Block, Inc. (then Square, Inc.) — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. The filing was made under the name Square, Inc. The business comprises Seller and Cash App ecosystems.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net revenue | $5.057 billion | $1.381 billion | +266% |
| Bitcoin revenue | $3.511 billion | $306.1 million | +1,047% |
| Gross profit | $963.5 million | $538.5 million | +79% |
| Operating income (loss) | $67.7 million | ($90.3 million) | Improved |
| Net income (loss) | $39.0 million | ($105.9 million) | Improved |
| Diluted EPS | $0.08 | ($0.24) | Improved |
| GPV | $33.138 billion | $25.743 billion | +29% |
| Adjusted EBITDA (non-GAAP) | $236.2 million | $9.3 million | Higher |
| Operating cash flow | ($97.7 million) | $121.3 million | Declined |
- Bitcoin accounted for 69% of reported revenue and 87% of its year-over-year increase, but generated only 8% of gross profit. Excluding bitcoin revenue, net revenue rose 44% to approximately $1.546 billion.
- Seller revenue increased 19% to $1.018 billion, with gross profit up 32% to $468.0 million. Cash App revenue increased 666% to $4.040 billion, including bitcoin; segment gross profit rose 171% to $495.5 million.
- Reported gross margin was approximately 19% versus 39% in Q1 2020, heavily affected by bitcoin’s large revenue base and low transaction spread. Excluding bitcoin, gross margin was approximately 57% versus 49%.
- Operating expenses increased 42% to $895.8 million. Product development, sales and marketing, and general and administrative costs rose substantially; transaction and loan losses fell 81% to $20.4 million.
Balance sheet, liquidity, and debt
- At March 31, cash and cash equivalents were $3.022 billion; cash, cash equivalents, restricted cash, and marketable debt securities totaled $4.286 billion. The company also had $500 million available under its undrawn revolving credit facility, reporting approximately $4.8 billion of available funds including that facility.
- Total assets were $11.349 billion and total liabilities were $9.034 billion. Long-term debt was $2.980 billion on the balance sheet; convertible notes had $3.017 billion aggregate principal outstanding and $2.985 billion carrying value.
- PPPLF advances were $764.2 million outstanding, collateralized by the same value of PPP loans. The $500 million revolving facility was undrawn, and the company reported compliance with its financial covenants.
- Operating cash flow was negative, principally reflecting net PPP loan facilitation and timing-related working-capital outflows. Investing cash outflow was $158.0 million, including $170 million of bitcoin purchases; financing cash inflow was $181.0 million, primarily net PPPLF advances.
Material changes and unusual items
- Revenue growth reflected higher bitcoin prices and customer demand, growth in Cash App services, stimulus-related consumer inflows, and improving Seller GPV as some regions reopened. Management noted Seller GPV improved in March versus January and February.
- Q1 results included a $19.9 million bitcoin impairment charge. The bitcoin investment’s reported fair value was $472.0 million versus its $200.1 million carrying value; accounting rules do not permit reversing impairment for subsequent price increases until sale.
- A $28.9 million loss from revaluing the DoorDash equity investment increased other expense. The investment was carried at $328.4 million at quarter-end.
- The company early adopted ASU 2020-06 on January 1, 2021. Adoption increased convertible debt carrying value by $399.7 million and reduced additional paid-in capital by $502.7 million, with a $103.0 million cumulative adjustment to accumulated deficit. It also reduced future non-cash interest expense; it did not affect cash flows.
- Square Financial Services received FDIC and Utah charter approval and began banking operations March 1; its operations were not material in the quarter. On April 30, after quarter-end, the company completed its majority-interest acquisition of TIDAL for $302 million.
Outlook, risks, and contingencies
- The filing provides no specific numeric revenue or earnings guidance. Management said stimulus programs benefited Q1 results and expected American Rescue Plan funds to positively affect results, while emphasizing that pandemic impacts and the timing of recovery remain uncertain. It cautioned that Cash App growth may not be sustained at recent rates and bitcoin revenue varies with customer demand and market prices.
- Key uncertainties include COVID-19 effects on sellers, consumers, and credit performance; dependence on stimulus-related activity; bitcoin volatility and asymmetric impairment accounting; competition; fraud, chargebacks, cybersecurity and third-party processing risks; and extensive financial-services regulation, including obligations associated with Square Financial Services.
- The Texas Comptroller indicated it intended to assess $38 million, including interest and penalties, following a sales and use tax audit. A written assessment had not been received; the company disputes the position. The filing also describes other litigation and tax examinations whose outcomes or potential exposure were not clearly quantifiable.
- The company reported disclosure controls and procedures were effective at the reasonable-assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of ongoing growth and gross profit comes from core Seller and non-bitcoin Cash App activity versus bitcoin trading and temporary stimulus effects.
- Whether operating cash flow improves as PPP lending and working-capital balances change, and how PPP loan forgiveness and PPPLF repayments progress.
- Convertible-note conversion, settlement, dilution, and cash requirements; the filing said the 2022, 2023, and 2025 notes were convertible in Q2 2021 under the applicable price conditions.
- Bitcoin investment valuation, impairment exposure, and actual realization of any gains; and changes in the DoorDash investment’s fair value.
- Resolution and potential financial exposure of the Texas tax matter and other legal, regulatory, and tax contingencies.
- Integration costs, operating performance, and risks arising from the post-quarter TIDAL acquisition and the launch of Square Financial Services.