Growing Up

RESULTS ANALYSIS

Need To Know

• Square gross profit up 18%yoy ($888m), Cash App gross profit up 37%yoy ($968m), both above expectations 
• Cash App continues to grow, gaining 1m monthly transacting active users since March 2023, now with 54m
• Q2 group gross profit trends were up 27%yoy, with the exit run-rate slowing to ~21%yoy over July which was below expectations, although impacted by specific economic changes
• Full year 2023 EBITDA guidance lifted ~10% to $1,500m from $1,360m (and consensus at ~$1,364m), as Block focuses on its profitable growth 

Investment Implications

Block continues to build itself, rebuffing any macroeconomic uncertainty. Both ecosystems (Cash App and Square) continue to grow in healthy double digits, showing continued momentum. Group gross profit was up 27%yoy to $1.87bn for the quarter. Profitability also showed improvement, with adjusted EBITDA up 105%yoy to $384m, although was only up 4% sequentially on 1Q. Importantly, the incremental adjusted EBITDA margin was 50% in the quarter, up from 40% in March and 20% in December.

Square continues to grow up market, with 40% of GPV now in the 'mid-market' up from 39% in 2022. Gross profit from the mid-market was up 20%yoy, outpacing the overall segment gross profit of 18%yoy. This market segment continues to be a strong focus, as it often has higher attachment rates and retention rates as the ecosystem becomes entrenched in the business's operations. The global expansion continues, still representing 16% of segment gross profit, but up ~23%yoy. We expect both the upmarket and international expansion to be the key drivers of growth over the medium term.

Cash App network effects were on display as the peer-to-peer transaction volume continues its momentum (to $53bn, up 18%yoy), driving an increase in monthly transacting actives to 54m, up 15%yoy. Cash App Taxes and other product launches continue to be a key retention factor and monetisation opportunity for the app, with adoption of financial services functionalities driving inflows per transacting actives up 8%yoy to $1,134. The launch of Cash App Pay has seen strong adoption among the Gen Z customers, with nearly 1m monthly actives as of June. We believe this can be an effective opportunity to further increase adoption of Cash App overall.

Full year EBITDA guidance upgraded 10% to $1,500m as Block's increased focus on profitability and cost control flows through the business. This is the second upgrade following one at the 1Q result. We see continued potential upside risk as focused hiring and efficiency gains could see additional margin improvements. The July exit gross profit rate was 21%yoy, which was softer than the market expected, however we note the April exit run rate after the 1Q result was 24%yoy, and the actual 2Q growth was 27%yoy, meaning there could still be upside to the July rate. The softening July number will however likely drive some negative sentiment on the growth rate in the short-term, and we expect some potential downgrades.

Investment View

Block is clearly continuing to execute on its strategy and comments from management around profitability discipline should continue to provide positive momentum to the stock. The July exit run rate of 21%yoy was below expectations, however we believe further efficiencies could lift the overall margin, offsetting any slow down in top-line growth. The July month also has some specific items such as revised interchange economics and some pricing economic changes in Cash App. We expect the company to continue providing conservative guidance and beating throughout the year and retain our Buy recommendation.