Square’s Payment Volume Jumps 45%, but Growth Measures Cause Loss To Widen

Boosted by a 45% increase in payment volume to $10.3 billion, Square Inc.’s adjusted revenues jumped 64% in the first quarter, but the merchant processor’s net loss doubled to $96.8 million on higher expenses as the company continued to invest like a startup for future growth.

In its second earnings report as a public company, San Francisco-based Square on Thursday reported adjusted revenues of $146.2 million compared with $89.2 million in 2015’s first quarter. What Square calls adjusted revenues are what remains after subtracting from total revenues the transaction revenue from Starbucks Corp., which is moving to JPMorgan Chase & Co.’s Chase Commerce Solutions subsidiary, and transaction costs. For 2016’s first three months, Square had $379.3 million in total revenues, including $38.8 million from Starbucks, and $194.3 million in transaction costs.

The revenues were generated mostly by gross payment volume (GPV), which boomed from $7.1 billion in 2015’s first quarter. What’s more, the share of payments from more-profitable larger merchants, those with $125,000 or more in annual volume, continued to increase, accounting for 39% of GPV versus 34% a year earlier.

“Our core payments business remains strong and is growing,” chief executive Jack Dorsey, who also is CEO of Twitter Inc., said in a conference call with analysts. Square serves 2-million-plus merchants, or what it calls sellers.

Transaction revenue as a percentage of GPV came in at 2.92% versus 2.97% a year earlier. Square attributed the decline to promotions and “custom pricing” for some larger merchants. The transaction profit was 1.03%, down from 1.11%.

The overall loss of nearly $97 million, double the $48 million in 2015’s first quarter, came largely from a 72% increase in operating expenses to $207.4 million. The company booked $50 million for a pending settlement of a lawsuit over intellectual property. Expenses also included $64.6 million for product development, up 63%.

“We are still very much in investment mode, too,” said chief financial officer Sarah Friar. But while the company continues to hire engineers and other personnel, it still could reach the break-even point this year, she said.

Some of the operating costs went for distributing Square’s new EMV and near-field communication reader for mobile devices, which enables Square’s sellers to accept chip cards and contactless mobile payments. Friar said the company has deployed “nearly half a million” of the readers.

Dorsey said Square’s reader processes EMV chip cards, which have been criticized for slow transaction times compared with the magnetic-stripe cards they’re replacing, faster than other EMV terminals. And he said Square will continue to provide its merchants with competitive speeds even though both Visa Inc. and MasterCard Inc. have announced initiatives to smooth EMV transactions.

“We are focused on speed, and speed has always been a winning proposition for Square,” he said. But Dorsey added that Square’s proposition rests on other pillars besides payments, including business-management software and Square Capital, which the company recently changed from a merchant cash-advance service to a loan product.

“Our real advantage is not just the payment device, but the fact that we have a cohesive ecosystem,” Dorsey said.

Square reported $24 million in first-quarter software and data-product revenues, up 197%.