Media Moves

Coverage: Square files for IPO

October 15, 2015

Posted by Meg Garner

Jack Dorsey

Jack Dorsey was finally given the full reins at Twitter last week, and now his second company, Square, is proceeding with its plans to go public.

In regulatory filings yesterday, the mobile payment company disclosed all the details of its impending IPO.

Jason Del Ray of Re/code describe some of the filing’s key points:

Square filed documents to go public on Wednesday, revealing on the surface a fast-growing payments business with widening losses, thanks in part to a winding-down Starbucks partnership that looks disastrous financially.

But a more nuanced look at the numbers, stripping out the Starbucks deal, tells a story of a healthier core business with even a path toward, yes, profitability.

First, the high level: Square recorded revenue of about $560 million in the first half of the year, a 51 percent increase over the first half of 2014. For the same period, losses were about flat year-over-year at about $78 million. That doesn’t look great.

But the profit-or-loss metric that investors and analysts will look at more closely is adjusted Ebitda, or its profit minus a few standard items like taxes and depreciation. To get to this metric, Square is also stripping out all the revenue and transaction costs associated with its Starbucks partnership*, which it says will come to an end in the third quarter of 2016. As a result, Square is making the case that that deal doesn’t reflect its core business, and it is right: Square loses money on Starbucks transactions, while Square makes money on the transactions it processes for all the other brick-and-mortar businesses it works with.

Mike Isaac of The New York Times explained the scope of Square’s impending IPO:

While the filing revealed that Square’s revenue jumped to $850 million last year, up 54 percent from a year earlier, losses increased to $154 million in 2014, more than in 2013. For the first six months of this year, Square lost $77 million on revenue of $561 million.

That means Mr. Dorsey, 38, will need to sell a money-losing Square to investors when I.P.O.s — including recent technology offerings like Pure Storage — have been met with a lackluster reception. In addition, Mr. Dorsey faces questions about whether he can juggle his chief executive roles at Twitter and Square. Taking a company public and navigating the turnaround of another are each tall tasks on their own.

“You can rarely successfully serve two masters,” said Brendan Miller, an analyst with Forrester Research who studies mobile commerce.

In its prospectus, Square noted Mr. Dorsey’s multiple jobs, saying the dual roles “may at times adversely affect his ability to devote time, attention and effort to Square.”

Aaron Zamost, a spokesman for Square, declined to comment on Wednesday. In a statement last week, Mr. Zamost said Mr. Dorsey “has shown for the past several months he has the ability, passion and commitment to lead both companies effectively.”

Square filed with an initial offering size of $275 million, which is a place holder figure used to calculate registration fees that may change. That number may be an inside joke to payments wonks: Square takes a 2.75 percent cut of most of the credit card transactions that it processes.

Maureen Farrell of The Wall Street Journal pointed out seven interesting points from the filing, including Dorsey’s role in the company:

MoneyBeat took a look at its regulatory filing, and here are seven points that jumped out at us:

1) Jack Dorsey is a risk factor.When Jack Dorsey was named acting CEO of Twitter, most speculated that he would have to step down as CEO of Square if he was to be name permanent CEO of Twitter. He didn’t. And Twitter’s board still chose him as its new CEO.

Square’s warning for investors: “Jack Dorsey, our co-founder, President, and Chief Executive Officer, also serves as Chief Executive Officer of Twitter. This may at times adversely affect his ability to devote time, attention, and effort to Square.”

2) Jack Dorsey has a third company.

Square’s filing says that Mr. Dorsey has a “direct ownership interest” in a West Studios, LLC. The filing says that Square incurred $1.2 million in expenses for consulting services that West Studios provided. That company, in turn, has an option to purchase 375,000 shares of Square’s common stock.

Twitter’s IPO filing also discussed West Studios and said that in 2011 and 2012 Twitter paid West Studios $300,000 and $1.9 million respectively “for marketing and communication services.” As of September 30, 2013, Twitter hadn’t paid anything more to West Studios, according to the filing.

Davey Alba of Wired broke down Square’s unprofitable relationship with Starbucks:

Starbucks had previously used Bank of America Merchant Services to process its payments and said the deal with Square would save it money. Square, meanwhile, said it believed the deal with Starbucks would be “a valuable catalyst for building best-in-class enterprise infrastructure.” Little more than a year later, in October 2013, Schultz stepped down from Square’s board. In December 2014, Starbucks said it would stop accepting Square-based mobile payments from shoppers in its stores.

Now, thanks to Square’s IPO filing, we know that the companies are officially planning to part ways—and that the deal was a big bust for Square.

Based on Square’s filings, the company appears to have lost more than $56 million dollars on the deal, the difference between revenue earned and the cost of processing transactions for Starbucks over three years

So it’s kind of understandable that Square says its agreement with Starbucks won’t be renewed when it’s scheduled to expire in the third quarter of 2016—“at which point,” the company writes in its filing, “we would cease generating both Starbucks transaction revenue and Starbucks transaction costs, positively affecting our overall gross profit.” These are the kinds of fixes Square needs to make to shore up would-be shareholder confidence ahead of its IPO. But it’ll be seeking its caffeine fix elsewhere.

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