The U.S. stock market is excited, is the volatile behavior of Block reliable or not?

After the U.S. stock market closed on February 23, Beijing time, the American version of "Alipay," Block (SQ.US), released its fourth-quarter earnings report for 2024. Here are the key points:

Unsatisfactory Growth in the Square Segment: The cornerstone segment of the company, the Square segment, had a total revenue of $18.1 billion, only a 3% year-on-year increase, significantly lower than the market's expected $19.4 billion revenue. However, this was mainly due to the change in revenue recognition from Afterpay being split equally between the Square and Cash App segments, with 100% now being recorded in the Cash App segment, so the impact is not as bad as it seems.

However, another key operating indicator—the Gross Payment Volume (GPV) achieved through the Square ecosystem was $536 billion, a 10% year-on-year increase, with a 2% slowdown in growth. The Consumer-to-Business (C2B) payment volume completed through Cash App was $4 billion, a 9% year-on-year decrease, totaling 2% lower than the market's expectations, showing a less than ideal performance.

Steady Growth in Cash App: Excluding the Bitcoin business, the Cash App segment achieved revenue of $13.9 billion, higher than the expected $12.6 billion, with the difference mainly due to the aforementioned change in revenue recognition.

In terms of key operating indicators, this quarter saw $630 billion flowing into the Cash App ecosystem, an 18% year-on-year increase. Although there is still double-digit growth year-on-year, it has remained steady at the $600-630 billion level for four consecutive quarters. If there is no significant improvement in the future, the year-on-year growth rate is expected to slow down significantly after the base period next year.

Overall Performance is Decent: Excluding the expected difference that Square and Cash App can offset each other due to the change in revenue recognition, this quarter Block's total revenue was $57.7 billion, a 15% year-on-year increase, which is basically in line with market expectations. Excluding the Bitcoin business, the core revenue was $32.5 billion, a 15% year-on-year increase, which is also in line with expectations.

The company's most closely watched indicator—gross profit for this quarter was $20.3 billion, a 22% year-on-year increase, an increase of 1% from the previous quarter. Slightly exceeding the market's expected $19.7 billion by 3%, it was not a significant surprise.

Excluding one-time changes, cost control continues: On the cost front, with total revenue (ex. BTC) increasing by 15% year-on-year and total gross profit increasing by 22%, the company's total operating expenses for this quarter were nearly $21.6 billion, a 20% year-on-year increase. While expense growth is slightly lower than gross profit, the contribution to profit seems relatively limited.

However, the year-on-year growth in research and development and marketing expenses continues to slow down, with marketing expenses even showing negative growth. This quarter, restructuring expenses and goodwill impairment of approximately $250 million were confirmed in the operating expenses.

In the end, under the GAAP standard, Block's operating loss for this quarter was $130 million, only narrowing by $5 million compared to the same period last year, showing little improvement.

However, after excluding about $330 million in stock-based compensation expenses and the previously mentioned restructuring and impairment charges, the adjusted operating profit reached $460 million, a nearly 36% increase QoQ, showing a decent improvement.

At the same time, the company's guidance for adjusted EBITDA for the next quarter is $580 million, which is 13% higher than the expected $510 million. The trend of profit improvement continues.

Dolphin Research Insights:

Looking solely at the company's performance this quarter, whether it's revenue, gross profit, key financial indicators, or key operational indicators like Gross Payment Volume (GPV) and Cash App inflows, Block has delivered results in line with expectations, but without any outstanding performance. Especially considering the current slowing trend, there seems to be significant pressure on future revenue growth.

However, through continuous and effective cost control measures, the company has still delivered profit figures significantly above expectations on an adjusted basis. As the company is still on the edge of profitability, the outlook for future profitability is not clear. Therefore, recent marginal changes in profit may have a considerable impact on market judgments of the company's long-term profit prospects. With the current exuberant market environment in the US stock market, fluctuations in stock prices may be significant as short-term profits change.

1. How to Interpret Block's Earnings Report?

Although Block is not a giant in scale, its business structure is quite complex. Readers can briefly understand the company's business structure through the table below to better comprehend Block's financial report and our analysis in the following text. In short, the company's core business consists of two main segments: the Square ecosystem for merchants and the Cash App electronic wallet ecosystem for individuals.

2. Slowing Growth in Gross Payment Volume, Unimpressive Growth in Square Segment

The company's cornerstone segment, the Square segment for merchants, achieved total revenue of $18.1 billion this quarter, a mere 3% YoY growth, significantly lower than the expected $19.4 billion revenue. Looking at revenue types:

Transaction fee revenue this quarter was approximately $14.9 billion, a 10% YoY increase, consistent with the previous quarter, indicating that core payment revenue growth did not significantly deteriorate, and the segment's poor performance was due to drag from other businesses;

The subscription service revenue, including providing ERP/CRM services and fund loans to merchants, was $2.9 billion this quarter, a 20% decrease YoY. This is mainly due to a change in revenue recognition from Afterpay - shifting from sharing 50% with Square to 100% fully recorded under the Cash App segment.

The payment hardware sales revenue, reflecting the number of new merchants, was $32 million, a 9% YoY decrease. This marks five consecutive quarters of zero/negative growth, possibly indicating a limited increase in new merchants in recent quarters.

Another key indicator - the total payment volume processed by the company (including Cash App channel) was $57.6 billion, a 10% YoY increase. The growth rate slightly declined, slightly below the market expectation of $58.7 billion.

Specifically, the C2B payment volume through the Cash App channel was approximately $4 billion, a 9% decrease from the same period last year, suggesting challenges in promoting Cash App as a payment tool.

Overall, the growth in payment volume is also below expectations.

One of the current strategic focuses of the Square segment is the progress in developing medium to large-sized merchants, with 39.9% of merchants with annual payment volume exceeding $500,000 this quarter, a 1.2% increase YoY, showing steady advancement.

On the other strategic front - expanding overseas business, this quarter under the Square segment, the gross profit contributed from overseas reached $106 million, accounting for 13% of Square's total gross profit, a 1% increase from the same period last year. Although not a significant improvement, it indicates steady progress.

3. Steady Growth of Cash App

This quarter, excluding the Bitcoin business, the Cash App segment achieved revenue of $1.39 billion, surpassing the expected $1.26 billion, primarily due to the aforementioned change in revenue recognition with Afterpay fully included in Cash App.

1) The revenue from payment fees in Cash App based C2B transactions was 1.09 billion yuan, showing a decrease of around 10% both MoM and YoY, mainly due to a 9% YoY decrease in Cash App's GPV.

2) The subscription service revenue from co-branded bank card business, instant withdrawal service, and Afterpay business this quarter was 12.8 billion yuan, marking a significant increase of 42% YoY, mainly driven by Afterpay's impact.

Key operational data shows that by the end of this quarter, Cash App's monthly active transaction volume reached 56 million, a 9% YoY increase, slightly slower than the 11% growth in the previous quarter. The monetization rate was 1.48%, up by about 9 bps YoY, with a slightly increased growth rate.

Overall, the inflow amount in Cash App's ecosystem this quarter was 63 billion US dollars, an 18% YoY increase, but has shown very limited QoQ growth for four consecutive quarters since 2023.

4. Excluding the impact of changes in criteria, the overall performance is generally in line with expectations.

Combining all businesses, the total revenue for this quarter was 5.77 billion US dollars, a 15% YoY increase, which is basically in line with market expectations. Excluding the Bitcoin business, the core revenue was 3.25 billion, a 15% YoY increase, also in line with expectations.

From a gross profit perspective, the overall gross profit for this quarter was 2.03 billion US dollars, a 22% YoY increase, with a 1% higher growth rate than the previous quarter, slightly exceeding the market's expectation of 1.97 billion by 3%.

Looking at specific segments:

The Square segment achieved a gross profit of 830 million yuan, slightly below market expectations by 7%. Apart from the impact of changes in criteria, the lower-than-expected growth in payment volume may have also played a role.

Excluding the Bitcoin business, the Cash App segment achieved a gross profit of 1.12 billion US dollars, a 23% increase, 4% slower than the previous quarter, but 11% higher than market expectations, mainly due to the impact of Afterpay's changes in criteria.

Bitcoin also achieved a gross profit of 66 million this quarter, showing a significant increase both MoM and YoY, likely due to the recent surge in cryptocurrency prices and trading activity.

Overall, excluding the impact of Afterpay's recalibration on Square and Cash App's gross profit, the company's overall gross profit slightly exceeded expectations, with a gross profit margin of 28.8%, a slight improvement from the same period last year at 28.6%.

Reducing expenses, narrowing losses

Due to significant fluctuations in total revenue due to Bitcoin business, the significance of expense-to-income ratio is limited. We mainly observe the year-on-year growth of expenses.

Overall, with a 15% YoY growth in total revenue (ex. BTC) and a 22% YoY growth in total gross profit, the company's total operating expenses this quarter were nearly $2.16 billion, a 20% YoY increase. While expense growth was slightly lower than gross profit growth, it still contributed to a slight improvement in profit.

Specifically, the year-on-year growth of research and marketing expenses continues to slow down, with marketing expenses even showing negative growth, reflecting the company's efforts in cost control.

On the other hand, the significant increase in administrative expenses was mainly due to the company recognizing approximately $250 million in restructuring costs and goodwill impairment this quarter.

Ultimately, under GAAP standards, Block's operating loss this quarter was $130 million, only narrowing by $5 million compared to the same period last year, showing minimal improvement.

However, after excluding around $330 million in equity incentive expenses and the aforementioned restructuring and impairment charges, the adjusted operating profit reached $460 million, a nearly 36% QoQ increase, indicating a decent improvement in the company's actual profit

Dolphin Research's Previous [Block] Research:

Earnings Report Review

November 3, 2023 Earnings Report Review " After-hours surge by 15%, is overseas Alipay Block soaring to new heights?"

November 3, 2023 Conference Call "Block: What's the future growth path?](https://longportapp.com/zh-CN/topics/10451598)"

May 6, 2023 Conference Call "Block: Focus on profit growth and risk control](https://longportapp.cn/en/topics/5769725)"

May 5, 2023 Earnings Report Review "Block: Rising strong in adversity as the 'American Alipay'?](https://longportapp.cn/zh-CN/topics/5750317?app_id=longbridge)"

February 25, 2023 Conference Call "Block: Trading balanced investments for long-term growth](https://longportapp.cn/en/topics/4309555)"

February 24, 2023 Earnings Report Review "Scar healed, lesson learned - the US 'Alipay' must remember](https://longportapp.cn/en/topics/4303536)"

November 4, 2022 Conference Call "Block: Increasing user transaction amounts and wallet share is the top priority (3Q22 conference call summary](https://longbridgeapp.com/en/topics/3612414?invite-code=EZND0I&channel=t3586604)"

November 4, 2022 Earnings Report Review "Customers borrowing to spend, Block boldly moving forward](https://longbridgeapp.com/en/topics/3611070?invite-code=EZND0I&channel=t3586604)"

August 5, 2022 Conference Call "Block: Temporarily slowing investment pace, but unwavering commitment to diversified long-term business (conference call summary](https://longbridgeapp.com/topics/3257702)"

August 5, 2022 Earnings Report Review "Slower cash inflow but still aggressively investing, Block in an 'awkward' position](https://longbridgeapp.com/topics/3256521)" In-depth Analysis

On July 19, 2022, "Chasing Dreams but Failing to Deliver, the Bubble of Square Needs to Burst"

On June 21, 2022, "The Trillion-dollar Choice in Payments, Can Square and PayPal Stand Out"

Risk Disclosure and Statement of this Article: Disclaimer and General Disclosure by Dolphin Research