A month has gone by since the last earnings report for Square (SQ - Free Report) . Shares have lost about 6% 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 its most recent earnings report in order to get a better handle on the important catalysts.
Square Surpasses Earnings & Revenues Estimates in Q1
Square delivered first-quarter 2019 adjusted earnings of 11 cents per share, which beat the Zacks Consensus Estimate by 3 cents and was also higher than management’s guided range of 6-8 cents per share. The figure also soared 83.4% on a year-over-year basis but fell 21.4% on a sequential basis.
Net revenues of $959.36 million surpassed the Zacks Consensus Estimate of $942.62 million and also came ahead of the guided range of $918 million to $938 million. The figure increased 43.5% from the year-ago quarter and 2.9% sequentially.
Per the company, adjusted revenues came in $489.05 million, up 59.4% year over year and 5.3% from the previous quarter. The figure also comfortably outpaced management’s revised guided range of $472-$482 million.
The top line was driven by robust contributions from Weebly and Zesty buyouts, and growing adoption of Cash App. Further, continued acceleration in gross payment volume (GPV) of the company drove the results.
Additionally, its robust product portfolio and strengthening seller contribution are expected to aid business growth in the near term.
Gross Payment Volume
Gross Payment Volume in the first quarter came in $22.59 billion which missed the Zacks Consensus Estimate of $22.68 billion. Notably, the figure increased 27% year over year but decreased 1.6% on a sequential basis.
Year-over-year growth was driven by the company’s continued momentum across the larger sellers.
Square defines larger sellers as those that make more than $125,000 of annualized GPV and mid-market sellers as those with annualized revenues of more than $500,000.
GPV from larger sellers contributed 51% to total GPV, up 37% year over year. Further, Square experienced strong contributions from mid-market sellers who accounted for 24% of total GPV, up 50% from the year-ago quarter.
This can be attributed to Square’s robust product portfolio and comprehensive ecosystem that aids the company in attracting new sellers to its platform and retaining the existing sellers as well.
Additionally, strong performance of Square Invoices and Square for Retail boosted GPV growth during the reported quarter. Further, robust Cash App whose volume accelerated 2.5 times year over year contributed well.
Transaction (68.5% of net revenues): The company generated transaction revenues of $656.76 million, up 25.6% year over year. Revenue growth within this category can be attributed to strengthening momentum across sellers driven by friendly ecosystem, robust products and payback offers for new sellers.
Subscription and services (22.8% of revenues): The company generated $218.86 million revenues from this category, soaring 125.5% from the year-ago quarter. This improvement came primarily on the back of benefits from Weebly and Zesty buyouts excluding which the category’s top-line growth would have been 97%. Further, strong performance of Cash Card, which sustained growth in its monthly active users during the first quarter aided revenue generation. Additionally, robust Caviar, Instant Deposit and Cash App were major positives. Moreover, robust Square Capital which facilitated $508 million of business loans during the first quarter increased 50% from the year-ago quarter.
Hardware (1.9% of revenues): Square generated $12.21 million of revenues from this business, up 26.3% year over year. The top-line growth within this category was primarily driven by Square Stand, Square Register, Square Terminal and the company’s solid momentum with third-party peripherals.
Bitcoin (6.8% of revenues): Square generated $65.53 million revenues from this category, soaring 92.2% on a year-over-year basis. Square continues to benefit in the bitcoin space on the back of growing momentum of Cash App among users.
Per the company’s report, gross profit as a percentage of net revenues came in 41.4%, expanding 320 bps year over year.
Adjusted EBITDA as a percentage of adjusted revenues was 12.6%, expanding 90 bps year over year.
Operating expenses came in $418.8 million, surging 51.6% from prior-year quarter. Adjusted operating expenses were $339.7 million, up 53.8% year over year.
Product development expenses were $153.6 million, up 46% year over year, primarily owing 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 $101.6 million, up 35% from prior-year quarter. This was primarily owing to finance, legal and support personnel costs.
Further, sales and marketing costs were $133.7 million, up 73% year over year, due to increase in Cash App peer-to-peer payment transfer, advertising and personnel costs.
As of Mar 31, 2019, cash and cash equivalents balance was $521.7 million, down from $583.2 million as of Dec 31, 2018. Short-term investments were $566.5 million in the reported quarter, up from $540.9 million in the previous quarter.
Long-term debt was $909.3 million, increasing slightly from $899.7 million in previous quarter.
For second-quarter 2019, Square expects net revenues between $1.09 billion and $1.11 billion.
Further, adjusted revenues are anticipated in the range of $545-$555 million. Adjusted EBITDA is expected in the band of $90-$94 million.
Adjusted earnings are expected in the range of 14-16 cents per share.
For 2019, Square raised the guided range for total revenues from $4.35-$4.41 billion to $4.41-4.47 billion.
Further, the guided range for adjusted revenues also got revised upward from $2.22-$2.25 billion to $2.25-$2.28 billion. Adjusted EBITDA is anticipated in the range of $405-$415 million.
Adjusted earnings are projected in the range of 74-78 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 -72.45% due to these changes.
Currently, Square has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
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 #2 (Buy). We expect an above average return from the stock in the next few months.