Despite beating top- and bottom-line analyst estimates, the Street was disappointed in Square's (SQ 2.05%) second-quarter update. This is because the digital payments and point-of-sale solutions company's third-quarter forecasts for revenue and adjusted earnings per share were below what analysts were looking for. The stock slipped 14% on Friday as investors digested the news.
Of course, there's more to the quarter than these metrics. This is why it's beneficial for investors to tune into the company's earnings call, where management expands on some of the key trends at the company.
Here are some key takeaways from Square's second-quarter earnings call, including insight into Cash App's momentum, how sellers are self-serving onto Square's platform, and the impressive return on investment the company is getting on its sales and marketing.
Cash App. Image source: Square.
Cash App has achieved significant scale
Driving Square's 46% adjusted top-line growth in its second quarter was its fast-growing subscription and services-based revenue. This revenue rose 87% year over year to $251 million.
One major catalyst for this segment was revenue from Square's Cash App, or the company's peer-to-peer payments app. In the company's earnings call, Square CEO Jack Dorsey explained what a spectacular catalyst Cash App has been.
"The Cash App ecosystem continues to exceed our expectations. In just three years, Cash App revenue grew from basically $0 to $135 million [in the second quarter alone], excluding bitcoin," he said.
Sellers are self-serving into Square's services
One way Square is able to consistently grow its business at high rates is because sellers can easily self-onboard into the company's platform. During the call, Dorsey said this is really benefiting the company when larger sellers, or sellers with sales of $125,000 or more, are signing up for services like Square for Restaurants and Square for Retail. For these two services, Dorsey said around 70% to 80% of these customers "are self-serving into the app and into the service."
During the earnings call, Dorsey expanded on why this is important:
[S]elf-service is important because it means ... we've built an intuitive interface where they don't need a call, where they don't need help, and they can just go right away. And if we can make larger sellers approach Square as smaller sellers do, who just go to the App Store and get it done, that's a really scalable model.
Square's sales and marketing are extremely effective
Finally, it's worth pointing out how effective Square's marketing has been, explaining why management's policy is to reinvest revenue outperformance back into the business to capitalize on growth opportunities.
"We've seen payback period [on sales and marketing spend on Square's seller business] trend toward three quarters with continued positive revenue retention," said Square CFO Amrita Ahuja. "This results in a three to four times return on investment for a new seller cohort within three years of onboarding."
Though Square may have missed the mark when it comes to guidance, the company has some significant momentum across its business. With revenue and adjusted earnings per share soaring, and given management's strong execution, investors should think twice before they sell shares.
