Fintech Headlines: February 20 - 26, 2023

Block commits to grow profitably, Coinbase aims to generate adjusted EBITDA in all market conditions, MercadoLibre posts record profit, Remitly reaches adjusted profitability

This Week in the Markets

This Friday, the U.S. Department of Commerce reported that the PCE Price Index, the Federal Reserve’s preferred measure of inflation, rose 0.6% in January 2023 on a month-over-month, and 5.4% on a year-over-year basis. PCE Price Index rose 0.2% MoM and 5.3% YoY in December 2022, which indicates that inflation accelerated. A couple of weeks ago, the Fed’s Chairman, Jerome Powell, said “…if we continue to get, for example, strong labor market reports or higher inflation reports, it may well be the case that we have to do more and raise rates more than is priced in…”. The inflation data sent the major stock indices into the red territory.

Remitly (NASDAQ: RELY 0.00%↑) and MercadoLibre (NASDAQ: MELI 0.00%↑) reported strong Q4 2022 results (more on that below), which placed them among the very few Fintech companies that finished this week in the green (the other companies in this lonely group were Flywire and Payoneer that report next week).

Q4 2022 reporting season continues; thus, Shift4 Payments (NYSE: FOUR 0.00%↑), Marqeta (NASDAQ: MQ 0.00%↑), Payoneer (NASDAQ: PAYO 0.00%↑), and Flywire (NASDAQ: FLYW 0.00%↑) will report their results on Tuesday (February 28) and PagSeguro (NYSE: PAGS 0.00%↑) will report its results on Thursday (March 2).

✔️ Key Fed inflation measure rose 0.6% in January, more than expected
✔️ Fed’s Preferred Inflation Gauge Accelerates, Adding Pressure for More Rate Hikes
✔️ Inflation Firmed, Consumer Spending Jumped in January
✔️ Stocks Fall Friday to Close Worst Week of 2023

Block Misses Earnings Estimates, but Commits to Grow Profitably Going Forward

Block, Inc. (NYSE: SQ 0.00%↑), the parent company of Square, Cash App, Afterpay, Tidal, and TBD, reported its Q4 2022 results on Thursday. In Q4 2022, total revenue rose 14% YoY to $4.65 million, and gross profit grew 40% YoY to $1.66 billion. The key growth driver continued to be Cash App: “excluding our BNPL platform, Cash App gross profit was $750 million, up 45% year over year.” The company reported a Net Loss of $114 million for the quarter, compared to a Net Loss of $77 million in Q3 2021, and an Adjusted EBITDA of $281 million, compared to an Adjusted EBITDA of $184 million in Q4 2021.

The company’s management laid out an investment framework, which focuses on balancing growth with profitability, including a 100%+ growth profit retention rate target for all businesses (a metric similar to Net Revenue Retention, or NRR, used in SaaS businesses), the Rule of 40 (another SaaS metric, which in case of Block means “gross profit growth and adjusted operating income margins should be at or above 40% over the long term”), as well as treating share-based compensation as cost in calculating profitability (finally!). The company guided for an Adjusted EBITDA of $1.30 billion in 2023 (compared to an Adjusted EBITDA of $0.99 billion in 2022).

✔️ Block, Inc. Q4 2022 Shareholder Letter
✔️ Block misses on earnings but beats on revenue, gross profit
✔️ Dorsey-led Block allays slowdown worries after mixed quarterly results
✔️ Block Stock Seesaws After Mixed Earnings Report

Coinbase Reports Decline in Trading Volume, Aims to Be Profitable in “All Market Conditions”

Coinbase (NASDAQ: COIN 0.00%↑) reported its Q4 2022 results on Tuesday. In Q4 2022, Assets on the Platform and Trading Volume continued to decline to $80 billion and $145 billion respectively (compared to $278 billion and $548 billion in Q4 2021). The company reported a Net Loss of $557 million for the quarter on total net revenue of $605 million (compared to a Net Income of $840 million on total revenue of $2.5 billion in Q1 2021). 2022 was a brutal year for the company and the crypto industry as a whole, but it's time to start looking forward.

In January 2023, Coinbase announced another round of layoffs, which is expected to reduce operating expenses by 25% (or approx. $275 million) in Q1 2023. In addition, the company keeps diversifying its revenue away from trading. Thus, subscription and services revenue contributed $283 million, or 47% of total revenue, in Q4 2022, and is expected to increase further to $300-325 million in Q1 2023. Brian Armstrong, the company’s CEO, announced the goal to “generate adjusted EBITDA in all market conditions,” meaning in both up and down cycles, and the growth of non-transaction revenue lays a solid ground for it.

✔️ Coinbase Posts $557 Million Loss With Eyes on Expenses
✔️ Coinbase’s Earnings Beat Expectations. But Its Outlook Isn’t Impressing Wall Street
✔️ Coinbase swings to quarterly loss as crypto winter hits trading volume
✔️ Coinbase unveils its Ethereum Layer 2 network that won't have a token

MercadoLibre Reports Record Profit, Continues to Scale its Fintech Businesses

MercadoLibre (NASDAQ: MELI 0.00%↑), the LatAm e-commerce and fintech giant, reported its Q4 2022 results on Thursday smashing analysts' estimates. In Q4 2022, Gross Merchandise Volume grew 20% YoY to $9.6 billion, driving a 22% YoY increase in Commerce revenue to $1.66 billion. Total Payment Volume grew 49% YoY to $36.0 billion and Credit Portfolio grew 68% YoY to $2.84 billion, driving a 73% YoY increase in Fintech revenue to $1.34 billion. The company posted a Net Income of $165 million on consolidated net revenue of $3.0 billion (compared to a Net Loss of $46.1 million on consolidated net revenue of $2.1 billion in Q4 2021).

While not a “pure” Fintech company, MercadoLibre’s Fintech arm, MercadoPago, is definitely a force to reckon with in Latin America. In Q4 2022, the company reported 43.7 million unique “fintech active users” (of which 23.3 million used the company’s digital wallet), processed $25.8 billion in payment volume outside of MercadoLibre’s marketplace, as well as continued scaling its consumer, credit card and merchant lending, and insurance brokerage businesses. Given the growth pace of the company’s many Fintech businesses, I would expect the fintech revenue to overtake the commerce revenue in 2023 or 2024 at the latest (see the chart below).

✔️ MercadoLibre swings to quarterly profit, fueled by fintech arm
✔️ MercadoLibre Tops Estimates, Will Be ‘Tactical’ in Brazil
✔️ MercadoLibre Posts Record Profits, Remains Cautious of Expanding Credit Offering

Remitly Maintains its Growth Momentum, Reaches Profitability on an Adjusted Basis

Remitly (NASDAQ: RELY 0.00%↑), a remittance company, reported its Q4 2022 results on Wednesday. Active clients increased 48% YoY to 4.2 million and the "send volume" (dollar value of transfers sent via the service) increased 35% YoY to $8.1 billion, resulting in a 41% YoY increase in revenue to $191.0 million. The company posted a Net Loss of $19.4 million, but turned to profitability on an adjusted basis reporting an Adjusted EBITDA of $7.5 million. Remitly guided for a 32-35% growth in revenue in 2023 and expects to maintain adjusted profitability with an Adjusted EBITDA at breakeven or positive $10 million.

For comparison, Remitly’s European competitor, Wise, reported 5.8 million customers, 28% YoY growth in volume sent via the service to £26.4 billion ($31.1 billion at an average exchange rate in Q4 2022), and 50% YoY growth in revenue to £225.2 million ($264.1 million) in its FY Q3 2023 / CY Q4 2022 update (the company’s Fiscal Year 2023 ends on March 31, 2023). The company expects the Adjusted EBITDA margin for the second half of FY 2023 (CY Q4 2022 - Q1 2023) to be above 22%. As of this writing, the market capitalization of Remitly was $2.42 billion, compared to the market capitalization of Wise of £5.85 billion ($6.99 billion).

✔️ Remitly Reports Fourth Quarter and Full Year 2022 Results
✔️ Remitly scraps digital bank account product, expands to Dubai
✔️ Remitly expands into the Middle East

In Other News

✔️ The $1.8 Trillion Student Debt Bubble Is Now the Supreme Court's Problem
✔️ After Multibillion-Dollar Fintech Binge, Wall Street Has a Writedown Hangover
✔️ Going Private Again Is All the Rage Among Newly Public Companies
✔️ JPMorgan Could Reach $1 Trillion Market Value by 2030, Morgan Stanley Says
✔️ PayPal’s Outgoing CEO Dan Schulman Buys Up Stock
✔️ Klarna wins over the US
✔️ Opendoor Announces Fourth Quarter and Full Year 2022 Financial Results
✔️ Opendoor Posts Heavy Losses After Losing Money on Home Sales
✔️ Paymentus Reports Fourth Quarter and Full Year 2022 Financial Results
✔️ Paymentus Finds Demand for Modern Billing Solutions Across Industries
✔️ Olo Announces Fourth-Quarter and Full-Year 2022 Financial Results
✔️ Alkami Announces Fourth Quarter 2022 Financial Results

Cover image: Photo by Clay Banks on Unsplash

Disclosure & Disclaimer: I own shares in several companies that I write about in this newsletter, as I am bullish on the transformation in the financial services industry. However, the information contained in this newsletter is intended for informational purposes only and should not be considered financial advice. You should do your own research or seek professional advice before making any investment decisions.