Yesterday, Sunday, August 1, 2021, financial services and digital payments company Square Inc. (ticker: SQ) released two great news bulletins for its shareholders, analysts, and investors. The first news to be released was the company’s decision to buy Australian financial technology company Afterpay Ltd (ticker: APT) in an all-stock deal that will be closed at $29 billion.
Founded in 2014 by Nick Molnar, Anthony Eisen and headquartered in Melbourne, Australia, Afterpay Ltd is an instalment-payment company with a buy-now-pay-later model that is seen as a cheaper and more responsible alternative to a credit card.
Afterpay allows users (over 20 million as of October 2020) to pay for goods and services in four interest-free instalments while receiving the goods immediately at checkout. When customers miss an automated payment, they will be required to pay a fine, including their account getting locked until the balance is repaid in full. This fine and closure of accounts that default on automated payments keeps customers in check and helps the company limit bad debts.
The company’s primary revenue stream is a fixed fee paid by retail merchants to have Afterpay’s technology deployed on their premises or system and from a percentage of the value of each order placed by customers. However, the company does not earn much from the fines it charges defaulters. Afterpay has operations in its home country of Australia, the United Kingdom (UK), the USA, and New Zealand. Its notable clients are retailers Anthropologie and Free People.
Speaking of Afterpay’s planned acquisition, Square’s Chief Executive Officer (CEO) and co-founder Jack Dorsey said that the two companies have a shared purpose: making the financial system more fair, accessible, and inclusive. Dorsey added that Afterpay had built a trusted brand over the years that is aligned with those principles.
The second news bulleting Square released yesterday was its earnings report for the second quarter of the 2021 fiscal year (Q2 FY2021), in which it reported a net income of $204.0 million, or Earnings Per Share (EPS) of 40 cents. These figures far outperformed those posted in the same quarter a year ago, which closed at a loss of $11.5 million, or EPS of only three cents. After adjustments, Square earned EPS of 66 cents, up from EPS of 18 cents it earned 12 months ago. These earnings have exceeded analysts’ consensus surveyed by FactSet, which called for 31 cents a share.
In Q2 FY2021, the report shows that Square earned revenue of $4.68 billion, doubling last year’s income in the same quarter that stood at 1.92 billion. However, the company fell a few dollars short of what analysts had expected it to earn, which was $5.03 billion. Just like its revenue report, Square nearly doubled its total gross profit to $1.14 billion from $596.8 million reported a year ago. Cash App, which boasts of over 40 million active users as of June 2021, was Square’s most significant revenue stream, bringing in $546 million in gross profit.
It is public knowledge that Square’s CEO Jack Dorsey is a big fan of bitcoin and has spoken about it in conferences multiple times. As such, Square is one of the mainstream companies that hold a considerable amount of this world’s largest cryptocurrency. Square earned $2.72 billion in bitcoin revenue in Q2 FY2021, but it spent $2.67 billion in bitcoin costs during the same period.
Square has scaled up Cash App functions to become much more than just a money transfer app. The company noted that over 4.5 million Cash App customers held a stock or Exchange-Traded Fund (EFT) through its brokerage section in Q2 FY2021. This is an increase of more than three times compared to the number of people trading assets on Cash App 12 months ago.
In Q2 FY2021, Square report revealed that the company earned $1.31 billion from its seller business and $585 million of gross profit in the quarter. There has been an improvement in in-person spending after COVID-19 restrictions were relaxed, but online channels still contributed strong growth to the company’s finances.
Due to its stellar performance in June, Square offered some guidance yesterday where it said that it expects its gross profit to grow even stronger in July compared to last year. The company also expects its seller gross payment volume to grow by more than 45% year-over-year.
For Q3 FY2021, the company expects adjusted product development, sales and marketing, and general and administrative expenses to increase by about $150 million.