SBUX Starbucks Corporation

By Peter Rudegeair and Ezequiel Minaya 

Square Inc. posted a wider-than-expected loss for its first quarter as the payments provider reported rising expenses and set aside $50 million to help resolve a long-running legal dispute over the company's origins.

Shares dropped about 12% after-hours Thursday.

Aside from the legal charge, many of the San Francisco company's main business are expanding rapidly. Square's revenue increased 51% to $379 million, above the $344 million estimate of analysts surveyed by Thomson Reuters.

But operating expenses grew to $207 million, as product development expenses climbed 63%, reflecting higher personnel costs. Overall operating expenses surged 72%.

Run by Twitter Inc. founder and Chief Executive Jack Dorsey and known for the small white payment devices it sells to small businesses, Square has been the subject of intense focus since its initial public offering late last year. Despite settling for a lower per-share price in that deal than many expected, Square shares have since bounced back to overcome a growing tide of pessimism about Silicon Valley startups' valuations.

For the quarter however, Square reported a loss of $96.8 million, wider than its year-earlier loss of $48 million. On a per-share basis, the company posted a loss of 29 cents, compared with a loss of 33 cents a year earlier.

Analysts surveyed by Thomson Reuters expected a loss of nine cents a share.

The company's earnings per share still would have fallen about five cents short of analyst expectations without the $50 million litigation charge the company took. The sum will go toward the settlement of legal proceedings that date back to 2010 involving Square and Washington University professor Robert E. Morley Jr.

Square said that without the litigation charge and the cost of compensation employees with shares, operating expenses would have only risen 18%.

Mr. Morley holds many of the patents that underlie Square's payments technology, and he and the company have been fighting in court over the monetary value of his claims.

Square now expects it could earn as much as $14 million in earnings on an adjusted basis this year, which takes out costs such as taxes and stock compensation. That was up from the $12 million the company said in March it expected to earn for 2016.

Transaction revenue climbed 42% to $300 million, while transaction revenue as a percentage of gross payment volume was 2.92%, down from 2.97%. Gross payment volume in the quarter grew 45% to $10.3 billion.

Square's hardware sales rose more than 7 times to $16 million, as it shipped its new payment devices. That came with accelerating hardware costs as well, to $26.7 million from $4.2 million in the first quarter of 2015, as Square spends to develop and distribute the new devices that work with contactless mobile-phone apps and "chip" cards with enhanced security features.

Software and data revenue tripled to $24 million, thanks in part to Square Capital, the company's lending arm and an expected source of profitability growth.

Square Capital extended $153 million in cash advances and loans during the first quarter, a 4% increase from the fourth quarter. The company said "more challenging credit market conditions" were a reason for the slow growth, as two new, unnamed investors delayed their purchases of Square Capital credits.

Square also reminded investors that its 180-day post-IPO lockup period was due to expire on May 16. That would make 64 million stock options and warrants exercisable, or 10% more than the 335 million Square shares that are currently outstanding.

Write to Peter Rudegeair at Peter.Rudegeair@wsj.com and Ezequiel Minaya at ezequiel.minaya@wsj.com

(END) Dow Jones Newswires

May 05, 2016 19:35 ET (23:35 GMT)

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