Earnings Results: Block’s stock rallies as upbeat earnings outlook comes as a relief

On an adjusted basis, Block
SQ,
+1.66%
earned 22 cents a share, down from $1.05 a share a year before, whereas analysts were modeling 30 cents a share. The company also posted adjusted earnings before interest, taxes, depreciation, and amortization (Ebitda) of $281 million, ahead of the FactSet consensus, which was for $227 million.

For the full year, executives at Block anticipate $1.3 billion in adjusted earnings before interest, taxes, depreciation and amortization (Ebitda), which was in line with the FactSet consensus. The company is also targeting gross profit of 25% for the combined company, versus 22% in the fourth quarter of 2022.

Shares of Block, the company formerly known as Square, were up nearly 8% in after-hours trading Thursday.

That movement likely “can be owed to strong gross profit trends and adjusted Ebitda guidance meeting buy-side expects despite uncertainty into the print,” wrote Wolfe Research analyst Darrin Peller in a note to clients.

Block’s fourth-quarter revenue increased to $4.65 billion, up 14% from a year before, whereas the FactSet consensus was for $4.63 billion. With Block, however, analysts generally look at the company’s gross profit as a proxy for revenue as the true top line includes large contributions from a bitcoin-trading feature on the Cash App mobile wallet that carries minimal profit.

Overall gross profit came in at $1.66 billion in the fourth quarter, up 40% from a year before, while analysts were modeling $1.63 billion. Gross profit for the Square seller business was $801 million, while gross profit for the Cash App business was $848 million.

Block rolled out a new “investment framework” under which the company will target gross-profit retention of at least 100% for each ecosystem and for the broader company. It is also aiming to be a “rule of 40” company based on gross profit growth and adjusted operating margin.

“We want to further raise the bar on our growth rates and our efficiencies,” Chief Executive Jack Dorsey said on the earnings call Thursday. “We believe measuring our ecosystems on growth plus margins is the best framework to enable this.”

Block’s management disclosed that the company plans to shift its focus toward adjusted operating income rather than adjusted Ebitda in a bid to better capture impacts from non-cash expenses like stock-based compensation.

“We wanted to really see it as true costs and report it as such and hold a bar to ourselves on making sure that we integrate that as a real cost,” Dorsey said on the call.

The Cash App had 51 million monthly active transacting users in December, and inflows per active user for the fourth quarter topped $1,000. Chief Financial Officer Amrita Ahuja told MarketWatch that this marked relatively stable inflow performance despite a lack of government disbursements and taking into account “how dynamic the macro environment is.”

“Ultimately we’re encouraged here by the healthy trends that we’re seeing in inflows per activity,” she said on the earnings call.

Block is focused on augmenting the inflow experience for users by offering multiple ways for customers to load money into their Cash App accounts and through efforts to increase limits for those inflows, Ahuja said in an interview.

“There are ways as we get to know the customer and understand more about their financial profile where we can increase those limits over time,” she said.

Within the Square seller business, Block witnessed moderation in growth rates toward the middle of the quarter in discretionary areas like food and beverage and retail, while the company saw stability in growth rates for service-oriented areas.

Ahuja deemed this part of the “broader shift in retail to services,” adding that since Block works “across multiple categories, there’s less of a pronounced impact when you look at broader ecosystem we serve.”