Few stocks have shown greater appreciation recently than shares of Square Inc. (SQ -2.28%). Over the past year, Square's stock price is up an incredible 160%; year to date, the price is up almost 100%. While that type of torrid growth is hard to sustain, Square keeps backing it up with great quarterly performances, and when Square reported its second-quarter earnings last week, the company once again delivered stellar results.
In Q2, Square's adjusted revenue rose to $385 million, a 60% increase year over year, and its adjusted EBITDA grew to $68 million, an even better 87% increase year over year. Underlining this strong growth was a surge in its gross payment volume, the dollar amount of transactions made at a Square point of sale. This quarter, this figure rose 30% to $21.4 billion.
| Square Metrics | Q2 2018 | Q2 2017 | Change (YOY) |
|---|---|---|---|
| Adjusted revenue | $385 million | $240 million | 60% |
| Adjusted EBITDA | $68 million | $36 million | 87% |
| Gross payment volume | $21.4 billion | $16.4 billion | 30% |
| Subscription and services-based revenue | $134 million | $59 million | 127% |
Data source: Square Inc.
More than a payment processing company
The beautiful thing about Square, however, is that it is more than just another payment processing company offering a commoditized service. It also offers dedicated and attractive features and services to its small-business clientele. These include Square Capital, a microloan business platform, Instant Deposit, a feature allowing businesses to receive money from credit card sales immediately, and Caviar, a restaurant delivery and order-ahead platform. These services are accounted for in Square's subscription and services-based revenue category, where revenue increased to $134 million this quarter, a dazzling 127% gain over last year's second-quarter figure.
Square is targeting restaurants with its new point-of-sale platform, Square for Restaurants. Image source: Square Inc.
More than a rapidly growing revenue stream, however, these services also make Square's relationships with its customers deeper and wider than they would be otherwise, making it less likely that customers will leave for another payment processing company down the road.
Vertical relationships
Another way Square has ingrained itself deeper into its customers' businesses is by designing industry-specific point-of-sale solutions. Square for Restaurants, a solution designed for the unique needs of restaurants, joins previous point-of-sale solutions Square has released for service and retail industries. In Square's second-quarter conference call, CEO Jack Dorsey said:
We're excited about the launch of Square for Restaurants, our newest industry-specific point of sale, and our first for larger, full-service restaurants. With this product, restaurants can more easily manage operations so that servers can spend more time delighting diners. This ease of use also extends to setup. While other points of sale require a salesperson to onboard, more than 60% of Square for Restaurants sellers have self-onboarded.
Square's point-of-sale solutions always "just work," requiring little technical assistance to install or implement, a selling point the company constantly uses for business owners too busy or strapped to hire someone for lots of technical assistance. The reason why Square chose to release vertical point-of-sale solutions for these three specific industries is that, combined, they represent 85% of Square's gross payment volume.
Square's big differentiator in the restaurant business
Of course, other point-of-sale solutions exist for restaurants. For instance, Global Payments Inc. (GPN -0.07%) released Xenial, a cloud-based restaurant management solution that allows restaurants to manage their menus and analyze sales data, to much success last year. Square believes the differentiator between Square for Restaurants and competitors, however, is Caviar, its delivery and order-ahead platform for small restaurants.
No other payment processing company can match the services offered by Caviar, making Square a one-stop shop for nearly all a restaurant's back-office needs. As Dorsey said in the conference call, "We're also making it easier for restaurants to manage online and in-person orders by working to integrate Caviar with Square for Restaurants. This integration will be unique to Square because we're the only company that provides both the point of sale and food delivery and pickup."
While no specific numbers were given, in Q2, Caviar's revenue doubled year over year. Dorsey also said Caviar was now the top food-ordering platform in San Francisco due to its capabilities.
Why this is a big deal
Square for Restaurants represents a huge opportunity for Square. Not only do full-service restaurants (FSRs) comprise a significant percentage of Square's existing customers, the total addressable market for these businesses is huge across the U.S., as more than 300,000 FSRs produce almost $200 billion in annual sales.
Even better, the average Square for Restaurants customer accounts for about $650,000 in annualized sales, representing a much-larger-than-average seller on Square's platform. By comparison, in Q2, 78% of Square sellers still made less than $500,000 in annual revenue; 50% generated less than $125,000 in sales.
Square continues to build an impressive ecosystem around its payment processing services. Not only does this allow the company to capture higher-margin opportunities from small businesses hungry for services that were traditionally only available to larger merchants, but it also makes Square's relationship with its sellers far stickier than it would otherwise be, leading to less churn and strong retention rates. Investors with an appetite for more growth in their portfolio might want to take a bite out of Square.
