What to Look For From SQ
- Analysts estimate adjusted EPS of $0.19 vs. $0.41 in Q1 FY 2021.
- Gross payment volume is expected to rise at a healthy pace YOY, but a slower pace than the previous three quarters.
- Revenue is expected to decline YOY for the first time in over four years.
Block Inc. (SQ), the digital payments company that recently changed its name from Square, posted explosive revenue growth during the past two years amid the COVID-19 pandemic. But that may be ending. Block ‘s growth has decelerated sharply in recent quarters. And it’s facing regulatory scrutiny and security issues. The federal Consumer Financial Protection Bureau has sought information about how its flagship Cash App handles customer complaints and disputes. And Block recently discovered that a former employee downloaded confidential customer account data in a highly publicized incident.
Investors will watch how Block is managing these challenges and how it plans to revive growth when the company reports earnings on May 5 for Q1 FY 2022. Analysts are not optimistic. Block is expected to report a second consecutive quarter of year-over-year (YOY) decline in adjusted earnings per share (EPS). Analysts also expect revenue to decline YOY for the first time in at least four years.
Investors will also be focused on Block’s gross payment volume (GPV), a key metric that provides an overall picture of transaction volumes. It is Block’s main gauge of the total dollar amount being transacted through its payment ecosystems. Analysts predict GPV will show healthy, but slower YOY growth for the quarter relative to recent quarters.
Block shares have significantly underperformed the broader market over the last year. Block stock staged a modest rally starting in May 2021 and overtook the market briefly several times between July and October of that year. It then began to underperform the market and entered a sustained period of decline through February. Although shares briefly advance in late February, they essentially have traded sideways since then. As of May 3, Block shares have provided a 1-year trailing total return of -58.0%, far below the S&P 500’s total return of -0.4%.
Block (Square) Earnings History
Block posted robust growth in adjusted EPS throughout FY 2018 and FY 2019, rising 64.0% and 69.4% respectively. The company was hit hard at the start of the COVID-19 pandemic and posted adjusted losses per share for Q1 FY 2020. Starting in Q2, the company posted six straight quarters of improving profits, highlighted by a 265.6% increase in adjusted EPS in Q2 2021. Block’s performance has worsened since then, marked by decelerating profit growth in the third quarter and falling adjusted EPS in the fourth. For Q1 FY 2022, analysts expect EPS to fall 53.4% YOY.
Block’s revenue has seen a much more stable growth trajectory. YOY revenue growth accelerated from the low-40s to around 50% from FY 2018 to FY 2019. It then accelerated at a rapid pace for four straight quarters from Q2 FY 2020 through Q1 FY 2021, when revenue rose 266.2%. In the three most recent quarters, from Q2 through Q4 FY 2021, this pace of growth has slowed considerably. Revenue rose by only 29.1% in the fourth quarter. For the first quarter of this year, analysts now predict that Block’s revenue will fall 17.7%, the first decline in at least four years.
|Block (Square) Key Stats|
|Estimate for Q1 FY 2022||Q1 FY 2021||Q1 FY 2020|
|Adjusted EPS ($)||0.19||0.41||-0.02|
|Gross Payment Volume ($B)||44.6||33.1||25.7|
Source: Visible Alpha
The Key Metric
As mentioned above, investors will also be focusing on Block’s GPV, a key metric tracking the total dollar amount, net of refunds, of all card payments processed by sellers using the company’s payments ecosystem. It includes peer-to-peer payments as well as transactions with merchants that use Block’s mobile payments app. Block charges transaction fees on these gross payments and those fees constitute a major source of revenue. The transaction fees are generally calculated on a percentage of the total transaction amount processed. The greater the GPV, the more transaction-based revenue Block is able to generate.
GPV also provides an indication of how many users the company has on its platform. If Block can attract more users to its main payments ecosystem, then it will be able to direct more traffic to its other businesses. This helps fuel more revenue because Block takes a cut of the transactions. In addition, Block’s GPV has been fueled by acquisitions that provide business services to different clients, and this additional business helps spur people to use their other services beyond the company’s well-known Cash App brand.
In the last 16 quarters, Block’s GPV has only declined YOY one time, in Q2 FY 2020. Since then, Block has reported six straight quarters of accelerating growth in GPV. In Q2 FY 2021, GPV rose 87.8%, the biggest increase in recent quarters. In fact, each of the last three quarters in FY 2021 posted the biggest quarterly GPV growth compared to the three years FY 2018 through FY 2020. In Q1 FY 2022, analysts continue to expect healthy growth of 37.4%. While they expect that growth to be slower than Q4 FY 2021, it will will be faster than Q1 FY 2021.