By Emily Bary
Analysts were glad to see the Square parent company reduce operating expenses, though there was debate on how effective latest moves would be
Square-parent Block Inc. became the latest payment-technology company to indicate it would pull back on costs in the current economy, joining PayPal Holdings Inc., which announced a similar move earlier in the week.
"We are reducing our planned investments for the full year 2022 by $250 million," Chief Financial Officer Amrita Ahuja said on Block's (SQ) earnings call. "We pulled back on experimental and less efficient go-to-market spend, adjusted risk loss estimates based on more current trends, and slowed the pace of hiring."
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Following a messy Thursday-afternoon report for Block, in which the company fell short of volume expectations, analysts saw the expense-related move as a positive, though some were looking for greater cuts or skeptical that the latest expense reductions could outweigh other more negative signals.
The stock was off 2.6% in Friday morning trading.
"[T]he key highlight of the quarter was management planning to spend $250M less in incremental annual opex than originally expected, which should more than offset any potentially lowered gross profit estimates," Raymond James' John Davis wrote in a note to clients praising the company's "encouraging opex control."
Barclays analyst Ramsey El-Assal added that "reductions in the opex outlook showed solid management execution."
Jefferies analyst Trevor Williams wrote that Block's latest quarter showed upside on earnings before interest, taxes, depreciation, and amortization (Ebitda) "despite a headline gross profit miss," while he noted that fiscal 2022 Ebitda estimates could head about 20% higher thanks to the new cost forecast.
That said, there were still some questions about how much the expense cuts can help Block, with Bernstein's Harshita Rawat calling the move "good but not great."
"The cuts fall short of similar actions by other companies in this environment (e.g., PayPal)," she wrote in a note to clients, adding that she would like to see additional cuts. Rawat rates the stock at outperform with a $120 target price.
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Davis of Raymond James noted that "further expense reduction could buoy any top-line weakness," but at the same time, he argued that "the heightened macro risk on Block's underlying business could weigh on growth." He has a market perform rating on the stock.
Other callouts from analysts included signs of progress on Cash App initiatives.
"While still not available to the entire Cash App user base, the company reported that it has already enabled the 'Discovery' option on the app for some users, enabling them to find merchants and make in-app purchases," Barclays' El-Assal wrote.
"It is in the Discovery tab that we believe Cash App users will have access to Boosts, but also Afterpay offerings," he continued. "We believe this development shows the company has made important progress on merger revenue synergy realization, and has also already taken action on some of the integration initiatives discussed at their May Investor Day."
El-Assal rates the stock at overweight with a $150 price target.
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Jefferies' Williams said he saw "little to pick at with the Cash App story" as weekly-active and daily-active users are growing faster than the company's monthly-active base, "underscoring the ongoing success in driving a more highly engaged user base."
He sees the Cash App business as "poised for [second-half] acceleration" amid easier comparisons to the year-earlier period. Williams rates the stock a buy with a $105 price target.
Shares of Block have fallen 69% over the past 12 months, as the S&P 500 has lost about 7%.
(END) Dow Jones Newswires
August 05, 2022 10:04 ET (14:04 GMT)
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