U.S. stocks are slightly lower early on Tuesday afternoon, with the Dow Jones Industrial Average (^DJI +2.49%) and the S&P 500 (^GSPC +2.91%) down 0.30% and 0.54%, respectively, at 1:20 p.m. EDT.
Square Reader and iPhone 3G. Image source: Chris Harrison, republished under CC BY 2.0.
The headline of a Financial Times article from yesterday reads "Square slips back into a loss," referring to the payments start-up co-founded and headed by Twitter Inc CEO Jack Dorsey. As I was skimming the headlines on my smartphone, I misread it as "Square slips back into its box" and concluded the company was postponing its upcoming initial public offering (IPO).
You can see how I might have thought that. The market environment for new offerings isn't particularly hospitable right now: Payments giant First Data Corp completed its IPO earlier this month, offering shares at $16 each. This was at a discount to the offering range of $18 to $20 per share, but the discount wasn't wide enough to prevent shares from closing below the offering price on their first day of trading. They're back below $16 today.
First Data isn't alone: Of the 89 initial public offerings that were completed on U.S. markets in the second half of the year, over a third (34) are currently trading below their offering prices, according to data from Bloomberg.
Finally, only five of the 89 companies have a market capitalization above $2 billion, with only two above $10 billion (First Data and last week's listing of Ferrari NV).
Getting back to the headline news: What about this loss? In a new filing, Square updated its offering prospectus to include its financial results for the third quarter.
Those numbers don't show a perfect square. Yes, revenues grew 46% year over year in the third quarter, but the GAAP loss rose 43% to a loss of $53.9 million for a cumulative year-to-date loss of $131.5 million (GAAP: Generally Accepted Accounting Principles).
Square highlights instead an "adjusted Ebitda" loss of just $15.8 million compared to a $13.0 million loss in the year-ago quarter. This adjusted figure excludes the loss associated with a disastrous agreement with Starbucks, which is expiring and will not be renewed.
Even if you accept that this is a "one-off" item -- one that nevertheless doesn't reflect well on management's acumen -- the adjusted EBITDA also excludes share-based compensation expense, depreciation, and amortization. Those may not be cash costs, but they are certainly genuine costs! It's difficult to believe this is the best measure to assess "steady-state" operating profitability.
(EBITDA, which refers to earnings before interest, taxes, depreciation, and amortization, is often used a measure of cash flow.)
Given that it operates in a rapidly evolving, highly competitive market, that it remains unprofitable, and that it is about to transition into the public markets, this is a company that needs the intense and undivided focus of its CEO instead of sharing him with Twitter.
There is one advantage to Dorsey having rejoined Twitter as chief executive and splitting his time between Twitter and Square: It helps to raise Square's profile. Furthermore, if Twitter reports better-than-expected results this afternoon, the market may (falsely) conclude that he has the Midas touch, and that Square is therefore a golden opportunity.
This is Dorsey's first full quarter as CEO at Twitter. He was named interim CEO on June 11 to replace Dick Costolo, and his status was upgraded to permanent CEO on Oct. 5.
Although he is off to a cracking start at Twitter, acting decisively to improve the service and motivate staff (those who were not culled in a round of job cuts), I think it highly unlikely that Dorsey's initiatives had any significant impact on the company's financial results last quarter.
Square has started down the path to the public markets, and I don't think it will be deterred from its goal. Still, I think my initial instinct is right: This is a Square that ought to remain in its private market box.
