Square (SQ) Q1 Loss Narrower Than Expected, Revenues Beat

Square (NYSE:SQ) reported narrower-than-expected first-quarter 2017 loss with revenues beating the Zacks Consensus Estimate.

Adjusted loss came in at 3 cents per share compared with the Zacks Consensus Estimate of a loss of 17 cents per share. Revenues came in at $461.6 million, surpassing the consensus mark of $450.7 million.

The company’s shares were up 5% in after-hours trading. Year to date, Square has impressed investors with its share price surging 34% compared with the Zacks Internet - Software industry’s gain of 12.7%. An impressive track record of growth backed this rise.

Year over year, net loss narrowed significantly driven by strong top-line growth, ongoing operating leverage and improvements in transaction loss rates. Management sounded upbeat about the company’s capacity of consistent business growth through balancing investment and margin expansion.

In the quarter, Square ventured into the UK. It became the fifth market where Square services are now available after the U.S., Australia, Canada and Japan. We believe this is a sensible move on Square’s part as the market has a considerably high concentration of small and medium-sized businesses and thus offers significant growth opportunities.

Square continues to add Invoices sellers, reaping benefits from the integration of Invoices into the Square app. The company continues to expand its industry-specific solutions, thereby increasing the reach of sellers and enhancing sales. Square’s Caviar unveiled Caviar pickup, a restaurant pickup program that allows people to order ahead and skip the queue at restaurants.

The company developed a new, secure and easily updatable mode of entering PINs into the Square app on a mobile device, removing the need for costly hardware PIN pads and making card acceptance easier.

We believe that Square’s comprehensive commerce ecosystem, accelerated business growth and focus on integration, automation, and platform will drive growth going forward.

Square, Inc. PE Ratio (TTM)

Let’s delve deeper into the numbers.

Revenues

Net revenue was up 2.1% sequentially and 21.7% on a year-over-year basis. Revenues came well ahead of the company’s guided range of $440 million and $452 million.

Transaction-based revenues of $403.5 million grew 0.2% sequentially and 34.3% year over year. The year-over-year rise was driven by strengths in Square’s comprehensive commerce ecosystem and managed payment solutions.

Subscription and services based revenues of $49.1 million were up 21.1% on a sequential basis and a massive 106.2% on a year-over-year basis. The year-over-year increase was driven by continuous product line expansion and improvements in existing products. Significant contributions came from Caviar, Square Capital, and Instant Deposit.

Hardware revenues were $9 million, up 1.7% sequentially but down 44.3% year over year. The year-over-year decline was the result of fulfillment of the majority of the backlog of pre-orders for the company’s contactless and chip reader

Operating Results

Non-GAAP gross margin was 38%, up 61 basis points (bps) sequentially and 815 bps year over year. The year-over-year growth was driven by higher revenues and strong product mix.

Operating expenses of $180 million were up 4.1% from $173 million in the previous quarter and 19% from $151.2 million in the year-ago quarter.

The company reported non-GAAP operating loss of $4.6 million, wider than the previous quarter’s loss of $4 million but narrower than the year-ago quarter’s loss of $6.5 million.

Non GAAP net loss was $11.1 million compared with $10.7 million in the previous quarter and $39.9 million in the year-ago quarter. GAAP net loss was $15.1 million or loss of 4 cents per share compared with $15.2 million or loss of 4 cents per share in the previous quarter and $96.8 million or loss of 29 cents per share a year ago.

Balance Sheet and Cash Flow

At the end of the first quarter, cash and cash equivalents balance was $704.5 million compared with $452 million in the previous quarter. The company has long-term debt of $345.7 million.

Square generated $44 million in cash from operating activities and spent $25.4 million on capex.

Outlook

For the second quarter of 2017, Square expects net revenue between $532 million and $538 million. The Zacks Consensus Estimate is pegged at $531.8 million. Adjusted EBITDA is expected in the range of $25 million to $28 million. Adjusted EPS is expected between 3 cents and 5 cents. The Zacks Consensus Estimate is pegged at a loss of 7 cents.

Zacks Rank and Stocks to Consider

Square currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the broader technology sector include Alphabet Inc. (NASDAQ:GOOGL) , Monolithic Power Systems, Inc. (NASDAQ:MPWR) and Internap Corporation (NASDAQ:INAP) . While Alphabet sports a Zacks Rank #1 (Strong Buy), Monolithic Power and Internap carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term expected earnings per share growth rates for Alphabet, Internap and Monolithic Power are 16.7%, 3% and 17%, respectively.

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