Square's Profit Projections Miss Estimates, Expenses Climb

(Bloomberg) -- Square Inc. projected profit in the current quarter that fell short of analysts estimates on higher spending for its expansion beyond payments processing.

Earnings, excluding some items, will be 9 cents to 11 cents per share in the second quarter, San Francisco-based Square said Wednesday in a statement. Analysts estimated 12 cents per share. Operating expenses gained 47 percent to $276 million in the first quarter.

While reporting first-quarter sales and profit that topped analysts' estimates, Square's shares declined as much as 7.5 percent in extended trading, suggesting investors have set a high bar for the company. The stock has rallied more than 40 percent this year, closing at $48.66 in New York, on the view that Square has matured from a credit-card processor for street vendors to a one-stop shop tying together hardware and software needs for larger merchants with multiple stores.

Ancillary products such as loans, food delivery, instant deposits, accounting, and inventory tracking are contributing to a growing share of revenue. Square agreed to buy website builder Weebly last month for $365 million in its biggest acquisition yet, giving the company another recurring revenue stream and base of new customers. The deal will help Square “become more deeply embedded in the blurring lines between physical, e-commerce, and mobile apps,” Josh Beck, an analyst at Keybanc Capital Markets Inc., wrote in a note to investors.

The company's first-quarter expenses grew the most in product development and sales and marketing, as the company invested in services like the Square Cash app, which lets people transfer money to friends and family.

“We see an ability to keep re-investing for growth,” Chief Financial Officer Sarah Friar said. “Sales and marketing is growing because we are re-investing in our sellers.”

Square reported that adjusted revenue rose 51 percent to $307 million in the quarter, compared with analysts average estimate of $293.7 million. It was the 10th consecutive quarter that Square topped analysts' sales projections. The company processed $17.8 billion in gross payment volume, an increase of 31 percent from a year earlier.

Chief Executive Officer Jack Dorsey, who also runs Twitter Inc., has pushed the company deeper into financial services. It has rolled out Bitcoin trading for almost all users of its cash payments app. The company said adjusted revenue from Bitcoin was $200,000 in the quarter. Square also offers a debit card to consumers that draws on funds from the cash app.

Adjusted earnings before interest, tax depreciation and amortization were $36 million in the first quarter, compared with analysts' average estimate $33.9 million.

To contact the reporter on this story: Selina Wang in San Francisco at swang533@bloomberg.net.

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Andrew Pollack, Alistair Barr

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