Block (SQ -0.72%↓) reported Q4 2022 earnings on February 23 and it was an unusual affair. Gross profits, excluding Afterpay (more on this below), grew a resilient 24%, with each of Cash App and Square surpassing Wall Street expectations. Instead of trumpeting this crucial outperformance immediately on the earnings call, co-founder Jack Dorsey began his opening remarks highlighting a brand new investment framework in which 2022 results fell short:
There are three principles guiding our investment framework:
- Number one, ensure our investments are focused on customer retention and growth;
- Number two, account for ongoing cost of the business, including stock-based compensation; and
- Number three, utilize industry standard conventions that are simple to communicate and to understand.
Block, in each of our ecosystems, must show a believable path to gross profit retention of over 100% and Rule of 40 on adjusted operating income. This is an ambitious goal, especially at our scale, and one we aren't meeting today.
By addressing the twin issues of costs and stock-based compensation upfront on the investor call, Dorsey may be signaling a new era for Block. After all, with 2022 gross profits of almost $6bn – more than double that of competitor Shopify (SHOP ) – it may be overdue for GAAP profitability. Current markets have switched from “growth at all costs” to “show me the money” since interest rates started skyrocketing.
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