Shift4 Payments (FOUR) has filed to raise $100 million in an IPO of its Class A shares, according to an S-1 registration statement.

The firm provides a suite of integrated payment processing services to small and medium businesses.

FOUR is growing quickly and producing free cash flow while operating in an industry that is likely to produce accelerating growth results in the years ahead.

Allentown, Pennsylvania-based Shift4 was founded to create an integrated payments platform serving businesses located primarily in the United States.

Management is headed by founder and Chief Executive Officer Jared Isaacman, who was previously founder of Draken International, an air services provider.

Below is a brief overview video of an interview with CEO Isaacman:

Source: pinnaclehs

The company’s primary offerings include:

  • End-to-end payment processing
  • Merchant acquisition
  • Omni-channel gateway
  • 350 integrations
  • Fixed and mobile POS solutions
  • Security and risk management tools
  • Reporting and analytics

Shift4 has received at least $148 million from investors including private equity firm Searchlight Capital Partners.

The company acquires customers solely through a partner distribution system.

Shift4 sells through well-developed partner programs of ISVs (Independent Software Vendors) and VARs (Value Added Resellers).

The firm served 66,000 merchants during the first quarter of 2020.

Advertising & Marketing expenses as a percentage of total revenue have been dropping as revenues have increased.

The Advertising & Marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Advertising & Marketing spend, was very high 34.2x in the most recent reporting period.

According to a 2019 market research report, the market for payment processing services is expected to reach $62.3 billion by 2024.

This represents a forecast CAGR of 9.9% from 2019 to 2024.

The main drivers for this expected growth are a continued growth in the number of merchants seeking integrated payment processing solutions and the entrance of new market participants with new technology offerings.

Major competitive vendors include:

  • PayPal (PYPL)
  • Global Payments (GPN)
  • Square (SQ)
  • Wirecard
  • Visa (V)
  • Jack Henry & Associates
  • Paysafe Group
  • Naspers Limited

Management says its system not only provides payment processing but integrates with a large number of third party 'commerce enabling' software to offer a more seamless set of solutions.

Shift4’s recent financial results can be summarized as follows:

  • Growing topline revenue
  • Stable gross profit but decreasing gross margin
  • A swing to operating profit
  • Positive cash flow from operations

Below are the firm’s recent financial results:

Source: Shift4 S-1 Filing

Source: Shift4 S-1 Filing

As of March 31, 2020, Shift4 had $70.2 million in cash and $833.2 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2020, was $18.4 million.

Shift4 intends to raise $100 million in gross proceeds from an IPO of its Class A shares, although the final amount may differ.

Class A shareholders will be entitled to one vote per share, and the Class B shareholder, private equity firm Searchlight Capital, will be entitled to an as-yet undisclosed number of votes per share.

The S&P 500 no longer admits firms with multiple classes of stock into its index.

Management says it will use the net proceeds from the IPO for general corporate purposes and working capital as well as to purchase LLC interests in the operating entity.

Management’s presentation of the company roadshow is not yet available.

Listed bookrunners of the IPO are Citigroup, Credit Suisse, Goldman Sachs,
BofA Securities, Morgan Stanley, RBC Capital Markets, Evercore ISI, Raymond James, SunTrust Robinson Humphrey, Wolfe Capital Markets And Advisory, Citizens Capital Markets, Scotiabank, TD Securities and Telsey Advisory Group.

Commentary

Shift4 is seeking to go public for unspecified reasons, although I imagine its private equity firm owner would like to exit its position post-IPO.

The firm’s financials show strong revenue growth and a swing to operating profit, a turn toward net profitability and positive cash flow from operations and free cash flow.

Advertising & Marketing expenses as a percentage of total revenue are extremely low; its Advertising & Marketing efficiency rate is quite high.

The market opportunity for online or electronic payment processing is large and expected to grow substantially.

Given the effects of the Covid19 pandemic, my expectation is that the digital payments industry will produce higher than expected growth rates in the years ahead, as consumers in the U.S. switch to online ordering at an increasing rate.

FOUR is well positioned to reap the benefits of this accelerating trend to online payment processing.

Citigroup is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of negative (20.4%) since their IPO. This is a lower-tier performance for all major underwriters during the period.

Shift4 is private equity owned and has significant debt as a result, so would typically be less desirable.

However, the firm is producing strong growth and other financial metrics, is turning toward net breakeven and is producing free cash flow while operating in an industry with very favorable growth trends.

I’ll provide an opinion when we learn more IPO details from management.

Expected IPO Pricing Date: To be announced.