Square’s IPO Filing: It’s Complicated

Square filed documents to go public on Wednesday, revealing on the surface a fast-growing payments business with widening losses, thanks in part to a winding-down Starbucks partnership that looks financially disastrous.

But a more nuanced look at the numbers, stripping out the Starbucks deal, tells a story of a healthier core business with even a path toward, yes, profitability.

First, the high level: Square recorded revenue of about $560 million in the first half of the year, a 51 percent increase over the first half of 2014. For the same period, losses were about flat year over year at about $78 million. That doesn’t look great.

But the profit-or-loss metric that investors and analysts will look at more closely is adjusted Ebitda, or its profit minus a few standard items like taxes and depreciation. To get to this metric, Square is also stripping out all the revenue and transaction costs associated with its Starbucks partnership*, which it says will come to an end in the third quarter of 2016. As a result, Square is making the case that that deal doesn’t reflect its core business, and it is right: Square loses money on Starbucks transactions, while Square makes money on the transactions it processes for all the other brick-and-mortar businesses it works with.

Additionally, the metric subtracts other costs associated with things like stock-based compensation that fast-growing tech companies often argue don’t reflect the health of their main business. In the first half of the year, Square narrowed its Ebitda losses to $19 million from $44 million in the same period last year. And in the second quarter of this year, Square actually recorded an adjusted Ebtida profit, even if just barely. That’s a good sign.

Analysts will also be interested in Square’s adjusted revenue metric, which excludes Starbucks transactions as well as the transaction costs Square has to pay banks and other credit card issuers every time someone swipes a card at one of Square’s merchants. For the first half of the year, adjusted revenue grew 67 percent year over year to about $199 million (remember that revenue including Starbucks grew 51 percent for the same period). The takeaway: While Square will be a much smaller business from a revenue standpoint after the Starbucks deal lapses, it will be a faster-growing one with a much better shot at profitability.

Square generates the vast majority of its revenue by charging brick-and-mortar businesses a transaction fee of typically 2.75 percent every time a customer pays with a credit card or debit card. But Square, like almost all payments processors, has to dole out around two-thirds of that fee to banks and other credit card issuers. More recently, Square has also created new business lines such as merchant cash advances and appointment-booking software in an effort to diversify and boost profit margins.

* Signed three and a half years ago, the deal involved Square taking over as Starbucks’ payment processor in its stores. The filing shows that Square actually lost money on this arrangement. Why did it do it? Supporters of the deal believed the credibility of working with a big national brand was valuable on its own, and Square also believed Starbucks would help promote the Square Wallet mobile wallet app. The latter never really happened, which doesn’t help the deal’s report card.

Here’s some background on the company, using data curated by findthecompany.com and sourced from VentureDeal:

[findthebest id=”1VfGvBGqN5X” title=”Square Inc. ” width=”700″ height=”530″ url=”https://w.graphiq.com/w/1VfGvBGqN5X” link=”http://listings.findthecompany.com/l/9536872/Square-Inc-in-San-Francisco-CA” link_text=”Square Inc. | FindTheCompany”]

This article originally appeared on Recode.net.