Block, Inc. (then Square, Inc.) — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The filing was made under the name Square, Inc. Amounts below are U.S. dollars.
Business context and results
Square operated Seller payment and commerce services alongside Cash App financial services. The quarter included the early effects of COVID-19, which disrupted sellers and customer activity, particularly from mid-March.
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net revenue | $1.381 billion | $959.4 million |
| Gross profit / gross margin | $538.5 million / 39.0% | $396.8 million / 41.4% |
| Operating loss / operating margin | $(90.3) million / (6.5)% | $(22.0) million / (2.3)% |
| Net loss / diluted loss per share | $(105.9) million / $(0.24) | $(38.2) million / $(0.09) |
| Adjusted EBITDA (non-GAAP) | $9.3 million | $61.7 million |
| Gross Payment Volume (GPV) | $25.743 billion, up 14% | $22.587 billion |
| Operating cash flow | $121.3 million | $32.4 million |
| Cash, cash equivalents and restricted cash at period-end | $2.010 billion | $569.3 million |
Financial position and material changes
- Revenue rose 44% year over year. Bitcoin revenue increased to $306.1 million from $65.5 million, while its associated costs were $299.4 million; this high-volume, low-margin activity contributed substantially to reported revenue growth. Transaction revenue increased 15%, broadly in line with 14% GPV growth.
- Gross margin declined to 39.0% from 41.4%. Operating expenses rose 50% to $628.8 million, including transaction and loan losses of $108.9 million versus $27.8 million a year earlier. The provision for transaction losses was $79.3 million versus $19.8 million; the loan fair-value charge was $22.0 million versus $6.7 million.
- Cash provided by operations was $121.3 million; investing activities used $114.6 million, including securities purchases, capital expenditures and acquisitions. Financing provided $918.1 million, mainly from the March issuance of 2025 convertible notes. Capital expenditures were $26.1 million.
- At March 31, cash and cash equivalents were $1.962 billion and short- and long-term marketable debt securities totaled $1.051 billion. Together with restricted cash, these totaled $3.061 billion. Management separately described approximately $3.4 billion of available funds including credit availability.
- Convertible notes had $2.049 billion aggregate principal outstanding and $1.761 billion net carrying value, including $1.0 billion of 2025 notes issued in March at 0.125% interest. The company also bought note hedges and sold warrants in connection with that issuance. The 2022 notes remained convertible under their terms; the company expected future conversions to be settled in shares, subject to review.
- In May 2020, after quarter-end, Square replaced its $375 million revolving facility with a $500 million senior unsecured facility maturing in May 2023; no funds had been drawn. Also after quarter-end, the company entered into a San Francisco tax settlement agreement, subject to city approvals.
Outlook, risks and unusual items
- Management expected COVID-19 and related economic disruption to have a material adverse effect on business, results, financial condition and cash flows. Seller GPV fell 35% year over year in the latter half of March; the slowdown continued into Q2. January and February Seller GPV had grown 29% year over year.
- The company anticipated lower revenue and operating cash inflows and potentially higher transaction and loan losses. It was reassessing hiring, real estate, marketing, travel and other discretionary spending. It refunded certain seller software subscription fees for March and April and offered subscription pauses.
- Management said available funds were sufficient for working capital and planned capital expenditures for at least the next 12 months, while warning that external financing could become more difficult or costly. No specific revenue, profit or GPV guidance was provided.
- Square Capital was approved as a lender under the federal Paycheck Protection Program. The filing highlights potential verification, forgiveness, servicing, compliance and credit risks associated with participation in the program and Cash App’s facilitation of stimulus payments.
- A San Francisco tax classification dispute could result in additional taxes, interest and penalties estimated at $0–$66 million for fiscal years 2016–2019 and Q1 2020, beyond amounts already paid; future-period exposure could also be material. Other legal matters were not quantifiable from the filing.
- COVID-related estimates for chargebacks, loan valuations and customer repayment were unusually uncertain. The company reported no goodwill or intangible-asset impairment in its quarter-end assessments. Its effective tax rate was negative, in part because valuation allowances prevented recognition of tax benefits.
Investor verification points
- Track post-March Seller GPV, revenue trends and the duration and severity of COVID-related customer disruption.
- Assess whether transaction and loan-loss provisions adequately reflect chargebacks, seller failures and loan repayment conditions.
- Separate bitcoin-related gross revenue from its much smaller contribution after bitcoin costs when evaluating growth and margins.
- Review cash generation and liquidity, including the distinction between company cash and customer funds, and the terms and availability of the post-quarter $500 million revolver.
- Monitor convertible-note conversion, dilution and settlement choices, and the potential effect of warrants and note hedges.
- Check approvals and final terms of the San Francisco tax settlement and assess any remaining tax or legal exposure.