Square, Inc. is a commerce ecosystem that enables its clients to start, run, and grow their businesses. The company provides financial and marketing services, the main of which is credit card payment processing solutions. Square Inc. enables its clients to start, run, and grow their businesses. It combines software with hardware to enable sellers to turn mobile and computing devices into payments and point-of-sale solutions. The company not only sells point-of-sale hard- and software but provides services that “help sellers make informed business decisions through the use of analytics and reporting.” As a result, sellers can manage orders, inventory, locations, employees and payroll; engage and grow their sales with customers, and gain access to business loans. Square Inc. customers are different in size, “ranging from a single vendor at a farmers' market to multi-location businesses”. They represent various industries in a wide span of geographies, including the United States, Canada, United Kingdom, Japan and Australia. The company earns its revenue by charging either a per transaction fee, a service or a subscription fee for its services. (Reuters)
Square Inc. is a “young” company. It was founded in 2009 and launched its first app and service in 2010. Since 2015 it has been traded as a public company on the New York Stock Exchange. The company has demonstrated impressive revenue growth in recent years, split between several reporting segments.
In 2017, the company's total net revenues amounted to 2.2 billion U.S. dollars, which is 29% higher than in the preceding year. In 2018 the company continues to drive strong revenue growth at scale. In the third quarter of 2018, total net revenue was $882 million and grew 51% year over year, compared to 48% in the second quarter of 2018. A key catalyst has been company's triple-digit growth in subscription and services-based revenue. In the third quarter, this revenue was up 155% to $166 million. 2018 Q3 was also the first quarter when the company saw net income that amounted to $20 million. However, this figure includes a gain of $37 million “as a result of the initial public offering and subsequent mark-to-market valuation of Square's Eventbrite investment”. Excluding the impact of this gain, net loss was $17 million, which is $1 million more than in the third quarter of 2017 ("Q3 2018 Shareholder Letter"). As of December 31, 2017, Square Inc. had an accumulated deficit of $842.7 million. Increases in customer base could cause Square Inc. to continue to incur increased losses. The costs associated with new sellers and programs are generally incurred up front, while revenue is recognized thereafter as sellers utilize the services. Nonetheless, the company is intended to continue to make significant investments in their business, including expansion of international operations.
The company frequently makes decisions that will reduce its short-term operating results if it believes that such decisions will improve customer experience and, as a result, will benefit the company in a long-run. Thus, in 2015 Square Inc. launched its Cash App to build an “ecosystem” of financial tools for individuals. Cash App allows individuals to send and receive money electronically. Although the Square Cash App isn't a huge revenue driver for the company right now, it could represent a multibillion-dollar opportunity for Square in the future. The Cash App is the #1 finance app in the App Store and continues to surge in popularity. As of February 2018, there were more than 7 million active monthly users. According to the latest data, in July 2018 the Square Cash App reached 33.5 million downloads, surpassing PayPal's Venmo app for the first time ever. (Franck) The company continues to invest in the growth of the Cash App by adding new features such as the Cash Card debit card, which has been growing rapidly in popularity. Cash Card was launched in 2017, and customer spending has already tripled in the six-month period ending in June 2018 reaching $3 billion annual run rate.
Total gross payment volume (GVP) also has been increasing over the years and has reached $65.34 billion in 2017. In the third quarter of 2018 GVP amounted to $22.5 billion, up 29% year over year. While initially Square Inc. was well-known for its small-business payment solutions, the company gradually developed greater success with slightly larger companies. In 2012, just 19% of Square's payment volume came from sellers with more than $125,000 in annualized gross payment volume. In 2017 this percentage has grown to 47% and the company continues to see strength from larger sellers. The most impressive growth in Square's GPV in recent years has come from sellers with over $500,000 in annualized GPV. In 2018 these sellers account for 24% of Square's gross payment volume, substantially up from 16% of payment volume two years ago. (“Square Inc. 2017 Form 10-K”)
Square Inc. experiences not only the growth of revenues, but the growth of cost of revenues as well. The total cost of revenue for the year ended December 31, 2017 amounted to $1.37 billion. This represents 21% increase compared to the year ended December 31, 2016, which is slower than the revenues rate of grows (29%) for the same period. ("Q4 2017 Shareholder Letter") In the third quarter of 2018 operating expenses were $363 million, up 55% year over year, and represented 41% of total net revenue. The cost of revenues rate of growth was slightly higher than the rate of revenue grows (51%). The increase in cost of revenue was attributable to growth in GPV processed, launch of new products - Square Terminal and Square Reader SDK, and growth in advertising expenditures and personnel costs.
As for Square's liquidity, the company ended the third quarter of 2018 with $1.8 billion in cash, cash equivalents, restricted cash, and investments in marketable securities. Operating cash inflows, proceeds from the exercise of stock options, and stock purchases under the employee stock purchase plan contributed positively to the cash balance. However, cash and cash equivalents went down by $78 million compared to the end of the second quarter of 2018. In part, the decline in cash balance was explained by the following. On March 6, 2017, Square Inc. issued $440 million aggregate principal amount of notes on the terms that the notes are convertible prior to December 1, 2021, at the option of the holders “under certain conditions or upon occurrence of certain events.” ("Square Inc. 2017 Form 10-K") Because the sale price of the company's Class A common stock exceeded the applicable threshold for the relevant period, in the third quarter of 2018, holders converted an aggregate principal of $70 million of their 2022 senior convertible notes. The company settled the principal amount in cash and the balance by issuing 2.2 million shares of our Class A common stock. The company expects to settle an additional $149 million of the 2022 notes in cash during the fourth quarter of 2018. Subsequent conversions are expected to be settled entirely in shares of Class A common stock. ("Q3 2018 Shareholder Letter")
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