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Square tells investors that 2016 is going better than expected

More business from bigger merchants has helped.

Drew Angerer / Getty
Jason Del Rey has been a business journalist for 15 years and has covered Amazon, Walmart, and the e-commerce industry for the last decade. He was a senior correspondent at Vox.

Square today unveiled better-than-expected financial results for the third quarter and improved its forecast for the rest of the year. Investors seemed to like the news, sending the stock up as much as 5 percent in after-hours trading.

The payments and small-business software company posted a smaller loss than expected, excluding one-time expenses, and revenue of $439 million that beat estimates of $431 million.

Additionally, Square raised its guidance for the full calendar year for net revenue and adjusted revenue, which excludes the impact of its Starbucks payment-processing relationship, which is ending soon.

The company also said that adjusted Ebitda, a profitability metric that does not take into account the expense of stock-based compensation, was going to be bigger than initially forecast. Square has been selling more products to existing payments customers, which has helped with profitability, since the customer acquisition costs on that extra revenue are typically low.

In a call with reporters, Square CFO Sarah Friar highlighted strong revenue growth among larger merchants as one positive trend boosting the core payments processing business. Forty-three percent of transactions that flow through Square’s payment pipes now come from businesses with annual sales of more than $125,000. That’s up from 37 percent in the same quarter last year.

Square’s merchant lending business, Square Capital, handed out $208 million in loans in the quarter, an increase of about 70 percent over last year and a 10 percent bump over the last quarter. Square recently opened up its lending business to non-Square merchants.

The lending business, and other non-core businesses such as Caviar restaurant delivery and software subscriptions, are crucial to Square’s future success. They both help to differentiate Square from payments industry competitors and also boast a combined gross margin of 65 percent.

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