Square’s S1 Filing: Diversified Customer Base, Good Growth, High Deficits

When Square launched its credit card processing reader for smart phones in May 2010, it was one of the most enabling services for very small businesses we’d ever seen. It allowed businesses to affordably process payments at 2.75 percent of revenues instead of paying 5-6 percent; and take credit cards without investing $1200+ for POS; it also provided a complete set of analytics so that businesses knew how to target.

Since then, the challenge for Square has been scale up to include larger and more lucrative businesses; fend off increasingly stiff competition from players with arguably deeper ties to the SMB community, including PayPal, Intuit Amazon – as well as new cloud based POS type products from First Data’s Clover and Poynt as well as traditional POS players such as Verifone ; expand internationally – currently there are only some sellers in Canada and Japan; and build a complete eco system around its core processing services, including – Windows style — the development of a wide range of third party apps.

Success as an ecosystem would allow Square to become a true disruptor for all kinds of SMB services, back office logistics and marketing. In addition to Square Analytics, these services have now come to include Square Capital, a fast SMB loans service based on payments; and Caviar, a food delivery service with 1000 restaurants in key cities. But the company faces competition in each of these areas – a factor that has forced it to give up its initial hope for instance, to charge for its readers and stands.

It hasn’t been an easy climb. A 2012 deal with Starbucks to process all its payments gave Square credibility and brought Square up to scale very quickly. But it has also been a yoke around its neck, resulting in hundreds of millions of dollars in losses. That deal has proved unsatisfactory for both sides, and is likely to end soon. Talent wise, Square has suffered from high turnover and earned a reputation as a disorganized, difficult place to work.

Yet, the company continues to grow, provide exciting new services, and has taken its place as a major enabler and innovator of the new SMB economy. In 2014, sellers using Square processed payment transactions worth $23.8 billion generated by 446 million card payments from 144 million payment cards. Square’s own revenues from transactions and other sources amounted to $850 Million in 2014.

This week, Square has optimistically filed an S1 that reveals a great deal more about the 1,171 employee, tight lipped company than previously revealed. Among the highlights:

Revenues still come mostly from payments and POS services. 95 percent of revenue still comes from payments and Point of Sale services. This suggests that efforts to diversify are taking some time.
Customers are becoming more diversified. While Square has a reputation as mostly serving coffee shops and flea market vendors, its customer base is now comprised of 21 % retail; 17% services; 15% food; 14% contractors and repairs’ 11% health and beauty; 9T individuals; 6% health; 4% charity/education; and 3% transportation.
Larger businesses are beginning to adopt Square. 11 percent of transaction revenues come from companies earning $500k or more; 26 percent comes from companies making between $125-500K. The ratio of transaction revenues for companies making less than $125,000 has fallen from 92 percent in 2011 to 63 percent.
Larger companies use a wider range of services. On average, more than 70% of sellers who process more than $125,000 per year engage daily with analytics in their Square Dashboard.
Square’s digital receipts are a powerful feedback mechanism with customers. More than 1.5 million monthly feedback communications sent by buyers to sellers through digital receipts
Square’s cumulative deficit has been $473.2 Million. It needs for the IPO to be successful.