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Square (SQ) Surpasses Earnings and Revenue Estimates in Q3

Zacks

Square Inc. SQ reported better-than-expected third-quarter 2017 results, beating the Zacks Consensus Estimate on both counts.

Adjusted earnings of 7 cents per share surpassed the consensus mark by a penny and were up significantly sequentially as well as year over year. Earnings came ahead of the guided range of 4 cents to 5 cents per share.

Revenues of $585 million beat the consensus mark by $11 million and increased 6.1% sequentially and 33.3% year over year. Revenues came well ahead of the guided range of $562 million – $568 million. Shares barely moved in afterhours trading.

The year-over-year top-line growth was driven by strength in core payments business. Again, strong top-line growth along with ongoing operating expense leverage drove the bottom line.


In the third quarter, Square partnered with Eventbrite, a leading event technology platform and invested $25 million in the company. Under the partnership, Square drives Eventbrite’s online, mobile, and in-person payment systems and backs its vision to power the world’s largest platform for live experiences. With Eventbrite, Square’s broader aim is to develop a general marketplace platform that any marketplace can use to build its own solutions.

Square recently came up with a new hardware offering called Square Register. It is a dual-screen stationary countertop point-of-sale (POS) device that accepts chip cards, magnetic stripe, and contactless payments. The product is aimed at larger sellers who drive the company’s core processing revenues.

The company displays consistent business growth through balancing investment and margin expansion. We believe that Square’s comprehensive commerce ecosystem, accelerated business growth and focus on integration, automation, and platform will drive growth going forward.

Year to date, Square has impressed investors with its share price surging a massive 169.4%, significantly outperforming the industry’s rally of 30%. An impressive track record of growth backed this rise.

Let’s delve deeper into the numbers.

Revenues in Detail

Transaction-based revenues of $510 million grew 5.8% sequentially and 31.3% year over year. The rise was driven by robust growth in Invoices, Virtual Terminal, and E-Commerce API payments.

Subscription and services based revenues of $65.1 million were up 10% on a sequential basis and a massive 84.2% on a year-over-year basis. The increase was driven by significant contributions from Caviar, Square Capital, and Instant Deposit.

Hardware revenues were $10.1 million, down 1.9% sequentially but up 23.5% year over year. Growth rate has normalized since contactless and chip reader started shipping in the first half of 2016.

Square, Inc. Revenue (TTM)

Gross Profit Volume (GPV)

Gross Payment Volume (GPV) increased driven by growth in both larger as well as midmarket sellers. Square defines larger sellers as those who make more than $125,000 of annualized GPV and midmarket sellers as those who make more than $500,000 of annualized revenues. GPV from larger sellers contributed 48% to total GPV and was up 44% year over year. GPV from midmarket sellers were up 64% year over year. The company processed $17.4 billion of total GPV that increased 31% year over year.

Virtual Terminal become the fastest product to cross the $1 billion GPV mark and processed more than $350 million in the third quarter.

Square’s is progressing well with its open platform strategy. This is evident from the fact that sellers utilizing business systems integrated with the company contributed almost 20% of third quarter GPV.

Operating Results

Non-GAAP EBITDA margin was 13%, down 200 basis points (bps) sequentially but up 600 bps year over year. The year-over-year growth was driven by higher revenues and ongoing operating expense leverage.

Non-GAAP operating expenses of $186 million were up 7.5% from $173 million in the previous quarter and 34% from $139 million in the year-ago quarter.

GAAP net loss was almost $16 million or loss of 4 cents per share, compared with $32.3 million or loss of 9 cents per share a year ago.

Balance Sheet and Cash Flow

As of Sep 30, 2017, cash and cash equivalents balance was $658.4 million compared with $717 million as of Jun 30, 2017. The company has long-term debt of $354.2 million. Square generated $130.3 million in cash from operating activities.

Outlook

For the fourth quarter of 2017, Square expects net revenues between $585 million and $595 million. The mid-point of the guided range is higher than the Zacks Consensus Estimate of $587.7 million. Adjusted EBITDA is expected in the range of $34 million to $37 million. Adjusted EPS is expected between 5 cents and 6 cents, lower than the Zacks Consensus Estimate of 7 cents.

Zacks Rank and Other Stocks to Consider

Square has a Zacks Rank #2 (Buy).

Other stocks in the broader technology sector worth considering include Adobe Systems Incorporated ADBE, Fair Isaac Corporation FICO and Autohome Inc. ATHM, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Adobe, Fair Isaac and Autohome is projected to be 17%, 10% and 18.8%, respectively

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