Square At Scale

Square will open the market today with stocks about 6 percent more valuable than they were at opening yesterday. Investors were pleased with the better-than-expected revenue and earnings outcomes — and favorably impressed by Square’s higher-than-expected “take rate” and its surge in subscription services.

“A lot of this progress stems from our work on integration, which I have mentioned is an area of focus for us this year,” CEO Jack Dorsey noted in his remarks to investors post-earnings announcement yesterday.

“We placed a lot of emphasis on integration because tools that work seamlessly together create a better experience for our customers. And we hear from our sellers that the cohesiveness of our services is why so many sellers choose Square to start their businesses and stay with us as they grow,” Dorsey continued.

So where did Square hit — and why were investors so chipper?

By The Numbers

Square beat on revenue — clocking $461.6 million versus the $450.7 million expected by analysts, representing a 21.7 percent improvement year on year. Losses per share also came in much lower than expected — net losses narrowed to $15.1 million, or 4 cents per share, in the first quarter. That is a big step down from the from $96.8 million, or 29 cents per share Square reported this time last year.

Square’s gross payments volume — the amount of transactions the company facilitates — was also on the rise, increasing 33 percent to $13.6 billion. This result was in range of analyst expectations. Transaction-based revenue was another beat, with Square logging $403.5 million vs. $399.9 the street was expecting.

Operating expenses also fell by 10 percent to $187.51 million. Shares of Square are 34 percent this year through Wednesday’s close.

And Square is adjusting its estimates for the year up slightly. The firm is forecasting adjusted earnings per share in the 16 cents to 20 cents range as opposed to the 15 cents to 19 cents projected previously. Revenue expectations have been adjusted to $890 million to $910 million as opposed to the previous guidance of $880 million to $900 million.

Services Comes Out Swinging
Among the bigger surprises were the results for Square’s subscription services. Subscription services, as a category, includes the firm’s payments-integrated services such as its lending unit Square Capital, food ordering service Caviar and peer-to-peer payment service Square Cash.

Subscription and services-based revenue came in at $49.1 million vs. $41.3 million the Street expected. That represents a growth rate of 106 percent, compared with the year-ago quarter.

According to Square’s CFO Sarah Friar comments during the post earnings call with analysts, Cash, Caviar and Capital were the three units most responsible for pushing growth in the Subscription Services line.

“I think in terms of highlights in that area, Capital is certainly one. Capital grew 64 percent year-over-year and we facilitated the origination of $241 million worth of loans, so feel great about that product. Clearly, we are answering a big market need and very few, if any others can really follow us into that market. Caviar continued to scale. Q1 ‘17 orders more than doubled year-over-year. And then I think the other one we would call out is Instant Deposit, so clearly benefiting from awareness across our ecosystem for both sellers and for Square Cash users as well, so those three are probably the biggest components.”

CEO Jack Dorsey also took time to call out the strategic importance of Caviar as Square is continuing in its push to expand and reach scale.

“We acquired Caviar in order to drive more sales to a type of seller we weren’t able to reach, which was a full-service restaurant. Along the way, we learned that not only was delivery important, but offering more types of fulfillment of food was critical as well, and it would continue to open us up to new types of restaurants as well, including QSRs. So we have learned a bunch from delivery, but the biggest learning is that we think we have an opportunity to go beyond just delivery and to really be a food platform anytime you are hungry.”

And continuing to develop, grow and carry on its quest for scale also seems to be the immediate forecast for Square’s future — with particular focus on its international ambitions (particularly in the U.K.) and expanding its educational efforts on NFC in general and Apple Pay in specific here in its home market in the U.S.

“Inside the United States, we still have a lot of work to do in educating both sellers and consumers. So we are working with our partners like Apple to make sure that we are giving our best effort to help consumers understand the value of Apple Pay and of NFC,” Dorsey noted in response to an investor comment.

As of today — Square’s stock price has doubled the Square $9 per share it was worth at the end of its 2015 IPO. The company’s market cap is $7 billion, which means it has officially exceeded the $6 billion valuation during its last private round.