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A Year Since Listing, Square Delivers Strong Results

Posted on Thursday, Nov 3rd 2016

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Jack Dorsey may be struggling with making Twitter work, but he appears to have impressed the market with Square’s (NYSE: SQ) performance. Earlier this week, Square reported its third  quarter results which overshot market expectations. Despite the beat though, the stock is still valued significantly short of its pre-listing valuation.

Square’s Financials

For the third quarter, Square’s revenues grew 32% over the year to $439 million compared with the Street’s expectations of $430 million. Its platform processed $13.2 billion of gross payment volume, recording a 39% growth over the year. Excluding Starbucks revenues, Square’s revenues grew 51% over the year to $178 million compared with market estimates of $172.6 million for the quarter. Loss per share reduced from $0.35 a year ago to $0.09 for the quarter and was better than the market forecast loss of $0.11 per share.

By segment, Transaction revenues grew 38% over the year to $388.3 million. Software and data product revenues increased 140% to $35.3 million driven by growth in Square Capital, Caviar, and Instant Deposit revenue. Hardware revenue in the quarter grew 94% to $8.2 million. Starbucks transaction revenues fell to $7.2 million.

Square’s efforts to upsell itself to the bigger businesses appear to be working, albeit slowly. During the quarter, GPV from larger sellers, who are defined as those generating more than $125,000 in annualized GPV, grew 55% year over year and accounted for 43% of GPV in the third quarter of 2016. A quarter ago, that number stood at 42% of GPV.

For the current quarter, Square expects revenues of $438 million-$443 million and adjusted revenue to be in the range of $182-$185 million. It expects to end the year with revenues of $1.695 billion-$1.7 billion and adjusted revenues of $677 million-$680 million. The Street was looking for revenues of $1.68 billion for the year.

Square’s New Offerings

Square’s success can be attributed to its continuing product innovation. Last quarter, it launched a new offering called Scheduled Deposit to make it easier for sellers to access their funds. The service allows sellers to preset the days of the week that they would like to receive the funds on. Scheduled Deposit is an added feature of the Instant Deposit capability that Square had launched last year. Instant Deposit allows sellers to deposit upto $2,500 per deposit instantly. Since the launch of the service, 200,000 sellers have completed nearly 4 million instant deposits.

Additionally, Square also launched the feature Register Card on File to allow sellers the ability to safely store and charge their customers’ cards in Square Register. The enhancement allows sellers to accelerate the check-out process especially for their most frequent customers.

Square and Caviar

Meanwhile, Square is trying to reshuffle its portfolio by selling off its food delivery service Caviar. Square had acquired Caviar in August of 2014 for $90 million. Since the acquisition, Square has grown the Caviar business. Weekly order volume has grown more than 11 times and the average annualized GPV of a seller that uses both Square and Caviar is greater than $500,000. Square has also benefited by leveraging Caviar’s customers to expand its reach within the restaurant segment. But the food delivery business is now extremely competitive with the likes of UberEats and Grubhub. Analysts estimate that Caviar is losing money, though the volume of the losses is not known.

According to market reports, Square has attempted to sell Caviar to Uber, Grubhub, and Yelp for an estimated $100 million. But it hasn’t received any bids at that price. It will continue to look for a potential buyer or it will have to take a beating on the asking price.

It has been a full year since Square went public. Prior to listing, the company had attained a $6 billion valuation. Currently, it is trading at $11.07 with a market cap of $3.58 billion. It touched a 52-week high of $15.91 in March this year and has recovered from the 52-week low of $8.06 it had fallen to in February.

Photo credit: Pieterjan Grobler/Flickr.com.

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