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We generated net losses of $85.2 million, $104.5 million, and $154.1 million in 2012, 2013, and 2014, respectively. As of December 31, 2014, we had an acc

We generated net losses of $85.2 million, $104.5 million, and $154.1 million in 2012, 2013, and 2014, respectively. As of December 31, 2014, we had an accumulated deficit of $395.6 million. For the six months ended June 30, 2015, we generated a net loss of $77.6 million. As of June 30, 2015, we had an accumulated deficit of $473.2 million. Could someone explain the motive to go public while operating in the losses? Isn't the public market more averse to companies operating in the negative. Also wouldn't the timing act more as a distraction for Jack?

dexterdog 11y ago
What are you using logic for? This is the next Jobs we're taking about.
meatysnapper 11y ago
What if Twitter was going to be packaged up for sale, or already was, and there was a buyer lined up for a sale within 3-6 months?
- cft 11y ago
  That buyer would have to be insane. Other than a pivot (Periscope?), there is no 17bn dollar business there, only a circle jerk and bot traffic.
  - mkorfmann 11y ago
    So, it's like HN?. On a more serious note: Twitter has a large following of powerful/smart people who don't leave over night. Sure, over time these people could leave, but why would they? What would a twitter competitor offer that twitter can't offer?
gdw2 11y ago
I recently read how Salesforce is worth nearly $50 billion but has never turned a profit[1][2]. [1] https://en.wikipedia.org/wiki/Salesforce.com https://en.wikipedia.org/wiki/Salesforce.com [2] http://www.npr.org/sections/money/2015/10/09/447249562/episode-656-bubblelicious http://www.npr.org/sections/money/2015/10/09/447249562/episo...
- lubos 11y ago
  Salesforce did a lot of acquisitions worth billions of dollars. Looking at their financial statements, net loss for last FY was 250MM but depreciation and amortization was over 700MM. In other words, the loss they show is just a paper loss. They make money. Unlike Enron which was making paper profit but they were actually losing money.
  - pedrocr 11y ago
    >Looking at their financial statements, net loss for last FY was 250MM but depreciation and amortization was over 700MM. In other words, the loss they show is just a paper loss. They make money. If they consistently do this then they're not making money. Depreciation/Ammortization is just an accounting method to distribute investments over time. If you're consistently returning a net loss it's not just a timing issue. In this case maybe Salesforce is like Amazon and continuously reinvests free cash flow so they don't return a profit to shareholders and instead reinvest it into new business. Is that what you mean?
    - genericpseudo 11y ago
      It means the business has positive free cash flow; it takes in more money than it spends in a year (i.e. it's not going bankrupt), but the paper value of assets it owns (largely intangible goodwill from acquisitions) is written down, meaning that they take a loss. This is generally a win, if you're expanding, because it means you pay no tax on your free cash.
      - pedrocr 11y ago
        >It means the business has positive free cash flow Note that this isn't necessarily true. You can have negative Net Income, positive EBITDA but negative FCF (what really matters).
    - lubos 11y ago
      Yeah, that's exactly what I mean. Wall street rewards growth over profits so incentives for Salesforce are to keep purchasing businesses which at least break-even (e.g. Heroku) which in turn show growth in revenue but don't necessarily translate into growth in profits. As long as Salesforce keeps buying these businesses, they can keep showing paper loss forever without actually being in any danger of running out of cash. And while they are doing this, their shareprice might double or triple. It sounds crazy that it actually works but I'm not the one who is going to argue with markets.
beat 11y ago
Same logic as angels and venture capital... you don't buy for profit, you buy for growth. As long as their growth numbers are great, profit numbers don't have to be. In 2012, they lost $85m. In 2014, they lost $154m. How much bigger are were they in 2014 relative to 2012? If it's more than 2x (and I have no doubt it is), they're on the right track. If they're 5x bigger, they're doing fantastic - revenue growth is outpacing red ink growth by a healthy margin. That means sooner or later, they'll not only be profitable, but tremendously so. Square is a category-killer, in a key category.
- gchokov 11y ago
  We've already seen this. It's going to be spectacular failure.
- JonFish85 11y ago
  "That means sooner or later, they'll not only be profitable, but tremendously so." Says who? Growth is great, but it doesn't necessarily mean that profits are in the pipeline (e.g. Groupon). And on top of that, what exactly is it that Square does that it's going to be profitable on? Is it the Point of Sale devices? Is it their Square Readers? Is it their small-business loans? They're not a terribly focused company, and maybe that's a reflection of their CEO doing double-time (completely speculation on my part). Personally I see this as their last-ditch effort to grab some cash, to exit before the market gets worse. Their investors don't want to be left holding the bag when the IPO market gets cold, so it's better to cash out now while the name Square is worth something than to bet that they'll get bigger/better in the future.
- justinator 11y ago
  I'm always curious why it's seems it's always this Hail Mary play, in attempt to win the lottery. It's betting on a future, and the future is unpredictable. "Too Big To Fail" is not the terminology I would ever want towards something I develop - I think Titanic. I understand that businesses do not start out profitable from the get go, but $700 million in debt?
  - narrowrail 11y ago
mikeyouse 11y ago
A share price reflects the future value of the company's profits, not the past value. If the investing public believes that a large infusion of cash from the IPO will help you achieve profitability, they'll gladly invest. Look at a company like Amazon, their net income was stunningly negative for a very long time [1] -- it's barely positive today -- yet their market cap is north of $250B. There is plenty of room for companies making losses to go public if they have a realistic plan to make profits in the future. [1] - http://i.imgur.com/M9igHQK.png http://i.imgur.com/M9igHQK.png
hkmurakami 11y ago
Here are some reasons that could be at play. 1. Shove it through while public market sentiments are still positive and accepting or riskier bets. 2. The numbers can only look worse in the future. The fact that the company is in the red, in itself, is not a reason to stop going public. Companies like FireEye are in the red but have multiplied in market cap since going public.
- 7Figures2Commas 11y ago
  > Companies like FireEye are in the red but have multiplied in market cap since going public. FireEye debuted at $20. It hit a peak of ~$85 shortly after the IPO. Its closing price today is $28.76. As of September, 40% of the companies that went public in the past year with market caps above $1 billion were below their offering prices[1]. The market for IPOs has become even tougher since September. Just look at Pure Storage[2] and CytomX[3]. In my opinion Square is getting out to market while they can. [1] http://www.bloomberg.com/news/articles/2015-09-14/many-of-the-companies-that-went-public-in-the-past-year-are-trading-below-their-offering-price http://www.bloomberg.com/news/articles/2015-09-14/many-of-th... [2] http://www.wsj.com/articles/pure-storage-trades-below-ipo-price-in-market-debut-1444227780 http://www.wsj.com/articles/pure-storage-trades-below-ipo-pr... [3] http://www.bizjournals.com/sanfrancisco/blog/biotech/2015/10/trading-nasdaq-bay-area-biotech-cytomx-ipo-bubble.html http://www.bizjournals.com/sanfrancisco/blog/biotech/2015/10...
cbhl 11y ago
Most of those losses are because Square subsidizes the actual cost of credit card processing (i.e. charges stores less than what Visa charges). There are a bunch of ways to mitigate this: - the termination of the Starbucks agreement in 2016 (this already saves $27 million/year based on the 2014 numbers) - raising flat-rate processing fees for businesses in the future - reduce the cost of transactions by adding more fraud-prevention measures that make credit card processors happy (e.g. Chip and PIN) - create a new business that allows Square to cut out the credit card networks by owning both sides of the transaction - create a new business using the information from being in the credit card processing flow that is profitable enough to subsidize the credit card processing Right now, I suspect they're trying to "pull an Amazon" -- they're operating at a loss, but they hope investors will like the brand and the vision enough that they'll put money in anyway.
- dangrossman 11y ago
  > charges stores less than what Visa charges Their flat rate of 2.75% is substantially more than what Visa charges for "card present" transactions. The highest cost cards are 2.4% but they're going to be a small portion of most stores' card mix. I'd think most shops cost Square 1.1-1.5% across all their transactions. Debit volume exceeds credit volume in the US -- most people are swiping their bank check cards, not commercial purchasing cards and the highest end reward cards that require pristine credit -- and the Durbin amendment capped the interchange fee on debit cards (when swiped a-la-Square Reader) at 0.05%+$0.21 per transaction. That means 2.75% is 98% profit for Square on a big debit card swipe. https://usa.visa.com/dam/VCOM/download/merchants/Visa-USA-Interchange-Reimbursement-Fees-2015-April-18.pdf https://usa.visa.com/dam/VCOM/download/merchants/Visa-USA-In... The only place Square's subsidizing the transaction fees is on very small purchases where the flat ~$0.15 of the interchange fee amounts to more than 1-2% of the total transaction, and with AmEx where, if Square hasn't negotiated better than sticker rate, they could be paying 2.85-3.5% depending on business type. If they're losing money on the one thing they charge money for, what's the business? And how are their competitors doing it? PayPal's historically offered merchants with volume as low as 1.9%. They offer 2.7% flat rate (no per-transaction flat fee either) for their swiper.
  - 11y ago
dragonwriter 11y ago
> Could someone explain the motive to go public while operating in the losses? The motive is to raise capital. The same as the motive to go public any other time. > Isn't the public market more averse to companies operating in the negative. In very broad terms, on average, sure, probably. But there's lots of factors in how the public markets react to a firm's offerings, and profitability is far from the only consideration.
nashashmi 11y ago
I suspect the gameplay is something different. Square when IPO'd will be in position of strength to make some waves of disruption in the market. That in itself will set Square to be the King of payment systems.
TheOsiris 11y ago
"we lose money on every sale, but we plan on making it up in volume" (TM)
ChuckMcM 11y ago
Basically there are three reasons to IPO, one you are "forced" into it because the number of individual investors has crossed a predefined threshold of 499, second you are scaling the business and this gives you access to the public markets for capital, or third you are running low on cash on hand and nobody is willing to lead a new round with your current structure. Given the wailing and gnashing of teeth this time last year [1] when Square raised $150M on a $6B valuation, it is entirely possible this is their last change to raise capital. If it doesn't work, and they can't cross the line into operationally cash flow positive they will become one of the larger unicorns to die this season. I really hope it isn't the case because I love their product and their service, but the S-1 doesn't paint a picture of hope. Doing some back of the envelope calculations I can't see any scale where they are profitable given their current fee structure. [1] http://www.theverge.com/2014/10/6/6918211/square-funding-singapore-struggle-valuation http://www.theverge.com/2014/10/6/6918211/square-funding-sin...
- deleted 11y ago
  [deleted]
- mikeyouse 11y ago
  A somewhat off-topic FYI, but the JOBS Act increased the private holder cap from 500 to 2,000 shareholders as long as no more than 499 of them are accredited. https://www.cooley.com/jobs-act-what-does-it-mean https://www.cooley.com/jobs-act-what-does-it-mean
  - mkehrt 11y ago
    That's, uh, pretty weird actually. It means you have to know whether your RSU'd employees are accredited investors to know whether you have to go public?
    - mikeyouse 11y ago
      Nah, there's a line that takes care of that; > The new rule excludes from these calculations people who obtained equity under the company's equity compensation plans and investors who purchased securities pursuant to the crowdfunding exemption discussed in this alert.
pbreit 11y ago
The primary function of an IPO is to raise money.
prostoalex 11y ago
The bet here is that as opposed to a good value company (which can kick off an occasional dividend based on its profits) it's a growth company, and the opportunity here is to capture future growth. AMZN is a similar proposition.
abalone 11y ago
Remember Amazon went public in '97 and took another 4-5 years to turn a small profit. To answer your question, smart investors are more concerned with the long term strategy than whether the company is turning a profit in the present moment. It is far from uncommon to raise a bunch of capital from the public market to invest in growth. This is not a comment on Square's prospects, but their business model is clearly one that is betting on getting to very big scale before turning a profit.
tomasien 11y ago
Lots of good answers on here, but I'll just add the minus the horrible Starbucks deal (which may have been worth a shot, but is killing them now) they're very close to being profitable and may achieve that very shortly.
sdrothrock 11y ago
Where did your inline quote come from? I tried googling the first line and it just led me back to your comment.
- acchow 11y ago
  The actual filing: https://www.sec.gov/Archives/edgar/data/1512673/000119312515343733/d937622ds1.htm https://www.sec.gov/Archives/edgar/data/1512673/000119312515...
  - sdrothrock 11y ago
    Thank you! Page 26 if anyone else was wondering.
chm 11y ago
This is a really honest question: How do you sleep at night being the founder of a company with half a billion dollars in deficit? How do you go to work everyday? Is this "normal"? Is this expected? I really don't understand how that situation can happen. Edit: I just looked up their numbers. They have large revenues, but still. Such deficits would scare me.

dexterdog 11y ago

What are you using logic for? This is the next Jobs we're taking about.

meatysnapper 11y ago

What if Twitter was going to be packaged up for sale, or already was, and there was a buyer lined up for a sale within 3-6 months?

cft 11y ago
That buyer would have to be insane. Other than a pivot (Periscope?), there is no 17bn dollar business there, only a circle jerk and bot traffic.
- mkorfmann 11y ago
  So, it's like HN?. On a more serious note: Twitter has a large following of powerful/smart people who don't leave over night. Sure, over time these people could leave, but why would they? What would a twitter competitor offer that twitter can't offer?

gdw2 11y ago

I recently read how Salesforce is worth nearly $50 billion but has never turned a profit[1][2]. [1] https://en.wikipedia.org/wiki/Salesforce.com https://en.wikipedia.org/wiki/Salesforce.com [2] http://www.npr.org/sections/money/2015/10/09/447249562/episode-656-bubblelicious http://www.npr.org/sections/money/2015/10/09/447249562/episo...

lubos 11y ago
Salesforce did a lot of acquisitions worth billions of dollars. Looking at their financial statements, net loss for last FY was 250MM but depreciation and amortization was over 700MM. In other words, the loss they show is just a paper loss. They make money. Unlike Enron which was making paper profit but they were actually losing money.
- pedrocr 11y ago
  >Looking at their financial statements, net loss for last FY was 250MM but depreciation and amortization was over 700MM. In other words, the loss they show is just a paper loss. They make money. If they consistently do this then they're not making money. Depreciation/Ammortization is just an accounting method to distribute investments over time. If you're consistently returning a net loss it's not just a timing issue. In this case maybe Salesforce is like Amazon and continuously reinvests free cash flow so they don't return a profit to shareholders and instead reinvest it into new business. Is that what you mean?
  - genericpseudo 11y ago
    It means the business has positive free cash flow; it takes in more money than it spends in a year (i.e. it's not going bankrupt), but the paper value of assets it owns (largely intangible goodwill from acquisitions) is written down, meaning that they take a loss. This is generally a win, if you're expanding, because it means you pay no tax on your free cash.
    - pedrocr 11y ago
      >It means the business has positive free cash flow Note that this isn't necessarily true. You can have negative Net Income, positive EBITDA but negative FCF (what really matters).
  - lubos 11y ago
    Yeah, that's exactly what I mean. Wall street rewards growth over profits so incentives for Salesforce are to keep purchasing businesses which at least break-even (e.g. Heroku) which in turn show growth in revenue but don't necessarily translate into growth in profits. As long as Salesforce keeps buying these businesses, they can keep showing paper loss forever without actually being in any danger of running out of cash. And while they are doing this, their shareprice might double or triple. It sounds crazy that it actually works but I'm not the one who is going to argue with markets.

beat 11y ago

Same logic as angels and venture capital... you don't buy for profit, you buy for growth. As long as their growth numbers are great, profit numbers don't have to be. In 2012, they lost $85m. In 2014, they lost $154m. How much bigger are were they in 2014 relative to 2012? If it's more than 2x (and I have no doubt it is), they're on the right track. If they're 5x bigger, they're doing fantastic - revenue growth is outpacing red ink growth by a healthy margin. That means sooner or later, they'll not only be profitable, but tremendously so. Square is a category-killer, in a key category.

gchokov 11y ago
We've already seen this. It's going to be spectacular failure.
JonFish85 11y ago
"That means sooner or later, they'll not only be profitable, but tremendously so." Says who? Growth is great, but it doesn't necessarily mean that profits are in the pipeline (e.g. Groupon). And on top of that, what exactly is it that Square does that it's going to be profitable on? Is it the Point of Sale devices? Is it their Square Readers? Is it their small-business loans? They're not a terribly focused company, and maybe that's a reflection of their CEO doing double-time (completely speculation on my part). Personally I see this as their last-ditch effort to grab some cash, to exit before the market gets worse. Their investors don't want to be left holding the bag when the IPO market gets cold, so it's better to cash out now while the name Square is worth something than to bet that they'll get bigger/better in the future.
justinator 11y ago
I'm always curious why it's seems it's always this Hail Mary play, in attempt to win the lottery. It's betting on a future, and the future is unpredictable. "Too Big To Fail" is not the terminology I would ever want towards something I develop - I think Titanic. I understand that businesses do not start out profitable from the get go, but $700 million in debt?
- narrowrail 11y ago

mikeyouse 11y ago

A share price reflects the future value of the company's profits, not the past value. If the investing public believes that a large infusion of cash from the IPO will help you achieve profitability, they'll gladly invest. Look at a company like Amazon, their net income was stunningly negative for a very long time [1] -- it's barely positive today -- yet their market cap is north of $250B. There is plenty of room for companies making losses to go public if they have a realistic plan to make profits in the future. [1] - http://i.imgur.com/M9igHQK.png http://i.imgur.com/M9igHQK.png

hkmurakami 11y ago

Here are some reasons that could be at play. 1. Shove it through while public market sentiments are still positive and accepting or riskier bets. 2. The numbers can only look worse in the future. The fact that the company is in the red, in itself, is not a reason to stop going public. Companies like FireEye are in the red but have multiplied in market cap since going public.

7Figures2Commas 11y ago
> Companies like FireEye are in the red but have multiplied in market cap since going public. FireEye debuted at $20. It hit a peak of ~$85 shortly after the IPO. Its closing price today is $28.76. As of September, 40% of the companies that went public in the past year with market caps above $1 billion were below their offering prices[1]. The market for IPOs has become even tougher since September. Just look at Pure Storage[2] and CytomX[3]. In my opinion Square is getting out to market while they can. [1] http://www.bloomberg.com/news/articles/2015-09-14/many-of-the-companies-that-went-public-in-the-past-year-are-trading-below-their-offering-price http://www.bloomberg.com/news/articles/2015-09-14/many-of-th... [2] http://www.wsj.com/articles/pure-storage-trades-below-ipo-price-in-market-debut-1444227780 http://www.wsj.com/articles/pure-storage-trades-below-ipo-pr... [3] http://www.bizjournals.com/sanfrancisco/blog/biotech/2015/10/trading-nasdaq-bay-area-biotech-cytomx-ipo-bubble.html http://www.bizjournals.com/sanfrancisco/blog/biotech/2015/10...

cbhl 11y ago

Most of those losses are because Square subsidizes the actual cost of credit card processing (i.e. charges stores less than what Visa charges). There are a bunch of ways to mitigate this: - the termination of the Starbucks agreement in 2016 (this already saves $27 million/year based on the 2014 numbers) - raising flat-rate processing fees for businesses in the future - reduce the cost of transactions by adding more fraud-prevention measures that make credit card processors happy (e.g. Chip and PIN) - create a new business that allows Square to cut out the credit card networks by owning both sides of the transaction - create a new business using the information from being in the credit card processing flow that is profitable enough to subsidize the credit card processing Right now, I suspect they're trying to "pull an Amazon" -- they're operating at a loss, but they hope investors will like the brand and the vision enough that they'll put money in anyway.

dangrossman 11y ago
> charges stores less than what Visa charges Their flat rate of 2.75% is substantially more than what Visa charges for "card present" transactions. The highest cost cards are 2.4% but they're going to be a small portion of most stores' card mix. I'd think most shops cost Square 1.1-1.5% across all their transactions. Debit volume exceeds credit volume in the US -- most people are swiping their bank check cards, not commercial purchasing cards and the highest end reward cards that require pristine credit -- and the Durbin amendment capped the interchange fee on debit cards (when swiped a-la-Square Reader) at 0.05%+$0.21 per transaction. That means 2.75% is 98% profit for Square on a big debit card swipe. https://usa.visa.com/dam/VCOM/download/merchants/Visa-USA-Interchange-Reimbursement-Fees-2015-April-18.pdf https://usa.visa.com/dam/VCOM/download/merchants/Visa-USA-In... The only place Square's subsidizing the transaction fees is on very small purchases where the flat ~$0.15 of the interchange fee amounts to more than 1-2% of the total transaction, and with AmEx where, if Square hasn't negotiated better than sticker rate, they could be paying 2.85-3.5% depending on business type. If they're losing money on the one thing they charge money for, what's the business? And how are their competitors doing it? PayPal's historically offered merchants with volume as low as 1.9%. They offer 2.7% flat rate (no per-transaction flat fee either) for their swiper.
- 11y ago

dragonwriter 11y ago

> Could someone explain the motive to go public while operating in the losses? The motive is to raise capital. The same as the motive to go public any other time. > Isn't the public market more averse to companies operating in the negative. In very broad terms, on average, sure, probably. But there's lots of factors in how the public markets react to a firm's offerings, and profitability is far from the only consideration.

nashashmi 11y ago

I suspect the gameplay is something different. Square when IPO'd will be in position of strength to make some waves of disruption in the market. That in itself will set Square to be the King of payment systems.

TheOsiris 11y ago

"we lose money on every sale, but we plan on making it up in volume" (TM)

ChuckMcM 11y ago

Basically there are three reasons to IPO, one you are "forced" into it because the number of individual investors has crossed a predefined threshold of 499, second you are scaling the business and this gives you access to the public markets for capital, or third you are running low on cash on hand and nobody is willing to lead a new round with your current structure. Given the wailing and gnashing of teeth this time last year [1] when Square raised $150M on a $6B valuation, it is entirely possible this is their last change to raise capital. If it doesn't work, and they can't cross the line into operationally cash flow positive they will become one of the larger unicorns to die this season. I really hope it isn't the case because I love their product and their service, but the S-1 doesn't paint a picture of hope. Doing some back of the envelope calculations I can't see any scale where they are profitable given their current fee structure. [1] http://www.theverge.com/2014/10/6/6918211/square-funding-singapore-struggle-valuation http://www.theverge.com/2014/10/6/6918211/square-funding-sin...

deleted 11y ago
[deleted]
mikeyouse 11y ago
A somewhat off-topic FYI, but the JOBS Act increased the private holder cap from 500 to 2,000 shareholders as long as no more than 499 of them are accredited. https://www.cooley.com/jobs-act-what-does-it-mean https://www.cooley.com/jobs-act-what-does-it-mean
- mkehrt 11y ago
  That's, uh, pretty weird actually. It means you have to know whether your RSU'd employees are accredited investors to know whether you have to go public?
  - mikeyouse 11y ago
    Nah, there's a line that takes care of that; > The new rule excludes from these calculations people who obtained equity under the company's equity compensation plans and investors who purchased securities pursuant to the crowdfunding exemption discussed in this alert.

pbreit 11y ago

The primary function of an IPO is to raise money.

prostoalex 11y ago

The bet here is that as opposed to a good value company (which can kick off an occasional dividend based on its profits) it's a growth company, and the opportunity here is to capture future growth. AMZN is a similar proposition.

abalone 11y ago

Remember Amazon went public in '97 and took another 4-5 years to turn a small profit. To answer your question, smart investors are more concerned with the long term strategy than whether the company is turning a profit in the present moment. It is far from uncommon to raise a bunch of capital from the public market to invest in growth. This is not a comment on Square's prospects, but their business model is clearly one that is betting on getting to very big scale before turning a profit.

tomasien 11y ago

Lots of good answers on here, but I'll just add the minus the horrible Starbucks deal (which may have been worth a shot, but is killing them now) they're very close to being profitable and may achieve that very shortly.

sdrothrock 11y ago

Where did your inline quote come from? I tried googling the first line and it just led me back to your comment.

acchow 11y ago
The actual filing: https://www.sec.gov/Archives/edgar/data/1512673/000119312515343733/d937622ds1.htm https://www.sec.gov/Archives/edgar/data/1512673/000119312515...
- sdrothrock 11y ago
  Thank you! Page 26 if anyone else was wondering.

chm 11y ago

This is a really honest question: How do you sleep at night being the founder of a company with half a billion dollars in deficit? How do you go to work everyday? Is this "normal"? Is this expected? I really don't understand how that situation can happen. Edit: I just looked up their numbers. They have large revenues, but still. Such deficits would scare me.