Square Earnings Forecast Comes Up Short of High Expectations

(Bloomberg) -- Square Inc. gave an earnings forecast for the current quarter and year that fell short of analysts' high expectations, a rare miss for the company and a signal its spending on new products and growth are tempering profit.

The payment processor projected adjusted earnings per share of 8 cents to 10 cents in the current quarter, missing analysts' average estimate of 13 cents. For the full year, Square repeated its previous forecast of 42 cents to 46 cents, compared with analysts' average projection of 46 cents. The shares were little changed in extended trading after closing Wednesday at $66.86 in New York.

Square has seen its stock almost double this year, putting pressure on the company to outperform analysts' expectations even as it has been spending to confront increasing competition from the likes of PayPal Holdings Inc. Chief Financial Officer Sarah Friar said Square has been investing in e-commerce offerings, financial services and international expansion.

“We should be putting dollars back into the business,” Friar said. “We believe if we build remarkable products it will drive momentum on the top line.”

The company boosted its adjusted revenue forecast for the year to as much as $1.54 billion, from an earlier estimate of as much as $1.48 billion, according to a statement Wednesday. Sales in the second quarter rose 60 percent to $385.4 million, exceeding analyst' projections of $365.2 million. The company reported gross payments volume of $21.4 billion, up 30 percent from a year earlier.

An increasing amount of Square's revenue is coming from higher-margin services like loans, instant deposits, food delivery, and employee management software. Earlier this month Square announced a partnership with EBay Inc. that will let Square offer merchant loans of as much as to $100,000. The agreement gives Square visibility into the financial risk of millions of small EBay vendors, providing valuable leads on potential loan customers.

“We believe the steady evolution of Square's platform increases its ability to win larger merchants as payment customers, while opening the door to various consumer monetization and other business software opportunities,” Paul Condra, analyst at Credit Suisse, wrote in a note before the earnings were released.

Square also made its biggest-ever acquisition in April, buying website-builder Weebly for $365 million. The deal is a linchpin in Square's strategy to build its online and e-commerce offerings for small and medium-sized businesses.

In the second quarter, Square narrowed its loss to $5.9 million, or 1 cent a share, from $16 million, or 4 cents, a year earlier. Adjusted earnings were 13 cents a share compared with analysts' estimates of 11 cents.

Square has also been pushing into cryptocurrencies, a move Wall Street has seemed to endorse. Chief Executive Officer Jack Dorsey said the company would introduce Bitcoin trading to almost all users of Square cash, which allows people to transfer money to friends and family. New York granted Square a virtual-currency license in June, letting customers in the state buy and sell Bitcoin. The company said Bitcoin contributed to $37 million of total net revenue in the second quarter.

The move has fueled growth for the app, which had more than 7 million monthly active customers in December and recently surpassed PayPal's Venmo in the number of downloads, according to data insights company SensorTower. The company has also expanded its financial services products for consumers. A year ago Square rolled out a Visa prepaid card, called Cash Card, that allows customers to spend cash from their Cash app. Square said customers spent $250 million in June 2018, almost tripling spending333 since December 2017.

Still, Square has run into a few roadblocks in some of its other pushes into financial services. The company withdrew its applications with the Federal Deposit Insurance Corporation for a banking charter earlier this month, but said it plans to resubmit. The charter allows nonbank companies to operate retail and banking businesses, and it could save Square money by eliminating the need for a loan-origination partner.

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, Molly Schuetz

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