One Quarter, Two Businesses Pulling in Opposite Directions
This Form 10-Q, covering the quarter ended March 31, 2020, is Square's first pandemic-era quarterly report. The headline looks strong: total net revenue grew 44% year-over-year to $1.381 billion. But that number is doing a lot of work to hide what actually happened underneath it. Bitcoin revenue alone grew from $65.5 million to $306.1 million - a $240.6 million increase that accounts for more than half of the quarter's entire dollar growth - and bitcoin costs of $299.4 million against that $306.1 million of revenue mean Square kept just $6.7 million of gross profit on the whole line. Strip bitcoin out of both years' totals, and revenue growth for the actual payments-and-software business was closer to 15%, not 44%.
That 15% is itself a blend of two very different stories playing out in real time within the same ninety days. January and February 2020 were normal - Gross Payment Volume» (GPV) was tracking the same growth rate it had all through 2019. Then, in the words of the filing itself, "in the latter half of March 2020," GPV processed by Square's seller business "significantly declined" as shelter-in-place orders shut down the small brick-and-mortar businesses - restaurants, salons, retail shops - that make up the bulk of Square's seller base. GPV for the full quarter still grew 14% to $25.7 billion, entirely on the strength of January and February; the March collapse is what took the quarter from a strong beat to a mixed one, and it's the trajectory investors should be watching heading into Q2, not the quarter just reported.
Operating loss widened to $(90.3) million from $(22.0) million a year earlier, and Adjusted EBITDA» collapsed 85%, from $61.7 million to just $9.3 million - a far more honest read on the quarter's underlying economics than the revenue headline, since Adjusted EBITDA strips out the bitcoin pass-through's negligible contribution and captures the real cost of a $108.9 million transaction-and-loan-losses line that nearly quadrupled year-over-year as Square provisioned for credit deterioration across its Square Capital loan book heading into a recession.
The Prescription
Square should keep building out Cash App's financial-services stack - direct deposit, the Cash Card debit product, and stock/bitcoin investing - as fast as it can, because this quarter is the clearest evidence yet that Cash App is the business insulated from a seller-side shock like COVID-19: individuals kept using Cash App to receive and spend money even as small businesses shut their doors. That's the diversification thesis this filing accidentally proves in real time.
What it should stop doing: reporting Bitcoin revenue and cost of revenue as if they were comparable in kind to transaction-based or subscription revenue, without immediately contextualizing the near-zero margin next to the headline growth number. The filing does disclose the bitcoin cost of revenue on the same line, so nothing is hidden - but a 44%-revenue-growth headline sitting one line above a business that just lost most of its GPV growth for the back half of the quarter is exactly the kind of gross-only framing a reader has to work to see past.
Key Financial Metrics
Q1 2020 vs. Q1 2019 - consolidated, reported in USD (Square reports natively in USD, no FX conversion needed)
| Metric | Q1 2020 | Q1 2019 | YoY |
|---|---|---|---|
| Total Net Revenue | $1,381.1M | $959.4M | ⚠️ +44% (mostly low-margin bitcoin pass-through - see above) |
| Adjusted EBITDA | $9.3M | $61.7M | ⚠️ -85% |
| Operating Loss | $(90.3)M | $(22.0)M | ⚠️ loss widened 4x |
| Net Loss | $(105.9)M | $(38.2)M | ⚠️ loss widened 2.8x |
| Free Cash Flow» | $95.2M | n/a - not separately disclosed for Q1 2019 in this filing | — |
| Cash and Cash Equivalents (period-end) | $1,962.3M | n/a - not disclosed for Mar 2019 in this filing | — |
| Balance sheet metric | Mar 2020 | Dec 2019 | Change |
|---|---|---|---|
| Total Assets | $6,003.9M | $4,551.3M | ✅ +31.9% |
| Total Liabilities | $4,195.9M | $2,836.2M | ⚠️ +47.9% (mostly the $1B convertible note - see below) |
| Total Stockholders' Equity | $1,807.9M | $1,715.1M | ✅ +5.4% |
Free Cash Flow is operating cash flow of $121.3 million less $26.1 million of capital expenditures - positive despite the net loss, because non-cash items (share-based compensation, transaction and loan loss provisions) and a favorable swing in customers payable more than offset the cash net loss. Total liabilities jumped nearly 48% sequentially almost entirely because of the $1.0 billion aggregate principal of 2025 Convertible Senior Notes Square issued on March 5, 2020 - see Beyond the Usual below for why the timing of that raise matters.
Q1 2020's 44% revenue growth is not what it looks like: roughly $241 million of the $422 million year-over-year increase came from near-zero-margin bitcoin pass-through revenue, while the actual payments business absorbed a real GPV slowdown in the final two weeks of March as COVID-19 shelter-in-place orders hit small-business sellers.
Key Operational Metrics
Q1 2020 vs. Q1 2019
| Metric | Q1 2020 | Q1 2019 | YoY |
|---|---|---|---|
| GPV | $25,743M | $22,587M | ✅ +14% (front-loaded in Jan/Feb, decelerating sharply in late March) |
| Transaction-Based Revenue | $758.1M | $656.8M | ✅ +15% |
| Subscription and Services-Based Revenue | $296.2M | $218.9M | ✅ +35% |
| Bitcoin Revenue | $306.1M | $65.5M | ⚠️ +367%, but ~$6.7M gross profit on it - see above |
| U.S. Revenue (% of total) | 95.1% | 95.3% | ➡️ roughly flat |
Square still reported as a single operating and reportable segment this quarter - the filing states plainly that the company "anticipates changing its operating and reportable segments from one segment to two segments in subsequent quarters of 2020," representing the Seller and Cash App businesses. That split hadn't happened yet as of March 31, 2020, so there is no Cash App-versus-Seller segment comparison to run this quarter - the first one arrives next quarter, once the new structure is in place.
Stock Price: A Crash and the Start of a Recovery, Inside One Quarter
Square's stock closed 2019 at $62.56, then fell as low as the low-$30s intraday in the third week of March 2020 during the broad COVID-19 market selloff, before recovering to close the quarter at $52.38 on March 31 - a decline of roughly 16% for the quarter overall, materially better than where the stock bottomed intraquarter. Over the trailing two years (April 2018 through March 2020), the stock ranged from a low near $31 (the March 2020 trough) to a high near $86 (mid-2018) - a swing well past the ~30-40% threshold that warrants calling the move out explicitly rather than folding it into the valuation section alone. Square has not split its stock at any point in this window, so these are actual nominal prices, not split-adjusted figures. The March low and the subsequent partial recovery track the broader market's pattern that quarter almost exactly - nothing in this filing suggests a Square-specific driver for either the crash or the bounce, which is itself informative: the market was pricing macro risk into Square, not anything the company itself had done.
Beyond the Usual
A $1 Billion Debt Raise, Priced at Almost No Interest, Landed Right at the Bottom of the March Panic
Square issued $1.0 billion aggregate principal amount of 2025 Convertible Senior Notes on March 5, 2020 - just as the broader market selloff was accelerating and roughly two weeks before Square's own stock bottomed for the quarter. The notes carry a coupon of just 0.125% and convert at $121.01 per share, more than double where the stock closed the quarter. Raising a full year's worth of Adjusted EBITDA-scale capital at essentially zero real cost, weeks before a recession that would visibly hit Square's own seller base, reads as well-timed defensive balance-sheet management rather than opportunistic growth financing - the proceeds sat almost entirely in cash and cash equivalents at quarter-end rather than being deployed.
Square also entered a new $500.0 million senior unsecured revolving credit facility in May 2020 (after quarter-end, disclosed as a subsequent-events-adjacent update to Note 12), replacing a $375.0 million facility that had never been drawn on since its 2015 inception - a second, separate liquidity cushion layered on top of the convertible-note proceeds, undrawn as of this filing.
A Related-Party Office Lease With a Co-Founder, Not Yet on the Balance Sheet
In July 2019, Square signed a 15.5-year lease for 226,158 square feet of office space in St. Louis, Missouri, with an affiliate of co-founder and board member Jim McKelvey - total future minimum lease payments of approximately $42.7 million over the lease term. The lease commencement date was expected in July 2020, and as of March 31, 2020 Square had not yet recognized a right-of-use asset or lease liability for it. A multi-decade real-estate commitment with a sitting board member's affiliated entity is exactly the kind of related-party arrangement worth tracking for how its terms compare to an arm's-length market lease once it actually shows up on the balance sheet next quarter.
A San Francisco Tax Dispute Is Close to a Settlement, With Up to $66 Million Still on the Table
San Francisco's Treasurer & Tax Collector has argued since at least 2018 that Square's primary business activity should be classified as financial services rather than information for Gross Receipts Tax and Payroll Expense Tax purposes - a classification dispute that, if Square loses, could cost an estimated $0 to $66 million in additional taxes, interest, and penalties across fiscal years 2016 through the current quarter. On May 4, 2020, Square and the City entered into a settlement agreement, though it still required approval from the Mayor, Controller, and Board of Supervisors as of this filing - not yet final, but a meaningful de-escalation of a multi-year dispute that had been sized as high as $66 million.
Target Valuation Range
~4.9x EV/TTM Revenue, ~$52 per share at quarter-end. Too early to call this cheap or expensive on fundamentals alone - Square remains GAAP loss-making and the quarter's own numbers are distorted by both the bitcoin pass-through and a COVID-19 shock still working its way through the business - but the market was pricing Square at a lower revenue multiple than it would just one quarter later (see the Q2 2020 post), reflecting genuine uncertainty about how deep the seller-side damage would go.
| Market cap → enterprise value | Q1 2020 (period-end) |
|---|---|
| Share price (period-end) | $52.38 |
| Shares outstanding (Class A + B, ~May 2020) | ~439.4 million |
| Market capitalization | ~$23.0 billion |
| Total liabilities | $4.20 billion |
| Less: cash and cash equivalents | $1.96 billion |
| Enterprise value | ~$25.2 billion |
| Peer-multiple sanity check | TTM ending Q1 2020 |
|---|---|
| TTM Revenue (reconstructed: FY2019 less Q1 2019 plus Q1 2020) | ~$5.14 billion |
| Enterprise Value | ~$25.2 billion |
| EV/TTM Revenue | ~4.9x |
| TTM GPV | ~$104.9 billion |
| EV/TTM GPV | ~0.24x |
A full DCF isn't attempted here: Square is GAAP loss-making, this quarter's own results are distorted by both the bitcoin revenue pass-through and an in-progress pandemic shock whose full-year impact on the seller business isn't yet knowable, and the segment split that would let a reader separately value the Seller and Cash App businesses doesn't exist yet in this filing. The EV/TTM Revenue multiple above is offered as a sanity check against Square's own trading history, not a fair-value verdict.
Square, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020, filed with the SEC.