Business context and reporting period
Square, Inc. (now Block, Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2019. Its businesses included seller payments and commerce tools, Cash App, Square Capital, hardware, and Caviar. Unless otherwise noted, comparisons are with the same 2018 period.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Total net revenue | $1,174.2 million | $814.9 million | +44% |
| Gross profit | $465.8 million | $315.8 million | +47% |
| Gross margin | 39.7% | 38.8% | +0.9 percentage points |
| Operating loss | $0.8 million | $2.6 million | Improved |
| Net loss | $6.7 million | $5.9 million | Worsened |
| Adjusted EBITDA (non-GAAP) | $105.3 million | $68.3 million | +54% |
| Adjusted diluted EPS (non-GAAP) | $0.21 | $0.13 | Up |
- Q2 transaction revenue rose 24% to $775.5 million; subscription and services revenue rose 87% to $251.4 million; hardware revenue rose 21% to $22.3 million; and bitcoin revenue rose 238% to $125.1 million. Bitcoin costs were $122.9 million, so bitcoin revenue contributed little gross profit.
- Gross Payment Volume (GPV) grew 25% to $26.8 billion. Larger sellers, defined as generating more than $125,000 in annualized GPV, represented 53% of Q2 GPV versus 50% a year earlier.
- Operating expenses increased 47% to $466.7 million, including product development up 52%, sales and marketing up 59%, and transaction, loan and advance losses up 56%. Share-based compensation was $79.5 million for the quarter.
Six months ended June 30
- Revenue was $2,133.6 million, up 44%; gross profit was $862.6 million. Net loss was $44.9 million versus $29.9 million in 2018. Adjusted EBITDA was $167.0 million versus $104.2 million; adjusted diluted EPS was $0.32 versus $0.20.
- Operating cash flow was $165.8 million, compared with $71.0 million. Investing activities used $95.8 million and financing activities used $42.4 million. Cash, cash equivalents, and restricted cash increased $30.0 million to $662.9 million.
- At June 30, cash and cash equivalents were $617.3 million; short- and long-term marketable debt investments totaled $1,033.0 million; restricted cash was $45.6 million. Together, cash, cash equivalents, restricted cash, and marketable debt securities totaled $1,695.9 million. Management separately reported $1,650.3 million of cash, cash equivalents, and marketable debt securities.
Balance sheet, debt, and liquidity
- Total assets were $4,654.0 million and total liabilities were $3,469.5 million. Current assets were $3,528.6 million and current liabilities $2,375.6 million; these balances include substantial settlement and customer-fund items.
- Convertible notes had $1,074.2 million principal outstanding and $919.0 million net carrying value: $862.5 million principal due 2023 and $211.7 million due 2022. The $375 million revolving credit facility was undrawn and available through November 2020; the company reported compliance with its covenants.
- Management stated existing liquidity and the credit line should cover working capital and planned capital expenditures for at least 12 months. It noted daily cash and working-capital fluctuations tied to settlement timing and GPV.
Material changes versus the prior comparable period
- Revenue growth was broad-based, led by subscription and services, with the filing attributing growth to Cash App, Square Capital, Caviar, Instant Deposit, and acquisitions including Weebly and Zesty. Bitcoin revenue growth reflected product timing and customer demand.
- Higher product development and marketing spending reflected hiring and investment in product development, Cash App activity, advertising, and growth initiatives. Loan losses rose with portfolio growth and aging and newer products for which risk models were still being trained.
- Six-month operating cash flow increased, but period-end settlement receivables and payables were unusually elevated in part because June 30 fell on a weekend. The company cautioned these working-capital balances generally move together and fluctuate with settlement timing and GPV.
- Adoption of lease accounting on January 1, 2019 recognized operating lease assets and liabilities and derecognized a $149 million build-to-suit asset and liability; this was an accounting change, not a comparable-period operating trend.
Outlook, commentary, risks, and unusual items
- The filing provided no specific revenue, earnings, or GPV guidance. Management expected available liquidity to meet needs for at least 12 months and described continued investment in products, infrastructure, employees, and expansion.
- On July 31, 2019, after quarter-end, Square agreed to sell Caviar to DoorDash for expected gross proceeds of $410 million in a combination of cash and DoorDash preferred stock, subject to contractual adjustments; closing was expected in 2019. Caviar revenue and costs would cease to contribute after completion.
- Eventbrite investment revaluation caused a $4.8 million Q2 and $18.9 million six-month loss in other expense; management noted future marks could fluctuate with the stock price.
- Significant exposures include the unresolved San Francisco tax classification dispute, which could result in additional taxes, penalties, and interest that may be material; California Caviar courier classification claims with potential liability not yet reliably estimable; and other legal matters whose outcomes are uncertain.
- Key operating risks include fraud and chargebacks, loan credit losses and third-party loan funding, cybersecurity and service outages, payment processor concentration, extensive financial-services and privacy regulation, bitcoin price and regulatory volatility, and competition. The filing also notes potential dilution from equity compensation and convertible notes. Class B shares carried ten votes per share and represented about 71.2% of combined voting power as of June 30.
- The company reported a full valuation allowance on deferred tax assets in the U.S. and certain foreign jurisdictions. It also disclosed $772.0 million of unrecognized share-based compensation cost expected to be recognized over a weighted-average 2.9 years.
Most important facts for investors to verify
- Whether the Caviar sale closed on the disclosed terms, and the eventual cash versus preferred-stock consideration and use of proceeds.
- Underlying growth and economics excluding bitcoin pass-through revenue, especially subscription and services growth and Caviar’s contribution.
- Whether elevated settlement balances were principally timing-related, and how operating cash flow performs across periods.
- Trends in Square Capital loan losses, transaction losses, and third-party investor demand for loans.
- Developments and potential financial exposure from the San Francisco tax dispute and courier classification litigation.
- Convertible-note conversion, repayment, and dilution exposure, alongside recurring share-based compensation and its effect on profitability.