Business context and reporting period
Square, Inc. (the registrant named in this filing; now Block, Inc.) reported unaudited results for the quarter and six months ended June 30, 2017. Its business spans payment processing, seller software and services, Square Cash, Square Capital, Caviar, and hardware. The company reported one operating segment.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net revenue | $551.5 million | $438.5 million | $1,013.1 million | $817.8 million |
| Gross profit | $207.4 million | $149.0 million | $380.9 million | $259.2 million |
| Gross margin | 37.6% | 34.0% | 37.6% | 31.7% |
| Operating loss | $(12.2) million | $(27.4) million | $(26.3) million | $(124.5) million |
| Net loss | $(16.0) million | $(27.3) million | $(31.1) million | $(124.1) million |
| GAAP net loss per share | $(0.04) | $(0.08) | $(0.08) | $(0.37) |
- Q2 transaction-based revenue rose 32% to $482.1 million; subscription and services revenue increased 99% to $59.2 million. Gross Payment Volume (GPV) grew 32% to $16.4 billion. Hardware revenue declined 7% to $10.3 million.
- Six-month Adjusted Revenue, a company-defined non-GAAP measure, was $444.2 million, up 40%; Adjusted EBITDA was $63.5 million versus $3.5 million; and Adjusted diluted earnings per share were $0.12 versus a loss of $0.03. These measures exclude specified items and should be read alongside GAAP results.
- For the six months, operating cash flow was $90.6 million, versus cash used of $32.5 million a year earlier. Investing activities used $255.7 million and financing activities provided $427.8 million.
- At June 30, cash and cash equivalents were $717.0 million; short- and long-term marketable investments totaled $327.4 million; and restricted cash was $36.7 million. Total cash, cash equivalents, restricted cash, and investments were $1.081 billion. The MD&A separately cites $1.044 billion of cash and investments, excluding restricted cash.
- Convertible notes had $440 million principal and $350.0 million net carrying value; disclosed fair value was $539.1 million. The $375 million secured revolver was undrawn and fully available. Stockholders’ equity was $703.7 million.
Material changes versus the prior comparable period
- Revenue growth reflected 32% GPV expansion and stronger subscription and services revenue. The latter was led by Instant Deposit, Caviar, and Square Capital.
- Starbucks completed its transition to another provider in late 2016. Square reported no Starbucks transaction revenue in 2017 and said it did not expect future revenue from Starbucks.
- Operating and net losses narrowed year over year. Six-month general and administrative expense also fell versus 2016, which included a $48 million legal settlement charge; excluding that prior-year item, 2017 expense increased.
- Square issued $440 million of convertible notes in March, entered into note hedges and warrants, and paid $54.8 million to terminate the Starbucks warrant. Cash and investments increased from $576.0 million at year-end 2016 to $1.081 billion, including restricted cash.
Outlook, risks, contingencies, and unusual items
- No specific revenue, earnings, or margin guidance was provided. Management said available cash, investments, and revolver capacity should cover working capital and planned capital expenditures for at least 12 months; future financing may be pursued, with no assurance of availability on acceptable terms.
- Management identified growth, seller retention, competition and pricing, payment-network and processor dependence, fraud and chargebacks, cybersecurity and service interruptions, regulation, international expansion, and Square Capital funding and credit performance as significant risks.
- One of the three largest acquiring-processor agreements was due to expire in 2017; the company said it was negotiating a replacement. The filing notes that processor relationships are important to transaction processing and settlement.
- Caviar courier misclassification matters had reached a preliminary global settlement, subject to final approval; the company accrued an immaterial expected settlement amount. Exposure from other legal matters could not be reasonably estimated.
- Convertible notes carry a 0.375% coupon but a 5.34% effective interest rate on the liability component due to discount and issuance-cost amortization. Potential conversion, repurchase, and dilution obligations remain relevant.
- Share-based compensation was $39.6 million in Q2 and $71.3 million for the six months. Management reported disclosure controls effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether GPV growth and rising subscription and services revenue persist, and how much growth translates into gross profit after transaction costs.
- Whether improving GAAP losses and operating cash flow are sustainable, given working-capital volatility, loan activity, and substantial recurring share-based compensation.
- The cash and investment figure used for liquidity analysis, distinguishing restricted cash from funds available for general use; also monitor the undrawn revolver and the 2022 notes’ cash-settlement terms.
- Progress in renewing the expiring processor agreement, and any changes in processor concentration or settlement exposure.
- Final resolution and cost of the Caviar courier settlement, and developments in other litigation and regulatory matters.
- Performance and funding arrangements for Square Capital, including loan losses and the continued willingness of institutional investors to purchase loans.