Block, Inc. (XYZ) Earnings Call Transcript & Summary

Great. Thanks. This is Tien-Tsin Huang from JP Morgan. I'm the analyst following the payments processors and IT services sector at JPMorgan again. I'm really grateful to have Square back as a keynote, it's really something I look forward to every year. And I know it is a little different with the virtual format. The Square is doing some amazing things to level the playing field for both consumers and for sellers and really wanted to get an update from the team on that. So with us from Square, we got Jack Dorsey, the Co-Founder and CEO of Square; and Amrita Ahuja, the CFO of Square. And hope everyone can see us. Thanks so much for joining us guys. Hope quarantine life is treating you all okay?

Thanks for having us.

No, it will be fun. So in terms of format, we'll do like we've done in the past, if that's okay with you guys. We'll do a fireside chat. I thought we'd start with the seller business and then go through some questions there and then dig in on the sellers -- and then digging on the Cash App business. I've gathered a lot of questions from investors. We'll have a chance to take questions from the audience through the Ask a Question button on the platform. So feel free to hit that, and I'll do my best to manage it. But I think, I hopefully, will cover a lot of the key questions that we've got here during this session.

So let me kick it off maybe for you, Jack, just thinking about the obligatory COVID-19 question here, and by the way, I got to say it upfront, right? Mad props to you for the $1 billion equity donation that you're doing for COVID release, that's a big time very, very generous. But thinking about it from a Square perspective, what is Square doing from a product and technology standpoint, but also in helping small businesses with access to stimulus, which you're doing a lot of there? Can you maybe give us an update on that to start?

Well, just to put some color on it, every week, I shadow our sales and our support calls. And we get a lot of questions, certainly about our tools, but a lot of our questions come in the form of more, how do I run my business? Like I remember one-time, I was shadowing a call and someone called in and said, I have 3 employees. I'm a coffee shop and just one employee isn't working out, have you ever fired someone? How do I fire someone? And to me, what that indicates is we're seeing more as a partner in terms of like how to build the business, inclusive of the tools, but also just general guidance. And we've taken the same approach as we thought about COVID. We're just overwhelmed with calls, typically, with sellers trying to figure out how do I shift online. And we've been talking on this on this stage, now virtual stage, for years about omnichannel being a priority. And when we say omnichannel, we don't mean e-commerce. We mean in person, we mean offline, we mean marketplaces through our API. Really, it's just providing flexibility. So that no matter where a customer is coming from, no matter how they're paying, the seller can always make the sale. And a lot of our sellers wanted to make the shift, but these folks are busy. And they never really got around to it. So this was a forcing function to have them take stock of their entire business and how they're using their tools and shift. So we moved super-fast, specifically for our restaurants. We're not a company that's just focused on one vertical. We focus on all of them. So restaurants, retail services. And we had a lot of people call us, just how do I set up my online store? How do I shift to pick up and delivery, and we built that functionality within the first 2 weeks of the stay at home orders that were flowing across the country. And we're able to move really quickly in features. But more importantly, our community site, our FAQs, our account management, our sales team, our customer support, we're all armed with information to help sellers smoothly transition. And then the big one I think that will earn us a lot of trust and also future customers is how we handled the second disbursement of PPP. So Square Capital is -- has been a phenomenal product for us and something we're really proud of. But we saw an opportunity to help get funds to our sellers faster than any bank out there. And we heard this directly from folks as well. So we started dispersing loans to existing sellers in the second round. Almost immediately, the day after it was released, sellers were getting funds into their accounts. And we submitted over $1 billion in applications to the SBA after we are approved. On behalf of 70,000 sellers and 60,000 of them have already been approved by the SBA, and that's a total of $650 million. So the biggest issue for any seller is cash flow. And we built a gift card directory, and we increased our gift card capacity so that people within the neighborhood could buy gift cards to give these sellers cash flow, even though that they may have been closed. And then capital loans was a huge one. So we moved fast. Fortunately, we didn't have to add anything to our roadmap. We just had to bring it forward because a lot of this stuff was later in the year. But we're able to move really quickly and deliver. And I think we earned a lot of trust and a lot of partnership through that.

Yes. I know the goodwill part of it, I think is it's really, really important. So maybe if we can dig in on what you're seeing on the ground, if that's okay and bring you in conversation, Amrita, just you have a really unique view on the health of the SME market, especially in the U.S., have you seen any recent signs of normalization and sort of build on what Jack talked about. What structural changes you think you'll see in your seller business? You've talked about a pretty big TAM. You have 3% market penetration today, but it seems like you're better positioned to win, given what Jack was talking about with building the trust and shifting towards omni? Your thoughts on that?

Sure. So let's start on what we're seeing in the near term, and then we can talk about what that could portend for the future structurally. In the near term, it's early, but we continue to see SMEs are still negatively impacted on a year-over-year basis. But the trends that we're seeing in recent weeks are improving and encouraging to us. And let's break that down a little bit. We're seeing sellers starting to reopen with growth now in the number of active sellers that we have and in terms of unique buyer cards and that's really since the second half of April and has continued. We believe it shows that our ecosystem is strongly supporting sellers as they adapt. We're also able to attract new sellers coming on to our platform, and we can talk more about that as well as these government stimulus efforts like the PPP and consumer focus stimulus efforts starting to make an impact. When you look across the types of sellers that we serve, we're seeing improving trends across all of our seller types, seller sizes and verticals. By vertical, we're seeing the greatest improvements in health and beauty and leisure and entertainment, 2 of the hardest hit verticals, especially early on with shelter-in-place measures. From a product perspective, products around card-not-present growth rates continue to improve, which, again, is an indication of the importance of our omnichannel efforts. And from a location standpoint, we're seeing growth improve in regions, which still have shelter-in-place restrictions as well as in regions. We see 10 states where shelter-in-place measures have eased. And we're seeing even greater growth in those areas across volumes, seller count and unique cards. To date, those improving trends have primarily been due to our existing sellers adapting, but we're also encouraged by the top-of-funnel indicators that we're starting to see around new sellers, too. From a longer-term perspective, we don't know yet what the longer-term impact from COVID will be, but we do continue to believe that there is a significant opportunity both in the U.S. and around the world for our ecosystem to help sellers transition from legacy solutions. As you noted, we released some slides around our TAM in March, and what we've identified in the U.S. alone is 20 million relevant sellers in our target market today, who represent $6 trillion in gross receipts, an $85 billion opportunity in the U.S. alone, when you layer in the 4 markets that we're in internationally, there's an additional $16 billion. So across the markets that we serve, $100 billion of opportunity and multiple levers to drive growth across managed payments, software, financial services and further expansion geographically. And when we look at where that opportunity sits today in the U.S. and across our other markets, much of it sits on legacy payment platforms. Those solutions often lack the modern technology, the cloud-based software or are stitched together that results in a way that's fragmented to the seller and inflexible. So that makes it hard for a seller on a legacy solution to adapt their business in times like this. When they need to sell online or they need to take new forms of commerce. And we believe that we're uniquely differentiated there by the speed of our system, the breadth of the products that we serve, the flexibility because the products work together, and we believe that, that's even more powerful post-COVID as it was pre-COVID.

Yes, that makes sense, right? Legacy is, for sure, going to convert right into your sweet spot of software-based selling. So maybe to build on that with e-com and omni, clearly benefiting from this. I saw that Square recently launched online checkout. I don't think I got a chance to talk to you guys about that yet. So maybe, Jack, do you want to give us an update on what that product is about and what problem you're trying to solve with it?

Yes. So the overriding principle here is accept any form of payment that comes across the counter, whether it be a physical one or a virtual one. And we have seen a dramatic shift in our business towards online and this, I think, is quite favorable to us and to our sellers. So we just made it easier to sell online, really. So I was going to add a quick pay link to items on other websites or social platforms that allow them to complete the transaction without having to do an entire website. You see this in Instagram, you see this in these microsites all over the world. So it's just adding more of that flexibility and making sure that like all of our products work in tune with it. And that kind of goes back to the strategy that we have around an ecosystem. We want to build tools that are constantly reinforcing one another. So as we see people get more sales online, that fuels what we can do with Square Capital, they're building their business. They might hire employees, they will then use Square Payroll. And this whole model is very, very durable because they may not like what we're doing with payments, but love what we're doing with payroll, the point-of-sale and capital. So they don't -- they can fire one product instead of firing the entire company. And that's the durability that we've been seeking across the seller ecosystem for quite some time, but also with the cash ecosystem as well, where they may not have a need for peer-to-peer, but they want to buy Bitcoin or they want to buy equities. So they can fire the peer-to-peer aspects, but hire Bitcoin and hire equities. And actually, they want a Cash Card as well so that they can spend anything there and on the equities or what they earn on Bitcoin. So that's the strategy and that's the model, and it continues to play out well. And as we add more of these tools, it creates even more opportunity for retention.

Right. So before we transition to Cash App, I do want to ask just on the underwriting side, right, with something like online checkout and given what's going on with the pandemic, your underwriting was a huge advantage to bring aboard sellers, you also provide Square Capital as well. So you have exposure to transaction losses as well as to loan losses. So can you catch us up on what your philosophy is around risk management now and how that might change going forward?

Sure. Let me break down the question in a couple of different ways. First, explain where the risk lies today; second, what we did in Q1 in terms of reserving for our risk exposure; and then third, looking forward, how we manage that exposure in this new environment. So first, the 2 types of risks that we see in the seller business, as you mentioned, one around transaction processing, the other around capital loans that we keep on our balance sheet. From a transaction processing perspective, think of it as our managed payments offering, which we view to be an important benefit to our ecosystem because we help simplify that payments platform for our sellers versus many competitors who typically push that responsibility around risk for payments back to the merchant. What that means though is during times of macroeconomic stress, you would expect to see higher charge-backs related to some businesses that may struggle to deliver on the goods and services that they have already been paid for, think of it like ticket sales, where there's a presale. And a risk for us there is around when a seller ultimately doesn't have the funds to cover a charge-back, as an example. From a capital loans perspective, we've historically kept 10% to 15% of our loans on balance sheet. And for those loans, we both receive the entire economics, and we also feel the impact of any losses. What we looked at when we looked at Q1 reserves was using our predictive models, looking at probability weighted outcomes and using the current data and trends that we have. We ended up booking reserves across both seller transaction and processing and capital losses that are 4x what we booked on a dollar basis in the fourth quarter, which was more of a normalized quarter. What we're seeing on transaction processing is less than 2x right now in terms of charge-backs. But we know we haven't completed this crisis that we're in. There will be further duration and possibly further severity. And so we've reserved at the higher level at 4x. From a capital standpoint, even with the elevated losses that we're assuming here, which is a lot -- from a loss rate perspective, about 2.5x the 4% loss rates that we saw in 2019. Even at those levels, we still expect to see profitable unit economics on the loans held on our balance sheet. So what are we changing as we look forward from a risk management perspective? We've made some adjustments. As we look across the sellers that we serve and the products that we serve, we are assessing risk on an industry-by-industry basis and by products, as an example, to ensure that sellers have adequate funds in their accounts in the event of charge-backs. We are also using technology and communication to enable our sellers manage disputes and charge-backs. We've added SMS reminders to help sellers navigate the process. And we see that sellers who respond to our request for information are twice as likely to win disputes than those who don't. And we've launched a contract service that provides sellers with a legal framework for longer-term -- longer payment terms. And those who submit documentation for that framework are 40% more likely to win non-fraud dispute than those who don't. So ultimately, looking forward, our reserves and our future risk are going to depend on a number of factors, the actual losses that come through on those Q1 reserves, our go-forward GPV levels, and the mix of products and verticals that we serve. But we are taking measures to mitigate our risk exposure as we address these areas.

Okay. Good. No, that's helpful to go through it again. Look, I mean, I agree, there's a lot of opportunity to get access to more sellers through the pandemic and as you manage through it, I'm sure you do the right thing on the underwriting side. So let's maybe switch gears on the new Cash App. We're about halfway through. So want to make sure we get through some of these questions. So the same thing, Jack, I'll start with that. What are you guys doing to help consumers manage through COVID here with Cash App?

Well, I mean, this is a big one. And again, it comes down to what the government stimulus program meant. And really how complicated it was for a lot of folks. So one of the opportunities that we saw was just to really simplify what the stimulus program meant for individuals, how to quickly get access to it. And that also meant highlighting some things in our product that were buried before like a direct deposit number. So we did a few things. We surfaced the direct deposit in the main navigation so that you can see it immediately. You can hook it up to your employer, but you can also hook it up to the IRS website. We built a pretty robust FAQ that we also popped in an in-app notification so that people could see how to hook cash up to the IRS to get their funds instantly and, more importantly, use them immediately. Our website traffic doubled overnight because of that, it was spread wide and far, and we imagine we got a lot of sign-ups just because they saw an opportunity to get their money faster, and direct deposit was a big deal for us here. We worked with our partner bank to increase the number of direct deposit accounts from [ $3 million ] to [ $14 million. ] And this is important for us because people who do use direct deposit tend to be a lot more profitable for us and tend to use a lot more of the services, such as Cash Card. They use peer-to-peer a lot more. They buy equities in our investing product and they buy Bitcoin. So the more we can give people access to a direct deposit number, the more they can hook at it into their financial lives. So with the stimulus, we also saw the tax refund. So we saw a lot of tax refunds, they catch up. And we're also seeing a lot of unemployment checks, they catch-up as well. So we think the team worked really fast to prioritize these opportunities. Again, these are things that were on our roadmap but we just pulled forward? And we saw a lot of goodness out of it, both in terms of usage, which we reported on the call, but also trust and people seeing us like hey, I don't really need anything else. I download this app, and I've got a card, I've got a way to hook my payroll to it. I've got a way to buy equities, which I never had before. I can buy this weird thing called Bitcoin, and that's cool. And I can use this card in an ATM. So what else do I need? And that's what informs our roadmap or what are those critical functions that help us kind of replace a bunch of trips to a bank branch.

I think when we spoke to the regulators and they did appreciate how quickly a lot of the fintechs you included move to help those get access to their funds. And like you said, it opened the doors up for a lot more product to be utilized here. But I'm curious as you think about, hate to always go back to the TAM, but I did study the slides before this session. Is the profile, the demographic of the user now that you've pulled forward different than maybe what you thought of at this point in the cycle? I know you talk about take a road down your $60 billion opportunity, you're less than 2% penetrated. Details probably don't matter, but has it changed your thinking in terms of the type of user that you're bringing in and the quality?

Well, I can start with is by saying that we have a very mainstream customer for Cash App. And evidence of this is -- I talked about this on the call, maybe on the stage before, but the number of hip-hop songs that include the phrase Cash App or even named Cash App is pretty incredible. I think it's over 1,000 or 2,000 right now. So we've tapped into some of the most influential people in the world, and they're using us in their song lyrics, they're using us too on Twitter and Instagram to give money away to people. They're just talking about us nonstop. And that has been a huge, huge boom for our growth and our usage. And we're also seeing just a lot of people who are struggling with the financial system as is and want to move to something that's much more straightforward and easy. And we benefit a lot still from these viral loops that are built into the peer-to-peer network. And then every Friday during payday, you see Cash App go straight to the top 10 or even the top 5 because people are getting their paychecks, they're sending cash to friends or family. Those people may not have a Cash App account and then they download it. And then they discover, and this is part of the ecosystem model, more of the other services like investing like Bitcoin and like the Cash Card. So that model has proven to work out quite well. And we're still serving in underserved, we are serving in underbanked as well or in unbanked, but we've tapped into a lot of the cool, and we've tapped into a lot of the culture. And our brands reflects that. And our goal here is to look very, very different from a traditional bank so that we're seeing this fresh, and we're seeing a -- in just really simple, simple utility.

Yes. My kids know about Cash App, not because they're dad studies it, because [Robbie] is seeing it about it in his songs. So I totally can appreciate that. So maybe, Amrita, just to bring you into it to bring some numbers into the conversation. I know, maybe just go through some of the trends that you thought were interesting for us in terms of user growth picking up. And Jack sort of alluded to it, right? You started out with P2P as the customer acquisition product, but now it's spreading out through a lot of different things. So how do you think about the monetization and the engagement and customer acquisition versus LTV that -- the same old CFO stuff we always ask you about?

Yes. I mean, look, if you look at what's changed post-COVID for Cash App, I think the way we think about driving the business is the same, which is expanding our reach to more and more customers and then deepening our engagement with those customers across the products that we serve. And we've seen improvement across both those areas. Including in this COVID period from a network reach perspective, we were 24 million monthly actives as of December, which was a 60% year-over-year growth rate. But we had our highest months of new additions into our network in terms of new customers in both March and then again in April. And for our existing base of customers, we're seeing the strongest retention across -- we're seeing strong retention across this customer base even with COVID. And again, I think we're seeing opportunities to grow our base there because of how relevant Cash App is, in the new forms of commerce, social giving, online tipping, et cetera, that are taking place right now, whether it's plug-ins to the Spotify platform through Twitch, on Twitter, people find Cash App as a relevant place to go when they want to participate in new forms of commerce. And we're seeing that play out in terms of our reach for new customers. From an engagement perspective, once folks come into our platform, we've got 7 core products that we've expanded to over the past 2 to 3 years, that we can offer them, whether it's P2P, which is -- continues to be extremely relevant in this time where people are helping each other out whether it's Cash Card where you can make immediate use of your funds or the Boost product, which we feel is a really unique product in that it's instant rewards for a debit card, fractional investing with stocks, Bitcoin investing, direct deposit now, where we're, again, seeing an inflection around COVID, where there's a real reason to bring your funds in, whether it's government stimulus funds, whether it's unemployment funds or it's your regular pay check. And that's where we saw the 3x and 4x uplift from March to April around users and volume around direct deposit with the now 14 million enabled accounts. And now most recently, we also launched cross-border between the U.S. and U.K. with more features to come. And it's really because of that, that we've continued to grow monthly transacting activity with Cash App customers, where in March and April, our customers are transacting pretty much every other day on average. And our daily actives continue to grow even faster than our monthly actives. So you see these compounding effects of growing your reach than growing the activity within that base of customers in terms of transactions on a monthly basis. And that leads to the monetization that we're seeing, where over 50% of our monthly active customers are monetized in a given month. And the ARPU that we generate from our customers has 2x-ed in 2 years from 2017 to the end of 2019. So really strong fundamentals that we see as we look at the health and the flywheel within this ecosystem with Cash App across both efficient acquisition, strong paybacks on that acquisition and then strong and growing ROI over time.

All right. That's great. That's a great update. I just had a couple more, and then we'll let you guys go. Just Jack, I've heard you talk a lot in the past about the importance of a distributed workforce. And you guys are pretty quick to move to work from home. So I'm curious sort of what are you doing for employees today, right? And what does that mean longer-term for Amrita's world of margins and thinking about running the business differently?

Yes, we mandated worked from home early in March as we were seeing more and more of what was happening around the world, and specifically, China. We do manufacture in China. So we had a lot of insight in terms of like what was going on, on the ground and whatnot. So we sent people home out of abundance of caution and since we've been talking about decentralizing our workforce for some time, we're able to flip the switch and it just worked. And it's been pretty great. There are areas where we've seen increased productivity, there's areas where we have been challenged a little bit. When schools closed, that added a whole new dimension, where people had to adapt to a new routine. So we're now in that and our parents and the company are handling and caregivers are handling it well. But the reason this was important to us before is because we, with a more distributed model, we can get talent anywhere. There's a lot of folks out there that just do not want to move to San Francisco. They don't want to work in a big headquarters. They feel very comfortable working in a much smaller office or even at home. And they would say, no, in the past because they built their lifestyle, and they don't want to change it. So the people that we can get with this model, and Cash App has actually been working on this model for quite some time. It's the most distributed team we have with the company. They're all around the world with hotspots in Waterloo, Canada and Sydney and Melbourne, Australia, but just all over. And we're able to learn quickly from how they've been operating for some time and just apply it to the whole company. And that's one of the things that I appreciate so much about what we built as we have 2 business units who are doing things slightly different, and we get to learn from each. And if there's any good ideas here, we can shift it over here and make it more of a company-wide thing. So our capacity for learning and experimentation is quite high even at the corporate level, which allows us to, I think, build a lot more agility and move much faster. So this has taught us a lot, we proved that we could make it work. And I imagine it gives us a ton of optionality in the future, especially for our employees.

Yes. So maybe to close out on the financials then, Amrita. Just thinking about everything we have talked about and balancing the short-term with the long-term on revenue as well as to protect the bottom line as well, what are your thoughts on that?

Yes. I mean, look, even in this new world, we remain focused on driving, long-term profitable growth and compounding that growth over time. We're seeing in -- from a COVID impact perspective, different aspects play out across the seller ecosystem and the Cash App ecosystem. From a Cash App perspective, we are expected to grow over -- well over 100% in April. So we're seeing real tailwinds in this business, and we've got incremental positive, healthy incremental margins from a Cash App perspective. So as we scale that business, we want to continue to invest to keep that flywheel going with efficient network acquisition, increasing ARPU, strong retention, et cetera. From a seller perspective, though, obviously, the seller business has been incredibly impacted by COVID. With April gross profit, we expect to be down in the 35% range year-over-year. We are seeing improving trends here. And we've talked earlier about seeing the shifts of new customers coming in from legacy platforms. We saw our strongest monthly growth for inbound leads to our sales team from those sellers where shelter-in-place is actually a really interesting opportunity for them to transition to a new platform. And so we're seeing signs of wanting to lean in here, whether it's in marketing or in sales and, obviously, continuing from a product perspective to build out these ecosystems. We're going to be disciplined as we do that. We're going to continue to look at ROI and efficiency metrics. And we did evaluate a portion of our discretionary spend to pull that back, as we mentioned on our earnings call. So we'll be efficient here and disciplined, but continuing to invest to drive long-term growth.

Got it. Well, that's just great. We're almost out of time. So I guess I'll just ask one more. I was hoping to ask you about crypto, yes, but we'll save that for another day. I guess just with -- this is not enough time to talk about it, although I'd love to hear your perspective one day on that, but just this whole economic empowerment thing, and it feels like there's a lot of energy around it, and this inflection point is really critical to Amrita's point to lean in now. Talk to us about sort of your energy and the firm's energy and how that feels relative to past cycles of the company, whether it be going to the IPO versus when it started up? Like how would you describe that energy level if that question makes sense?

Yes. I would say that this -- events like this just make, very tangible, our purpose and our mission. So it just increased people's urgency around why we're here and what we're doing in both seller and cash. Kind of immediately shifted into a gear or to protect our sellers and protect individuals and make sure that they are -- we're doing everything that we're able to, to help them thrive. So missions and purpose tend to be these abstract intangible things oftentimes and so far away from your day-to-day. But when something like COVID occurs and you have the whole world focused on solving one problem, it becomes very real, very quickly, especially when it affects you personally because you now have to work from home with your kids and you can't go to your favorite restaurants, and you can't go outside and congregate in the park. So it just -- you feel it. And that feeling inspires you to like work as hard as possible to get out of it and to help others get out of it as well. So I think the energy hype level is high. It's unfortunate that we can't like feel the vibrations with everyone in the same office. But it's also an opportunity. I mean when we're -- right before this, you said your son might come in and ask for his iPad back, you have these experiences where you only hear stories of people's families, you only hear stories of people's lives. And now you actually see it. You see kids on all these Hangout calls and BlueJeans and Zooms and you just add -- you add so much dimensionality to every single person. And I think that builds a lot of empathy. I think it just helps us realize we're kind of all in this together and we're all struggling a little bit, but we have something bigger than us that we have to work towards. And we're seeing the results. So it's been incredible to help serve in the way that we can.

Good. Lot of good stuff. Well said. It's a fun stock to follow-up. That's for sure. I really appreciate you guys taking the time. Again, I know how busy you all are and hopefully, we'll have you back next year in person.

In-person.

So I can shake you guys' hands and give each other some high-fives. So I appreciate your time, guys. I really appreciate it.

Thank you so much. Appreciate It.

Thank you.