Block’s strategy is delivering results

Block's strategy

In Q2 2023, Block’s total fintech revenue grew 26% YoY to $5.53bn, well above the consensus estimate of $5.18bn. Excluding bitcoin revenue, Block’s revenue recorded a 20% YoY increase to $3.14bn.

By segment, transactional revenue grew by 11% YoY to $1.64bn. One of the main drivers of transactional revenue growth was a 15% YoY increase in trade turnover to $59bn, just below the consensus forecast of $59.6bn. We note a slight slowdown in trade turnover and transactional revenue growth relative to Q1, but growth rates remain higher than throughout last year. Square ecosystem turnover grew 12% YoY to $54.2bn and Cash App ecosystem turnover grew 15% YoY to $4.9bn. Subscriptions and services revenue increased 33% YoY to $1.46bn, while bitcoin revenue rose 34% YoY to $2.39bn.

By business area, Square’s revenue and gross profit increased by 12% YoY and 18% YoY, respectively. E-commerce, international expansion and active attraction of customers with high sales turnover of more than $500 thousand per year to the platform remain the growth drivers for Square. We note that Square is doing better in the international market than in the US in terms of trade turnover growth, revenue growth and gross margins. In the US, trade turnover grew just 10% YoY, while international markets grew 26% YoY (32% YoY in constant currency). Square’s gross profit in international markets is growing at a faster pace, up 23% y/y. The company is also seeing strong demand for Square’s banking products – loans, debit cards, instant transfers – and as such, it intends to further expand its product lineup to enable merchants on the platform to effectively manage their cash flow. Block has not been left out of the artificial intelligence trend either – in July, the company launched Square Team Communication with an Announcements AI component, in which generative AI helps sales teams generate text messages and adverts, saving time.

In turn, Cash App ecosystem revenue and gross profit increased by 36% YoY and 37% YoY, respectively. Cash App ecosystem demonstrates outstanding growth due to the launch of new products and features for app users, growth in the number of active users and their engagement. Special attention is paid to user retention and monetisation ratio. The number of monthly active transactional Cash App users reached 54 million (+15% YoY) by the end of the quarter, the number of transactions per active user was a record, and P2P transactions reached a record $53bn (+18% YoY).

Turning to the overall performance, total gross profit grew 27% YoY to a record $1.87bn, beating the consensus forecast of $1.83bn. For both the Square and Cash App ecosystems, gross profit was a record. Operating expenses slowed to 15% YoY from 22% YoY and 39% YoY two quarters earlier, mainly due to savings on marketing costs. As a result, the company’s adjusted EBITDA reached a record $384mn (+105% YoY), with the growth accelerating for 4 quarters in a row. The consensus forecast for the company’s adjusted EBITDA was for growth to $298 mln. The adjusted EBITDA margin rose to 6.9% from 4.2% a year ago, as the company is gradually improving its operating efficiency. The company’s diluted earnings per share were in line with expectations and totalled $0.39 vs. $0.18 a year earlier.

Based on the results of the first two quarters of the year, Block improved its 2023 year-end EBITDA guidance to $1.5bn from $1.36bn. In addition, the company now expects a $25m operating profit, compared to the previously expected operating loss of $115m.

We are very positive on the company’s results as Block’s strategy is delivering results, allowing the company to deliver record revenue, gross profit and adjusted EBITDA. We reiterate a Buy rating on Block shares with a target price of $102.70 and upside from current levels of 40%.

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