Square Eyeing Large Sellers

| About: Square, Inc. (SQ)

Summary

CEO Jack Dorsey has talked about the shift in strategy to extend the company's target market to large sellers, which he feels are vital to build a viable, long-term business.

Companies with more than $125,000 annualized GPV now account for 42% of Square's total GPV, up from 37% in 2Q15.

Larger sellers' payment volume grew by 61% in the second quarter.

According to eMarketer, the number of people in the US using proximity mobile payments is expected to grow 61.8% to 37.5 million by 2016 while mobile payments are estimated to grow 210% to $27.05 billion in 2016 from $8.71 billion in 2015. Mobile payment firm Square (NYSE:SQ), former member of the Billion Dollar Unicorn Club, went public early this year and recently reported second quarter results that beat analyst estimates.

Square's Financials

For the second quarter, mobile payment firm Square processed $12.5 billion of Gross Payment Value (GPV), up 42% y-o-y. It reported total net revenue of $438 million, up 41% y-o-y, beating analyst estimates of $405 million. Adjusted revenue, excluding Starbucks Transaction revenue and transaction costs, was up 54% y-o-y to $171 million. Net loss narrowed to $27.35 million or $0.08 per share beating analyst estimates of loss of $0.11 per share.

Net loss was $29.62 million or $0.20 per share a year ago. Adjusted EBIDTA was a positive $13 million, a major milestone for the company. Operating expenses increased to $176.3 million from $118. 4 million a year ago.

By segment, Transaction revenue grew 40% to $365 million, Software and Data Product revenue grew 130% to $30 million, and Hardware revenue grew 205% to $11 million. Starbucks Transaction revenue declined 2% to $32 million. Revenue from the Starbucks arrangement, which is expiring this year, accounted for 7.4% of total revenue from 10% in the previous quarter.

Square Capital, the company's merchant lending arm, saw strong growth in volumes during the quarter. Loans made to businesses grew by 123% over the year to $189 million. Its association with millions of sellers allows it to have low acquisition costs, and its low rates are also a big draw.

For the third quarter, Square expects revenue to be within the range of $410 million to $420 million and adjusted revenue to be in the range of $167 million to $171 million. Analysts expect loss of $0.10 per share on revenue of $415 million.

The company raised its full-year guidance. It now expects total GAAP net revenue to be within a range of $1.63 billion to $1.67 billion. Adjusted revenue is expected to be in the range of $655 million to $670 million, up 6% at the midpoint from its previously guidance range. Adjusted EBITDA is expected to be in the range of $18 million to $24 million, up from its previous range of $8 million to $14 million.

Square Attracting Large Sellers

During the earnings call, CEO Jack Dorsey talked about the shift in their strategy to extend its target market to large sellers, which he feels are vital to build a viable, long-term business. Companies with more than $125,000 annualized GPV now account for 42% of Square's total GPV, up from 37% in 2Q15. Larger sellers' payment volume grew by 61% in the second quarter.

Analysts were concerned about the company's strategy to attract larger sellers, which could lead to pricing concerns and affect margins. However, Square has put those concerns to rest by maintaining the transaction revenue margin while increasing the large sellers' GPV.

Its stock is trading at $11.30 with a market cap of $3.65 billion, which is a little over half of its valuation of $6 billion before going public. It touched a high of $15.81 in April after hitting a low of $8.34 in February this year. Of the 23 analysts covering the company, 11 have given it a "buy" recommendation while 12 have given it a "hold" recommendation. Median target estimate price is $13.