Block, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Figures below are in U.S. dollars; financial amounts are rounded to millions unless stated otherwise. Block operates the Square and Cash App ecosystems and completed its acquisition of Afterpay on January 31, 2022.
Financial and operating performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $4,515m (+17%) | $3,845m | $12,881m (-5%) | $13,583m |
| Revenue excluding bitcoin | +36% year over year | — | +37% year over year | — |
| Gross profit | $1,567m | $1,133m | $4,332m | $3,238m |
| Gross margin | 34.7% | 29.5% | 33.6% | 23.8% |
| Operating income (loss) | $(49)m | $23m | $(489)m | $216m |
| Net income (loss) attributable to common stockholders | $(15)m | $0.1m | $(427)m | $243m |
| Adjusted EBITDA | $327m | $233m | $710m | $829m |
| Gross Payment Volume (GPV) | $54.4bn (+20%) | $45.4bn | $150.4bn (+24%) | $121.4bn |
| Cash provided by operating activities | Not separately presented | Not separately presented | $131m | $653m |
Reported gross margin is affected by bitcoin’s large revenue base and comparatively low gross profit contribution. Bitcoin represented 39% of Q3 revenue and 41% of nine-month revenue, but only 2% and 3% of gross profit, respectively. Adjusted EBITDA and adjusted EPS are non-GAAP measures; Q3 adjusted diluted EPS was $0.42 versus $0.25, while nine-month adjusted diluted EPS was $0.78 versus $1.06.
Revenue, segments, and material period changes
- Q3 transaction revenue rose 17%; subscription and services revenue rose 71%, including Afterpay and growth in Cash App Card, Instant Deposit, seller banking, and software. Hardware revenue increased 16%.
- Bitcoin revenue declined 3% in Q3 and 34% over nine months, reflecting lower bitcoin prices and customer demand. This drove the nine-month decline in total revenue despite growth in non-bitcoin revenue.
- Q3 Square revenue increased 27% and gross profit increased 29%. Cash App revenue increased 12% and gross profit increased 51%. For nine months, Square revenue and gross profit increased 33%; Cash App revenue fell 20%, principally because of lower bitcoin revenue, while its gross profit increased 35%.
- Operating expenses increased 46% in Q3 and 60% for nine months. Nine-month transaction, loan, and consumer receivable losses rose to $395m from $131m; product development and general and administrative costs also increased substantially.
- Afterpay was acquired for consideration valued at approximately $13.8bn, primarily Block Class A shares. The acquisition added approximately $11.7bn of goodwill and substantial customer and other intangible assets. Afterpay results are included from the acquisition date and allocated equally to Square and Cash App.
Cash, debt, and liquidity
- At September 30, 2022, cash and cash equivalents were $4.33bn; short- and long-term marketable debt securities totaled $1.86bn. Together with restricted cash, reported customer funds, and securities, the filing reports $9.49bn. Customer funds are held separately and are not available for corporate use; excluding customer funds, cash, restricted cash, and marketable debt securities totaled approximately $6.5bn.
- Management stated that approximately $7.1bn of available funds included an undrawn $600m revolving credit facility. An additional $1.2bn remained available under Afterpay warehouse facilities. The warehouse facilities had $479m drawn against $1.7bn of commitments.
- Long-term notes had $4.61bn aggregate principal outstanding, including $461m of 2023 convertible notes classified as current. Warehouse funding debt was $479m and PPP Liquidity Facility advances were $31m. Block redeemed approximately $1.1bn of Afterpay convertible notes in cash during the first quarter.
- Nine-month operating cash flow was $131m, down from $653m. Investing activities provided $1.51bn, while financing activities used $881m; investing cash flow included marketable-security maturities and sales and cash acquired in business combinations. These flows should not be read as recurring operating cash generation.
- Management believes available liquidity is sufficient for working capital and planned capital expenditures for at least the next 12 months. Block reported compliance with credit-facility covenants; its revolving facility requires at least $250m of defined quarterly liquidity.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific numerical revenue, earnings, or GPV guidance. Management emphasizes continued investment in products, employees, and integration of Afterpay, and cautions that interim results are not necessarily indicative of full-year results.
- Afterpay integration, consumer repayment performance, rising transaction and loan losses, macroeconomic weakness, competition, and the ability to realize acquisition synergies are key business risks. Afterpay consumer receivables had a $142m allowance for credit losses at quarter-end; the filing cites changing delinquency and economic conditions as factors in estimating reserves.
- Bitcoin investment impairment charges were $38m for nine months. The investment’s carrying value was $111m versus an indicated fair value of $156m; accounting rules do not permit reversing impairment write-downs before sale. Foreign-currency translation reduced other comprehensive income by $985m for nine months, largely reflecting translation of foreign goodwill and intangible assets.
- Block recorded a $66m one-time share-based compensation charge related to accelerated awards in the Afterpay acquisition. Share-based compensation totaled $795m for nine months, compared with $430m a year earlier.
- The company is cooperating with CFPB and state Attorneys General inquiries into Cash App customer complaints and disputes; the related accrual was not material, but potential exposure beyond the accrual could not be reliably estimated. H&R Block’s trademark case remained pending; an injunction restricting use of the Block name in connection with Cash App Taxes was stayed during Block’s appeal.
- Other notable exposures include BNPL and loan losses, regulatory change in payments and consumer finance, data security and fraud, bitcoin custody, foreign exchange, debt obligations, and supply-chain constraints. The filing notes that a former employee downloaded certain Cash App Investing reports containing U.S. customer information without permission.
Important facts for investors to verify
- Whether growth in GPV and non-bitcoin revenue can continue to translate into gross profit and improved GAAP operating results, given sharply higher operating expenses and credit losses.
- Afterpay’s integration progress, contribution to segment results, consumer receivable delinquency trends, loss allowance adequacy, and reliance on warehouse funding.
- Cash-flow quality: distinguish corporate liquidity from customer funds and assess whether operating cash generation improves beyond the $131m reported for nine months.
- Debt repayment and refinancing requirements, particularly the $461m of 2023 convertible notes, and continued compliance with liquidity covenants.
- Resolution and potential financial impact of the CFPB/state inquiries, H&R Block litigation, tax examinations, and the Pagantis deferred-consideration valuation process.
- An apparent labeling inconsistency in the filing: the risk-factor discussion states an accumulated deficit of $1,046.6m, while the balance sheet reports accumulated deficit of $454.9m and accumulated other comprehensive loss of $1,046.6m.