Cashing in

4Q/FY22 RESULT

Need To Know

• ~8% beat on adjusted EBITDA ($991m vs $918m)
• Solid 4Q Cash App result, partly offset by slowing growth in Square
• Strong YTD trading, 25% gross profit growth, slightly above market 1Q23 growth of ~22%

The 4Q result was solid and above street expectations. For the full year, group gross profit grew 22% to US$5,404m (excluding the Afterpay acquisition), driven predominantly by Cash App (+28%) with Square (+17%) growth slowing in the 4Q (+7%). Afterpay (and other segments) added $588m in gross profit for the year. 

Square mid-market sellers were the fastest-growing segment, (GPV between $500k-$10m) with gross profit up 16%, which is the key focus given the size of the addressable market ($125b gross profit opportunity). Pleasingly the global expansion continues, rising from 9% to 17% of total Square gross profit in the 4Q. Square loans has been a solid growth opportunity, originating nearly $400m throughout the global market, with similar loss rates to the US.

Cash App monthly transacting users increased 16% to 51m, with acquisition cost remaining stable at ~$10 or less. Cash App card delivered strong growth, generating more than $750m in gross profit, up 56%. The Card now represents 26% of total Cash App gross profit. BNPL continues to grow, with the ads and affiliate program generating nearly $100m in revenue across 2,000 advertisers. Block continues to integrate the apps, pairing affiliate offerings with Cash App’s Boost rewards and incentive capabilities.

Operating expenses rose 45% in 4Q to $1.8b, with ~$174m of this relating to amortisation of intangibles from the acquisition. Product development expenses were up 54% primarily driven by headcount. Sales and marketing expenses were up 11%, largely from the Square ecosystem, with Cash App marketing expenses down 9%. 

Guidance for FY23 is for adjusted EBITDA of $1,300m (+31% on FY22), slightly up from street estimates of ~$1,280m. YTD trading has been strong, with gross profit up 25% (assuming full ownership of Afterpay in January 2022).

Investment View

Positive gross profit retention across both ecosystems drove a solid result. The network effects continue to become evident, with Cash App still maintaining market leading low cost of acquisitions. Square growth was partly impacted by a slowdown in overall volume turnover, however the international expansion provides runway for growth. The PE de-rate has been largely done, and with ~30% forecast EBITDA growth, the ~40x PER is not expensive when compared to peers and the market. Earnings upgrades are expected and we retain our Buy recommendation. 

Figure 1: Strong growth in Cash App driving gross profit growth

Specific Disclosure: Sandstone Insights analyst holds a position in the subject company.