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Assessing Square’s Key Financials

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Square’s EBITDA improved significantly

In this part of the series, we’ll focus on Square’s (SQ) key financials. Square’s 2Q16 adjusted EBITDA reached $13 million, reflecting a sharp improvement from 2Q15, as can be seen in the chart below. The company noted that the strong growth in its top line provided much of the leverage for its EBITDA.

Square’s adjusted EBITDA margin expanded by 7% YoY (year-over-year). The company stated that the margin expansion reflected “increased scale and operating leverage, positive dollar-based retention of our sellers, and our ability to drive new product adoption.”

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The company’s operating expenses came in at $176 million in 2Q16, up by 49% YoY. Excluding share-based compensation, its operating expenses increased by 35% YoY. Product development expenses jumped by 50% YoY to $69 million, driven by increased personnel costs (including share-based compensation expense).

Moreover, sales and marketing costs increased by 24% YoY to $39 million due to increased costs related to paid marketing.

Square’s upbeat guidance

Buoyed by its strong 2Q16 results, Square raised its fiscal 2016 guidance for both adjusted revenue and adjusted EBITDA. The company now expects its 2016 adjusted revenue to be in the range of $655 million to $670 million, up from its earlier guidance of $615 million to $635 million.

Its adjusted EBITDA is forecasted to be in the range of $18 million to $24 million, up from its earlier guidance range of $8 million to $14 million. The company’s total net revenue is expected to be in the range of ~$1.6 billion to ~$1.7 billion.

For 3Q16, the company forecasts net revenues to be in the range of $410 million to $420 million, while adjusted revenue is expected to be in the range of $167 million to $171 million. Its adjusted EBITDA is expected to mark a significant improvement in 3Q16 compared with 3Q15 and is expected to be in the range of $5 million to $6 million.

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