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Square was started in 2009 to enable businesses to accept card payments, an important capability that was previously inaccessible to many businesses. Since then, Square has continued to expand its product offerings to match the needs of its customers and now operates a cohesive commerce ecosystem that combines sophisticated software with affordable hardware to enable sellers to turn mobile and computing devices into powerful payments and point-of-sale solutions.

A little over a month has passed since Square, Inc. released their most recent 10-Q, and investors were pleasantly surprised to see that the company surpassed market earnings estimates yet again. While Square failed to generate Net Income in the first quarter of 2017, its losses were much narrower than expected as the company continues to experience significant revenue growth that is outpacing the growth rate of its expenses. For the first quarter, Square reported a loss per share of $0.04, beating the Zack’s Consensus Estimate of $0.17. This encouraging earnings release fared well for Square’s stock price as it has increased by 18% since the announcement. This better-than-expected financial performance for the quarter can be attributed to several factors.

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Growing business segments

Square made a name for itself by offering an ingenuitive tool that allowed small business owners to facilitate debit and credit card transactions using their smartphones and collect valuable transaction data previously unavailable to them. In addition to continuing to grow this transaction-based line of business, Square has kept innovating new products and services aimed at bringing big business capabilities to those who would otherwise lack the means to attain them.

At the end of Q1 2017, the management provided an update on its food delivery service Caviar, which now includes a pickup option with Q1 orders more than doubling year over year; Square management sees Caviar as being an important part of reaching the full-service restaurant industry and providing new solutions to business owners.

As will be discussed later, revenue growth from subscription and services was a big factor in Square beating market earnings expectations. A large part of this was attributable to Square Capital, which grew 64% year over year and facilitated over 40,000 business loans totaling $251 million.

A second contributor to subscription and services was Instant Deposits. The feature allows merchants and P2P users to receive deposits up to $2,500 paying a 1% fee to Square. The company has already seen a growing demand for instant deposits and predicts it will continue to have a positive impact on the margins of its subscriptions and services segment.

Each of these new product and service offerings is helping Square reach new and untapped market segments as it continues to build market share and push to become the premier name in small business financial and data solutions.

Expanding revenue

Total net revenue for Q1 2017 increased by $82.3 million or 22% compared to Q1 2016. This increase in total net revenue for the quarter was primarily driven by an increase in transaction-based revenue from Q1 2017 by $103.0 million — or 34% — compared to Q1 2016. This increase in transaction-based revenue was attributable to growth in Gross Payment Volume (GPV) processed in Q1 2017 of 33% compared to Q1 2016, some of which came from growth in processed sales volumes from Square’s existing sellers, and the rest of which comes from new businesses using Square’s services.

One notable aspect of revenue missing from the newest quarterly earnings is transaction-based earnings from Starbucks. During the fourth quarter of 2016, Starbucks completed its previously announced transition to another payment solution provider, resulting in a $38.8 million decrease in revenue. Accordingly, no future transaction-based revenues are to be expected from Starbucks.

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