Investors have had mixed expectations from Square, Inc. (SQ, Financial) prior to its recent quarterly results. Given the fact that Covid-19 has adversely impacted many small-time retailers and merchants, the expectations of Square's seller ecosystem were particularly low, but this was expected to be offset by a strong performance by the company's online payment wallet platform, Cash App.
Square ended up delivering solid results on both counts with visible initiatives from the management to help its seller ecosystem cope with the pandemic situation.
Square has excellent long-term growth prospects, in my opinion, and is on track for a bright future ahead as it continues to cash in on the cashless trend in the U.S. and the rest of the world.
Company overview
Square is a commerce ecosystem company that revolves around the provision of point-of-sale solutions to sellers and helps them grow their businesses. Its offerings include both hardware as well as software products to the merchant community.
Its hardware solutions include the magstripe reader and the contactless and chip readers for reading card payments, the Square Stand (which helps an iPad to be used as a payment terminal), the Square Register (which combines its hardware, point-of-sale software and payments technology) and the Square Terminal (a portable payments device that replaces keypad terminals for accepting various payments).
On the software front, the company's offerings include Square Point of Sale, Square Virtual Terminal, Square Appointments, Square for Retail, Square for Restaurants, Square Invoices, Square Online Store, Square Loyalty, Marketing and Square Dashboard.
Square employs close to 3,835 people and is headquartered in San Francisco, California.
Recent financial results
Square had a solid quarter where it reported revenue of $1.92 billion, significantly above the analyst consensus estimate of $1.13 billion. This was an increase of 241.8% in the top-line over the corresponding quarter of 2019. This growth was driven largely by the exceptionally good performance of the company's Cash App, which compensated for the drop in revenues of the point-of-sale solutions and the sellers' ecosystem.
The company's total gross profit was $597 million, up 28% as compared to the same quarter of the previous year. Square reported adjusted Ebitda of $98 million, showing a 28% growth, while its earnings per share (EPS) came in at 18 cents, well above the analyst consensus estimate of a loss per share of 5 cents.
The company managed to process around $873 million in paycheck protection payment (PPP) loans in the second quarter, while overall quarterly gross payment volumes grew 17.5% to $26.8 billion.
The fact that Square managed to deliver such solid top-line growth and beat estimates in a tough business environment is a big deal, and the market has already increased the stock rise by a phenomenal 80% since March.
Helping merchants counter the Covid-19 pandemic
The company's base of merchants was bound to face tough challenges and poor business conditions on account of the economic downturn but Square managed to provide support to them in going online and increasing revenues through its new offerings.
Being a service provider to merchants, mostly small and medium-sized businesses (SMBs), Square's quarterly results could have been badly hit by the pandemic, which has ended up destroying many SMBs.
However, Square has managed to find a counter strategy in helping SMBs cope with the crisis and adapt themselves to the new normal. Among the new tools provided by Square to SMBs to improve their online presence and facilitate easy ordering by customers is the Square Online Checkout, which allows merchants to sell online without building their own e-commerce platform. The other major assistance to merchants is with respect to the delivery of the products, which Square has taken care of through its new On-Demand Delivery platform. The platform provides merchants with access to a variety of third-party delivery apps. The merchants benefit from economies of scale by operating through Square's On-Demand Delivery platform, which helps them get better margins and minimize the cost of deliveries, unlike the case where they directly use other third-party delivery services without involving Square.
The outcome was visible through the Gross Payment Volume (GPV) from online channels rising by more than 50% as compared to 2019. The company was not only able to help its existing merchant base but also acquire many new sellers on its platform.
Also, it is worth highlighting that the company's new merchants generated higher gross profit in their first five weeks after onboarding than those who joined the platform during the same period a year ago.
Despite all these countermeasures, the seller ecosystem generated revenue of $723 million (a 17% drop) and a gross profit of $316 million (a 9% drop) as compared to the previous year. However, the fact that Square is providing value-add services to its merchants in such tough times should help them build resilience.
Final thoughts
The pandemic has certainly acted as a strong catalyst for a cash-free society. With people being forced to carry out more of their purchasing activity online, there is a gradual migration towards the use of e-wallets, and Square has definitely benefitted from this changing consumer behavior.
The company's Cash App offering had a solid performance in the quarter as it generated revenue of $1.20 billion with $281 million in gross profit. In fact, it has now crossed 30 million monthly transacting active customers with over 7 million spendings on Cash Card.
With such a formidable product performance and some expected recovery in the seller ecosystem, Square investors can continue to be optimistic about the future, in my view.
Disclosure: No positions.
Read more here:
- Zendesk: No Reason to Be Disappointed
- VeriSign: A Market Leading Cash Cow
- Logitech: Why Solid Peripherals Make the Stock a Buy
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