Block, Inc. (then Square, Inc.) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The filing is by Square, Inc.; Block, Inc. is the company’s later name. Financial statements are unaudited. Amounts below are in U.S. dollars unless noted.
Business context and results
Square operated a commerce and payments ecosystem for sellers, alongside Cash App, Caviar, Square Capital and hardware offerings. It acquired website-services company Weebly on May 31, 2018, aiming to combine its web tools with Square’s in-person and online commerce products.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $814.9M | $551.5M | $1,483.5M | $1,013.1M |
| Gross profit | $315.8M | $207.4M | $571.0M | $380.9M |
| Operating loss | $(2.6)M | $(12.2)M | $(23.6)M | $(26.3)M |
| Net loss | $(5.9)M | $(16.0)M | $(29.9)M | $(31.1)M |
| Adjusted EBITDA (non-GAAP) | $68.3M | $36.5M | $104.2M | $63.5M |
| Adjusted revenue (non-GAAP) | $385.4M | $240.4M | $692.3M | $444.2M |
Revenue grew 48% in Q2 and 46% in the first half. Q2 gross margin was approximately 38.8%, versus 37.6% a year earlier; first-half gross margin was approximately 38.5%, versus 37.6%. GAAP net losses narrowed, while non-GAAP Adjusted EBITDA increased. These non-GAAP measures exclude specified costs and should be considered alongside GAAP results.
Growth drivers and material changes
- Transaction-based revenue rose 30% in both Q2 and the first half, alongside 30% growth in gross payment volume (GPV). Q2 GPV was $21.372B; sellers generating over $125,000 in annualized GPV contributed 50% of Q2 GPV, up from 46%.
- Subscription and services revenue increased 127% in Q2 and 114% in the first half, driven principally by Instant Deposit, Caviar, Cash Card and Square Capital, as well as acquisitions.
- Bitcoin revenue was $37.0M in Q2 and $71.1M in the first half, with associated costs of $36.6M and $70.5M. Revenue reflects gross sale proceeds, so the reported line is much larger than the related margin; customer demand and bitcoin prices can make it volatile.
- Operating expenses rose 45% in Q2 and 46% in the first half, including higher product development, marketing, personnel and acquisition-related costs. Share-based compensation was $52.1M in Q2 and $98.9M for the half-year.
- Square adopted ASC 606 on January 1, 2018, using the modified retrospective method. It recorded a $4.6M cumulative reduction to retained earnings; adoption increased reported hardware revenue by $2.3M in Q2 and $3.5M for the first half.
Cash flow, liquidity and debt
- For the six months, operating cash flow was $71.0M, down from $90.6M; investing cash outflow was $166.0M, versus $255.7M; financing cash inflow was $791.8M, versus $427.8M. The financing inflow chiefly reflected the 2023 convertible-note offering.
- At June 30, cash and cash equivalents were $1,388.0M, restricted cash $40.4M and marketable investments $401.7M. Cash, cash equivalents, restricted cash and investments totaled $1,830.1M. The company separately reported $1,789.7M of cash, cash equivalents and marketable investments, excluding restricted cash.
- Long-term debt had a carrying value of $1,071.4M; principal outstanding was $1,302.5M. In May, Square issued $862.5M principal of 0.50% convertible notes due 2023. Existing $440.0M principal of 0.375% notes due 2022 also remained outstanding. The company had a $375M revolving facility undrawn and available, and reported compliance with its covenants.
- Management said available cash, investments and the credit facility were expected to cover working capital and planned capital expenditures for at least the next 12 months. It expected higher interest expense in future quarters due to increased debt.
Outlook, risks and unusual items
- The filing provides no specific quarterly or full-year revenue, earnings or GPV guidance. Management emphasized continued seller and GPV growth, product investment and international expansion; interim results were not presented as necessarily indicative of full-year results.
- Weebly’s preliminary purchase consideration was $271.3M, including $131.9M cash and $139.4M of stock; acquisition-related goodwill was $189.5M. Purchase-price allocation remained subject to change. Weebly’s contribution was not material to reported revenue or net loss for the period.
- Some holders notified Square in late July of an intention to convert $45M principal of the 2022 notes. Those notes were convertible during the quarter ending September 30, 2018, subject to note terms. Conversion, repurchase and maturity obligations may require cash or shares.
- Square paid San Francisco taxes assessed for fiscal 2014 and 2015 while disputing the city’s classification of its business as financial services. If it does not prevail, additional taxes, penalties and interest for later years could be material; the company could not estimate the possible loss range.
- Other disclosed exposures include litigation and regulatory matters, payment fraud and chargebacks, loan-credit and funding risks, data security and privacy, and evolving payments and cryptocurrency regulation. The filing specifically notes GDPR took effect in May 2018 and California’s CCPA was enacted in June 2018.
- Management expected the new lease accounting standard to add material right-of-use assets and lease liabilities upon adoption. Disclosure controls were assessed as effective; the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether GPV growth and larger-seller contribution continue, and how transaction margin develops.
- Whether rapid growth in subscription, Cash App and bitcoin activity translates into durable contribution after associated costs and marketing investment.
- How much of Adjusted EBITDA and Adjusted Revenue growth reflects recurring operations versus exclusions, acquisition effects or accounting changes.
- The cash requirements and potential dilution from convertible-note conversions, hedges and warrants, including the 2022-note conversion notice.
- The final Weebly purchase accounting, integration progress and expected economics, along with the outcome and potential cost of the San Francisco tax dispute.