Square Reports 2019 Q2 Earnings

Investment Analysis Clubs Saul’s Investing Discussions
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TL;DR Square announced strong Q2 numbers:

Revenue +44% YOY, Adj. rev. +46% YOY
Subscription rev. +87% YOY
GPV = $26.8b (+25%YOY)
54% of rev. from larger sellers
Adj. EBITDA +54% YOY
Cash app rev. = $260m ($125m from bitcoin)
Caviar sold for $410M to Doordash

Shares are currently down about 7% in AH trading. Why? Because SQ revised its net income loss per share for the full year. Why? 2 reasons…

  1. Guidance does not yet include impact from sale of Caviar. Acquisition is expected to be completed by the end of the year;

  2. SQ’s mark-to-market valuation of its investment in Eventbrite.

Raise your hand if your thesis for Square hinged on any of those two factors.

Here’s a look at some revenue and earnings 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		815		882		933
2019						959		1,170

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		385		431		464
2019						489		563

Adjusted EBITDA (millions)			Q1		Q2		Q3		Q4
2016								13		12		30
2017						27		36		34		41
2018						36		68		71		81
2019						62		105

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)		(0.01)		0.04		(0.07)
2019						(0.09)		(0.02)

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		0.13		0.13		0.14
2019						0.11		0.21

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		21.4		22.5		23.0
2019						22.6		26.8

Subscription and Services Rev (millions)	Q1		Q2		Q3		Q4
2016										 35		41
2017						49		59		 65		79
2018						97		134		166		194
2019						219		251

Adjusted Revenue Growth (millions)
2018 Q2 TTM Revenue = 1,232
2019 Q2 TTM Revenue = 1,947
YOY TTM Adj Revenue Growth =58%, previous quarter 62.7%
*Remember adjusted revenue is what you want to look at, not total net revenue

EPS Growth (GAAP - diluted)
2018 Q2 TTM Earnings = ($0.15)
2019 Q2 TTM Earnings = ($0.14)
YOY TTM EPS Growth = NA

EPS Growth (Adjusted)
2018 Q2 TTM Earnings = $0.34
2019 Q2 TTM Earnings = $0.59
YOY TTM EPS Growth = 74%, previous quarter 82%

Adjusted P/E (Check Current Price) = 75.44/0.59 = 128

Adjusted P/S ratio = ~16.4

Big news: Sells Caviar to DoorDash for $410M

August 2014: $SQ acquires food delivery service Caviar for $90M in stock.

August 2019: SQ sells Caviar to DoorDash for $410M in cash/preferred stock.

Not a bad return on investment and positions SQ as neutral platform for all food delivery services to participate equally on. Some might say SQ’s stock has appreciated considerably in that time, so not as good investment at first glance. But that ignores the value Caviar brought to SQ during those 5 years. Remember, 26% of SQ’s GPV comes from restaurants, how many of which are now part of SQ’s ecosystem b/c Caviar attracted them as a service in the first place? Plus young companies don’t have cash, they have stock. That’s just reality. Pre-IPO, should SQ have taken out a $90M loan to buy Caviar? Of course not! Issuing stock for a nice tuck-in acquisition like Caviar was definitely the way to go.

Finally, Caviar had outlived its usefulness to Square. When Square acquired Caviar, it was a nice feature it could use to attract restaurants to its payments ecosystem. And it obviously worked, with more than a quarter of all SQ’s GPV coming from food/drink verticals. But since that time 3rd party delivery services have exploded and restaurants need to be on all of them. This made Caviar much less useful within SQ’s ecosystem. SQ saw that it was more valuable for its customers to integrate all 3rd-party delivery apps into its payments ecosystem, not promote its own.

Other quick and dirty highlights:

  • Subscription and services-based revenue: $251M, +87% YOY
  • Square Capital: Loan volume 78K business loans for $528M, +36% YOY; average loan ~$6800. Since inception in May 2014, SQ Capital facilitated approximately 800,000 loans totaling more than $5 billion.
  • Instant Deposit: No figure given, listed as a primary driver of growth for subscription and services-based revenue.
  • Cash App revenue reached $260M, $135M excluding bitcoin. Cash App has been the number one free finance app in the U.S. App Store for the past two years, and is consistently top 20 free app.
  • Bitcoin contributed $125 million to revenue, $2M in gross profit, benefiting from increased volume as a result of the increase in the price of bitcoin. Bitcoin costs not counted in adjusted revenue numbers.
  • Cash Card: In June, approximately 3.5 million customers used Cash Card, typically for everyday purchases at food and grocery, mainstream retailers, and gas and transportation. Cash Boost, the Cash Card’s rewards program, called out for increasing adoption and usage of Cash Card.
  • Operating expenses: Non-GAAP operating expenses were $467M, +47% YOY
  • Cash/cash equivalents: $1.7B, +80M from previous quarter.

Matt
Long SQ
Phoenix 1 Contributor
BlackLine (BL), MasterCard (MA), Ollie’s (OLLI), PayPal (PYPL), and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx

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Great summary Matt. Thanks for sharing.

Caviar has been a question mark in my head, I am glad to see them exiting it for nice upside.

Market reaction to SQ earnings / guidance obviously has been disappointing… i increased my holding upto 10% of my portfolio in SQ over last month… wondering if I should dial back just for time value of money as for whatever reason, market is not willing to give credit to SQ for a long time now… and a lot of cloud / SW stocks continue to get extra love!!

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Wow, SQ must really be out of investors favor with so little commentary even on this board

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Well,

Probably a counter indicator, but I added today.

Cheers
Qazulight

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Guidance does not yet include impact from sale of Caviar. Acquisition is expected to be completed by the end of the year.

Hi Matt,
Actually it sounds like they have reduced revenue guidance to take into account that Caviar will no longer be there. Here’s a Q&A paraphrased by me.

Q - As we’ve become accustomed to seeing, you did beat the high end of the revenue guidance for the quarter. Now typically, that’s been accompanied by a raise in your annual revenue guidance. We did not see that this quarter, so I just wanted to get an understanding of why you decided to not raise the full year revenue guidance despite another very strong quarterly performance.

A - I’d urge you to remember that we just announced the coming sale of Caviar [which will reduce some revenue]. We will update you after the closing of this transaction, which we’d expect to happen later this year, with respect to guidance for the rest of the year. Also remember, we raised guidance last quarter by $30 million, which was obviously more than the beat that we had last quarter.

Saul

PS - I added to my small Square position (added about 80% more shares actually) at about $68.90 average. It had been my smallest at about 2.5% last Friday, and it’s now still small, but a 3.65% position in spite of the fall. Part of my reasoning was that everyone got all excited again about a “lack of increase in guidance,” which I felt was explained by that one line in the conference call. Also I agreed with the sale of Caviar, which was a hands-on low margin, delivery service, which they now longer need to sell their platform to restaurants as someone else will be handling it. Brilliant divesture. But look, my timing is wrong at least half the time, so don’t buy because I did.
Saul

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And thanks Matt for an excellent summary. I liked the way you summarized the Caviar sale especially. Appreciate the effort it took to put all that together.
Saul

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PS - I added to my small Square position (added about 80% more shares actually) at about $68.90 average. It had been my smallest at about 2.5% last Friday, and it’s now still small, but a 3.65% position in spite of the fall. Part of my reasoning was that everyone got all excited again about a “lack of increase in guidance,” which I felt was explained by that one line in the conference call. Also I agreed with the sale of Caviar, which was a hands-on low margin, delivery service, which they now longer need to sell their platform to restaurants as someone else will be handling it. Brilliant divesture. But look, my timing is wrong at least half the time, so don’t buy because I did.

Hi Saul,

Did it concern you that they mentioned Caviar was actually the largest segment within their Merchant and Subscription Solutions? I noticed it dropped quite a bit this quarter (87% growth off the top of my head) and therefore did not increase the total amount of Subscription Solutions as % of total Adj Revenue. (Approximately 44% of total revs). I know that segment is the high margin stuff that we want to see continuously increasing as a portion of total revenue. Perhaps that explains the drop in addition to the guidance remaining flat. (I think the CFO mentioned they would update again once the sale closes sometime in Q3).

best,
Matt

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Actually it sounds like they have reduced revenue guidance to take into account that Caviar will no longer be there. Here’s a Q&A paraphrased by me.

Saul, I am pretty sure that is just management acknowledging guidance will have to be adjusted. This is from page 9 of the shareholder letter:

Our third quarter and full-year 2019 guidance does not include the impact from the sale of Caviar. We will update guidance after the completion of the transaction, which is subject to certain closing conditions, including regulatory approvals. We expect the transaction to close in 2019. This transaction will allow for increased focus on and investment in our seller and Cash App ecosystems.

Essentially, SQ did not change full-year guidance b/c they are not sure yet on the timing of the sale.

Matt
Long SQ
Phoenix 1 Contributor
BlackLine (BL), MasterCard (MA), Ollie’s (OLLI), PayPal (PYPL), and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx

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Matt,

Caviar is the 2nd-largest component of SQ’s subscription and services-based revenue. It also has the lowest margins, meaning that once it is sold, the margins will only go up in this category. From the conf call:

But just to give you a little bit of boundaries as you kind of model the business, from a revenue scale perspective, Caviar is the second largest component of our subscription and services revenue stream where we did $251 million in revenue in the second quarter. We’ve now disclosed Q revenues for Cash App, which was the number one driver of our subscription and services revenue stream; Capital is the third. So you can kind of benchmark within there backing into a figure within range for Caviar.

From a margin perspective, as a delivery platform Caviar has lower gross margin profile than the remainder of our revenue streams related to subscription and services. There are ongoing costs associated with Caviar including fees for couriers and the revenue share with restaurants that have made it the largest component of subscription and services based costs.

From https://www.fool.com/earnings/call-transcripts/2019/08/02/sq…

The segment grew 87% despite lapping two acquisitions from last year and coming off a much larger base. It wasn’t going to keep growing by triple-digits forever. Yes, that growth will drop once it sells Caviar, but the margins will improve. I was good with that.

Matt
Long SQ
Phoenix 1 Contributor
BlackLine (BL), MasterCard (MA), Ollie’s (OLLI), PayPal (PYPL), and Square (SQ) Ticker Guide
See all my holdings at http://my.fool.com/profile/TMFCochrane/info.aspx

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Did it concern you that they mentioned Caviar was actually the largest segment within their Merchant and Subscription Solutions?

Hi Matt, I just figured a physical delivery system had to have low margins (and was there to help them line up restaurants, which they can now do without it).
Saul

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“But since that time 3rd party delivery services have exploded and restaurants need to be on all of them.”

I think getting rid of Cavier is beneficial since there seems to be a bloodbath by delivery services. Restaurants do not need to be on all of them; in fact delivery services are now lowering their fees in order to obtain exclusive arrangements with a restaurant. These new exclusivity arrangements also come with other costs to the delivery service. An additional negative is the push back by retailers on the percent taken by the delivery services. Consolidation is happening and whether the last ones standing will be profitable is yet to be determined.

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