Block, Inc. (then Square, Inc.) — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The filing was signed August 2, 2021. The company operated Seller and Cash App ecosystems; Square Financial Services began banking operations in March 2021. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenue | $4.681bn | $1.924bn | $9.738bn | $3.305bn |
| Gross profit | $1.141bn | $597m | $2.105bn | $1.135bn |
| Operating income (loss) | $125m | ($23m) | $193m | ($113m) |
| Net income (loss) | $204m | ($11m) | $243m | ($117m) |
| Diluted GAAP EPS | $0.40 | ($0.03) | $0.48 | ($0.27) |
| Adjusted EBITDA (non-GAAP) | $360m | $98m | $596m | $107m |
- Q2 revenue rose 143% year over year; six-month revenue rose 195%. Bitcoin revenue was $2.724bn in Q2 and $6.235bn in the first half, but generated only 5% and 6% of gross profit, respectively. Excluding bitcoin revenue, revenue increased 87% in Q2 and 65% for the first half.
- Q2 segment results: Cash App revenue was $3.330bn and gross profit $546m; Seller revenue was $1.311bn and gross profit $585m. Gross Payment Volume was $42.8bn, up 88% year over year.
- Q2 gross margin was about 24%, compared with about 31% a year earlier; the large share of low-margin bitcoin revenue weighs on this consolidated comparison.
- For the six months, operating cash flow was $298m, versus cash used of $152m in 2020. Investing activities used $933m and financing activities provided $2.111bn; cash, cash equivalents, and restricted cash increased by $1.469bn.
- At June 30, cash and cash equivalents were $4.581bn; cash, restricted cash, and marketable debt securities totaled $6.633bn. Management cited approximately $7.1bn of available funds, including the undrawn $500m revolving facility.
- Debt carrying value was $4.841bn, with $4.904bn aggregate principal outstanding. This includes $2.0bn of senior unsecured notes issued in May. The $823.7m of PPP Liquidity Facility advances were separately reported as current liabilities and generally collateralized by PPP loans.
Material changes and notable items
- Revenue growth reflected reopening-related improvement in in-person Seller activity, continued growth in Cash App, and higher bitcoin prices and customer demand. Bitcoin accounted for 58% of Q2 revenue and 67% of the year-over-year revenue increase, making headline revenue particularly sensitive to bitcoin activity and prices.
- Q2 operating expenses increased 64% year over year to $1.016bn, including higher product development, sales and marketing, and general and administrative spending, plus $45.3m of bitcoin impairment. Transaction and loan-loss expense was $48.2m in Q2; the first-half amount declined 53% from 2020, partly because of lower COVID-related provisions.
- The company recognized $73.3m of Q2 gain from revaluing its DoorDash investment and sold its remaining investment in June; management said it would not affect future periods. Bitcoin impairment was $45.3m in Q2 and $65.1m for the first half. Under the accounting policy described, subsequent bitcoin price increases do not reverse impairment before sale.
- Square acquired 86.23% of TIDAL on April 30 for preliminary consideration of $237m, including cash, deferred consideration, and stock. Purchase accounting remains preliminary; the acquisition did not materially affect the reported statements.
- Effective January 1, 2021, Square early adopted convertible-debt accounting guidance, increasing reported debt and reducing equity by a net $399.7m at adoption; it also reduces future non-cash interest expense. This accounting change did not affect cash flows.
Outlook, risks, and contingencies
- Management described business results and outlook as positive, citing economic recovery, reopenings, Seller GPV, and Cash App spending and inflows. It gave no specific numerical financial guidance in this filing and cautioned that COVID-19 variants, renewed restrictions, and changes in stimulus could affect results.
- Management said existing liquidity was sufficient for working capital and planned capital expenditures for at least the next 12 months. The company was in compliance with its credit facility covenants; $500m remained available under its revolving facility.
- On August 1, 2021, after quarter-end, Square agreed to acquire Afterpay for an estimated $28.2bn of consideration, primarily approximately 114m Square Class A shares. The transaction remained subject to shareholder, regulatory, and other conditions; specified termination circumstances could trigger an approximately $283m payment.
- Risks highlighted include bitcoin price volatility and impairment accounting; COVID-19 and the durability of stimulus-driven activity; credit, transaction, and PPP administration risks; competition and execution in new businesses; TIDAL royalty estimates and rights-holder relationships; cybersecurity, fraud, payment processor reliance, and extensive financial-services regulation.
- The Texas Comptroller indicated it would seek a $38m sales-and-use-tax assessment, including interest and penalties, for an audit period ending April 2018; no written assessment had been received. Square disputes the position. The filing says litigation exposure for other matters cannot be reasonably estimated; resolution of matters could affect results in a particular period.
Important facts for investors to verify
- Separate bitcoin-related revenue from underlying transaction, subscription, and services growth; assess gross profit and Cash App customer activity rather than revenue alone.
- Track Seller GPV, Cash App engagement, and whether reopening- and stimulus-related growth persists; the filing provides no quantified forward guidance.
- Review operating expense growth, recurring share-based compensation, and the drivers of transaction and loan losses.
- Assess liquidity alongside customer funds and settlement obligations, PPP-related advances, and the company’s debt maturities and conversion terms.
- Monitor the Afterpay transaction’s approvals, final consideration and dilution, and integration risks; also follow TIDAL’s preliminary purchase accounting and royalty liabilities.
- Follow bitcoin impairment exposure, the Texas tax dispute, and other legal, regulatory, cybersecurity, and credit contingencies.