Block Inc Earnings - Q1 2025 Analysis
Positives
- Gross profit margins are high, and strong returns on investments are reflected in operating income.
- The company is encouraged by the early results with strong attach rates and healthy growth trends.
- The company delivered strong results in Square and demonstrated discipline across expenses with the highest adjusted operating income and adjusted EBITDA ever in Q1.
- The company is improving its motion to get the message out to more sellers on product innovations with more effective sales through the field sales channel.
- Adjusted EBITDA was $813 million, up 15% YoY, and adjusted operating income was $466 million, up 28% YoY.
Q&A Highlights - Q1 2025
Analyst asked about the company's approach to developing their view on the macro uncertainty given the changing environment.
Jack Patrick Dorsey, CEO of Block Inc., explained that the company has made significant changes to their systems and engineering platforms, leading to increased market share for Square. He also mentioned that the company is focusing on increasing network density and expanding their reach, particularly through peer-to-peer transactions. He highlighted the importance of trust and customer satisfaction in their marketing efforts, and the need to update their view of the world to reflect changes in the market. He also mentioned the company's work on AI, specifically the codename goose tool, which has been successful in increasing productivity.
Analyst asked about the adoption rate and long-term plan for the new feature that allows users to split their payments after making a purchase using the Cash App Card.
Jack Patrick Dorsey, CEO, stated that the company believes this feature is a great incentive for moving customers over to payroll direct deposit and that it is deeply strategic. He also mentioned that the company sees Cash App and Afterpay as evolutions of a credit function and that this is just one step along that path. He emphasized that the feature is particularly beneficial for younger generations who want different options for managing their payments.
Analyst asked about the company's comfort level in expanding the Borrow model, even if the macro environment deteriorates further.
Amrita Ahuja, CFO, explained that there are several factors that go into expanding Borrow, including TAM expansion and increasing Borrow limits for eligible customers. She also mentioned that the company has confidence in their underwriting models, which are designed to mitigate potential risk and support healthier underwriting performance. She emphasized that the company has not seen any changes to underwriting outcomes and that they have the ability to move quickly and manage underwriting outcomes if needed.
Analyst asked about the vision and potential of Proto, Block Inc's new Bitcoin mining hardware.
Jack Patrick Dorsey, CEO of Block Inc, explained that Proto is a transformational product that aims to address the needs of Bitcoin miners and the systems they use. He highlighted the company's close relationships with vendors and manufacturers, as well as its focus on reliability, flexibility, and speed. He also mentioned that the Bitcoin hardware supply industry is a $3 billion to $6 billion annual revenue industry, and that Proto will allow consumers and tinkerers to play with mining and build novel platforms and experiments. He emphasized that Proto is an open-source initiative that will allow the company to get feedback from the community and integrate improvements, and that it will build an entirely new developer ecosystem around mining.
Analyst asked about the products that will drive Square's gross profit acceleration in 2023 and the breakdown between US and international markets.
Amrita Ahuja, CFO of Square, explained that the company is seeing encouraging growth in its Q1 numbers, with gains in core verticals such as food and beverage and retail, as well as mid-market seller segments. She highlighted product innovation and go-to-market enhancements as key drivers of growth, including the release of Square Online enhancements, improved delivery and courier delivery integrations, and better banking and invoices experiences for sellers. She also mentioned the company's improved motion to get the message out to more sellers through field sales channels and partnerships, as well as increased marketing spend within five- to seven-quarter payback thresholds. She emphasized that the improved cadence around product velocity, product innovations, and effective go-to-market channels between sales and partnerships is driving early success for Square.
Analyst asked about the components of the guidance down from macro-conservatism, decremental margin, and incremental reinvestment.
The company explained that the guidance down is due to a more cautious approach to the macro outlook, with incremental conservatism embedded in the gross profit guidance. The company is taking a more cautious approach to reflect wider error bars with a broader macro backdrop. The incremental margins on gross profit are high, and that's reflected in the flow-through to operating income, along with strong returns on investments in go-to-market and risk-loss areas. The company expects full-year adjusted operating income margins of 19%, despite the more cautious macro-outlook, and continues to expect margins to expand this year versus last year. The company has the flexibility to invest in high-return areas, such as go-to-market and risk-loss, where it continues to see strong returns.
Analyst asked about how the more cautious macro approach funnels down into what the company is assuming for Square GPV.
The company expects Square GPV growth to accelerate to high single-digits on a reported basis for Q2, with a continued expectation for GPV growth improvement throughout the year. The company is making a number of product investments and go-to-market enhancements across sales and partnerships, which are paired with future roadmap announcements to sellers. The company has taken a more cautious approach to the macro outlook, but remains encouraged by the trajectory of the Square business based on what it sees in its business and the conviction behind the investments it's making.
