Square Earnings Breakdown – Sean D. Emory
Square is out with their earnings and it is more of the same at the business level, with new insights and strategies.
- Cash in the business: Square has decided to sell its Caviar food delivery business to DoorDash for $410M. They purchased Caviar in 2014 for $90M. A nice ROI.
- Cash App making cash: Square broke out their Cash App revenue and it was big. Cash App is currently running at a $500M annual run rate, or $1B if Bitcoin is included. Cash App was generating only $1m three years ago. Also, they mentioned that 3.5 million customers used the Cash Card in June, typically using it purchase multiple times per week.
- Larger Sellers Continues: 54% of all the sellers using Square are considered mid to large sellers. This is the highest reading ever for the business. This is key as larger sellers need more products and more products mean they are more dependent on Square.
- Bitcoin: If you believe in cryptocurrencies at all then Square gives you an opportunity to participate alongside a strong and growing core business. This quarter Cash App saw $125M in Bitcoin revenue.
- Eventbrite: It is good to remember that they have an investment in Eventbrite. Each quarter they have to mark to market the value of that investment and it goes against their earnings. It has been negative in the last 2 quarters.
Let us dig a little bit more on some of the highlights…
Revenue from subscription and services was $252M for the quarter and growing north of 87% year over year. The importance of this segment is that carries a much larger margin profile than its core business. As this grows, so will the overall margins of the organization. One thing of note, Amrita, the CFO reminded me on the earnings call, that when Caviar is their lowest margin business in the category and will be a net positive to cash and margins for Square as a whole. Caviar was also the largest revenue driver for Subscription and Services.
Here’s the catch: Square use to only allow its sellers to use Caviar as its integrated delivery partner. Now? Square created Order Manger, a delivery API, enabling sellers to integrate with more than 20 delivery companies. DoorDash, Postmates, etc. Square shares in the economics of orders placed through connected delivery apps, which drives additional revenue to Square.
This increases their overall market and margins…
Square continues its quest on growing the size of its sellers. As investors, we want sticky sellers, therefore we want to see the percent of large sellers grow. The growth of sellers can come in two forms. First, bringing on new larger sellers, or second, having your smaller sellers grow into larger sellers. Either one is good. As you can see 25% are considered large, which is the highest on record.
Square Capital continues on. This is really a reinforcing tool for Square sellers. Remember Square provides automated loans to sellers by analyzing the data of their sellers. They have real-time access to seller data, which in theory should help them underwrite business loans better. So far it is showing up in the data as they have less than 4% loss rates. Also, they get paid back from the sellers through transactions of the customers. No need to knock on doors.
This quarter we saw a continuation of growth in the total loans along with a stable size of loans.
It is pretty clear that Square is focusing on growing Cash App and the services it provides. However, their hardware remains a decent gauge on future usage. Hardware sales remain firm, growing 21% year over year.
Lastly is focusing on customer funds. This is a decent proxy for the Cash App along with maybe their payroll product. Customer funds are growing 132% year over year, which is a big number.
They issued guidance which is strong. They are guiding their revenue to 43% growth for 2019 over 2018 and profitability growth of 60% year over year. I’d say those are some good numbers. Keep in mind Amrita made it clear that they will make some adjustments once the Caviar deal closes. Overall I think they were conservative with this guidance despite how strong it is.
So that’s it. Strong quarter for Square as they build on their ecosystem of products and services. Can this team continue to execute at a high rate? Well hey turned a $90M business into a $410M business in 5 years and took Cash App from $1m to $500M run rate in 3 years. I wouldn’t bet against it…
That is it. Hope you enjoyed.
Sean D. Emory
Avory & Co. Founder & Chief Investment Officer
Disclaimer: This is not a recommendation for the purchase or sale of any securities. Avory does own SQ.
AVORY & CO. IS A REGISTERED INVESTMENT ADVISER. INFORMATION PRESENTED IS FOR EDUCATIONAL PURPOSES ONLY. PLEASE SEE FULL DISCLAIMER HERE
Published at Thu, 01 Aug 2019 22:58:12 +0000
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