Square, Inc. Management Talks Growth Catalysts and Banking Aspirations

Square's revenue guidance was particularly bullish. But why?

Daniel Sparks
Daniel Sparks
Nov 14, 2017 at 5:03PM

Payment company Square (NYSE:SQ) impressed investors last week when it reported accelerating revenue growth and top- and bottom-line figures that exceeded analysts' consensus estimates. The company's 45% year-over-year rise in third-quarter adjusted revenue and its sharp increase in adjusted EPS shouldn't be overlooked.

But there's more to the quarter than the financial figures featured in the company's quarterly earnings release. Square's earnings call gave investors a closer look at the financial-technology company's business. Two topics that stood out were the key drivers behind management's aggressive revenue guidance and commentary about Square's recent application to form a bank.

A customer uses a chip reader built into Square Register

Square Register. Image source: Square.

The catalysts behind Square's big revenue guidance

One positive surprise in Square's third quarter was its updated revenue guidance for the full year. Management said it now expects full-year adjusted revenue, or total net revenue less transaction-based revenue from Starbucks and transaction-based costs, to be between $963 million and $966 million. Not only is this up significantly from management's previous guidance range for full-year revenue between $925 million and $935 million, but it represents incremental upside beyond Square's top-line outperformance in Q3. In other words, management has heightened expectations for its fourth quarter.

When one analyst asked about this optimistic outlook, Square CFO Sarah Friar said the company has "great momentum." Specifically, she listed a range of strong drivers behind Square's growth (via an S&P Global Market Intelligence transcript), including its core transaction-based business, growth in larger sellers, the residual effects of Square's more comprehensive product ecosystem, and progress in international markets.

So first of all, the core itself, remember, we still have that positive dollar-based retention. ... On top of that, we are continuing to move upmarket. You saw that growth in the midmarket sellers, all the way up at 64% year-over-year. Beyond that, adding in all of the products from Ecosystem, right, we just see more and more virtual loops being created.

Friar described how this virtual loop works from a seller's point of view:

I get it for capital loan, it helps my business grow, I, therefore, am doing more in payments -- we love those inter linkages. ... And then finally, I think international had a good quarter, you saw the growth rate kick up there in Q3, and we continue to expect ongoing momentum from our international markets.

What about that application for a bank charter?

The Wall Street Journal reported in September that Square had applied for a bank charter. The application to form a wholly owned bank fueled lots of interest from investors about Square's banking aspirations.

In Square's third-quarter earnings call, CEO Jack Dorsey articulated Square's thinking behind a bank charter:

[Forming a wholly owned bank] allows us to go faster, create more efficiencies in the model, but also allows us to just take a different tack on our business and make sure that we're constantly doing the right thing. We can bring the lending capabilities of a bank in-house, allowing us to be more verticalized and to make stronger and faster decisions.

Dorsey emphasized that its charter has not been approved and that it is a year-long process.

Dorsey also said that though it does expect an approval to form a bank would help its Square Capital business, it believes it would also help the company offer more financial services to underserved sellers and individuals -- a tenet Square has held to since it first launched an easy way to accept credit cards with its first mobile credit card reader.

Square has already gotten its feet wet in banking with Square Capital. With Square Capital, Square is able to make loans and cash advances to small businesses by partnering with Celtic Bank. Square Capital, which falls under Square's fast-growing subscription and services revenue and contributes the majority of the segment's top line, facilitated $303 million worth of business loans in Q3, up 45% year over year. These loans were spread across 47,000 businesses.

Investors can listen to a full recording of Square's third-quarter conference call on the company's investor relations website.