A month has gone by since the last earnings report for Square (SQ). Shares have added about 17.6% 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 its most recent earnings report in order to get a better handle on the important drivers.
Square Reports Loss in Q1
Square reported first-quarter 2020 adjusted loss of 2 cents per share, which compares unfavorably with the Zacks Consensus Estimate of earnings of 13 cents per share. Notably, the company reported earnings of 11 cents and 23 cents in the year-ago quarter and prior quarter, respectively.
Accumulating reserves for transaction and loan losses owing to the expected impact from coronavirus pandemic on losses in future resulted in loss during the reported quarter.
Net revenues of $1.38 billion surpassed the Zacks Consensus Estimate by 5.8%. Further, the figure came ahead of the revised guided range of $1.30-$1.34 billion. The top line also improved 44% from the year-ago quarter and 5.1% sequentially.
The top line was driven by Seller ecosystem that contributed $853 million to net revenues, up 16% year over year. Further, robust performance of Cash App, which generated $528 million of net revenues, up 197% year over year, was a major positive. Furthermore, strengthening momentum across Bitcoin and strong adoption of Cash Card contributed to the results.
Additionally, continued acceleration in gross payment volume (GPV) aided the results.
Notably, the company completed the divestiture of Caviar to DoorDash at the end of October 2019. Caviar had been underperforming and consequently its sale remains a major positive.
Excluding Caviar, net revenues would have exhibited growth of 51% on a year-over-year basis.
Square has refrained from providing guidance for the ongoing quarter and the full year 2020. This can be attributed to the uncertainties related to COVID-19, which are expected to act as headwinds during the second quarter.
The company has put a temporary stop on subscription billings and waived subscription fees on software for sellers. This is likely to hurt subscription revenues in the second quarter.
Nevertheless, growing adoption of contactless payment mode remains positive. Further, seller GPV from card-not-present transactions is expected to gain steam.
Additionally, growing momentum across peer-to-peer volumes, Cash Card spend, Cash Card orders, direct deposit transacting active customers and bitcoin volumes are likely to sustain revenues generated by Cash App.
Gross Payment Volume
GPV in the first quarter amounted to $25.7 billion missing the Zacks Consensus Estimate of $26.7 billion. Notably, the figure improved 14% year over year on the back of 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 52% to total GPV. This can be attributed to Square’s robust product portfolio and comprehensive ecosystem that aided it in attracting new sellers to its platform while retaining the existing ones.
Notably, the company witnessed 29% year-over-year growth in GPV during the January 2020 to February 2020 time period. However, the growth started slowing down since mid-March due to the rapidly spreading COVID-19 that impacted the seller business negatively.
Seller GPV declined 49% on a year-over-year basis in the last week of the first quarter.
Nevertheless, strong performance of Square Online Store owing to coronavirus-induced growing transition rate of sellers to online commerce from in-person sales mode drove GPV growth. Further, solid GPV generated from eGift Cards remained a positive.
Transaction (54.9% of net revenues): The company generated transaction revenues of $758.1 million, up 15.4% year over year. Strong payment volume contribution from existing and new sellers during the first two months of the reported quarter drove the category’s top line. The company witnessed softness in transaction revenues during last two weeks of the first quarter owing to coronavirus pandemic.
Subscription and services (21.4% of revenues): The company generated $296.2 million revenues from this category, surging 34.9% from the year-ago quarter. This improvement can be attributed to the strong performance by Cash App, which contributed $222 million to the category’s top line. Further, solid momentum across seller subscription and services products remained positive. Additionally, Square Capital, which facilitated 75,000 loans worth $548 million, up 8% from the year-ago quarter, contributed to the results. However, performance of Square Capital was also impacted by COVID-19.
Hardware (1.5% of revenues): Square generated revenues of $20.7 million from this business, up 13.5% year over year. The category’s top line was primarily driven by robust Square Terminal. However, COVID-19 hurt the hardware unit sales.
Bitcoin (22.2% of revenues): The company generated revenues of $306.1 million from this category, up a whopping 367.1% on a year-over-year basis. Square continued to benefit in the bitcoin space driven by growing adoption of Cash App. Notably, without bitcoin revenues, Cash App revenues would have come in at $222 million. The company witnessed growth in the transacting active bitcoin customer base owing to fall in bitcoin prices.
Per management, gross profit grew 36% from the year-ago quarter to $538.5 million. As a percentage of net revenues, the figure came in 38.9%, contracting 240 basis points (bps) year over year. While Transaction, Subscription and services and Bitcoin generated profit, Hardware category reported loss during the reported quarter.
Further, coronavirus pandemic remained a woe.
Adjusted EBITDA as a percentage of net revenues was 0.7%, contracting from 6.4% in the year-ago quarter.
Operating expenses came in $628.8 million, surging 50.1% from prior-year quarter.
Product development expenses were $194.9 million, up 26% year over year, primarily owing to growing engineering, data science and design personnel costs.
General and administrative expenses were $129.5 million, up 27% from prior-year quarter. This can primarily be attributed to finance, legal and support personnel costs.
Further, sales and marketing costs were $194.5 million, up 45% year over year, due to increase in Cash App peer-to-peer payment transfer and Cash Card issuances.
As of Mar 31, 2020, cash and cash equivalents balance was $1.96 billion, up from $1.05 billion as of Dec 31, 2019.
Short-term investments were $521.8 million in the reported quarter, down from $492.5 million in the previous quarter.
Long-term debt was $1.8 million, increasing from $938.8 million in previous quarter.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -40.82% due to these changes.
Currently, Square has a nice Growth Score of B, 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 lowest 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.
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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