Despite a strong Q3 earnings report, Square’s Q4 forecast disappoints investors

Despite a strong third-quarter earnings report, Square’s forecast for the final quarter of this year gave investors pause, sending its share price down 6 percent in after-hours trading before it gradually climbed up again.

Square’s adjusted revenue grew 68 percent year-over-year to $431 million, beating expectations from analysts polled by Refinitiv (formerly the financial and risk arm of Thomson Reuters), who had forecast $413.9 million. It also reported 13 cents in adjusted earnings per share, better than the 11 cents analysts expected.

Total third-quarter revenue was $882.1 million, a 51 percent increase from the same period last year, and Square also marked its first quarterly profit of $20 million, compared to a loss of $16 million last year. In an earnings call, CFO Sarah Friar said this was due largely to Square’s investment in Eventbrite, which held its IPO in October.

Despite beating analysts’ expectations for its third quarter and also raising its adjusted core earnings forecast for 2018 to between $250 million and $255 million, up from $240 million to $250 million, Square’s forecast for the fourth quarter missed expectations. The company expects adjusted earnings of 12 cents to 13 cents a share, lower than the 15 cents forecast by analysts polled by Refinitiv.

Investors were also worried about Square’s transaction-based revenue, which grew 29 percent to $655 million during the third quarter, compared to 31 percent last year, because even slightly slower growth may signal that competitors like Clover are gaining more traction. Square reported, however, that the important segment of gross payment volume (GPV) it processes from “large sellers,” or merchants who do more than $125,000 a year in GPV, grew to 52 percent, up from 48 percent a year ago.

Friars said in Square’s earnings call that this is because Square has made it easier for large retailers to integrate Square’s platform into their operations, as well as the recent launches of Square Terminal, its credit card machine, and Square Installments, which enables merchants to allow customers to make monthly payments.

Friar, who oversaw Square’s IPO in November 2015 and has served as its CFO since 2012, announced last month that she will leave the company to become the CEO of Nextdoor. CEO and founder Jack Dorsey said that the search for a new CFO is his “number one focus at the company” and will be led by independent director David Viniar and board member Roelof Botha.