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Why Is Square (SQ) Down 12.7% Since Last Earnings Report?

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It has been about a month since the last earnings report for Square (SQ - Free Report) . Shares have lost about 12.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Square due for a breakout? 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 drivers.

Square Surpasses Earnings & Revenues Estimates in Q3

Square delivered robust third-quarter 2018 adjusted earnings of 13 cents per share, which beat the Zacks Consensus Estimate by 2 cents and also exceeded management’s guided range of 8-10 cents per share. The figure also soared 85.7% on a year-over-year basis and came in line on a sequential basis.

Net revenues of $882.12 million surpassed the Zacks Consensus Estimate of $860.52 million and also came ahead of the revised guided range of $840-$860 million. The figure increased 51% from the year-ago quarter and 8.2% on a sequential basis.

Per the company, adjusted revenues came in $431.14 million, up 68% year over year and 11.8% from the previous quarter. The figure also comfortably outpaced management’s revised guided range of $407-$412 million.

Benefits from the acquisitions of Weebly and Zesty drove year-over-year top-line growth. Additionally, strengthening presence of Square in the bitcoin space and robust performance of subscription and services drove the results.

Moreover, impressive gross payment volume (“GPV”) growth aided revenue generation in the reported quarter.

During the third quarter, the company rolled out Square Terminal which will aid it in attracting new sellers to its platform, consequently bolstering market share. Additionally, the company unveiled Square Reader SDK that is also helping the company in improving its reach to larger sellers.

Both the products bode well for the company’s strong endeavors toward bolstering its GPV.

Gross Payment Volume

Gross Payment Volume in the reported quarter increased 29.3% year over year and 5.1% on a sequential basis to $22.5 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 52% to total GPV, up 41% year over year. This can be attributed to Square’s robust product portfolio that helps the company in attracting new sellers to its platform and retaining the existing sellers as well.

Further, Square’s strengthening momentum across micro sellers also aided its GPV.

Additionally, robust performance of Virtual Terminal drove overall GPV growth. It generated more than $780 million of GPV in the reported quarter, reflecting year-over-year growth of 120%. Further, the launch of Square Reader SDK remained a major positive. Using this, the average annualized GPV of a seller came in $500 K as of September 2018.

Top-Line Details

Transaction (74.3% of net revenues): The company generated transaction revenues of $655.4 million, up 29% year over year and 4.8% sequentially. The rise can be attributed to strong performance of Square’s high-margin products, especially Virtual Terminal. Transaction-based revenues as a percentage of GPV were 2.91%, down slightly from 2.93% in the year-ago quarter. Further, transaction-based profit as a percentage of GPV was 1.07%, up from 1.05% in the prior-year quarter. This was driven by improvement in transaction cost profile.

Subscription and services (18.8% of revenues): The company generated $166.2 million revenues from this category, soaring 155% from the year-ago quarter and 23.7% on a sequential basis. This improvement came on the back of strong performance of Instant Deposits, Cash Card and Caviar. Further, robust Square Capital which facilitated $405 million of business loans during the third quarter, increasing 34% from the year-ago quarter contributed well. Additionally, the company significantly benefited from the buyouts of Weebly and Zesty without which the Subscription and services revenues would have totaled $141 million, reflecting growth of 117% from the year-ago quarter.

Hardware (2% of revenues): Square generated $17.5 million of revenues from this business, up 74.2% year over year but down 4.9% sequentially. Strong year-over-year growth was driven by well-performing Square Register. Additionally, steady growth in Square Stand and Square Reader, and the company’s solid momentum with third-party peripherals remained positive for the top line in this category.

Bitcoin (4.9% of revenues): Square generated $42.9 million revenues from this category which advanced 15.9% from the previous quarter. The company made its foray in the bitcoin space this January. Square continues to benefit in the bitcoin space from the gaining traction of Cash App among the users. Without bitcoin revenues, the company’s net revenues would have been $839 million and surged 43% year over year.

Operating Details

Per the company’s report, gross profit as a percentage of net revenues came in 39.9%, expanding 250 basis points (bps) year over year and 120 bps sequentially.

Adjusted EBITDA margin was 16%, expanded 300 bps year over year but contracted 200 bps on a sequential basis.

Operating expenses came in $362.5 million, surging 55% from prior-year quarter and 13.9% from the previous quarter. Adjusted operating expenses were $289.3, up 56% year over year.

Product development expenses were $136 million, up 64% year over year, primarily due to growing engineering, data science and design personnel costs. Further, cost related to Weebly acquisition led to increase in these expenses.

General and administrative expenses were $86 million, up 33% from prior-year quarter. This was primarily due to finance, legal, non-recurring acquisition and support personnel costs.

Further, sales and marketing costs were $116 million, up 75% year over year, due to an increase in Cash App peer-to-peer payment transfer, advertising and personnel costs.

Balance Sheet

As of Sep 30, 2018, cash and cash equivalents balance was $721.7 million, which went down from $1.39 billion as of Jun 30, 2018. Short-term investments were $448.9 million in the reported quarter, up from $233.6 million in the previous quarter.

Long-term debt was $897.9 million, which declined from $1.07 billion in previous quarter.

Guidance

For fourth-quarter 2018, Square expects net revenues between $895 million and $905 million. Further, adjusted revenues are anticipated in the range of $446-$451 million.

Adjusted EBITDA is expected in the band of $75-$80 million.

Adjusted earnings are expected in the range of 12-13 cents per share.

For 2018, Square expects total revenues between $3.26 billion and $3.27 billion, up from the previous guided range of $3.19-3.22 billion.

Further, the company raised guidance for adjusted revenues from $1.52-$1.54 billion to $1.569-$1.574 billion. Adjusted EBITDA is anticipated in the range of $250-$255 which was previously projected to lie within $240-$250 million.

Adjusted earnings are projected in the range of 45-46 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 -227.27% due to these changes.

VGM Scores

At this time, Square has a strong Growth Score of A, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Square has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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