A Sixth Quarter of Accelerating Revenue for Square

After soaring for much of 2018, investors had high expectations going into Square's (SQ 5.04%) third-quarter financial report. The stock had jumped as much as 185% earlier this year, before giving back some of those gains during the recent market uncertainty. Investors were looking for indications that the company's breakneck run could continue.

Square reported adjusted revenue of $431 million, up 68% year over year. This exceeded analysts' consensus estimates of $413.9 million, while also surpassing the high end of management's forecast, which topped out at $412 million. It also marked the sixth consecutive quarter of accelerating revenue growth. The company reported adjusted earnings per share of $0.13, better than the $0.11 expected by analysts.

Image source: Square.

An all-around stellar quarter

Data source: Square third-quarter financial report. GAAP = generally accepted accounting principles.

Excluding Square's recent acquisitions of Weebly and Zesty, total net revenue grew 46% year over year, while adjusted revenue climbed 56%. Subscription and services-based revenue also contributed; they grew to $166 million, up 155% compared to the prior-year quarter, and up 117% excluding the acquisitions. Much of the growth was driven by the company's fast-growing ancillary businesses, including Instant Deposit, Cash Card, Caviar, and Square Capital.

Square produced its first quarterly profit of $20 million, compared to a loss of $16 million in the prior-year quarter. It's important to note that this was the result of the company's stake in Eventbrite (EB 1.70%). The ticketing company soared 60% on its initial public offering in September, raising the value of Square's investment, which helped to boost its bottom line.

Gross profit also improved, up 50% year over year; it increased not only on an absolute basis, but also as a percentage of revenue, climbing from 37% to 40% of net revenue. The strong revenue growth was partially the result of increased payment processing. Gross payment volume (GPV) topped $22.5 billion, up 29% year over year.

Expenses continued to grow at a faster rate than revenue. Total operating expenses increased 55% year over year, with the bulk of the spending going to product development and sales and marketing, which increased 64% and 75% year over year, respectively. This isn't unusual or unexpected in a company squarely in growth mode (pun intended), and will likely continue for some time as Square continues to chase market share.

A look ahead

Based on the strength of the company's results this year, Square has increased its full-year guidance, as it has done in each quarter of 2018:

Data source: Square financial reports.

For the upcoming fourth quarter, Square is forecasting adjusted revenue in a range of $446 million to $451 million, an increase of 58% at the midpoint of its guidance. The company is guiding for adjusted earnings of between $0.12 and $0.13 per share.

To put this into perspective of the broader expectations of Wall Street, analysts' consensus estimates are calling for adjusted revenue of $442.4 million, and adjusted earnings per share of $0.15.

Even after an expectation-beating quarter, it appears investors fixated on Square's profitability forecast. But with a company that's growing as quickly as this, investors should take a step back and look at the big picture. Square is steadfastly focusing on its growth and foregoing profit over the short term, thereby reducing the amount of time until it produces meaningful profitability. That's exactly what I want as a shareholder. Investors should ignore the market noise, and look to the long runway ahead for Square.