Stripe, the pride of Ireland, is now the most valuable technology start-up in the US. It was valued at $95 billion in its latest funding round. But because it is still a private company, little is known about its underlying business. That’s because it doesn’t have to disclose financials to the stock market, and in the US, private companies don’t have to disclose anything to their equivalent of the companies registration office (CRO).  

So the filing of accounts for Stripe’s international businesses at Ireland’s CRO is an important event. It’s the best view we have of this giant business.

This week Stripe filed consolidated 2019 accounts for Stripe Payments International Holdings Limited (SPIHL), a company that’s a subsidiary of Stripe Inc in the US, but which is the holding company through which Stripe’s European, Middle Eastern, African (EMEA), Asian and Pacific (APAC) businesses flow. 

The SPIHL 2019 accounts are not complete. Not only do they leave out Stripe’s business in the Americas, but they only give a partial picture of its business in EMEA and APAC. That’s because funds, assets and liabilities flow between the different companies within the wider Stripe group. The SPIHL accounts are like looking at the company through a gap in the curtains.

Nonetheless, there are important hints at the size and trajectory of Stripe’s business. SPIHL accounts show $800 million in revenue, up 51 per cent on 2018. According to the notes, this number “is in respect of its principal activity and comprises the value of services supplied by the group exclusive of value added tax. Turnover is generated in Ireland and from sales in the EMEA and APAC region.” 

The notes also say “turnover and the associated cost of sales have increased due to growth in business from existing users, expansion into new markets and an increase in user adoption in existing markets.”

From this, we take it that the turnover figure corresponds to real sales generated in EMEA and APAC. And that it’s not an accounting quirk of Stripe’s group structure. 

Stripe’s cost of sales came to $698 million, for a gross profit margin of 12.6 per cent. Its administrative expenses were $204 million, for an operating margin of minus 12.8 per cent. (Strictly speaking SPIHL made an operating profit, but that includes a $150 million gain on an IP asset disposal. I’m omitting that to focus on the underlying operating business.) 

Costs and profitability

What do these cost figures mean? Broadly, cost of sales relates to the costs incurred to generate an additional unit of sales. Administrative expenses tend to be fixed in nature. Cost of sales would typically include stuff like raw materials, admin expenses would include salaries and depreciation. 

Stripe doesn’t give any detail on what comprises its cost of sales or administrative expenses. For a better look at payments companies’ costs, we compared SPIHL’s results to those of Square, another digital payments processor. 

As we’ve seen, SPIHL’s gross margin is 12.6 per cent. By comparison Square’s gross margin is 28 per cent. 

Gross margin is revenue minus cost of sales. What goes into cost of sales for a payments company like Square? By far the biggest chunk is transaction costs. These are “interchange and assessment fees, processing fees, and bank settlement fees paid to third-party payment processors and financial institutions.” The fees, in other words, a payments company must pay to credit cards, and the owners of the payments infrastructure it runs on. 

Square spent 38 per cent of its revenue on administrative expenses (ie, the expenses that are fixed in nature, and not specifically tied to producing extra sales). Stripe spent 25 per cent of revenue on that category. 

What goes into administrative expenses for a payments company? For Square, the biggest items are research and development, and sales and marketing. SPIHL reports $204 million in administrative expenses. That includes $57 million on staff and $17 million on other detailed fixed costs, leaving around $130 million unexplained – presumably some mix of marketing, R&D, and perhaps royalties paid for access to technology IP.

Though Square and Stripe are similar in age, and now are both worth about $100 billion, they took different paths. Square was initially more focused on physical terminals for merchants. Stripe has always been focused on handling payments online. Square floated on the public markets in 2015; Stripe is still private.

Crazy valuations

What’s most interesting about them is their valuation. Square’s valuation is pretty crazy by any standards: it’s worth 11 times turnover, 222 times Ebitda, 275 times earnings. 

Square’s valuation is crazy, but it made almost $10 billion in revenue last year. Stripe by comparison made $800 million in revenue outside the Americas, which hints a ballpark estimate for its total revenue number. It couldn’t be much more than, say, $3.5 billion. So however crazy Square’s valuation is, Stripe’s is no different – it was $35 billion in September 2019, the year covered in the latest filing. We don’t have more recent revenue figures to relate to its $95 billion valuation this year, which only shows how fast these companies have been growing.

The huge valuation is great news for Ireland. It means investors expect it to get much, much bigger in the coming years. 

A note in the accounts showing merchant settlement assets offers a hint at the size of its payments business. Settlement is the final stage of the payments process, when the money clears in the merchant’s account after a transaction. Settlement takes up to two days in Europe, Australia and the US, and up to a week in many Asian countries such as Japan and India. SPIHL had $1.1 billion of merchant settlement assets on its balance sheet at the end of 2019. If you assume an average of three days for settlement, that implies SPIHL processed roughly $134 billion of transactions that year. That’s up from about $52 billion in 2017.

SPIHL’s headcount, too, is way up in recent years. In 2019, it employed 365 people, up from 76 in 2016. Around 300 are currently reported to be based in Dublin. What’s also notable is the changing composition of its workforce. In 2016, five per cent of employees were engineers, with the bulk working in general administration. By 2019, 25 per cent of employees were engineers. 

Perhaps as a consequence of hiring more software engineers, wages have gone up. Average wages at SPIHL increased steadily from $128,000 to $157,000 between 2016 and 2019. 

If and when Stripe does go public, its employees will do well. The company has set aside 14.5 million restricted stock units, with an estimated fair value of $5.93 each and a cost of 83¢ each. So should certain conditions be met (an IPO probably being one), $73.9 million will be distributed to Stripe’s employees.

Double Irish in Bermuda

On the last day of the accounting period just reported by Stripe in Ireland, the group also engaged in a series of transactions that has since cemented Ireland as the centre of a €10 billion business representing its activities outside the US.

Until the end of 2019, Stripe ran a Double Irish structure typical of US-headquartered tech multinationals. As an Irish-registered, Bermuda tax-resident company, SPIHL was tasked with “the holding of equity investments in subsidiaries and licensing of a platform and related technology to a subsidiary”. It extracted income under the form of charges for access to this technology through a group of Irish companies and a cascade of further customer-facing subsidiaries outside the EU.

SPIHL had the capacity to own intellectual property (IP) rights associated with the group’s payments technology and centralise any corresponding profits, parking them in tax-free Bermuda until the head office in San Francisco decided what to do with them.

That was the hypothetical plan – the company did not in fact return a profit until the double Irish was outlawed last year. Since its establishment in Dublin in 2014, Stripe had been in full-on growth mode, continuing to raise funds and focusing on expansion rather than earnings.

As it approached break-even, the group’s international business needed a new structure.

On December 31, 2019, SPIHL “disposed of certain intellectual property rights” worth $10.8 billion to a subsidiary. It is unclear whether the Irish-registered, Bermuda-resident company had in fact owned such IP rights for any length of time or if it just acquired them from the US for the purpose of transferring them on to Ireland (its balance sheet never reported ownership of intangible assets in previous years). As mentioned above, it did not need to actually own IP rights to justify corresponding profits at the time, as it did not make any profits.

Further transactions would reveal the company acquiring the intellectual property to be Stripe Technology Company Ltd, the fully Irish resident unit now at the centre of the group’s non-US business.

The Dublin unit did not pay for the IP immediately – instead, the two companies booked an equivalent $10.8 billion debt on their balance sheet. The interest-free intercompany loan was repayable within four years at the latest.

Meanwhile, on the same day, a separate smaller transaction saw Stripe Technology Company Ltd issue $11.2 million worth of shares to SPIHL in exchange for “certain trademark rights” – establishing the template for the much larger intangible transfer under way on the IP front.

Irish base fully paid up

Four months ago, on December 22, 2020, Stripe Technology Company Ltd again allotted new shares to its parent. This time, the Irish IP licensing company raised €9.6 billion in cash in the process – a near-exact match for the $10.8 billion it owed for the acquisition of the technology rights one year earlier. The debt was extinguished and Stripe’s so-called green jersey structure was now fully paid up. 

Further down the corporate pyramid, nothing is changing: customers pay fees on their payment transactions to Stripe Payments Europe Ltd in Dublin, which is the only “trading company” disclosed by the group outside the US – either directly or through its subsidiaries across Asia and the Pacific, which act as “resellers” of its services. Stripe Payments Europe Ltd then pays IP rights owner Stripe Technology Company Ltd to access the technology enabling these sales. The latter company can amortise the cost of its $10.8 billion IP assets against this income for up to 10 years.

The main difference, however, is that SPIHL posted a pre-tax profit for the first time in 2019. And as such profits grow from Stripe’s expanding international business in a post-Covid world, they will now be declared and taxed in Ireland.

Further reading

A 21st century emigrant song: Stripe, the diaspora and the story of Ireland