Square Falls on Concerns Over Financing Business-Loan Program

  • Profit margin on hardware sales not favored by investors
  • Company cites `challenging credit market conditions' on loans

Why Investors Are Worried About Square's Loan Program

Square Inc. shares fell as much as 20 percent on concerns about financing for its small-business customer-loan program, a service that had been viewed as a growth area for the digital-payments company.

The company said Thursday in its first-quarter earnings report that it extended $153 million in loans and advances, a 4 percent increase from the previous quarter. Square said it faced “challenging credit market conditions” and cited delays signing new investors to help back its lending business.

“That might worry people if those delays happened once it could happen again,” said David Ritter, an analyst at Bloomberg Intelligence.

Chief Executive Officer Jack Dorsey has been trying to show investors that Square can keep growing amid increasing competition from PayPal Holdings Inc. and First Data Corp. in the crowded transactions industry. Among the services offered by the company to expand the business is its lending program.

“Investors are looking past the fast growth to Square’s long-term viability,” said Gil Luria, an analyst at Wedbush Securities Inc. “A lot of people are hanging their hopes on the lending business, so them highlighting a challenging credit market is a big problem.”

Shares declined to a low of $10.50 in trading Friday morning, their biggest intraday decline since November 19. They were trading at $10.54 at 10:30 a.m. in New York.

The stock has taken a roller-coaster ride since Square’s initial public offering at $9 in November. The IPO price was lower than the planned range of $11 to $13, and shares dropped as low as $8.37 in February on concerns about competition, before rebounding to a high of $15.48 last month. They were up a total of 45 percent since the IPO as of Thursday’s close.

Square Chief Financial Officer Sarah Friar said the language about a challenging credit market was included in the earnings report to reflect industry conditions and didn’t represent issues unique to Square. Demand is strong for loans from Square customers and the company said it added two investors at the end of April that will increase funding for the program.

Square is trying to shift its customers from advances to loans. Loans give businesses the flexibility to pay back balances more quickly than advances, which deducted payments from transactions until the balance was repaid.

“This was a really big quarter for laying a foundation for growth” Friar said, as Square converts more customers to loans.

Quarterly Sales

In its first-quarter results Thursday, Square said sales rose 51 percent percent to $379.3 million, compared with analysts’ average estimate of $345.6 million, according to data compiled by Bloomberg. The company reported a net loss of $96.8 million, or 29 cents per share.

Square targets small businesses with devices that plug into smartphones and tablets, allowing merchants to process credit-card payments. The company usually takes a 2.75 percent cut per transaction swipe. It also provides tools to small business for managing inventory and analyzing sales data.

Gross payments volume rose 45 percent to $10.3 billion from a year earlier. That’s a slower pace than 47 percent reported in the fourth quarter.

Device Orders

The company has received 500,000 orders for its new contactless chip reader that helps merchants update from magnetic strips on payment cards to chips. Square expects those sales to continue as businesses make the transition and the company has improved access through partnerships with Amazon.com Inc., Staples and other retailers.

Hardware sales more than doubled from the fourth quarter to $16 million. The company, however, sells its device at a loss to gain new payments customers, Luria said.

The low-margin payments business is seen as an entry point to attract customers, who can be sold additional services. Square has customers in the U.S., Canada, Japan and Australia.

Square forecast adjusted revenue of $151 million to $156 million in the current quarter, and raised its annual projection by $15 million to $615 million to $635 million. Adjusted revenue excludes sales from its deal with Starbucks, which expires in the third quarter, and transaction costs.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE