Shift4 Payments, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Shift4 provides integrated payment processing, merchant acquiring, gateway, point-of-sale, eCommerce, software, analytics and related technology solutions. Its customers span hospitality, food and beverage, gaming, stadiums and arenas, specialty retail, nonprofits and eCommerce. The company is expanding internationally and distributes through internal teams, independent software vendors and value-added resellers.
This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. The company reports one operating and reportable segment.
Financial Performance and Key Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Gross revenue | $547.3 million | $377.8 million | $1,455.9 million | $968.1 million |
| Gross revenue growth | 44.9% | — | 50.4% | — |
| End-to-end payment volume | $20.6 billion | $13.5 billion | $50.9 billion | $33.3 billion |
| Gross revenue less network fees | $196.7 million | $148.3 million | $528.1 million | $382.1 million |
| Net income | $46.4 million | $(13.8) million | $48.2 million | $(60.3) million |
| Net income attributable to Shift4 | $43.1 million | $(9.2) million | $45.9 million | $(38.8) million |
| Adjusted EBITDA | $85.4 million | $55.8 million | $195.3 million | $123.2 million |
| Operating cash flow | Not separately provided | Not separately provided | $135.9 million | $6.3 million |
Payments-based revenue increased 46.7% in Q3 and 52.6% for the first nine months, driven primarily by higher end-to-end payment volume. Subscription and other revenue increased 23.9% in Q3 and 26.1% year to date, aided by acquisitions.
Approximate calculated margins were as follows: gross revenue less network fees was 35.9% of gross revenue in Q3 2022 and 36.3% for the nine months; operating margin was 9.8% and 4.4%, respectively; and net margin was 8.5% and 3.3%, respectively. These are calculated measures and are not presented as GAAP gross margins in the filing.
Q3 EBITDA was $95.0 million and nine-month EBITDA was $165.5 million. Adjusted EBITDA increased 53.0% in Q3 and 58.5% for the first nine months. Adjusted EBITDA excludes, among other items, acquisition costs, equity compensation, contingent-liability revaluations, the Tax Receivable Agreement liability change and other nonrecurring items.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $672.7 million at September 30, 2022, down from $1,231.5 million at December 31, 2021.
- Operating cash flow was $135.9 million for the first nine months, compared with $6.3 million in the restated 2021 period.
- Investing cash use was $483.0 million, including $268.2 million for residual commission buyouts, $135.2 million for acquisitions, $39.6 million for equipment to be leased and $31.7 million for capitalized software development.
- Financing cash use was $211.4 million, primarily reflecting $185.9 million of share repurchases.
- Total principal debt was $1,772.5 million, 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 balance-sheet carrying value of long-term debt was $1,739.8 million.
- Debt maturities are $690.0 million in 2025, $450.0 million in 2026 and $632.5 million in 2027. The company reported compliance with its financial covenants and expected compliance for at least 12 months after issuance of the financial statements.
- The revolving credit facility had $99.5 million of borrowing capacity, net of a $0.5 million letter of credit, with no borrowings outstanding.
Material Changes Versus the Prior Comparable Period
- Revenue, payment volume and adjusted EBITDA increased substantially, although the 2021 comparison was depressed by $22.4 million of merchant payments and $2.3 million of partner payments related to the TSYS outage.
- Operating income improved to $53.5 million in Q3 2022 from an operating loss of $5.6 million; nine-month operating income improved to $64.7 million from a $44.2 million loss.
- General and administrative expense increased 54.1% in Q3 and 29.7% year to date, primarily due to higher employee-related costs, insurance and acquisitions.
- Depreciation and amortization increased 92.7% in Q3 and 37.0% year to date, reflecting residual commission buyouts, acquired intangibles and leased equipment.
- Advertising and marketing expense declined 57.1% year to date because 2021 included substantial Shift4Shop integration, rebranding and Inspiration4-related costs.
- The company completed $311.7 million of residual commission buyouts during the first nine months, including a $298.5 million mass strategic buyout program intended to insource distribution.
- Shares repurchased totaled 3.9 million for $184.4 million during the first nine months; approximately $44.5 million remained available under the repurchase programs at September 30.
- Goodwill increased to $777.3 million from $537.7 million and net intangible assets increased to $561.7 million from $188.5 million, primarily due to acquisitions and residual commission buyouts.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative revenue, EBITDA or earnings guidance. Management expects continued growth from integrated payments, gateway-to-end-to-end conversion, larger merchants, new verticals, international expansion, product investment and acquisitions.
- In September 2022, Shift4 acquired Online Payments Group for $125.9 million net of cash acquired. The transaction included a potential earnout of up to $60.0 million.
- During Q3, the company acquired six restaurant technology partners for $80.3 million net of cash acquired.
- The Giving Block acquisition included a potential earnout of up to $246.0 million. The recorded fair value of its earnout declined by $36.9 million in Q3 and $37.2 million year to date, producing a material operating benefit that management attributed primarily to lower projected revenues.
- The pending Finaro acquisition is expected to require $200.0 million in cash, approximately 6.4 million Class A shares valued at approximately $325.0 million at signing, and a performance earnout of up to $50.0 million in shares. Regulatory approval was expected by the first quarter of 2023.
- The company adopted crypto-asset safeguarding guidance, recognizing $1.7 million of crypto settlement assets and an equal liability at September 30, 2022.
- The company restated the nine-month 2021 cash-flow presentation because customer acquisition costs had been classified as investing rather than operating activities. Restated 2021 operating cash flow was $6.3 million instead of $25.6 million; total change in cash was unchanged.
- Management concluded that disclosure controls were not effective because of a material weakness involving the classification of customer acquisition costs in the cash-flow statement. A remediation plan is in progress, but the weakness had not been remediated as of September 30, 2022.
- Key risks include intense payments-industry competition, reliance on third-party vendors and software partners, acquisition execution, merchant and consumer spending trends, inflation, foreign exchange, cybersecurity and interoperability, significant goodwill and intangible assets, debt obligations, the Tax Receivable Agreement, founder control, COVID-19 effects and geopolitical events.
Most Important Facts for Investors to Verify
- Reconcile growth rates against the nonrecurring 2021 TSYS outage payments and assess underlying organic growth.
- Evaluate cash conversion after the significant residual commission buyouts, acquisitions, capitalized software spending and share repurchases.
- Review the timing, terms and potential dilution or cash requirements of the Finaro, Giving Block and Online Payments Group earnouts.
- Assess leverage, fixed-rate debt maturities and the company’s ability to fund 2025–2027 obligations while continuing acquisitions and repurchases.
- Monitor remediation and auditor-related disclosures concerning the material weakness and the cash-flow restatements.
- Assess goodwill, acquired intangible assets and future amortization, including the risk of impairment or further contingent-liability revaluations.
- Review non-GAAP reconciliations, particularly the substantial adjustments included in Adjusted EBITDA.