It has been about a month since the last earnings report for Square (SQ). Shares have lost about 8.6% 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 the most recent earnings report in order to get a better handle on the important drivers.
Square Surpasses Earnings & Revenues Estimates in Q4
Square delivered fourth-quarter 2018 adjusted earnings of 14 cents per share, which beat the Zacks Consensus Estimate by 1 cent and also higher than management’s guided range of 12-13 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 $932.53 million surpassed the Zacks Consensus Estimate of $908.21 million and also came ahead of the guided range of $895-$905 million. The figure increased 51.4% from the year-ago quarter and 5.7% on a sequential basis.
Per the company, adjusted revenues came in $464.25 million, up 64.2% year over year and 7.7% from the previous quarter. The figure also comfortably outpaced management’s revised guided range of $446-$451 million.
Positive contributions from the acquisitions of Weebly and Zesty continued to drive year-over-year top-line growth. Further, the company’s robust product lines contributed well during the reported quarter. Moreover, impressive gross payment volume (“GPV”) growth aided revenue generation in the reported quarter.
Additionally, strengthening presence of Square in the bitcoin space and robust performance of subscription and services drove the results. Further, robust Cash App which experienced more than 15 million monthly active customers in December 2018 aided the results.
Gross Payment Volume
Gross Payment Volume in the reported quarter increased 28% year over year and 1.8% on a sequential basis to $22.9 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 51% to total GPV, up 39% year over year. This can be attributed to Square’s robust product portfolio and comprehensive ecosystem that helps the company in attracting new sellers to its platform and retaining the existing sellers as well.
Additionally, robust performance of the company’s online payment products such as Invoices, Virtual Terminal and e-commerce API which aid sellers to serve buyers in a better way, contributed more than 10% to GPV growth.
Further, the launch of Square Payroll along with employee benefits remained a major positive as it helped in acquiring new small sellers.
Transaction (71.6% of net revenues): The company generated transaction revenues of $667.8 million, up 27.3% year over year and 1.8% sequentially. Revenue growth within this category was driven by increasing average transactions per customer. Further, solid adoption of Cash App remained positive.
Subscription and services (20.8% of revenues): The company generated $194.1 million revenues from this category, soaring 144.4% from the year-ago quarter and 16.8% on a sequential basis. This improvement came on the back of benefits from Weebly and Zesty buyouts. Further, strong performance of Cash Card, Caviar, Instant Deposit, Cash App and Square Capital also drove revenues of this category. Additionally, robust Square Capital which facilitated $472 million of business loans during the fourth quarter, increased 55% from the year-ago quarter.
Hardware (2% of revenues): Square generated $18.2 million of revenues from this business, up 51.4% year over year and 4% sequentially. The top-line growth within this category was primarily driven by Square Register, Square Terminal and the company’s solid momentum with third-party peripherals.
Bitcoin (5.6% of revenues): Square generated $52.4 million revenues from this category, advancing 22.1% from the previous quarter. The company made its foray in the bitcoin space in January 2018. Square continues to benefit in the bitcoin space on the back of growing momentum of Cash App among the users. Without bitcoin revenues, the company’s net revenues would have been $880 million and surging 43% year over year.
Per the company’s report, gross profit as a percentage of net revenues came in 40.8%, expanding 190 basis points (bps) year over year and 90 bps sequentially.
Adjusted EBITDA margin was 17.5%, expanded 290 bps year over year and 150 bps on a sequential basis.
Operating expenses came in $383.2 million, surging 51.6% from prior-year quarter and 5.7% from the previous quarter. Adjusted operating expenses were $304.4, up 52% year over year and 5.2% sequentially.
Product development expenses were $142 million, up 53% 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 $95 million, up 44% from prior-year quarter. This was primarily owing to finance, legal and support personnel costs.
Further, sales and marketing costs were $119 million, up 55% year over year, due to increase in Cash App peer-to-peer payment transfer, advertising and personnel costs.
As of Dec 31, 2018, cash and cash equivalents balance was $583.2 million, down from $721.7 million as of Sep 30, 2018. Short-term investments were $540.9 million in the reported quarter, up from $448.9 million in the previous quarter.
Long-term debt was $899.7 million, increasing slightly from $897.9 million in previous quarter.
For first-quarter 2019, Square expects net revenues between $918 million and $938 million.
Further, adjusted revenues are anticipated in the range of $472-$482 million. Adjusted EBITDA is expected in the band of $47-$51 million.
Adjusted earnings are expected in the range of 6-8 cents per share.
For 2019, Square expects total revenues between $4.35 billion and $4.41 billion.
Further, the company expects adjusted revenues within the range of $2.22-$2.25 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 -205.56% due to these changes.
At this time, Square has a strong Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. However, 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.
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.
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