Payments processing company Square (NYSE:SQ) has been growing by leaps and bounds in recent years. The fourth quarter of 2017 was no different.
On Feb. 27, Square reported quarterly adjusted net revenue growth of 47% year over year to $283 million, which beat analysts' expectations of $266.6 million. This was driven by a 31% year-over-year increase in gross payment volume to $17.9 billion for the quarter.
EPS was adjusted to remove the discontinued Starbucks activity, and amounted to $0.27 in 2017, versus $0.04 in 2016.
Beyond the headlines, however, management had much to share about everything from the target market it's most excited about to an embrace of bitcoin. Here are the top five takeaways from Square's quarterly call.
1. Abuzz about bitcoin
The cryptocurrency bitcoin seems to be on the tip of everyone's tongue these days. Square CEO Jack Dorsey and CFO Sarah Friar discussed it at length on the conference call with analysts, with Friar noting it is "really immaterial" to Square's financials. Still, it doesn't seem inconsequential to Square's long-term strategy:
... we fully rolled out the ability to buy and sell bitcoin in Cash App to 100% of all of our customers, which is a really exciting milestone. -- Friar
An individual can set up the [Cash] app in minutes and send peer-to-peer payments, store money, receive their paycheck, and buy and sell bitcoin. -- Dorsey
Bitcoin, for us, is not stopping at buying and selling. We do believe that this is a transformational technology for our industry, and we want to learn as quickly as possible. We also believe that it does provide an opportunity to get more people access to the financial system. -- Dorsey
Square leadership admits it doesn't know how bitcoin will unfold -- in general or for the company. It's of minimal risk given it's a small amount, but they're keen on being a leader in making monetary exchange digital, fast, and accessible to all, so it would be foolish not to explore the cryptocurrency.
2. Serving an "underserved" market
Dorsey twice mentioned the importance of Square's focus on the "underserved" or "underbanked" audience. When Square launched, it was this audience of small American businesses that the company set out to serve. They represented something that start-ups often refer to generally as "white space" in a given market: an area ignored by (often larger) competitors.
Today, Square continues to serve those small businesses, a market that JPMorgan Chase CEO Jamie Dimon recently noted as a big missed opportunity for his company. And Square is now embracing an additional underserved audience: the individuals who transact with small businesses. Said Dorsey during the conference call:
And this is one of the things we've been really good at, is blurring the line between consumer and sellers so they don't have to think about that at all. ... this all comes back down to that original thesis of providing access to people. So everything that we do, whether it be on the seller side or the consumer side, we want to make sure that we are providing more, increasingly financial access to these various constituencies.
Where financial institutions (see banks) are reluctant to invest, Square is pursuing those areas aggressively. To be even better, it may have to become a bank itself.
3. Payday pickup and banking ambitions
Investors have analyzed and speculated about Square's banking ambitions since the day it filed its application for a charter. No statement has made Dorsey's intentions more clear than the following words from him during the conference call:
... every Friday, we see a significant bump because of payday. And this, to us, indicates a strong network effect. So we see a bump in terms of sign-ups and also downloads and usage. As people are getting paid, they're sending money to their friends, they're receiving money from their family, which continues to further densify the network. And this is a network-driven business, and we're seeing all the positive indicators that it is healthy and also thriving. As we look at how people are using this, it really points to what we want to do in the future. And a lot of what we're seeing is this being a primary spending device for people and being a simple way for them to go to the App Store, download one app, and have everything they would need and expect from a typical bank.
This is noteworthy for investors because Square's aim is to go head-to-head with the banking industry, particularly those players without physical branches.
4. Ecosystem expansion
I've pointed out before that while Square is winning new customers, it is also strategically expanding its ecosystem of products and services for existing customers. This creates "stickier" customers -- a phenomenon that investors describe as high switching costs.
But even as Square offers new products, it's not about cross-selling for the sake of it, but about solving the next challenge for customers. Friar refers to this tactic as consistently creating "utility" for its end users:
[I]t has to be because there's utility, because when they are using payments and point of sale, we can make something like payroll easier for them because we're already doing employee management. So absolutely, we see a lot of these virtuous cycles being created. And thus, the ecosystem continues to grow. I think that effect that Jack talked about, the network effect, that's important in something like Cash App [and] is also very important on the seller side, too.
5. Payback period
The ecosystem can expand only to the extent Square can go upmarket with its products. Larger sellers have broader needs and bigger pockets. In this regard, what analysts and shareholders want to keep an eye on is how much Square's marketing spend increases as it pursues the bigger fish in the pond. Here's what Friar had to say about what it thinks about the return on that increased investment:
So we're still seeing a three- to four-quarter payback period, and that's even as we have more than doubled sales and marketing expense. If you look at from kind of 2014 through 2017 just on core seller, it's more than doubled. And yet we haven't hit any kind of signs of channels becoming less efficient. And then secondly, this is an area where Square has been quite innovative. So go-to-market strategies like referral programs really work well for us because when you have a Net Promoter Score of 70 plus, it really means that sellers want to tell their friends and their family and other sellers about the product, and that's a channel no one can follow us into because that's our sellers talking about our product.
The takeaway for investors
Square's on a roll. Its small bets on bitcoin will undoubtedly steal the headlines, but we'll continue to dig into the more fundamental drivers of the business and the financials. What's truly impressive from management is its ability to simultaneous satisfy and delight its core (see "small") customers while also swimming upstream to acquire larger sellers, test new products, and venture into banking and international markets. This is a story that is still in its infancy.