Square Sees ‘Signficant Slowdown,’ Quadruples Loss Reserves

(Bloomberg) -- Square Inc. said it quadrupled the money it sets aside to cover losses after the coronavirus pandemic and the economic crisis sparked a steep drop-off in parts of its business.

The financial technology company run by Jack Dorsey said gross payment volume, the total amount of all card payments processed by Square sellers, was $25.7 billion in the first quarter compared to analysts' average estimate of $26 billion. The company's loss for the quarter totaled $106 million. Analysts had expected losses of only about $34 million.

“During the last two weeks of the quarter, our seller ecosystem experienced a significant slowdown,” the company said Wednesday in its shareholder letter. “The macroeconomic environment remains uncertain.”

Transaction and loan losses, which account for bad loans as well as fraud, were $109 million, a 291% increase from the year earlier. The company said that included additional reserves of $79 million for transaction losses and $22 million for outstanding loans in its Square Capital business -- a fourfold increase compared to the fourth quarter.

Square's stock was down more than 4% in after-hours trading Wednesday. Before the company reported earnings, shares were up about 9% for the year, compared to a 12% drop for the S&P 500 index.

In March, Square withdrew its financial guidance for 2020, citing uncertainty related to the pandemic. In its letter to shareholders Wednesday, the company did not give earnings or revenue guidance for the second quarter or for the year. It did say that it expects the lingering public health crisis to have “a material impact” on results for the coming quarter.

One bright spot for Square was its peer-to-peer payments app, called Cash App, which added its largest number of new customers in April. That helped the San Francisco-based company report revenue of $1.38 billion in the first quarter, topping analyst estimates.

Cash App “has an opportunity to serve our customers uniquely in this moment,” Chief Financial Officer Amrita Ahuja said on a call with investors. “This is a key priority for us.”

Square plans to continue to invest in new products that will help expand Cash App, Ahuja said. Still, the company will cut costs tied to product development, sales and marketing, and general and administrative expenses by $75 million to $125 million.

Square has also stopped making new offers for its core “flex loan” product and it's begun reviewing its exposure to certain “high-risk” sellers in industries that have been hardest hit, Ahuja said.

By mid-April, Square said 14 million customers were eligible to have funds directly deposited into their Cash App wallet, compared with 3 million in February, a number that got a boost as the company worked to quickly deliver people stimulus checks from the government. That also helped boost overall stored balances in Cash App from $945 million in March to $1.3 billion in April, Ahuja said.

The increase in people receiving direct deposits into their Cash App wallet can “lead to people seeing Cash App ultimately as a primary account,” Dorsey said during the conference call. Instead of going to a bank branch, customers can complete transactions by “simply going to the app store, signing up, and they're in business,” he said.