Square Q3 FY2021 Earnings Report Preview: What to Look for

Square Inc. (SQ) recently made a major step to expand in the booming installment loan market, focused on a new generation of younger customers, by announcing the $29 billion acquisition of Australian fintech company Afterpay. Installment loans, which allow customers to "buy now, pay later," have already been a key driver of Square's growth. Now, that growth is likely to accelerate as Afterpay is integrated into Square's popular Cash App ecosystem.

Investors will watch closely how installment loans are fueling, and will fuel, Square's growth when it reports financial results for Q3 FY 2021 after market close on Nov. 4. Analysts predict that the company will report modest adjusted earnings per share (EPS) growth on a year-over-year (YOY) basis compared with the past four quarters. Revenue is expected to rise at a healthy pace, but at the slowest rate in six quarters.

Investors will also be focused on Square's gross payment volume (GPV), a key metric that provides an overall picture of transaction volumes. It is Square's main gauge of the total dollar amount being transacted through its payment ecosystems. Analysts estimate that Square's GPV will grow at its second-fastest quarterly rate in at least four years.

Square stock has consistently outperformed the market over the past year, though its performance has been marked by steep advances and declines. Square shares spiked in February and April 2021, in both cases followed by sharp pullbacks. The stock reached its highest level in the past year early in August, following the company's Q2 FY 2021 earnings report. Since then, the stock has drifted downward. Square has now provided a 1-year trailing total return of 60.4%, well ahead of the S&P 500's total return of 39.9%.

Square Earnings History

In the 11 quarters leading up to the COVID-19 pandemic, Square posted dramatic adjusted EPS gains. During this time, the slowest pace of growth was 38.6% YOY in Q1 FY 2018. The company was hit hard during the early stages of the pandemic, posting an adjusted loss per share in Q1 FY 2020 and a YOY decline in Q2 of that year. Since then, Square's adjusted EPS has staged a sharp rebound in the four quarters through Q2 FY 2021, when adjusted EPS rose 263.8%. Now, analysts expect Square's adjusted EPS growth to slow dramatically to 9.2% YOY in Q3 FY 2021. That would be the slowest growth rate in at least 18 quarters.

Square has continued to post robust revenue gains in spite of the pandemic. Revenue growth hovered at or just below 50% YOY each quarter of FY 2019 before slowing slightly to 44.0% in Q1 FY 2020. Since that time, Square's revenue growth has accelerated dramatically. It more than doubled YOY in each of the last four quarters through Q2 FY 2021. Analysts expect Square's revenue to rise at a healthy 46.1% pace in Q3 2021, but at a significantly slower than previous quarters.

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The Key Metric

As mentioned above, investors will also be focusing on Square's GPV, a key metric tracking the total dollar amount, net of refunds, of all card payments processed by sellers using the company's payments ecosystem. It includes peer-to-peer payments as well as transactions with merchants that use Square's mobile payments app. Square charges transaction fees on these gross payments and those fees constitute a major source of revenue. The transaction fees are generally calculated on a percentage of the total transaction amount processed. The greater the GPV, the more transaction-based revenue Square is able to generate.

GPV also provides an indication of how many users the company has on its platform. If Square can attract more users to its main payments ecosystem, then it will be able to direct more traffic to its other businesses, such as operations management software company Stitch Labs LLC and website building platform Weebly Inc. It will also be able to offer its digital payment services to customers of those businesses. Square's planned Afterpay purchase also would play a similar role in enhancing Square's ecosystem.

Square's GPV growth was on a slow decelerating trend prior to the pandemic, from the low 30s in FY 2017 to the high 20s by the end of FY 2018 and the mid-20s by the end of FY 2019. GPV growth dropped to 14.0% in Q1 FY 2020, and then a 14.9% decline in Q2 as the pandemic's impact widened. This trend reversed in Q3 and Q4 FY 2021, but at a slow pace. Then, growth accelerated dramatically in Q1 and Q2 FY 2021, with gross payments volume surging 87.8% in Q2. Analysts also expect strong growth in Q3 as GPV rises 40.1%. While that's slower than Q2, it still would be the second-highest GPV growth rate in at least 18 quarters for Q3 FY 2021.