TL;DR: Square turns in excellent quarter, shares are down in AH trading. And that might not even be an irrational move for a market focused on the short-term. Square’s steep valuation is real. But for long-term minded investors any dip here should be welcomed. The long-term thesis is very intact IMHO.
Let’s take 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 669 815 882 933 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 Adjusted EBITDA (millions) Q1 Q2 Q3 Q4 2016 13 12 30 2017 27 36 34 41 2018 36 68 71 81 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) 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 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 Subscription and Services Rev (millions) Q1 Q2 Q3 Q4 2016 35 41 2017 49 59 65 79 2018 97 134 166 194
2018 Q4 Earnings:
Adjusted Revenue Growth (millions)
2017 Q4 TTM Revenue = $984
2018 Q4 TTM Revenue = $1,587
YOY TTM Adj Revenue Growth = 61.3%, previous quarter 57.4%
*Remember adjusted revenue is what you want to look at, not total net revenue, for Square
EPS Growth (GAAP - diluted)
2017 Q4 TTM Earnings = ($0.16)
2018 Q4 TTM Earnings = ($0.10)
YOY TTM EPS Growth = NA
EPS Growth (Adjusted)
2017 Q4 TTM Earnings = $0.27
2018 Q4 TTM Earnings = $0.46
YOY TTM EPS Growth = 70.4%, previous quarter 67%
Adjusted P/E (Check Current Price) = 79.32/0.46 = 172
Other quick and dirty highlights:
Subscription and services-based revenue: $194M, +144% YOY; excluding Weebly and Zesty acquisitions it was $168M, +112% YOY
Square Capital: Loan volume 72K business loans for $472M, +55% YOY
Transaction, loan, and advance losses were again below 0.1% (~$24M) reflecting investments in risk management.
Instant Deposit: No figure given this quarter, listed as a primary driver of growth for subscription and services-based revenue.
Caviar: No figure given this quarter, listed as a primary driver of growth for subscription and services-based revenue.
Cash App: 15M MAUs, +114% YOY
Cash Card: No figure given this quarter, listed as a primary driver of growth for subscription and services-based revenue.
Operating expenses: Non-GAAP operating expenses were $304M, up 52% YOY
Cash/cash equivalents: $1.6B, previous quarter $1.8B.
Quick takeaway: It’s all about the ecosystem. It’s not about neat little gimmicks, sleek hardware, easy-to-use software solutions for merchants – Square has all those things. But every launch of a new product, makes its payments ecosystem a little bit stickier, a bit more holistic. Just this quarter, Square…
• Released the Square Card, a free business debit card for Square’s merchants. It gives Square merchants instant access to their funds for free, so it might start to cannibalize SQ’s Instant Deposit rev. But that’s okay b/c SQ will earn interchange fees on the card use. Square Card helps sellers separate business and personal expenses, making it easier to assess their business’s health and track expenses for tax purposes. Merchants get 2.75% back on purchases when they use it at other SQ vendors, so they will be incentivized to use it and seek out SQ merchants. This will help push SQ transactions higher, possibly giving transaction revenues a little boost.
• Released an in-app payments SDK (software developer kit). With this, sellers can use Square for in-person, online, and in-app payments, completing the circle (so to speak). SQ is considerably behind PayPal and Stripe in this space, but it’s good to see them add this capability. Better late than never.
• Launched a mobile app and employee benefits for Square Payroll, a full-service solution for small businesses. W/mobile app, employers can easily integrate Payroll with SQ to manage OT calculations and tax filings. Employees “can view their pay stubs, clock in and out of shifts, and manage their preferences, such as whether they’d like to be paid via Cash App.” Payroll has proven to be valuable customer acquisition tool for SQ: 1/3rd of SQ Payroll sellers that joined in 2018 were new to Square.
When I reviewed Shopify’s quarter, I said, “I think of Shopify as the Square of the internet. Or maybe Square is the Shopify of brick-and-mortar? Both companies, though, release innovative products that solve pain points for small merchants at a fairly brisk pace. It’s hard to keep up with them at times.” Still holds true.
Why are these two of my favorite companies right now? High switching costs is a very real economic moat: https://www.fool.com/knowledge-center/economic-moat.aspx
Think of Oracle, back in the day. When a company stored its heart and soul on an Oracle database, they never tore it out. Think another vendor could come along, offer a slightly better DB at a slightly cheaper price, and a company would rip out its Oracle servers for the new and improved and cheaper ones? No way! Those companies are still on Oracle databases to this day. And Oracle raises its prices every year.
The switching costs for Square (and Shopify) are also real (though maybe not quite as high as Oracle’s in the pre-cloud days). The life blood of these aspiring entrepreneurs and small businesses are on Square’s ecosystem. They will grow and add employees using Square for business loans, payroll needs, industry-specific point-of-sale solutions, scheduling solutions, etc. As they grow, Square will grow with them. The next Starbucks or Chipotle or Shake Shack could be a Square seller right now.
Tomorrow shares for Square could very well be down. Next quarter they could be down. Next year they could be down. When valuation is steep, stock prices can be volatile. But Square is growing like wildfire and the merchants on-boarding to Square’s ecosystem will not be easily displaced.
I will be back with more thoughts after reading through the conference call.
Long SHOP, SQ
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MasterCard (MA), PayPal (PYPL), and Square (SQ) Ticker Guide
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