Shift4 Payments, Inc. 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2023. Financial statements are unaudited and prepared under U.S. GAAP. Shift4 provides integrated payment processing, gateway, point-of-sale, software, acquiring and related technology services across multiple merchant verticals.
Financial performance and key metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Gross revenue | $637.0 million | $506.7 million | +25.7% |
| Payments-based revenue | $600.1 million | $473.9 million | +26.6% |
| End-to-end payment volume | $26.8 billion | $16.9 billion | +58.8% |
| Income from operations | $33.9 million | $22.9 million | +48.0% |
| Net income | $36.8 million | $15.0 million | +145.3% |
| Net income attributable to Shift4 | $25.1 million | $10.3 million | +143.7% |
| Diluted EPS | $0.42 | $0.18 | +133.3% |
| Adjusted EBITDA | $110.0 million | $65.6 million | +67.7% |
| Metric | Six months 2023 | Six months 2022 | Change |
|---|---|---|---|
| Gross revenue | $1,184.0 million | $908.6 million | +30.3% |
| End-to-end payment volume | $49.1 billion | $30.3 billion | +61.9% |
| Income from operations | $42.7 million | $11.2 million | Increase of $31.5 million |
| Net income | $57.2 million | $1.8 million | Increase of $55.4 million |
| Net income attributable to Shift4 | $39.9 million | $2.8 million | Increase of $37.1 million |
| Diluted EPS | $0.67 | $0.02 | Material increase |
| Adjusted EBITDA | $199.3 million | $109.9 million | +81.3% |
Margins and operating drivers: Q2 gross revenue less network fees was $228.1 million, or approximately 35.8% of gross revenue, compared with $182.6 million, or approximately 36.0%, in the prior-year quarter. Six-month gross revenue less network fees was $428.1 million, or approximately 36.2%, compared with approximately 36.5% previously. Growth was driven by higher payment volume, larger merchants and acquisitions. Network fees rose 26.2% in Q2 and 31.0% for the six-month period, while other costs of sales declined due primarily to lower residual commissions following the 2022 strategic buyout program.
General and administrative expense increased 40.6% in Q2 and 34.7% for the six months, reflecting compensation, expansion, restructuring and acquisition-related costs. Depreciation and amortization increased 115.0% in Q2 and 109.4% for the six months, primarily from residual commission buyouts and acquired intangible assets.
Cash flow and liquidity: Six-month operating cash flow was $171.3 million, compared with $70.8 million in 2022. Investing cash use was $108.0 million, including the Focus acquisition, equipment for lease, software development and capital expenditures. Financing cash use was $115.2 million, including $96.8 million for share repurchases and $15.7 million for employee tax withholding on vested equity awards. Cash and cash equivalents were $649.0 million at June 30, 2023; cash plus restricted cash was $725.3 million.
Debt: Principal debt outstanding was $1.7725 billion, consisting of $690.0 million of 2025 convertible notes, $450.0 million of 2026 senior notes and $632.5 million of 2027 convertible notes. Net long-term debt was $1.7460 billion. The company had $100.0 million of revolving credit capacity and no revolver borrowings. Management stated that the company was in 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
- Payment volume growth substantially exceeded revenue growth, reflecting continued onboarding of larger merchants and associated pricing or mix effects.
- Profitability improved significantly, supported by revenue scale, lower residual commissions and higher interest income from cash balances.
- Interest income increased to $8.8 million in Q2 and $16.4 million for the six months, from $1.4 million in each prior-year period.
- The company recorded $8.9 million of non-cash unrealized gains on investments in securities during the six months, with no comparable prior-year gain.
- Q2 and six-month results included $5.6 million and $12.6 million, respectively, of unfavorable revaluation expense for acquisition-related contingent liabilities, primarily Online Payments Group.
- On April 3, 2023, Shift4 acquired Focus POS Systems for $45.2 million net of cash acquired, including $36.0 million of cash and $10.2 million of stock consideration.
- On May 3, 2023, the board authorized a new $250.0 million repurchase program through December 31, 2023. During the six months, the company repurchased and retired 1.515 million Class A shares for $97.3 million, including commissions and excise tax.
- The company amended its revolving credit facility to transition from LIBOR to SOFR effective July 1, 2023.
Guidance, outlook, risks and unusual items
Management expects cash and cash equivalents together with operating cash flow to fund operating expenses and capital expenditure requirements for at least the next 12 months and into the foreseeable future under its current operating plan. The filing does not provide a clear quantitative revenue or Adjusted EBITDA forecast.
Shift4 continues to pursue international expansion and identifies Finaro as a pending acquisition expected to support cross-border eCommerce. The transaction remains subject to regulatory approvals and includes $200.0 million of cash consideration, approximately $325.0 million of Class A stock consideration based on the agreement-date valuation, and a performance-based earnout of up to $50.0 million in stock.
Significant contingencies include the Online Payments Group earnout, with fair value of $45.6 million at June 30, 2023 and potential payments of up to $60.0 million based on customer revenue performance. The fair value of all contingent liabilities was $57.7 million, including $10.1 million related to asset acquisitions. Management also disclosed a potential but unrecognized Tax Receivable Agreement liability of approximately $297.5 million because realization of the related tax benefits was not considered probable.
Key risks include intense competition; macroeconomic, inflation and consumer-spending pressures; dependence on third-party vendors, merchant and software-partner relationships; cybersecurity and technology risks; acquisition integration and valuation risk; international regulatory and foreign-exchange exposure; and the possibility that larger merchants reduce revenue yield relative to payment volume. The founder retains significant influence, and Rook has pledged certain company-related interests in connection with margin loans and variable prepaid forward contracts.
The company reported no material changes to previously disclosed risk factors, no legal proceedings expected to have a material adverse effect, and effective disclosure controls as of June 30, 2023.
Investor verification checklist
- Verify the sustainability of 58.8% quarterly and 61.9% year-to-date end-to-end payment volume growth relative to revenue growth.
- Assess adjusted EBITDA quality, including the effects of equity compensation, acquisition and restructuring costs, contingent-liability revaluations and other excluded items.
- Review debt maturities beginning in 2025, total interest obligations of $87.1 million, covenant requirements and refinancing or repayment capacity.
- Monitor the Online Payments Group earnout and other contingent liabilities, including potential cash and share dilution.
- Evaluate the pending Finaro acquisition, regulatory approval status, consideration structure and integration requirements.
- Reconcile reported cash with restricted cash and assess working-capital needs, merchant settlement obligations and future capital expenditures.
- Consider the potential future recognition of the $297.5 million unrecognized TRA liability if tax-benefit realization becomes probable.
- Review the remaining authorization under the $250.0 million share repurchase program and its effect on liquidity and share count.