Square puts itself on a collision course with the biggest terminal makers

As companies mature out of their startup phase, their sales growth curves begin to flatten and costs start to rise — unless, of course, they change their business model. And that’s exactly what Square is doing to maintain its startup-style growth.

But the biggest terminal makers — which Square CEO Jack Dorsey likens to dinosaurs — still have very sharp teeth, and are aggressively reorganizing their own businesses to steal Square's own market of smaller, digitally savvy merchants.

Square began as a challenger in the merchant acquiring industry by serving smaller customers that were typically ignored because of their low sales volume — however, as that market is now well-served and crowded, Square is now moving to serve larger businesses. Meanwhile, larger competitors such as NCR, Diebold and Ingenico are changing their business and ownership models to compete with smaller, more nimble rivals such as Square.

In the third-quarter earnings call, Dorsey called out the large, legacy terminals as ripe opportunity for its new offering, a product called Square Terminal.

“We believe that this is huge. You see these black rectangular boxes; they’re dinosaurs, like stegosauruses everywhere in the world," said Dorsey, who is also Twitter's CEO.

It may just be that competition has finally caught up with Square, leaving it with few markets all to itself. Recently its online rival, Stripe, entered the hardware business to better serve its omnichannel clients. Square has also felt the heat from big banks that are expanding their efforts to counter the advance of fintechs. Ultimately this means that Square needs to invest in terminals and go up-market to drive more sales.

Square reported that 52 percent of its payment volume is now coming from larger sellers, eschewing its roots with the small merchant. Gross payment volume (GPV) generated by sellers with over $500,000 in annualized GPV was now 24 percent of the total GPV for the third quarter, up from 20 percent in third quarter of the prior year. GPV from sellers with annualized GPV of $125,000 to $500,000 was 28 percent in the quarter, up from 27 percent in the third quarter of 2017. This is the first quarter in which small merchants (less than $125,000 in annualized GPV) made up less than half of total GPV. In the second quarter the split was 50/50 between small and larger merchants.

Square’s total net revenue grew to $882 million in the third quarter, up 51 percent from $585 million in the third quarter of the prior year. Net income was $20 million in the third quarter, up from a net loss of $16 million in the third quarter of the prior year.

“This is our first quarter of GAAP profitability,” noted Sarah Friar, Square's CFO, in reference to the company’s first quarter in the black. Friar announced last month that she would step down from this role to become CEO of Nextdoor.

Despite Square's positive financial results, MarketWatch reported that Wall Street was disappointed in Square’s fourth-quarter outlook as it fell short of market expectations.