Block (SQ) Q1 2023 Earnings: What to Expect

Payments processing specialist Block (SQ) will report first quarter fiscal 2023 earnings results after the closing bell Thursday. Investors will want to know just how much has the company’s payment ecosystem has grown amid recent competition.

Shares of Block have been under heavy selling pressure over the past year, falling some 40%, compared to a 1% decline from the S&P 500 index. So far in the first three months of 2023, the stock has moved sideways to slightly down, falling 3.5% year to date, compare to a 8% rise for the S&P 500 index. Originally called Square, and known for its peer-to-peer money-transfer service Cash App, the company rebranded its name to Block to present an emphasis on its shift towards blockchain technology.

Although the company continues to build out what it envisions as a decentralized finance business using cryptocurrency, the management expects its Cash App, which is already used to buy and sell Bitcoin, to lead the new business. At the same time, the company has struggled with negative operating margins due to the integration of Afterpay acquisition, an Australia-based buy now, pay later company. 

Block management notes that the closing of the deal includes an expected $1 billion in Afterpay operating expenses, with $53 million in quarterly expenses related to the deal over the next few years. These costs will weigh on profits by about $200 million per year. Despite these issues, the stock appears drastically oversold at current levels. Its management has outlined a new long-term investment framework, which they believe will improve the company’s earnings quality. On Thursday investors will want more details on these initiatives to assess how much time management deserves.

For the three months that ended March, Wall Street expects the San Francisco, Calif.-based company to earn 34 cents per share on revenue of $4.58 billion. This compares to the year-ago quarter when earnings came to 18 cents per share on revenue of $3.96 billion. For the full year, ending in December, earnings are projected to rise 71% year over year to $1.71 per share, while full-year revenue of $20.06 billion would rise 14.4% year over year. 

Concerns of slowing growth, compressing margins and rising competition has pressured the stock. This is even though the fintech specialist has posted a beat on both the top and bottom lines in the three straight quarters. Company CEO Jack Dorsey has discussed the importance of achieving financial flexibility so the company can invest in various new technology concepts. However, famous short seller Hindenburg Research has raised doubts about the company’s business metrics.

CNBC noted that Hindenburg Research described Block’s internal systems as a ”‘Wild West’ approach to compliance.” The report, which also alleged that Cash App’s compliance programs were deficient, sent the stock plunging nearly 20%. This is even though Hindenburg failed to provide any concrete proof of its allegations. In the fourth quarter, Block grew revenue by 14% year over year, which is an attractive growth rate to $4.65 billion, beating estimates by $56.7 million.

Q4 gross payment volume of $53.2 billion, missing estimates of $54.6 billion, and down from $54.4 billion in Q3. During the quarter, Cash App generated revenue of $2.86 billion, up 12% year over year. The app generated $1.83 billion of bitcoin revenue, with gross profit of $35 million. The Square ecosystem generated $1.76 billion revenue, slightly lower than the $1.77 billion in Q3. However, gross profit of of $801 million grew from $783 million in Q3, while rising 22% year over year.

Investors on Thursday will look to see whether these metrics can improve, along with the details provided by management outlining ways to improve the company’s earnings quality.