SELLER ECOSYSTEM

We launched Orders API so sellers can manage orders from all their channels within Square.

Sellers need many solutions to build a successful business, and more than 20% of our total GPV now comes from sellers connected to a third-party application. We have opened our platform to enable developers to integrate third-party products with Square so that: (1) sellers can select the solutions that are best for their business, and (2) sellers have a more comprehensive view of their data to effectively manage their business.

For example, businesses increasingly sell through multiple channels, which is why we built Orders API to allow external applications to create and process orders via Square’s platform. As a result, we can provide visibility to sellers on all their sales data whether transactions are placed through Square or a third-party solution. Developers use the Orders API to connect services to Square such as online ordering and logistics and fulfillment, which streamlines workflows and simplifies reporting.

In the second quarter, we launched Order Manager, which uses our Orders API to enable delivery app integrations with strategic partners. Square for Restaurants now integrates with more than 20 delivery platforms, including Caviar, DoorDash, and Postmates. Food and drink is an important vertical for Square, generating 26% of our second quarter GPV. The online food-ordering market in the U.S. generated approximately $27 billion in sales in 2018 and is expected to grow at a double-digit rate through 2020.¹ Postmates also integrates with Square Point of Sale and Square for Retail, providing more seller types with the ability to offer delivery to their customers.

These integrations further differentiate Square’s omnichannel offering: We are able to serve diverse seller verticals across in-person and online channels through deeply integrated first- and third-party products. Sellers can manage all orders from the point of sale, remove the counter clutter of “tablet farms,” and eliminate the manual aggregation of online and in-person orders. Square shares in the economics of orders placed through connected delivery apps, which drives additional revenue to Square.

Bobwhite Counter is a restaurant specializing in Virginia-style Southern cuisine. With three locations in Manhattan, Bobwhite relies on food delivery apps to provide additional revenue with limited incremental overhead. Using Order Manager, Bobwhite saves valuable time by managing orders from Caviar, Postmates, DoorDash, and Chowly—all from the point of sale.

 

Order Manager Order Manager integrates more than 20 delivery platforms with Square for Restaurants, allowing sellers to manage all orders from the point of sale.

 

SELLER HIGHLIGHT

 

Manual order entry is very unproductive, especially when the process is scattered across multiple devices. Consolidating four delivery services into one tablet experience has saved me 30 to 60 minutes per shift.”

Keedick Coulter

Bobwhite Lunch and Supper Counter

New York City

CASH APP ECOSYSTEM

Our Cash App ecosystem has reached significant scale, generating $260 million in total net revenue in the second quarter of 2019. Excluding bitcoin, Cash App revenue was $135 million.

We evaluate the performance of Cash App based on the strength of our network, our customers’ engagement, and our monetization of the ecosystem.

Network: Driven by peer-to-peer (P2P) network effects and a fast, frictionless onboarding experience, we continued to efficiently grow our base of millions of customers. Cash App has been the number one free finance app in the U.S. App Store for the past two years, and is consistently a top 20 free app, demonstrating ongoing mainstream adoption.

Engagement: We have added several features that have increased daily utility and driven customer engagement. Customers have increasingly used Cash Card as a primary spending tool: In June, approximately 3.5 million customers used Cash Card, typically for everyday purchases at food and grocery, mainstream retailers, and gas and transportation. Cash Boost—a unique instant rewards program built into the debit card—has increased Cash Card adoption and driven Cash Card usage. Cash Boost also has demonstrated the ability to drive incremental revenue for merchants via customer acquisition, more frequent visits, and higher ticket sizes. These benefits are leading merchants such as DoorDash to partner with us on Boost programs.

Monetization: Cash App has reached meaningful scale, and today we generate revenue from Cash App through six different sources:

 

1.

Instant Deposit

2.

Cash Card

3.

Business Accounts

4.

P2P transactions funded with a credit card

5.

Bitcoin

6.

Interest on customers’ stored balances

In three years, total net revenue from Cash App increased from approximately $1 million in the second quarter of 2016 to $135 million, excluding bitcoin, in the second quarter of 2019.

		Performance We evaluate the performance of Cash App based on its network, engagement, and monetization.

 

 

 

Cash Card areas of spend based on activity in the top 100 merchants during the second quarter of 2019.

OPERATING EXPENSES

 

 

Operating expenses were $467 million in the second quarter of 2019, up 47% year over year, and non-GAAP operating expenses were $364 million, up 45% year over year. In the second quarter, operating expenses were 40% of total net revenue on a GAAP basis and 31% of total net revenue on a non-GAAP basis.

 

•

Product development expenses were $174 million on a GAAP basis and $107 million on a non-GAAP basis in the second quarter of 2019, up 52% and 42% year over year, respectively. This increase was driven primarily by personnel costs related to our engineering, data science, and design teams, as well as Weebly.¹

 

•

Sales and marketing expenses were $156 million on a GAAP basis and $147 million on a non-GAAP basis in the second quarter of 2019, up 59% and 61% year over year, respectively. Cash App marketing expenses were up 115% year over year, driven primarily by increases in peer-to-peer transactions and risk loss, and Cash Card issuances. Excluding Cash App marketing expenses, sales and marketing expenses were up 32% year over year. We continued to achieve a 3- to 4- quarter payback period for our seller ecosystem. Given this strong return on investment, we see further opportunities to increase our sales and marketing investments and drive long-term growth. In April, we launched an ecosystem marketing campaign to build broader awareness and understanding of our products and bring more sellers to Square.

 

•

General and administrative expenses were $101 million on a GAAP basis and $76 million on a non-GAAP basis in the second quarter of 2019, up 21% and 20% year over year, respectively. The increase was due primarily to additions to finance, legal, and support personnel.

 

•

Transaction, loan, and advance losses were $34 million in the second quarter of 2019, up 56% year over year. This increase is driven primarily by growth in seller GPV, Cash App volumes, and Square Capital loan volumes, including newer loan products for which we continue to train our risk models. Seller transaction losses continued to trend below 0.1% of GPV, underscoring continued discipline in risk management. For Square Capital, we continued to see an average loss rate of less than 4% for our core Flex Loan product.

    

 

 

 

 

 

Sales and marketing shown above represents GAAP sales and marketing expenses, excluding Cash App marketing expenses.

Payback period measures the effectiveness of sales and marketing spend. Payback period equals the number of quarters for a cohort’s cumulative Adjusted Revenue (excluding revenue from hardware, Gift Cards, and the acquisition of Zesty) to surpass our sales and marketing expense in the quarter in which we acquired the cohort. This measurement excludes both revenue and costs associated with Cash App. The 2018 payback period represents a trailing four-quarter average as of the third quarter of 2018.

EARNINGS

 

 

Net loss in the second quarter of 2019 was $7 million, compared to a net loss of $6 million in the second quarter of 2018. Net loss in the second quarter was $2 million when excluding the loss of $5 million as a result of the mark-to-market valuation of our Eventbrite investment. Net loss per share was $0.02 both on a basic and diluted basis for the second quarter of 2019, based on 423 million weighted-average basic and diluted shares. This compares to a net loss per share of $0.01 in the second quarter of 2018 on both a basic and diluted basis. Excluding the effect of Eventbrite, both basic and diluted net loss per share in the second quarter of 2019 would have been $0.00.

Adjusted EBITDA was $105 million in the second quarter of 2019, up 54% year over year. Adjusted Net Income Per Share (Adjusted EPS) was $0.21 based on 487 million weighted-average diluted shares for the second quarter of 2019, representing an $0.08 improvement year over year.

BALANCE SHEET/CASH FLOW

 

 

We ended the second quarter of 2019 with $1.7 billion in cash, cash equivalents, restricted cash, and investments in marketable fixed income securities, an increase of approximately $80 million compared to the end of the first quarter of 2019.

In the second quarter of 2019, Adjusted EBITDA and proceeds from the exercise of stock options contributed positively to our cash balance. This was partly offset by cash outflows due to the timing of the settlement of customers payable and settlements receivable, purchases of property and equipment and other long term investments, and payments for tax withholding related to vesting of restricted stock units.

 

In August 2017, we invested $25 million for preferred shares of Eventbrite, which converted into common stock in connection with Eventbrite’s IPO in September 2018. We revalued this investment, which resulted in a gain of $37 million in the third quarter of 2018, and losses of $17 million, $14 million, and $5 million in the fourth quarter of 2018, first quarter of 2019, and second quarter of 2019, respectively.

 

SAFE HARBOR STATEMENT

 

 

This letter contains forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact could be deemed forward-looking, including, but not limited to, statements regarding the future performance of Square, Inc. and its consolidated subsidiaries (the Company); the Company’s expected financial results for future periods; the Company’s intentions of reinvesting in its ecosystem and its expected benefits; future growth in the Company’s businesses and products and the Company’s ability to drive such growth; the Company’s expectations regarding scale, profitability, and the demand for or benefits from its products, product features, and services in the U.S. and in international markets; the Company’s expectations regarding Orders API and its ability to interoperate with third-party applications; the Company’s expectations regarding the Cash App ecosystem; statements regarding the proposed acquisition of Caviar by DoorDash (the Acquisition); and management’s statements related to business strategy, plans, and objectives for future operations. In some cases, forward-looking statements can be identified by terms such as “may,” “will,” “appears,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. Such statements are subject to a number of known and unknown risks, uncertainties, assumptions, and other factors that may cause the Company’s actual results, performance, or achievements to differ materially from results expressed or implied in this letter. Investors are cautioned not to place undue reliance on these statements and reported results should not be considered as an indication of future performance.

Risks that contribute to the uncertain nature of the forward-looking statements include, among others, the Company’s ability to deal with the substantial and increasingly intense competition in its industry; the Company’s ability to ensure the interoperability of its technology with that of third parties; changes to the rules and practices of payment card networks and acquiring processors; the impact of acquisitions or divestitures, strategic investments, or entries into new businesses; the effect of evolving regulations and oversight related to the Company’s provision of payments services and other financial services; the effect of management changes and business initiatives; adoption of the Company’s products and services in international markets; changes in political, business, and economic conditions; the possibility that the Acquisition will not close or that the closing may be delayed; the ability to realize the expected benefits from the transaction in the expected time period, or at all; as well as other risks listed or described from time to time in the Company’s filings with the Securities and Exchange Commission (the SEC), including the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2019, which is on file with the SEC and available on the investor relations page of the Company’s website. Additional information will also be set forth in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2019. All forward-looking statements are based on information and estimates available to the Company at the time of this letter and are not guarantees of future performance. Except as required by law, the Company assumes no obligation to update any of the statements in this letter.

KEY OPERATING METRICS AND

NON-GAAP FINANCIAL MEASURES

 

 

To supplement our financial information presented in accordance with generally accepted accounting principles in the United States (GAAP), we consider certain operating and financial measures that are not prepared in accordance with GAAP, including Gross Payment Volume, Adjusted Revenue, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income, Diluted Adjusted Net Income Per Share (Adjusted EPS), and non-GAAP operating expenses. We believe these metrics and measures are useful to facilitate period-to-period comparisons of our business and to facilitate comparisons of our performance to that of other payments solution providers.

We define Gross Payment Volume (GPV) as the total dollar amount of all card payments processed by sellers using Square, net of refunds. Additionally, GPV includes Cash App activity related to peer-to-peer payments sent from a credit card, and Business Accounts.

Adjusted Revenue is a non-GAAP financial measure that we define as our total net revenue less transaction-based costs and bitcoin costs, and we add back the impact of the acquired deferred revenue adjustment, which was written down to fair value in purchase accounting. We believe it is useful to subtract transaction-based costs and bitcoin costs from total net revenue to derive Adjusted Revenue as this is a primary metric used by management to measure our business performance, and it affords greater comparability to other payments solution providers. Substantially all of the transaction-based costs are interchange and assessment fees, processing fees, and bank settlement fees paid to third-party payment processors and financial institutions. While some payments solution providers present their revenue in a similar fashion to us, others present their revenue net of transaction-based costs because, unlike us, they pass through these costs directly to their sellers and are not deemed the principal in these arrangements. Under our standard pricing model, we do not pass through these costs directly to our sellers. We deduct bitcoin costs because we consider our role in the bitcoin transactions to be facilitating customer access to bitcoin. Since we only apply a small margin to the market cost of bitcoin when we sell bitcoin to customers, and we have no control over the cost of bitcoin in the market, which tends to be volatile, we believe deducting bitcoin costs is a better reflection of the economic benefits as well as the Company’s performance from the bitcoin transactions. We recognize acquired deferred revenue that was written down for purchase accounting since we believe that it is correlated with ordinary and ongoing operations of the acquired company and facilitates analysis of revenue growth and business trends. We define Adjusted Revenue from subscription and services as the total net subscription and services-based revenue adjusted to add back the impact of the write-down adjustment to acquired deferred revenue related to purchase accounting. We add back this deferred revenue that was written down since we believe it is correlated with ordinary and ongoing operations of the acquired company and facilitates analysis of revenue growth and business trends. Adjusted Revenue has limitations as a financial measure, should be considered as supplemental in nature, and is not meant as a substitute for the related financial information prepared in accordance with GAAP.

Adjusted EBITDA, Adjusted EBITDA margin, Adjusted Net Income, Diluted Adjusted Net Income Per Share (Adjusted EPS), and non-GAAP operating expenses are non-GAAP financial measures that represent our net income (loss) and net income (loss) per share, adjusted to eliminate the effect of share-based compensation expenses, amortization of intangible assets, amortization of debt discount and issuance costs in connection with our offering of convertible senior notes in the first quarter of 2017 and in the second quarter of 2018, the gain or loss on the disposal of property and equipment, gain or loss on revaluation of equity investment, gain or loss on debt extinguishment related to the conversion of senior notes and impairment of intangible assets, as applicable. We also exclude certain costs associated with acquisitions and other activities that are not normal recurring operating expenses, including amounts paid to redeem acquirees’ unvested stock-based compensation awards, and legal, accounting, and due diligence costs, and we add back the impact of the acquired deferred revenue and deferred cost adjustment, which was written down to fair value in purchase accounting. Additionally, for purposes of calculating diluted Adjusted EPS we

add back cash interest expense on convertible senior notes, as if converted at the beginning of the period, if the impact is dilutive, since we intend to settle future conversions of our convertible senior notes entirely in shares. In addition to the items above, Adjusted EBITDA and non-GAAP operating expenses are non-GAAP financial measures that also exclude depreciation, other cash interest income and expense, other income and expense, and provision or benefit from income taxes, as applicable. To calculate the diluted Adjusted EPS we adjust the weighted-average number of shares of common stock outstanding for the dilutive effect of all potential shares of common stock. In periods when we recorded an Adjusted Net Loss, the diluted Adjusted EPS is the same as basic Adjusted EPS because the effects of potentially dilutive items were anti-dilutive given the Adjusted Net Loss position. Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by Adjusted Revenue.

We have included Adjusted EBITDA and Adjusted EPS because they are key measures used by our management to evaluate our operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources. Accordingly, we believe that Adjusted EBITDA and Adjusted EPS provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. In addition, they provide useful measures for period-to-period comparisons of our business, as they remove the effect of certain non-cash items and certain variable charges. Adjusted EBITDA and Adjusted EPS have limitations as financial measures, should be considered as supplemental in nature, and are not meant as substitutes for the related financial information prepared in accordance with GAAP.

We believe that the aforementioned metrics provide useful information about our operating results, enhance the overall understanding of our past performance and future prospects, and provide useful measures for period-to-period comparisons of our business, as they remove the effect of certain variable amounts. Our management uses these measures to evaluate our operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources.

These non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. These non-GAAP financial measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similarly titled measures presented by other companies.