Square's First Results After IPO: Loss Widens, Revenues Top
Jack Dorsey’s Square, Inc. SQ has surprised investors with better–than–expected top line performance in what was its first quarterly report since going public in November. Shares shot up nearly 7% during after-hours trading yesterday following the company’s announcement of its fourth quarter 2015 results.
The results especially came as a breather for Jack Dorsey who has been dividing his time between Square and Twitter TWTR by reportedly working 18 hours a day as the CEO of the two companies he founded.
Apparently, Dorsey wasn’t exaggerating when he said, "I have set up a structure that is working very well for me, so that I can spend meaningful time at both companies, and I have enough flexibility in the schedule" at Twitter’s earnings call.
Six-year old Square has gained popularity for its mobile payment and financial services offerings. While the company is not yet profitable, it reported strong revenues of $374 million that surpassed the Zacks Consensus Estimate of $341 million.
On the operational front, the company’s results were encouraging in both core payments (transaction and hardware) business and software and data products. Square’s performance in this quarter also got a boost from the holiday splurge. Excluding Starbucks (the deal is set to expire in 2016), the company’s transaction revenues grew 44.7% year over year to $298.5 million.
With rapid evolution of smartphones, users are now opting for contactless payment technologies such as EMV or NFC. Square has positioned itself well to sail smoothly amid such changing tides in the mobile payments market. If we look at the statistics, about 53% of the total cards swiped on Square were EMV chip-type in Dec 2015, in contrast to only 12% at the beginning of 2015. Moreover, this is despite mounting competition from players like Apple AAPL and Samsung.
Investors seem particularly pleased with its growth trajectory. Square exited 2015 with growing demand for its latest version of contactless and chip reader (with 350,000 pre-orders for this $49 reader!). Moreover, the company has plans to expand its distribution from its own site and Apple Store at present to include most popular market places like Amazon AMZN, Staples, Best Buy and Target in a few months’ time.
Square is also doing remarkably well in terms of its new products like Square Capital (for lending capital to sellers) through which it extended $150 million in the quarter. Its more recent offerings like Instant Deposit, Square Invoices and Caviar also appear to be promising.
Despite a strong performance and robust growth in Gross Payment Volumes (50% up in 2015 to $35.6 billion), the concern regarding profitability remains. In the fourth quarter, Square’s loss of 34 cents per share was greater than the Zacks Consensus Estimate of a loss of 22 cents. This was due to increasing investments in product development and other expense including IPO-related stock compensation charges.
While the euphoria surrounding above-expectation revenues and strong demand is justified, a little word of caution may be in order. The company remains in investment mode and is also trying to diversify, both of which will continue to tell on the bottom line. So any investment in the shares will carry a certain amount of risk because of the uncertainty related to the recovery of amounts invested.
At present, Square carries a Zacks Rank #3 (Hold).
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