Square, Inc. (now Block, Inc.) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is Q1 2018. The filing was made under the name Square, Inc. Unless noted otherwise, financial figures below are in U.S. dollars and millions.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total net revenue | $959.4 | $668.6 | +43% |
| Gross profit | $396.8 | $255.2 | +55% |
| Gross margin | 41.4% | 38.2% | +3.2 percentage points |
| Operating loss | $(22.0) | $(21.0) | Loss widened slightly |
| Net loss | $(38.2) | $(24.0) | Loss widened |
| Adjusted EBITDA (non-GAAP) | $61.7 | $35.9 | +72% |
| Operating cash flow | $32.4 | $52.1 | Down $19.6 |
- Revenue by source: transaction-based $656.8 (+26%); subscription and services $218.9 (+126%); hardware $18.2 (+26%); Bitcoin $65.5 (+92%). Bitcoin costs were $64.7, so reported Bitcoin revenue contributed little gross profit.
- Gross Payment Volume (GPV) was $22.6 billion, up 27%. Sellers generating more than $125,000 in annualized GPV accounted for 51% of GPV, versus 47% a year earlier.
- Adjusted Revenue, a company-defined non-GAAP measure that deducts transaction and Bitcoin costs and includes an acquired deferred-revenue adjustment, was $489.1, up from $306.8. Adjusted net income per share was $0.13 basic and $0.11 diluted; GAAP diluted loss per share was $0.09.
- Operating expenses rose 52% to $418.8, including product development of $153.6, sales and marketing of $133.7, and general and administrative expense of $101.6. Share-based compensation was $61.1.
Balance sheet, debt, and liquidity
- At March 31, cash and cash equivalents were $521.7; marketable debt securities were $1,047.6; and restricted cash was $47.7. Cash, cash equivalents, and marketable debt securities totaled $1,569.3, excluding restricted cash. Including restricted cash, the total was $1,616.9. Customer funds are associated with customer obligations and should not be treated as unrestricted corporate liquidity.
- Cash, cash equivalents, and restricted cash declined $63.5 during the quarter. Investing activities used $70.4 and financing activities used $26.9. Operating cash flow was affected by substantial settlement and customer-payable movements; management attributed much of the quarter-end increase in these balances to the period ending on a weekend.
- Long-term debt, net of discounts and issuance costs, was $909.3; principal outstanding on convertible notes was $1,074.2. The company had $375.0 available under its undrawn revolving credit facility and reported compliance with its covenants.
- Current assets were $3,266.5 and current liabilities were $2,183.6; these include large settlement and customer-fund balances that fluctuate with payment processing activity.
Material changes and management commentary
- Management attributed transaction revenue growth to 27% GPV growth, contributions from existing and new sellers, and increased penetration among larger sellers. Subscription and services growth reflected Cash App, Caviar, Square Capital, and acquisitions including Weebly and Zesty.
- Cash App-related activity drove higher subscription revenue and marketing expense. Hardware costs grew faster than hardware revenue, partly because Square Terminal production costs exceeded sales revenue and a larger share of hardware was sold through lower-margin retail channels.
- Transaction, loan, and advance losses increased 54% to $27.8, reflecting business growth and a larger, aging Square Capital loan portfolio; management also cited newer offerings with higher risk profiles. Seller transaction losses as a percentage of GPV remained below the company’s historical average of 0.1%.
- Other expense, net, rose to $11.3, primarily due to a $14.1 mark-to-market loss on the company’s Eventbrite investment. Management noted future gains or losses could fluctuate with Eventbrite’s share price.
- The company launched Square Card for sellers during the quarter. It also reported that it expected existing cash, investments, and available credit to meet working capital and planned capital expenditure needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
Risks, contingencies, and unusual items
- Tax dispute: San Francisco’s Tax Collector classified Square’s primary activity as financial services for 2014 and 2015; the company paid the assessed amounts but disputes the classification. Additional taxes, penalties, and interest for later years could be material, and the company could not estimate a loss range. A city tax measure effective in 2019 may add exposure if applicable.
- Litigation: Caviar courier worker-classification cases in California remain unresolved; the filing says potential liability cannot yet be reliably determined. Other litigation, claims, and investigations are also disclosed.
- Lease accounting and commitments: Adoption of ASC 842 on January 1, 2019 resulted in $112.0 of operating right-of-use assets and $135.6 of operating lease liabilities, and derecognition of a $149.0 build-to-suit asset and liability. A 12-year Oakland office lease is expected to commence in November 2019 and has approximately $276.0 of total payments.
- Convertible notes and dilution: The company expected to settle future note conversions in Class A shares, but retained discretion to revisit that policy. The 2022 Notes met conversion conditions through March 31, making them convertible during the quarter ending June 30, 2019. Class B shares carried ten votes each; Class B holders held approximately 72.2% of combined voting power.
- Other principal risks highlighted include cybersecurity and data protection, payment-processor and network reliance, fraud and chargebacks, regulation of payments, lending and cryptocurrency, competition, hardware supply and tariffs, and the company’s history of losses. Management stated disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether rapid revenue and GPV growth—particularly in Cash App and subscription services—translates into sustained GAAP profitability, given rising operating costs and recurring share-based compensation.
- How much of reported revenue growth reflects Bitcoin activity, whose revenue and costs are both volatile, and how non-GAAP Adjusted Revenue and Adjusted EBITDA reconcile to GAAP results.
- Whether operating cash flow remains adequate after considering working-capital swings, loan purchases and sales, and customer funds; quarter-end settlement balances were unusually affected by timing.
- Potential exposure and developments in the San Francisco tax matter and California courier-classification cases.
- Future conversion, repayment, and dilution effects of the convertible notes, as well as the company’s substantial lease commitments and dual-class voting structure.