IPO Report: Square (SQ)

Francis Gaskins |

Square (SQ) started Square in February 2009 to enable anyone with a mobile device to accept card payments, anywhere, anytime. The company is based in San Francisco, CA.

Seven other companies are scheduled for the week of Nov 16. The full IPO calendar is available at IPO Premium.

SEC Documents

Manager, Joint-managers: Goldman Sachs, Morgan Stanley/ J.P. Morgan
Co-managers: Barclays, Deutsche Bank Securities, Jefferies, RBC Capital Markets, Stifel, LOYAL3 Securities, SMBC Nikko

End of lockup (180 days): Tuesday, May 17, 2016
End of 25-day quiet period: Monday, December 14, 2015

SQ scheduled a $324 million IPO with a market capitalization of $3.9 billion at a price range midpoint of $12 for Thursday, Nov. 19, 2015 on NYSE.

Summary

SQ started Square in February 2009 to enable anyone with a mobile device to accept card payments, anywhere, anytime.

While SQ found early success providing easy access to card payments, commerce extends beyond payments. In every transaction, SQ sees opportunity for its sellers: to learn more about which products are selling best, to reinvest in their businesses, or to create and engage loyal buyers.

Valuation

Glossary

Accumulated deficit (mm)

.

.

-$527

     

Per share dilution

.

.

-$10.64

     
             

Valuation Ratios

Mrkt Cap (mm)

Price /Sls

Price /Erngs

Price /BkVlue

Price /TanBV

% offered in IPO

Square (SQ)

$3,876

3.6

-26.9

7.4

8.8

8%

             

Conclusion

Neutral

Last  private equity valuation $6bb, 50% higher than IPO valuation

Recent private investors guaranteed more stock to be issued so they don't lose money

CEO thinks he can run SQ & Twitter at same time, perhaps indicating ego issues

Increasing competition from Apple Pay, Android Pay, Paypal, etc

Excluding Starbucks (a money losing busted deal) rev growth rates declining

DECLINING rev growth rate

Rev growth rate declines:  2013, 56%; 2014, 40%'

Rev growth rate declines:  June 6 mos, 37%; 9 mos growth rate, 33%

P/E of -27, indicating moderate cash burn rate relative to market cap

Lost -13% on rev in June 6 mos

Lost -14% on rev in Sept 9 mos

Price to bk of 7.4

Price to sales of 3.6

Business

SQ started Square in February 2009 to enable anyone with a mobile device to accept card payments, anywhere, anytime.

While SQ found early success providing easy access to card payments, commerce extends beyond payments. In every transaction, SQ sees opportunity for its sellers: to learn more about which products are selling best, to reinvest in their businesses, or to create and engage loyal buyers.

Red Flags

Busted Starbucks deal cost SQ heavy losses and misdirection of management resources.

Competition includes Apple Pay, Android Pay, Paypal & others.

Revenue from Payments & Point of Sale Services

Although SQ currently generates approximately 95% of its revenue from payments and point-of-sale (POS) services, which includes the impact of revenue generated from Starbucks, SQ has extended its product and service offerings to include financial services and marketing services, all to help sellers start, run, and grow their businesses.

SQ works to democratize commerce—leveling the playing field for sellers of all sizes.

SQ’s focus on technology and design allows SQ to create products and services that are accessible, intuitive, and easy-to-use. SQ set attractive and transparent pricing, and SQ accepts approximately 95% of sellers who seek to process payments with Square.

SQ provides a free software app with its affordable (often free) hardware to turn mobile devices into powerful POS solutions in minutes. SQ’s insights into its sellers’ businesses have allowed SQ to develop services that are applicable to businesses of all types and sizes, from Square Analytics to digital receipts.

SQ also continues to add advanced software features that tailor its POS solution to specific types of sellers, such as open tickets for bars and restaurants and inventory management for retailers.

Because of its approach, SQ has grown rapidly. Millions of sellers accept payments with Square. They span all types of businesses: from cabs to coffee shops, lawyers to landscapers, retail stores to restaurants.

Although substantially all of its revenue is currently generated in the United States, SQ also serves sellers throughout Canada and Japan.

As this international base of sellers grows, so too should its Gross Payment Volume (GPV) and revenue in these regions.

SQ serves sellers of all sizes, ranging from a single vendor at a farmers’ market to multinational businesses. SQ’s products and services are built to scale, so sellers can stay with SQ over the life of their businesses.

GPV (gross purchase volume)

In the 12 months ended September 30, 2015, sellers using Square processed $32.4 billion of GPV, which was generated by 638 million card payments from approximately 180 million payment cards.

GPV measures the total dollar amount of card payment transactions SQ processes for its sellers (net of refunds), excluding card payments processed for Starbucks and SQ’s Square Cash peer-to-peer service. Since SQ generates transaction revenue as a percentage of payment volume, SQ believes GPV is a key indicator of its ability to generate revenue.

In the 12 months ended September 30, 2015, over two million sellers accepted five or more payments using Square, accounting for approximately 97% of SQ’s GPV.

Intellectual Property

As of September 30, 2015, SQ had 113 issued patents and 460 filed patent applications in the United States and in foreign jurisdictions relating to a variety of aspects of SQ’s technology. SQ’s issued patents will expire between 2022 and 2034 (with the exception of a single patent obtained through an acquisition, which will expire in 2016).

Competition

For payments and POS services, SQ competes primarily with traditional acquiring processors and payment processors who sell more expensive POS systems, often bundled with long-term contracts, through direct sales and ISO channels.

While competitive factors and their relative importance vary based on the size, industry, and focus of sellers, SQ believes these principal methods of competition in the market for payments and POS services are the following:

accuracy and promptness of payment;

ability to accept new payment types, such as NFC (Apple Pay, Android Pay and other electronic wallets) and EMV;

product and service pricing, the transparency of that pricing, and contract complexity and length of commitment;

simplicity and ease-of-use;

breadth and depth of features and functionality;

brand recognition and reputation;

integration with payment processing, third-party apps, and mobile platforms;

security and reliability;

support for a seller’s brand development; and

ease and timing of seller sign-up process.

SQ’s competitors range from large, well-established vendors to smaller, earlier-stage companies, including third-party acquiring processors or payment processors, POS software and terminal providers, peer-to-peer payment providers, and business software providers such as those that provide ecommerce, inventory management, analytics, and appointment solutions.

SQ seeks to differentiate itself from competitors primarily on the basis of its cohesive commerce ecosystem and focus on accessibility, speed, transparency, and trust. SQ’s ability to innovate quickly to accept new payment technologies such as NFC through Apple Pay, Android Pay, and other new currencies further differentiates SQ’s payments platform from its competition.

5% Shareholders Pre-IPO

Khosla Ventures III, LP   16.9%

Entities affiliated with JPMC Strategic Investments         5.5%

Entities affiliated with Sequoia Capital    5.3%

Entities affiliated with Rizvi Traverse       5.3%                            

Jack Dorsey     23.7%  

Roelof Botha    5.3%

Vinod Khosla    16.9%

James McKelvey           9.1%    

Dividends

No dividends are planned.

Use of Proceeds

SQ expects to receive $285 million from its IPO and use it for the following:

In short-term, investment-grade, interest-bearing securities such as money market accounts, certificates of deposit, commercial paper, or guaranteed obligations of the U.S. government. SQ currently intends to use the net proceeds received by SQ from this offering primarily for working capital and general corporate purposes. SQ may also use a portion of the net proceeds from this offering for acquisitions of complementary businesses, technologies, or other assets. SQ has not entered into any agreements or commitments with respect to any specific acquisitions and have no understandings or agreements with respect to any such acquisition or investment at this time.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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