Block, Inc. (then Square, Inc.) — Q1 2017 Form 10-Q
Period: Three months ended March 31, 2017; filed May 3, 2017. The filing is by Square, Inc., the company now known as Block, Inc. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
Square operated a commerce ecosystem spanning managed payments, point-of-sale software and hardware, Square Capital, Square Cash, Caviar, and related services. It reported one operating segment. Starbucks had completed its transition to another payments provider in Q4 2016, and Square did not expect future Starbucks transaction revenue.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenue | $461.6 | $379.3 | +22% |
| Gross profit | $173.4 | $110.2 | +57% |
| Gross margin | 37.6% | 29.1% | +8.5 percentage points |
| Operating loss | $(14.1) | $(97.1) | Improved |
| Net loss | $(15.1) | $(96.8) | Improved |
| GAAP diluted loss per share | $(0.04) | $(0.29) | Improved |
| Operating cash flow | $44.0 | $(13.7) | Improved |
Transaction-based revenue rose 34% to $403.5 million, alongside 33% growth in GPV to $13.647 billion. Subscription and services revenue increased 106% to $49.1 million, while hardware revenue declined 44% to $9.0 million. Adjusted Revenue, a company-defined non-GAAP measure, was $203.8 million, up 39%; Adjusted EBITDA was $27.0 million versus a loss of $9.1 million; adjusted net income was $20.1 million, or $0.05 per diluted share. These non-GAAP figures exclude specified costs and should be considered alongside GAAP results.
Operating expenses declined 10% to $187.5 million. General and administrative expense fell 41%, primarily because Q1 2016 included a $50 million Morley litigation charge. Transaction, loan and advance losses increased 51% to $11.9 million, while sales and marketing rose 30% to $49.9 million.
Balance sheet, debt and liquidity
- At March 31, 2017, cash and cash equivalents were $704.5 million; short- and long-term investments totaled $249.5 million. Cash, cash equivalents and investments were approximately $954.0 million, excluding $36.5 million of restricted cash.
- Total assets were $1.591 billion; current assets were $1.343 billion and current liabilities were $554.9 million.
- Square issued $440 million principal amount of 0.375% convertible senior notes due 2022. Net carrying value was $345.7 million, reflecting debt discount and issuance costs. The notes’ disclosed fair value was $456.5 million.
- The company reported $375 million available under its undrawn secured revolving credit facility, maturing in November 2020, and said it was in compliance with facility covenants.
- Net cash increased $252.2 million, to $741.0 million including restricted cash. Operating cash flow was $44.0 million; investing cash outflow was $170.4 million, largely from securities purchases; financing cash inflow was $377.6 million, mainly reflecting the notes financing and related transactions.
Changes, outlook and risks
- Revenue growth was driven by GPV and expansion in Square Capital, Caviar and Instant Deposit, partly offset by the loss of Starbucks revenue and lower hardware sales compared with a prior-year period that included fulfillment of a reader pre-order backlog.
- The notes offering included a $92.1 million convertible-note hedge purchase and $57.2 million warrant proceeds, intended to reduce dilution from conversion up to an effective share price of $31.17. The company also paid Starbucks $54.8 million to terminate its warrant.
- Management said available cash, investments and credit availability were expected to cover working capital and planned capital expenditures for at least the next 12 months. No quantified earnings or revenue guidance was provided.
- Key disclosed risks include continued losses and uncertain path to profitability; payment fraud, chargebacks and lending losses; reliance on card networks, processors and third parties; competition and margin pressure; data security, system reliability and regulatory compliance; and risks to Square Capital funding and loan performance.
- Caviar courier misclassification claims had a preliminary global settlement, subject to final approval; Square accrued an immaterial expected settlement amount. The company could not estimate exposure from certain other legal matters. It reported no material change in internal control over financial reporting and concluded disclosure controls were effective at a reasonable assurance level.
Investor facts to verify
- How much of the improvement in GAAP losses and margins reflects durable operating progress versus the prior-year $50 million litigation charge and the absence of Starbucks activity?
- Whether GPV growth, subscription and services revenue, and Square Capital loan activity can continue without materially higher transaction, credit or operating costs.
- The notes’ cash-settlement, refinancing and dilution implications, including the warrants’ potential dilution above their $31.17 strike price.
- Loan sale demand and pricing from third-party investors, loan repayment performance, transaction-loss reserves, and exposure to payment processors.
- Final approval and terms of the Caviar settlement, and developments in other legal, regulatory, privacy and security matters.