Afterpay is contributing 10 per cent of Block’s second-quarter gross profit of $US1.47 billion, which was up 29 per cent year-on-year. It ended up paying 47 per cent less for Afterpay than initially intended, after Block shares fell between the time the scrip deal was announced last August at $US29 billion and the close at the end of January, when shares offered to Afterpay investors were worth $ US13.9 billion.
Block shares are down 29 per cent this calendar year but were up almost 18 per cent this past week anticipating a strong second-quarter result. Block said on Friday its EBITDA for the quarter was $US187 million, down 48 per cent on the previous second quarter, but above expectations. Bitcoin was a drag on performance.
Shares fell about 7 per cent in after-hours trading in the US and opened down the same amount on the ASX at $117.24.
Bad debts fall
As analysts pushed for detail on cost reductions, credit quality and the focus on profitability, given macroeconomic headwinds, Mr Dorsey highlighted Afterpay’s “discovery capabilities”. He pointed to a new Cash App “discover” tab, based on Afterpay’s “shop directory”, that was key to driving its exponential growth in Australia. Mr Dorsey said this would help Americans work out where to shop and drive incremental sales to Square.
“We will continue to increase our customers’ ability to discover new products and services within the Cash App and also make it easier for sellers to turn on these features, so they can make more sales,” he said.
Block said Afterpay’s bad debts as a proportion of sales had failed over the quarter while overall sales using the service were higher. Over the second quarter, Afterpay contributed $US208 million of revenue and $US150 million of gross profit, down 2 per cent year-on-year.
Quarterly sales on Afterpay of $US5.3 billion was up 13 per cent year-on-year but softer than expected in the US as spending continued to shift from online to in-store, where Afterpay is underweight. Growth was strong in Australia where spending using Afterpay is more diversified.
Bad debts were 1.02 per cent of sales, better than the 1.17 per cent in the first quarter, as it tightened credit criteria. “We continue to see healthy consumer repayment behaviour, with 95 per cent of installations made on time,” said CFO Amrita Ahuja.
Overall transaction, loan and consumer receivable losses were $157 million, up 225 per cent year-on-year as Afterpay was added to the company. Block said loss rates were consistent with historical ranges, despite rising interest rates in the US. “We will continue to monitor trends closely given the dynamic macro environment,” it said.
RBC Capital Markets analyst Daniel Perlin said the second-quarter numbers “showed solid net revenue, gross profit and adjusted EBITDA against our and the street’s expectations, partially driven by execution in its strategic priorities of growing upmarket with larger merchants, expanding internationally, and building out more omnichannel capabilities”.
“While this is encouraging, we note a material deceleration in [sales using] Cash App,” Mr Perlin said.
While Cash App’s total revenue of $US2.6 billion was down 21 per cent year-on-year, this was driven by volatility in bitcoin. Total net revenue of $US4.4 billion in the second quarter was down 6 per cent year over year and missed expectations, also because of the decrease in bitcoin revenue as users shied away from the volatile cryptocurrency.
‘Super app’ goals
Cash App’s 47 million active users was up 18 per cent. Mr Dorsey said the market should focus on “connections” and “discovery” between retailers and see Afterpay as much as a referral and engagement tool as a financial product.
“This gets to the heart of exactly why we made the acquisition of Afterpay in the first place: we believe that Cash App can ultimately drive a tonne of discovery for merchants all around the world, but especially around local merchants [including] products and services that people would not otherwise have had a signal around,” Mr Dorsey said.
He pointed to aspirations to become a “super app”, distinguishing Cash App from other buy now, pay later players focused mostly on an installation product that is now being mimicked by banks all over the world and other tech players such as Apple. Cash App also offers Cash App Pay and Cash App Loans.
“We believe Cash App ultimately becomes a place you want to check not on a weekly basis but every single day because it consistently gives a good sense of your friends and family, the businesses around you, products and services you are interested in and offers such as Boost all in one place,” Mr Dorsey said. (Boost is a Cash App feature allowing users to round up spending to invest in stocks or bitcoin.)
Block presented a relatively upbeat view of the resilience of the American consumer in the face of the US inflation outbreak, especially discretionary spending. Square’s food and drink vertical delivered the strongest gross profit growth of any vertical over the past five years, it said, and sales from its restaurant sellers more than doubled year-on-year.
Analysts on the conference call pushed for detail on Block’s credit risk and spending discipline. Other buy now, pay later players such as Zip are also being forced by markets towards profitability. Block cut its operating expenditure by $450 million in the first six months and is restricting new hiring. “We are very mindful of profitability and demonstrating discipline here,” Ms Ahuja said.
“Of course, we have to balance that with large market opportunity and taking share gains at a time customers need us. We are continuing to invest given the vast opportunity we have seen. But we also recognize the environment has changed, and we are prepared to adapt and will maintain discipline by pulling back on some of discretionary operating expenses.
“We are focused on demonstrating greater near term profitability as we head into what could be a more volatile macro environment.”
To which JPMorgan’s analyst replied: “That is clear and encouraging.”
The second-quarter loss attributable to stockholders was $US208 million, which was affected by $US57 million of amortization of acquired intangible assets, including some relating to Afterpay, a $US36 million bitcoin impairment loss, and $US17 million in Afterpay deal and integration -related expenses.
As of June 30, the fair value of Block’s bitcoin investment was $U160 million, $US47 million greater than the carrying value of the investment after impairment charges as the price of the improved cryptocurrency.