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Square (SQ) Up 3.8% Since Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Square, Inc. (SQ - Free Report) . Shares have added about 3.8% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Square Surpasses Earnings and Revenue Estimates in Q3

Square reported better-than-expected third-quarter 2017 results, beating the Zacks Consensus Estimate on both counts.

Adjusted earnings of 7 cents per share surpassed the consensus mark by a penny and were up significantly sequentially as well as year over year. Earnings came ahead of the guided range of 4 cents to 5 cents per share. Revenues of $585 million beat the consensus mark by $11 million and increased 6.1% sequentially and 33.3% year over year. Revenues came well ahead of the guided range of $562 million - $568 million.

Revenues in Detail

Transaction-based revenues of $510 million grew 5.8% sequentially and 31.3% year over year. The rise was driven by robust growth in Invoices, Virtual Terminal, and E-Commerce API payments.

Subscription and services based revenues of $65.1 million were up 10% on a sequential basis and a massive 84.2% on a year-over-year basis. The increase was driven by significant contributions from Caviar, Square Capital, and Instant Deposit. Hardware revenues were $10.1 million, down 1.9% sequentially but up 23.5% year over year. Growth rate has normalized since contactless and chip reader started shipping in the first half of 2016.

Gross Payment Volume (GPV) increased driven by growth in both larger as well as midmarket sellers. Square defines larger sellers as those who make more than $125,000 of annualized GPV and midmarket sellers as those who make more than $500,000 of annualized revenues. GPV from larger sellers contributed 48% to total GPV and was up 44% year over year. GPV from midmarket sellers were up 64% year over year. The company processed $17.4 billion of total GPV that increased 31% year over year.

Virtual Terminal become the fastest product to cross the $1 billion GPV mark and processed more than $350 million in the third quarter. Square’s is progressing well with its open platform strategy. This is evident from the fact that sellers utilizing business systems integrated with the company contributed almost 20% of third quarter GPV.

Operating Results

Non-GAAP EBITDA margin was 13%, down 200 basis points (bps) sequentially but up 600 bps year over year. The year-over-year growth was driven by higher revenues and ongoing operating expense leverage. Non-GAAP operating expenses of $186 million were up 7.5% from $173 million in the previous quarter and 34% from $139 million in the year-ago quarter. GAAP net loss was almost $16 million or loss of 4 cents per share, compared with $32.3 million or loss of 9 cents per share a year ago.

Balance Sheet and Cash Flow

As of Sep 30, 2017, cash and cash equivalents balance was $658.4 million compared with $717 million as of Jun 30, 2017. The company has long-term debt of $354.2 million. Square generated $130.3 million in cash from operating activities.

Outlook

For the fourth quarter of 2017, Square expects net revenues between $585 million and $595 million. Adjusted EBITDA is expected in the range of $34 million to $37 million. Adjusted EPS is expected between 5 cents and 6 cents.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend for fresh estimates. There has been one revision higher for the current quarter.

Square, Inc. Price and Consensus

 

Square, Inc. Price and Consensus | Square, Inc. Quote

VGM Scores

At this time, Square's stock has a great Growth Score of A, though it is lagging a bit on the momentum front with a B. The stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our style scores, the stock is primarily suitable for growth investors while also being suitable for those looking for momentum.

Outlook

While estimates have been broadly trending upward for the stock, the magnitude of these revisions has been net zero. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.


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