Square (SQ), which made its IPO debut in November 2015, is trading sharply higher (+11%) this morning after reporting Q4 results last night. In terms of quick background, Square is a new company as it was founded in 2009.
When you are out shopping, you may have noticed that some small businesses, perhaps a florist or a dog walker, may allow you to pay by swiping your credit card through a white, square reader attached to a mobile device (tablet, cell phone etc.) Square makes that reader that allows payments to be received.
The advantage for consumers is that they can pay with a credit card when cash is usually required. Also, it's easy for business owners who get their money deposited in their bank account as soon as the next business day. There are no monthly fees and Square provides payment dispute assistance. Square does charge a 2.75% fee per swipe.
The company started out as a mobile payment system for small businesses and still does that but it has branched out into other areas. Square's point-of-sale service offers tools for every part of running a business, from accepting credit cards and tracking inventory, to real-time analytics and invoicing. Square also offers sellers financial and marketing services, including small business financing and customer engagement tools. Businesses and individuals use Square Cash, an easy way to send and receive money, as well as Caviar, a food delivery service for popular restaurants.
Of note, Square has taken some criticism as its Founder and CEO Jack Dorsey is also CEO and co-founder of Twitter (TWTR). Some have said he needs to spend his full time on one or the other. Square also has been in the news in recent years as its deal with Starbucks has fizzled. In 2012, before Square went public, Starbucks had a deal for Square to be its exclusive card processor and SBUX invested $25 mln in Square. However, the deal did not work out well as Square was getting squeezed because it was offering SBUX a discount but still had to pay fees to Visa and MasterCard. Anyway, the deal was terminated in 2015 and that revenue stream ended in 2016.
Turning to the Q4 results, Square reported non-GAAP EPS of $0.05, up from a $(0.05) loss in the prior year period. Adjusted revenue rose 42.7% year/year to $191.9 mln. Both results were better than expected. For Q1, SQ sees non-GAAP EPS of $0.00-0.02 and adjusted revs of $190-193 mln. EPS guidance was well above, while the revenue guidance was in-line.
SQ says it saw strong growth across its products, with revenue growth driven by both transaction-based and subscription and services-based monetization efforts. Additionally, SQ increased operating efficiency and continued to make improvements in transaction losses. SQ is carrying this momentum into 2017 by thoughtfully balancing margin expansion and growth investments.
Looking ahead, one thing to note, Q1 is typically its slowest in terms of sequential growth of transaction-based revenue. Additionally, SQ does not expect to see Starbucks transaction-based revenue going forward, which will have a negative impact on YoY growth in 2017.
In sum, investors seem pretty happy with the Q4 results and guidance. After a sell-off in May 2016, the stock has been steadily climbing back and it's trading at new post-IPO highs today.