Company Overview: Square, Inc. (Square) is a commerce ecosystem. The Company enables its sellers start, run and grow their businesses. It combines software with hardware to enable sellers to turn mobile devices and computing devices into payments and point-of-sale solutions. Once a seller downloads the Square Point of Sale mobile application, they can take their first payment. With its offering, a seller can accept payments in person via magnetic stripe (a swipe), Europay, MasterCard, and Visa (EMV) (a dip), or Near Field Communication (NFC) (a tap); or online via Square Invoices, Square Virtual Terminal, or the seller's Website. Once on its system, sellers gain access to technology and features, such as reporting and analytics, next-day settlements, digital receipts, payment dispute management and chargeback protection, and Payment Card Industry (PCI) compliance. On the consumer (buyer) side, Square Cash offers individuals access to a way to send and receive money.


SQ Details
 
Square Inc (NYSE: SQ), is a fintech company that is gathering attention lately as it offers solutions for payments through mobile, develops software for point of sale that is used for providing digital receipts, and helps in merchant services aggregation while managing sales & inventory that are used for analysis and getting relevant feedback. Square had reported a fourth quarter top-line figure for 2018 beating the market expectations with adjusted net revenues finding support from growth in subscription & services revenues. Then, Cash App is also appearing to be a meaningful growth driver. The adjusted EBITDA margin and EPS were at decent levels while the company aims to adopt a conservative approach given its guidance for 2019. Product pipeline and growth opportunities are expected to frame a medium to long-term profile while volatility and integration risks may prevail. The group is yet to report operating margins and full year return on equity in the positive zone; however, the improvement so far has been encouraging and is expected to be on track in the next 2-3 years.
 

Product Launches (Source: Company Reports)
 
Better than expected results for the fourth quarter of FY 18: Square Inc for the fourth quarter of 2018 has posted stronger than expected results, while for the first quarter 2019, the company has provided lower than expected guidance. The company has delivered the net loss of $28 million for the fourth quarter, which comprised of the loss incurred during the quarter on the back of mark-to-market valuation of the company’s strategic investment in Eventbrite. This is compared to a net loss of $16 million reported by the company in the fourth quarter of 2017. Excluding the impact of Eventbrite (which is a loss of $17 million), the company has reported the net loss of $12 million. Meanwhile, SQ has reported strong growth of 97% in the adjusted EBITDA to $81 million for the fourth quarter on year-over-year basis. For the full year of 2018, the company has delivered the adjusted EBITDA of $257 million, versus $139 million posted for the full year of 2017, which reflects the growth of 85% year over year. The company had ended the fourth quarter of 2018 with cash & cash equivalents of $1.6 billion. SQ in the fourth quarter of FY 18 has reported the adjusted income per share of 14 cents, that represents a $0.06 improvement on year on year basis. This has beaten the market expectation for the adjusted income per share of 13 cents. The company for the fourth quarter of FY 18, had delivered the adjusted revenue growth of 64 percent to $464, which has also beaten the street expectation for revenue of $454 million. For FY 18, the company has reported 53 percent growth in the adjusted revenue year over year excluding acquisitions of Weebly and Zesty, which declined from 56 percent in the third quarter. The market expectation was although for a 60 percent growth in the revenue year over year; however, the result was still not very adverse. The company has achieved positive Adjusted Revenue retention across the company’s seller base, which reflects that the existing sellers can grow in the Square ecosystem.


Key Ratios (Source: Company Reports and Thomson Reuters)

Growth in Gross Payment Volume: Moreover, for the fourth quarter of FY 18, the company has posted 28% increase in gross payment volume (GPV) to $23.0 billion year over year. For the full year of 2018, GPV grew 30% to $84.7 billion, from the full year of 2017.  During the fourth quarter of FY 18, larger sellers formed 51% of overall gross payment volume (GPV), which has increased from 47% in the fourth quarter of 2017. Additionally, during the fourth quarter of 2018, the company has reported 27% growth in the transaction-based revenue to $668 million year over year, and has delivered 29% growth in the transaction-based profit to $247 million year over year. The company’s subscription and services-based revenue grew 144% to $194 million during the fourth quarter of 2018 year over year. During the fourth quarter of FY 18, the company has posted this growth on the back of Instant Deposit, Caviar, Cash Card and Square Capital. In the fourth quarter of 2018, the company has given approximately 72,000 business loans of total value of $472 million, which is a rise of 55% on year on year basis. For the fourth quarter of 2018, the company has delivered 51% rise in the Hardware revenue to $18 million year over year, on the back of Square Terminal, that had started the shipment in November 2018, also due to Square Register and third-party peripherals. For the full year of 2018, the company has reported 65% rise in the hardware revenue to $69 million versus the full year of 2017. In addition, the company’s peer-to-peer Cash App that has posted more than 15 million monthly active customers in December 2018, doubled from a year earlier.


Fourth Quarter Financial Highlights (Source: Company Reports)

Rise In Major Operating Expenses During the Fourth Quarter of FY 18: For the fourth quarter of 2018, SQ  has reported 52% rise in the non-GAAP operating expenses to $304 million. The Product development expenses grew 50%  to $88 million on a non-GAAP basis during the fourth quarter of 2018 on the back of the rise in the personnel costs related to the company’s engineering, data science, and design teams, along with Weebly. The sales and marketing expenses grew 57% to $112 million on a non-GAAP basis for the fourth quarter of 2018, year on year driven by the expenses related to the Cash App, personnel costs, and the rise in the expenditures related with advertising. The general and administrative expenses grew 51% to $80 million on a non-GAAP basis in the fourth quarter of 2018, year on year due to increase in personnel in finance, legal, and support departments. These expenses, however, appear to be providing support to company’s performance in the long run.

Bitcoin Trading: Square had launched the trading of bitcoin through its Cash App in January 2018, which has reported the revenue from the cryptocurrency of $52 million for the fourth quarter. This is an increase versus the revenue from the cryptocurrency of $43 million in the prior quarter. For the full year, the company has generated the revenue from the cryptocurrency of $167 million from the trading of bitcoin.

Capital Management: During the full year of 2018, Adjusted EBITDA, amount received due to the exercise of stock options, and buying of stock under the employee stock purchase plan have boosted the company’s cash balance. During the second quarter of 2018, the company’s cash balance rose due to the net amount received from the company’s offer of 2023 convertible senior notes of total value of $795 million. Further, during the second quarter of 2018, the company had completed the acquisition of Weebly, whose acquisition was partly funded of total amount of $106 million in cash (which is the net of cash acquired). The company experienced cash outflows due to the principal payments on some convertible notes. In the third quarter of 2018, few investors of the 2022 had converted the senior notes of $70 million (principal amount). The company then had settled this amount in cash and had issued 2.2 million shares of the company’s Class A common stock through the balance amount. During the fourth quarter of 2018, the holders of the 2022 convertible senior notes converted $149 million of their notes. The company had settled this principal amount in cash and had issued 4.7 million shares of the Class A common stock with the balance. The company now plans to settle subsequent conversions entirely in shares of the company’s Class A common stock.

Key Appointment: SQ has appointed Amrita Ahuja as the company’s new chief financial officer in January. Amrita Ahuja was previously heading the same position at Blizzard Entertainment, which is a division of Blizzard. This is expected to provide a new dimension to the group’s growth strategy.

Future Outlook: For the first quarter of FY 19, adjusted earnings per share is expected to be in the range of 6 cents and 8 cents while the market was expecting adjusted earnings per share to be of 11 cents. For the first quarter of FY 19, SQ expects the adjusted revenue to be in the range of $472 million to $482 million, which is in line with the broader expectations. It is experienced that from a revenue perspective, the first quarter is seasonally slower quarter compared to the fourth quarter that has the holiday season, which ultimately affects the company’s profitability. The operating expenses are projected to rise in the first quarter as the company is making investments for growth. For FY 19, SQ projects the adjusted revenue to be in the range of $2.22 billion to $2.25 billion. At the midpoint, this projection represents 41% growth in the adjusted revenue on year-over-year basis. For the full-year 2019, the company expects the adjusted EBITDA to be in the range of $405 million to $415 million, which reflects the increase of 60% at the midpoint. For the full year 2019, the company will continue to focus on key aspects that are expected to strengthen the company’s omni-channel offerings.


Guidance (Source: Company Reports)

Stock Recommendation: SQ stock is trading at a price of $75.14, and has support at $50.71 level and resistance around $98. SQ has posted an expansion in its margin in each of the last five years and has been able to maintain momentum in the fourth quarter of FY 18. The short-term challenges with regards to volatility, expenses etc. do prevail and the guidance has also been conservative, the company is expected to benefit from catalysts including Cash App, and growing ecosystem entailing Cash Card, and Capital. International penetration through Weebly is also expected to provide long-term growth. The industry dynamics with transformation from cash to electronic payments are expected to support the trajectory. An expectation of consensus EPS of above $1 by FY21 can help the stock move up at least by single digit to low double digit (in terms of growth in %). Given the scenario, we have a “Buy” recommendation on SQ at the current market price of $ 75.14.

 
SQ Daily Chart (Source: Thomson Reuters)

 
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