Only disappointment is a low earnings forecast. They’re forecasting high on revenue, so either they intend to invest in the business more aggressively or costs are unexpectedly rising somewhere.
The call contained many clues that the former is the bigger factor, which is just fine for me as a long-term investor in SW.
Here’s a look at the numbers:
Total Net Revenue (millions) Q1 Q2 Q3 Q4
2014 250
2015 374 310 332 374
2016 379 438 439 452
2017 462 552 585 616
2018 669
Adjusted Revenue (millions) Q1 Q2 Q3 Q4
2014 82
2015 89 111 118 135
2016 146 171 178 192
2017 204 240 257 283
2018 307
Adjusted EBITDA (millions) Q1 Q2 Q3 Q4
2016 13 12 30
2017 27 36 34 41
2018 36
EPS (diluted) Q1 Q2 Q3 Q4
2014 (0.25)
2015 (0.34) (0.20) (0.35) (0.34)
2016 (0.29) (0.08) (0.09) (0.04)
2017 (0.04) (0.04) (0.04) (0.04)
2018 (0.06)
EPS (Adjusted) Q1 Q2 Q3 Q4
2015 (0.05)
2016 (0.05) 0.02 0.01 0.05
2017 0.05 0.07 0.07 0.08
2018 0.06
GPV (billions) Q1 Q2 Q3 Q4
2015 7.1 8.8 9.5 10.2
2016 10.3 12.5 13.2 13.7
2017 13.6 16.4 17.4 17.9
2018 17.8
2018 Q1 Earnings:
Adjusted Revenue Growth (millions)
2017 Q1 TTM Revenue = 745
2018 Q1 TTM Revenue = 1,087
YOY TTM Adj Revenue Growth = 45.9%, previous quarter 43.2%
*Remember adjusted revenue is what you want to look at, not total net revenue, for Square
EPS Growth (Adjusted)
2017 Q1 TTM Earnings = $0.13
2018 Q1 TTM Earnings = $0.28
YOY TTM EPS Growth = 115%
Adjusted P/E (Check Current Price) = 48.66/0.28 = 173
Other quick and dirty highlights:
Subscription and services-based revenue: $97M, +98% YOY and +22.8% sequentially
Square Capital: Loan volume +35% YOY, 50K business loans for $339M - Note these numbers are essentially flat sequentially. Losses were again below 0.1% (~$18M) reflecting investments in risk management.
Instant Deposit: Benefited in volume growth in seller base and Cash App user base. Introduced in UK this quarter.
Take rate revenue: 2.93% - flat sequentially
Take rate profit: 1.09% - up 2 basis points sequentially
Cash App: Introduced in UK, #1 finance app in 1Q, I did not see an update on active users, last quarter it was 7M
Operating expenses: Non-GAAP operating expenses were up 49% year over year, accounting for 72% of Adjusted Revenue in the fourth quarter of 2017.
Cash/cash equivalents: $1.2B, previous quarter $1.1B
Updated 2018 Full Year Guidance
Adj. Revenue: $1.4B to $1.43B
Adj. EBITDA: $240M to $250M
GAAP EPS: ($0.04) to ($0.00)
Adj. EPS: $0.44 to $0.48
Quick takeaway: I need to go through the numbers more, I’ve only given them a quick glance. But expenses seem to be rising essentially as fast as adj. revenue. Notably raised guidance for revenue, not adjusted EBITDA. company did raise EPS guidance (both GAAP and adjusted) however.
That being said, I don’t think any of that matters as long as subscription and services-based revenue keeps growing like they are - as Bear aptly noted above. Large sellers are moving to Square for its ecosystem, not its payment processing services. From the shareholder letter:
Larger sellers often have business needs that extend beyond payments, such as managing multiple employees and locations and tracking inventory. Square provides integrated solutions to meet these diverse needs—saving sellers the time and burden of stitching together individual products from different vendors.
Larger businesses, like other Square sellers, choose Square because they value our cohesive ecosystem: More than half of larger sellers used two or more Square products during 2017. As these sellers use more products, we deepen our relationship with them, and they drive meaningful growth for Square: In the first quarter, total net revenue from larger sellers grew 47% year over year, and Adjusted Revenue from larger sellers grew 60% year over year.
Again, that’s just a quick takeaway. I’ll have more after I get a chance to go through the company’s conference call this weekend.
Matt
Long SQ
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx
I’m seeing a lot of what looks like “go away in May” this earnings season. At least that’s the only sense I can make of it.
Peace,
Dana
Excellent numbers.
Drop appears to be related to Amazon Payments rumors.
https://www.bloomberg.com/news/articles/2018-05-02/payments-…
Square continues to execute at the highest level.
I thought it was a pretty so-so report from Square at first, except for adjusted revenue rising 51% which is a continued acceleration, and Sub and Service revenue up 98%, which is still barreling along, but I was disappointed in their large GAAP loss and their adjusted earnings which were positive, but up only a penny from the year before.
But then I looked at their 2018 guidance for adjusted revenue growth and saw they raised it from 34% growth to 44% growth, which I thought was a pretty impressive guidance raise.
And they raised their GAAP net income up to breakeven at the high end (which I assume they plan to beat). That would bring their annual totals year by year to:
($211 million)
($123 million)
($63 million)
($00 million)
That’s a pretty impressive sequence.
Their adjusted earnings guidance makes a pretty impressive sequence too (also using the high end of their guidance, which will rise as the year goes on):
-39 cents
+04 cents
+27 cents
+48 cents
And their high end Subscription and Service revenue, if it keeps going at 98% will look something like this:
$58 million
$139 million
$253 million
$501 million
I ended up feeling considerably better about them.
Saul
I completely agree Saul - I really liked the overall report and the way business is pointing.
Ant
Operating expenses: Adjusted operating expenses were up 49% year over year, accounting for 72% of Adjusted Revenue in the fourth quarter of 2017.
Matt, have you considered that part of that increase may be due to the expense (legal, accounting, etc) of setting up two acquisitions? In which case that part would disappear in a quarter or two.
Saul
Square lost more money and guided margins down. Prior guidance was 19% for 2018 and they guided down to 17.3%.
Some kinda wow, sure.
Square lost more money and guided margins down. Prior guidance was 19% for 2018 and they guided down to 17.3%.
Some kinda wow, sure.
Najdorf, isn’t it a good thing that they’ve found new markets to get into – to the extent that they’re willing to invest more capital than they’d planned to make sure they capture the opportunity? It’s not like margins are compacting because they’re having trouble growing the top line – it keeps accelerating because they keep creating new things people want to buy.
I am delighted to see them go after all the potential markets they can. Because of the customers they attract, their optionality is through the roof, and I think they’re really making the most of it.
What are your concerns, exactly?
Bear
What are your concerns, exactly?
Bear.
Naj is a doom merchant and a glorified pessimist. All his posts for whatever reason on this board are just to knock the stocks down without much reasoning with the future in mind. Would be interested to see his holdings and his reply to your question.
Naj is a doom merchant and a glorified pessimist.
Not that he needs any assistance from me, but you really have no idea, do you?
Naj is a doom merchant and a glorified pessimist. All his posts for whatever reason on this board are just to knock the stocks down without much reasoning with the future in mind. Would be interested to see his holdings and his reply to your question.
Got it. Thanks branmin. I’ll be sure to ignore him unless he offers more thoughtful posts, with more “reasoning with the future in mind” (I like the way you put that). And I suggest others do likewise, ignoring not just this poster, but any posts which offer no substance. We’re too busy finding great companies that will outperform the market. I ALWAYS have time for thoughtful, reasoned, dissenting opinions – in fact, I encourage them! But those who post statements or opinions without offering their reasoning should be ignored.
Bear
I’ll be sure to ignore him unless he offers more thoughtful posts, with more "reasoning with the future in mind
I agree that it would be more helpful if he could contribute more than just the ‘doom and gloom’. But His post got you to articulate specifically why SQ guarding margins down isn’t an issue for you. I think there’s value in that.
Beware the echo chamber.
Beware the echo chamber.
You make a good point and I see both sides of the argument. Short quips, however, don’t generally bring a lot of insight. Sure, we got to understand Bear’s line of thinking as he provided some reasoning and a synopsis to counter the quip. But all we get from the other poster is a short quip. We really don’t ever get to see or understand the bear thesis with one line. I hope we all consider the bear thesis on our own when making investment decisions, but I definitely want to hear it from someone else. The same as I want to hear their bull opinion.
I think that is all we are hoping for. Give us more than one line.
A.J.
Najdorf, isn’t it a good thing that they’ve found new markets to get into – to the extent that they’re willing to invest more capital than they’d planned to make sure they capture the opportunity? It’s not like margins are compacting because they’re having trouble growing the top line – it keeps accelerating because they keep creating new things people want to buy.
Bear:
One concern that we have discussed on the NPI is that SQ originally was supposed to be some amazing payment processing technology that the world would embrace for its ease and seamless transactions.
That business, were it to have played out that way, would have high margins for sure.
But what we have seen is that Square is creating its own customers, who then use its transactions services…creating various businesses that then are captive to its own fees. Caviar was exactly that IMO…so is Zesty.
The Weebly purchase smells of the same dynamic…create a marketplace that then uses Square’s payment transactions.
So the point is that Square has morphed into something else by virtue of having to be both customer and seller. That revelation does create concern when one contemplates the control that AMZN has with its planned transaction services…it certainly doesn’t need Square…and its ecosystem is built out like none other and is truly massive.
Doesn’t mean that Square can’t make money at the edges but Square does seem to need to create its own customers…thus likely driving down margins.
The business has become somewhat confusing with their purchases and startup side business. Just what exactly is Square now??? A delivery service?? A bank? A transaction company?? A marketplace like Shopify?? An alternative currency service??
Hopefully you get the drift and the potential negative impact to margins.
I thought this was an excellent quarter for SQ. The increased revenue guidance without an increase in profitability would have bothered me in the past, because I want to see improving profitability.
However, SQ, Shopify, etc, are different business models.
A traditional business would increase revenue, thus increase cash flow/profitability, and then spend more capital on expansion and repeat.
SQ (and I think Shopify), increase revenue, thus have more cash available, and spend the money for expansion by increasing Sales and Marketing, R@D, etc. The point is they increase expenses to expand so we don’t see the increase in cash flow like “traditional” business models. Thus the worse margins.
And they don’t have to pay taxes (like Amazon).
I think Square and Shopify are going after the same market, business services, taking care of all “omni channel” services. They are just coming at it from different strengths.
Jim
Also, if you saw the MA/V earnings reports, one of the CEOs [MA?] said they are cooperating with the other to have a single payment button on phones that you can load either processor’s credit cards on for payment.
I like SQ and if it returns to a reasonable price [for their growth] I’ll own it again.
So the point is that Square has morphed into something else…Square does seem to need to create its own customers…thus likely driving down margins.
But Duma, these aren’t game changing acquisitions. They’re not doing what SNCR did and buying a company that’s practically larger than they are! They are a $20 billion dollar company and they paid just a few hundred million for Weebly. It’s whatevs. Basically about one quarter’s revenue. Don’t sweat it.
Sure, Square started by allowing small businesses to take payments easier. But then they added a killer app, so to speak, when they realized they could offer these businesses extremely profitable short term loans…and software the businesses can use…and now websites. What’s wrong with any of that? These all seem like great, high margin offerings. Gross margin on their subscriptions revenue are pushing 70%.
What’s so bad about creating your own customers? It seems like they are creating an ecosystem that is valuable and in high demand.
Bear
That business, were it to have played out that way, would have high margins for sure.
Duma, have to disagree with you there. Payment processing is largely a commoditized service, with lower margins. It’s the other services SQ offers, that have the potential for higher margins.
That revelation does create concern when one contemplates the control that AMZN has with its planned transaction services…it certainly doesn’t need Square…and its ecosystem is built out like none other and is truly massive.
I’m not too worried about Amazon. For starters, how many retailers will really want to give that type of data over to the “Death Star”. I’m guessing not too many?
https://www.fool.com/investing/2017/11/23/the-biggest-obstac…
It might gain some traction with restaurant customers which kinda makes sense that TGI Fridays was one of their first larger customers: https://www.fool.com/investing/2017/07/27/amazon-payments-wa…
But I think SQ’s ecosystem will prove to be more attractive to most restaurants. That’s just a guess, could be wrong, and I feel like I got both bets covered by owning Amazon too 
Matt
Long AMZN, SQ
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx
Also, if you saw the MA/V earnings reports, one of the CEOs [MA?] said they are cooperating with the other to have a single payment button on phones that you can load either processor’s credit cards on for payment.
NajdorfSicilian,
They both said it and it will be a collaborative effort that will include Amex, Discover, MA, and V. But retailers will still need an online payment processing service, this will just add a convenient button for consumers to use when they check out. If this hurts anyone, it will be PayPal, not SQ. PayPal has found a huge amount of traction with its One Touch solution over the past year and a half. The quick and painless checkout button works wonderfully well and has a sales conversion rate almost twice that of the competition when it comes to online sales: https://www.fool.com/investing/2017/11/04/paypal-is-the-obvi…
That being said, it will be a year before the standards are agreed to and this product can be rolled out in a big way (that’s according to MA CEO Ajay Banga, I thought 1 year was a bit optimistic). Personally, I think there will still be plenty of room for PayPal, but it does make me want to add to MA/V before PayPal at this point. But I think Square will be almost wholly unaffected by this. JMHO.
Matt
Long MA, PYPL, SQ
MasterCard (MA), PayPal (PYPL), Skechers (SKX) and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx