Square’s August Earnings Surprise

With its stock value up 10 percent in after-hours trading – Square has managed to please investors with losses smaller than expected, growing payments volumes and continuing signs of strength emanating from its lending platform for small business, Square Capital.

It’s a far cry from investor reactions during Square’s Q1 announcement, which saw Square’s after-hours trading stock price take a 12 percent tumble – as investors proved to be much more concerned about Square’s rising costs then they were by the firm’s increasing payments volume.  On the whole, 2016 has been tough going for Square – its stock price is down 20 percent, and it’s been the recipient of a good deal of media attention due to its CEO Jack Dorsey’s second job – as the CEO of Twitter, which needs a lifeline or two of its own.

But the Q2 numbers are a bit more positive.  Square is still losing money – but a lot less than it was this time last year or this time last quarter. Payments volume continues to grow – and its merchant base is looking larger, more established and more profitable – all of which is good news for Square.  Square Capital also finds itself well positioned in the SMB lending space – and it sees that service growing.

On the whole, CEO Jack Dorsey was positive about the outcomes of Q2 – and quick to point out how the firm plans to scale into profitability moving forward.

“There are more questions as you get larger, so we’ve been applying a lot of machine learning and data science,” Dorsey told analysts during the quarterly earnings call. “We’re finding that larger sellers come to us because of our brand. They see us around their neighborhood.”

Chief Financial Officer Sara Friar followed up on that theme, noting that Square has had the unique ability to grow up with their clients – and thus has been uniquely well positioned to help business transition up technologically as their corporate ambitions expand.

“Now that the product has become much more sophisticated, they are able to use it for their entire business,” Friar told investors.

And it seems the market, so far, agrees with Square’s self- assessment of good news. But is all the enthusiasm warranted?

Square Earnings By The Numbers

Square beat expectations on revenue –  clocking $439 million as opposed to the $406 million analysts were predicting.  That is a 41 percent pick-up from the same quarter in 2015.  Square’s other big metric was payment volume – which was up 42 percent year-over-year to $12.5 billion.

According to Square’s letter to shareholders, more than just growth, Square is seeing a sharp uptick in payment volume among large sellers that generate more than $125,000 worth of payment volume per year. Growth in that high value group was up 61 percent. As of today,  high value sellers represent 41 percent of the of total volume on Square, up from 37 percent of the total of volume during Q2  2015.

Square is still losing money – net losses this time around were $27 million. Losing $27 million is never good news – but it is much better news than the $97 million that Square lost in Q1. Square earnings before interest, taxes, and other expenses included was $13 million – which beat the firm’s upper end guidance.

Lending’s Continued March Forward

Square lending business – first launched in 2014 – saw some big growth too, with 34,000 new loans extended – for a total of $189 million lent out last quarter.  That is a 123 percent increase over 2015, and a 23 percent uptick from Q1 2016.

Square has also recently announced that it would be expanding into traditional online loans, with fees between 10 percent to 16 percent of the total sum to borrowers.  That program had slowed down due to “challenging credit market conditions” and difficulties attracting borrowers to what was essentially Square’s take on a marketplace loan (they arrange the loan, collect a service fee and sell the loan to a third-party buyer).  Those difficulties seem to have been resolved – as Square announced it has added five new investors to provide lending capital.

Square further reported that revenue from its lending program – and the company’s other software service business – was up 130 percent over the same time last year to $30 million. That is also a 25 percent increase over last quarter.

Getting Back With Starbucks?

Among the stranger pieces of information out of the earnings report was the news that Square’s unhappy processing marriage to Starbucks may get some extension.

The deal had been set to expire at the end of Q3 2016 – but as of yesterday, Square had announced the two firms are “currently negotiating an amendment that may extend the agreement beyond the third quarter to allow Starbucks additional time to complete its transition.”

Starbucks made up about $33 million in net revenue and $4 million in transaction profit for Square in Q2.

The question most analysts are speculating about now: what will this all look like in Q2 2017?  The early indication is they are pleased by these results – but given the number who referenced AmEx’s and Chase’s coming forays into SMB online lending, they are also curious to see if Square can stay competitive.

Square and its multi-tasking CEO are unsurprisingly confident.

“We haven’t been experiencing the challenges our competitors are mentioning,” Dorsey said on the call.




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