Block, Inc. (then Square, Inc.) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. The filing was signed November 5, 2020. The company operates Seller and Cash App ecosystems; it adopted these two reportable segments effective June 30, 2020. Unless noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $3.034 billion | $1.266 billion | $6.339 billion | $3.400 billion |
| Gross profit | $794.5 million | $500.0 million | $1.930 billion | $1.363 billion |
| Operating income (loss) | $49.3 million | $32.1 million | $(64.0) million | $9.2 million |
| Net income (loss) | $36.5 million | $29.4 million | $(80.9) million | $(15.5) million |
| Adjusted EBITDA (non-GAAP) | $181.3 million | $131.3 million | $288.6 million | $298.3 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $260.9 million | $404.6 million |
Q3 gross margin was approximately 26.2%, versus 39.5% a year earlier; nine-month gross margin was approximately 30.4%, versus 40.1%. These percentages are heavily affected by bitcoin revenue and its nearly corresponding cost: Q3 bitcoin revenue was $1.634 billion and bitcoin cost was $1.602 billion, leaving about $32.1 million of gross profit. Bitcoin revenue depends on customer demand and can materially affect reported revenue and margins.
- Revenue mix and activity: Q3 transaction revenue rose 13% to $925.3 million; subscription and services revenue rose 60% to $447.5 million; hardware revenue rose 25% to $27.3 million; bitcoin revenue rose to $1.634 billion from $148.3 million. Gross Payment Volume (GPV) increased 12% to $31.729 billion. For the nine months, GPV increased 3% to $80.272 billion.
- Segment performance: Q3 Seller revenue was $965.3 million, up 5%, and gross profit was $409.3 million, up 12%. Cash App revenue was $2.069 billion, up 574%, and gross profit was $385.1 million, up 212%; bitcoin was the principal driver of Cash App revenue growth.
- Expenses and earnings: Q3 operating expenses rose 59% to $745.1 million, including a 133% increase in sales and marketing, primarily reflecting Cash App activity and marketing. Nine-month transaction and loan losses rose 71% to $161.7 million; Q3 expense declined year over year after the company released $39.6 million of previously established transaction-loss provisions. Nine-month share-based compensation was $283.9 million.
- Cash flow: Operating cash flow for the nine months declined to $260.9 million. Investing cash outflow was $531.7 million, including net purchases of marketable securities, capital expenditures of $86.4 million, and acquisitions. Financing cash inflow was $1.331 billion, principally from the 2025 convertible notes and PPP Liquidity Facility borrowings.
Balance sheet, debt, and liquidity
- At September 30, cash and cash equivalents were $2.119 billion; restricted cash was $41.3 million; short- and long-term marketable debt securities totaled $1.162 billion. Together, cash, restricted cash, and marketable debt securities were $3.322 billion.
- Management reported approximately $3.8 billion of available funds, including the undrawn $500 million revolving credit facility, and said resources were sufficient for working capital and planned capital expenditures for at least 12 months. Customer funds of $1.851 billion are associated with customer obligations and should not be treated as unrestricted corporate liquidity.
- Reported long-term debt carrying value was $1.759 billion; principal outstanding on the 2022, 2023, and 2025 convertible notes totaled $2.009 billion. The $1.0 billion 2025 notes were issued in March at 0.125% interest. The $500 million revolving facility was undrawn.
- PPP Liquidity Facility advances were $473.5 million, at 0.35% interest and collateralized by PPP loans. Current liabilities were $3.826 billion, including $2.723 billion of customers payable and the PPP advances.
- Loans held for sale totaled $524.2 million, including $462.1 million of PPP loans. Management said PPP-related credit losses were immaterial given government guarantees and potential forgiveness.
Material changes and management outlook
- Management described a sharp Seller-business slowdown from late March through mid-April during COVID-19 restrictions, followed by improvement as sellers adapted to contactless and online commerce, restrictions eased, and stimulus supported spending. Management warned that renewed restrictions or economic deterioration could reduce revenue and increase transaction and loan losses.
- Cash App benefited from increased bitcoin activity, customer engagement, and stimulus and unemployment benefit deposits. Management cautioned that growth may not continue at the same pace as stimulus programs and benefits end.
- Square Capital suspended regular seller lending in the second quarter, except PPP lending, and resumed regular lending under stricter eligibility criteria at the end of July. Management said it could take time for loan volumes to return to pre-pandemic levels.
- No specific numerical earnings or revenue guidance is provided in the supplied filing text. Management said it would continue monitoring COVID-19 conditions and adjusting investment and discretionary spending.
- Subsequent to quarter-end, the company invested $50 million in bitcoin in October, intending to hold it long term. Management noted that declines below cost may require impairment charges, without upward accounting adjustments when prices recover. The company also announced a $100 million commitment to support underserved communities.
- The company expects to early-adopt convertible-instrument accounting guidance on January 1, 2021, anticipating a material reclassification from equity to debt and lower interest expense.
Risks, contingencies, and unusual items
- COVID-19 and credit estimates: The pandemic created heightened uncertainty in transaction-loss reserves and loan valuations. Better-than-estimated realized losses led to the Q3 $39.6 million release of prior-period provisions; future actual losses may differ materially from estimates.
- Tax dispute: Texas indicated it would assess $38 million, including interest and penalties, over sales and use taxes for 2015–April 2018. The company disputes the assessment; additional exposure for later periods could also be material.
- PPP program: The company identified potential documentation, verification, forgiveness, servicing, regulatory, litigation, and government-guarantee risks associated with facilitating PPP loans and borrowing against them.
- Litigation and regulation: The company is involved in ordinary-course litigation, claims, and investigations; it could not estimate a reasonable exposure range for certain matters. Payments, lending, money transmission, securities, cryptocurrency, privacy, and data security are subject to extensive and evolving regulation.
- Convertible notes and dilution: Holders could require cash payment or repurchase in specified circumstances, although the company currently expects to settle future conversions in shares. Note conversions, warrants, and equity compensation may dilute shareholders.
- Concentration and related party: Two third-party processors represented approximately 52% and 36% of settlements receivable at quarter-end. The company also recorded lease assets and liabilities for a long-term St. Louis lease with an affiliate of co-founder and director Jim McKelvey.
Most important facts for investors to verify
- How much of reported revenue growth and margin change reflects bitcoin resale volume rather than higher-margin operating activity; review GPV and segment gross profit alongside GAAP revenue.
- Whether Seller GPV, Cash App engagement, and subscription growth remain resilient as pandemic conditions, reopening patterns, and stimulus support change.
- Whether transaction-loss reserves, loan valuations, and regular Square Capital lending assumptions are supported by subsequent realized results.
- The status and potential total exposure of the Texas sales-tax dispute and other tax examinations.
- Liquidity available after accounting for customer funds, PPP collateral and repayment mechanics, convertible-note settlement choices, and the company’s investment commitments.
- The ongoing effects of share-based compensation, potential dilution from notes and warrants, and the anticipated accounting change for convertible debt.