Square cites slowdown in bitcoin demand for underwhelming third quarter

Gross profit comes in just shy of expectations, along with adjusted earnings and sales Square reported lower-than-expected revenue for the third quarter as less volatile pricing for bitcoin impacted demand, though the company’s chief financial officer noted “strength” in volume during October.

The company posted a break-even third quarter, after earning $37m, or 7 cents a share, in the year-earlier quarter. On an adjusted basis, Square earned 37 cents a share, up from 34 cents a share a year earlier, while analysts tracked by FactSet were expecting 38 cents a share. The fintech company grew revenue to $3.84bn from $3.03bn, while analysts had been modelling $4.39bn.

Shares fell roughly 3% in after-hours trading following the release of the report.

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Square’s revenue total for the latest quarter consisted of $1.30bn in transaction-based revenue, $695m in subscription revenue, $37.3m in hardware revenue, and $1.82bn in bitcoin revenue. Analysts tracked by FactSet were expecting $2.6bn in bitcoin revenue.

Bitcoin is a relatively low-margin business for Square, and the company incurred $1.77bn in bitcoin costs during the quarter.

“Bitcoin revenue and gross profit benefited from year-over-year increases in the price of bitcoin and number of bitcoin actives,” the company noted in its shareholder letter, though bitcoin revenue and gross profit both declined on a sequential basis, which Square largely attributed to “relative stability in the price of bitcoin.”

Chief Financial Officer Amrita Ahuja noted on a call with reporters that as bitcoin prices increased in October, the company “saw strength” in demand.

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The company’s total gross profit for the third quarter came in at $1.13bn, up from $794m a year earlier. Analysts had been expecting $1.15bn. Speaking on the call with reporters, Ahuja argued for the importance of the gross-profit metric as an indicator of Square’s performance.

Square’s Cash App mobile wallet generated gross profit of $512m, whereas analysts tracked by FactSet were looking for $536m. Wolfe Research analyst Darrin Peller suggested the miss wasn’t particularly surprising.

“Heading into the print, we believed Cash App would face waning impacts of government stimulus benefits and lower bitcoin revenues,” he wrote in a note to clients. “We believe these dynamics were known by most investors, who were expecting $510m in Cash App gross profit.”

The results were “unusual for Square, especially given the company’s track record of revenue/earnings beats,” Wedbush analyst Moshe Katri told MarketWatch. The results likely reflected the “impact of fading stimulus payments,” which was a “similar theme at other payments names as well,” he continued.

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During the third quarter, Square saw a lower portion of transactions take place through debit cards, while average transaction size also fell on a year-over-year basis. Despite the decreases, Square noted in its shareholder letter that “these trends remained elevated relative to historical periods partly as a result of changes to consumer behaviours due to COVID-19 and government disbursements, which may not continue in future quarters.”

Square saw gross payment volume of $45.43bn, up from $31.73bn a year earlier. The FactSet consensus was for $45.61bn.

Square expects seller GPV to be up 42% on a year-over-year basis during October.

Square has the largest short interest in the data-processing and outsourced services sector with $9.7bn, according to data from S3 Partners. That short interest has increased by $996m over the past 30 days. Square’s short interest as a percentage of its float stands at 9.81%.

Shares of Square have declined about 7% over the past three months as the S&P 500 has risen roughly 6%.

This MarketWatch article was published by Dow Jones Newswires