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How Square Makes Money: Transactions and Subscriptions

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Square, Inc. (SQ) is a financial services and online payments company that provides hardware and software tools to help businesses run and grow their operations. Among Square’s primary products are: a point-of-sale hardware system; software for payments processing and analytics; Square Card, a free business debit card; and Cash App, a peer-to-peer (P2P) payment service. Square faces a broad array of small and large competitors such as business software companies, payroll processors, payment terminal vendors, and banks. They include PayPal Holdings, Inc. (PYPL), Intuit Inc. (INTU), and venture capital startup ShopKeep.

Key Takeaways

  • Square is a financial services and mobile payments company that sells a broad range of products, including point-of-sale hardware and software.
  • Transactions were Square’s biggest revenue generator in 2019, but Bitcoin sales were its fastest-growing area.
  • On March 24, Square lowered its guidance for Q1 growth in revenue and gross profit due the coronavirus pandemic. It says the outlook may worsen in coming quarters.

Square’s Financials

Since its 2015 initial public offering (IPO), Square has grown rapidly into one of the largest and best-known payment services companies in the U.S. But it only recently achieved profitability. Four years after going public, Square posted its first annual profit in FY 2019, reporting $375.5 million in net income compared to a $38.5 million loss a year earlier. Those profits were fueled by soaring net revenue, up 42.9% year-over-year (YOY) to $4.7 billion.

Square’s Business Segments

For FY 2019, Square does not divide its businesses into operating segments and, instead, reports as a single entity. However, Square does break out its four main business generators by revenue, below, which are: transactions, subscriptions and services, hardware, and bitcoin sales. The company does not provide net income or other metric figures for these categories.

Transaction-Based Revenue

Businesses pay a fee to Square for each transaction utilizing its services and products. This fee is typically calculated based on a percentage of the total value of the transaction. In FY 2019, transaction fees accounted for $3.1 billion in revenue, up 24.7% YOY. Although transaction-based revenue was one of its slowest-growing categories, it represented by far the largest share of net revenue, about 65%.

Subscription and Service-Based Revenue

Square’s subscription and service-based revenue comes from sources such as its Cash App platform, Square Capital, and Instant Transfers. This revenue is comprised of certain transaction fees, as well as hosting and domain name services, gift cards, payroll services, and the Square Card. In FY 2019, Square generated $1.0 billion in subscription and service-based revenue, up 74.3% YOY. Subscription and service-based revenue was the second-fastest-growing category in FY 2019 and for accounted for nearly 22% of total net revenue.

Hardware Revenue

Square sells hardware products and devices to help businesses conduct transactions, including contactless and chip readers, stands, registers, terminals, and card swiping devices. Hardware is one of Square’s smallest business areas, but it’s growing steadily. Revenue rose 23.4% to $84.5 million in FY 2019 and accounted for about 2% of revenue.

Bitcoin Revenue

Since late 2017, Square has offered users of its Cash App peer-to-peer payment (P2P) service the option of buying and selling bitcoin using their balances on the platform. Bitcoin revenue soared 210.2% to $516.5 million in FY 2019. Bitcoin was Square’s fastest-growing category and made up 11.0% of Square’s revenue in 2019.

Square’s Recent Developments

In late March, Square lowered its guidance for Q1 growth due the coronavirus pandemic. Square revised its net revenue and gross profit expectations to between $1.30 and $1.34 billion and between $515 to $525 million, respectively. Because so much of Square’s revenue is generated from merchant transactions, and because many businesses across the country have effectively been shut down during the crisis, Square anticipates substantial negative impact to its revenue for the near future.

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