Square (SQ) Notes Raw Deal with Starbucks (SBUX) in IPO Filing

Payment processor Squre (NYSE: SQ) filed for an IPO of its common stock today.

Square said its revenue for 2014 increased 54 percent to $850.2 million. Adjusted EBITDA for 2015 was negative $67.74 million, from negative $51.53 million the prior year.

Square also said, In 2014, sellers using Square processed $23.8 billion of GPV, which was generated by 446 million card payments from approximately 144 million payment cards. GPV measures the total dollar amount of card payment transactions we process for our sellers (net of refunds), excluding card payments processed for Starbucks and our Square Cash peer-to-peer service. Since we generate transaction revenue as a percentage of payment volume, we believe GPV is a key indicator of our ability to generate revenue. In the 12 months ended June 2015, over two million sellers accepted five or more payments using Square, accounting for approximately 97% of our GPV.

Notably, for 2014, Starbucks transaction revenue came in at $123.0 million, while transaction costs were about $151 million. Square said it wouldn't renew its agreement with Starbucks when it expires in Q316.

Overall commentary on the Starbucks agreement is as follows: "In the third quarter of 2012, we signed an agreement to process credit and debit card payment transactions for all Starbucks-owned stores in the United States. We believe this agreement was a valuable catalyst for building best-in-class enterprise infrastructure. For the six months ended June 30, 2015, and the year ended December 31, 2014, the gross loss related to our payment processing agreement with Starbucks was $14.3 million and $27.9 million, respectively.

"In August 2015, we amended our payment processing agreement with Starbucks to eliminate the exclusivity provision in order to permit Starbucks to begin transitioning to another payment processor starting October 1, 2015. Under the amendment, Starbucks also agreed to pay increased processing rates to us for as long as they continue to process transactions with us. We anticipate that Starbucks will transition to another payment processor and will cease using our payment processing services prior to the scheduled expiration of the agreement in the third quarter of 2016. As a result, Starbucks payment processing volumes may decrease meaningfully in the future, and may cease entirely prior to the scheduled expiration of the agreement in the third quarter of 2016.

"In any event, we do not intend to renew our payment processing agreement with Starbucks when it expires in the third quarter of 2016, at which point we would cease generating both Starbucks transaction revenue and Starbucks transaction costs, positively affecting our overall gross profit. Because we do not expect to renew our payment processing agreement with Starbucks, and because the agreement’s historical terms are not representative of future economics, we believe it is useful to exclude Starbucks activity to clearly show the impact Starbucks has had on our financial results historically, to provide insight into the impact of the expected termination of the Starbucks agreement on our revenues in the future, to facilitate period-to-period comparisons of our business, and to facilitate comparisons of our performance to that of other payment processors."

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