Earnings Results: Square stock slumps as losses grow in preparation for expected coronavirus effects

Earnings Results

Payments processor falls to an adjusted loss as it prepares for merchants’ transaction and loan losses with reserves

Many Square merchants have been forced to temporary close their brick-and-mortar locations amid the pandemic.


Square

Square Inc. losses more than doubled in the first quarter as the payment processor filled reserve funds to deal with expected problems for its merchant customers stemming from the COVID-19 pandemic.

The company posted a net loss of $106 million, or 24 cents a share, compared with a loss of $38 million, or 9 cents a share, in the year-earlier period. Adjusted earnings per share fell to a loss of 2 cents from earnings of 11 cents last year, while analysts surveyed by FactSet were expecting adjusted earnings of 13 cents.

Square
SQ,
+2.11%

has been trying to equip its merchants with the tools they need to help generate more online sales now that the COVID-19 crisis has forced the temporary closure of many brick-and-mortar locations. The company said in its shareholder letter that earnings were “significantly affected by an increase in reserves for transaction and loan losses as a result of the anticipated impact from COVID-19 on losses in future periods.”

The company’s transaction and loan loss expenses amounted to $109 million in the first quarter of 2020, up from $77 million in the fourth quarter and $81 million in the prior March quarter.

Chief Financial Officer Amrita Ahuja said on a call with reporters that Square’s approach was to establish reserves that were four times larger than in the fourth quarter, which saw a more normal run rate of reserves. The company is seeing less than two times the rate of chargebacks relative to normal levels but anticipates it could see additional losses depending on the severity of the pandemic’s impact.

Square’s revenue for the quarter increased to $1.38 billion from $959 million, while analysts were expecting $1.29 billion. The company’s revenue consisted of $758 million from transactions, $296 million from subscriptions and services, and $21 million from hardware.

Gross payment volume, or GPV, totalled $25.7 billion for the quarter, up from $22.6 billion in the prior March quarter. The FactSet consensus was for $27.3 billion. The company generated 52% of its volume from sellers doing more than $125,000 in annualized GPV. That compares with 55% in the December quarter and 51% a year earlier.

Ahuja said on the media call that growth rates for existing sellers have been fairly consistent regardless of size, but that the company has seen more success bringing on larger merchants since the pandemic began. The new seller cohorts that Square has onboarded since mid-March are larger than those from earlier in terms of both volume and gross profit.

Ahuja disclosed that volume growth rates have improved since mid-April. “We recognize it’s still early and we continue to see daily volatility, but we’ve been encouraged by these recent trends,” she said on Square’s earnings call.

Square’s Cash App business added its largest number of net new-transacting active customers in March as people began to use the peer-to-peer app for fundraising, religious donations and online tipping. The company also benefited as people opted to get their stimulus checks directly deposited to the Cash App, helping drive Square’s highest-ever monthly direct-deposit volumes in April.

From March to April, direct-deposit volumes through Cash App grew by three times. Stored funds rose to over $1.3 billion from $945 million.

Chief Executive Jack Dorsey said on Square’s earnings call that direct deposits represent a “huge opportunity” for Square as those who conduct direct deposits “are some of the most engaged on the platform.” They tend to carry larger balances and use more Cash App services, according to Dorsey.

Shares fell more than 4% in after-hours trading following the release of the results. Square stock has lost 12% over the past three months as the S&P 500
SPX,
-0.69%

has declined 14%.

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