SQ – Questions about organic growth

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Hi all!

I have been digging into the revenue numbers of SQ and was a bit puzzled about organic growth.

As far as I can see SQ is not specifically reporting organic growth numbers. In the last quarterly report they mentioned that „excluding the impact of the Weebly and Zesty acquisitions, year-over-year revenue growth also accelerated“. However that leaves a rather big gap of where organic revenue growth is. In Q2 2017 adjusted revenue grew 41% YoY to $240M. In Q2 2018 growth was 60% (to $385M).

So their acceleration in organic revenue growth could be between 42% (which wouldn’t be a very exciting amount of acceleration, but still technically an acceleration) all the way up to the reported 60% (although surely a bit lower due to the acquisitions made).

42% organic growth would translate to approximately $341M, whereas 60% growth got us to $385M. That leaves a gap of $44M that could be organic or acquisition fueled growth.

I’ve been trying to find revenue numbers for Weebly and Zesty (the two acquisitions they did in the last year), to have an idea what they could have added in revenues this quarter, but didn’t find any official numbers. I read something about $60M to $80M annual revenues for Weebly (I think that’s for 2017 though), and Zesty is so small that revenue additions would be immaterial. So quarterly contribution could be between $15M and, I don’t know, $30M (?).

As stated many times on this board, a big part of why SQ is such an exciting investment, is their accelerating growth numbers. My concern is that maybe a good junk of this acceleration is actually “bought“ revenues. If they stop acquiring, will revenue growth decelerate? If so, by how much? Also with the change of CFO it is unclear how the new CFO will think about acquisitions going forward. And this is becoming a more and more competitive industry, so acquisitions won’t come easy (and cheap).

How do you feel about organic vs. inorganic growth? Is the differentiation even that important? You could argue that it doesn’t matter as long as the acquisitions fit into the overall business strategy and they don’t overpay for them (of course, that’s hard to judge from the outside).

However, as an anecdote, I remember watching my 3D-printing investments rise amazingly when they had high (and expensive) acquisition fueled growth, only to see them crash spectacularly when acquisitions stopped and growth rates fell sharply. Not that I want to compare – I know it’s a completely different situation between SQ and DDD for example.

Still, I was wondering if this is something to worry about. We know how sensitive these stocks can be to even slightly decelerating growth.

Best wishes,
Niki

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Yes SQ is benefiting from acquisitions, kind of the point right?

Transactional revenues climbed at 30% which is the same as it has been for numerous quarters.

Subscription and services is where these new acquisitions are having an impact. This segment was growing rapidly and acceleratingg to 91% yoy in Q1. In Q2 it bumped up to 131% yoy. Management attributed that bump largely to the acquisitions of Weebly and the other one might have been Zesty, I can’t remember. And with some additional acceleration of organic services like Cash and instant deposit.

So without the acquisitions this segment would still be growing >91% as of Q2.

Darth

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Here’s the relevant comments.

We saw strong momentum in subscription and services adjusted revenue growth, which accelerated to 131% year-over-year, driven primarily by Instant Deposit, Caviar, Cash Card and Square Capital and also included the impact of the acquisitions of Zesty and Weebly. Excluding acquisitions, growth also accelerated. Speed continues to differentiate Square to our sellers across all our products. For example, Instant Deposit volume was $4 billion in the second quarter. Hardware revenue was $18 million in the quarter, up 78% year-over-year, driven by continued growth in Square Register as well as Square Stand and Square Reader for contactless and chip.

1% revenue of $4B instant deposit is $40M.

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Acquisitions are a two-edged sword. There’s what Peter Lynch referred to as “deworsification.” Intelligent acquisitions that integrate well and enhance the business plan and objectives can be highly beneficial. Bolt on acquisitions which just juice the earnings report for a quarter or two, but don’t integrate or provide direct benefit to the business generally drag the business down over time.

IMO, Dorsey has to date been very judicious in his choice of acquisition targets (I give Friar credit for engineering the acquisitions, but maybe less so in deciding which specific targets to acquire).

As such, I don’t really care where the growth comes from. If another acquisition makes good business sense and all the financials line up, I’m confident that it will be made, or at least attempted. Elsewise, Square and those of us who hold its stock will be better served by organic growth alone. In either case I have reasonably high confidence that the appropriate decisions will be made in order to strengthen Square’s competitive position while maximizing Square’s growth and market share.

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I think trying to nit-pick on SQ growth rate really misses the point.
How many companies you know that can deliver new product and services, almost all of it very successfully (extremely fast rate of acceptance) in and adjacent to their current customer base AND continue to expand both # of customers and # of market segments they address…

Last I knew it was Amazon… Shopify does come near and certainly in the same league as SQ but nothing beats SQ.

To achieve these, they need to make build or buy decisions all the time and as long as those decisions result into better outcomes, it is a good thing for shareholders.

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