Block, Inc. 10-Q

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. Overview Block launched the Square ecosystem in February 2009 to enable businesses ("sellers") to accept card payments, an important capability that was previously inaccessible to many businesses. We have expanded to provide sellers 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. In January 2022, we completed the acquisition of Afterpay, a buy now, pay later ("BNPL") platform that facilitates commerce between retail merchants and consumers by allowing retail merchant clients to offer their customers the ability to buy goods and services on a BNPL basis. We allocate the financial results from our BNPL platform equally to the Cash App and Square segments. In addition, we also operate TIDAL, a global platform for musicians and fans, and TBD, an open developer platform, to contribute to our purpose of economic empowerment. We delivered strong growth across our ecosystems in the second quarter of 2023. Gross profit was $1.9 billion, up 27% year over year, driven primarily by our Cash App and Square ecosystems. Cash App generated gross profit of $968.0 million in the second quarter of 2023, up 37% year over year. Performance was driven by growth in transacting actives and adoption of our broader ecosystem, including financial services products. Square generated gross profit of $888.3 million in the second quarter of 2023, up 18% year over year as we continued to make progress growing upmarket with larger sellers, expanding globally, and optimizing our go-to-market strategies. We continued to exercise expense discipline and are focused on driving long-term growth. In the second quarter of 2023, operating loss was $132.1 million and Adjusted Operating Income was $25.5 million. For the same period, net loss attributable to common stockholders was $122.5 million and Adjusted EBITDA was $384.4 million, an increase of 105% year over year. Refer to the Key Operating Metrics and Non-GAAP Financial Measures section below for reconciliations of non-GAAP financial measures to their nearest generally accepted accounting principles ("GAAP") equivalents. We ended the second quarter of 2023 with $7.5 billion in available liquidity, including $6.8 billion in cash, cash equivalents, restricted cash, and investments in marketable debt securities, and $775.0 million available to be withdrawn from our revolving credit facility. This represents a increase of $39.0 million from the end of 2022, including a $461.8 million cash payment for the settlement of the outstanding 2023 Convertible Notes that matured in May 2023. 40 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 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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 Gross Payment Volume ("GPV") (in millions) $ 59,012 $ 52,499 $ 110,129 $ 96,003 Adjusted Operating Income (Loss) (in thousands) $ 25,499 $ (103,457) $ 76,473 $ (145,711) Adjusted EBITDA (in thousands) $ 384,402 $ 187,342 $ 752,769 $ 382,703 Adjusted Net Income Per Share: Basic $ 0.41 $ 0.19 $ 0.82 $ 0.38 Diluted $ 0.39 $ 0.18 $ 0.80 $ 0.36 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. • We believe that excluding the expense related to amortization of debt discount and issuance costs 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. 41 • To aid in comparability of our results across periods, 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, impairment charges, and 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. 42 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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 Operating loss $ (132,107) $ (213,773) $ (138,279) $ (440,562) Amortization of acquired technology assets 18,392 17,899 36,900 33,368 Acquisition-related, integration and other costs 102,349 17,067 103,900 93,132 Bitcoin impairment losses — 35,961 — 35,961 Amortization of customer and other acquired intangible assets 36,865 39,389 73,952 66,053 Acquisition-related share-based acceleration costs — — — 66,337 Adjusted Operating Income (Loss) $ 25,499 $ (103,457) $ 76,473 $ (145,711) The following table presents a reconciliation of net income (loss) to Adjusted EBITDA for each of the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net loss attributable to common stockholders $ (122,506) $ (208,014) $ (139,344) $ (412,213) Net loss attributable to noncontrolling interests (3,336) (1,263) (5,824) (4,427) Net loss (125,842) (209,277) (145,168) (416,640) Share-based compensation expense 319,248 256,638 598,839 532,061 Depreciation and amortization 94,545 90,839 187,718 160,895 Acquisition-related, integration and other costs 102,349 17,067 103,900 93,132 Interest expense (income), net (3,944) 12,966 (7,105) 28,714 Other expense (income), net 1,379 (18,766) 19,750 (52,238) Bitcoin impairment losses — 35,961 — 35,961 Provision (benefit) for income taxes (3,700) 1,304 (5,756) (398) Loss on disposal of property and equipment 343 548 534 1,082 Acquired deferred revenue and cost adjustment 24 62 57 134 Adjusted EBITDA $ 384,402 $ 187,342 $ 752,769 $ 382,703 43 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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net loss attributable to common stockholders $ (122,506) $ (208,014) $ (139,344) $ (412,213) Net loss attributable to noncontrolling interests (3,336) (1,263) (5,824) (4,427) Net loss (125,842) (209,277) (145,168) (416,640) Share-based compensation expense 319,248 256,638 598,839 532,061 Acquisition-related, integration and other costs 102,349 17,067 103,900 93,132 Amortization of intangible assets 55,257 57,288 110,852 99,421 Amortization of debt discount and issuance costs 2,885 3,826 5,834 7,456 Loss (gain) on revaluation of equity investments 1,370 5,115 16,255 (44,626) Bitcoin impairment losses — 35,961 — 35,961 Loss on disposal of property and equipment 343 548 534 1,082 Acquired deferred revenue and cost adjustment 24 62 57 134 Tax effect of non-GAAP net income adjustments (109,647) (57,734) (194,254) (96,060) Adjusted Net Income - basic $ 245,987 $ 109,494 $ 496,849 $ 211,921 Cash interest expense on convertible notes 958 1,247 2,194 2,488 Adjusted Net Income - diluted $ 246,945 $ 110,741 $ 499,043 $ 214,409 Weighted-average shares used to compute Adjusted Net Income Per Share: Basic 606,692 581,350 604,476 561,501 Diluted 626,669 619,272 627,153 602,002 Adjusted Net Income Per Share: Basic $ 0.41 $ 0.19 $ 0.82 $ 0.38 Diluted $ 0.39 $ 0.18 $ 0.80 $ 0.36 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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 Provision (benefit) for income taxes, as reported $ (3,700) $ 1,304 $ (5,756) $ (398) Tax effect of non-GAAP net income adjustments 109,647 57,734 194,254 96,060 Adjusted provision for income taxes, non-GAAP $ 105,947 $ 59,038 $ 188,498 $ 95,662 Non-GAAP effective tax rate 30 % 35 % 27 % 31 % 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. 44 Results of Operations Revenue (in thousands, except for percentages) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change Transaction-based revenue $ 1,637,654 $ 1,475,707 $ 161,947 11 % $ 3,060,359 $ 2,708,676 $ 351,683 13 % Subscription and services-based revenue 1,461,497 1,094,856 366,641 33 % 2,827,721 2,054,413 773,308 38 % Hardware revenue 44,922 48,051 (3,129) NM (i) 82,373 85,377 (3,004) NM (i) Bitcoin revenue 2,390,884 1,785,885 604,999 34 % 4,554,635 3,516,678 1,037,957 30 % Total net revenue $ 5,534,957 $ 4,404,499 $ 1,130,458 26 % $ 10,525,088 $ 8,365,144 $ 2,159,944 26 % (i) Not meaningful ("NM") Total net revenue for the three and six months ended June 30, 2023 increased by $1.1 billion, or 26%, and $2.2 billion, or 26%, compared to the three and six months ended June 30, 2022, respectively. Bitcoin revenue increased by $605.0 million and $1.0 billion for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022, respectively. Excluding bitcoin revenue, total net revenue increased by $525.5 million, or 20%, and $1.1 billion, or 23%, in the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022, respectively. Transaction-based revenue for the three and six months ended June 30, 2023 increased by $161.9 million, or 11%, and $351.7 million, or 13% compared to the three and six months ended June 30, 2022, respectively, while Gross Payment Volume ("GPV" as defined above in Key Operating Metrics and Non-GAAP Financial Measures ) grew by 12% and 15% in the same periods. The increase in transaction-based revenue was driven by: • growth in Square GPV from 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 and six months ended June 30, 2023 increased by $366.6 million, or 33%, and $773.3 million, or 38% compared to the three and six months ended June 30, 2022, respectively. 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 Deposit 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 $235.4 million and $459.2 million during the three and six months ended June 30, 2023, respectively. Revenue generated for the three months ended June 30, 2022 was $208.1 million and $337.9 million from the date of acquisition through June 30, 2022. 45 Bitcoin revenue for the three and six months ended June 30, 2023 increased by $605.0 million, or 34% and $1.0 billion, or 30%, compared to the three and six months ended June 30, 2022, respectively. 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 and six months ended June 30, 2023 was driven by an increase in the quantity of bitcoin sold to customers, partially offset by a decrease in the average market price of bitcoin compared to the three and six months ended June 30, 2022, respectively. While bitcoin revenue contributed 43% of total net revenue in the three and six months ended June 30, 2023, gross profit generated from bitcoin transactions was only 2% and 3% of total gross profit in the three and six months ended June 30, 2023, respectively, compared to 3% of total gross profit in the three and six months ended June 30, 2022. Cost of Revenue (in thousands, except for percentages) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change Transaction-based costs $ 950,523 $ 875,762 $ 74,761 9 % $ 1,771,310 $ 1,591,998 $ 179,312 11 % Subscription and services-based costs 279,223 213,271 65,952 31 % 543,315 396,128 147,187 37 % Hardware costs 74,085 83,494 (9,409) NM (i) 132,870 147,158 (14,288) NM (i) Bitcoin costs 2,346,633 1,744,425 602,208 35 % 4,460,008 3,431,884 1,028,124 30 % Amortization of acquired technology assets 18,392 17,899 493 3 % 36,900 33,368 3,532 11 % Total cost of revenue $ 3,668,856 $ 2,934,851 $ 734,005 25 % $ 6,944,403 $ 5,600,536 $ 1,343,867 24 % (i) Not meaningful ("NM") Total cost of revenue for the three and six months ended June 30, 2023 increased by $734.0 million, or 25%, and $1.3 billion, or 24%, compared to the three and six months ended June 30, 2022, respectively. Bitcoin costs of revenue increased by $602.2 million and $1.0 billion in the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022, respectively. Excluding bitcoin costs of revenue, total cost of revenue increased by approximately $131.8 million, or 11%, and $315.7 million, or 15%, in the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022, respectively. Transaction-based costs for the three and six months ended June 30, 2023 increased by $74.8 million, or 9%, and $179.3 million, or 11%, compared to the three and six months ended June 30, 2022, respectively, while GPV grew by 12% and 15% in the same periods. Transaction-based costs during the three and six months ended June 30, 2023 saw more favorable interchange economics, which offset a higher percentage of card-present and credit card transactions, which are less favorable to our economics on a per transaction basis. Subscription and services-based costs for the three and six months ended June 30, 2023 increased by $66.0 million, or 31%, and $147.2 million, or 37%, compared to the three and six months ended June 30, 2022, respectively. The increase in the three and six months ended June 30, 2023 was driven by: • growth in Cash App's financial service-related products, including Cash App Card, Cash App Instant Deposit 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 $67.0 million and $133.2 million for the three and six months ended June 30, 2023, respectively. The costs of revenues associated with the BNPL platform were $58.5 million for the three months ended June 30, 2022 and $96.0 million from the date of acquisition through June 30, 2022. Bitcoin costs for the three and six months ended June 30, 2023 increased by $602.2 million, or 35%, and $1.0 billion, or 30%, compared to the three and six months ended June 30, 2022, respectively. Bitcoin costs are comprised of the total amount we pay to purchase bitcoin, which fluctuates in line with bitcoin revenue. 46 Operating Expenses (in thousands, except for percentages) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change Product development $ 694,672 $ 524,827 $ 169,845 32 % $ 1,321,609 $ 983,051 $ 338,558 34 % % of total net revenue 13 % 12 % 13 % 12 % % of total gross profit 37 % 36 % 37 % 36 % Sales and marketing $ 537,607 $ 530,827 $ 6,780 NM (i) $ 1,033,618 $ 1,032,389 $ 1,229 NM (i) % of total net revenue 10 % 12 % 10 % 12 % % of total gross profit 29 % 36 % 29 % 37 % General and administrative $ 549,293 $ 395,720 $ 153,573 39 % $ 982,118 $ 839,869 $ 142,249 17 % % of total net revenue 10 % 9 % 9 % 10 % % of total gross profit 29 % 27 % 27 % 30 % Transaction, loan, and consumer receivable losses $ 179,771 $ 156,697 $ 23,074 15 % $ 307,667 $ 247,847 $ 59,820 24 % % of total net revenue 3 % 4 % 3 % 3 % % of total gross profit 10 % 11 % 9 % 9 % Bitcoin impairment losses $ — $ 35,961 $ (35,961) (100) % $ — $ 35,961 $ (35,961) (100) % % of total net revenue — % 1 % — % — % % of total gross profit — % 2 % — % 1 % Amortization of customer and other acquired intangible assets $ 36,865 $ 39,389 $ (2,524) (6) % $ 73,952 $ 66,053 $ 7,899 12 % % of total net revenue 1 % 1 % 1 % 1 % % of total gross profit 2 % 3 % 2 % 2 % Total operating expenses $ 1,998,208 $ 1,683,421 $ 314,787 19 % $ 3,718,964 $ 3,205,170 $ 513,794 16 % (i) Not meaningful ("NM") Product development expenses for the three and six months ended June 30, 2023 increased by $169.8 million, or 32%, and $338.6 million, or 34%, compared to the three and six months ended June 30, 2022, respectively, primarily due to the following: • an increase of $117.7 million and $246.2 million in personnel costs for the three and six months ended June 30, 2023, respectively, related to an increase in headcount among our engineering 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 $44.3 million and $97.1 million for the three and six months ended June 30, 2023, respectively; and • an increase of $23.6 million and $47.0 million in software and cloud computing infrastructure fees, consulting fees, and certain operating costs for Cash App crypto networks for the three and six months ended June 30, 2023, respectively, as a result of increased capacity needs and expansion of our cloud-based services. 47 Sales and marketing expenses for the three and six months ended June 30, 2023 had no significant change, compared to the three and six months ended June 30, 2022, primarily due to offsetting costs, including: • a decrease of $50.1 million and $115.1 million in advertising costs for the three and six months ended June 30, 2023, respectively, primarily from decreased online and television campaigns as we focused on expense discipline; partially offset by • an increase of $22.3 million and $50.2 million in sales and marketing personnel costs for the three and six months ended June 30, 2023, respectively, to enable growth initiatives. The increase in personnel related costs includes an increase in share-based compensation expense of $7.7 million and $15.8 million for the three and six months ended June 30, 2023, respectively; and • an increase in Cash App peer-to-peer processing costs, related transaction losses, and card issuance costs of $31.2 million and $81.8 million for the three and six months ended June 30, 2023, respectively. Cash App marketing costs decreased by $12.8 million and $3.0 million for the three and six months ended June 30, 2023, respectively. General and administrative expenses for the three and six months ended June 30, 2023 increased by $153.6 million, or 39%, and $142.2 million, or 17%, compared to the three and six months ended June 30, 2022, respectively, primarily due to the following: • an increase of $119.8 million and $149.0 million in general and administrative personnel costs for the three and six months ended June 30, 2023, respectively, mainly as a result of additions to our 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 $10.7 million for the three months ended June 30, 2023 and a decrease of $46.1 million for the six months ended June 30, 2023. The decrease in share-based compensation expense for the six months ended June 30, 2023 is due partially to a one-time charge related to the acceleration of various stock compensation arrangements in connection with the Afterpay acquisition compared to the six months ended June 30, 2022; and • an increase in third-party legal and other professional fees and other administrative expenses. Transaction, loan, and consumer receivable losses for the three and six months ended June 30, 2023 increased by $23.1 million, or 15%, and $59.8 million, or 24%, compared to the three and six months ended June 30, 2022, respectively, primarily due to the following: • an increase in loan losses for the three and six months ended June 30, 2023 of $21.3 million and $43.0 million compared to the three and six months ended June 30, 2022, respectively, which was due to increased loan volumes; and • an increase in transaction losses for the three and six months ended June 30, 2023 of $1.8 million and $16.8 million compared to the three and six months ended June 30, 2022, respectively, which was primarily due to growth in Cash App Card in the three and six months ended June 30, 2023. Amortization of customer and other acquired intangible assets for three and six months ended June 30, 2023 decreased $2.5 million, or 6%, and increased $7.9 million, or 12%, compared to the three and six months ended June 30, 2022, respectively, primarily as a result of the timing of the acquisition of Afterpay in the first quarter of fiscal year 2022 and the related intangible assets and measurement period adjustments. Refer to Note 9, Acquired Intangible Assets within Notes to the Condensed Consolidated Financial Statements for more details. 48 Interest Expense (Income), Net, and Other Expense (Income), Net (in thousands, except for percentages) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change Interest expense (income), net $ (3,944) $ 12,966 $ (16,910) (130) % $ (7,105) $ 28,714 $ (35,819) (125) % Other expense (income), net $ 1,379 $ (18,766) $ 20,145 107 % $ 19,750 $ (52,238) $ 71,988 138 % Interest income, net, of $3.9 million and $7.1 million during the three and six months ended June 30, 2023, respectively, 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 periods. Interest expense, net of $13.0 million and $28.7 million for the three and six months ended June 30, 2022, respectively, was primarily due to our 2026 Senior Notes and 2031 Senior Notes, partially offset by interest income received on our investments. Other expense, net, of $1.4 million and $19.8 million during the three and six months ended June 30, 2023, respectively, was primarily due to unrealized losses on certain marketable and non-marketable investments. Other income, net, of $18.8 million and $52.2 million for the three and six months ended June 30, 2022, respectively, was primarily due to recording an unrealized gain of $59.8 million during the first quarter of 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 table provides a summary of the revenue and gross profit for our Square segment for the three and six months ended June 30, 2023 and June 30, 2022 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change Net revenue $ 1,929,431 $ 1,725,525 $ 203,906 12 % $ 3,596,665 $ 3,169,229 $ 427,436 13 % Cost of revenue 1,041,158 970,086 71,072 7 % 1,938,111 1,752,569 185,542 11 % Gross profit $ 888,273 $ 755,439 $ 132,834 18 % $ 1,658,554 $ 1,416,660 $ 241,894 17 % Revenue Revenue for the Square segment for the three and six months ended June 30, 2023 increased by $203.9 million, or 12%, and $427.4 million, or 13%, compared to the three and six months ended June 30, 2022, respectively. The increase was primarily due to growth in Square GPV from 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 and six months ended June 30, 2023 increased by $71.1 million, or 7%, and $185.5 million, or 11%, compared to the three and six months ended June 30, 2022, respectively. Transaction-based costs during the three and six months ended June 30, 2023 were affected by more favorable interchange economics, which offset a higher percentage of card-present and credit card transactions, which are less favorable to our economics on a per transaction basis. 49 Cash App Results The following table provides a summary of the revenue and gross profit for our Cash App segment for the three and six months ended June 30, 2023 and June 30, 2022 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 $ Change % Change 2023 2022 $ Change % Change Net revenue $ 3,555,447 $ 2,622,133 $ 933,314 36 % $ 6,827,752 $ 5,084,476 $ 1,743,276 34 % Cost of revenue 2,587,402 1,917,240 670,162 35 % 4,928,467 3,755,924 1,172,543 31 % Gross profit $ 968,045 $ 704,893 $ 263,152 37 % $ 1,899,285 $ 1,328,552 $ 570,733 43 % Revenue Revenue for the Cash App segment for the three and six months ended June 30, 2023 increased by $933.3 million, or 36%, and $1.7 billion, or 34%, compared to the three and six months ended June 30, 2022, respectively. The increase was due to growth in bitcoin revenue, Cash App's financial service-related products, including Cash App Card and Cash App Instant Deposit 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 and six months ended June 30, 2023 was driven by an increase in the quantity of bitcoin sold to customers, partially offset by a decrease in the average market price of bitcoin during the three and six months ended June 30, 2023 compared to three and six months ended June 30, 2022. While bitcoin contributed 43% of the total net revenue for the three and six months ended June 30, 2023, gross profit generated from bitcoin was 2% and 3% of the total gross profit in those same periods. Excluding $2.4 billion and $4.6 billion in bitcoin revenue for the three and six months ended June 30, 2023, respectively, Cash App revenue increased by $328.3 million, or 39%, and $705.3 million, or 45%, in the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022, respectively. Cost of Revenue Cost of revenue for the Cash App segment for the three and six months ended June 30, 2023 increased by $670.2 million, or 35%, and $1.2 billion, or 31%, compared to the three and six months ended June 30, 2022, respectively. The increase was due to the items referenced within the revenue discussion. Excluding $2.3 billion and $4.5 billion in bitcoin cost of revenue in the three and six months ended June 30, 2023, respectively, Cash App cost of revenue increased by approximately $68.0 million, or 39%, and $144.4 million, or 45%, in the three and six months ended June 30, 2023, compared to the three and six months ended June 30, 2022, respectively. 50 Liquidity and Capital Resources Liquidity Sources As of June 30, 2023, we had approximately $7.5 billion in av ailable funds, including an undrawn amount of $775.0 million available under our revolving credit facility. Additionally, we had $0.9 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 June 30, 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): June 30, 2023 December 31, 2022 Cash and cash equivalents $ 4,745,884 $ 4,544,202 Short-term restricted cash (i) 536,733 639,780 Long-term restricted cash 73,196 71,600 Customer funds cash and cash equivalents 3,352,656 3,180,324 Cash, cash equivalents, restricted cash, and customer funds 8,708,469 8,435,906 Investments in short-term debt securities 1,121,830 1,081,851 Investments in long-term debt securities 297,230 573,429 Cash, cash equivalents, restricted cash, customer funds, and investments in marketable debt securities $ 10,127,529 $ 10,091,186 (i) As of June 30, 2023, the Company has invested $209.4 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 June 30, 2023, we had $10.1 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 funds we are holding on behalf of customers that are separate from the Company's corporate funds and are not available for corporate purposes. 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 June 30, 2023 was $6.8 billion. As of June 30, 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 i n the three and six months ended June 30, 2023. As of June 30, 2023, the cumulative impairment charges to date were $117.7 million and the fair value of our investment in bitcoin was $244.6 million based on observable market prices, which was $142.1 million in excess of the Company's carrying value of $102.5 million after impairment charges. 51 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 June 30, 2023, we held over $4.2 billion in aggregate principal amount of debt, comprised of $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," collectively referred to as 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. On May 15, 2023, we paid $461.8 million in cash to settle the outstanding principal balance and interest on the 2023 Convertible Notes upon maturity. Revolving Credit Facility We have entered into a revolving credit agreement with certain lenders, as subsequently amended, which provides a $775.0 million senior unsecured revolving credit facility (the "2020 Credit Facility") maturing in June 2028. 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 $820.2 million was drawn and $895.3 million remained available as of June 30, 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. 52 Short-term restricted cash of $536.7 million as of June 30, 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 $73.2 million as of June 30, 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. Customer funds obligations, which are included in customers payable, may also 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 June 30, 2023, the safeguarding obligation liability related to bitcoin held for other parties was $763.5 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 partie s. Staff Accounting Bulletin No. 121 ("SAB 121") als o 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. 53 Cash Flow Activities The following table summarizes our cash flow activities (in thousands): Six Months Ended June 30, 2023 2022 Net cash provided by operating activities $ 407,719 $ 114,797 Net cash provided by investing activities 578,899 1,340,283 Net cash used in financing activities (721,010) (1,240,199) Effect of foreign exchange rate on cash and cash equivalents 6,955 (35,442) Net increase in cash, cash equivalents, restricted cash, and customer funds $ 272,563 $ 179,439 Cash Flows from Operating Activities For the six months ended June 30, 2023, cash provided by operating activities was $407.7 million. Net loss of $145.2 million was adjusted for the add back of net non-cash expenses of $1.0 billion, consisting primarily of share-based compensation; transaction, loan, and consumer receivable losses; depreciation and amortization; non-cash lease expense; change in deferred taxes; and losses on revaluation of equity investments, all of which contributed positively to operating activities. This was offset by the amortization of discounts and other non-cash adjustments on consumer receivables of $221.7 million, net outflows from loan products of $179.9 million, as well as changes in other assets and liabilities of $290.3 million, primarily due to the timing of period end. For the six months ended June 30, 2022, cash provided by operating activities was $114.8 million. Net loss of $416.6 million was adjusted for the add back of non-cash expenses of $740.5 million, consisting primarily of share-based compensation; transaction, loan, and consumer receivable losses; depreciation and amortization; bitcoin impairment losses; and non-cash lease expenses, which all contributed positively to operating activities, partially offset by gains on revaluation of equity investments. Additionally, there was a net inflow from the repayment and forgiveness of Paycheck Protection Program (“PPP”) loans, and a net outflow related to changes in other assets and liabilities of $238.4 million due to timing of period end. Cash Flows from Investing Activities Cash flows provided by investing activities primarily relate to business acquisitions, consumer receivables, capital expenditures to support our growth, and investments in marketable debt securities. For the six months ended June 30, 2023, cash provided by investing activities was $578.9 million, primarily due to net proceeds from the sales and maturities of marketable securities including investments from customer funds of $681.4 million and a net inflow related to consumer receivables of $387.4 million. These were partially offset by the purchases of marketable debt securities, property and equipment, and other investments of $423.8 million, $61.8 million, and $4.4 million, respectively. For the six months ended June 30, 2022, cash provided by investing activities was $1.3 billion, primarily due to the net proceeds from the sales and maturities of marketable securities including investments from customer funds of $1.2 billion, the net cash acquired through acquisitions during the period including Afterpay of $539.5 million, and a net inflow related to consumer receivables of $144.4 million. These were partially offset by the purchase of marketable debt securities, property and equipment and other investments of $383.4 million, $85.4 million, and $39.4 million, respectively. Cash Flows from Financing Activities For the six months ended June 30, 2023, cash used in financing activities was $721.0 million primarily as a result of net repayments from Warehouse Facilities borrowings of $505.0 million and the cash payment to settle the 2023 Convertible Notes in May 2023 of $461.8 million. These were partially offset by a change in customer funds of $172.3 million, as well as proceeds from issuances of common stock from the exercise of options and purchases under our employee share purchase plan of $66.0 million, and a net increase in interest-bearing deposits of $28.6 million. 54 For the six months ended June 30, 2022, cash used in financing activities was $1.2 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 Paycheck Protection Program Liquidity Facility advances of $429.1 million, partially offset by net proceeds from Warehouse Facilities borrowings of $93.7 million, a change in customer funds of $74.4 million, a net increase in non-interest bearing deposits related to Square Financial Services of $53.8 million, as well as proceeds from issuances of common stock from the exercise of options and purchases under our employee share purchase plan of $43.1 million. 55 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 June 30, 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in market risk from the information presented in Part II, Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" in the 2022 Annual Report on Form 10-K.