When Square announced its payment processing deal with Starbucks three years ago, accompanied by a $25 million investment from Starbucks, it wasn't clear how the math would benefit the payment processor.
Many believed it would cost Square more to process a Starbucks transaction than what it expected to receive in revenue from coffee sales. And in filing its initial public offering Wednesday, Square revealed that this prediction had come true.
Square reported Starbucks transaction revenue at $123 million for 2014, but reported transaction costs at $151 million. The companies will not renew the processing agreement when it expires in the third quarter of 2016, Square said.
In its IPO commentary on the Starbucks deal, Square stated it amended its payment processing agreement with the coffee giant in August of 2015 to allow Starbucks to begin a transition to another payment processor, starting Oct. 1, 2015. At the same time, Starbucks agreed to pay increased processing rates to Square for as long as the relationship continued.
"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," Square stated. "As a result, Starbucks payment processing volumes may decrease meaningfully in the future and may cease entirely prior to the scheduled expiration."
Square’s revelation comes as no surprise to those who have followed the company’s attempt to jump into a larger market.
“It was never a good fit, because it is not what Square does,” said Gil Luria, analyst with Los Angeles-based Wedbush Securities. “Square does a great job in simplifying payment acceptance for micro and small merchants and that has absolutely nothing to do with what Starbucks wanted.”
It’s a lesson learned for Square, Luria said. “Those enterprise-scale customers need enterprise-scale support, so that’s not a good target for Square at this point."
Square provided the explanation in the IPO because it felt "it is useful to exclude Starbucks activity to clearly show the impact Starbucks has had on our financial results historically [and] to provide insight into the impact of the expected termination of the Starbucks agreement on our revenues in the future."
The IPO revealed strong revenue increases overall for Square in 2014 at a 54% clip to $850.2 million, but adjusted EBITDA for 2015 was a negative $67.74 million.