Investors Need to Watch Square’s Service Business

EXCLUSIVE — With payment volumes and revenue on the up, payments company Square had another positive quarter yesterday as it reported its third-quarter earnings.

However, company investors and enthusiasts should keep a closer eye on Square’s service business in future quarters, if yesterday was any indication.

This section of Square’s business reported $65 million in revenue in the third quarter, according to company statements. While that’s a pittance compared to the company’s total net revenue of $585 million, it’s a figure that’s up 84% year over year; in the third quarter of 2016, the company reported $35 million in revenue for the sector.

That’s a significant leap, made more so by the fact that this slice of Square’s business includes revenue from its Instant Deposit service, Square’s Caviar delivery product, and business lending arm Square Capital.

On its own, Square Capital originated 47,000 loans to small businesses in the Square network, representing $303 million in loans. That’s a 45% YoY increase, though that percentage is down sequentially — it was up 68% YoY last quarter — but Square is confident that the business will continue its climb forward, company CFO Sarah Friar said during yesterday’s earnings call.

Friar pointed to the lackadaisical summer months as a reason for the sequential decline of Square Capital, as well as the Texas and Florida hurricanes, and noted that Square was going to “keep growing” the capital business with the help of partners.

Friar said during the call:

When you look at capital in the future though and growth, I think there are two areas we’re really focused on. One is partnerships, and the team has done a great job in the last 12 months building a capital partnerships platform, and we announced a second big partner.

The “big partner” here refers to e-commerce software company Big Commerce, which allows Square to make business loans to its own business clients. The partnership was first announced in October. Friar continued:

The net of it though is we see our broader ecosystem. So subscription services, where capital fits, is still growing 84% year over year. And in my mind, that speaks to just the broad ecosystem of many products.

How these partnerships will impact Square Capital remains to be seen, but is worth watching. In addition to its services revenue, the company continued to see steady growth in its gross payment volume, reporting $17.4 billion for the quarter, up 31% YoY.

This is in keeping with Square’s previous quarters for the year, as GPV was up 32% and 33% in 2Q17 and 1Q17, respectively.

Square shares are down 3% at 9:57 a.m. ET, trading at $35.53 a share.