurrency regulation and custody risks, privacy and cybersecurity obligations, inflation, the Russia-Ukraine conflict, goodwill and intangible-asset impairment, and restrictions on distributions from Shift4 Payments, LLC.
- The company had a $248.3 million unrecognized Tax Receivable Agreement liability because future payments were not considered probable. Future taxable income or release of valuation allowances could affect recognition.
- Management stated that disclosure controls and procedures were effective as of March 31, 2022 and that no material changes occurred in internal control over financial reporting.
Most important facts for investors to verify
- Whether end-to-end payment volume growth and recovery in travel-related categories continue after Q1.
- Whether network-fee growth and merchant mix pressure gross margins.
- The regulatory approval, financing, dilution and integration consequences of the proposed Finaro acquisition.
- The ultimate value and settlement mix of The Giving Block earnout, which could require substantial equity and cash payments.
- Cash generation after April 2022 share repurchases, acquisitions, capitalized development spending and debt service.
- Debt maturities beginning in 2025 and the company’s ability to refinance or repay $1.773 billion of principal.
- Potential volatility from cryptocurrency regulation, privacy and cybersecurity obligations, COVID-19 effects, inflation and geopolitical disruptions.