Block, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Block operates Square and Cash App, and acquired buy-now-pay-later provider Afterpay on January 31, 2022. Unless stated otherwise, amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenue | $4.40B | $4.68B | $8.37B | $9.74B |
| Gross profit | $1.47B | $1.14B | $2.76B | $2.10B |
| Operating income (loss) | ($214M) | $125M | ($441M) | $193M |
| Net income (loss) | ($209M) | $204M | ($417M) | $243M |
| Adjusted EBITDA (non-GAAP) | $187M | $360M | $383M | $596M |
| Operating cash flow | Not stated separately | Not stated separately | $115M | $246M |
- Q2 gross margin was approximately 33.4%, versus 24.4% a year earlier; operating margin was approximately negative 4.9%, versus 2.7%. Gross margin benefited from the lower bitcoin revenue and related costs, which have low gross profit contribution.
- Q2 GAAP loss per share was $0.36; six-month loss per share was $0.73. Adjusted diluted EPS, a non-GAAP measure, was $0.18 for Q2 and $0.36 for the first half, down from $0.49 and $0.81, respectively.
- Gross Payment Volume (GPV) increased 23% to $52.5B in Q2 and 26% to $96.0B for the first half.
Revenue and material changes
- Q2 revenue declined 6% year over year, and first-half revenue declined 14%, primarily because bitcoin revenue fell 34% in Q2 and 44% for the first half. Excluding bitcoin, revenue increased 34% in Q2 and 38% for the first half.
- Q2 transaction-based revenue rose 20%; subscription and services revenue rose 60%, including Afterpay. Hardware revenue rose 10%. Afterpay contributed $208M of Q2 revenue; BNPL represented 5% of total Q2 revenue.
- Square Q2 revenue grew 32% and gross profit 29%. Cash App revenue fell 21% as bitcoin revenue contracted, while Cash App gross profit increased 29%. Excluding bitcoin, Cash App revenue grew 38%.
- Operating expenses rose 66% in Q2. Transaction, loan and consumer-receivable losses increased to $157M from $48M; the filing cites Afterpay credit-loss provisioning, Square transaction losses and higher loan volumes. Share-based compensation was $257M in Q2 and $532M for the first half.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $4.02B; short- and long-term debt securities were $1.96B. The company reported $6.2B of corporate cash, restricted cash and marketable debt securities, excluding customer funds, and $600M available under its revolving facility. It also had $1.5B available under Afterpay warehouse facilities.
- Customer funds of $2.91B are held separately and are not available for corporate purposes. The filing’s $9.1B aggregate of cash, restricted cash, customer funds and debt securities therefore should not be read as unrestricted corporate liquidity.
- Long-term debt was $4.10B and current debt $460M; notes had $4.61B aggregate principal outstanding. Warehouse facilities had $193M drawn, secured by consumer receivables; PPPLF advances were $68M. The company reported compliance with credit-facility covenants.
- First-half operating cash flow was $115M. Investing activities provided $1.34B, including marketable-security proceeds and cash acquired in business combinations; financing activities used $1.24B, including $1.07B to redeem Afterpay convertible notes and $429M of PPPLF repayments.
Outlook, risks and unusual items
- No quantified full-year revenue, earnings or other formal guidance is provided in the supplied filing text. Management said available funds were sufficient for liquidity needs for the foreseeable future and working capital and planned capital expenditures for at least the next 12 months; actual results may differ materially.
- Afterpay was acquired for approximately $13.8B in stock consideration, with 113.6M Class A shares issued. Preliminary purchase accounting recorded $11.7B of goodwill from acquisitions, mostly Afterpay; valuation allocations remained subject to change. Management cited integration and realization of expected synergies as key execution challenges.
- Bitcoin revenue is sensitive to customer demand and bitcoin prices. Block recorded a $36M Q2 impairment on its own bitcoin investment; its carrying value was $113M after cumulative impairment charges of $107M. Accounting rules do not permit reversal of impairment before sale.
- Afterpay consumer receivables totaled $1.39B amortized cost, with a $122M allowance for credit losses. The filing highlights repayment, underwriting and warehouse-funding risks, including potential effects from weaker economic conditions.
- Other notable matters include a former employee’s unauthorized download of certain Cash App Investing customer reports, disclosed in April 2022; CFPB and state Attorneys General inquiries into Cash App complaint handling; and H&R Block’s trademark suit over the Block name and Cash App Taxes branding. The preliminary injunction restricting use of the Block name for Cash App Taxes was stayed during the appeal. Potential liabilities beyond recorded reserves were not reliably estimable.
- Foreign-currency translation adjustments reduced comprehensive income by $641M in Q2. Management also identified macroeconomic, competition, supply-chain, regulatory, cybersecurity, bitcoin-custody and acquisition-integration risks. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether growth in transaction, subscription and services revenue—and GPV—continues to offset bitcoin-driven revenue volatility.
- Afterpay’s integration progress, credit-loss trends, BNPL economics and access to warehouse funding.
- Operating-expense growth, recurring share-based compensation and the path from adjusted profitability to GAAP profitability and operating cash generation.
- Available corporate liquidity after excluding customer funds, and the timing and settlement terms of debt maturities and convertible notes.
- Developments in customer-data incidents, regulatory inquiries and the H&R Block litigation, including any effect on reserves, operations or branding.