Business context and reporting period
Square, Inc. (the registrant named in this filing; now Block, Inc.) filed this Form 10-K for the fiscal year ended December 31, 2016. Its commerce ecosystem combines payment processing, point-of-sale software and hardware, Square Capital, Square Cash, and Caviar. Results are annual unless otherwise noted; fourth-quarter figures are unaudited.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Gross Payment Volume (GPV) | $49.7 billion (+39%) | $35.6 billion (+50%) |
| Total net revenue | $1.709 billion (+35%) | $1.267 billion (+49%) |
| Adjusted Revenue (non-GAAP) | $686.6 million (+52%) | $452.2 million (+64%) |
| Gross profit / gross margin | $576.0 million / 33.7% | $370.0 million / 29.2% |
| Operating loss | $170.5 million | $174.5 million |
| Net loss | $171.6 million | $179.8 million |
| Adjusted EBITDA (non-GAAP) | $44.9 million | $(41.1) million |
| Cash from operating activities | $23.1 million | $21.1 million |
- Transaction-based revenue was $1.456 billion, up 39%; subscription and services-based revenue grew 123% to $129.4 million, led primarily by Square Capital and Caviar. Hardware revenue rose 171% to $44.3 million.
- Fourth-quarter 2016 revenue was $451.9 million versus $374.4 million a year earlier. GPV was $13.7 billion versus $10.2 billion; Adjusted Revenue was $191.9 million versus $134.5 million; and Adjusted EBITDA was $29.8 million versus a loss of $6.1 million.
- GPV from larger sellers (over $125,000 annualized GPV) reached 42% in Q4 2016, up from 39% in Q4 2015. No customer represented more than 10% of 2016 revenue or GPV.
- 2015 net loss attributable to common stockholders was $212.0 million, including a $32.2 million deemed dividend; 2016 had no comparable dividend. Adjusted Revenue and Adjusted EBITDA are non-GAAP measures and should be considered alongside GAAP results.
Liquidity, debt, and cash flows
- At December 31, 2016, cash and cash equivalents were $452.0 million and short- and long-term marketable securities totaled $87.3 million, for $539.3 million combined. Cash and equivalents were $461.3 million at year-end 2015.
- Working capital was $424.0 million, compared with $371.4 million. Current assets and liabilities include significant settlement and customer-funds balances that fluctuate with transaction timing.
- No debt was outstanding. A secured revolving credit facility provided $375.0 million of undrawn availability and matures in November 2020. Management said available cash, investments, and credit capacity should cover working capital and planned capital expenditures for at least 12 months.
- Investing activities used $122.7 million, mainly reflecting net purchases of marketable securities; financing activities provided $90.7 million. Capital expenditures were $25.4 million. Restricted cash totaled $36.7 million.
Changes, outlook, risks, and unusual items
- Starbucks completed its transition to another provider in Q4 2016. Starbucks revenue fell 45% to $78.9 million for the year; Square does not expect it to recur. The filing also reports a February 2017 agreement to pay Starbucks approximately $54.8 million to cancel warrants for 9.46 million shares.
- Square fully transitioned from merchant cash advances to loans originated through a bank partner in Q1 2016. It sells most loans to third-party investors and services them; the model depends on investor demand and the bank relationship.
- General and administrative expense rose 76% to $252.0 million, including a $48.0 million company payment to settle litigation with Robert E. Morley. The settlement was completed in June 2016.
- Square recorded a $6.0 million out-of-period adjustment in 2016 to correct an understatement of transaction-loss reserves in prior periods; management concluded it was not material to the periods affected. It also corrected an immaterial prior cash classification error involving Square Cash customer funds.
- No numerical forward guidance is provided. Management expects continued investment in product development, growth, and international operations; it also expects product development, sales and marketing, and general and administrative expenses to decline over time as a percentage of revenue, while noting growth and profitability are uncertain.
- Key risks include payment-processing and card-network dependence, fraud and chargebacks, data security and service outages, intense competition and pricing pressure, extensive financial regulation, reliance on third-party loan investors and a bank partner, and the ability to sustain growth and reach GAAP profitability. The Caviar courier classification matters remained in litigation; the filing says exposure for other disputes could not be reasonably estimated.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting as of year-end.
Investor verification priorities
- Track core payments growth and unit economics: GPV, transaction-based revenue, transaction costs, and the gap between GAAP revenue and Adjusted Revenue.
- Assess underlying profitability and cash generation, including the effects of recurring share-based compensation and excluded items in non-GAAP measures.
- Confirm the post-Starbucks revenue and margin trajectory, and the cash and share impact of the $54.8 million warrant cancellation agreement.
- Monitor Square Capital loan-sale proceeds, investor funding availability, retained loan exposure, and credit and loss assumptions.
- Review the development and resolution of Caviar courier litigation and any regulatory, fraud, chargeback, or security events.