Business context and reporting period
Unaudited Form 10-Q for the three months ended March 31, 2016. The filing identifies the registrant as Square, Inc.; the request metadata says Block, Inc., so the issuer identity should be verified. Square provides payment processing, point-of-sale hardware and software, seller financing, marketing services, Square Cash and Caviar. Payment processing, including Starbucks, generated approximately 89% of revenue.
Financial and operating performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net revenue | $379.3 million | $250.6 million |
| Gross profit / gross margin | $110.2 million / 29.1% | $74.3 million / 29.6% |
| Operating loss | $97.1 million | $46.4 million |
| Net loss | $96.8 million | $48.0 million |
| Net loss per share, basic and diluted | $0.29 | $0.33 |
| Operating cash flow | $(15.5) million | $(11.0) million |
| Cash and cash equivalents at period end | $370.6 million | $201.0 million |
- Revenue increased 51%; GPV, excluding Starbucks and Square Cash, grew 45% to $10.3 billion. Transaction revenue rose 42%, software and data revenue 197%, and hardware revenue 634%.
- Adjusted Revenue, a company-defined non-GAAP measure that excludes transaction costs and Starbucks transaction revenue, increased 64% to $146.2 million. Adjusted EBITDA, also non-GAAP, was a loss of $9.1 million versus a loss of $20.1 million.
- Operating expenses grew 72% to $207.4 million. General and administrative expense included a $50.0 million litigation accrual; share-based compensation was $31.2 million, up from $13.5 million.
- Investing cash outflow was $81.3 million, mainly reflecting $73.1 million of marketable-security purchases; property and equipment purchases were $7.5 million. Cash declined $100.1 million during the quarter.
- Cash, cash equivalents and marketable securities totaled $443.8 million at March 31. A $375 million secured revolving credit facility was undrawn and available through November 2020. The company reported no funded debt under it.
- Current assets were $720.1 million and current liabilities $449.9 million. Total liabilities were $500.2 million. Restricted cash of $28.5 million was reported separately from cash and investments.
Material changes versus the prior comparable period
- Revenue growth outpaced cost of revenue growth (51% versus 53% growth in cost of revenue), and gross margin edged down to 29.1% from 29.6%.
- Net loss approximately doubled, principally alongside higher operating costs and the new $50.0 million litigation accrual. Excluding that accrual, reported Adjusted EBITDA loss improved, although that measure excludes several costs and is not a GAAP substitute.
- Transaction and advance losses declined to $7.9 million from $16.3 million, including the absence of a prior-year $5.7 million fraud loss from one seller and updated Square Capital estimates.
- Cash and cash equivalents decreased from $470.8 million at year-end; the company began holding $73.2 million of available-for-sale marketable securities at quarter-end.
Outlook, commentary, risks and unusual items
- Management said existing cash, investments and credit availability were expected to cover working capital and planned capital expenditures for at least 12 months, while noting additional financing might be sought and might not be available on acceptable terms.
- Starbucks had announced it would move to another processor and cease using Square before the existing agreement expired in Q3 2016. Starbucks contributed $38.8 million, or about 10% of Q1 revenue; the agreement’s amended rates had increased revenue while it remained in effect.
- Square expanded Square Capital from merchant cash advances to merchant loans. MCA receivables were $48.2 million net; management said estimates for uncollectible advances continued to be refined as historical data accumulated.
- A binding settlement term sheet with Robert Morley and REM was signed, but a definitive agreement was not finalized as of the filing. Square recorded a $50.0 million accrual; the court had denied its summary-judgment motion on April 22, 2016. The filing gave no assurance of final settlement terms.
- A Caviar courier classification class action was dismissed in its entirety on May 2, 2016, after the quarter ended; certain claims could potentially be pursued by another courier.
- Three third-party processors represented approximately 48%, 34% and 15% of settlements receivable at quarter-end. The company also cited working-capital volatility related to payment timing and daily GPV. Other risks include transaction losses, foreign-exchange exposure, and continued operating losses.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to the previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether this Square, Inc. filing is the intended filing for the Block, Inc. request.
- Final terms, timing and cash consequences of the Morley/REM settlement, and whether the $50.0 million accrual proves sufficient.
- Actual revenue and GPV impact as Starbucks transitions away, and Square’s ability to replace that business profitably.
- Whether revenue growth can translate into improving gross margins and operating results given higher expenses and share-based compensation.
- Operating cash use, settlement-receivable movements, processor concentration, and the performance and loss assumptions for Square Capital advances and loans.