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

All right. Well, good early afternoon to everyone in the East Coast. Good late morning in the West Coast, where I think Amrita is dialing in from. So we're incredibly happy to have Square joining us for a fireside chat this afternoon. Amrita's obviously quite busy, so we're really appreciative of her time. So I'm going to read a quick disclaimer and then jump into some Q&A. Investors, if you have questions, there should be a Zoom inbox or Zoom messaging window, you can place them in there. Or if you'd like to go to the old-school way, you can e-mail me at jbeck@key.com, and we will try to work those in at the end, time permitting. So maybe I'll just go ahead and do the disclaimer. So during this conversation, Amrita may make forward-looking statements that are subject to certain risks and uncertainties. She may also speak as to certain non-GAAP metrics. Please take a look at Square's most recent filings with the SEC for a discussion of the company's risk factors and for reconciliations of non-GAAP metrics to their most directly comparable GAAP financial measure.

So with that out of the way, maybe we can hop in and just dive right into the topic du jour, which is COVID and how it's rippled across the economy. And certainly, with your ecosystem of small businesses and consumers, you've obviously seen a lot of aspects of that. Certainly, I think one of the things that stands out to me is we have seen -- obviously, it's been very challenging on a lot of fronts, for lots of different constituents. But we also have seen a surge in digital products and how they've been embraced across financial services, commerce, collaboration, many others. So just would love to hear from you what has been the impact across your ecosystem and what do you see as the enduring elements of change here?

Well, first, Josh, thank you so much for having me here today. You're right, we've seen both our Seller and Cash App ecosystems serve important roles for our customers during these challenging times, during COVID. And now, more than ever, we see the strength and the value of our ecosystem strategy, and it comes down to 2 things. It comes down to speed and trust. For Seller, to illustrate some of the issues that our sellers have been going through, GPV, dollar-based retention. This is a metric that we look at that's similar to same-store sales. Went from negative 50% in April, negative 50% year-over-year, to down approximately 10% to 15% in July. The strong resilience that we saw in those months in between, with progressive improvement each month amongst existing sellers, we believe was the result of 4 factors that our ecosystem enabled for our sellers. That was a shift to online, that was vertical expansion, it was increased access to contactless hardware and it was through PPP loans. For our online strategy, it includes a variety of channels that serve sellers of all types and sizes, connecting them with buyers through web and mobile. We saw a 3-year adoption cycle compressed into 3 weeks, in mid-March and in April, and we believe the elements of this are enduring. For vertical expansion, this is where we've seen sellers get creative about how they meet their customers. I'll give you an example of one of our sellers, Brother & Sisters Flower Shop in Oakland switched from another platform to Square Online at the start of shelter-in-place. And once retailers were able to safely reopen, they started using our Appointments products to keep track of their customer visits and to set up shopping appointments. This sort of blending, where a retailer can use services products like Appointments or a restaurant can become a retailer or a grocer, is something we can uniquely enable given our expertise across restaurants, retail and services. With contactless hardware, this has really empowered our sellers to adapt to social distancing measures, and it's an important differentiator for us relative to legacy payments platforms. These hardware products continue to serve. They're an important acquisition tool for us. They bring in new sellers to Square, and we've seen a significant acceleration to that transition to cashless. In February, we were at about a 5% rate for U.S. sellers who are effectively cashless. In April, we were at about a 23% rate. That's now normalized to about 14% as of June, but obviously elevated to what we saw pre-COVID and we can continue to serve here. And then finally on Seller, with PPP loans. In the second quarter, we provided access for really a financial lifeline for over 80,000 small and largely underserved businesses around the country for a total of $873 million in PPP loans. And that loan size is 1/10 of the average SBA loan during the PPP. And now the Square Capital team is relaunching our Flex Loan product and is beginning to ramp that to continue to provide that lifeline as we have in the past. And it's because of the value that our ecosystem has demonstrated for our existing sellers that we've seen strong acquisition of new sellers in the second quarter. We believe this market is still 85% to 90% legacy solutions today, which aren't entirely digital, aren't entirely cloud-based. And as companies are reevaluating -- they're taking this time to reevaluate their point-of-sale solutions, we believe the Seller business is well positioned here, and that's why we want to lean in even more on go-to-market. On the other side of the house, Cash App, our cash ecosystem has continued to rapidly grow its network of active customers and to drive higher engagement even as we've grown the base. In June, we have 30 million monthly actives, up 25% versus the last number we gave in December. And once customers join Cash App, they adopted more products. Our Q2 cohort of customers saw an increase in the number of products they adopted within their first month after activation. Those products that they adopted include things like Cash Card, direct deposit, our Boost product, Bitcoin in investing. What that shows us is that now more than ever, we're seeing consumers look for modern financial solutions that can help. And as I said, as we've grown that network, we've seen engagement increasing over time. Our monthly actives are -- transacted in Q2 at about an average of 15x per month, which is up almost 50% year-over-year across, again, significant products like Cash Card, which are driving mainstream usage, 7 million Cash Card-transacting actives, and the majority of whom are transacting 20x per month on average. All of that engagement -- I'll close on this. All of that engagement led to higher revenue per monthly active customer in Q2, up 3x over the last few years from less than $15 in 2017 to almost $45 in June of 2020. And so to your enduring question, some of this uplift is very likely stimulus-driven. But the increasing popularity here on Cash App, the increasing use cases around our products is something we plan to continue to build upon.

Okay. That is a great overview. Obviously, you touched a lot of different parts of the ecosystem. So that's incredibly helpful. Yes, I wanted to go back to the first point that you made around online channels. So I mean that's been a surprise for me. I think you gave some very helpful disclosure, that it's risen to greater than 25% of GPV. So maybe just help us understand, there's lots of moving parts underneath that. But really where you're seeing the most momentum and how we should think about online/omni over a longer-term period?

Sure. So our omnichannel strategy, which basically means we're helping sellers serve their buyers through multiple channels, remains our top strategic priority for our Seller ecosystem. For a number of years now, we've invested in building out our capabilities. And we've seen many of our sellers utilize that online ecosystem, particularly, obviously, during these dynamic times. So as you noted, Q2 GPV from online channels -- those online channels, by the way, are virtual terminal invoices, Square online and our online APIs, was up more than 50% year-over-year and made up 25% of our Seller GPV. If you look at that period a year ago, that was 14% of Seller GPV. So pretty meaningful mix shift here. And it's not just a COVID phenomenon. GPV from online channels has been growing at over 50% for the past 6 quarters. But it's now at a scale where it's meaningful to our overall business growth profile. During COVID, obviously, we are able to drive heightened awareness, that Square is here to help sellers with online needs. We see now sellers coming to Square for our online solutions, with Square Online serving as a front door for sellers to adopt the broader ecosystem of tools. 1 in 3 of our Square Online sellers in the second quarter were net new to Square's overall platform. And that percentage actually increased in July and August. That means people are coming to us for their online needs. And we've been encouraged that these sellers have not only used Square Online once they've joined, but they've also adopted other channels and other products in our ecosystem, including in-person payments. So those Square Online sellers who onboarded in Q2 generated up to 50% of their volumes from channels outside of Square Online. And while awareness of these offerings has improved, we believe that there's further opportunity to drive awareness here for our online offerings. And again, this is a key focus area for our sales and marketing investments in the back half of the year.

Okay. That's really helpful. So another angle there is really what's happening with developers. I think you gave some really helpful examples of how sellers are viewing you maybe as a online store first and that helped to bring you customers. But I'm just kind of curious on your maybe perception within the developer community. When I think about the e-com API, the in-app SDK, it certainly seems like you've started to invest more and your presence is increasing. Just how do you think about the opportunity to work with developers as a growth avenue for Square? Is that something that has already been factored into your TAM numbers that you provided? And just how should we think about that opportunity?

Sure. I think there's 2 parts of this question that are important to address here. First is the internal platform that we're building and how we build our ecosystem of first-party products on that platform. And then second, how we leverage that platform for the external-facing developer platform that enables third parties, both sellers and developers, to build and extend functionality on our APIs, and that concurrently serves as an acquisition tool for larger sellers. So maybe starting first on how we build our first-party products on our platform. We've invested heavily on having a tech stack that's agile, that's scalable. Each additional product that we add gets leverage on all the products that have been launched previously. I'll give you an example of that. Our vertical software for restaurants and retail were constructed using the internal building blocks around inventory orders, employees and more for our platform. We didn't have to rebuild those pieces as we launched new vertical products. Our engineering teams here are designing features that are applicable cross-functionally, that speeds up our development and that creates economies of scale over time. And for the seller, that means that the ecosystem is more cohesive, and it gives us greater power in managing their business, understanding their customers and, ultimately, driving growth for them. We can provide the seller, through those first-party products that are cohesive, a 360-degree view of their customer, no matter where that product is that they're using. And that's a key driver of our ability to create a more durable and retentive relationship with our seller. Now the external side of it, using that platform approach, our external-facing developer platform is an important area for us in terms of investment to help us extend our ecosystem capabilities and better address the needs of more sellers, particularly those with more custom needs. Our developer platform helps us -- you asked about TAM, it helps us address more of the TAM opportunity that we've identified. That $6 trillion in gross receipts in the U.S., using -- including verticals where we don't offer first-party software, for instance, like health care, and our developer platform is also extending our TAM to even larger sellers. Currently, that $6 trillion is cut off at about $100 million in volume on an individual seller basis. But as we grow our developer platform, we have the ability to grow that upmarket reach. That platform enables a combination of partnership integrations. We have over 500 app -- marketplace partners today. Other third-party integrations, where we don't have a formal [ relationship ] and then custom solutions for larger sellers. And we've seen that, that has resonated so far with our larger sellers. Last year, we saw 46% of GPV for sellers in our largest grouping, over $0.5 million in annualized GPV. 46% came from businesses that used our open platform, and that has grown 3x since 2016. So obviously, an important part of driving our business with larger sellers and one that we want to continue to build upon.

Really helpful. Maybe just going back to some of your comments on how the businesses trend throughout the quarter. Certainly, there was a lot of resilience in the Seller ecosystem, and you spoke to that, and really what I think was a pretty substantial acceleration in the Cash App business. So maybe just help us understand how those things progressed as you went into Q2. And obviously, you didn't guide, but as we think about moving forward into Q3, how you want to invest in some of the opportunities that have really come up in the last 3 to 6 months?

Sure. So in the second quarter and through July, we saw improving trends for both Seller and Cash App. With Seller, we saw a rebound in Seller GPV. The trough in April was about minus 39% year-over-year. And in July, we saw positive 5% year-over-year growth, where trends improved each month. That was primarily driven by sellers pivoting to other channels with Square and obviously strong acquisition of new sellers on the platform. Given that card-not-present growth was back at pre-COVID levels during July, continued GPV improvements will depend on the recovery of in-person transactions and our ability to further help sellers adapt around that. On Cash App, gross profit grew 140 -- sorry, 167% year-over-year in the second quarter and more than 200% in July with, again, improvement in each month since March. That compares to over 100% year-over-year growth pre-COVID. The growth levers that I would articulate here was, again, strong customer acquisition and 30 million monthly actives in June; continued product adoption with customers finding daily utility here with Cash App. And then a strong increase in dollar inflows per active, which we believe was partly driven by stimulus. So as with our Seller ecosystem, our Cash App team did an excellent job resonating with both new and existing customers during a difficult time. Now since Q2, we've seen -- we've been closely monitoring any impacts as stimulus programs decreased and changed in late July. And in August, we believed -- as we believe possible, as we indicated at earnings, we saw modest deceleration in Cash App's gross profit growth relative to July, following changes to stimulus programs, although growth remained well above those pre-stimulus levels in Q1. So the variability that we may see here is one of the [ reasons we ] didn't provide guidance for the second half of the year, but instead want to focus on understanding and tracking trends in real time.

Okay. That is really helpful, and that definitely makes sense. One of the questions that I wanted to ask on Cash App, I think back at your spring investor update, you had mentioned you see a $60 billion-plus revenue opportunity. Just would be curious, obviously, that's a sizable number versus where you're at today. How do you realize this? Is it more so on the ARPU side? Is it really just bringing in consumers? Is it both? Just where do you find the leverage to kind of realize this opportunity in the mid and long term?