Block Got Its Start Selling Payment-Processing Hardware, but That’s Now Less Than 1% of the Business. You’ll Never Believe What Its Top Revenue Stream Is Now.

When financial technology (fintech) company Block (SQ -1.39%)went public in 2015, back when it was known as Square, it explained its business in its registration documents like this: “We started Square in February 2009 to enable anyone with a mobile device to accept card payments, anywhere, anytime.” The company had a square-shaped credit card reader that plugged right into smartphones and tablets.

Block has more hardware devices today, and many people think of these devices when thinking about the company. However, through the first three quarters of 2023, the company has only generated $125 million in hardware revenue. This means that hardware sales are a measly 0.7% of its $16.1 billion year-to-date revenue.

On the other end of the spectrum, revenue generated from Bitcoin (BTC -0.91%) accounted for 43% of Block’s year-to-date revenue — its largest revenue source. But surprisingly, the purpose of this Bitcoin revenue stream isn’t dissimilar to its hardware revenue stream, as I’ll explain.

How are fintech hardware and Bitcoin alike?

Gross profit compares the cost of an item against its sales price. Let’s say someone makes a pizza with $5 of ingredients. If they sell that pizza for $10, their gross profit is $5.

For Block’s hardware, it has a negative gross margin — the hardware costs more to make than the sales price. The company’s 2% gross margin for Bitcoin is better, but it’s still not a big money-maker.

Why go to all the effort of making hardware and processing Bitcoin transactions if you aren’t going to make money off of it?

Block views fintech hardware as a way to expand its merchant customer base with its Square ecosystem, and it views Bitcoin as a way to increase its consumer customer base with its Cash App ecosystem. It’s not uncommon for companies to willingly lose money on customer-acquisition strategies in order to make money down the line from something else. That’s what’s happening here.

For both Square and Cash App, Block generates transaction-based revenue, as well as subscription and services revenue. And these are higher-margin propositions.

For transaction-based revenue, Block’s gross margin is about 42% — not too shabby.

For revenue from subscriptions and services, Block’s gross margin is even better, at 81%. And what’s exciting is that, through the first three quarters of 2023, this revenue segment rose an impressive 33% from the same period of 2022, making it Block’s fastest-growing

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