It has been about a month since the last earnings report for Square (SQ - Free Report) . Shares have added about 20.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Square due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Square delivered strong second-quarter 2018 adjusted earnings of 13 cents per share, which beat the Zacks Consensus Estimate by 2 cents and also came ahead of management’s guided range of 9-11 cents per share. The figure also surged 85.7% on a year-over-year basis and 116.7% sequentially.
Net revenues of $815 million surpassed the Zacks Consensus Estimate of $773 million and also came ahead of the revised guided range of $744-$764 million. The figure increased 47.6% from the year-ago quarter and 21.8% on a sequential basis.
As per the company reported, adjusted revenues came in $385 million, up 60.4% year over year and 25.4% from the previous quarter. The figure also comfortably surpassed management’s revised guided range of $362-$367 million.
Year-over-year top-line growth was driven by growing adoption of Cash App which aided the growth in the company’s bitcoin revenues. Moreover, Cash App experienced increase in its customer spending, thanks to Cash Card. In the reported quarter, total spending was $250 million.
Further, robust product performance of Caviar drove the results further. Moreover, impressive gross payment volume (GPV) growth aided second-quarter results.
During the second quarter, the company rolled out Square for Restaurants which bodes well for its improving industry-specific point-of-sale offerings. Further, this will strengthen Square’s footprints in the growing market for restaurant.
Additionally, the company completed the acquisition of Weebly, which will help Square to improve omni-channel business by combining Weebly’s web presence tools with Square’s in-person and online offerings. Further, Weebly has a total of 625K paid subscribers out of which 40% belong to non U.S. region. This will aid the global expansion of Square.
Gross Payment Volume
Gross Payment Volume in the reported quarter increased almost 30.5% year over year and 20.2% on a sequential basis to $21.4 billion, driven by growth in larger sellers.
Square defines larger sellers as those that make more than $125,000 of annualized GPV and midmarket sellers as those that make more than $500,000 of annualized revenues.
GPV from larger sellers contributed 50% to total GPV for the first time and it was up 42% year over year. This can be attributed to strengthening relationships with these sellers that can be attributed to robust product portfolio of the company.
Moreover, Square Register performed well with the existing sellers and also attracted new sellers to the platform in the reported quarter. Further, the capability of API platform and Build with Square in retaining larger sellers continued to contribute well. Further, robust performance by Instant Deposit drove the GPV growth further.
Additionally, the launch of Square for Restaurants in the second quarter remained positive for GPV growth.
Transaction (76.7% of net revenues): The company generated transaction revenues of $625.2 million, up 29.7% year over year and 19.5% sequentially. The rise can be attributed to strong performance of high-margin products of Square. Transaction-based revenues as a percentage of GPV were 2.92%, down slightly from 2.94% in the year-ago quarter. Further, transaction-based profit as a percentage of GPV was 1.08%, up from 1.04% in the prior-year quarter. This was driven by improvement in transaction cost profile.
Subscription and services (16.5% of revenues): The company generated $134.3 million revenues from this category, surging 127.2% from the year-ago quarter and 38.3% on a sequential basis. This improvement came on the back of robust performance of Instant Deposits, Cash Card, Caviar and Square Capital which facilitated $390 million of business loans, increasing 22% from the year-ago quarter. Further, payment volume from Instant Deposit totaled $4 billion in the reported quarter. Additionally, benefits from acquisitions contributed well.
Hardware (2.3% of revenues): Square generated $18.4 million of revenues from this business, up 78.6% year over year and 27.8% sequentially. Strong year-over-year growth was driven by Square Register which exhibited roughly $300K average annual GPV of a seller. Additionally, steady growth in Square Stand and Square Reader remained positive for the top-line growth in this category.
Bitcoin (4.5% of revenues): Square generated $37 million revenues from this category which advanced 8.5% from the previous quarter. The company entered the bitcoin space for the first time this January. Square continues to benefit in the bitcoin space from the gaining traction of Cash App, which is expanding globally. Without bitcoin revenues, the company’s net revenues would have been $778 million and would have surged 41% year over year.
Per the company’s report, gross profit as a percentage of net revenues came in 38.7%, expanding 110 basis points (bps) year over year and 60 bps sequentially.
Adjusted EBITDA margin was 18%, up 300 bps year over year and 600 bps on a sequential basis.
Operating expenses came in $318 million, surging 45% from prior-year quarter but as a percentage of adjusted revenues declined 700 bps on a year-over-year basis.
Adjusted product development expenses were $75 million, up 51% year over year, primarily due to growing engineering, data science and design personnel costs.
Non-GAAP general and administrative expenses were $63 million, up 28% from prior-year quarter. This was primarily due to finance, legal, non-recurring acquisition and support personnel costs.
Further, sales and marketing costs were $92 million, up 65% year over year, due to an increase in Cash App peer-to-peer payment transfer, advertising and marketing and personnel costs.
As of Jun 30, 2018, cash and cash equivalents balance was $1.39 billion, which went up from $738.5 million as of Mar 31, 2018. Short-term investments were $233.6 million in the reported quarter, up from $200 million in the previous quarter.
Long-term debt was $1.07 billion, increasing from $362.9 million in previous quarter.
For third-quarter 2018, Square expects net revenues between $840 million and $860 million.
Further, adjusted revenues are expected in the range of $407-$412 million. Adjusted EBITDA is expected in the band of $62-$65 million.
Adjusted earnings are expected in the range of 8-10 cents per share.
For 2018, Square expects total revenues between $3.19 billion and $3.22 billion, up from the recently revised guided range of $3.03-3.09 billion.
Further, the company raised guidance for adjusted revenues from $1.45-$1.48 billion to $1.52-$1.54 billion. Adjusted EBITDA is anticipated in the range of $240-$250 million.
Adjusted earnings are projected in the range of 42-46 cents per share.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -315.91% due to these changes.
At this time, Square has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for growth based on our style scores.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Interestingly, Square has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.