01—Abstract
Summary
Summary of the 10-K filed February 27, 2019. Cited figures are marked; the original filing is the authoritative source.
Square, Inc. (now Block, Inc.) reported total net revenue of $3,298.2 milliona for 2018, up from $2,214.3 million in 2017, while net loss narrowed to $38.5 million from $62.8 million.
Gross Payment Volume (GPV) grew to $84.7 billionb from $65.3 billion, and transaction-based revenue rose to $2,471.5 million. Adjusted EBITDA, a non-GAAP measure, was $256.5 million versus $139.0 million in 2017. Growth was broad-based, with subscription and services-based revenue increasing to $591.7 million, driven by Instant Deposit, Caviar, Cash Card and Square Capital, and bitcoin revenue of $166.5 million added from Cash App.
The company's cost base also rose, with total operating expenses of $1,340.3 millionc, led by product development ($497.5 million) and sales and marketing ($411.2 million). Operating loss narrowed to $36.6 million from $54.2 million. Cash provided by operating activities was $295.1 million.
As of December 31, 2018, the company held $1.6 billiond in cash, cash equivalents and marketable debt securities, and it issued $862.5 million of 0.50% convertible notes due 2023 in May 2018. Investors should note the risk factors highlighted in the filing: a dual-class structure in which Class B holders held approximately 74.3% of voting power, an accumulated deficit of $885.8 million, a pending San Francisco Gross Receipts Tax classification dispute, and class action litigation over the classification of Caviar couriers as independent contractors.
02—Key points
Key Highlights
- Total net revenue rose 49% to $3,298.2 million in 2018, compared with $2,214.3 million in 2017.
- GPV reached $84.7 billion in 2018, up from $65.3 billion in 2017, generated by nearly 1.8 billion card payments.
- Net loss narrowed to $38.5 million in 2018 from $62.8 million in 2017; operating loss narrowed to $36.6 million from $54.2 million.
- Adjusted EBITDA increased to $256.5 million in 2018 from $139.0 million in 2017 (non-GAAP measure).
- Subscription and services-based revenue grew 134% to $591.7 million, now 18% of total net revenue.
- Bitcoin revenue of $166.5 million was added in 2018 through Cash App, with corresponding bitcoin costs of $164.8 million.
- Cash and investments in marketable debt securities totaled $1.6 billion at December 31, 2018, after issuing $862.5 million of 2023 convertible notes.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2018, Block lost $0.01.
- Revenue$3.30B100.0%
- Cost of revenue−$1.99B60.5%
- Gross profit$1.30B39.5%
- Operating costs−$1.34B40.6%
- Operating income−$36.6M1.1%
- Interest, other & tax−$1.8M0.1%
- Net income−$38.5M1.2%
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 27, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $3.30B$2.21B | +49.0% |
| Cost of Revenue | $1.99B$1.37B | +45.1% |
| Gross Profit | $1.30B$839.31M | +55.3% |
| R&D Expenses | $497.48M$321.89M | +54.6% |
| Operating Expenses | $1.34B$893.51M | +50.0% |
| Operating Income | -$36.61M-$54.21M | +32.5% |
| Interest Expense | $37.80M— | — |
| Net Income | -$38.45M-$62.81M | +38.8% |
| EPS (Basic) | $-0.09$-0.17 | +47.1% |
| EPS (Diluted) | $-0.09$-0.17 | +47.1% |
| Shares Outstanding (Basic) | 405.73M379.34M | +7.0% |
| Shares Outstanding (Diluted) | 405.73M379.34M | +7.0% |
05—Questions
Frequently Asked Questions
How did Square's revenue and profitability change in 2018?
Total net revenue increased by $1,083.9 million, or 49%, to $3,298.2 million. Net loss narrowed to $38.5 million from $62.8 million, and operating loss narrowed to $36.6 million from $54.2 million. Adjusted EBITDA, a non-GAAP measure, rose to $256.5 million from $139.0 million.
What drove growth in transaction-based revenue?
Transaction-based revenue increased $551.3 million, or 29%, to $2,471.5 million, attributable to GPV growth of $19.3 billion, or 30%, to $84.7 billion. The company cited growth from existing sellers and new sellers, and larger sellers (over $125,000 in annualized GPV) represented 51% of GPV in the fourth quarter of 2018.
What are the main risks for investors in the Class A common stock?
Class B holders, including many executives and directors, held approximately 74.3% of combined voting power as of December 31, 2018. The company had an accumulated deficit of $885.8 million, faces a San Francisco Gross Receipts Tax classification dispute, and is defending class action lawsuits alleging Caviar misclassified couriers as independent contractors. It also relies on a limited number of acquiring processors and single-source hardware suppliers.
How is the company funding its growth and what debt does it carry?
Long-term debt was $899.7 million at December 31, 2018, consisting of 0.375% convertible senior notes due 2022 and 0.50% convertible senior notes due 2023 ($862.5 million principal). The company also has a $375.0 million revolving secured credit facility maturing in November 2020, with no funds drawn. Management believes existing cash, marketable securities and credit availability will be sufficient for at least the next 12 months.
What is the company's exposure to Cash App and bitcoin?
Cash App customers can buy and sell bitcoin, generating bitcoin revenue of $166.5 million in 2018. The filing notes bitcoin price volatility, security and private key risks, and regulatory uncertainty, and states the company does not believe the feature subjects it to federal securities or commodities registration. Sales and marketing expenses rose $90.6 million, largely due to Cash App peer-to-peer transfer costs and Cash Card issuance.
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