Quick thoughts on Square’s Q3 2015 numbers

Payments company Square filed an amended S1 with the SEC on Monday, with financial and operating metrics for Q3 2015. I previously talked about Square’s original IPO filing on Techpinions a couple of weeks ago, and today I’m just going to focus on a couple of elements of the new numbers. If you’re not familiar with Square, I suggest you take a quick read through that earlier piece as it will be helpful context for what’s below.

The charts here are taken from more in-depth analysis I do as part of the Jackdaw Research Quarterly Decks Service, a subscription service which provides slides on financial and operating metrics on some major consumer technology companies each quarter. I’ll post a screenshot of the slides in the Square deck, which went out to subscribers last night, at the bottom of this post. Any reporters reading this can contact me directly to receive copies of this and other decks from the service.

As a quick into, here’s Square’s revenue line by product:

Square revenue breakdown

As you can see, revenue growth is pretty healthy, primarily driven by core transaction volumes, but helped also by a newer category called Software and Data Products. This is where Square Capital, Square’s cash advance business, sits, along with a couple of SaaS businesses it’s acquired and launched.

Importantly, Square’s gross margins from these different businesses are very varied, as the chart below shows:

Square margins by product

Software and Data Products have had by far the highest margins of all, although they’ve come down as Square has begun to incur costs of revenue around these businesses, which started out at almost 100% margins, with almost no costs. However, the Hardware business has historically been run at a loss, as Square essentially gave away many of its hardware products for free, although it’s now moving to a sell-at-cost model for some of its newer products. Lastly, you can see the huge discrepancy between the gross margins on Starbucks transactions, which have been consistently negative (around 20–30%), and all other transactions, which are very consistent at 35%.

Where things get really interesting is when you look at Starbucks transactions, which are fairly consistent in both revenue and gross profit dollars for now, in comparison to Software and Data Products.

Square small segments

The latter is now just large enough to effectively cancel out the Starbucks gross loss, and at the current rate of growth it should fairly quickly outweigh it, which should help substantially with overall margins going forward. The ending of the Starbucks relationship (formalized this week with an announcement that Starbucks will indeed be going with another vendor going forward) combined with the growth of the Software and Data Products business are arguably the two keys to Square’s journey to future profitability.

A screenshot of the full set of slides from the Square quarterly deck I sent to subscribers yesterday is below:

Square deck screenshot