Payment company Square (NYSE: SQ) impressed investors last week when it reported accelerating revenue growth and top- and bottom-line figures that exceeded analysts' consensus estimates. The company's 45% year-over-year rise in third-quarter adjusted revenue and its sharp increase in adjusted EPS shouldn't be overlooked.
But there's more to the quarter than the financial figures featured in the company's quarterly earnings release. Square's earnings call gave investors a closer look at the financial-technology company's business. Two topics that stood out were the key drivers behind management's aggressive revenue guidance and commentary about Square's recent application to form a bank.
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The catalysts behind Square's big revenue guidance
One positive surprise in Square's third quarter was its updated revenue guidance for the full year. Management said it now expects full-year adjusted revenue, or total net revenue less transaction-based revenue from Starbucks and transaction-based costs, to be between $963 million and $966 million. Not only is this up significantly from management's previous guidance range for full-year revenue between $925 million and $935 million, but it represents incremental upside beyond Square's top-line outperformance in Q3. In other words, management has heightened expectations for its fourth quarter.
When one analyst asked about this optimistic outlook, Square CFO Sarah Friar said the company has "great momentum." Specifically, she listed a range of strong drivers behind Square's growth (via an S&P Global Market Intelligence transcript), including its core transaction-based business, growth in larger sellers, the residual effects of Square's more comprehensive product ecosystem, and progress in international markets.
Friar described how this virtual loop works from a seller's point of view:
What about that application for a bank charter?
The Wall Street Journal reported in September that Square had applied for a bank charter. The application to form a wholly owned bank fueled lots of interest from investors about Square's banking aspirations.
In Square's third-quarter earnings call, CEO Jack Dorsey articulated Square's thinking behind a bank charter:
Dorsey emphasized that its charter has not been approved and that it is a year-long process.
Dorsey also said that though it does expect an approval to form a bank would help its Square Capital business, it believes it would also help the company offer more financial services to underserved sellers and individuals -- a tenet Square has held to since it first launched an easy way to accept credit cards with its first mobile credit card reader.
Square has already gotten its feet wet in banking with Square Capital. With Square Capital, Square is able to make loans and cash advances to small businesses by partnering with Celtic Bank. Square Capital, which falls under Square's fast-growing subscription and services revenue and contributes the majority of the segment's top line, facilitated $303 million worth of business loans in Q3, up 45% year over year. These loans were spread across 47,000 businesses.
Investors can listen to a full recording of Square's third-quarter conference call on the company's investor relations website.
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