Business context and reporting period
This is Square, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed February 27, 2019; it is an annual report, not a standalone fourth-quarter filing. The company’s business includes seller payments, point-of-sale software and hardware, Square Capital, Caviar, and Cash App. The filing does not identify the issuer as Block, Inc.
Square processed $84.7 billion of gross payment volume (GPV) in 2018, up 30% from 2017. GPV from larger sellers was 51% of fourth-quarter volume, versus 47% a year earlier. Weebly was acquired in May 2018 for approximately $272.5 million in cash and stock, adding website and online-store services.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total net revenue | $3.298 billion | $2.214 billion | +49% |
| Gross profit | $1.304 billion | $839.3 million | +55% |
| Gross margin | 39.5% | 37.9% | +1.6 percentage points |
| Operating loss | $36.6 million | $54.2 million | Loss narrowed |
| Net loss | $38.5 million | $62.8 million | Loss narrowed |
| Adjusted EBITDA (non-GAAP) | $256.5 million | $139.0 million | +85% |
| Operating cash flow | $295.1 million | $127.7 million | More than doubled |
Transaction-based revenue rose 29% to $2.471 billion. Subscription and services revenue increased 134% to $591.7 million, reflecting Instant Deposit, Caviar, Cash Card, Square Capital, and acquisitions. Bitcoin revenue was $166.5 million, largely offset by $164.8 million of bitcoin costs; bitcoin revenue therefore does not represent a comparable amount of net economic contribution. Hardware revenue increased 65% to $68.5 million.
Fourth-quarter 2018 revenue was $932.5 million, versus $616.0 million in fourth-quarter 2017. Fourth-quarter net loss was $28.2 million, compared with $15.7 million a year earlier; quarterly results included volatile investment revaluation effects. The filing reports seasonally stronger transaction activity in the fourth quarter, although growth had historically masked seasonality.
Cash and cash equivalents were $583.2 million at year-end, down from $696.5 million. Cash, cash equivalents, restricted cash, and marketable debt securities totaled $1.639 billion, compared with $1.108 billion. Working capital was $1.093 billion. Operating cash flow was $295.1 million; investing cash outflow was $905.8 million, primarily reflecting purchases of marketable securities, acquisitions, and capital spending. Financing cash inflow was $515.8 million.
Long-term debt carrying value was $899.7 million, against $1.074 billion of convertible-note principal outstanding. Square issued $862.5 million of 0.50% convertible notes due 2023 and had $211.7 million principal remaining on its 2022 notes after conversions. A $375 million revolving credit facility was undrawn. Management stated available cash, investments, and credit capacity were expected to cover working capital and planned capital spending for at least 12 months.
Material changes versus the prior comparable period
- Revenue growth accelerated to 49% from 30% in 2017, with GPV up 30% and substantial expansion in subscription and services revenue.
- Gross margin improved, and GAAP operating and net losses narrowed, although the company remained loss-making.
- Adjusted EBITDA and adjusted earnings per share improved materially; 2018 adjusted EPS was $0.55 basic and $0.47 diluted, versus $0.30 and $0.27. These non-GAAP measures exclude, among other items, share-based compensation and other costs; share-based compensation was $216.9 million and is a significant recurring expense.
- Cash from operations increased, while investment and acquisition activity drove substantially higher investing outflows. Year-end cash and equivalents fell, while the investment portfolio and total reported liquid resources grew.
- Square adopted ASC 606 in 2018. The company reported a $6.4 million revenue increase from adoption for the year and a $4.6 million reduction to opening retained earnings.
Outlook, risks, contingencies, and unusual items
No numerical revenue, earnings, or GPV guidance is provided in this filing. Management described continued investment in product development, marketing, employees, acquisitions, and international expansion, and cautioned that growth rates may slow and profitability is not assured.
- Key operating risks include intense competition, dependence on card networks and acquiring processors, fraud and chargebacks, cybersecurity and service disruptions, and reliance on limited suppliers for hardware components. U.S. tariffs on some China-manufactured hardware could pressure margins.
- Square Capital depends in part on third-party investors purchasing loans and on its bank partner; loan performance and funding availability may weaken in adverse economic conditions.
- Regulatory and legal uncertainties include payments and lending rules, data privacy requirements, cryptocurrency regulation, and San Francisco’s disputed classification of Square’s business for gross-receipts and payroll taxes. The company paid assessed taxes for 2014 and 2015 but could face additional taxes, penalties, and interest; it could not estimate the possible exposure.
- Two California matters allege Caviar couriers were misclassified as independent contractors. Their potential liability was not reliably estimable at the filing date.
- 2018 included a $20.3 million gain from revaluing the Eventbrite investment after its IPO and a $5.0 million loss on extinguishment of converted 2022 notes. These items affect reported results and may not recur consistently.
- Convertible notes may create dilution or cash obligations depending on conversion and settlement decisions. The filing also describes potential dilution from equity compensation and the company’s dual-class voting structure.
Important facts for investors to verify
- Reconcile GAAP losses with adjusted EBITDA and adjusted EPS, including the recurring impact of share-based compensation and other exclusions.
- Assess whether subscription and services growth, larger-seller GPV, and Cash App activity can continue, and distinguish bitcoin transaction volume from revenue contribution.
- Review cash-flow quality, working-capital swings from payment settlements and customer funds, and the composition and availability of reported liquid resources.
- Track remaining convertible-note principal, conversion terms, potential share dilution, and debt maturities.
- Monitor the San Francisco tax dispute, Caviar courier litigation, and relevant regulatory developments, including privacy and cryptocurrency rules.
- Confirm the filing period and issuer: the document is Square, Inc.’s FY 2018 10-K, not a quarterly filing for Block, Inc.