SQ: Growing too fast to reinvest all back in


At the beginning of this year, Square (NYSE:SQ) CFO Sarah Friar told analysts they should expect relatively modest EBITDA margin expansion in the mid-single digits of percentage points over the next few years. “We think that’s probably the right balance of being able to invest to grow against showing you that we’re going to grow prudently and show leverage where we can,” she said on the company’s fourth-quarter earnings call.

Since then, it posted margin expansion of 19 percentage points and 8 percentage points in the first and second quarters, respectively. With the second-quarter report, management guided for just 5 percentage point EBITDA margin expansion. And Friar recently said the midpoint of the full-year 2017 EBITDA margin shows 7 percentage points of expansion at Deutsche Bank’s 2017 Technology Conference.

Friar said Square is seeing upside across its entire range of products. That’s important to note because the vast majority of its revenue comes from processing payments, but payment processing carries a lower-margin profile than its other products like Square Capital. Square’s ability to grow revenue across its suite of products means that it’s achieving higher operating leverage than expected, not that it’s simply selling more higher gross margin products. That bodes well for continued margin expansion going forward.

Maybe we’re going to see a big beat when SQ reports Q3…