Square Earnings: Why I'll Be Watching Guidance

The financial technology company is on a tear. But how will it fare in 2019?

Daniel Sparks
Daniel Sparks
Feb 20, 2019 at 6:51PM
Technology and Telecom

On Wednesday, financial technology company Square (NYSE:SQ) will report its fourth-quarter and full-year results. With six consecutive quarters of accelerating year-over-year revenue growth rates behind it, investor expectations are high. Will Square be able to live up to the Street's expectations for more strong growth?

While Square's fourth-quarter revenue growth and other key metrics such as adjusted revenue, gross payment volume, and transaction-based margins will be worth checking on, investors should also look to management's 2019 outlook. The stock has seen extraordinary momentum recently, rising 72% over the past 12 months. After such a sharp run-up, a pricier valuation makes the company's growth prospects a critical narrative for the stock.

An employee and customer interact with the two displays included with Square Register

Square Register. Image source: Square.

A wild run

It would be difficult to overstate the momentum Square has going for it. In the company's third quarter of 2018, revenue increased an impressive 51% year over year. This is a staggering acceleration from the 33% year-over-year revenue growth the company saw in its third quarter of 2017. Adjusted revenue, or total revenue less transaction-based costs, bitcoin costs, and the impact of deferred revenue related to purchase accounting, gained 68% year over year during the quarter -- an acceleration from 45% growth in the third quarter of 2017.

The company's robust performance has been helped both by strong growth in transaction-based revenue (revenue from transactions on the company's mobile and online payment platform) and accelerating growth in subscription and services-based revenue (revenue primarily from Instant Deposit, Caviar, and Square Capital). 

For Square's fourth quarter, the company expects more notable growth. Management guided for adjusted revenue between $446 million and $451 million. The midpoint of this guidance range implies 59% year-over-year growth.

Given the company's remarkable run recently, along with the stock's big increase, investors will look to Square's full-year guidance to see if the company can keep up a wild pace.

Expect a conservative forecast

So, what should investors expect from Square's full-year outlook when it reports its fourth-quarter results? If you're expecting management to guide for year-over-year revenue growth in line with the company's third-quarter growth, you're setting yourself up for disappointment.

Check out the latest Square earnings call transcript.

Even if management thinks it's possible to keep growing at similar rates as it has in recent quarters, the company will probably share a more moderate view with investors, giving the company a margin of error in its forecast. Not only will Square be up against tough comparisons in 2019, but it's also simply difficult to forecast revenue a full year out; so, it makes sense to model for a natural deceleration.

I'll be looking for Square to guide for adjusted 2019 revenue of approximately $2.15 billion, representing about 41% growth over the midpoint of management's latest outlook for full-year 2018 revenue.

Square will report its fourth-quarter results on Wednesday, Feb. 27, after the market closes.