Block: "US Alipay" staying strong and positive amidst adversity?
After the US stock market closed on May 5th Beijing time, digital payment company Block (SQ.US) released its Q1 2023 financial report. Overall, the actual performance was better than the market's conservative expectations, but lacked eye-catching highlights. The key points are as follows:
1. Square business - slightly better than expected but already in a platform period? The company's basic B2B Square business achieved a total revenue of $1.67 billion this quarter, which is basically consistent with the market's expectation of $1.68 billion.
Although the YoY growth rate continued to decline from 19% in the previous quarter to 15%, the increase brought by Afterpay (which accounted for about $4.6 billion in revenue at the time of the merger in 1Q22) disappeared in this quarter's figures. Therefore, although the growth rate appears to have significantly decreased, the actual comparable growth should not be too bad.
Breaking it down by business segment: ① Transaction fees generated revenue of approximately $1.29 billion this quarter, a YoY growth rate of 15%, and a QoQ increase of 3 percentage points due to the low base effect of last year. ② Subscription & Services business achieved revenue of $342 million, with a YoY growth rate of 57%, a significant increase. However, it is difficult to calculate the comparable growth rate of the original business because the impact of Afterpay cannot be eliminated.
In terms of business operations, the newly issued loans this quarter amounted to $1.1 billion, which is slightly lower than the previous quarter. Additionally, since 2Q22, the volume of new loans has remained at slightly above $1.1 billion for four consecutive quarters, which indicates that it has not been able to further grow and seems to have entered a period of growth bottleneck. The GPV of C2B payments was $46 billion, a YoY growth rate of 17%, a decrease of $3 billion QoQ, and a continuous decline in scale since 3Q22.
At the same time, the transaction fee rate continues to decline, with a decrease of 0.1 percentage points QoQ. As the scale continues to grow and competition intensifies, the fee rate may continue to decline steadily in the future.
The only highlight is that the gross profit from overseas markets reached $120 million this quarter, a YoY growth rate of nearly 42%, accounting for 16% of Square's overall gross profit. The overseas market may truly become the driving force for growth in the future.
2. Cash App demonstrates its anti-cyclicality and growth potential: The consumer-oriented mobile wallet Cash App business has stronger anti-cyclical growth potential due to its logic of penetrating the market.
After excluding the Bitcoin business this quarter, the Cash App segment achieved revenue of $1.1 billion, a YoY growth rate of 52%, which is also higher than the market's expected $1 billion. It can be seen that Cash App has indeed stronger growth potential.
Specifically, based on the transaction fee income generated by C2B payments within Cash App, it amounted to $135 million, a YoY growth rate of 23%, significantly higher than the B2B Square growth rate. Subscription services focused on co-branded credit cards and instant withdrawals (to bank accounts) generated revenue of $970 million this quarter, an 8% QoQ increase. In terms of operating data, the proportion of transactions made with Cash App joint bank cards has increased from 33% to 38% compared to last year. Instant deposit service reached a total amount of $2.5 billion in March, with a year-on-year growth of 69%. In the first quarter, Cash App received a total of $61 billion in funds, with a year-on-year growth rate of 27%, which is the highest growth rate in a single quarter in 22 years.
From the above indicators, it can be seen that Cash App still has good growth.
The gross margin seems to have declined, but it is actually not bad: adding up all businesses, the company's total revenue this quarter was $4.99 billion, a year-on-year growth of 14%. Excluding the bitcoin revenue, which accounts for nearly half of the revenue but has extremely low gross margin, the core revenue was RMB 2.83 billion, a year-on-year growth of 27%, which is significantly higher than the market's expected RMB 2.68 billion. Square performed well overall, and Cash App remains the main force behind growth.
From a more concerning gross margin perspective, Block achieved a gross profit of $1.72 billion this quarter, a year-on-year growth of more than 32% on a low base, but the gross margin decreased by 0.6 percentage points on a month-on-month basis, to 34.4%.
Looking at each segment, the gross margin of Cash App was flat month-on-month, the gross margin of Square segment increased by 0.6 percentage points on a month-on-month basis, and the gross margin of Bitcoin also improved. Only the gross margin of the group and new businesses declined. Therefore, the overall gross margin decline of Block was only due to changes in marginal businesses and revenue structures, and the gross margin of the actual core business was increasing.
Profit release depends on cost control: In the case of a year-on-year increase in total revenue (excluding BTC) of 27% and total gross profit of 32%, the company's total operating expense this quarter was $1.72 billion, a year-on-year growth rate of nearly 13%, indicating that Block has begun to control costs this quarter. Looking at it separately, except for research and development expenses, which are still increasing at a rate of 29%, marketing and internal management expenses have both decreased year-on-year.
Overall, the company's revenue and gross profit growth this quarter cannot be considered strong, and the growth rate is still slowing down (but slightly higher than conservative expectations), but due to a significant reduction in expenditure, the GAAP operating loss has narrowed to only $6 million, significantly lower than the market's expected loss of $130 million.
However, Block's fluctuating pace of expenditure makes it difficult for the market to grasp the management's strategy and the sustainability of the company's profit improvement.
Q2 2023 performance guidance: Looking ahead to the next quarter, the guidance given is that the company's total gross profit growth rate in April is 24%, which is still slowing down compared to this quarter's 32% growth. However, it is not bad compared to the market's expected growth rate of 22%.
At the same time, the management also guided that the non-GAAP operating expenses for Q1 will increase by $200 million compared to the previous quarter, to $1.56 billion, which means that profits may decline again next quarter, and the company's problem of erratic cost and profit spikes has not been resolved.
According to Changqiao Dolphin, Block's overall performance this quarter was not as bad as expected, but there were no highlights (although revenue and gross profit slightly exceeded expectations, they are in a slowing trend), and the impression is rather bland. The outlook for the next quarter is also a story of "better-than-expected growth but still slowing down, while profits may deteriorate", which is difficult to judge whether it is good or bad, therefore, the market may not have a particularly strong reaction.
As for the judgment of later performance, the Square sector has currently entered a platform period of macroeconomic volatility, while Cash App still has room for penetration and monetization. Therefore, the focus in the future is on the development of the US macroeconomy, as well as the number of Cash App users, their level of activity, and whether there are new monetization measures.
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I. How to view Block's financial report?
Although Block's revenue scale is not that of a giant, its business structure is quite complex. Readers can use the table below to briefly understand the company's business structure in order to better understand Block's financial report and our analysis below. In brief, the company's core business consists of two major segments: the Square ecosystem for merchants, and the Cash App digital wallet ecosystem for individuals.
1. Square business: provides merchants with POS machine hardware and payment settlement services as its cornerstone, and extends to merchant operating loans (Square Loan), ERP/CRM and other software management services for merchants.
2. Cash App business: based on the free P2P transfer service between individuals, extending to C2B payments (Cash for Business or Cash App Pay), co-branded bank card services, installment shopping services (Afterpay), stock investment (commission-free), and bitcoin transactions, etc. The company records the total trading volume of Bitcoin as revenue (rather than net price difference), a business with large revenue scale and fluctuations.
- In addition, the company's acquisition of the installment shopping company Afterpay in the first quarter of 2022 has been incorporated into the performance of the Square and Cash App segments respectively, with a 50% share. The company's acquisition or establishment of emerging businesses such as the Tidal music streaming app, the Spiral cryptocurrency development platform, and the TBD decentralized technology development platform currently account for a small proportion and do not require attention. 2. Has C2B Payment Business Stabilized?
Firstly, the core to-B sector of the company, Square, achieved a total revenue of 1.67 billion USD this quarter, a year-on-year increase of 15%, which is basically consistent with market expectations of 1.68 billion USD.
Although the growth rate continues to decline compared to last quarter's 19%, considering that Block consolidated Afterpay (which contributed approximately 4.6 billion in revenue) in the first quarter of last year, the thickening effect of the revenue base disappeared in this quarter's consolidation, and the actual revenue growth is not so bad. For the same reason, the company no longer separately discloses Afterpay's financial data.
Looking at each business within the sector:
- This quarter's transaction fees generated approximately 1.29 billion USD in revenue, a year-on-year increase of 15%. Due to the low base last year, the growth rate has increased by 3% compared to last quarter. Since the revenue from consolidating Afterpay is included in service revenue and does not affect transaction revenue, it can be regarded as the natural actual growth of Square's original business after removing the effect of Afterpay.
- Including subscription & service businesses such as providing ERP/CRM services and funding loans to merchants, this quarter achieved revenue of $342 million USD, with a year-on-year growth rate as high as 57%, returning to the previous high growth rate. However, due to the inability to remove the impact of Afterpay consolidation, it is currently difficult for Dolphin to judge the growth trend of the original business.
- As a loss-leading drainage business that attracts merchants, revenue from selling payment hardware remained at 37 million USD, basically the same as the previous period. From this, Dolphin speculates that Square's merchant count may have entered the platform period, and the demand for hardware has shifted from a growth period to a main stage of stock replacement.
For payment fee revenue and subscription service revenue, Block also disclosed the underlying operating data behind them, from which we can better understand revenue growth and the actual operating situation behind it.
Firstly, the loan amount newly issued that impacts service revenue was 1.1 billion USD this quarter. Due to seasonal effects, it has decreased slightly compared to the previous period, but it is basically in line with the market expectation of 1.07 billion USD.
In terms of trends, the absolute amount of new loans issued has remained at slightly above 1.1 billion USD for four consecutive quarters since 2Q22, indicating that business growth has entered a platform period.
As for the impact on transaction fee revenue, the payment amount (GPV) achieved within the Square sector was 46 billion USD, a year-on-year increase of 17%, and a decrease of 3 billion USD compared to the previous period. The scale has been continuously declining since 3Q22. However, considering the slowdown in the US economic growth, the overall GPV including Cash App was 51 billion USD, which is consistent with market expectations. In the first quarter, C2B payments completed through Cash App reached $4.7 billion, a 20% increase. Consumer (C) app payment volume growth is still stronger than business (B) app payment growth, reflecting Cash App's stronger potential for growth. The average payment processing fee rate for the payment business this quarter, calculated by dividing processing fee income by payment amount (GPV), was 2.79%, down 1 basis point from the previous quarter, indicating a consistent downward trend in processing fees. As the user base grows and competitiveness improves, future fees may continue to decline.
Square's expansion in overseas markets has always been a key strategy for the company. In the first quarter of this year, gross profit from overseas internships reached $120 million, a nearly 42% increase year-on-year, accounting for 16% of Square's overall gross profit. This shows that the expansion of overseas business is capable of contributing significantly to profit growth.
Compared to the Square segment, which is highly correlated with macroeconomic trends, Cash App, a mobile wallet business aimed at consumers, is expected to achieve relative cyclical growth through penetration rate improvements in the US market, where digital payments are not yet mature. Excluding bitcoin business this quarter, Cash App segment revenue was $1.1 billion, up 52% year-on-year, higher than the market's anticipated $1 billion.
Looking at performance by income type:
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The processing fee income based on C2B payments within Cash App was 135 million yuan, a 23% increase year-on-year, significantly higher than B-side Square's growth rate.
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Subscription services that focus on co-branded bank card business and instant withdrawal service (to bank account) generated revenue of $970 million this quarter. As it is difficult to exclude the incremental revenue brought by Afterpay, the comparable growth rate cannot be calculated for the time being.
Overall, while Square's segment revenue has been declining sequentially for three consecutive quarters, Cash App's segment revenue continues to reach new highs with a high growth rate, indicating that Cash App's performance will be the most crucial factor in determining the company's future trend. According to this season's shareholder letter, the monthly transaction volume on Cash App in the first quarter reached 53 million, a year-on-year increase of 15%. The proportion of total transaction volume accounted for by Cash App Card has increased from 33% to 38% compared to last year. The transformation of Cash App from a pure P2P software to a daily consumer payment tool is steadily advancing.
Although this still reflects the higher status of bank cards in the minds of American residents compared to mobile wallets. However, the company has recently announced that it will continue to cooperate with banks to launch various types of debit and credit cards for merchants, and use Cash App Card as a lever to try to make Cash App the first entry point for users to use banking services, rather than as the main function of P2P transfer.
In addition, the Instant Deposit business, another monetization channel within the Cash App segment, had a total of 20 million transactions in March, with a total amount of up to 2.5 billion, a year-on-year increase of 69%.
Furthermore, the amount of funds that Cash App can obtain from users in the process of transforming into a full-featured financial and payment tool is crucial. And according to more disclosures by the company, Cash App received a total of USD 61 billion in funds during the first quarter, a year-on-year increase of 27%, the highest quarterly growth rate in 22 years.
From various indicators, Cash App has indeed demonstrated impressive anti-cyclical capabilities.
Although the gross profit margin seems to have declined, it has not actually done so. Adding up various businesses, the company's total revenue for the season was USD 4.99 billion, a year-on-year increase of 14%. Due to the over-expectation of the Cash App segment, the overall revenue was slightly higher than the market's expected 4.65 billion yuan. Excluding bitcoin revenue, which accounts for nearly half of revenue but has extremely low gross profit, the core revenue was 2.83 billion yuan, a year-on-year increase of 27%, significantly exceeding the market's expected 2.68 billion. Among them, the Square segment remained stable, and Cash App was still the main driver of growth. From the perspective of the company's focus on gross profit, Block achieved a gross profit of USD 1.72 billion in the current quarter, a year-on-year increase of more than 32% on a lower base. The gross profit margin decreased slightly to 34.4% compared to the previous quarter, approaching the gross profit margin center of 2022.
Looking at each segment specifically:
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The Square segment achieved a gross profit of 770 million yuan, a year-on-year increase of 16%, slightly higher than the market's expected 750 million yuan. At the same time, the gross profit margin increased by 0.76 percentage points compared to the previous quarter.
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Excluding the Bitcoin business, the Cash App segment achieved a gross profit of USD 880 million, higher than the market's expected 840 million yuan. The actual gross profit margin of this quarter's Cash App (ex. BTC) was 79.5%, which was flat compared to the previous quarter.
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In addition to core business, with the recovery of Bitcoin trading activity, the company's revenue and gross profit margin in this segment have also improved. Only the gross profit of other new businesses at the group level is declining. Therefore, the proportion of low gross profit businesses that caused the overall gross profit margin of this quarter's Block to decline has increased, and the actual gross profit margin of each major segment is improving.
It can be seen from the above that the total operating expenses of the company this quarter were USD 1.72 billion, a year-on-year decrease of nearly 13%, mainly due to the volatility of the company's total revenue (ex. BTC), making the reference of the expense-to-income ratio insignificant. Despite the total revenue (ex. BTC) growing by 27% year-on-year and the total gross profit growing by 32%, the company is still controlling expenses this quarter.
Looking at the details, except for R&D expenses, which are still growing at a rate of 29%, marketing and internal management expenses have both declined year-on-year.
Considering that the company is still promoting the integration of Afterpay with its existing Square and Cash App, continuously launching new features, and reasonably increasing R&D expenses, it seems that the company is on the right track. Therefore, although the company's revenue and gross profit growth is not strong and the growth rate is still slowing down (but slightly stronger than conservative expectations), due to the significant reduction in expenses, the GAAP operating loss narrowed to only USD 6 million, significantly lower than the market's expected loss of USD 130 million. Moreover, after removing equity incentive expenses and other adjustments, Dolphin's calculation of Non-GAAP operating profit reached USD 275 million, a significant improvement from the previous quarter's USD 180 million. However, due to Block's fluctuating pace of expense investment, it is difficult for the market to grasp the management's strategy and the sustainability of the company's profit improvement.
Long Port Dolphin Investment Research on Block:
Financial Report Commentary
February 25, 2023 Telephone Conference "Block: Balanced Investment for Long-term Growth"
February 24, 2023 Financial Report Commentary "Alipay in the US has Long-term Memory after the Scar is Healed."
November 4, 2022 Telephone Conference "Block: Increasing User Revenue and Wallet Share is Top Priority (3Q22 Telephone Conference Minutes)"
November 4, 2022 Financial Report Commentary "Block is Bold: Customers Borrow Money to Spend, While Block is Frugal."
August 5, 2022 Telephone Conference "Block: Investment Pace Will Slow Down Slightly in the Short Term, but Long-term Business Diversity Will Remain Unchanged (Telephone Conference Minutes)"
August 5, 2022 Financial Report Commentary "Block is Embarrassed: Still Crazy for Investment but Money is Coming Slowly."
In-Depth Analysis
July 19, 2022 "If You Have a Promise, But No Fulfillment, You Still Have to Get Rid of the Bubble in Square." On June 21, 2022, "The Trillion-Dollar Choice of Payment: Square and PayPal, Who Will Come Out On Top" was published.
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