Square Thriving Through Acquisitions And PaaS

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About: Square, Inc. (SQ)
by: Sramana Mitra
Summary

Square is looking to offer a comprehensive ecosystem of services that's sticky or something that a young entrepreneur or startup might grow to use.

These include business loans, payroll services, POS solutions, and now omnichannel commerce.

This expansion of its ecosystem makes it attractive but also increases its range of competition.

Earlier this month, mobile payments platform Square (NYSE:SQ) announced its first quarter results. While the results outpaced market expectations, a lackluster first quarter outlook disappointed the market and the stock fell 8% since the results announcement.

Square's Financials

Square's gross revenues grew 43% to $959.36 million. Adjusted revenues for the quarter grew 59% over the year to $489 million, ahead of the Street's expectations of $479.63 million. It ended the quarter with a net loss of $38 million, or $0.09 a share, compared with a loss of $24 million, or $0.06 a share reported a year ago. On an adjusted basis, the EPS came in at $0.11, compared with the market's forecast of $0.08.

By segment, subscription and services-based revenues grew 126% over the year to $ 218.9 million. Transaction-based revenues increased 26% to $656.8 million. It generated $12.2 million revenues from the hardware business and revenues from Bitcoin soared 92% to $65.5 million.

Among other metrics, Square's gross payment volume came in at $22.6 billion, marginally short of the estimates of $22.8 billion.

For the current quarter, Square forecast gross revenues of $1.09-$1.11 billion, adjusted revenues of $545-$555 million and an EPS of $0.14-$0.16. The Street was looking for adjusted revenues of $557 million for the quarter with an EPS of $0.18. Square expects to end the current year with revenues of $4.41-$4.47 billion, adjusted revenues of $2.22-$2.25 billion compared with the market's forecast of $4.42 billion, and adjusted revenue forecast of $2.26 billion.

Square's Market Expansion

Square is continuing to drive growth through several key initiatives. It's focusing on larger sellers, those who generate more than $125,000 in annualized gross payment volume. During the quarter, it saw revenues from these sellers grow 37% over the year and account for 51% of its total GPV as against the 47% contribution a year ago. It's also driving adoption in the mid-market sellers with annualized GPV of more than $500,000. This segment grew 50% over the year and accounted for 24% of total GPV, compared with 20% contribution a year ago.

Its Cash App ecosystem also is continuing to thrive. The peer-to-peer payment app now allows direct deposit, Instant Deposit, and Cash for Business features and has seen transactions grow nearly 2.5 times within a year of its launch. Within Cash App, it's not only seeing a growing number of monthly active Cash Card customers, but also an increase in transaction frequency per customer.

Recently, Square also entered into an agreement with Postmates. Postmates offers a network of couriers who deliver food, groceries, and alcohol locally. As part of the agreement, Square customers can use Postmates' couriers to get goods to customers who place orders with Square. Square already has its own food delivery service Caviar, based on a company it had acquired in 2014. But the deal with Postmates will help expand its market reach since Postmates is present in more than a thousand cities.

Square also is investing in the AI segment. Earlier this month, it acquired Eloquent Labs, a small business-focused conversational assistant. Based in Redwood City, Eloquent Labs uses AI tools to enhance live chat customer support agents at eCommerce players. Its flagship product Elle can hold natural and conversational dialogs with customers fully autonomously by relying on natural language processing and AI capabilities. Square plans to leverage the solution to offer an AI-enabled chat solution to its payment customers. Prior to the acquisition, Eloquent Labs had raised $1.5 million. Owler estimates its annual revenues at $6 million. Terms of the acquisition were not disclosed.

Square's Platform Strategy

Besides building a robust product portfolio, Square also has helped build a thriving developer community. It allows developers to use APIs and SDKs free of charge. Developers can build self-service kiosk applications that are powered by Square Reader SDK and are streamlined for in-store ordering processes. It also offers several third-party apps on its marketplace that provide services ranging from accounting and tax support to e-commerce, marketing, and inventory and logistics management.

Earlier this year, Square released an In-App Payments SDK that provides a customizable payments flow that works with most popular payment types. The SDK will allow developers of retail organizations to integrate Square as a payment option that will be customized for the retailer. Square plans to use this service to grow its omnichannel payments platform. It's the only platform that provides a payment solution that spans across online, in-person and mobile options.

Square is looking to offer a comprehensive ecosystem of services that is sticky or something that a young entrepreneur or startup might grow to use. These include business loans, payroll services, POS solutions, and now omnichannel commerce. This expansion of its ecosystem makes it attractive but also increases its range of competition to include Adobe's (NASDAQ:ADBE) Magento, Shopify (NYSE:SHOP), and Wix.com.

Its stock is trading at $66.4 with a market capitalization of $28.1 billion. It had climbed to a 52-week high of $101.15 in September last year. Like other tech stocks, its stock had fallen to a 52-week low of $49.82 in December last year.