Square Earnings: What Happened

SQ gross payment volume narrowly missed expectations

Key Takeaways

  • Adjusted EPS was $0.32 vs. the $0.25 analysts expected.
  • Revenue narrowly missed analyst expectations.
  • Gross payment volume was slightly lower than the level expected by analysts.
  • Cash App had more than 36 million monthly transacting active customers at the end of December.

What Happened

Square reported adjusted EPS for Q4 FY 2020 that beat analyst expectations. Both revenue and gross payment volume narrowly missed analyst forecasts. All three financial metrics were higher compared to the same three-month period a year ago.

The Cash App ecosystem added 12 million customers compared to the end of FY 2019, bringing the total to 36 million. Square sees significant investment opportunities focused on customer acquisition and product innovation.

(Below is Investopedia's original earnings preview, published February 22, 2021.)

What to Look For

Square Inc. (SQ), the fast-growing fintech company, has seen the popularity of its Cash App soar amid the COVID-19 pandemic. Digital payment technologies have been some of the clear winners during the pandemic, making it easier for people and businesses to continue sending and receiving payments amid government lockdowns and shelter-in-place measures. Square's payments ecosystem and revenue growth are benefiting from this accelerating shift to online commerce.

Investors will be focused on whether these trends are continuing to booost Square's top and bottom lines when it reports earnings on February 23, 2021 for Q4 FY 2020. The results may be mixed. Analysts expect only a modest rise in adjusted earnings per share (EPS) on the company's fastest pace of revenue growth in at least 18 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 are forecasting GPV to rise, but at less than half the pace of the same quarter a year earlier, continuing a years-long deceleration trend.

Shares of Square have soared over the past year. The stock plunged further than the rest of the market during the pandemic-induced crash in early 2020, but rebounded at a much quicker pace. Since first beginning to outperform in early May 2020, the stock has dramatically widened its performance gap with the rest of the market. The ascent has been marked by several pullbacks, including a big one a month ago in January. But, just like the others, it was short lived and the stock climbed to new highs in February. Square shares have provided a total return of 224.5% over the past 12 months, well above the S&P 500's total return of 15.4%.

One Year Total Return for S&P 500 and Square
Source: TradingView.

The stock initially jumped after Square reported earnings that more than doubled analyst expectations in Q3 FY 2020. Adjusted EPS rose 29.9%, a significant improvement after posting an adjusted earnings decline in the second quarter and an adjusted loss in the first. Revenue rose 139.6%, the fastest pace in at least 17 quarters. Square said that its Seller and Cash App ecosystems benefited from the acceleration of contactless payments, digital wallets, and other trends.

In Q2 FY 2020, adjusted EPS fell 12.1% compared to the year-ago quarter. But that decline was still an improvement from the adjusted loss of $0.02 posted in the previous quarter, the first such loss in at least 15 quarters. Revenue rose 63.8% in Q2, continuing to accelerate from the first quarter. While payment transactions initially took a hit from the shock of the pandemic as government-imposed restrictions limited merchants' operations, the restrictions gradually eased throughout the quarter and both merchants and consumers adapted to the new environment. Square said its payment ecosystems were well-suited to its customers' needs in this evolving market.

Analysts expect overall improving performance in Q4 FY 2020. Adjusted EPS is expected to grow 9.4% compared to the same three-month period a year ago. That would be markedly slower than the same quarter a year ago and compared to the most recent Q3. Still, revenue is forecast to rise 142.5%, which would be the fastest pace in at least 18 quarters. For full-year FY 2020, expectations are more mixed. Analysts are forecasting adjusted EPS to fall 3.1%, which would mark the first decline in at least five years. But revenue is expected to rise 101.1%, which would be the fastest pace of growth in at least five years.

Square Key Metrics
  Estimate for Q4 2020 (FY) Q4 2019 (FY) Q4 2018 (FY)
Adjusted Earnings Per Share ($) 0.25 0.23 0.15
Revenue ($B) 3.2 1.3 0.9
Gross Payment Volume ($B) 32.1 28.6 23.0

Source: Visible Alpha

As mentioned above, investors will also be focused on Square's GPV, a key metric tracking the total dollar amount, net of refunds, of all card payments processed by sellers using the payments ecosystem. It includes Cash App activity related to peer-to-peer payments sent from a credit card and Cash for Business, the company's mobile payments app designed for businesses. Transaction fees charged to sellers using the payment ecosystem constitute a major source of Square's total revenue. The transaction fees are generally calculated based on a percentage of the total transaction amount processed. The greater the volume of payments, as tracked by GPV, the more transaction-based revenue Square is able to generate. While GPV is primarily a gauge of the total dollar amount of transactions, it also loosely tracks the number of users on Square's platform. The more users on the platform, the easier it is for Square to offer other services provided by some of its other businesses.

Square's GPV has grown considerably over the past four years. Following Square's IPO in November 2015, GPV more than doubled from FY 2016 to FY 2019. However, growth in GPV has consistently slowed each year, from a pace of 39.0% in FY 2016 to 25.5% in FY 2019. The deceleration trend has continued in FY 2020. GPV grew at a pace of 14.0% in the first quarter of FY 2020 before falling 14.9% in the second quarter as business transactions fell dramatically amid the pandemic and related lockdown measures. GPV rebounded in the third quarter, rising 12.4% from the same three-month period a year ago. Analysts are expecting Square's GPV to rise 12.0% in Q4 FY 2020 and just 5.8% for all of FY 2020, which would make for the slowest pace of growth in at least the past five years.

Article Sources
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  1. The Wall Street Journal. "Cash App’s Surge During Covid-19 Pandemic Fuels Square Stock."

  2. Square Inc. "Square to Announce Fourth Quarter and Full Year 2020 Results."

  3. Visible Alpha. "Financial Data."

  4. Yahoo! Finance. "Square, Inc. (SQ): Analysis."

  5. Square Inc. "Q3 2020 Shareholder Letter," Page 3.

  6. Square Inc. "Q2 2020 Shareholder Letter," Page 3.

  7. Square Inc. "Form 10-K for the fiscal year ended December 31, 2019," Page 46.

  8. Square Inc. "Form 10-K for the fiscal year ended December 31, 2019," Page 54.

  9. Square Inc. "Form 10-K for the fiscal year ended December 31, 2019," Page 51.

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