Business context and reporting period
Square, Inc. (the registrant named in this 2018 filing) reported unaudited results for the quarter and nine months ended September 30, 2018, compared with the same 2017 periods. Its business spans seller payments and commerce tools, Cash App, Caviar, Square Capital, and hardware. It acquired website-services provider Weebly in May 2018.
Financial performance and liquidity
Amounts below are in millions of dollars unless noted.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $882.1 | $585.2 | $2,365.6 | $1,598.2 |
| Gross profit | $352.7 | $218.6 | $923.6 | $599.5 |
| Gross margin | 40.0% | 37.4% | 39.0% | 37.5% |
| Operating loss | $(9.9) | $(14.9) | $(33.5) | $(41.2) |
| Net income (loss) | $19.6 | $(16.1) | $(10.2) | $(47.2) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $118.7 | $130.3 |
- Revenue growth: Q3 revenue increased 51% year over year; nine-month revenue rose 48%. Transaction revenue grew 29% in both periods, alongside sharply higher subscription and services revenue. Bitcoin revenue was $43.0 million in Q3 and $114.1 million for nine months; the filing records bitcoin sales largely gross, with corresponding costs.
- Operating metrics: Q3 gross payment volume (GPV) was $22.5 billion, up 29%. Larger sellers, defined as generating more than $125,000 of annualized GPV, represented 52% of Q3 GPV versus 48% a year earlier. Management reported transaction-based margin as a percentage of GPV of 1.07%, up from 1.05%.
- Profitability: Q3 net income included a $36.9 million non-cash gain from revaluing Square’s Eventbrite investment following its IPO; operating results remained loss-making. Q3 adjusted EBITDA was $71.0 million and adjusted net income was $65.4 million, both non-GAAP measures. Nine-month adjusted EBITDA was $175.2 million and adjusted net income was $156.8 million. Share-based compensation was $157.9 million for the nine months.
- Cash and liquidity: At September 30, cash and cash equivalents were $721.7 million; marketable debt securities totaled $986.6 million, and restricted cash was $43.3 million. Cash, cash equivalents, and marketable securities totaled approximately $1.708 billion, excluding restricted cash. Management said available cash, investments, and credit capacity were sufficient for working capital and planned capital expenditures for at least 12 months.
- Cash flow: Nine-month investing cash outflow was $775.3 million, mainly reflecting $859.1 million of marketable-security purchases and $112.4 million of acquisitions, partly offset by security maturities and sales. Financing cash inflow was $690.7 million, principally reflecting the 2023 convertible-note issuance.
- Debt: Convertible-note carrying value was $1.024 billion at quarter-end; principal outstanding was $1.232 billion. Square issued $862.5 million principal of 0.50% notes due 2023. It also had $369.953 million principal outstanding on 0.375% notes due 2022. A $375 million secured revolving facility was undrawn and available.
- Balance sheet: Total assets were $3.973 billion and total liabilities $2.851 billion at September 30. Customers payable and settlements payable were $1.315 billion and $203.3 million, respectively, and largely reflect payment-processing activity.
Material changes versus the prior comparable period
- Q3 net income swung from a $16.1 million loss to $19.6 million income, while nine-month net loss narrowed from $47.2 million to $10.2 million. The Q3 profit included the Eventbrite revaluation gain; the company continued to report operating losses.
- Subscription and services revenue increased 155% in Q3 and 129% for the nine months, driven by Instant Deposit, Caviar, Cash Card, Square Capital, and second-quarter acquisitions. Weebly added website hosting and domain-registration offerings.
- Q3 operating expenses rose 55% year over year; nine-month operating expenses rose 49%, including greater personnel, product development, sales and marketing costs, and acquisition-related costs.
- Nine-month operating cash flow fell to $118.7 million from $130.3 million, while investing outflows increased to $775.3 million from $360.5 million. Cash and investments rose substantially, supported in part by the 2023 notes issuance.
- Square adopted ASC 606 on January 1, 2018, using the modified retrospective method. Adoption increased reported revenue by $1.6 million in Q3 and $5.3 million for nine months; opening retained earnings was reduced by $4.6 million.
Outlook, risks, contingencies, and unusual items
- No specific revenue, earnings, or GPV guidance was provided. Management highlighted continued growth in seller volumes and larger sellers, product investment, and global expansion, but cautioned that interim results are not necessarily indicative of full-year results.
- Square identified risks from competition, seller retention and growth, transaction fraud and chargebacks, cybersecurity and service disruptions, reliance on payment processors and suppliers, and extensive financial-services, privacy, and other regulation. Bitcoin operations are exposed to price volatility, custody/security concerns, and evolving regulation.
- Square paid San Francisco business taxes assessed for fiscal 2014 and 2015 while disputing the city’s classification of its business. Potential additional taxes, penalties, and interest for later years could be material; the company said it could not reliably estimate the possible loss. A San Francisco tax measure approved in November 2018 could add exposure from 2019 if applicable.
- Two California Caviar courier matters allege worker misclassification. One plaintiff’s arbitrable claims were sent to arbitration in November 2018; the separate representative PAGA case was at an early stage, and potential liability could not yet be reliably estimated.
- Holders had notified Square of intent to convert $149 million principal of 2022 notes, expected to settle in Q4 2018. In October 2018, Square revised its stated policy and said it expected future note conversions to be settled entirely in shares, subject to periodic reassessment.
- Square expected adoption of the new lease standard in 2019 to add material right-of-use assets and lease liabilities. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported revenue growth reflects sustainable transaction and subscription growth versus gross-presented bitcoin sales, acquisitions, and ASC 606 timing effects.
- How the Eventbrite gain affected GAAP profitability and how non-GAAP reconciliations treat recurring share-based compensation and acquisition-related items.
- The amount and timing of 2022-note conversions, the share-settlement policy, potential dilution, and the effect of note hedges and warrants.
- Credit quality, loss provisioning, and third-party funding availability for Square Capital; reported loan and transaction losses increased.
- Developments and potential financial exposure from San Francisco taxes and Caviar courier litigation.
- Liquidity and working-capital movements, including settlement balances, customer funds, and the difference between reported cash, restricted cash, and marketable securities.