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Square Posts Mixed Q4 Results, but Promise of Future Profits Boosts Stock

It was an okay first earnings report for Jack Dorsey's other company.

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.

Payments firm Square posted mixed results in its first earnings report, but said it would show profitability over the next year, sending its stock up as much as 3 percent in after-hours trading.

The company, run by CEO Jack Dorsey, said it would generate a profit of $6 million to $12 million in 2016, using a metric known as adjusted Ebitda. The metric, popular with fast-growing tech companies, typically excludes expenses that the company believes are not indicative of the health of the core business, such as those associated with stock-based compensation. In Square’s case, the metric also strips out all revenue and costs associated with its payment processing deal with Starbucks, which is ending this year.

Overall, Square posted a loss of 20 cents per share in the fourth quarter, excluding some costs, which was more than the 13 cents per share analysts were expecting. But revenue came in well above expectations, at $374 million compared to forecasts of $343 million.

Revenue growth was driven by the company’s core payment processing business, as well as its young software and data business, which includes products such as merchant cash advances and its Caviar restaurant delivery offering.

This unit registered $22 million in revenue in the fourth quarter, a 52 percent sequential gain over the third quarter. CFO Sarah Friar told reporters that the majority of this unit’s revenue comes from merchant cash advances and the Caviar service, but that new software products such as an invoicing offering are showing promise.

As I explained in a Square earnings preview post earlier on Wednesday, the software and data business is a crucial piece of Square’s future for two reasons:

“First, it’s a profit driver. This unit’s gross profit margin was 80 percent higher than that of Square’s core payments business in the first half of 2015.

Secondly, it’s a differentiator. If a merchant who processes payments with Square likes these other offerings, it seems logical that they would be less likely to flee to a competitor payments processor, even if a slightly better deal comes along.”

Correction: An earlier version of this story incorrectly spelled the last name of Square’s CFO.

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