Block: Square is mired in difficulties, Cash App struggles to stand alone

On November 8th, Beijing time, after the U.S. stock market closed, the American version of "Alipay" $Block(SQ.US) announced its Q3 2024 financial report, with the following key points:

1. The cornerstone business Square segment's revenue this quarter was approximately $2 billion, a year-on-year growth of only 1%, continuing to decline from 3% in the previous quarter. As one of the company's two main pillars, the Square segment is deeply mired in a growth slump, and when it will show signs of accelerated growth is one of the core concerns of the market, with no improvement seen this quarter.

Another key indicator — the payment amount completed by Square ecosystem merchants (including Cash App channels) was approximately $62 billion, roughly flat quarter-on-quarter, with a year-on-year growth rate dropping by 1 percentage point to 4%. This underlying indicator also reflects the increasing weakness in Square's growth. Without growth in underlying payment amounts, the segment's revenue will naturally not see fundamental improvement.

2. The Cash App segment achieved revenue of $1.5 billion, with a year-on-year growth rate of 29%, roughly flat compared to the previous quarter. Fortunately, Cash App, as another pillar, continues to grow strongly. Cash App's C2B payment processing fee revenue was only $70 million, with the scale continuing to shrink, indicating that Cash App Pay has basically declared a phase failure.

The subscription services, primarily based on co-branded card services, instant withdrawal services, and Afterpay services, generated $1.43 billion in revenue this quarter, a year-on-year growth of 38%, with stable growth.

3. Overall, Block's total revenue this quarter was $5.98 billion, a year-on-year increase of 6%, about 4% below expectations, mainly due to the drag from Bitcoin revenue (which was 7% below expectations). Excluding the volatile Bitcoin business, core revenue was $3.54 billion, a year-on-year increase of 11%.

The company's most closely watched profitability indicator — gross profit this quarter was $2.25 billion, slightly above the market expectation of $2.24 billion. Gross profit increased by approximately 18% year-on-year, with a slight slowdown in growth of 1 percentage point quarter-on-quarter, continuing to maintain relatively high growth. Gross margin reached 37.6%, an increase of approximately 1.3 percentage points quarter-on-quarter, with the trend of continuous improvement in gross margin unchanged.

Among them, the Square segment achieved a gross profit of $930 million, a year-on-year increase of 3.7%, which is also stagnant. Excluding the Bitcoin business, the Cash App segment achieved a gross profit of $1.24 billion, a year-on-year increase of 32%. Cash App's gross margin significantly increased by 1.5 percentage points to 82.7%, indicating that Cash App's profitability is continuously strengthening.

4. From the perspective of expenses, with total revenue (ex. BTC) increasing by 11% year-on-year and total gross profit increasing by 18% year-on-year as a benchmark, the company's overall operating expenses this quarter only increased by 1% year-on-year. Although this is an improvement compared to the -4% year-on-year growth in expenses from the previous quarter, cost control and efficiency improvements are still ongoing. Specifically, marketing expenses have increased this quarter, rising by 7% year-on-year. Management and R&D expenses remain relatively stable, growing by 0% to 1%. This should indicate a focus on customer acquisition.

Ultimately, under GAAP standards, Block achieved an operating profit of $320 million this quarter, with a slight increase in profit margin of 0.4 percentage points (mainly due to the contribution from gross margin improvement). The profit release is significantly higher than market expectations, but the quarter-on-quarter improvement is not substantial.

5. For Q4 2024, Block guides gross profit to be $2.31 billion, a year-on-year increase of 14%, showing a notable slowdown in growth. This is slightly below the expected $2.35 billion. The guided operating profit is $360 million, an approximate 12.5% increase compared to this quarter's $320 million.

Dolphin Investment Research Perspective:

Block's performance this quarter is mixed; the concern is that one of its pillars, the Square segment, is experiencing increasingly slow growth, with only a 1% growth this quarter. This not only fails to show signs of a rebound in Square's growth that the market anticipated but rather indicates that it is "sinking deeper." Dolphin Investment Research speculates that Square's struggles may suggest that small and medium-sized businesses in the U.S. are facing a rather harsh operating environment.

In contrast, the other pillar, Cash App, continues to maintain good growth. As the company leverages the tens of millions of active users on Cash App to continuously explore monetization channels, the gross margin of the Cash App segment is also steadily increasing. This quarter, the segment's gross margin grew by 32%.

Overall, the performance aligns with the pre-earnings sell-side expectations of Square's slowing growth versus the Cash App's gross profit exceeding expectations, balancing each other out. However, in Dolphin Investment Research's view, the slowdown in Square's growth exceeded expectations, while Cash App, although still strong, showed a slight slowdown compared to the previous quarter rather than an acceleration in growth beyond expectations. Therefore, overall, the negative drag from Square still prevails.

Here are the detailed comments :

1. Square's growth is sinking deeper into a quagmire

The company's cornerstone business — the Square segment generated approximately $2 billion in revenue this quarter, with a year-on-year growth of only 1%, continuing to decline from 3% in the previous quarter and falling short of market expectations. As one of the company's two main pillars, the Square seller segment is deeply mired in growth challenges, and when it will show signs of a growth rebound is one of the core issues of market concern, but it is evident that it is still at the bottom . Looking at the specific details of the segmented business:

1) Transaction fee revenue for this quarter is approximately $1.57 billion, a year-on-year increase of 6.8%, slightly slowing down by 0.5 percentage points compared to the previous quarter;

2) Revenue from subscription services including SaaS software services and funding loans this quarter is $320 million, essentially flat quarter-on-quarter, indicating stagnation in growth. Due to the separation of 50% of Afterpay's revenue from the Square segment, it has declined by 20% year-on-year, but the comparison is not significant.

Another key indicator — the payment amount completed by Square ecosystem merchants (including Cash App channels) is approximately $62 billion, remaining roughly flat quarter-on-quarter, with a year-on-year growth rate dropping by 1 percentage point to 4%. This bottom-line indicator also reflects the increasingly weak growth issue of Square.

Among them, the C2B payment amount completed through Cash App channels is approximately $2.6 billion, which has been continuously declining in recent quarters, indicating that Cash App Pay seems to be facing significant difficulties, with little hope of improvement in the short term.

In terms of the proportion of Square merchants classified by size, this quarter the proportion of large merchants with annual payments exceeding $500k increased by 1.1 percentage points to 42.4%. Large merchants continue to capture a larger share from medium and small merchants. However, despite the increasing proportion of large merchants, it has not brought a net increase in GPV growth. Moreover, the increase in the proportion of large merchants will lead to a decrease in the average payment fee rate, which is detrimental to the growth of fee income.

2. Another pillar, Cash App, can still support

Excluding Bitcoin business this quarter, the Cash App segment achieved revenue of $1.5 billion, slightly below expectations by 2%, with a year-on-year growth rate of 29% showing almost no slowdown compared to the previous quarter. Fortunately, under the shadow of Square, Cash App remains a strong growth pillar. In detail:

1) Cash App's C2B payment fee revenue is only $70 million, continuously shrinking, down 11% year-on-year;

2) The subscription service, mainly focused on co-branded bank card business, instant withdrawal business, and Afterpay business, generated revenue of 1.43 billion yuan this quarter, a year-on-year increase of 38%, with growth rate basically flat compared to the previous quarter. However, it is worth noting that the proportion of Afterpay revenue included in the consolidated statements increased from 50% to 100%, which is a positive factor.

3) The Bitcoin business, which contributes the most to revenue, generated revenue of 2.43 billion yuan this quarter, a quarter-on-quarter decrease of 6.9%, and the year-on-year growth rate also narrowed to 2%.

In terms of key operational data, as of the end of this quarter, Cash App's monthly active transaction volume was 57 million, remaining flat quarter-on-quarter. The monetization rate slightly decreased to 1.52% quarter-on-quarter. Additionally, the inflow amount within the Cash App ecosystem this quarter also slightly decreased by $1 billion to $70 billion, with the year-on-year growth rate slowing to 13%, showing some signs of deceleration.

3. Cash App's gross profit margin continues to improve, driving gross profit growth

Aggregating all business segments, Block's total revenue this quarter was $5.98 billion, a year-on-year increase of 6%, about 4% lower than expected, mainly due to the drag from Bitcoin revenue (which was 7% lower than expected). Excluding the volatile Bitcoin business, core revenue was $3.54 billion, a year-on-year increase of 11%, slightly below expectations by 2%.

The company's most closely watched profitability metric — gross profit this quarter was $2.25 billion, slightly higher than the market expectation of $2.24 billion. Gross profit increased by approximately 18% year-on-year, with the growth rate slightly slowing down by 1 percentage point quarter-on-quarter, maintaining relatively high growth . The gross profit margin reached 37.6%, an increase of about 1.3 percentage points quarter-on-quarter, with the trend of continuous improvement in gross profit margin unchanged.

By segment:

The Square segment achieved a gross profit of 930 million yuan, a year-on-year increase of 3.7%, which is also stagnant. The gross profit margin remained flat at 46.6%

Excluding Bitcoin business, the Cash App segment achieved a gross profit of $1.24 billion, a year-on-year increase of 32%, slightly slowing compared to the previous quarter. The actual gross profit was about 4% higher than expected; the gross profit margin significantly increased by 1.5 percentage points to 82.7%, indicating that Cash App's profitability continues to strengthen.

Although revenue from Bitcoin decreased this quarter, it still achieved a gross profit of $65 million, showing no significant reduction compared to the previous quarter;

4. Although growth is weak, cost reduction and efficiency improvement must continue.

From the expense perspective, based on total revenue (ex. BTC) growing by 11% year-on-year, total gross profit increased by 18% year-on-year, while the company's overall operating expenses this quarter only grew by 1% year-on-year. Although the expense growth rate improved from -4% year-on-year compared to the previous quarter, cost control and efficiency improvement are still ongoing.

In detail, marketing expenses increased this quarter, rising by 7% year-on-year. Management and R&D expenses remained relatively stable, growing by 0% to 1%. This should indicate a focus on customer acquisition.

Overall, under GAAP standards, Block achieved an operating profit of $320 million this quarter, with a slight increase in profit margin of 0.4 percentage points (mainly due to the improvement in gross profit margin). The profit release was significantly higher than market expectations, but the extent of improvement was not very large.