Can Square Cap Off a Stellar Year When It Reports Earnings?

It seemed that Square (NYSE:SQ) could do no wrong for much of 2018. The payment processing specialist’s stock price nearly tripled last year as the company delivered quarter after quarter of accelerating revenue growth. In the end, it wasn’t Square’s performance that derailed the stock’s ascent, but the year-end correction that hammered most technology companies. That didn’t stop Square from racking up a gain of more than 60% last year, making it among the stock market’s best-performing equities.

Square will have another opportunity to reassure investors that its future looks bright, as the company is scheduled to report the results of its fourth quarter after the market close on Wednesday, Feb. 27. Let’s recap its third quarter and look at some recent events to see if they provide insight into what investors can expect when Square reports earnings.

A merchant inserting a credit card into a Square payment terminal with a customer standing by.

Image source: Square.

Six quarters of accelerating revenue growth

For the third quarter, Square reported net revenue of $882 million, up 51% year over year. Excluding its recent acquisitions of Weebly and Zesty, that increase was still an impressive 46%. Adjusted revenue, which excludes transaction-based costs, bitcoin costs, and purchase accounting, came in at $431 million, up 68% year over year. This easily topped management’s forecast and analysts’ consensus estimates of $412 million and $413.9 million, respectively.

The better-than-expected performance carried down to the bottom line, resulting in adjusted earnings per share of $0.13, more than double the $0.06 achieved in the prior-year quarter. An ever-growing base of sellers and escalating payments powered the results, as gross payment volume hit $22.5 billion, up 29% year over year.

Recent developments

Square continues to develop new products and services that help small businesses succeed and the company had several pertinent announcements after its third-quarter earnings report.

In mid-November, Square launched employee benefit offerings for companies that use Square Payroll. These benefits — which include health insurance, retirement savings, pre-tax accounts, and workers’ compensation — remove the administrative complexity and integrate seamlessly with the rest of Square Payroll. Caroline Hollis, head of Square Payroll, described it as “giving small businesses access to ‘big company’ benefits.” 

Early last month, Square launched Payments SDK (Software Development Kit), which enables developers to process payments directly within their consumer-facing mobile apps. By simply inserting a few lines of code in their iOS or Android app, Square payments can be built in. This is just the latest in a series of developments that not only serves business owners, but helps keep companies in Square’s payment ecosystem. 

An illustration showing a series of credit cards passing over a smartphone.

Image source: Square.

What the future may hold

Square boosted its full-year guidance after its better-than-expected results last quarter — something it’s done for each of the past three quarters. 

For the fourth quarter, Square is forecasting adjusted revenue in a range of $446 million to $451 million, a year-over-year increase of between 57% and 59%. The company is guiding for adjusted earnings of between $0.12 and $0.13 per share.

To put that into the perspective of Wall Street’s sentiment toward the company — and while we don’t want to get sucked into its short-term thinking — analysts’ consensus estimates are calling for adjusted revenue of $454 million, up 60.7% year over year, and adjusted earnings per share of $0.14 — both slightly ahead of management’s guidance. Investors have become accustomed to Square’s “beat and raise” — the practice of exceeding its guidance and raising its forecast — and are adjusting their expectations accordingly.

The company continues to execute on all fronts and there isn’t any indication that will change when Square reports earnings after the market close on Wednesday, Feb. 27.


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