Shares of Square (NYSE:SQ) tumbled last week following the release of the company's first-quarter earnings report. Although the company's business continues to grow rapidly, Square lost more money than analysts had anticipated.
During the company's subsequent earnings call, Square CEO Jack Dorsey and CFO Sarah Friar fielded questions from analysts and offered color on the state of Square's business.
NFC payments dominated Coachella
Square's management has been a vocal proponent of NFC-based mobile payments, arguing that the transition would give Square an opportunity to expand its base of merchants. During the call, Dorsey noted the company's recent partnership with the annual music festival Coachella and the trends it was seeing in the space"
[O]ur contactless and chip reader continues to gain traction. We think there's a great opportunity associated with Square Logo with the fastest way to pay with your phone. In April, our reader was the exclusive point of sale at Coachella. Contactless payments at the festival accounted for over 10% of card transactions. When compared to the U.S. industry average of less than 1%, this demonstrates how the speed and simplicity of our reader can change ... behavior.
Square is still in a hypergrowth phase
Square isn't profitable, and though it expects to become profitable on an adjusted basis sometime this year, it's unlikely to be so under GAAP accounting. During the call, Friar framed the company's current status and how management views its trajectory:
I would take that moment, though, to say we are still very much an investment too, right? This is a company -- our adjusted revenue grew at 64% year over year, so we're still in really hypergrowth phase. We want to keep doing the things that drive our products and keep driving our roadmap, and that includes being able to go out and hire from an engineering and data-science standpoint. So you will see us continue to lean into that.
Developers can build with Square hardware
Square has opened up its hardware to developers, offering the ability to create apps and services around its devices. Dorsey spoke about how this feature could be utilized:
Real exciting, though, is we've actually opened up our hardware so that any developer can utilize our hardware and our payment stock and they can build custom points of sale around our hardware. So with our new contactless and chip card reader, for instance, anyone can build a point of sale around that and accept Apple Pay. That really frees a lot of our sellers to build custom points of sale that [attract] more and more sellers into our ecosystem.
Organic growth remains strong
Square's marketing efforts have been minimal relative to its growth. Dorsey quantified the strong organic growth Square continues to enjoy:
[W]ith larger sellers as with all our sellers, we see really strong power in our brand. Fifty percent of new sellers come organically to the platform. They've never been touched by any form of paid marketing, and that is true even for bigger sellers. We are meeting though those bigger sellers with sales, and we do have sales people picking up the phone. They're able to walk a seller through what an onboarding would look like, and clearly we're having a lot of success with that.
Square Capital is giving out tens of thousands of loans
Square has been working to build an ecosystem of services around its core payment processing business. One of the most intriguing is Square Capital, the company's lending arm that provides money to needy merchants. Friar offered up some numbers on Square Capital, and some of Square's other services.
Square Capital, 23,000 loans and advances given out in this particular quarter, but if you look at it cumulatively based on what we've told you, it's now well over 100,000. You think about 100,000, though, in terms of the millions of active sellers we have ... you're still looking at single-digit-type attach rates for probably one of our most advanced products ... instant deposits. We love the motion that we saw there in the quarter, effectively doubling in terms of cumulative payments sent, and clearly you can imagine that underneath the hood, seeing more and more attach from customers. Other areas that we've called out in the past, still seeing very nice traction with invoices. We didn't update the number this quarter, but as of last quarter 135,000 sellers had used our invoice product. It's a great example of yet more innovation on the payment side. Generally I'd say we're quite pleased. We see high engagement with our sellers. We need to keep building great products that they want to own to help them start, run, and grow their business.
Sellers want the latest technology
Square's latest reader is its most advanced, capable of accepting both NFC-based mobile payments and also chip-enabled credit cards. Demand for the reader has been strong, and during the call Dorsey spoke about how that commitment to advanced technology benefits Square:
Clearly, the new reader is helping. It's great to see that we're nearly at half a million deployed. It's an incredibly fast deployment for a piece of hardware. Being able to put in front of sellers, whether it be a Coachella or whether it[s] through your small mom-and-pop local business, but showing that they can look as good as, if not better than, really big merchants by being able to take that latest technology -- that clearly continues to drive them toward Square.
How an ecosystem of partners can benefit Square
Square's decision to open its hardware up to developers could benefit its business in the long run, as an ecosystem of complementary services and software could make Square the preferred payment solution. Dorsey cited the company's relationship with Intuit as an example:
One of our biggest partners and third-party developers is Intuit. Intuit enables anyone to connect to QuickBooks directly with their Square register so they can easily account for their entire business. That's become so popular on the Square side that Intuit suggests Square as a point of sale, as a payment processor as well.
The Caviar acquisition opened Square's business up to an entirely new class of seller
Alongside Square Capital, Caviar -- Square's take-out delivery business -- has been seen as one of the company's most intriguing services. But competition in the space has been fierce and has intensified in recent months. Dorsey spoke about why Square acquired Caviar and what it hopes to achieve with the service:
[O]ne of the reasons we acquired Caviar in the first place is it helped us reach a type of seller that we weren't able to reach before, which is a restaurant. The biggest constraint a restaurant has in their business is the number of tables and how quickly they can turn them over. Delivery provides this amazing unlock, and a lot of restaurants just don't want to have to deal with a delivery infrastructure and staff. So Caviar can neatly fit into their workflow and give them new sales.
Speeding up the payment process
Dorsey offered additional color on the company's new reader, and why it's motivated to encourage more mobile payments:
[W]e want to push more and more people toward NFC because the transaction time is subsecond, a whole lot more convenient and more secure.
Helping sellers focus on their business
Dorsey closed the call by summarizing Square's competitive advantage and the value it provides to its merchant partners:
[W]e continue to set ourselves apart from a lot of competitors who are just providing one part of the equation, which is a terminal. They're not doing the point-of-sales software, they're not doing the network, they're not providing the analytics, and they're not providing anything for customer and sellers
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