Block: Performance guidance shows double discrepancies, no highlights!

On February 21st, Beijing time, after the US stock market closed, Block (XYZ.US), the American version of "Alipay," announced its Q4 2024 financial report. Here are the key points:

1. The cornerstone business Square segment's revenue for this quarter was approximately $1.97 billion, a year-on-year increase of 9%, with a significant acceleration compared to the previous quarter. However, this surge in growth was mainly due to the base period from a year ago when the negative impact of the BNPL business divestiture had passed. But compared to the market expectation of about 11.5% revenue growth, the actual performance still lagged behind.

Another key indicator -- the C2B payment amount completed by merchants within the Block ecosystem (including Cash App channels) was approximately $61.95 billion, roughly in line with expectations. The year-on-year growth rate rebounded from 4% in the previous quarter to about 8%. This was mainly due to the C2B payment amount completed through Cash App being approximately $3.1 billion (although it still declined by 23% year-on-year), but it was stronger than the more pessimistic expectation of $2.9 billion.

The year-on-year growth rate of GPV within the Square ecosystem also recovered from 7.3% to 9.9%. However, before the performance, the market had very high expectations for Square's accelerated growth, and the actual recovery was not significant.

2. Excluding the Bitcoin business, the Cash App segment achieved revenue of $1.59 billion this quarter. Similarly, due to the favorable adjustments of the BNPL business a year ago having passed, the year-on-year growth rate plummeted to 14%, but the market had fully anticipated this.

However, in terms of operational data, this quarter the monthly active transaction volume of Cash App was 57 million, with year-on-year growth having dropped to only 2%, indicating that Cash App's user activity has encountered a significant growth bottleneck. Relying on an average single transaction amount still showing a 10% increase, the inflow amount of the Cash App ecosystem managed to maintain a 12% growth this quarter. But the increase in value is clearly not as healthy as the increase in volume.

3. The Bitcoin business, which contributes the most to revenue, generated revenue of $2.43 billion this quarter, a year-on-year decrease of 4%. Originally, with the cryptocurrency surge following Trump's election, the market believed that Bitcoin in the stock market would benefit significantly, expecting a +4% growth. The Bitcoin business significantly missed market expectations.

Summing up all businesses, Block's total revenue for this quarter was $6.03 billion, a year-on-year increase of 4.5%, significantly lower than the expected growth rate of about 9%, mainly due to the drag from the Bitcoin business. Excluding the volatile Bitcoin business, core revenue was $3.6 billion, a year-on-year increase of 11%, which was just slightly below the market expectation of $3.66 billion.

The company's most concerned profitability indicator — gross profit for this quarter was $2.31 billion, slightly below the market expectation of $2.32 billion. Gross profit increased by approximately 14% year-on-year, with a quarter-on-quarter decline of 4 percentage points, indicating that growth continues to slow down. The gross profit margin reached 37.6%, continuing to improve by 0.7 percentage points quarter-on-quarter. The gross profit margin is still improving, indicating that the weakness on the growth side is the more significant issue. **

From a segment perspective, the Cash App segment achieved a gross profit of $1.3 billion, a year-on-year increase of 16%, slightly lower than the market expectation of $1.32 billion. The gross margin also decreased by about 1 percentage point to 81.7%, below the expected 82.9%. The unexpected decline in profitability of the Cash App segment, alongside the lackluster performance of the Square segment, is clearly bad news.

5. From an expense perspective, based on total revenue (ex. BTC) growing by 11% year-on-year, the overall operating expenses of the company increased by 7% year-on-year this quarter, while the growth of expenses has risen for two consecutive quarters amid slowing revenue growth, which is a negative trend.

Breaking it down, the main reason is that R&D investment increased by 12% year-on-year this quarter, while management and marketing expenses grew by -2% and 3%, respectively, still reflecting a relatively conservative spending state.

6. Due to the poor growth on the revenue side, the slight increase in gross margin resulted in gross profit only meeting expectations. The unexpected growth in expenses (approximately $200 million higher than market expectations for total expenses) led to this quarter only being breakeven, below the market expectation of $300 million. The profit side can be considered a significant miss.**

7. For the guidance for Q1 2025, Block guides gross profit to be $2.32 billion, a year-on-year increase of 11%, with growth continuing to slow compared to this quarter, slightly below the expected $2.38 billion. The adjusted operating profit guidance is $430 million, also lower than the market expectation of $470 million.**

At the same time, for the full year of 2025, the company guides gross profit to grow approximately 15% year-on-year, with a profit amount of $10.22 billion, slightly below the expected $10.25 billion. The adjusted operating profit for the full year is about $21 billion, with a profit margin of 21%, which will improve from this year's 18%. However, it is also slightly below the expected $21.8 billion.**

Dolphin Research's Viewpoint:

Overall, Block's performance this quarter is relatively poor, with issues across all key indicators. Specifically, regarding the Square segment, we learned that sell-side analysts were quite optimistic about the acceleration of growth in the Square segment ahead of the earnings report (many investment banks viewed Block as a top pick this quarter). However, while the actual performance did accelerate, the extent was not as much as the market expected. Therefore, the ongoing sluggish growth issue in the Square business has not been fundamentally alleviated.

In the Cash App segment, although revenue growth generally met expectations, several key indicators showed that the number of monthly active transactions nearly stagnated, and the gross margin unexpectedly declined. With the Square segment consistently underperforming, the Cash App segment, which originally supported the overall performance of the group, is also showing signs of encountering growth bottlenecks The company's specialty business, which the market believes would benefit from the surge in cryptocurrency, the Bitcoin trading business, did not bring the expected contribution. The growth performance across major segments was disappointing, and the significant increase in R&D expenses led to a notable decline in profits for the quarter.

The company's guidance for both the next quarter and the entire fiscal year 2025 was also generally weaker than the market's previous expectations. With poor performance this quarter and no highlights in the subsequent guidance, it is naturally difficult to attract investor favor.

Here are the detailed comments :

1. Square's growth accelerated as expected, but not to the anticipated extent

The company's cornerstone business — Square segment revenue for this quarter was approximately $1.97 billion, a year-on-year increase of 9%, with a noticeable acceleration compared to the previous quarter. However, as the plunge in growth rate in Q4 2023 was mainly due to the exclusion of BNPL business from Square, this increase in growth rate was primarily due to the impact of the base period. Compared to the market expectation of about 11.5% revenue growth, the actual performance fell short. Looking at specific sub-businesses:

1) The transaction fee revenue for this quarter increased by 7.7% year-on-year, showing a slight improvement from 6.8% in the previous quarter, but the extent was limited;

Revenue from subscription services, including SaaS software services and funding loans, was $340 million this quarter, which, after experiencing a year-on-year decline for four consecutive quarters due to business adjustments, recovered to a year-on-year growth of 15% this quarter after the impact faded, a significant drop from over 20% growth before the business adjustments.

Key indicator — The C2B payment amount completed by merchants within the Block ecosystem (including Cash App channels) was approximately $61.95 billion, roughly in line with expectations. The year-on-year growth rate rebounded from 4% in the previous quarter to about 8%. Among them, the C2B payment amount completed through Cash App was approximately $3.1 billion, stronger than the expected $2.9 billion, which was the main reason for the overall growth improvement. However, it still declined by 23% year-on-year.

In addition, the year-on-year growth rate of GPV achieved within the Square ecosystem also recovered from 7.3% to 9.9% this quarter. This indicates that the recovery of the underlying indicator GPV is better than the revenue metric. Reflected in financial metrics, the comprehensive transaction fee rate for Square's payment business this quarter decreased by 3 basis points year-on-year.

In terms of the proportion of payment volume classified by merchant size, this quarter the proportion of large merchants with annual payment amounts exceeding $500k decreased by 0.3 percentage points quarter-on-quarter. However, historically, the decline in the proportion of large merchants in Q4 seems to be a common occurrence. The year-on-year growth rates of GPV contributed by large, medium, and small merchants were 16%/8%/4%, indicating that large merchants remain the main driving force behind the overall payment volume growth. **

II. Is Cash App's Active Usage Growth Facing a Bottleneck?

Excluding Bitcoin business this quarter, the Cash App segment achieved revenue of $1.59 billion. Similarly, due to the favorable impact of 100% inclusion of BNPL business in the Cash App segment a year ago fading, the year-on-year growth rate plummeted to 14% this quarter. However, the market had fully anticipated this. In detail:

Cash App's C2B payment processing fee revenue continued to decline by 32% year-on-year, consistent with the GPV data trend that fell over 20% year-on-year;

The subscription service, primarily based on co-branded card business, instant withdrawal business, and Afterpay business, generated revenue of $1.51 billion this quarter, and after passing the favorable base period, the year-on-year growth rate decreased to 18%.

The Bitcoin business, which contributes the most to revenue, generated revenue of $2.43 billion this quarter, a year-on-year decline of 4%. Originally, with the cryptocurrency surge following Trump's election, the market believed that Bitcoin in the stock market would benefit significantly, with an expected growth of +4%. In other words, the Bitcoin business significantly missed market expectations.

In key operational data, as of the end of this quarter, Cash App's monthly active transaction volume was 57 million, with year-on-year growth dropping to only 2%, indicating that Cash App's user activity has clearly encountered a growth bottleneck. Relying on an average single transaction amount still showing a 10% increase, the inflow amount of the Cash App ecosystem maintained a 12% growth this quarter. However, a common golden rule is that growth in volume is generally healthier than growth in price.

III. Cash App's Gross Margin Decreased Quarter-on-Quarter

Summing up all businesses, this quarter Block's total revenue was $6.03 billion, a year-on-year increase of 4.5%, significantly lower than the expected growth rate of about 9%, as previously mentioned, mainly due to the Bitcoin business revenue not growing significantly as expected, but rather dragging down with a year-on-year decline. After excluding the volatile Bitcoin business, core revenue was $3.6 billion, a year-on-year increase of 11%, just slightly below the market expectation of $3.66 billion.**

The company's most important profit indicator — gross profit for this quarter was $2.31 billion, slightly below the market expectation of $2.32 billion. Gross profit increased by approximately 14% year-on-year, but decreased by 4 percentage points quarter-on-quarter, indicating a continued slowdown in growth. Gross margin reached 37.6%, an increase of 0.7 percentage points quarter-on-quarter. The gross margin continues to improve, but due to the rapid decline in revenue growth, the increase in gross profit is also slowing.

By segment:

The Square segment achieved a gross profit of $924 million, slightly down quarter-on-quarter and also slightly below the expected $940 million. However, the gross margin still improved by 0.3 percentage points quarter-on-quarter, mainly due to the drag from the growth side;

Excluding the Bitcoin business, the Cash App segment achieved a gross profit of $1.3 billion, a year-on-year increase of 16%, also slightly below the market expectation of $1.32 billion. The gross margin also decreased by approximately 1 percentage point quarter-on-quarter to 81.7%, lower than the expected 82.9%, indicating an unexpected decline in the profitability of the Cash App segment.

Although revenue from Bitcoin decreased this quarter, it still achieved a gross profit of $77 million, higher than the expected $66 million;

Four, R&D expenses unexpectedly surged, significantly missing profit expectations

From an expense perspective, with total revenue (ex. BTC) increasing by 11% year-on-year, the overall operating expenses of the company increased by 7% year-on-year this quarter, while the growth of expenses has continued to rise for two consecutive quarters amid slowing revenue growth, which is a negative trend.

Breaking it down, the main reason is that R&D investment increased by 12% year-on-year this quarter, while management and marketing expenses grew by -2% and 3%, respectively, still reflecting a relatively conservative spending state. The main impact is from the investment in R&D.

Overall, under GAAP standards, due to the poor growth in revenue, the gross profit margin slightly increased, and the gross profit amount only met expectations. The unexpected increase in expenses (approximately 200 million higher than market expectations for total expenses) resulted in breakeven this quarter, which is lower than the market expectation of 300 million. The profit side can be considered a significant miss.

Dolphin Research's past research on [Block]:

Financial Report Commentary

November 8, 2024 Financial Report Commentary “ Block: Square is stuck in a quagmire, Cash App can't hold up alone ”

August 2, 2024 Financial Report Commentary “ Block: Cost control can squeeze profits, but it's not a long-term solution ”

May 5, 2024 Financial Report Commentary “ Block: Finally squeezed out profits, but are clouds looming? ”

February 23, 2024 Financial Report Commentary “ U.S. stocks are euphoric, is the volatile Block reliable? ”

November 3, 2023 Financial Report Commentary “ Surging 15% after hours, is overseas Alipay Block “rising to the occasion”? ”

November 3, 2023 Conference Call “ Block: What’s the path for future growth? ”

May 6, 2023 Conference Call “ Block: Focus on profit growth and risk management ” May 5, 2023 Financial Report Review: Block: "America's Alipay" Strongly Rising in Adversity?

In-depth

July 19, 2022: With Efforts but No Returns, Square's Bubble Still Needs to Be Popped

June 21, 2022: The "Trillion Dollar Choice" in Payments: Who Will Stand Out, Square or PayPal?

Risk Disclosure and Statement of This Article: Dolphin Research Disclaimer and General Disclosure