Square Tops Sales Estimates on Growth of Bigger Merchants

Square Tops Sales Estimates on Growth of Bigger Merchants
By Selina Wang. Source: Bloomberg.

Square Inc., the electronic-payments company run by Twitter Inc. Chief Executive Officer Jack Dorsey, topped sales estimates for the fourth quarter, bolstered by larger merchants that are contributing an increasing share of Square’s payments volume. The shares climbed as much as 9 percent in extended trading.

Key Points

  • Fourth-quarter adjusted revenue rose 43 percent from a year earlier to $191.9 million, compared with analysts’ average estimate of $187.7 million.
  • Square forecast adjusted revenue of $190 million to $193 million in the current quarter, in line with analysts’ average estimate of $191 million.
  • The company projected full-year adjusted sales from $880 million to $900 million, in line with the average estimate of $895 million.
  • Square sees 2017 adjusted EBITDA of $100 million to $110 million.

The Big Picture

Square has steadily gained larger merchants on its platform by offering more services such as loans through Square Capital, food delivery through Caviar and tools for managing inventory and analyzing sales. Yet to win a greater share of the market for bigger customers, Square will face competition from more established rivals like PayPal Holdings Inc. and First Data Corp. Square’s shares have increased 45 percent during the past 12 months as the San Francisco-based company became profitable on a basis of adjusted earnings before interest, taxes, depreciation and amortization.

The Detail

  • The company reported a net loss of $15 million in the fourth quarter, or 4 cents a share. That compares to analysts’ average estimate of a loss of 9 cents a share.
  • Gross payment volume rose 34 percent to $13.7 billion.
  • Larger merchants, those handling more than $125,000 of annualized gross payments volume, contributed 42 percent of Square’s total GPV, an increase from 39 percent in the previous quarter.
  • Square Capital extended more than 40,000 business loans totaling $248 million in the quarter, an increase of 68 percent year over year.
  • Hardware revenue was $8.9 million, up 39 percent from a year earlier.

Street Views

  • Square “posted emphatic outperformance in each of the categories that matter to investors,” Mark Palmer, analyst at BTIG LLC, wrote in a note to investors. “It benefited from operating leverage, as well as growth in its higher-margin services.”
  • “We have noted the importance of Square’s Software and Data Products segment to the sustained growth of the company’s profitability,” Palmer wrote. “Businesses such as Square Capital, Caviar and Instant Deposit feature higher margins and their revenues are more recurring in nature than those of its core payments business.”

CFO Comments

  • “For the fourth quarter, products that were launched in 2014 now account for a quarter of adjusted revenue,” Chief Financial Officer Sarah Friar said in an interview. “That underscores the strength of the base that we’ve built.”
  • “We do expect operating expenses to become more efficient,” Friar said. “We don’t need to keep scaling at the same rate.”

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