Square Earnings Show It Can Grow Beyond Just Mobile Payments

Updated on
  • Larger merchants becoming greater share of customer base
  • First report after IPO shows growth in all categories

Square Inc. is showing some early signs of success in expanding its business beyond just selling mobile credit-card readers to food trucks and dog walkers.

Chief Executive Officer Jack Dorsey -- who also runs Twitter Inc. -- has been pushing to get small businesses to use Square’s add-on services for managing inventory, securing cash advances and analyzing sales data. Bigger merchants are also signing up, the company said in its first earnings report as a public company. The shares climbed after fourth-quarter sales rose 49 percent to $374 million, beating analysts’ average estimate of $345 million, according to data compiled by Bloomberg.

Larger customers will help Square become profitable this year, the San Francisco-based company said on Wednesday. That will help Dorsey convince investors that Square has the potential to grow even as PayPal Holdings Inc., Apple Inc. and others join the crowded transactions industry, and that he can juggle his other job as CEO of struggling social-media company Twitter.

“Momentum looks very strong and a lot of their initiatives are working,” said Steven Weinstein, an analyst at ITG Inc. “The more Square products a business uses, the more likely they are to remain a Square customer.”

Square shares rose in extended trading after earlier gaining 4.8 percent to close at $12.03. The stock has gained 34 percent since its initial public offering at $9 in November.

The company said revenue increased across all categories -- payment transactions, software and data products. Square said it lost $80.5 million, or 34 cents a share, in the fourth quarter, compared with $37.1 million, or 25 cents, a year earlier. The loss included a $32.2 million dividend on preferred stock.

Square said it processed $10.2 billion in payments in its busiest quarter -- up 47 percent from a year earlier -- on behalf of more than 2 million merchants. More importantly, larger merchants -- those processing at least $125,000 annually -- represented 39 percent of all transactions in the quarter, an increase from 33 percent of volume a year earlier.

Square dongles plug into smartphones and tablets, enabling credit-card payments on the go. The company usually takes a 2.75 percent cut per transaction. The low-margin payments business is seen as an entry point to attract customers, who can be sold additional services. Square Capital issued more than $400 million in cash advances to merchants in 2015.

Square forecast 2016 adjusted revenue of $600 million to $620 million, which topped analysts’ projections by 15 percent to 20 percent, said David Ritter, a Bloomberg Intelligence analyst. “The guidance looks very positive,” Ritter said.

Square is in a position to attract more business as merchants shift from accepting payments by reading magnetic strips on credit cards to reading chips embedded in cards and using near-field technology to accept smartphone payments. Square said it received 350,000 orders for its latest $50 reader that can scan chips and accept payments from smartphones. That shift exposes more merchants to Square’s other products, Dorsey said.

“Most of the competition is on parts of what we do instead of the whole vision,” Dorsey said. “We haven’t seen competition with the full cohesion we provide.”