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The numbers moved in the right direction for Square Inc. in the first quarter, with gross payment volume up 33% and profitability measures improving. But an analyst urged the merchant acquirer to disclose more data about its fast-growing but potentially volatile loan business called Square Capital.
Gross payment volume of $13.6 billion was up 33% from $10.3 billion in the year-earlier quarter. Revenues and Square’s net loss of $15 million both beat analysts’ expectations. Square, which had an initial public offering of stock in November 2015, posted a net loss of $97 million in 2016’s first quarter, its first full quarter as a public company. Since then, quarterly net losses mostly have been narrowing. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) swung to a positive $27 million from a negative $9 million a year earlier.
Transaction-based revenue grew 4 basis points to 2.96% from 2.92% in 2016’s first quarter while transaction-based profit increased to 1.07%, also up 4 basis points. Transaction losses fell slightly and remain just below 0.1%.
In a letter to shareholders, Square attributed the improving financials to “strong top-line growth, coupled with ongoing operating leverage and improvements in transaction loss rates. Similar to previous quarters, we saw strong momentum across our products, with revenue growth driven by both transaction-based and subscription and services-based monetization.”
Subscription and services revenues hit $49 million in the first quarter, up 106% from a year earlier as Square’s sellers, or merchants, used more of the processor’s services such as Square Capital loans, Caviar, Square’s food-ordering and delivery service, and Instant Deposit. Square Capital facilitated 40,000 business loans totaling $251 million, up 64% year over year.
In a report issued Wednesday, stock analyst Robert Napoli of Chicago-based investment firm William Blair & Co. said investors don’t know enough about Square Capital, which provides loans to merchants based on their Square processing volume. Napoli said Square Capital’s revenues are is “much riskier” than those from transaction processing.
“We strongly advise management to improve Square Capital disclosures; nothing positive can come from limited information and investors could be unintentionally misled,” the report says. “The revenue stream out of Square Capital is very different and investors need and deserve to know exactly what it is. The revenue stream has the potential to be very volatile. A negative surprise in the credit business, without proper disclosures, could harm credibility of a company that appears to have a really strong payments franchise. Management should give specific revenue and profit contribution metrics. It should show real credit performance metrics.”
A Square spokesperson was not immediately available to comment on the report.
Meanwhile, Square launched in the United Kingdom in the first quarter, where, as in the U.S., it will be offering EMV chip card acceptance on smart phones as well as acceptance of contactless transactions. The U.K. and Australia, another Square market, use chip-and-PIN authentication for both credit and debit EMV cards in contrast to the U.S., where signatures are still used to authenticate EMV credit cards. In its shareholder letter, Square said it has “built a new, secure way [for merchants] to enter PINs into the Square app on a mobile device, eliminating the need for expensive hardware PIN pads and making card acceptance more accessible.”
The company also said its contactless and chip card reader “aims to meet the needs of the U.K. market,” where there are more than 100 million contactless cards.
