Square's (SQ 0.03%) first-quarter earnings results came in above expectations, but management's outlook for the second quarter disappointed. CFO Amrita Ahuja said she expects Square's adjusted revenue in the second quarter to come in between $545 million and $555 million. Analysts were expecting about $556 million, on average.

The disappointing near-term outlook combined with a slight underperformance in gross payment volume during the first quarter led investors to punish the stock. That's not surprising, considering shares were practically priced for perfection.

But long-term investors shouldn't worry about Square's second-quarter outlook. The company actually raised its guidance for the full year, and it's showing promising growth from one of its most important ancillary products.

A shopper paying with a credit card at a Square Terminal

Image source: Square.

Short-term pain, long-term gain

The table below shows Square's second-quarter and full-year adjusted revenue outlook compared to the analysts' consensus.

Square Q2 Outlook

Analysts Q2 Estimate

Square FY Outlook

Analysts FY Estimate

$545 million-
$555 million

$556 million

$2.25 billion-
$2.28 billion

$2.26 billion

Data sources: Square, Yahoo! Finance.

While Square's second-quarter range comes in below analysts' expectations, the mid-point of the company's full-year outlook is now above expectations. Ahuja raised her guidance by $30 million for the full year, while the first quarter outperformed by just $7 million at the midpoint of the guidance provided in February. That suggests the factors that caused the outperformance in the first quarter will sustain higher revenue throughout the rest of the year.

Importantly, Square has historically outperformed its adjusted revenue guidance, including in each of the last eight quarters. The gap between guidance and outperformance has been narrowing, though, which is what may have scared investors when the outlook came in below expectations.

Despite raising the full-year adjusted revenue guidance, Ahuja didn't raise EBITDA guidance. "We plan to use our momentum in delivering growth at scale to reinvest back into the business as we execute on our long-term opportunities of omni-channel financial services and international," she said during Square's first-quarter earnings call. That strategy is consistent with how Square's former CFO, Sarah Friar, balanced investment and EBITDA growth. Investors shouldn't be concerned about lower EBITDA margin.

What's driving growth at Square?

Beyond Square's disappointing second-quarter outlook, investors expressed concern about Square's gross payment volume. GPV in the first quarter was $22.6 billion, but analysts were expecting $22.8 billion.

However, payment volume isn't the only thing driving revenue growth at Square. In her decision to raise guidance for the full year, Ahuja cited "outperformance in Cash App as well as continued strength across our seller business."

Cash App volume increased 2.5 times year over year. That number includes peer-to-peer payments as well as monetized Cash Card and Cash for Business transactions. Cash App's user base is growing at more than 100% year over year, and volume is increasing even faster as users become more engaged. Cash App volume isn't included in Square's gross payment volume.

While Cash App's engagement continues to grow, management isn't particularly concerned with monetization at this point. "The hard part is the engagement, and our team is nailing that," Ahuja said. "So as we launch more features, as we launch more services, as we grow daily utility, we believe monetization will follow."

The company's seller business appears healthy as well, and its ecosystem strategy is attracting higher-value customers. The company's focus on specific verticals and omnichannel retail have enabled it to grow payment volume from larger sellers (those generating over $500,000 in GPV per year) -- more than 50% year over year in the first quarter. That's nearly double its overall pace.

Continued improvements in the ecosystem will help Square attract more high-value customers with relatively high payment volume. Further, it gives the company more ways to monetize its merchants than through payments.

While Square's second-quarter outlook was disappointing, the long-term outlook for the company still looks good for investors.