Square Makes Small Business Push For Growth Ahead Of Earnings

By Ryan Mac for Forbes,

Following Square’s initial public offering in November, the company’s executives hung up a new sign at San Francisco headquarters to remind employees of their mission. Located just through the doors of Square’s main entrance, the white block letters set against a similarly colored backdrop broadcasts one of CEO Jack Dorsey’s highest principles: “Economic Empowerment.”

Dorsey has used the slogan to describe Square’s purpose for at least the last two years, but as the company prepares to report earnings for the first time as a public company next month, it has never been more important. Square needs to prove to investors that it can be a one-stop shop for small businesses, selling them products like cash advances and payroll software, and not just the payment processing services that currently make up 95% of revenue.

Right now, that amalgam of non-payments businesses–defined on the company’s IPO documents as “software and data product revenue”–is tiny, combining for $35.6 million in sales in the first nine months of 2015. But if you’re to believe the executives at Square, that category should grow in leaps over the next few years as the company offers its newer products to an existing base of 2 million sellers who use Square for card processing.

 Former Amazon executive and current Square Seller Lead Alyssa Henry illustrates that by noting how Square now has products for every early step a merchant needs to take. Square can initially allow business owners who wouldn’t normally be accepted for payment processing to begin taking cards, she said, and then help them to grow by offering cash advances for expansion or payroll services to streamline operations.

“What’s great is that the flywheel for the merchant ends up being a flywheel for Square,” she said.

“It’s very closely aligned. As they grow, we grow.”

Growth, however, hasn’t come easy at seven-year-old Square. Prior to its IPO, the company disclosed that the rate of revenue growth had slowed in the third quarter of 2015. And since the beginning of the year, Square’s stock has been anemic, falling back toward its IPO price of $9.

Focusing on extending the reach of products outside of payment processing could reverse that tide, said Schwark Satyavolu, a former MasterCard MA -0.09%executive and partner at Trinity Ventures. Products like marketing software and cash advance operation Square Capital have much higher margins that payment processing, which has a “high cost of sale to sign up merchants,” he said.

To that end, Square has made a concerted effort to widen its ecosystem. On Wednesday, it improved the coverage of its payroll product, adding Tennessee, New Hampshire, Nevada, South Dakota, and Alaska to the existing markets of California, Texas and Florida. That allows them to serve 30% of independent businesses in the U.S., said Henry, who declined to say how many merchants were using the product. She did note that 90% of the sellers who have enrolled in the product since its launch in June have continued to use it.

More importantly, products like payroll will allow Square to “target the up-market segment.” According to Henry, the average Square Payroll user processes six times the amount of payments than the average Square seller. “You have to get to size and scale to have employees and use these products,” she said. “Our larger sellers are embracing it.”

Square CFO Sarah Friar offered a similar message to analysts earlier this month at a Goldman Sachs conference in downtown San Francisco when highlighting the potential of Square Capital. With more than $300 million originated in cash advances, the two-year-old Capital is perhaps Square’s most promising business outside of payment processing.

“We definitely have started to build more products on the platform that can speak to sellers of all sizes,” Friar said. “What we have actually seen is that [Capital] had broad applicability from micro-sellers–folks that do $20,000 on Square a year–all the way up to sellers doing millions.”

Still, it may be some time before those ancillary products have a direct effect on the company’s financial results. Wedbush Securities’ Gil Luria said he doesn’t expect businesses likes Square Capital or Square Payroll to become a material part of revenue “any time soon.” He also added that just because a merchant uses Square for payment processing doesn’t necessarily mean they will sign up for payroll software. “Small businesses are very sophisticated and they buy what makes sense for them,” he said. “They don’t need to buy everything from one provider.”

However, some merchants like Fort Campbell, Ky.’s Everett Burbridge are doing just that. A 43-year-old army veteran who started using Square payments in 2010 for Soul Fuel BBQ catering service, he’s used both Square Capital and payroll to expand his company, which went from $5,000 in sales in its first year to expected sales of about $200,000 this year.

“For someone starting a business, once you establish your integrity with Square, your loyalty with the company is rewarded,” he said. “When I needed them the most they were there.”

Dale Fewson began using Square to process payments in May 2014. Now, he’s using the company for payroll, cash advances and marketing to run his 12-employee Essence of Coffee shops in Rapid City, S.D.

“They’re winning in all those aspects and if they weren’t I wouldn’t use them,” he said. “They’re making my life easy.”

Square CEO Jack Dorsey celebrating his company’s initial public offering in Nov. 2015. (Photo: Yana Paskova/Bloomberg)

The article first appeared in Forbes.com