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How Does Square Make Its Money?

By Matthew Frankel, CFP® and Brian Withers – Updated Sep 2, 2021 at 9:56AM

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Here's a closer look at Square's income statement to help understand exactly where the revenue comes from.

Fintech giant Square (SQ 9.11%) has several different ways it generates revenue, and many investors don't really understand how much comes from each source. In this Fool Live video clip, recorded on Aug. 23, contributors Matt Frankel, CFP, and Brian Withers take a close look at Square's latest income statement to give investors a better feel for how this massive financial disruptor makes its money.

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Matt Frankel: This is their income statement. Look at this far left column, that's what we're going to be paying attention to. This is the most recent quarter, the three months ended June 30, 2021. This is the second quarter. This is how Square's revenue is broken down. Transaction-based revenue, a little over $1.2 billion. Subscription and services based revenue, about $685 million. Hardware revenue: A lot of people are surprised to see this hardware is just a drop in the bucket. Less than $44 million of Square's revenue comes from selling the actual payment terminals and things like that, that you see in stores.

Their biggest revenue source by far, more than after the revenue is Bitcoin (BTC 1.52%) right now. That's to be expected. This revenue counts their entire Bitcoin volume. This means that about $2.7 billion worth of Bitcoin was bought by Cash App customers. That's not money in Square's pocket. So when you see them report a lot of numbers in their earnings release, and when I talk about a lot of these numbers on this page, I'm going to say them twice, once including Bitcoin and once without Bitcoin because it distorts some of the numbers. Bitcoin is 58% of Square's revenue. But if you break down the other three categories without Bitcoin, transaction-based revenue, this is like swipe fees from their payment volume, things like that. Any transaction-based revenue makes up 52% of the non-Bitcoin total. Subscription and services-based revenue makes up 29% of the total, and hardware is just under 2% of their non-Bitcoin total revenue. Hardware is not only a very small part of the business, but when you go down to the next section where it says cost of revenue, you will see that the hardware is actually an unprofitable revenue source. They made about $44 million in hardware revenue. It cost them over $61 million to make that hardware, and the reason is, it's because that hardware is what generates the $1.2 billion worth of transaction-based revenue. They're more than willing to take a hit on that. Just a couple of other things I wanted to point out here.

Brian Withers: Matt, before you leave that and I know talking to my brother-in-law, he doesn't pay any subscription fees to Square for any of the services that he gets or for any of the reports and whatnot. He explained to me that he just pays the percentage fee for the transactions, and then there's a whole bunch that comes with that. He gets all sorts of reports, and he gets, certainly, customer service and things like that. I always think of, and I was just hoping you could tell me that I was thinking about this the right way, is that transaction-based revenue is something that everybody pays, and then for those customers that are larger and want more services, maybe like employee scheduling and things like that, that would be the subscription line so that I would think of being a high-end subscription services or the plus plan, or whatever, the premier plan.

Frankel: Yeah. Add-on services, I guess, is what you can call the subscription-based revenue. That's a really good point. Transaction-based revenue is when, for example, Square makes, I think, $0.10 or $0.12 off every swipe transaction through its seller ecosystem. That would be an example of transaction-based revenue. Square Capital generates a lot of the services-based revenue, is a good example of that. Two more things I wanted to point out. If you look at gross profit down here, Square's gross margin is 24% based on this gross profit number and this revenue number. That's not great for a tech company. But when you back out Bitcoin from the equation, Square's gross profit jumps from 24% to 63%. Bitcoin is not a high-profit business for it. That's not why Jack Dorsey has Bitcoin included on the Cash App. It's not because it's a high-margin business. Square might make 1 or 2% from a Bitcoin transaction, if that. Operating margin, which is bottom line, this is where the earnings and profitability comes from. Based on this operating income, 2.7% based on the total revenue. But if you just look at non-Bitcoin stuff, it's about 20%, big difference there. The key points that new investors should know about the income statement, if you want to see earnings per share, it's on the bottom. It's not consistently a profitable company. A $0.45 earnings per share for a company that's trading at $270 a share is not a gigantic profit margin, especially when you see that in previous periods, it hasn't really been very profitable. Those are the key points.

Matthew Frankel, CFP owns shares of Square. The Motley Fool owns shares of and recommends Bitcoin and Square. The Motley Fool has a disclosure policy.

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