Dive Brief:

• Buy now-pay later provider Afterpay generated $92 million in gross profit during February and March for its new parent company, digital payments firm Block, on $130 million in revenue, the company said Thursday in its first-quarter earnings report via a shareholder letter.
• The Afterpay benefit showed up equally in Block’s Square merchant unit and its Cash App digital wallet services, with $46 million of that BNPL gross profit recognized in each. Block paid $29 billion to acquire Afterpay in August 2021; the transaction closed during the first quarter of this year.
• San Francisco-based Block’s total net revenue for the quarter dropped 22% to $3.96 billion, compared to the period last year. However, excluding the benefit of bitcoin revenue, which ebbs and flows based on that volatile cryptocurrency, Block's total revenue would have been up 44%. Block reported a $204 million net income loss for the quarter; which included Afterpay-related transaction and integration expenses of $42 million.

Dive Insight:

Jack Dorsey, who officially changed his title to “Block Head” last month in a filing with the Securities and Exchange Commission, said the company is “just getting started” with integrating Afterpay into its Cash App service. His comments came during a conference call with analysts to discuss the earnings report.

Block also integrated Afterpay with Square's online sellers during the quarter. Dorsey said about 20,000 Square sellers have processed a transaction through the buy now-pay later service. “We plan to make buy now-pay later available for in-person payments soon as well,” he said. 

Dorsey said it’s “still extremely early” with the Afterpay integration, but the BNPL provider is expected to play a pivotal role in bolstering both Cash App and Square. By connecting multiple business units under Block’s umbrella, “we see a lot of power and a lot of value created for our customers, both in the seller space and also the individual space,” Dorsey said.

Block CFO Amrita Ahuja said during the call that the company is in the early days of “building out a broader commerce platform” with Cash App and Afterpay. The combined consumer scale Block now has between the two is “really compelling” for merchants, she said. 

Ahuja also said the company's management expects Square to enhance Afterpay’s growth via access to millions of sellers in the U.S. and beyond. 

Still, Ahuja acknowledged BNPL is a competitive market. “We are holding our ground,” Ahuja said. In the near term, Block is focused on growing Afterpay’s customer base, managing its loss rate and driving increased consumer frequency, she said. 

The number of merchants using Afterpay rose 68% to 144,000 relative to last year, and its active consumer count climbed 37% to about 20 million, Ahuja said. The loss rate on consumer receivables was 1.17% in the first quarter, consistent with what it was in the second half of last year, she added.

With respect to the loss rate, investment firm Baird Equity Research analysts said this in a report Thursday: "They're onboarding consumers responsibly and maintaining discipline."

“Obviously, as you manage the loss rate, there’s some deliberate trade-offs you’re making on growth, but we feel that that’s the right thing to do in this environment,” Ahuja said.

Baird analysts also noted Afterpay "could bring some revenue synergies, but also adds some growth uncertainty and complexity" for Block. Afterpay transaction expenses factored into Block’s $1.52 billion in operating expenses for the quarter, which increased 70% year-over-year. That included the $42 million Afterpay expense.

Transaction, loan and consumer receivables losses were $91 million for the quarter, more than quadrupling over the period last year due largely to Afterpay. "The increase was driven primarily from losses related to Afterpay consumer receivables, as well as a release of provisions for transaction losses related to Square in the prior year period," per the company's shareholder letter.