Square (finally) reported its Q4 2015 results today, and they demonstrate solid progress on the key things that matter. For a very quick primer on the keys to Square’s long-term success, see the video embedded below. For more detailed earlier analysis, see this piece and this piece.

Here’s an update on some key areas where Square is making progress. As a reminder, the core transaction processing business has pretty much fixed margins – Square takes a roughly 3% cut of transaction value, and keeps around a third of that (or 1%) as gross profit:
So, no matter how much Square grows this side of its business, its margins are capped according to standard payment industry rates. However, Square isn’t just sticking to this business, but instead seeks to build an ecosystem around it through software and data products, so far mostly Square Capital (loans to Square payments customers) and Caviar (restaurant services). That business is very highly profitable because it has few incremental costs, and has been growing rapidly:Another positive indicator this quarter was the fact that Square’s renegotiated contract with Starbucks, which was previously a heavy loss maker, broke even in Q4. This deal, which was originally done to drive scale for Square, has always been a drag on the business, but now promises to be much less of one:That also now means that Square’s three smaller reporting segments are collectively profitable on a gross margin level too:To be sure, Square is still loss making overall by every measure but gross margin, but projects to be Adjusted EBITDA positive in 2016 and to start generating margins sometime beyond that. This quarter’s results suggest it’s very much on track for that goal, although it’s still a long way off.

Payments company Square filed an amended S1 with the SEC on Monday, with financial and operating metrics for Q3 2015. I previously talked about Square’s original IPO filing on Techpinions a couple of weeks ago, and today I’m just going to focus on a couple of elements of the new numbers. If you’re not familiar with Square, I suggest you take a quick read through that earlier piece as it will be helpful context for what’s below.

The charts here are taken from more in-depth analysis I do as part of the Jackdaw Research Quarterly Decks Service, a subscription service which provides slides on financial and operating metrics on some major consumer technology companies each quarter. I’ll post a screenshot of the slides in the Square deck, which went out to subscribers last night, at the bottom of this post. Any reporters reading this can contact me directly to receive copies of this and other decks from the service.

As a quick into, here’s Square’s revenue line by product:As you can see, revenue growth is pretty healthy, primarily driven by core transaction volumes, but helped also by a newer category called Software and Data Products. This is where Square Capital, Square’s cash advance business, sits, along with a couple of SaaS businesses it’s acquired and launched.

Importantly, Square’s gross margins from these different businesses are very varied, as the chart below shows:Software and Data Products have had by far the highest margins of all, although they’ve come down as Square has begun to incur costs of revenue around these businesses, which started out at almost 100% margins, with almost no costs. However, the Hardware business has historically been run at a loss, as Square essentially gave away many of its hardware products for free, although it’s now moving to a sell-at-cost model for some of its newer products. Lastly, you can see the huge discrepancy between the gross margins on Starbucks transactions, which have been consistently negative (around 20-30%), and all other transactions, which are very consistent at 35%.

Where things get really interesting is when you look at Starbucks transactions, which are fairly consistent in both revenue and gross profit dollars for now, in comparison to Software and Data Products. The latter is now just large enough to effectively cancel out the Starbucks gross loss, and at the current rate of growth it should fairly quickly outweigh it, which should help substantially with overall margins going forward. The ending of the Starbucks relationship (formalized this week with an announcement that Starbucks will indeed be going with another vendor going forward) combined with the growth of the Software and Data Products business are arguably the two keys to Square’s journey to future profitability.

A screenshot of the full set of slides from the Square quarterly deck I sent to subscribers yesterday is below: