US version of Alipay Block: Finally squeezed out a profit, but dark clouds are looming?

After the US stock market closed on the morning of May 3rd Beijing time, the American version of "Alipay" Block (SQ.US) released its financial report for the first quarter of 2024. Overall, profits exceeded expectations due to cost control and efficiency improvement. However, there seems to be significant pressure on the future growth of the Square sector. Here are the key points:

1. Square continues to move forward slowly, with increasing pressure? The cornerstone sector of the company - the Square sector generated total revenue of $1.73 billion, lower than the market's expected $1.77 billion. It only grew by 4% year-on-year. Despite the impact of the afterpay adjustment, achieving low single-digit growth for two consecutive quarters implies that Square's growth pressure seems to be increasingly evident due to the pressure on optional consumer spending in the United States and intense competition among payment merchants for small and medium-sized businesses.

In terms of key operating indicators, the payment volume within the Square ecosystem (including the Cash App channel) was approximately $54.4 billion, lower than the market's expected $55.5 billion, with a year-on-year growth rate of 6%, also declining for four consecutive quarters.

Furthermore, the progress of Square's penetration into medium and large merchants has been fluctuating in recent quarters. The proportion of payment contributions from merchants with annual sales of $500,000 has declined for two consecutive quarters by 1 percentage point (a total of 2 percentage points), indicating that the penetration of medium and large merchants may be one of the reasons for the weak growth in Gross Payment Volume (GPV), according to Dolphin Research.

2. Steady growth of Cash App: Excluding the bitcoin business, the Cash App sector achieved revenue of $1.44 billion, higher than the expected $1.36 billion, showing good growth. Looking at the breakdown of business segments, fee income decreased by 19% year-on-year, consistent with the downward trend in GPV.

However, subscription service revenue for this quarter was $1.33 billion, a 37% year-on-year growth, which is strong. Although the favorable factor of the consolidation of afterpay from 50% to 100% is present. This quarter, driven by a 10% increase in per capita inflow of assets into Cash App, the total inflow amount into Cash App this quarter jumped from the scale of $610-630 billion throughout 23 to $710 billion, marking a significant breakthrough.

3. Overall performance is still decent: Total revenue for Block this quarter was $5.96 billion, a 19% year-on-year increase, slightly higher than the market's expected $5.89 billion. However, excluding the bitcoin business, core revenue was $3.23 billion, a 14% year-on-year growth, which is basically in line with expectations. The company's most closely watched indicator - gross profit for this quarter was $2.09 billion, 3% higher than the market's expected $2.02 billion. It grew by 22% year-on-year, with growth rate remaining relatively stable compared to the previous quarter Looking at it by segment: Square's gross profit increased by 6.5% year-on-year, showing weak growth, but market expectations are not high either; excluding the Bitcoin business, the Cash App segment achieved a gross profit of $1.18 billion, a year-on-year increase of 33.8%, exceeding expectations by 9%. The gross profit margin also increased by 1.3 percentage points to 81.7% on a quarter-on-quarter basis, indicating that the Cash App segment is in a good period of rising revenue and profit margins.

4. Cost control remains strong, finally squeezing out profits: On the cost side, based on a 22% year-on-year increase in total gross profit, Block's total operating expenses only increased by 7% this quarter, showing a significant gap between expense and gross profit growth rates, indicating profit release.

Looking into details, the company remains optimistic about its investment in product research and development, with spending of $720 million this quarter, with the growth rate increasing against the trend to 15%, while the growth in management and marketing expenses continues to slow down, especially marketing expenses have been negative for 3 consecutive quarters, with a year-on-year decrease of 11% this quarter, indicating that the company is focusing resources on product research and development.

1. Slightly raising full-year profit guidance: For the second quarter of 2024, Block's revised EBITDA guidance midpoint is $680 million, 6% higher than the expected $640 million. The guidance expects a 26.8% year-on-year increase in gross profit, maintaining high-speed growth, but generally meeting market expectations.

In addition, the company slightly raised its full-year gross profit guidance for 2024 from $8.65 billion to $8.78 billion, an increase of 1.5%. Overall, while the performance guidance did not show a significantly outstanding performance above expectations, the strong growth trend of Cash App continues.

Dolphin Research's View:

Looking at the quarterly performance, due to the significant slowdown in growth in the Square segment, although Cash App showed better-than-expected revenue and gross profit performance, the overall group's revenue and gross profit did not stand out, only falling between in-line and slightly above expectations.

However, due to the company's continued cost control efforts, Block's operating profit this quarter still significantly exceeded expectations. However, the company is still on the edge of breaking even, with single-quarter operating profits fluctuating within a narrow range of +- $200 million over the past 2 years, yet to truly break through the range and achieve stable profitability. Therefore, the company's valuation is difficult to grasp, and it can mostly be judged based on the trend changes in the company's revenue and gross profit growth. With no signs of improvement in the slowing down of the Square segment and renewed market concerns about U.S. consumption (especially discretionary spending), this may be the reason why the company's stock price has not improved recently Below is a detailed review:

1. Square continues to move forward slowly, with increasing growth pressure?

The cornerstone of the company—Square business, achieved total revenue of $1.73 billion this quarter, a year-on-year growth of 4%, achieving low single-digit growth for two consecutive quarters, slightly lower than the market's expected $1.77 billion. Given the pressure on optional consumer spending in the United States and intense competition among payment merchants for small and medium-sized businesses, a detailed breakdown of specific business segments is as follows:

Transaction fee revenue this quarter is approximately $1.4 billion, a 9% year-on-year growth, a slight decrease of 1 percentage point from the previous quarter, although the growth rate is not "strong", it has not decreased significantly either;

Subscription service revenue, including providing SaaS software services and funding loans to merchants, was $296 million this quarter, a 13% year-on-year decrease, mainly due to 50% of Afterpay's revenue originally being included in the Square segment, but has now been fully allocated to the Cash App segment since 4Q23;

Payment hardware sales revenue reflecting the number of new merchants is $32 million, flat on a quarter-on-quarter basis, a 15% year-on-year decrease, with the decline continuing to widen, having experienced zero/negative growth for six consecutive quarters, perhaps indicating that the outlook for new merchant numbers is not optimistic. Subsequent segment growth will shift from merchant number growth to single-user payment amount growth.

Another key indicator—the total payment amount completed by merchants within the company's ecosystem (including the Cash App channel) is approximately $54.4 billion, a 6% year-on-year growth, with the growth rate declining for four consecutive quarters without signs of improvement, also lower than the market's expected $55.5 billion.

The C2B payment amount completed through the Cash App channel is approximately $4 billion, a 16% year-on-year decrease from the approximately $4.7 billion in the same period last year, indicating that the progress of promoting Cash App Pay payments does not seem to be smooth.

In conclusion, the fundamental reason for the continued slowdown in segment revenue growth is the slowdown in overall merchant payment amounts within the system.

Moreover, it can be seen that the company's important strategic focus on the Square segment—progress from serving SME merchants primarily to gradually developing, penetrating, and expanding to medium and large-scale merchants has regressed for two consecutive quarters since 4Q23. The contribution of merchants selling $500,000 in 1Q24 to payment amounts has decreased by 1 percentage point for two consecutive quarters (a total of 2 percentage points) The proportion of total payments made by merchants with annual sales below $125,000 increased by 1.7 percentage points.

However, the progress in another major strategic direction - expanding overseas business - was relatively good. In this quarter, the gross profit contribution from overseas for the Square segment reached $103 million, accounting for 13% of Square's overall gross profit, remaining flat on a quarter-on-quarter basis but increasing by 2 percentage points year-on-year.

Second, Cash App user stickiness accelerated, with growth still performing well.

Excluding the Bitcoin business, the Cash App segment achieved revenue of $14.4 billion this quarter, higher than the expected $13.6 billion. Part of the reason is the reclassification of 100% of Afterpay into Cash App. Looking at the specific business segments:

The revenue from C2B payment processing fees within Cash App was $109 million, remaining relatively flat on a quarter-on-quarter basis but decreasing by 19% year-on-year, which was also influenced by the approximately 16% year-on-year decrease in Cash App GPV mentioned earlier.

The subscription service revenue, mainly driven by co-branded bank cards, instant cash withdrawal services, and Afterpay business, reached $1.33 billion this quarter, a 37% year-on-year growth, with the positive impact of 100% consolidation of Afterpay.

1. The Bitcoin business, which contributes the most to revenue, saw its revenue grow to $2.73 billion as cryptocurrency prices and trading activities gradually heated up, continuing to reach new highs for 5 consecutive quarters.

In terms of key operational data, as of the end of this quarter, Cash App's monthly active transaction volume was 57 million, a 6% year-on-year growth, with user growth continuing to slow down. The monetization rate was 1.48%, remaining relatively flat on a quarter-on-quarter basis. However, the average deposit amount per active user increased from $1,137 in the previous quarter to $1,255 (+10.3% QoQ).

As a result, driven by the contribution of single-user deposits, the inflow of Cash App in this quarter remained at the level of 600+ billion for the whole year of 23, finally jumping to the level of 700+. From this perspective, Cash App's growth driven by user stickiness is impressive.

Third, with the strong performance of the Cash App business, overall growth is still decent.

Adding up all businesses, this quarter's total revenue for Block is $5.96 billion, a year-on-year increase of 19%, slightly higher than the market's expected $5.89 billion. However, excluding the Bitcoin business, core revenue is $3.23 billion, a year-on-year increase of 14%, which is basically in line with expectations.

The company's most closely watched indicator— gross profit for this quarter is $2.09 billion, 3% higher than the market's expected $2.02 billion. Year-on-year growth is 22%, with growth rate roughly stable compared to the previous period.

Looking at the segments:

The Square segment achieved a gross profit of $820 million, a year-on-year increase of 6.5%, showing weak growth, but market expectations are not high either;

Excluding the Bitcoin business, the Cash App segment achieved a gross profit of $1.18 billion, a year-on-year increase of 33.8%, 9% higher than expected. It is evident that Cash App's growth is quite good. The gross profit margin increased by 1.3 percentage points to 81.7% compared to the previous period;

Bitcoin also achieved a gross profit of $80 million this quarter, significantly exceeding the market's expected $62 million, thanks to the warming up of the cryptocurrency market.

Excluding the impact of Afterpay's change in accounting standards, the gross profit of the Square and Cash App segments fluctuated, but overall, a gross profit growth rate of over 20% is still impressive. Four, Cost Control Continues, Profits Squeezed

Overall, with total revenue (ex. BTC) increasing by 14% year-on-year and total gross profit increasing by 22% year-on-year as the benchmark, the company's total operating expenses in this quarter only increased by 7%, significantly lower than the growth rate of gross profit, indicating a considerable profit release.

Looking into details, the company's investment in product research and development remains optimistic, with expenditures of 720 million this quarter, showing an accelerated growth rate of 15%. This suggests that the company is optimistic and values investments and iterations in new features/products (such as Afterpay integration).

Meanwhile, the growth in management and marketing expenses continues to slow down, especially with marketing expenses experiencing negative growth for three consecutive quarters, decreasing by 11% year-on-year this quarter, as resources are concentrated on product research and development.

In the end, on a GAAP basis, Block once again turned losses into profits this quarter, with an operating profit of 250 million USD, significantly exceeding the market's expected 150 million USD operating profit.

Historical Research by Dolphin Research on Block:

Financial Report Review

November 3, 2023 Financial Report Review "Block's Overseas Alipay Soars 15% After Hours?"

November 3, 2023 Conference Call "Block: What's the Future Growth Strategy?"

May 6, 2023 Conference Call "Block: Focus on Profit Growth and Risk Management"

May 5, 2023 Financial Report Review "Block: Rising Strong in Adversity as the 'American Alipay'?"

February 25, 2023 Conference Call "Block: Balancing Investments for Long-Term Growth" February 24, 2023 Financial Report Review "Healed Scars, Alipay in the US Needs to Remember"

November 4, 2022 Conference Call "Block: Increasing User Deposit Amount and Wallet Share is a Top Priority (3Q22 Conference Call Summary)"

November 4, 2022 Financial Report Review "Customers Borrowing to Spend, Block Shows Generosity"

In-depth

July 19, 2022 "Promises Unfulfilled, Square's Bubble Needs to Burst"

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

Risk Disclosure and Disclaimer for this Article: Dolphin Research Disclaimer and General Disclosure