Key Points
Block grew gross profit faster than it had guided and raised its full-year outlook again.
Square's U.S. payment volume growth sped up, a sign its sales push is working.
On a GAAP basis, loan losses and legal charges are growing much faster than the business.
Block (NYSE:XYZ) grew gross profit 22% in the third quarter, ahead of its own guidance, and raised its full-year outlook again. Shares rose about 8% in early after-hours trading. Its smaller workforce is now turning growth into profit, but GAAP results show two costs that the adjusted figures skip: loan losses and a third straight quarter of large legal charges.
Key numbers
- Gross profit: $3.24 billion, up 22% year over year.
- Cash App gross profit: $2.07 billion, up 27%.
- Square gross payment volume: $76.4 billion, up 14%.
- Operating income: $428 million, up 5%, versus $923 million adjusted, up 92%.
What it means
Square's growth is real and speeding up. U.S. payment volume growth rose to 10%, and gross profit grew in step with volume as field sales reps and reseller partners won sellers still on older systems. In payments, more volume at steady pricing compounds.
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The adjusted jump comes from February's staff cuts, which shrank product spending while gross profit kept rising. The catch is what adjusted results exclude: $435 million of contingency, restructuring, and other charges, mostly accrued legal costs, after similar charges in each of the prior two quarters. The letter doesn't name the legal matter.
Credit is the other cost: transaction and loan losses rose 66%, three times as fast as gross profit, as Cash App Borrow and Afterpay lending grew. Loan fees count in gross profit, while the losses land below it as an operating expense. Management says lending margins held steady with last year.
What to watch next
Watch whether loss growth slows in the fourth quarter, as Block expects, once Borrow limits start rising again. Block also guides gross profit growth to slow to 15% that quarter.
David Kretzmann has positions in Block. The Motley Fool has positions in and recommends Block. The Motley Fool has a disclosure policy.