Thoughts on Square's Q4

TL;DR: Square turns in excellent quarter, shares are down in AH trading. And that might not even be an irrational move for a market focused on the short-term. Square’s steep valuation is real. But for long-term minded investors any dip here should be welcomed. The long-term thesis is very intact IMHO.

Let’s take a look at the numbers:

Total Net Revenue (millions)			Q1		Q2		Q3		Q4	
2014												250
2015						374		310		332		374
2016						379		438		439		452
2017						462		552		585		616
2018						669		815		882		933

Adjusted Revenue (millions)			Q1		Q2		Q3		Q4
2014												82
2015						89		111		118		135
2016						146		171		178		192
2017						204		240		257		283
2018						307		385		431		464

Adjusted EBITDA (millions)			Q1		Q2		Q3		Q4
2016								13		12		30
2017						27		36		34		41
2018						36		68		71		81

EPS (diluted) 					Q1		Q2		Q3		Q4	
2014												(0.25)	
2015						(0.34)		(0.20)		(0.35)		(0.34)
2016						(0.29)		(0.08)		(0.09)		(0.04)
2017						(0.04)		(0.04)		(0.04)		(0.04)
2018						(0.06)		(0.01)		0.04		(0.07)

EPS (Adjusted)					Q1		Q2		Q3		Q4
2015												(0.05)
2016						(0.05)		0.02		0.01		0.05
2017						0.05		0.07		0.07		0.08
2018						0.06		0.13		0.13		0.14
GPV (billions)					Q1		Q2		Q3		Q4
2015						7.1		8.8		9.5		10.2
2016						10.3		12.5		13.2		13.7
2017						13.6		16.4		17.4		17.9
2018						17.8		21.4		22.5		23.0

Subscription and Services Rev (millions)	Q1		Q2		Q3		Q4
2016										 35		41
2017						49		59		 65		79
2018						97		134		166		194

2018 Q4 Earnings:

Adjusted Revenue Growth (millions)
2017 Q4 TTM Revenue = $984
2018 Q4 TTM Revenue = $1,587
YOY TTM Adj Revenue Growth = 61.3%, previous quarter 57.4%
*Remember adjusted revenue is what you want to look at, not total net revenue, for Square

EPS Growth (GAAP - diluted)
2017 Q4 TTM Earnings = ($0.16)
2018 Q4 TTM Earnings = ($0.10)

EPS Growth (Adjusted)
2017 Q4 TTM Earnings = $0.27
2018 Q4 TTM Earnings = $0.46
YOY TTM EPS Growth = 70.4%, previous quarter 67%

Adjusted P/E (Check Current Price) = 79.32/0.46 = 172

Other quick and dirty highlights:

Subscription and services-based revenue: $194M, +144% YOY; excluding Weebly and Zesty acquisitions it was $168M, +112% YOY
Square Capital: Loan volume 72K business loans for $472M, +55% YOY
Transaction, loan, and advance losses were again below 0.1% (~$24M) reflecting investments in risk management.
Instant Deposit: No figure given this quarter, listed as a primary driver of growth for subscription and services-based revenue.
Caviar: No figure given this quarter, listed as a primary driver of growth for subscription and services-based revenue.
Cash App: 15M MAUs, +114% YOY
Cash Card: No figure given this quarter, listed as a primary driver of growth for subscription and services-based revenue.
Operating expenses: Non-GAAP operating expenses were $304M, up 52% YOY
Cash/cash equivalents: $1.6B, previous quarter $1.8B.

Quick takeaway: It’s all about the ecosystem. It’s not about neat little gimmicks, sleek hardware, easy-to-use software solutions for merchants – Square has all those things. But every launch of a new product, makes its payments ecosystem a little bit stickier, a bit more holistic. Just this quarter, Square…

• Released the Square Card, a free business debit card for Square’s merchants. It gives Square merchants instant access to their funds for free, so it might start to cannibalize SQ’s Instant Deposit rev. But that’s okay b/c SQ will earn interchange fees on the card use. Square Card helps sellers separate business and personal expenses, making it easier to assess their business’s health and track expenses for tax purposes. Merchants get 2.75% back on purchases when they use it at other SQ vendors, so they will be incentivized to use it and seek out SQ merchants. This will help push SQ transactions higher, possibly giving transaction revenues a little boost.
• Released an in-app payments SDK (software developer kit). With this, sellers can use Square for in-person, online, and in-app payments, completing the circle (so to speak). SQ is considerably behind PayPal and Stripe in this space, but it’s good to see them add this capability. Better late than never.
• Launched a mobile app and employee benefits for Square Payroll, a full-service solution for small businesses. W/mobile app, employers can easily integrate Payroll with SQ to manage OT calculations and tax filings. Employees “can view their pay stubs, clock in and out of shifts, and manage their preferences, such as whether they’d like to be paid via Cash App.” Payroll has proven to be valuable customer acquisition tool for SQ: 1/3rd of SQ Payroll sellers that joined in 2018 were new to Square.

When I reviewed Shopify’s quarter, I said, “I think of Shopify as the Square of the internet. Or maybe Square is the Shopify of brick-and-mortar? Both companies, though, release innovative products that solve pain points for small merchants at a fairly brisk pace. It’s hard to keep up with them at times.” Still holds true.

Why are these two of my favorite companies right now? High switching costs is a very real economic moat:

Think of Oracle, back in the day. When a company stored its heart and soul on an Oracle database, they never tore it out. Think another vendor could come along, offer a slightly better DB at a slightly cheaper price, and a company would rip out its Oracle servers for the new and improved and cheaper ones? No way! Those companies are still on Oracle databases to this day. And Oracle raises its prices every year.

The switching costs for Square (and Shopify) are also real (though maybe not quite as high as Oracle’s in the pre-cloud days). The life blood of these aspiring entrepreneurs and small businesses are on Square’s ecosystem. They will grow and add employees using Square for business loans, payroll needs, industry-specific point-of-sale solutions, scheduling solutions, etc. As they grow, Square will grow with them. The next Starbucks or Chipotle or Shake Shack could be a Square seller right now.

Tomorrow shares for Square could very well be down. Next quarter they could be down. Next year they could be down. When valuation is steep, stock prices can be volatile. But Square is growing like wildfire and the merchants on-boarding to Square’s ecosystem will not be easily displaced.

I will be back with more thoughts after reading through the conference call.


Phoenix 1 Contributor
MasterCard (MA), PayPal (PYPL), and Square (SQ) Ticker Guide
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Thanks for the update Matt - added to my position after-hours today.

Hey Matt,

Thanks for write up and enjoyed your Twitter thread on this.

I’m getting close to jumping back in. Obviously a ton to like here.

Been watching Dorsey closely as he’s done a lot of media lately and he is definitely a compelling, powerful character. Still seems odd to me he runs two companies of such massive size and importance. Twitter must require massive attention, much of it urgent. So I wanted to see who is clearly #2 in terms of operations.

There is no COO. Friar was acting COO after last guy left in 2013. Is new CFO essentially COO since this is a financial company and it makes sense to have everything run through her? I don’t have time today to dig into this so apologies if I’m missing anything obvious.

Bottom line - This is a company with a lot of moving parts and rapid innovation is key to the story. Of course common sense that since the products are working this is not a big deal. Still, understanding exactly how the machine runs and who is responsible for what is important to this story-driven investor. I like to know who my main characters are and what they do.

Again, thanks for your write up! Greatly appreciated.


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Thanks for the kind words, BroadwayDan.

There was an interview once with Dorsey where he described his work day. Basically, the Square and Twitter corporate HQs are within walking distance of each other in San Francisco. Every day he works the morning at one, and walks over to the other one in the afternoon, splitting his time between them almost evenly.

FWIW, he also has far more of his personal wealth tied up in SQ than Twitter (though it has probably been a good year since I calculated it).

When Friar was there, she was definitely a COO-type, almost a co-CEO. She was phenomenal. Have not yet gotten a good read on the role of the new CFO.

Long SQ
Phoenix 1 Contributor
MasterCard (MA), PayPal (PYPL), and Square (SQ) Ticker Guide
See all my holdings at

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Few tidbits/thoughts:

Dorsey owns about 60 million shares of Square (…)

  • On the call, Square did beta testing on their sellers, 40% of them did not have a business debit card.

  • A Square seller was on the call - I do not know if these are pre-planned or used to “market” for Square, but the question was interesting - asking about using Square solely as their one stop shop as a bank essentially. This is interesting given Square going for bank charter.

  • Cash App grew more than double YOY. I wonder how much more they can monetize it; they mentioned the current levers, and implied there would be more.

  • I do not know how much bigger the market cap of this company can grow easily. Meaning, I think the easy part has been done in terms of stock price going up rapidly over the last few years. But that said, for a company about 30 billion in market cap, it isn’t easy to have 51% YOY revenue growth or 64% adjusted YOY revenue growth.

  • I saw an article that question GPV growth downticking being a negative compared to revenue coming from the rising services/subs growth. I think it will be harder to keep adding GPV growth as Square becomes a larger company.

  • I think Square is just doing what they do; nothing significant has changed. Innovation rapidly happening; still growing. Just very high expectations, but even with those, they are doing fine.

  • Ahuja seemed great on her first conference call - knowledgeable, confident, well spoken. Looks like another stellar hire on first impression.


Also, Matt - thank you for your excellent write up.

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