Despite all the attention Cash App gets, Square's (NYSE:SQ) seller ecosystem still accounts for the vast majority of its revenue and gross profits. But over the last year, the company has seen gross payment volume (GPV) growth from its merchants decline. That's an area CFO Amrita Ahuja is focused on improving.
Last quarter, the digital payments company saw GPV growth hold steady at 25% after falling in five consecutive quarters. While Square is back to more stable GPV growth, there's still work to do, and Ahuja laid out exactly how the company plans to grow its seller business in 2020 through increased marketing spend.
A $75 million increase in marketing and sales
Ahuja announced plans to increase marketing and sales spend by $75 million next year, focusing on driving growth in merchants. That increase is double the incremental spend on marketing in 2019, and it'll push the payback period for new merchants to about four quarters. The current payback period is about three quarters, according to Ahuja. That may be too efficient for maximizing the long-term growth of the company.
One area of focus is on increasing awareness of its various seller products. Ahuja says Square has 80% brand awareness, but just 9% product awareness. Closing that gap should get merchants to use more than one Square product, improving revenue retention in the long term.
Square will also offer lower prices on hardware like Terminal and Register. The company has seen increased merchant signups from adjustments to the pricing on those devices over the last few months, and will continue investing in pricing next year. Importantly, those products appeal to larger sellers, so Square should see the greatest return in gross payment volume from offering discounts on those products.
The impact on financials
Square's increased marketing spend will take some time to pay off for the company. As mentioned, Ahuja expects the payback period for the heightened marketing spend to be about four quarters. As such, it won't have an incremental impact on GPV until the fourth quarter next year and beyond.
In the meantime, Square will be largely reliant on positive revenue retention and organic growth from its existing merchant base to push gross payment volume higher. The percentage of GPV from larger merchants accounted for 55% of Square's total last quarter, growing 34% year over year.
As a result of the delayed payback period, Ahuja expects Square's adjusted EBITDA margin to remain flat with the 18% margin implied by her full-year 2019 guidance. The company will reinvest the entirety of the EBITDA margin unlocked by its Caviar sale back into growing the seller business.
Over the long run, however, the company should return to EBITDA margin expansion. Square has shown strong margin expansion in the seller business at scale. Management expects adjusted EBITDA margin for the seller business alone to be 30% in 2019, up from negative 9% in 2015.
Adjusted EBITDA margin from its seller ecosystem may come down from the increased investment next year, but it'll be offset by the sale of Caviar and growth in Cash App. If Square's efforts succeed in attracting more merchants taking multiple products, it should see margin expansion continue in 2021.
Patient investors should be encouraged by Square's move to invest in its businesses with the strongest potential for growth even if it means delaying profits. The company should see improvements in gross payment volume in the long run, as well as increased attach rates for its ancillary products and services. Ultimately, that will lead to greater potential gross profits from the seller business.