May hasn't been kind to Jack Dorsey.
The tech entrepreneur can lay claim to a rare and impressive feat: running two of Silicon Valley's most intriguing companies. Unfortunately, both have disappointed investors in recent weeks. Shares of both Twitter and Square (SQ -4.25%) have plunged this month following disappointing earnings reports.
Shares of Square in particular fell more than 12% in after-hours trading on Thursday, following the release of the company's first-quarter earnings report. Square lost an adjusted $0.14 per share on total net revenue of $379 million. Analysts had expected the company to lose around $0.09 per share on revenue of about $343 million. That wider-than-expected loss may have contributed to the sell-off, but Square's business continues to grow rapidly, and the company raised its outlook for the full year.
Let's take a closer look at Square's earnings.
Double-digit growth continues
Every portion of Square's business experienced strong growth in the first quarter. Its gross payment volume, which reflects the amount of goods and services purchased using Square's readers, rose to $10.3 billion, up 45% on an annual basis. Adjusted revenue, which excludes transactions processed at Starbucks (the partnership between the two companies will end in the third quarter), came in at $146 million -- up 64% on an annual basis, and better than the $132 million to $137 million the company had anticipated. Square's adjusted EBITDA came in at a $9 million loss, better than last year's $20 million loss. Again this was at the high end of the $11-$9 million loss range Square provided in its earnings release.
The bulk of Square's revenue came from its payment processing. Square captured 2.92% of the payments it processed, good for $300 million (up 42% on an annual basis). Square's hardware revenue rose 634% on an annual basis to $16 million as its merchant partners upgraded to its recently released contactless reader. Software and product revenue rose 197% year over year to $24 million, led by Square Capital and Caviar.
Square said it was seeing continued improvements in its business, and consequently, management decided to raise its outlook for the year. Square now expects to generate adjusted revenue of $615 million to $635 million this year, with positive adjusted EBITDA of $8 million to $14 million. Both figures are up from its previous forecast. In February, Square said it would generate between $600 million and $620 million of adjusted revenue in 2016, and between $6 million and $12 million of adjusted EBITDA.
Operating costs surged during the quarter
Square isn't profitable, and while it believes it will post positive adjusted EBITDA this year, it's unlikely to be profitable under generally accepted accounting principles in the near future. Investors interested in the company are likely attracted to its rapid growth. Still, it will need to achieve profitability at some point in the future. The larger-than-expected loss may have been the primary driver of Square's Thursday sell-off.
Square's operating expenses totaled $207 million, up a massive 72% on an annual basis. About 54% of that was directly attributable to stock-based compensation. Product development costs and sales and marketing expenses rose 63% and 6%, respectively. But the biggest jump was general and administrative expenses, which rose an incredible 242% to $96 million. Square hired additional finance and legal staff on account of its now public company status, but it also accrued $50 million in legal fees related to a lawsuit.
Square remains volatile
The double-digit loss was certainly significant, though it's something longtime Square shareholders should be accustomed to at this point. Since its public market debut last year, Square stock has experienced significant swings in both directions. Before Thursday's decline, Square shares had risen more than 50% in the last three months.
Square's larger-than-expected loss was disappointing, but its fundamentals don't appear to have significantly changed. It remains a fast-growing, speculative company. If investors believe Square can continue to build its payment presence while enticing its sellers to buy into a growing ecosystem of ancillary products, it remains an attractive investment.