Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with the information set forth within the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K. The statements in this discussion regarding our expectations of our future performance, liquidity and capital resources, our plans, estimates, beliefs and expectations that involve risks and uncertainties, and other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Key Operating Metrics and Non-GAAP Financial Measures

We collect and analyze operating and financial data to evaluate the health of our business, allocate our resources, and assess our performance. In addition to total net revenue, operating income (loss), net income (loss), and other results under generally accepted accounting principles ("GAAP"), the following table sets forth key operating metrics and non-GAAP financial measures we use to evaluate our business. We believe these metrics and measures are useful to facilitate period-to-period comparisons of our business, and to facilitate comparisons of our performance to that of other payment solution providers.

			Three Months Ended March 31,
			2023						2022
Gross Payment Volume ("GPV") (in millions)			$	51,117					$	43,504
Adjusted Operating Income (Loss) (in thousands)			$	50,974					$	(42,254)
Adjusted EBITDA (in thousands)			$	368,367					$	195,361
Adjusted Net Income Per Share:
Basic			$	0.42					$	0.19
Diluted			$	0.40					$	0.18

Gross Payment Volume (GPV)

GPV includes Square GPV and Cash App Business GPV. Square GPV is defined as the total dollar amount of all card payments processed by sellers using Square, net of refunds, and ACH transfers. Cash App Business GPV is comprised of Cash App activity related to peer-to-peer transactions received by business accounts, and peer-to-peer payments sent from a credit card. GPV does not include transactions from our BNPL platform because GPV is related only to transaction-based revenue and not to subscription and services-based revenue.

Adjusted EBITDA, Adjusted Net Income Per Share ("Adjusted EPS") and Adjusted Operating Income

Adjusted EBITDA and Adjusted EPS are non-GAAP financial measures that represent our net income (loss) and net income (loss) per share, adjusted to eliminate the effect of items as described below.

We have included these non-GAAP financial measures in this Quarterly Report on Form 10-Q because they are key measures used by our management to evaluate our operating performance, generate future operating plans, and make strategic decisions, including those relating to operating expenses and the allocation of internal resources. Accordingly, we believe these measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. In addition, they provide useful measures for period-to-period comparisons of our business, as they remove the effect of certain non-cash items and certain variable charges that do not vary with our operations.

• We believe it is useful to exclude certain non-cash charges, such as amortization of intangible assets, and share-based compensation expenses, from our non-GAAP financial measures because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations.

• In connection with the issuance of our convertible senior notes (as described in Note 13, Indebtedness within Notes to the Condensed Consolidated Financial Statements), prior to the adoption of ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity ("ASU 2020-06") on January 1, 2021, we were required to recognize non-cash interest expense related to amortization of debt discount and issuance costs. Subsequent to adoption, we only recognize non-cash interest expense related to amortization of debt issuance costs on convertible notes and unsecured notes. We believe that excluding this expense from our non-GAAP measures is useful to investors because such incremental non-cash interest expense does not represent a current or future cash outflow for the Company and is therefore not indicative of our continuing operations or meaningful when comparing current results to past results. Additionally, for purposes of calculating diluted Adjusted EPS we add back cash interest expense on convertible notes, as if converted at the beginning of the period, if the impact is dilutive.

• We exclude the following from non-GAAP financial measures because we do not believe that these items are reflective of our ongoing business operations: gain or loss on the disposal of property and equipment; gain or loss on revaluation of equity investments; and bitcoin impairment losses on our investment in bitcoin, as applicable.

• To aid in comparability of our results across periods and with peer companies that may not have similar expenses, we also exclude certain acquisition related and integration costs associated with business combinations, and various other costs that are not normal operating expenses. Acquisition related costs include amounts paid to redeem acquirees’ unvested share-based compensation awards, and legal, accounting, valuation, and due diligence costs. Integration costs include advisory and other professional services or consulting fees necessary to integrate acquired businesses. Other costs that are not reflective of our core business operating expenses may include contingent losses, certain litigation and regulatory charges. We also add back the impact of the acquired deferred revenue and deferred cost adjustment, which was written down to fair value in purchase accounting.

In addition to the items above, Adjusted EBITDA as a non-GAAP financial measure also excludes depreciation and amortization, other cash interest income and expense, and other income and expense.

Non-GAAP financial measures have limitations, should be considered as supplemental in nature, and are not meant as a substitute for the related financial information prepared in accordance with GAAP. These limitations include the following:

• share-based compensation expense has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy;

• the intangible assets being amortized may have to be replaced in the future, and the non-GAAP financial measures do not reflect cash capital expenditure requirements for such replacements or for new capital expenditures or other capital commitments; and

• non-GAAP measures do not reflect changes in, or cash requirements for, our working capital needs.

In addition to the limitations above, Adjusted EBITDA as a non-GAAP financial measure does not reflect the effect of depreciation and amortization expense and related cash capital requirements, income taxes that may represent a reduction in cash available to us, and the effect of foreign currency exchange gains or losses, which is included in other income and expense.

In view of the limitations associated with Adjusted EBITDA, we also present Adjusted Operating Income (Loss), which is a non-GAAP financial measure that excludes certain expenses that we believe are not reflective of our core operating performance, including amortization of intangible assets, bitcoin impairment losses, acquisition-related accelerated share-based compensation expenses, and acquisition-related, integration, and other costs. Adjusted Operating Income (Loss) does however include the effect of share-based compensation expense, which is a significant recurring expense in our business and an important part of our compensation strategy, as well as depreciation expense.

Other companies, including companies in our industry, may calculate the non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures.

Because of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including net income (loss) and our other financial results presented in accordance with GAAP.

The following table presents a reconciliation of operating income (loss) to Adjusted Operating Income (Loss) for each of the periods indicated (in thousands):

			Three Months Ended March 31,
			2023						2022
Operating loss			$	(6,172)					$	(226,789)
Amortization of acquired technology assets			18,508						15,469
Acquisition-related, integration and other costs			1,551						76,065
Amortization of customer and other acquired intangible assets			37,087						26,664
Acquisition-related share-based acceleration costs			—						66,337
Adjusted Operating Income (Loss)			$	50,974					$	(42,254)

The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated (in thousands):

			Three Months Ended March 31,
			2023						2022
Net loss attributable to common stockholders			$	(16,838)					$	(204,199)
Net loss attributable to noncontrolling interests			(2,488)						(3,164)
Net loss			(19,326)						(207,363)
Share-based compensation expense			279,591						275,423
Depreciation and amortization			93,173						70,056
Acquisition-related, integration and other costs			1,551						76,065
Interest expense (income), net			(3,161)						15,748
Other expense (income), net			18,371						(33,472)
Benefit for income taxes			(2,056)						(1,702)
Loss on disposal of property and equipment			191						534
Acquired deferred revenue and cost adjustment			33						72
Adjusted EBITDA			$	368,367					$	195,361

The following table presents a reconciliation of net income (loss) to Adjusted Net Income and Adjusted EPS for each of the periods indicated (in thousands, except per share data):

			Three Months Ended March 31,
			2023						2022
Net loss attributable to common stockholders			$	(16,838)					$	(204,199)
Net loss attributable to noncontrolling interests			(2,488)						(3,164)
Net loss			(19,326)						(207,363)
Share-based compensation expense			279,591						275,423
Acquisition-related, integration and other costs			1,551						76,065
Amortization of intangible assets			55,595						42,160
Amortization of debt discount and issuance costs			2,949						3,630
Loss (gain) on revaluation of equity investments			14,885						(49,741)
Loss on disposal of property and equipment			191						534
Acquired deferred revenue and cost adjustment			33						72
Tax effect of non-GAAP net income adjustments			(84,607)						(38,326)
Adjusted Net Income - basic			$	250,862					$	102,454
Cash interest expense on convertible notes			1,236						1,241
Adjusted Net Income - diluted			$	252,098					$	103,695
Weighted-average shares used to compute Adjusted Net Income Per Share:
Basic			602,234						541,435
Diluted			627,423						583,452
Adjusted Net Income Per Share:
Basic			$	0.42					$	0.19
Diluted			$	0.40					$	0.18

Diluted Adjusted Net Income Per Share is computed by dividing Adjusted Net Income by the weighted-average number of shares of common stock outstanding adjusted for the dilutive effect of all potential shares of common stock. In periods when we reported an Adjusted Net Loss, diluted Adjusted Net Income Per Share is the same as basic Adjusted Net Income Per Share because the effects of potentially dilutive items were anti-dilutive.

The following table presents a reconciliation of the tax effect of non-GAAP net income adjustments to our provision (benefit) for income taxes (in thousands, except effective tax rate):

			Three Months Ended March 31,
			2023						2022
Benefit for income taxes, as reported			$	(2,056)					$	(1,702)
Tax effect of non-GAAP net income adjustments			84,607						38,326
Adjusted provision for income taxes, non-GAAP			$	82,551					$	36,624
Non-GAAP effective tax rate			25		%				26		%

We determined the adjusted provision for income taxes by calculating the estimated annual effective tax rate based on adjusted pre-tax income and applying it to Adjusted Net Income before income taxes.

Overview

On December 1, 2021, we changed our name as a corporate entity from Square, Inc. to Block, Inc. (together with its subsidiaries, "Block"). We started Block with the Square ecosystem in February 2009 to enable businesses ("sellers") to accept card payments, an important capability that was previously inaccessible to many businesses. However, sellers need a variety of solutions to thrive, and we have expanded to provide them additional products and services and to give them access to a cohesive ecosystem of tools to help them manage and grow their businesses. Similarly, with Cash App, we have built an ecosystem of financial products and services to help individuals manage their money. We also added TIDAL and TBD as businesses to contribute to our purpose of economic empowerment. TIDAL is a global platform for musicians and their fans that uses unique content, experiences, and features to bring fans closer to artists and to provide artists with tools to succeed as entrepreneurs. TBD is an open developer platform focused on making the decentralized financial world accessible for everyone. In January 2022, we completed the acquisition of Afterpay Limited ("Afterpay"), a buy now, pay later ("BNPL") platform that facilitates commerce between retail merchants and consumers by allowing its retail merchant clients to offer their customers the ability to buy goods and services on a BNPL basis.

Square is a cohesive commerce ecosystem that helps sellers start, run, and grow their businesses, and consists of more than 30 distinct software, hardware, and financial services products that provide cohesive Commerce, Customer Relationship Management, Staff Management, and Banking capabilities. Our products are designed to be self-serve and intuitive to make initial setup and new employee training fast and easy, although we also offer full-service setup and support. Our products are integrated to create a seamless experience and enable a holistic view of sales, customers, employees, and finances. Our open developer platform enables integrations with third-party applications as well. We monetize these products through a combination of transaction, subscription, and service fees. We have grown rapidly to serve millions of sellers that represent a diverse set of industries including services, food-related businesses, and retail businesses; and sizes, ranging from sole proprietors, such as a single vendor at a farmers’ market, to multi-location enterprise businesses. Square sellers also span geographies, including the United States, Canada, Japan, Australia, New Zealand, the United Kingdom, Ireland, France, and Spain.

Cash App provides an ecosystem of financial products and services to help consumers manage their money. Cash App’s goal is to redefine the world’s relationship with money by making it more relatable, instantly available, and universally accessible. While Cash App started with the single ability to send and receive money, it now provides an ecosystem of financial services focused on helping consumers make their money go further — whether that's by storing, sending, receiving, spending, saving or investing their money with Cash App. We monetize these products through a combination of transaction and service fees. Cash App has a diverse mix of transacting actives across a range of demographics and regions in the United States, as well as a small presence in Europe.

With the acquisition of Afterpay, we added a BNPL platform to our offerings. Our BNPL platform is being integrated into the Cash App and Square ecosystems, strengthening the connection between these ecosystems, expanding access to more sellers and customers, increasing Square’s omnichannel platform, and helping drive more commerce between our sellers and customers. Customers will be able to manage their installments and repayments directly within Cash App, while the commerce discovery functionality from the Afterpay app will be integrated with Cash App to help drive lead generation for merchants and customer engagement. As discussed further in Note 19, Segment and Geographical Information within Notes to the Condensed Consolidated Financial Statements, the financial results from our BNPL platform have been allocated equally to the Cash App and Square segments. Afterpay results are included in our financial statements from January 31, 2022, the date of acquisition.

Results of Operations

Revenue (in thousands, except for percentages)

			Three Months Ended March 31,
			2023						2022						$ Change						% Change
Transaction-based revenue			$	1,422,705					$	1,232,969					$	189,736					15		%
Subscription and services-based revenue			1,366,224						959,557						406,667						42		%
Hardware revenue			37,451						37,326						125						—		%
Bitcoin revenue			2,163,751						1,730,793						432,958						25		%
Total net revenue			$	4,990,131					$	3,960,645					$	1,029,486					26		%

Total net revenue for the three months ended March 31, 2023 increased by $1.0 billion, or 26%, compared to the three months ended March 31, 2022. Bitcoin revenue increased by $433.0 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Excluding bitcoin revenue, total net revenue increased by $596.5 million, or 27%, in the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Revenue from our BNPL platform, which includes fees generated from consumer receivables, late fees, and certain affiliate and advertising fees, was 4% of total net revenue in the three months ended March 31, 2023, and 3% from the date of acquisition through March 31, 2022.

Transaction-based revenue for the three months ended March 31, 2023 increased by $189.7 million, or 15%, compared to the three months ended March 31, 2022, while Gross Payment Volume ("GPV" as defined below in Key Operating Metrics and Non-GAAP Financial Measures) grew by 17% in the same periods. The increase in transaction-based revenue was driven by:

• growth in Square GPV as well as continued improvements in both card-present and card-not-present volumes as a result of growth from in-person and online channels; and

• growth in Cash App Business GPV, primarily driven by peer-to-peer transactions received by business accounts and peer-to-peer payments sent from a credit card.

Subscription and services-based revenue for the three months ended March 31, 2023 increased by $406.7 million, or 42% compared to the three months ended March 31, 2022. This increase was driven by:

• an increase in Cash App subscription and services-based revenue primarily due to growth in Cash App's financial service-related products, including Cash App Card usage, Cash App Instant Settlement volumes, as well as interest earned on customer funds; and

• revenue generated from the BNPL platform following the acquisition of Afterpay in the first quarter of 2022, which contributed $223.7 million during the three months ended March 31, 2023 compared to $129.8 million from the date of acquisition through March 31, 2022.

Hardware revenue for the three months ended March 31, 2023 had no significant change compared to the three months ended March 31, 2022.

Bitcoin revenue for the three months ended March 31, 2023 increased by $433.0 million, or 25% compared to the three months ended March 31, 2022. As bitcoin revenue is the total sale amount of bitcoin to customers, the amount of bitcoin revenue recognized will fluctuate depending on customer demand as well as changes in the market price of bitcoin. This increase in the three months ended March 31, 2023 was driven by an increase in the quantity of bitcoin sold to customers, partially offset by a decrease in the market price of bitcoin compared to the three months ended March 31, 2022. While bitcoin revenue contributed 43% of total net revenue in the three months ended March 31, 2023, gross profit generated from bitcoin transactions was only 3% of total gross profit in the three months ended March 31, 2023 and March 31, 2022.

Cost of Revenue (in thousands, except for percentages)

			Three Months Ended March 31,
			2023						2022						$ Change						% Change
Transaction-based costs			$	820,787					$	716,236					$	104,551					15		%
Subscription and services-based costs			264,092						182,857						81,235						44		%
Hardware costs			58,785						63,664						(4,879)						(8)		%
Bitcoin costs			2,113,375						1,687,459						425,916						25		%
Amortization of acquired technology assets			18,508						15,469						3,039						20		%
Total cost of revenue			$	3,275,547					$	2,665,685					$	609,862					23		%

Total cost of revenue for the three months ended March 31, 2023 increased by $609.9 million, or 23%, compared to the three months ended March 31, 2022. Bitcoin costs of revenue decreased by $425.9 million in the three months ended March 31, 2023, compared to the three months ended March 31, 2022. Excluding bitcoin costs of revenue, total cost of revenue increased by approximately $183.9 million, or 19%, in the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

Transaction-based costs for the three months ended March 31, 2023 increased by $104.6 million, or 15%, compared to the three months ended March 31, 2022, while GPV grew by 17% in the same periods. Transaction-based costs during the three months ended March 31, 2023 were affected by a decrease in the percentage of debit card transactions, which have a lower cost per transaction, as the proportion of these debit card transactions was comparable to pre-pandemic levels.

Subscription and services-based costs for the three months ended March 31, 2023 increased by $81.2 million, or 44%, compared to the three months ended March 31, 2022. The increase in the three months ended March 31, 2023 was driven by:

• growth in Cash App's financial service-related products, including Cash App Card, Cash App Instant Settlement volumes, and related processing costs and fees; and

• BNPL costs of revenue following the acquisition of Afterpay in the first quarter of 2022. The costs of revenues associated with the BNPL platform were $66.3 million for the three months ended March 31, 2023, and $37.5 million from the date of acquisition through March 31, 2022.

Hardware costs for the three months ended March 31, 2023 decreased by $4.9 million, or 8%, compared to the three months ended March 31, 2022. The decrease was due to improvements in supply chain disruptions, leading to decreased purchase price variances and inbound shipping rates compared to the three months ended March 31, 2022.

Bitcoin costs for the three months ended March 31, 2023 increased by $425.9 million, or 25%, compared to the three months ended March 31, 2022. Bitcoin costs are comprised of the total amount we pay to purchase bitcoin, which fluctuates in line with bitcoin revenue.

Amortization of acquired technology assets increased by $3.0 million in the three months ended March 31, 2023, compared to the three months ended March 31, 2022. The increase was driven by amortization related to the acquired technology assets from the acquisition of Afterpay primarily as a result of timing of the acquisition.

Operating Expenses (in thousands, except for percentages)

			Three Months Ended March 31,
			2023						2022						$ Change						% Change
Product development			$	626,937					$	458,224					$	168,713					37		%
% of total net revenue			13		%				12		%
% of total gross profit			37		%				35		%
Sales and marketing			$	496,011					$	501,562					$	(5,551)					NM (i)
% of total net revenue			10		%				13		%
% of total gross profit			29		%				39		%
General and administrative			$	432,825					$	444,149					$	(11,324)					NM (i)
% of total net revenue			9		%				11		%
% of total gross profit			25		%				34		%
Transaction, loan, and consumer receivable losses			$	127,896					$	91,150					$	36,746					40		%
% of total net revenue			3		%				2		%
% of total gross profit			7		%				7		%
Amortization of customer and other acquired intangible assets			$	37,087					$	26,664					$	10,423					39		%
% of total net revenue			1		%				1		%
% of total gross profit			2		%				2		%
Total operating expenses			$	1,720,756					$	1,521,749					$	199,007					13		%

(i) Not meaningful ("NM")

Product development expenses for the three months ended March 31, 2023 increased by $168.7 million, or 37%, compared to the three months ended March 31, 2022, due primarily to the following:

• an increase of $127.6 million in personnel costs for the three months ended March 31, 2023, related to an increase in headcount among our engineering, data science, and design teams, as we continue to improve and diversify our products. This increase in product development personnel costs also includes an increase in share-based compensation expense of $52.8 million for the three months ended March 31, 2023; and

• an increase of $23.4 million in software and data center costs, consulting fees, and certain operating costs for Cash App crypto networks for the three months ended March 31, 2023, as a result of increased capacity needs and expansion of our cloud-based services.

Sales and marketing expenses for the three months ended March 31, 2023 decreased by $5.6 million compared to the three months ended March 31, 2022, primarily due to the following:

• a decrease of $65.1 million in advertising costs for our Square services for the three months ended March 31, 2023, primarily from decreased online and television campaigns; partially offset by

• an increase of $27.9 million in sales and marketing personnel costs for the three months ended March 31, 2023, to enable growth initiatives. The increase in personnel related costs includes an increase in share-based compensation expense of $8.1 million; and

• an increase in Cash App peer-to-peer processing costs, related transaction losses, and card issuance costs of $50.6 million. Cash App marketing costs increased by $9.8 million for the three months ended March 31, 2023.

General and administrative expenses for the three months ended March 31, 2023 decreased by $11.3 million compared to the three months ended March 31, 2022, primarily due to the following:

• a decrease in acquisition-related integration and other expenses due to a $66.3 million one-time charge related to the acceleration of various stock compensation arrangements in connection with the Afterpay acquisition during the three months ended March 31, 2022, which was additional to ongoing share-based compensation expense for Afterpay employees; partially offset by

• an increase of $29.1 million in general and administrative personnel costs for the three months ended March 31, 2023, mainly as a result of additions to our human resources, customer support, and compliance personnel as we continue to add resources and skills to support our long-term growth. The increase in general and administrative personnel costs includes an increase in share-based compensation expense of $56.8 million for the three months ended March 31, 2023.

Transaction, loan, and consumer receivable losses for the three months ended March 31, 2023 increased by $36.7 million, or 40%, compared to the three months ended March 31, 2022, primarily due to the following:

• an increase in loan losses for the three months ended March 31, 2023 of $18.9 million compared to the three months ended March 31, 2022, which was due to increased loan volumes; and

• an increase in transaction losses for the three months ended March 31, 2023 of $15.1 million compared to the three months ended March 31, 2022, which was primarily due to growth in Cash App Card in the three months ended March 31, 2023.

Amortization of customer and other acquired intangible assets for three months ended March 31, 2023 increased $10.4 million, or 39%, compared to the three months ended March 31, 2022, primarily as a result of the timing of the acquisition of Afterpay and related intangible assets. Refer to Note 9, Acquired Intangible Assets within Notes to the Condensed Consolidated Financial Statements for more details.

Interest Expense, Net, and Other Expense (Income), Net (in thousands, except for percentages)

			Three Months Ended March 31,
			2023						2022						$ Change						% Change
Interest expense (income), net			$	(3,161)					$	15,748					$	(18,909)					(120)		%
Other expense (income), net			$	18,371					$	(33,472)					$	51,843					155		%

Interest expense, net, for the three months ended March 31, 2023 decreased by $18.9 million compared to the three months ended March 31, 2022. The decrease in net interest expense in the three months ended March 31, 2023 was primarily due to an increase in interest income received as a result of higher interest rates on our investments, which more than offset interest expense in the period. The increase in interest expense in the period was primarily related to our 2026 Senior Notes and 2031 Senior Notes, which were issued in May 2021. Refer to Note 13, Indebtedness within Notes to the Condensed Consolidated Financial Statements for further details.

Other expense, net, during the three months ended March 31, 2023 of $18.4 million was primarily due to unrealized losses on certain marketable and non-marketable investments. Other income, net, for the three months ended March 31, 2022 of $33.5 million was primarily due to recording an unrealized gain of $59.8 million during the three months ended March 31, 2022, arising from the revaluation of a non-marketable investment. Other expense (income), net also includes foreign exchange losses and amortization of investments in marketable debt securities.

Segment Results

The Company has two reportable segments, Square and Cash App. The results of Afterpay have been equally allocated to the Square and Cash App segments as management has determined the BNPL platform contributes equally to both the Square and Cash App platforms. Refer to Note 19, Segment and Geographical Information within Notes to the Condensed Consolidated Financial Statements for more details.

Square Results

The following tables provide a summary of the revenue and gross profit for our Square segment for the three months ended March 31, 2023 and March 31, 2022 (in thousands):

			Three Months Ended March 31,
			2023						2022						$ Change						% Change
Net revenue			$	1,667,234					$	1,443,704					$	223,530					15		%
Cost of revenue			896,959						782,483						114,476						15		%
Gross profit			$	770,275					$	661,221					$	109,054					16		%

Revenue

Revenue for the Square segment for the three months ended March 31, 2023 increased by $223.5 million, or 15%, compared to the three months ended March 31, 2022. The increase was primarily due to:

• growth in Square GPV and continued improvements in both card-present volumes and growth in higher-priced card-not-present transactions; and

• revenue generated from the BNPL platform following the acquisition of Afterpay.

Cost of Revenue

Cost of revenue for the Square segment for the three months ended March 31, 2023 increased by $114.5 million, or 15%, compared to the three months ended March 31, 2022. Transaction-based costs during the three months ended March 31, 2023 were affected by a decrease in the percentage of debit card transactions, which have a lower cost per transaction, as the proportion of these debit card transactions are returning to levels comparable with pre-pandemic levels.

Cash App Results

The following tables provide a summary of the revenue and gross profit for our Cash App segment for the three months ended March 31, 2023 and March 31, 2022 (in thousands):

			Three Months Ended March 31,
			2023						2022						$ Change						% Change
Net revenue			$	3,272,305					$	2,462,343					$	809,962					33		%
Cost of revenue			2,341,065						1,838,684						502,381						27		%
Gross profit			$	931,240					$	623,659					$	307,581					49		%

Revenue

Revenue for the Cash App segment for the three months ended March 31, 2023 increased by $810.0 million, or 33%, compared to the three months ended March 31, 2022. The increase was due to growth in Cash App's financial service-related products, including Cash App Card, Cash App Instant Settlement volumes, as well as interest earned on customer funds. Bitcoin revenue has and will fluctuate depending on customer demand, as well as changes in the market price of bitcoin. The increase in bitcoin revenue in the three months ended March 31, 2023 was driven by an increase in the quantity of bitcoin sold to customers, partially offset by a decrease in the market price of bitcoin during the three months ended March 31, 2023, compared to the three months ended March 31, 2022. While bitcoin contributed 43% of the total net revenue for the three months ended March 31, 2023, gross profit generated from bitcoin was 3% of the total gross profit.

Excluding $2.2 billion in bitcoin revenue for the three months ended March 31, 2023, Cash App revenue increased by $377.0 million, or 52%, in the three months ended March 31, 2023, compared to the three months ended March 31, 2022, due to growth in the number of active Cash App accounts, an increase in the number of business accounts, an increase of transaction fees related to Cash App Card and instant deposit, and revenue generated from the BNPL platform following the acquisition of Afterpay.

Cost of Revenue

Cost of revenue for the Cash App segment for the three months ended March 31, 2023 increased by $502.4 million, or 27%, compared to the three months ended March 31, 2022. The increase was due to the items referenced within the revenue discussion. Excluding $2.1 billion in bitcoin cost of revenue in the three months ended March 31, 2023, Cash App cost of revenue increased by approximately $76.5 million, or 51%, in the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

Liquidity and Capital Resources

Liquidity Sources

As of March 31, 2023, we had approximately $7.6 billion in available funds, including an undrawn amount of $600.0 million available under our revolving credit facility. Additionally, we had $1.0 billion available under our warehouse funding facilities. Refer to Note 13, Indebtedness within Notes to the Condensed Consolidated Financial Statements for more details. We intend to continue focusing on our long-term business initiatives and believe that our available funds are sufficient to meet our liquidity needs for the foreseeable future. As of March 31, 2023, we were in compliance with all covenants associated with our revolving credit facility and senior notes. None of our warehouse funding facilities contain financial covenants.

The following table summarizes our cash, cash equivalents, restricted cash, customer funds, and investments in marketable debt securities (in thousands):

			March 31, 2023						December 31, 2022
Cash and cash equivalents			$	5,061,091					$	4,544,202
Short-term restricted cash (i)			414,267						639,780
Long-term restricted cash			70,350						71,600
Customer funds cash and cash equivalents			3,800,473						3,180,324
Cash, cash equivalents, restricted cash, and customer funds			9,346,181						8,435,906
Investments in short-term debt securities			1,024,110						1,081,851
Investments in long-term debt securities			412,747						573,429
Cash, cash equivalents, restricted cash, customer funds, and investments in marketable debt securities			$	10,783,038					$	10,091,186

(i) As of March 31, 2023, the Company has invested $118.8 million of restricted cash into a money market fund. See Note 5, Fair Value Measurements.

Our principal sources of liquidity are our cash and cash equivalents, and investments in marketable debt securities. As of March 31, 2023, we had $10.8 billion of cash and cash equivalents, restricted cash, customer funds cash and cash equivalents, and investments in marketable debt securities. Customer funds cash and cash equivalents are separate from the Company's corporate funds and are not used for any corporate purposes. These funds are not used for Company liquidity, but rather to meet the obligations set aside for customers. Investments in marketable debt securities were held primarily in cash deposits, money market funds, reverse repurchase agreements, U.S. government and agency securities, commercial paper, and corporate bonds. We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Our investments in marketable debt securities are classified as available-for-sale. Excluding customer funds and undrawn amounts under our revolving credit facility, our total liquidity as of March 31, 2023 was $7.0 billion.

As of March 31, 2023, the Company has purchased a cumulative $220.0 million in bitcoin for investment purposes. We believe cryptocurrency is an instrument of economic empowerment that aligns with our corporate purpose. We expect to hold these investments for the long term but will continue to reassess our investment in bitcoin relative to our balance sheet. As bitcoin is considered an indefinite-lived intangible asset, under the accounting policy for such assets, we are required to recognize any decreases in market prices below carrying value as an impairment charge, with any mark up in value or reversal of impairment prohibited if the market price of bitcoin subsequently increases. We recorded no impairment charges in the three months ended March 31, 2023. As of March 31, 2023, the cumulative impairment charges to date were $117.7 million and the fair value of our investment in bitcoin was $228.7 million based on observable market prices, which was $126.2 million in excess of the Company's carrying value of $102.5 million after impairment charges.

In September 2020, we announced our intent to invest $100.0 million in supporting underserved communities, particularly, racial and ethnic minority groups who have been disproportionately affected by COVID-19. This initiative further deepens our commitment toward economic empowerment to help broaden such communities' access to financial services. As of March 31, 2023, we have invested $32.3 million in aggregate towards this initiative, of which $0.3 million was invested in the three months ended March 31, 2023.

Our principal commitments consist of convertible notes, senior notes, revolving credit facility, warehouse funding facilities, operating leases, capital leases, and purchase commitments.

Senior Notes and Convertible Notes

As of March 31, 2023, we held over $4.6 billion in aggregate principal amount of debt, comprised of $460.6 million in aggregate principal amount of convertible senior notes that mature on May 15, 2023 ("2023 Convertible Notes"), $1.0 billion in aggregate amount of convertible senior notes that mature on March 1, 2025 ("2025 Convertible Notes"), $575.0 million in aggregate amount of convertible senior notes that mature on May 1, 2026 ("2026 Convertible Notes"), and $575.0 million in aggregate amount of convertible senior notes that mature on November 1, 2027 ("2027 Convertible Notes," and together with the 2023 Convertible Notes, 2025 Convertible Notes, and 2026 Convertible Notes, the “Convertible Notes”). Additionally, on May 20, 2021, we issued $1.0 billion in aggregate principal amount of outstanding senior unsecured notes that mature on June 1, 2026 ("2026 Senior Notes") and $1.0 billion in aggregate principal amount of outstanding senior unsecured notes that mature on June 1, 2031 ("2031 Senior Notes" and, together with the 2026 Senior Notes, the “Senior Notes” and, together with the Convertible Notes, the “Notes”). Refer to Note 13, Indebtedness within Notes to the Condensed Consolidated Financial Statements for further details.

The 2023 Convertible Notes had an initial aggregate principal amount of $862.5 million. The conversion rate of the 2023 Convertible Notes as of March 31, 2023 was 12.8456 shares of our Class A common stock per $1,000 principal amount of 2023 Convertible Notes (which is equivalent to a conversion price of approximately $77.85 per share). The 2023 Convertible Notes became freely convertible on February 15, 2023 and, as of March 31, 2023, holders had elected to convert approximately $401.9 million aggregate principal amount of 2023 Convertible Notes, leaving approximately $460.6 million aggregate principal amount outstanding that could be converted prior to or repaid on the maturity date of May 15, 2023.

Revolving Credit Facility

We have entered into a revolving credit agreement with certain lenders, as subsequently amended, which provides a $500.0 million senior unsecured revolving credit facility (the "2020 Credit Facility") maturing in May 2024. On February 23, 2022, the Company entered into a sixth amendment to the Credit Agreement to, among other things, provide for a new tranche of unsecured revolving loan commitments in an aggregate principal amount of up to $100.0 million (the "Tranche B Loans"). Refer to Note 13, Indebtedness within Notes to the Condensed Consolidated Financial Statements for further details.

Warehouse Funding Facilities

Following the acquisition of Afterpay, we assumed Afterpay's existing warehouse funding facilities ("Warehouse Facilities") with an aggregate commitment amount of $1.7 billion on a revolving basis, of which $0.7 billion was drawn and $1.0 billion remained available as of March 31, 2023. The Warehouse Facilities have been arranged utilizing wholly-owned and consolidated entities (collectively, the "Warehouse Special Purpose Entities (SPEs)") formed for the sole purpose of financing the origination of consumer receivables to partly fund our BNPL platform. Borrowings under the Warehouse Facilities are secured against the respective consumer receivables. While the Warehouse SPEs are included in our condensed consolidated financial statements, they are separate legal entities that maintain legal ownership of the receivables they hold. The assets of the Warehouse SPEs are not available to satisfy our claims or those of our creditors.

Cash, Restricted Cash, and Working Capital

We believe that our existing cash and cash equivalents, investment in marketable debt securities, and availability under our line of credit will be sufficient to meet our working capital needs, including any expenditures related to strategic transactions and investment commitments that we may from time to time enter into, and planned capital expenditures for at least the next 12 months. From time to time, we have raised capital by issuing equity, equity-linked, or debt securities such as our convertible notes and senior notes; and we may do so in the future, however, such funding may not be available on terms acceptable to us or at all.

When we were last rated, in the second half of 2022, we received a non-investment grade rating by S&P Global Ratings (BB), Fitch Ratings, Inc. (BB), and Moody's Corporation (Ba2). We expect that these credit rating agencies will continue to monitor our performance, including our capital structure and results of operations. Our liquidity, access to capital, and borrowing costs could be adversely impacted by declines in our credit rating.

Short-term restricted cash of $414.3 million as of March 31, 2023 primarily includes cash held by the Warehouse SPEs used in the Warehouse Facilities funding arrangements, that will be used to pay the borrowings under the Warehouse Facilities or will be distributed to us. It also includes pledged cash deposits in accounts at the financial institutions that process our sellers' payment transactions and collateral pursuant to various agreements with banks relating to our products. We use restricted cash to secure letters of credit with the related financial institutions to provide collateral for cash flow timing differences in the processing of payments. We have recorded these amounts as current assets on our condensed consolidated balance sheet given the short-term nature of these cash flow timing differences and that there is no minimum time frame during which the cash must remain restricted.

Long-term restricted cash of $70.4 million as of March 31, 2023 is primarily related to cash held as collateral as required by the FDIC for Square Financial Services. We have recorded these amounts as non-current assets on our condensed consolidated balance sheet as the requirement by the FDIC specifies a time frame of 12 months or longer during which the cash must remain restricted.

We experience significant day-to-day fluctuations in our cash and cash equivalents due to fluctuations in settlements receivable, and customers payable, and hence working capital. These fluctuations are primarily due to:

*•*Timing of period end. For periods that end on a weekend or a bank holiday, our cash and cash equivalents, settlements receivable, and customers payable balances typically will be higher than for periods ending on a weekday, as we settle to our sellers for payment processing activity on business days; and

*•*Fluctuations in daily GPV. When daily GPV increases, our cash and cash equivalents, settlements receivable, and customers payable amounts increase. Typically our settlements receivable and customers payable balances at period end represent one to four days of receivables and disbursements to be made in the subsequent period. Customers payable, excluding amounts attributable to Cash App stored funds, and settlements receivable balances typically move in tandem, as pay-out and pay-in largely occur on the same business day. However, customers payable balances will be greater in amount than settlements receivable balances due to the fact that a subset of funds are held due to unlinked bank accounts, risk holds, and chargebacks. Also customer funds obligations, which are included in customers payable, may cause customers payable to trend differently than settlements receivable. Holidays and day-of-week may also cause significant volatility in daily GPV amounts.

Safeguarding Obligation Liability and Safeguarding Asset Related to Bitcoin Held for Other Parties

As detailed in Note 12, Bitcoin Held for Other Parties within Notes to the Condensed Consolidated Financial Statements, we recorded a safeguarding obligation liability and a corresponding safeguarding asset related to the bitcoin held for other parties. As of March 31, 2023, the safeguarding obligation liability related to bitcoin held for other parties was $726.5 million. We have taken steps to mitigate the potential risk of loss for the bitcoin held for other parties, including holding insurance coverage specifically for certain bitcoin incidents and using secure cold storage to store materially all of the bitcoin held for other parties. Staff Accounting Bulletin No. 121 ("SAB 121") also asks us to consider the legal ownership of the bitcoin held for other parties, including whether the bitcoin held for other parties would be available to satisfy general creditor claims in the event of Block’s bankruptcy. The legal rights of people with respect to crypto-assets held on their behalf by a custodian, such as us, upon the custodian’s bankruptcy have not yet been settled by courts and are highly fact dependent. Our contractual arrangements state that our customers and trading partners retain legal ownership of the bitcoin custodied by us on their behalf; they have the right to sell, pledge, or transfer the bitcoin; and they also benefit from the rewards and bear the risks associated with the ownership, including as a result of any bitcoin price fluctuations. We do not use any of the bitcoin held for other parties as collateral for our loans or any other financing arrangements, nor do we lend or pledge bitcoin held for others to any third parties. We have been monitoring and will continue to actively monitor legal and regulatory developments and may consider further steps, as appropriate, to support this contractual position so that in the event of Block’s bankruptcy, the bitcoin custodied by us should not be deemed to be part of Block's bankruptcy estate. We do not expect potential future cash flows associated with the bitcoin safeguarding obligation liability.

Cash Flow Activities

The following table summarizes our cash flow activities (in thousands):

			Three Months Ended March 31,
			2023						2022
Net cash provided by operating activities			$	294,401					$	229,423
Net cash provided by investing activities			623,924						1,130,613
Net cash used in financing activities			(9,083)						(968,556)
Effect of foreign exchange rate on cash and cash equivalents			1,033						(948)
Net increase in cash, cash equivalents, restricted cash, and customer funds			$	910,275					$	390,532

Cash Flows from Operating Activities

For the three months ended March 31, 2023, cash provided by operating activities was $294.4 million. Net loss of $19.3 million was adjusted for the add back of net non-cash expenses of $455.9 million, consisting primarily of share-based compensation; transaction, loan, and consumer receivable losses; depreciation and amortization; non-cash lease expense; and losses on revaluation of equity investments, all of which contributed positively to operating activities. This was offset by the foreign exchange impact on consumer receivables, net outflows from loan products, as well as changes in other assets and liabilities of $142.2 million, primarily due to the timing of period end.

For the three months ended March 31, 2022, cash provided by operating activities was $229.4 million. Net loss of $207.4 million, adjusted for the add back of non-cash expenses of $337.6 million, consisting primarily of share-based compensation; transaction, loan, and consumer receivable losses; depreciation and amortization; and gains on revaluation of equity investments, as well as non-cash lease expenses, which all contributed positively to operating activities. Additionally, there was a net inflow from the repayment and forgiveness of Paycheck Protection Program (“PPPL”) loans, and a net outflow related to changes in other assets and liabilities of $61.4 million due to timing of period end.

Cash Flows from Investing Activities

Cash flows used in investing activities primarily relate to business acquisitions, consumer receivables, capital expenditures to support our growth, and investments in marketable debt securities.

For the three months ended March 31, 2023, cash provided by investing activities was $623.9 million, primarily due to a net inflow related to consumer receivables of $428.3 million and net proceeds from the sales and maturities of marketable securities including investments from customer funds of $289.5 million, and . These were partially offset by the purchases of marketable debt securities, property and equipment, and other investments of $56.8 million, $32.3 million, and $4.8 million, respectively.

For the three months ended March 31, 2022, cash provided by investing activities was $1.1 billion, primarily due to the net proceeds from the sales and maturities of marketable securities including investments from customer funds of $620.5 million and the net cash acquired through the acquisition of Afterpay of $570.7 million. These were partially offset by the purchase of marketable debt securities, property and equipment and other investments of $210.0 million, $41.2 million, and $16.5 million, respectively.

Cash Flows from Financing Activities

For the three months ended March 31, 2023, cash used in financing activities was $9.1 million primarily as a result of net repayments from Warehouse Facilities borrowings of $644.6 million. The majority of this was offset by a change in customer funds of $620.1 million and a net increase in interest-bearing deposits of $13.6 million.

For the three months ended March 31, 2022, cash used in financing activities was $1.0 billion primarily as a result of the payment to redeem convertible notes assumed upon the acquisition of Afterpay of $1.1 billion, repayments of the PPPLF advances of $372.9 million, partially offset by the change in customer funds of $359.9 million and net proceeds from Warehouse Facilities borrowings of $92.9 million.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. GAAP requires us to make certain estimates and judgments that affect the amounts reported in our financial statements. We base our estimates on historical experience, anticipated future trends, and other assumptions we believe to be reasonable under the circumstances. Because these accounting policies require significant judgment, our actual results may differ materially from our estimates.

There were no significant changes in our critical accounting estimates during the fiscal quarter ended March 31, 2023 compared to those previously disclosed in “Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the 2022 Annual Report on Form 10-K.

Recent Accounting Pronouncements

See “Recent Accounting Pronouncements” described in Note 1, Description of Business and Summary of Significant Accounting Policies within Notes to the Condensed Consolidated Financial Statements.