Snapshot

The digital world is constantly changing, affecting how businesses and consumers handle their financial activities. This shift has created a demand for integrated solutions that simplify these transactions and financial management processes.

Against this backdrop, Block has emerged as a key player, offering expansive ecosystems to address these needs. Block’s primary focus is on building cohesive ecosystems that cater to different customer segments, including sellers, consumers, artists, fans, and developers. As a result, the company has carved out a position among the top five transaction and payment processing services amongst sector peers including incumbent giants, Visa and Mastercard.

The Square ecosystem is tailored to businesses of all sizes, from small entrepreneurs to large corporations across virtually all industries. This platform offers dozens of distinct products and services, helping businesses manage transactions and growth efficiently. While the company’s Cash App ecosystem focuses on individual consumers, providing a range of financial services designed to make money management more accessible and user-friendly.

Block has evolved from its initial focus on the Square ecosystem, which began in 2009 to facilitate card payments for businesses. Over time, it has expanded its services to include a wide range of consumer and business solutions. Now it is exploring new customer segments, and investing in emerging ecosystems such as TIDAL and bitcoin. TIDAL, acquired in 2021, represents Block’s foray into the music industry, offering a platform for artists and fans. While the Bitcoin ecosystem is focused on developing open-source projects and financial services leveraging blockchain technology, which the company believes can help address inefficiencies in the current financial system.

Block’s services facilitate close to a quarter of a trillion dollars in transaction value across a broad spectrum of sectors including food and drinks, retail, healthcare, and professional services, amongst many others. As the company’s strategy revolves around enhancing and diversifying its ecosystems, it continues to see robust growth in gross payment volumes solidifying its position in the financial services and payment processing markets.

Background

Founded in 2009 by Jack Dorsey and Jim McKelvey, Block, formerly known as Square, started its journey in the financial technology sector with a ground-breaking small, white card reader that connected to smartphones. The product was a game-changer for small businesses and individual entrepreneurs, making it easier and more affordable for them to process credit card payments.

The company saw rapid adoption of the Square card reader and within a few years had broadened its product range with additional versatile and user-friendly payment solutions. These included Square Register, a comprehensive point-of-sale system, and Square Stand, which transformed an iPad into a complete POS solution. While the introduction of Square Capital in 2015, a service offering business loans to Square merchants marked a further integration of financial services into the company’s portfolio.

Block went public in 2016 as its growth was supported by more and more new services such as payroll processing and additional Square Capital capabilities. In 2018, the company acquired Weebly, a website and eCommerce platform that allows website building and online store creation, catering to the growing demand for integrated online business solutions.

In recent years, new tools focused on business analytics and customer engagement, have further enhanced Block’s product offerings. This phase also included exploring new sectors such as the music industry with the acquisition of TIDAL and delving into blockchain technology. Consequently, the company underwent a significant rebranding in 2021, changing its name from Square, to reflect the evolution beyond its original Square ecosystem into various areas of financial services and technology.

Leadership

Co-founder Jack Dorsey still serves as the principal executive officer of Block, under the title, Block Head, which changed from CEO in 2022. He recently returned to running the Square business again after its former CEO stepped down. Dorsey’s leadership has been pivotal in Block’s expansion from a payment processing start-up to a major player in the financial technology sector. The company’s significant investments in Bitcoin, also reflect his belief in its potential as a ubiquitous currency in the future. He is also known for co-founding Twitter, where he was also CEO from 2015 to 2021 before stepping down at the same time Block went through its rebranding.

Dorsey is joined by CFO and COO Amrita Ahuja, who brings a wealth of experience from significant roles in high-profile companies including Blizzard Entertainment, Fox Networks, Walt Disney Company, and Morgan Stanley. Her diverse background in finance and operations has been instrumental in driving Block’s narrative to support businesses of all sizes with not only payments, but also software and integrated solutions, hardware, and financial services.

Customer

Block offers a diverse suite of products and services that cater to a wide range of customer use cases covering everything from banking and transactions, payroll and team management to loyalty and marketing applications. These are split across Square, Cash App, and the newer ecosystems, TIDAL and Bitcoin.

Initially launched to enable businesses to accept card payments, the Square ecosystem has expanded into a comprehensive suite encompassing over 30 distinct products and services. These include tools for commerce, customer relationship management, staff management, and banking. These are all designed to be intuitive and self-serve, with an open developer platform for seamless integration with third-party applications. This ecosystem is monetized through transaction, subscription, and service fees.

Cash App offers a range of financial products and services designed to make personal finance management more relatable and accessible. Starting as a simple tool for peer-to-peer money transfers, it has grown to provide a broader array of services, including storing, sending, receiving, spending, and investing money. It caters to a diverse mix of consumers, thanks to its ability to handle peer-to-peer transfers and bitcoin transactions, along with stocks and ETFs. At the end of 2022, Cash App had over 51 million monthly transacting “actives” across the United States and Europe.

Block entered into the music industry with its acquisition of TIDAL, a global platform for musicians and fans, offering an extensive catalog of songs and videos. It connects artists and fans worldwide, with listeners in over 60 countries and partnerships with more than 200 labels and distributors.

Investments in the bitcoin ecosystem are aiming to address inefficiencies in incumbent financial systems, particularly in areas of identity and trust. These include initiatives like Spiral, an independent team focused on contributing to bitcoin open source work and TBD, an open developer platform focused on making the decentralized financial world accessible for everyone. In addition, Bitcoin hardware projects include a self-custody wallet and a mining system.

Block’s customer base reflects the versatility and breadth of its services. Square solutions are utilized by a broad spectrum of businesses, albeit with food and drink, and retail businesses making up half of the platform’s gross product values (GPV) at 31% and 19% respectively. Although initially appealing to smaller businesses, products are being increasingly adopted by large corporations with GPV greater than $500k, which now make up close to 40% of transaction values, as the company successfully scales to meet the needs of mid-market and larger businesses.

Thematic

Jack Dorsey’s return to lead Block has brought a notable sense of market optimism regarding his strategies to revitalize the company’s growth and achieve the “Rule of 40” by 2026. This framework is characterized by a balance of growth and efficiency, targeting mid-teens gross profit growth coupled with mid-20% adjusted operating income margins. In a letter to shareholders, Dorsey set forth several strategies for enhancing growth and reducing costs. These include reducing and capping the employee count at 12,000, restricting stock-based compensation, trimming overhead staff, and implementing AI in sales, marketing, and development operations.

Despite implementing a strict cost discipline, Block is keen on maintaining a strong focus on innovation and growth. Dorsey emphasized overcoming internal silos and redundancies to foster a culture of collaboration and faster product development, especially across Square and Cash App ecosystems. In addition, Improving product features and streamlining the onboarding process are critical areas of focus. These improvements are aimed at making the platforms more accessible and attractive to a broader range of sellers and customers.

A major strategic move has been the restructuring of the commerce business, particularly the integration of the Buy Now, Pay Later (BNPL) platform into the Cash App, which is expected to enhance the consumer experience by combining the capabilities of both ecosystems. Since acquiring Australian BNPL company, Afterpay, Block has also continued to add new products and jurisdictions as part of its strategy to strengthen its position in the rapidly growing BNPL market, which is expected to exceed $100 billion before the end of the decade.

Dorsey’s return has also marked a renewed focus on Bitcoin and blockchain technologies with the company’s name change seen as a reflection of his well-known enthusiasm for cryptocurrency. Banking products are seen as a significant differentiator for Block, with the potential for both customer retention and new customer acquisition. The integration of banking services is expected to enhance the user experience and contribute to the company’s growth.

Financials

Up until 2022, at which time total revenue remained relatively flat year-over-year at $17.5 billion, Block maintained a remarkable path of revenue growth, consistently delivering high double-digit percentage increases. This record largely continued across transaction, subscription and services, and hardware-based revenue in 2022 also, given a notable near 70% surge in subscription and services revenue to $4.5 billion. However, a 29% decline in Bitcoin revenue for the year, significantly distorted the company’s result.

A strong rebound to double-digit growth has been achieved in FY23 as total revenue already hit $16.5 billion in September for just the first nine months of the year. This result is off the back of user-based subscription plans and Bitcoin revenue both delivering 25% year-over-year increases compared to 2022.

A more disciplined managerial approach has led to early signs of improving profitability. Looking forward, leadership expects record profitability in 2024 with gross profit at close to $7.5 billion for a 24% year-over-year increase. While adjusted EBITDA and operating income are anticipated to reach $1.7 billion and $225 million, respectively.

Consensus estimates also support management’s positive view with revenue coming in at $21.8 billion for FY23, a 25% increase year-over-year. While earnings per share are expected to improve strongly by 92% to $1.92, up from $1.00 in 2022.

Risks/Competition

Block operates in a highly competitive and rapidly evolving market. Its major competitors include industry stalwarts such as Visa and Mastercard, as well as newer yet still significant players such as PayPal and Stripe, among many other financial service providers. These rivals offer everything from business software, payment terminal hardware, merchant acquirers, banks, payroll processors, and alternative lenders. In addition, traditional methods like pen and paper, manual processes, and paper currency, continue to be used by potential customers. In the Cash App platform, Block also competes with money transfer apps, prepaid debit card offerings, brokerage firms, tax firms, financial technology apps, banks, and crypto trading services.

However, Block’s competitive advantages lie in its extensive commerce ecosystem, its focus on building cohesive, fast, self-serve, and elegant products and services, and its ability to innovate and reshape the industries it operates in. It also offers transparent pricing and no long-term contracts. Furthermore, the breadth of its network and the range of products in its ecosystem set it apart from its competitors.

Conclusion

Reinvigorated by the return of Jack Dorsey, Block is making traction with its targeted approach toward achieving balanced growth and operational efficiency. As a leaner organization, it continues to enhance its product offerings and user experience, while taking advantage of the growth in the key BNPL market.

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