Square Thrives as Payments Platform Woos Bigger Merchants

(Bloomberg) -- Square Inc. is on a roll, proving that it's not just a niche payments player but an all-inclusive business management platform for small companies.

Run by Twitter Inc. Chief Executive Officer Jack Dorsey, Square has come a long way from its early days as a credit card reader in food trucks. It's been expanding geographically and in terms of the services it offers merchants, winning bigger clients as a result and boosting sales. Revenue in the first quarter shot past forecasts from the company and analysts, rising 39 percent as businesses sign on for payments processing, loans and software to help manage inventory. Square also raised its sales and profit forecast for the year.

Not long ago investors had begun to question Square's prospects and growth in the face of rising competition from PayPal Holdings Inc. and Apple Pay. But the San Francisco-based company has plowed ahead, marking its biggest international push by launching services in the U.K. in March, and signing partnerships and acquisitions in the food-delivery business, a strategy it hopes helps attract more restaurants. Earlier this year, Square introduced a set of business tools aimed specifically at retailers, which accounted for 20 percent of all payments volume it processed last year.

The efforts haven't gone unnoticed, as investors pushed the stock to a record $18.81 on Tuesday. Square gained 5.4 percent at 5:28 p.m. in extended trading in New York Wednesday. Some analysts are looking for Square to head into even more markets this year and expect new products too.

“What continues to make me pleased with our results is growth in large businesses,” Chief Financial Officer Sarah Friar said in an interview. “That ongoing shift is good to see because I think those folks are not net new to the payments world, they've probably had an alternate supplier, but now they want to be on the latest technology and they value all we do.”

Square said revenue from larger sellers, those with at least $125,000 in annualized gross payment volume grew 44 percent in the first quarter from a year earlier.

Adjusted revenue was $204 million in the first quarter, beating analysts' average estimate of $192.8 million and the company's own forecast for as much as $193 million. Adjusted earnings before interest, tax, depreciation and amortization were $27 million, or 5 cents a share in the three months ended March 31, compared with estimates for $17.6 million, or 2 cents a share, the company said in a statement Wednesday.

For the full year, Square predicted adjusted revenue of as much as $910 million, up from a previous forecast of as much as $900 million. Analysts had estimated $901.5 million. Adjusted Ebitda in 2017 will be as much as $120 million, up from the company's earlier projection of as much as $110 million and analysts' estimates of $114.9 million.

The company has won investor confidence that it can drive sales growth and expand margins with more profitable products. Having moved beyond the white, square payment dongle for reading credit cards through mobile phones and tablets, Square is now targeting larger merchants with a growing suite of services, including loans and software services that let customers manage inventory and analyze sales. In the fourth quarter of 2016, those newer products comprised a quarter of adjusted revenue.

"Square has a rich ecosystem” of transactions, customer and inventory data and more that “could enable it to extend beyond payments and play a larger role in commerce,” wrote Josh Beck, an analyst at Pacific Crest Securities, in a note before the results were announced. "Square is set up for a consistent series of positive fundamental surprises over the next year."

Square's all-in-one offering has proven attractive for merchants who don't want to stitch together hardware, software and payments services from many different vendors. It's been able to maintain a steady transaction margin despite the increase of larger sellers, which tend to command lower fee rates. Analysts expect Square can achieve significant growth by bringing that model to the U.K., the world's fifth-largest economy that has a high concentration of small and medium-sized businesses. Though Square has already debuted in Canada, Japan and Australia, international sales are less than 5 percent of its revenue.

To contact the reporter on this story: Selina Wang in New York at swang533@bloomberg.net.

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Molly Schuetz, Andrew Pollack