Block, Inc. (then Square, Inc.) — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The unaudited filing covers Square’s Seller and Cash App ecosystems; the company later changed its name to Block.
Business context and key financial metrics
Square provides payment processing, commerce software and financial services to sellers, and payment, banking and investing tools through Cash App. During the period it began operating Square Financial Services, acquired a majority interest in TIDAL, and launched Square Banking.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $3.845 billion | $3.034 billion | $13.583 billion | $6.339 billion |
| Gross profit | $1.133 billion | $794.5 million | $3.238 billion | $1.930 billion |
| Operating income (loss) | $23.0 million | $49.3 million | $215.7 million | ($64.0 million) |
| Net income (loss), consolidated | ($2.9 million) | $36.5 million | $239.8 million | ($80.9 million) |
| Net income (loss) attributable to common stockholders | $0.1 million | $36.5 million | $243.1 million | ($80.9 million) |
| Adjusted EBITDA (non-GAAP) | $233.4 million | $181.3 million | $829.5 million | $288.6 million |
| Operating cash flow | Not presented by quarter in the supplied text | $672.8 million | $260.9 million |
Q3 gross margin was approximately 29.5%, compared with 26.2% a year earlier. For the nine-month periods, it was approximately 23.8%, versus 30.4%; the mix of high-volume, low-margin bitcoin revenue materially affects this comparison. Q3 diluted GAAP EPS was reported as $0.00; nine-month diluted EPS was $0.48. Adjusted diluted EPS, a non-GAAP measure, was $0.37 and $1.44, respectively.
Bitcoin revenue was $1.816 billion in Q3 and $8.051 billion year to date, but represented only 4% and 5% of gross profit in those periods. Excluding bitcoin revenue, total revenue grew 45% in Q3 and 57% year to date. GPV was $45.426 billion in Q3, up 43%, and $121.392 billion year to date, up 51%.
Liquidity, debt and cash flows
- At September 30, cash and cash equivalents were $4.515 billion; cash, cash equivalents and restricted cash totaled $4.602 billion. Marketable debt securities totaled $2.320 billion. Combined cash, restricted cash and marketable debt securities were $6.922 billion; management cited approximately $7.4 billion of available funds including the undrawn revolver.
- Current assets were $10.562 billion and current liabilities were $5.549 billion. Total assets were $13.909 billion, total liabilities $10.905 billion, and stockholders’ equity $3.005 billion.
- Long-term debt carrying value was $4.738 billion, and $725.7 million of PPP Liquidity Facility advances were current liabilities, generally collateralized by PPP loans. A $500 million revolving credit facility remained undrawn; the company reported compliance with its financial covenants.
- Nine-month operating cash flow was $672.8 million; investing cash outflow was $1.257 billion; financing cash inflow was $1.999 billion. Cash, cash equivalents and restricted cash increased by $1.401 billion.
Material changes versus comparable periods
- Q3 net revenue rose 27%; nine-month revenue rose 114%, with bitcoin accounting for much of the year-to-date increase. Revenue excluding bitcoin rose 45% and 57%, respectively.
- Seller revenue increased 44% in Q3 and 46% year to date, supported by recovering in-person activity, higher card-not-present volumes and growth in loans and software services. Cash App revenue rose 16% and 157%; excluding bitcoin, it grew 33% and 75%.
- Q3 operating expenses rose 49% year over year, including increases in product development and general and administrative costs. Transaction and loan losses also rose sharply in Q3, partly reflecting higher Cash Card activity and comparison with prior-year reserve releases.
- Debt increased following issuance of $2.0 billion in senior unsecured notes in May 2021. The early adoption of ASU 2020-06 changed convertible-note accounting, increasing reported debt and reducing future non-cash interest expense.
- Q3 consolidated net loss was $2.9 million, despite positive income attributable to common stockholders of $0.1 million, reflecting the reported noncontrolling-interest allocation.
Outlook, commentary, risks and unusual items
- Management described business trends and outlook as positive, citing economic recovery, reopenings, consumer spending and increased Seller in-person activity. It cautioned that new COVID-19 variants and renewed restrictions could affect performance; future pandemic effects remain uncertain.
- No numerical full-year revenue or earnings guidance is provided in the supplied filing text. Management said existing liquidity was sufficient for working capital and planned capital expenditures for at least the next 12 months.
- The proposed Afterpay acquisition, announced August 1, was estimated at $26.6 billion in stock consideration based on the September 30 share price and was expected to close in Q1 2022, subject to shareholder, regulatory and other conditions. Either party could owe a termination fee of approximately $283 million in specified circumstances.
- The company recorded $71.1 million of bitcoin impairment losses for the first nine months, including $6.0 million in Q3. Bitcoin’s $351.7 million fair value exceeded its $148.9 million carrying value at quarter-end, but accounting rules do not permit reversal of prior impairment until sale.
- Principal risks include bitcoin price volatility and asymmetric impairment accounting; transaction, lending and chargeback losses; dependence on payment processors and third parties; cybersecurity, privacy and service-continuity risks; extensive financial-services regulation; supply-chain constraints; and integration, regulatory and consumer-credit risks associated with Afterpay. Management noted global supply-chain disruptions and low inventory for some hardware.
- Litigation and tax examinations are ongoing; the company said it could not estimate a reasonable range of exposure for certain matters. It did not believe the ultimate outcome of existing ordinary-course litigation would materially harm its financial position, liquidity or results overall, while noting a resolution could affect results in a particular period.
Important facts for investors to verify
- Whether growth and profitability remain strong after excluding bitcoin revenue, and how bitcoin trading volumes and prices affect reported revenue and margins.
- Whether Seller GPV, Cash App engagement and non-bitcoin revenue growth can persist as stimulus effects and reopening comparisons change.
- Afterpay’s final consideration, closing timing, regulatory approvals, integration costs and any changes to the expected strategic benefits.
- Debt maturities, conversion and settlement terms, and the company’s capacity to meet obligations while funding growth and banking operations.
- Changes in transaction and loan losses, PPP forgiveness and repayment, and credit performance of loans originated through Square Financial Services.
- Cash flow quality, including working-capital and PPP-loan timing effects, and the distinction between company liquidity and customer funds.
- Bitcoin impairment exposure, hardware supply constraints, and material developments in litigation, regulatory matters or tax audits.