Square Made A 'Brave' Move By Raising Its Guidance

Square Inc SQ reported strong 1Q results and raised its guidance. JPMorgan’s Tien-tsin Huang maintained an Overweight rating for the company, with a price target of $14. The analyst commented that Square was among the few companies in JPMorgan’s FinTech coverage to be “brave enough to raise guidance so early in the year.”

Square reported its adjusted revenue at $146M, up 64 percent and higher than the JPM estimate of $136M. The beat was driven by a 44 percent y/y increase in GPV, compared to the JPM estimate of 38 percent, as well as a 197 percent y/y increase in software and data revenue, versus the JPM estimate for 202 percent.

Square reported an adjusted EBITDA loss of $9M, but this was better than what had been anticipated.

Related Link: Wedbush Sees "Saturation Approaching" At Square, Downgrades to Underperform

Transaction Revenue Drivers Strong

Growth in GPV was driven by ~70 percent growth in large seller GPV. “Gross take rates declined 3bps from the prior year period to 2.92% (JPMe 2.84%) due to processing credits tied to new hardware sales and merchant mix,” analyst Tien-tsin Huang wrote.

Guidance Raised

Square raised its adjusted EBITDA guidance for 2016 by $2M to $8M - $14M., “implying a high single digit adjusted EBITDA margin in 2H16,” Huang said. Square also raised the mid-point of its FY16 adjusted revenue outlook by 2.5 percent to $615M - $635M, implying growth of 36-41 percent growth.

“Square cited challenging credit market conditions on the 3rd party investor side, which is consistent with recent commentary provided by other alternative lenders and likely explains the $12M sequential increase in its merchant cash advance receivable,” the JPMorgan report noted.

The analyst pointed out, however, that borrower demand and origination economics remained solid, and Square was able to add two new credit investors in April. Square is shifting from cash advances to loans, with the latter likely being more attractive to third party investors.