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Square Continues to Acquire

Posted on Monday, Jun 29th 2020

In May, Square (NYSE: SQ) reported a mixed first quarter that showed slowing GPV but a significant uptake in its Cash App. It continues to follow a healthy acquisition strategy to boost its AI and P2P payments products. Its stock hit a 52-week high last week.

Square’s Financials

Square’s net revenues in the first quarter grew 44% to $1.38 billion, ahead of the market’s forecast of $1.3 billion. Adjusted loss was $0.02 per share, missing the market’s forecast of earnings of $0.13 per share.

During the first quarter, Square facilitated 75,000 loans worth $548 million, up 8%. Transaction-based revenues grew 15% to $758.1 million. Subscription and services revenues grew 35% to $296.2 million driven mainly by Cash App, Square Capital, and Instant Transfers for sellers. Hardware revenues grew 14% to $20.6 million and Bitcoin revenues grew a whopping 367% to $306.1 million.

Due to the impact of the COVID-19 outbreak and subsequent shelter in place orders, Square experienced a significant decline of 35% in GPV generated by its Seller business in the latter half of March 2020. First quarter GPV grew 14% to $25.7 billion driven mainly by 29% growth in payment volume in January and February by existing sellers and new sellers. 52% of volume mix came from larger sellers, at $125,000 or more of annualized GPV, slightly higher than a year ago. Card-present volumes declined by 60% in the last two weeks of March, while card-not-present volumes were less affected.

Square did not provide any guidance for the second quarter.

Square’s New Initiatives for COVID-19

Square has undertaken several initiatives to support its ecosystem that has been affected significantly by the pandemic. Some of the worst impacted verticals include sellers within food, beverage, and retail.

To support its sellers during the pandemic, Square refunded all March software subscription fees. From mid-March, it paused new core flex loan offers for Square Capital given the lower visibility in this disruptive time. Transaction and loan loss expenses were $109 million in the first quarter of 2020, up 291%.

In April, Square Capital secured the Small Business Administration (SBA) approval to offer Paycheck Protection Program (PPP) loans to provide small businesses with funding for two months of employee salaries. It then built a new product to enable quick processing of the loan applications. On June 15, Square Capital announced that in six weeks it has processed over $820 million in SBA PPP forgivable loans to over 76,000 small businesses.

A major highlight in the quarter was the uptake in Cash App. Square noted that it doubled its web traffic overnight when Cash App published straightforward FAQs to help people understand the stimulus program. Square then worked with its partner banks to expand direct deposit access for Cash App customers, making it easy for people to get their money deposited directly. In four weeks, the number of Cash App customers with direct deposit access grew from 3 million to 14 million and Cash App revenues were up 98% at $222 million.

Square’s Acquisitions

Square’s recent acquisitions focus on AI and P2P payments. Last year, Square had acquired Eloquent Labs, a small business-focused conversational assistant. Square planned to leverage the solution to offer an AI-enabled chat solution to its payment customers. 

In February this year, Square acquired Toronto-based machine learning applications company Dessa to boost its machine learning and AI initiatives. Founded in 2016, Dessa had raised $9 million in September 2017 from Fidelity. Terms of the deal were not disclosed. The Dessa team will continue to operate from its Toronto office. Dessa, best known for its work on the detection of deepfakes, is expected to work on improving Square’s financial tools by developing techniques that might mitigate the use of deepfakes

In June, Square announced its plans to purchase Spanish P2P payments app Verse. Terms of the deal were not disclosed but analysts estimate the deal to be worth between 30 million euros ($33.8 million) to 50 million euros ($56.3 million).

Founded in 2015, the Verse mobile app is available in all 27 countries of the European Union and works with all the different EU currencies. Verse allows users to make payments instantly at no cost. It had raised $37.6 million in funding. Verse will join the Cash App organization at Square but will continue to operate as an independent business. Square said its priority is to enable Verse to continue their successful growth in Europe.

Square’s stock is trading at $104.78 with a market capitalization of $45.8 billion. It hit a 52-week high of $107.84 last week. Its stock hit a 52-week low of $32.33 in March.

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