Shift4 Payments, Inc.: Form 10-Q for the period ended Sep 30, 2023
Filed with the SEC on Nov 9, 2023 and accepted by EDGAR at Nov 9, 2023, 16:17 ET.
Management's discussion and analysis
As filed, 46,747 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the information presented in our unaudited condensed consolidated financial statements and the related notes and other financial data included elsewhere in this Quarterly Report on Form 10-Q (“Quarterly Report”), as well as our audited consolidated financial statements and related notes as disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the U.S. Securities and Exchange Commission (“SEC”) on March 1, 2023 (the “2022 Form 10-K”). In addition to historical information, the following discussion contains forward-looking statements, such as statements regarding our expectation for future performance, liquidity and capital resources, that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified below and those described in “Cautionary Note Regarding Forward-Looking Statements,” and “Risk Factors” in Part I, Item 1A. of our 2022 Form 10-K. We assume no obligation to update any of these forward-looking statements.
As used in this Quarterly Report, unless the context otherwise requires, references to:
- “we,” “us,” “our,” the “Company,” “Shift4” and similar references refer to Shift4 Payments, Inc. and, unless otherwise stated, all of its subsidiaries.
- “Continuing Equity Owners” prior to May 24, 2022 refers collectively to Searchlight Capital Partners, L.P., a Delaware limited partnership, and certain of its affiliated funds, our Founder and their respective permitted transferees who may redeem at each of their options, in whole or in part from time to time, their LLC Interests for, at our election, cash or newly-issued shares of Shift4 Payments, Inc.’s Class A common stock. From May 24, 2022 onwards, the Founder is the sole remaining Continuing Equity Owner.
- “LLC Interests” refers to the common units of Shift4 Payments, LLC.
- “Founder” refers to Jared Isaacman, our Chief Executive Officer and the sole stockholder of Rook Holdings Inc. Our Founder is an owner of Class C common stock and the sole remaining Continuing Equity Owner.
- “Rook” refers to Rook Holdings Inc., a Delaware corporation wholly-owned by our Founder and for which our Founder is the sole stockholder.
Overview
We are a leading independent provider of software and payment processing solutions in the United States (“U.S.”) based on total volume of payments processed. We have achieved our leadership position through decades of solving business and operational challenges facing our customers’ overall commerce needs. Our merchants range in size from small owner-operated local businesses to multinational enterprises conducting commerce throughout the world. We distribute our services through a scaled network of seasoned internal sales and support teams, as well as through our network of software partners. Our software partners are comprised of independent software vendors (“ISVs”) and value-added resellers (“VARs”). For our software partners, we offer a single integration to a global end-to-end payment offering, a proprietary gateway and a robust suite of technology solutions to enhance the value of their software and simplify payment acceptance. For our merchants, we provide a seamless, unified consumer experience and fulfill business needs that would otherwise require multiple software, hardware and payment vendors.
At the heart of our business is our payments platform. Our payments platform is a full suite of integrated payment products and services that can be used across multiple channels (in-store, online, mobile and tablet-based) and industry verticals, including:
- end-to-end payment processing for a broad range of payment types;
- merchant acquiring;
- proprietary omni-channel gateway capable of multiple methods of mobile, contactless and QR code-based payments;
- complementary software integrations;
- full eCommerce capabilities, including web-store design, hosting, shopping cart management and fulfillment integrations;
- integrated and mobile point of sale (“POS”) solutions;
- security and risk management solutions; and
- reporting and analytical tools.
We also offer innovative technology solutions that go beyond payment processing. Some of our solutions are developed in-house, such as business intelligence and POS software, while others are powered by our network of complementary third-party applications. Our focus on innovation, combined with our product-driven culture, enables us to create scalable technology solutions that benefit from an extensive library of intellectual property.
In addition to our scaled network of seasoned internal sales and support teams, we market and sell our solutions through a diversified network of thousands of software partners, which consists of ISVs and VARs. ISVs are technology providers that develop commerce-enabling software suites with which they can bundle our payments platform. VARs are organizations that provide distribution support for ISVs and act as trusted and localized service providers to merchants by providing them with software and services. Together, our ISVs and VARs provide us immense distribution scale and provide our merchants with front-line service and support.
Our end-to-end payments offering combines our payments platform, including our proprietary gateway and breadth of software integrations, and our suite of technology solutions to create a compelling value proposition for our merchants. Our end-to-end payment volume was $27.9 billion and $20.6 billion for the three months ended September 30, 2023 and 2022, respectively, and $77.0 billion and $50.9 billion for the nine months ended September 30, 2023 and 2022, respectively.
We operate across numerous verticals including food and beverage, hospitality, stadiums and arenas, gaming, specialty retail, non-profits, eCommerce, and exciting technology companies. We expect our newest verticals, including stadiums and arenas, gaming, non-profits, and exciting technology companies, to contribute to our end-to-end payment volume significantly more in future periods than they have to date.
Key Financial Definitions
The following briefly describes the components of revenue and expenses as presented in the accompanying unaudited Condensed Consolidated Statements of Operations.
Gross revenue consists primarily of payments-based revenue and subscription and other revenues:
Payments-based revenue includes fees for payment processing services and gateway services. Payment processing fees are primarily driven as a percentage of end-to-end payment volume. They may also have a fixed fee, a minimum monthly usage fee and a fee based on transactions. Gateway services, data encryption and tokenization fees are primarily driven by per transaction fees as well as monthly usage fees.
Subscription and other revenues include software as a service (“SaaS”) fees for POS systems and terminals provided to merchants. POS and terminal SaaS fees are assessed based on the type and quantity of equipment deployed to the merchant. SaaS fees also include statement fees, fees for our proprietary business intelligence software and other annual fees. Subscription and other revenues also includes revenue derived from software license sales, hardware sales, third-party residuals and fees charged for technology support.
Cost of sales consists of interchange and processing fees, residual commissions, equipment and other costs of sales:
Interchange and processing fees represent amounts owed to card issuing banks and assessments paid to card associations based on transaction processing volume. These also include fees incurred by third-parties for data transmission and settlement of funds, such as processors and our sponsor bank.
Residual commissions represent monthly payments to third-party distribution partners. These costs are typically based on a percentage of payment-based revenue.
Equipment represents our costs of devices that are sold to merchants.
Other costs of sales includes amortization of capitalized software development costs, capitalized software, acquired technology and capitalized customer acquisition costs. It also includes shipping and handling costs related to the delivery of devices. Capitalized software development costs are amortized using the straight-line method on a product-by-product basis over the estimated useful life of the software. Capitalized software, acquired technology and capitalized customer acquisition costs are also amortized on a straight-line basis.
General and administrative expenses consist primarily of compensation, benefits and other expenses associated with corporate management, finance, sales, human resources, shared services, information technology and other activities.
Revaluation of contingent liabilities represents adjustments to the fair value of contingent liabilities associated with acquisitions.
Depreciation and amortization expense consists of depreciation and amortization expenses related to merchant relationships, trademarks and trade names, residual commission buyouts, equipment, leasehold improvements, other intangible assets, and property, plant and equipment. We depreciate and amortize our assets on a straight-line basis. Leasehold improvements are depreciated over the lesser of the estimated life of the leasehold improvement or the remaining lease term. Maintenance and repairs, which do not extend the useful life of the respective assets, are charged to expense as incurred. Intangible assets are amortized on a straight-line basis over their estimated useful lives which range from two years to twenty years.
Professional expenses consists of costs incurred for accounting, tax, legal, and consulting services.
Advertising and marketing expenses relate to costs incurred to participate in industry tradeshows and dealer conferences, advertising initiatives to build brand awareness, and expenses to fulfill loyalty program rewards earned by software partners.
Interest income primarily consists of interest income earned on our cash and cash equivalents.
Other (expense) income, net primarily consists of other non-operating items.
Unrealized gain on investments in securities represents adjustments to the fair value of our investments in non-marketable securities.
Change in TRA liability represents adjustments to the Tax Receivable Agreement (“TRA”) liability.
Interest expense consists of interest costs incurred on our borrowings and amortization of capitalized financing costs.
Income tax (expense) benefit represents federal, state and local taxes based on income in multiple jurisdictions, in addition to income taxes incurred in foreign jurisdictions.
Net income attributable to noncontrolling interests arises from net income from the non-owned portion of businesses where we have a controlling interest but less than 100% ownership. This represents the noncontrolling interests in Shift4 Payments, LLC and its consolidated subsidiaries, which is comprised of the income allocated to Continuing Equity Owners as a result of their proportional ownership of LLC Interests.
Comparison of Results for the Three Months Ended September 30, 2023 and 2022
The following table sets forth the consolidated statements of operations for the periods presented:
(in millions)
| Three Months Ended September 30, 2023 | 2022 | $ change | % change* | |
|---|---|---|---|---|
| Payments-based revenue | $626.9 | $509.0 | $117.9 | 23% |
| Subscription and other revenues | 48.5 | 38.3 | 10.2 | 27% |
| Gross revenue | 675.4 | 547.3 | 128.1 | 23% |
| Network fees | (432.4) | (350.6) | (81.8) | 23% |
| Other costs of sales (exclusive of certain depreciation and amortization expense shown separately below) | (62.7) | (61.0) | (1.7) | 3% |
| General and administrative expenses | (76.3) | (74.2) | (2.1) | 3% |
| Revaluation of contingent liabilities | (8.9) | 36.9 | (45.8) | NM |
| Depreciation and amortization expense (a) | (40.0) | (28.9) | (11.1) | 38% |
| Professional expenses | (5.7) | (10.4) | 4.7 | (45)% |
| Advertising and marketing expenses | (4.7) | (5.6) | 0.9 | (16)% |
| Income from operations | 44.7 | 53.5 | (8.8) | (16)% |
| Interest income | 9.6 | 3.5 | 6.1 | 174% |
| Unrealized gain on investments in securities | 2.6 | — | 2.6 | NM |
| Change in TRA liability | (1.5) | (1.1) | (0.4) | 36% |
| Interest expense | (8.0) | (8.3) | 0.3 | (4)% |
| Income before income taxes | 47.4 | 47.6 | (0.2) | —% |
| Income tax expense | (0.9) | (1.2) | 0.3 | (25)% |
| Net income | 46.5 | 46.4 | 0.1 | —% |
| Less: Net income attributable to noncontrolling interests | 13.9 | 3.3 | 10.6 | NM |
| Net income attributable to Shift4 Payments, Inc. | $32.6 | $43.1 | $(10.5) | (24)% |
* NM = Not Meaningful
(a) Depreciation and amortization expense includes depreciation of equipment under lease of $9.3 million and $8.2 million for the three months ended September 30, 2023 and 2022, respectively.
Gross revenue
Gross revenue was $675.4 million for the three months ended September 30, 2023, compared to $547.3 million for the three months ended September 30, 2022, an increase of $128.1 million or 23%. Gross revenue is comprised of payments-based revenue and subscription and other revenues.
Payments-based revenue was $626.9 million for the three months ended September 30, 2023, compared to $509.0 million for the three months ended September 30, 2022, an increase of $117.9 million or 23%. The increase in payments-based revenue was primarily driven by the increase in end-to-end payment volume of $7.4 billion, or 36%, for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. End-to-end payment volume growth outpaced payments-based revenue growth primarily due to our continued onboarding of larger merchants that have lower unit pricing than our existing customer base.
Subscription and other revenues were $48.5 million for the three months ended September 30, 2023, compared to $38.3 million for the three months ended September 30, 2022, an increase of $10.2 million or 27%. The increase in subscription and other revenues was primarily driven by higher SaaS fee revenue, which increased $10.4 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022.
Network fees
Network fees were $432.4 million for the three months ended September 30, 2023, compared to $350.6 million for the three months ended September 30, 2022, an increase of $81.8 million or 23%. This increase was related to the increase in payments-based revenue.
Gross revenue less network fees was $243.0 million for the three months ended September 30, 2023, compared to $196.7 million for the three months ended September 30, 2022, an increase of $46.3 million or 24%. The increase in gross revenue less network fees was driven by the increase in end-to-end payment volume. See “Key Performance Indicators and Non-GAAP Measures” below for a reconciliation of gross profit to gross revenue less network fees.
Other costs of sales
Other costs of sales was $62.7 million for the three months ended September 30, 2023, compared to $61.0 million for the three months ended September 30, 2022, an increase of $1.7 million, or 3%. This increase was primarily driven by higher capitalized software development cost amortization.
General and administrative expenses
General and administrative expenses were $76.3 million for the three months ended September 30, 2023, compared to $74.2 million for the three months ended September 30, 2022, an increase of $2.1 million or 3%. The increase was primarily driven by our recent acquisitions, which were partially offset by lower compensation and other employee-related expenses as a result of one-time expenses and bonuses in the three months ended September 30, 2022.
Revaluation of contingent liabilities
Revaluation of contingent liabilities resulted in expense of $8.9 million and income of $36.9 million for the three months ended September 30, 2023 and 2022, respectively. The expense for the three months ended September 30, 2023 was primarily driven by the remeasurement of the contingent liability related to the acquisition of Online Payments Group. The income for the three months ended September 30, 2022 was primarily driven by a decrease in the contingent liability for The Giving Block.
Depreciation and amortization expense
Depreciation and amortization expense was $40.0 million for the three months ended September 30, 2023, compared to $28.9 million for the three months ended September 30, 2022, an increase of $11.1 million or 38%. The increase was primarily driven by higher residual commission buyout amortization due to residual commission buyouts completed in 2022, in addition to higher amortization of new intangible assets as a result of acquisitions.
Professional expenses
Professional expenses were $5.7 million for the three months ended September 30, 2023, compared to $10.4 million for the three months ended September 30, 2022, a decrease of $4.7 million or 45%. The decrease was primarily driven by lower acquisition-related costs.
Advertising and marketing expenses
Advertising and marketing expenses were $4.7 million for the three months ended September 30, 2023, compared to $5.6 million for the three months ended September 30, 2022, a decrease of $0.9 million or 16%. The decrease was primarily driven by lower expenses related to conferences and trade shows.
Interest income
Interest income was $9.6 million for the three months ended September 30, 2023, compared to $3.5 million for the three months ended September 30, 2022, an increase of $6.1 million or 174%. The increase was primarily driven by higher weighted average interest rates on our cash and cash equivalents.
Unrealized gain on investments in securities
The unrealized gain on investments in securities resulted in $2.6 million of non-cash income for the three months ended September 30, 2023. There was no corresponding gain for the three months ended September 30, 2022.
Change in TRA liability
The change in TRA liability resulted in $1.5 million of non-cash expense for the three months ended September 30, 2023, compared to $1.1 million for the three months ended September 30, 2022. See Note 13 to the accompanying unaudited condensed consolidated financial statements for more information on the TRA.
Interest expense
Interest expense remained consistent for the three months ended September 30, 2023, compared to the three months ended September 30, 2022.
Income tax expense
The effective tax rate for the three months ended September 30, 2023 was approximately 2%, compared to the effective tax rate for the three months ended September 30, 2022 of approximately 3%.
The effective tax rate for the three months ended September 30, 2023 was different than the U.S. federal statutory income tax rate of 21% primarily due to the income allocated to the noncontrolling interest and the full valuation allowances on Shift4 Payments, Inc. and certain corporate subsidiaries in the U.S. The effective tax rate for the three months ended September 30, 2022 was different than the U.S. federal statutory income tax rate of 21% primarily due to the income allocated to the noncontrolling interest, the full valuation allowance on Shift4 Payments, Inc. and certain corporate subsidiaries in the U.S., and the nontaxable adjustment related to the revaluation of the contingent liability of The Giving Block.
Comparison of Results for the Nine Months Ended September 30, 2023 and 2022
The following table sets forth the consolidated statements of operations for the periods presented:
(in millions)
| Nine Months Ended September 30, 2023 | 2022 | $ change | % change* | |
|---|---|---|---|---|
| Payments-based revenue | $1,738.0 | $1,354.4 | $383.6 | 28% |
| Subscription and other revenues | 121.4 | 101.5 | 19.9 | 20% |
| Gross revenue | 1,859.4 | 1,455.9 | 403.5 | 28% |
| Network fees | (1,188.3) | (927.8) | (260.5) | 28% |
| Other costs of sales (exclusive of certain depreciation and amortization expense shown separately below) | (178.5) | (202.0) | 23.5 | (12)% |
| General and administrative expenses | (244.1) | (198.8) | (45.3) | 23% |
| Revaluation of contingent liabilities | (21.5) | 37.2 | (58.7) | NM |
| Depreciation and amortization expense (a) | (111.2) | (62.9) | (48.3) | 77% |
| Professional expenses | (17.2) | (25.7) | 8.5 | (33)% |
| Advertising and marketing expenses | (11.2) | (11.2) | — | —% |
| Income from operations | 87.4 | 64.7 | 22.7 | 35% |
| Interest income | 26.0 | 4.9 | 21.1 | NM |
| Other (expense) income, net | (0.3) | 0.3 | (0.6) | NM |
| Unrealized gain on investments in securities | 11.5 | — | 11.5 | NM |
| Change in TRA liability | (2.8) | (1.1) | (1.7) | 155% |
| Interest expense | (24.1) | (24.6) | 0.5 | (2)% |
| Income before income taxes | 97.7 | 44.2 | 53.5 | 121% |
| Income tax benefit | 6.0 | 4.0 | 2.0 | 50% |
| Net income | 103.7 | 48.2 | 55.5 | 115% |
| Less: Net income attributable to noncontrolling interests | 31.2 | 2.3 | 28.9 | NM |
| Net income attributable to Shift4 Payments, Inc. | $72.5 | $45.9 | $26.6 | 58% |
* NM = Not Meaningful
(a) Depreciation and amortization expense includes depreciation of equipment under lease of $24.7 million and $22.6 million for the nine months ended September 30, 2023 and 2022, respectively.
Gross revenue
Gross revenue was $1,859.4 million for the nine months ended September 30, 2023, compared to $1,455.9 million for the nine months ended September 30, 2022, an increase of $403.5 million or 28%. Gross revenue is comprised of payments-based revenue and subscription and other revenues.
Payments-based revenue was $1,738.0 million for the nine months ended September 30, 2023, compared to $1,354.4 million for the nine months ended September 30, 2022, an increase of $383.6 million or 28%. The increase in payments-based revenue was primarily driven by the increase in end-to-end payment volume of $26.1 billion, or 51%, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. End-to-end payment volume growth outpaced payments-based revenue growth primarily due to our continued onboarding of larger merchants that have lower unit pricing than our existing customer base.
Subscription and other revenues were $121.4 million for the nine months ended September 30, 2023, compared to $101.5 million for the nine months ended September 30, 2022, an increase of $19.9 million or 20%. The increase in subscription and other revenues was driven primarily by higher SaaS fee revenue, which increased $15.9 million in the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. In addition, our acquisitions collectively contributed $7.0 million more to subscription and other revenues in the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. This was partially offset by a decrease in software license sales of $3.0 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
Network fees
Network fees were $1,188.3 million for the nine months ended September 30, 2023, compared to $927.8 million for the nine months ended September 30, 2022, an increase of $260.5 million or 28%. This increase was related to the increase in payments-based revenue.
Gross revenue less network fees was $671.1 million for the nine months ended September 30, 2023, compared to $528.1 million for the nine months ended September 30, 2022, an increase of $143.0 million or 27%. The increase in gross revenue less network fees was largely correlated with the increase in end-to-end payment volume growth. See “Key Performance Indicators and Non-GAAP Measures” below for a reconciliation of gross profit to gross revenue less network fees.
Other costs of sales
Other costs of sales was $178.5 million for the nine months ended September 30, 2023, compared to $202.0 million for the nine months ended September 30, 2022, a decrease of $23.5 million, or 12%. This decrease was primarily the result of lower residual commissions, which were driven by the impact of residual commission buyouts.
General and administrative expenses
General and administrative expenses were $244.1 million for the nine months ended September 30, 2023, compared to $198.8 million for the nine months ended September 30, 2022, an increase of $45.3 million or 23%. The increase was primarily driven by our acquisitions, as well as our continued growth and expansion.
Revaluation of contingent liabilities
Revaluation of contingent liabilities resulted in expense of $21.5 million and income of $37.2 million for the nine months ended September 30, 2023 and 2022, respectively. The expense for the nine months ended September 30, 2023 was primarily driven by the remeasurement of the contingent liability related to the acquisition of Online Payments Group. The income for the nine months ended September 30, 2022 was primarily driven by a decrease in the contingent liability for The Giving Block.
Depreciation and amortization expense
Depreciation and amortization expense was $111.2 million for the nine months ended September 30, 2023, compared to $62.9 million for the nine months ended September 30, 2022, an increase of $48.3 million or 77%. The increase was primarily driven by higher residual commission buyout amortization due to the residual commission buyouts completed in 2022, in addition to the amortization of new intangible assets as a result of acquisitions. This was offset by a decline in other intangible asset amortization, driven by intangibles that reached the end of their useful life.
Professional expenses
Professional expenses were $17.2 million for the nine months ended September 30, 2023, compared to $25.7 million for the nine months ended September 30, 2022, a decrease of $8.5 million or 33%. The decrease was primarily driven by lower acquisition-related costs, in addition to transaction-related expenses associated with a consent solicitation for the 2026 Senior Notes in March 2022.
Advertising and marketing expenses
Advertising and marketing expenses remained consistent for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
Interest income
Interest income was $26.0 million for the nine months ended September 30, 2023, compared to $4.9 million for the nine months ended September 30, 2022, an increase of $21.1 million. The increase was primarily driven by a higher weighted average interest rate earned on our cash and cash equivalents.
Unrealized gain on investments in securities
The unrealized gain on investments in securities resulted in $11.5 million of non-cash income for the nine months ended September 30, 2023. There was no corresponding gain for the nine months ended September 30, 2022. See Note 12 to the accompanying unaudited condensed consolidated financial statements for more information on our investments in securities.
Change in TRA liability
The change in TRA liability resulted in $2.8 million of expense for the nine months ended September 30, 2023, compared to $1.1 million of expense for the nine months ended September 30, 2022, a decrease of $1.7 million or 155%. See Note 13 in the notes to the accompanying unaudited condensed consolidated financial statements for more information on the TRA.
Interest expense
Interest expense remained consistent for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.
Income tax benefit
The effective tax rate for the nine months ended September 30, 2023 was approximately (6)%, compared to the effective tax rate for the nine months ended September 30, 2022 of approximately (9)%.
The effective tax rate for the nine months ended September 30, 2023 was different than the U.S. federal statutory income tax rate of 21% primarily due to the income allocated to the noncontrolling interest, the full valuation allowances on Shift4 Payments, Inc. and certain corporate subsidiaries in the U.S., a $4.8 million tax benefit related to the valuation allowance release due to a legal entity restructuring, and a $1.5 million tax benefit related to the valuation allowance release due to acquired deferred tax liabilities from Focus POS Systems. The effective tax rate for the nine months ended September 30, 2022 was different than the U.S. federal statutory income tax rate of 21% primarily due to the income allocated to the noncontrolling interest, the full valuation allowance on Shift4 Payments, Inc. and certain corporate subsidiaries in the U.S., the nontaxable adjustment related to the revaluation of the contingent liability of The Giving Block, and a $6.4 million income tax benefit related to the valuation allowance release due to acquired deferred tax liabilities from The Giving Block.
Key Performance Indicators and Non-GAAP Measures
The following table sets forth our key performance indicators and non-GAAP measures for the periods presented:
(in millions)
| Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 | |
|---|---|---|---|---|
| End-to-end payment volume | $27,933.0 | $20,579.4 | $76,983.4 | $50,873.4 |
| Gross revenue less network fees | 243.0 | 196.7 | 671.1 | 528.1 |
| EBITDA | 100.9 | 95.0 | 248.5 | 165.5 |
| Adjusted EBITDA | 124.5 | 85.4 | 323.8 | 195.3 |
End-to-end payment volume
End-to-end payment volume is defined as the total dollar amount of payments that we deliver for settlement on behalf of our merchants. Included in end-to-end volume are dollars routed via our international payments platform and alternative payment methods, including cryptocurrency and stock donations, plus volume we route to one or more third party merchant acquirers on behalf of strategic enterprise merchant relationships. This volume does not include volume processed through our legacy gateway-only offering.
Gross revenue less network fees, EBITDA and Adjusted EBITDA
We use supplemental measures of our performance which are derived from our consolidated financial information but which are not presented in our consolidated financial statements prepared in accordance with GAAP. These non-GAAP financial measures include: gross revenue less network fees, which includes interchange and assessment fees; earnings before interest expense, interest income, income taxes, depreciation, and amortization (“EBITDA”); and Adjusted EBITDA.
Gross revenue less network fees represents a key performance metric that management uses to measure changes in the mix and value derived from our customer base as we continue to execute our strategy to expand our reach to serve larger, complex merchants.
Adjusted EBITDA is the primary financial performance measure used by management to evaluate its business and monitor results of operations. Adjusted EBITDA represents EBITDA further adjusted for certain non-cash and other nonrecurring items that management believes are not indicative of ongoing operations. These adjustments include acquisition, restructuring and integration costs, revaluation of contingent liabilities, unrealized gain on investments in securities, change in TRA liability, equity-based compensation expense, and other nonrecurring items. The financial impact of certain elements of these activities is often largely relative to our overall financial performance and can adversely affect the comparability of our operating results and investors’ ability to analyze the business from period to period.
We use non-GAAP financial measures to supplement financial information presented on a GAAP basis. We believe that excluding certain items from our GAAP results allows management to better understand our consolidated financial performance from period to period and better project our future consolidated financial performance as forecasts are developed at a level of detail different from that used to prepare GAAP-based financial measures. Moreover, we believe these non-GAAP financial measures provide our stakeholders with useful information to help them evaluate our operating results by facilitating an enhanced understanding of our operating performance and enabling them to make more meaningful period to period comparisons. There are limitations to the use of the non-GAAP financial measures presented in this Quarterly Report. Our non-GAAP financial measures may not be comparable to similarly titled measures of other companies. Other companies, including companies in our industry, may calculate non-GAAP financial measures differently than we do, limiting the usefulness of those measures for comparative purposes.
The non-GAAP financial measures are not meant to be considered as indicators of performance in isolation from, or as a substitute for, financial information prepared in accordance with GAAP, and should be read only in conjunction with financial information presented on a GAAP basis. Reconciliations of gross revenue less network fees, EBITDA and Adjusted EBITDA to its most directly comparable GAAP financial measure are presented below. We encourage you to review the reconciliations in conjunction with the presentation of the non-GAAP financial measures for each of the periods presented. In future fiscal periods, we may exclude such items and may incur income and expenses similar to these excluded items.
Reconciliations of gross revenue less network fees, EBITDA and Adjusted EBITDA
The tables below provide reconciliations of gross profit to gross revenue less network fees and net income on a consolidated basis for the periods presented to EBITDA and Adjusted EBITDA.
Gross revenue less network fees:
(in millions)
| Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 | |
|---|---|---|---|---|
| Gross revenue | $675.4 | $547.3 | $1,859.4 | $1,455.9 |
| Less: Network fees | (432.4) | (350.6) | (1,188.3) | (927.8) |
| Less: Other costs of sales (exclusive of depreciation of equipment under lease) | (62.7) | (61.0) | (178.5) | (202.0) |
| 180.3 | 135.7 | 492.6 | 326.1 | |
| Less: Depreciation of equipment under lease | (9.3) | (8.2) | (24.7) | (22.6) |
| Gross profit (a) | $171.0 | $127.5 | $467.9 | $303.5 |
| Gross profit (a) | $171.0 | $127.5 | $467.9 | $303.5 |
| Add back: Other costs of sales | 62.7 | 61.0 | 178.5 | 202.0 |
| Add back: Depreciation of equipment under lease | 9.3 | 8.2 | 24.7 | 22.6 |
| Gross revenue less network fees | $243.0 | $196.7 | $671.1 | $528.1 |
(a) The determination of gross profit is inclusive of depreciation of equipment under lease that is included in “Depreciation and amortization expense” on the Condensed Consolidated Statements of Operations. The table reflects the determination of gross profit for all periods presented. Although gross profit is not presented on the Condensed Consolidated Statements of Operations, it represents the most comparable metric calculated under U.S. GAAP to non-GAAP gross revenues less network fees.
EBITDA and Adjusted EBITDA:
(in millions)
| Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 | |
|---|---|---|---|---|
| Net income | $46.5 | $46.4 | $103.7 | $48.2 |
| Interest expense | 8.0 | 8.3 | 24.1 | 24.6 |
| Interest income | (9.6) | (3.5) | (26.0) | (4.9) |
| Income tax expense (benefit) | 0.9 | 1.2 | (6.0) | (4.0) |
| Depreciation and amortization | 55.1 | 42.6 | 152.7 | 101.6 |
| EBITDA | 100.9 | 95.0 | 248.5 | 165.5 |
| Acquisition, restructuring and integration costs (a) | 3.2 | 13.0 | 13.3 | 23.5 |
| Revaluation of contingent liabilities (b) | 8.9 | (36.9) | 21.5 | (37.2) |
| Change in unrealized gain on investments in securities (c) | (2.6) | — | (11.5) | — |
| Change in TRA liability (d) | 1.5 | 1.1 | 2.8 | 1.1 |
| Equity-based compensation (e) | 12.6 | 12.3 | 47.5 | 39.1 |
| Other nonrecurring items (f) | — | 0.9 | 1.7 | 3.3 |
| Adjusted EBITDA | $124.5 | $85.4 | $323.8 | $195.3 |
| (a) For the three months ended September 30, 2023, primarily consisted of $3.0 million of acquisition-related costs. For the nine months ended September 30, 2023, primarily consisted of $8.8 million of acquisition-related costs and $4.3 million of restructuring costs. For the three months ended September 30, 2022, primarily consisted of $10.3 million of acquisition-related costs. For the nine months ended September 30, 2022, primarily consisted of $19.1 million of acquisition-related costs and $1.4 million of transaction-related expenses associated with a consent solicitation for the 2026 Senior Notes in March 2022. | ||||
| (b) Consisted of fair value adjustments to contingent liabilities arising from acquisitions. | ||||
| (c) See Note 12 to the accompanying unaudited condensed consolidated financial statements for more information on the investments in non-marketable securities. | ||||
| (d) See Note 13 to the accompanying unaudited condensed consolidated financial statements for more information on the TRA. | ||||
| (e) Consisted of equity-based compensation expense for RSUs, including employer taxes for vested RSUs. See Note 19 to the accompanying unaudited condensed consolidated financial statements for more information on equity-based compensation. | ||||
| (f) For the nine months ended September 30, 2023, primarily consisted of $1.5 million of professional and legal expenses associated with one-time matters. For the three months ended September 30, 2022, primarily consisted of a $0.5 million donation and $0.4 million of nonrecurring advertising and marketing expenses. For the nine months ended September 30, 2022, primarily consisted of $1.1 million of costs associated with an internal processing system disruption that required technical remediation, $0.8 million of nonrecurring advertising and marketing expenses, $0.5 million of legal and professional fees for one-time matters, a $0.5 million donation and $0.4 million of costs associated with an early retirement initiative completed in the first quarter of 2022. |
Liquidity and Capital Resources
Overview
We have historically sourced our liquidity requirements primarily with cash flow from operations and, when needed, with debt borrowings or equity transactions. The principal uses for liquidity have been debt service, capital expenditures (including research and development) and funds required to finance acquisitions.
We do not intend to pay cash dividends on our Class A common stock in the foreseeable future. Shift4 Payments, Inc. is a holding company that does not conduct any business operations of its own. As a result, Shift4 Payments, Inc.’s ability to pay cash dividends on its common stock, if any, is dependent upon cash dividends and distributions and other transfers from Shift4 Payments, LLC. The amounts available to Shift4 Payments, Inc. to pay cash dividends are subject to the covenants and distribution restrictions in its subsidiaries’ agreements governing its indebtedness, including covenants in such agreements providing that the payments of dividends or other distributions are subject to annual limitations based on our market capitalization.
The following table sets forth summary cash flow information for the periods presented:
(in millions)
| Nine Months Ended September 30, 2023 | 2022 | |
|---|---|---|
| Net cash provided by operating activities | $283.0 | $135.9 |
| Net cash used in investing activities | (151.1) | (483.0) |
| Net cash used in financing activities | (124.3) | (211.4) |
| Effect of exchange rate changes on cash and cash equivalents and restricted cash | (0.8) | (0.3) |
| Change in cash and cash equivalents and restricted cash | $6.8 | $(558.8) |
40
Operating activities
Net cash provided by operating activities consists of net income adjusted for certain non-cash items and changes in other assets and liabilities.
For the nine months ended September 30, 2023, net cash provided by operating activities of $283.0 million was primarily a result of net income of $103.7 million adjusted for non-cash expenses, including depreciation and amortization of $152.7 million, equity-based compensation of $46.4 million, revaluation of contingent liabilities of $21.5 million, and unrealized gain on investments in securities of $(11.5) million. This was partially offset by an impact from working capital items of $(39.1) million.
For the nine months ended September 30, 2022, net cash provided by operating activities of $135.9 million was primarily a result of net income of $48.2 million adjusted for non-cash expenses, including depreciation and amortization of $101.6 million, equity-based compensation of $38.4 million, and revaluation of contingent liabilities of $(37.2) million. This was partially offset by an impact from working capital items of $(24.5) million.
Investing activities
Net cash used in investing activities includes cash paid for acquisitions, residual commission buyouts, purchases of property, plant and equipment, purchases of equipment to be leased, purchases of intangible assets, investments in securities, and capitalized software development costs.
Net cash used in investing activities was $151.1 million for the nine months ended September 30, 2023, a decrease of $331.9 million, compared to net cash used in investing activities of $483.0 million for the nine months ended September 30, 2022. This decrease was primarily the result of a $258.7 million decrease in residual commission buyouts and a $98.9 million decrease in net cash paid for acquisitions. This was partially offset by a $23.1 million increase in purchases of equipment to be leased.
Financing activities
Net cash used in financing activities was $124.3 million for the nine months ended September 30, 2023, a decrease of $87.1 million, compared to net cash used in financing activities of $211.4 million for the nine months ended September 30, 2022. This decrease was primarily the result of lower payments for the repurchase of common stock of $89.1 million.
Convertible Notes, Senior Notes and Revolving Credit Facility
As of September 30, 2023 and December 31, 2022, we had $1,772.5 million total principal amount of debt outstanding, including $690.0 million of 2025 Convertible Notes, $632.5 million of 2027 Convertible Notes, and $450.0 million of 2026 Senior Notes. See Note 11 to the accompanying unaudited condensed consolidated financial statements for more information about our debt.
The Revolving Credit Facility has a borrowing capacity of $100.0 million. As of September 30, 2023, we had no outstanding borrowings under the Revolving Credit Facility.
Stock repurchases
On May 3, 2023, our Board authorized the May 2023 Program, pursuant to which we were authorized to repurchase up to $250.0 million of shares of our Class A common stock through December 31, 2023. In the nine months ended September 30, 2023, we repurchased 1,515,000 shares of Class A common stock for $97.3 million, including commissions paid and accrued excise tax, at an average price paid of $63.89 per share. See Note 17 to the accompanying consolidated financial statements for more information. The remaining amount available under the current authorization as of September 30, 2023 was $153.2 million.
Cash Requirements
Our material cash requirements include the following contractual obligations.
Debt
As of September 30, 2023, we had $1,772.5 million of fixed rate debt principal outstanding with maturities beginning in 2025. Future interest payments associated with the outstanding debt total $85.5 million, with $24.0 million payable within twelve months.
Contingent Liabilities
As of September 30, 2023, the fair value of contingent liabilities to potentially be paid out in cash was $41.2 million, with $40.9 million payable within twelve months. As of September 30, 2023, the maximum amount of contingent liabilities to potentially be paid out in cash was $45.8 million, with $43.3 million payable within twelve months.
Leases
As of September 30, 2023, we are obligated under non-cancellable operating leases for our premises, which expire through November 2030. Future rent payments associated with outstanding operating leases total $28.4 million, with $7.8 million payable within twelve months.
We believe that our cash and cash equivalents and future cash flow from operations will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next twelve months and into the foreseeable future based on our current operating plan.
Critical Accounting Estimates
Our discussion and analysis of our historical financial condition and results of operations for the periods described is based on our audited consolidated financial statements, and our accompanying unaudited condensed consolidated financial statements, each of which have been prepared in accordance with U.S. GAAP. The preparation of these historical financial statements in conformity with U.S. GAAP requires management to make estimates, assumptions and judgments in certain circumstances that affect the reported amounts of assets, liabilities and contingencies as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. We evaluate our assumptions and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, we have made accounting estimates for our allowance for doubtful accounts, valuation of our contingent liabilities, other intangible assets and goodwill based on the facts and circumstances available as of the reporting date. Actual results may differ from these estimates under different assumptions or conditions.
We have provided a summary of our significant accounting policies in Note 1 in the notes to the accompanying unaudited condensed consolidated financial statements.
Market risk
As filed, 1,408 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Our future income, cash flows and fair values relevant to financial instruments are subject to risks relating to interest rates.
As of September 30, 2023, we had $1,772.5 million of fixed rate debt principal outstanding pursuant to the notes with a fair value of $1,647.1 million. Since these notes bear interest at fixed rates, they do not result in any financial statement risk associated with changes in interest rates. However, the fair value of these notes fluctuates when interest rates change.
We also have a Revolving Credit Facility available to us with available borrowing capacity of $100.0 million. We are obligated to pay interest on loans under the Revolving Credit Facility as well as other customary fees, including an upfront fee and an unused commitment fee based on our debt rating. Borrowings under the Revolving Credit Facility, if any, bear interest at floating rates. As a result, we are exposed to risks related to fluctuations in interest rates to the extent it impacts our borrowings. As of September 30, 2023 and December 31, 2022, we had no amounts outstanding under the Revolving Credit Facility. See “Liquidity and Capital Resources” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2. of this Quarterly Report and Note 11 to the accompanying unaudited condensed consolidated financial statements for more information.
Controls and procedures
As filed, 1,539 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Limitations on Effectiveness of Disclosure Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2023, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Risk factors
As filed, 951 characters, with its headings, lists and tables. Extracted from the main document; charts and exhibits are in the original on sec.gov.
Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks described under the heading “Risk Factors” in Part I, Item 1A. of our 2022 Form 10-K, the other information in this Quarterly Report, including our unaudited condensed consolidated financial statements and the related notes, as well as our other public filings with the SEC, before deciding to invest in our Class A common stock. There have been no material changes to the Company’s risk factors previously disclosed in our 2022 Form 10-K. The occurrence of any of the events described therein could harm our business, financial condition, results of operations, liquidity or prospects. In such an event, the market price of our Class A common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business.
Figures reported in this filing
Standardized line items from the XBRL in this filing, for the period ended 2023-09-30. Comparative periods it repeats are left out.
| Line item | Period | Value | XBRL concept |
|---|---|---|---|
| Revenue | 3 months2023-07-01 to 2023-09-30 | $675.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months2023-01-01 to 2023-09-30 | $1.86bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months2023-07-01 to 2023-09-30 | $44.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months2023-01-01 to 2023-09-30 | $87.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months2023-07-01 to 2023-09-30 | $8.0m | us-gaap:InterestExpense |
| Interest expense | 9 months2023-01-01 to 2023-09-30 | $24.1m | us-gaap:InterestExpense |
| Income tax | 3 months2023-07-01 to 2023-09-30 | $900.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months2023-01-01 to 2023-09-30 | −$6.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months2023-07-01 to 2023-09-30 | $32.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months2023-01-01 to 2023-09-30 | $72.5m | us-gaap:NetIncomeLoss |
| Operating cash flow | 9 months2023-01-01 to 2023-09-30 | $283.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months2023-01-01 to 2023-09-30 | $11.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months2023-01-01 to 2023-09-30 | $96.8m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | At period end2023-09-30 | $692.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | At period end2023-09-30 | $1.04bn | us-gaap:AssetsCurrent |
| Total assets | At period end2023-09-30 | $2.65bn | us-gaap:Assets |
| Current liabilities | At period end2023-09-30 | $313.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | At period end2023-09-30 | $2.11bn | us-gaap:Liabilities |
| Long-term debt | At period end2023-09-30 | $1.75bn | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | At period end2023-09-30 | $400.2m | us-gaap:StockholdersEquity |
Source: SEC EDGAR, the filing index for accession 0001794669-23-000029. Last ingested by Listed: Nov 5, 2026, 16:36 ET. Listed shows no prices and gives no investment advice.