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

[Audio Gap] payments processors and IT services team. I'm really happy to introduce Amrita Ahuja, CFO of Square. Before we start, I just have to read this brief disclaimer. 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. Great. Hi, Amrita. How are you? Good to see you.

I'm doing great. How are you, Pete? It's good to see you, too.

All right, doing well, doing well. So I'm thinking back, February 26, Square just reported 4Q. Great quarter. Back on offense on Seller with the pricing transformation going on there. 42% origination growth in Square Capital. And this was the first full quarter that after Square introduced the new tabs redesigned for Cash App, really sharp MAU growth and ARPU. The stock, I think was up intraday, 12% in the next -- that day. But it was also the same day, the market was down 4.5%. I think it was the first awakening that COVID was upon us here. So can you take us back to that time period there? Can you walk us through how Square pivoted its strategy in the early days of COVID? How are the priorities -- how do they shift internally? I'd imagine that Seller was the initial primary concern. But how did that fold into Square's priorities -- fold into the COVID action plan?

Sure. Those were very uncertain days for many of us. We looked internally, and we know that everything that we do is guided by our customers and by our purpose of economic empowerment. We also see that our customers, whether from the early days of when the company was founded out in the last recession, all the way to today, our customers value most 2 things, trust and speed. We build trust through things like transparent and fair pricing. And speed matters because people need fast access to funds and to cash flow. They also need fast access to new products and the ability to onboard quickly, especially in a dynamic environment like this. So how those principles got expressed in the early days of COVID was through accelerating future launches that helped our customers get access to cash flow and to keep their doors open. Order ahead and delivery, e-commerce enhancements like Square Checkout and an e-gift card directory, waiving SaaS fees in March and April and then enabling the pause on SaaS fees afterwards. We also worked hard to enable that fast access to government funds through our PPP initiative and on the Cash App side, customers receiving stimulus funds through direct deposit. The key learning to me in all of this is that we have the ability to move incredibly quickly on product innovation and that our employees are deeply motivated by serving our customers and by our purpose. Our response across the company showed me how much we're motivated to build long-term relationships with our customers. We were willing to make some of the tough trade-offs in the short term like refunding SaaS fees those 2 months that we knew would pay dividends in the long term in terms of building trust. From a strategic perspective, the strategies for both ecosystems haven't changed due to COVID. They've accelerated. And now we have an opportunity to invest in this moment and bring on more customers to expand our ecosystem. And as a part of that, we're planning to grow our non-GAAP OpEx next year, excluding risk loss, by about 40% compared to this year. That's $800 million to $850 million of growth on a dollar basis.

That's great. It's interesting that you were so quick and agile to adapt to this market. And it seems like you're now going a lot more on offense, particularly in Cash App, things like that. And you just touched upon the incremental investment and -- commitment that you've made for next year, $800 million to $850 million non-GAAP expenses, excluding risk loss. Now how should investors think about how that could impact margins next year? And could you also break that spending commitment down by product development, go-to-market, support initiatives? How would you characterize this level of spend between priorities and opportunities?

Sure. Maybe let me start with what are we spending the money on and then will come back at the end to potential impact to profitability and margins in the near term. Starting on Seller, we're continuing to invest across our platform to solve the needs of our customers. And in 2021, we'll be directing the investment primarily across 2 areas. First, sales and marketing; and then second, building out the portfolio of products globally. From a sales and marketing standpoint, a couple of things to call out. Brand and awareness marketing, which helps drive reach. It helps drive top-of-funnel demand. We launched our first global brand awareness campaign this year, and saw encouraging results in the third quarter. And we're going to be building out our sales and account management teams to address those larger seller needs, and who have delivered efficient returns even in the midst of COVID. And we intend on doubling the size of our sales team next year as a result. As we mentioned on the earnings call, we have an increasing global focus. Markets outside the U.S. represent 11% of Seller GPV in the third quarter. And so we'll be deploying those marketing campaigns across those 4 markets where we've seen returns become more efficient over time in driving new seller acquisition. On the Seller side for product development, we plan to continue to build out our engineering and data science teams to reach larger sellers, and again, bring those products more globally. An ongoing focus of product velocity includes strengthening vertical-specific software, adding more developer tools and making our omnichannel offering more robust. From a Cash App perspective, key priorities, again, focus across 3 primary areas: acquisition and win back to grow the network of customers; operations and support as our customers have taken on more products across our ecosystem; and product velocity, investment in our product development. From an acquisition and win back perspective within Cash App, we're endeavoring to bring in new actives as well as reengage nonactive customers. As of the end of June, we had more than 30 million monthly active customers. And you can imagine, quarterly active and annual active is much higher. So we launched our first paid ads less than a year ago. I want to lean in here, in Q3, both ARPU and lifetime values were up over 3x compared to where we were in 2017, which enabled us to ramp spend across new channels while still preserving low customer acquisition costs and that less than 1-year payback period. To explain a little bit of what we're doing from a scaling and operation support on Cash App, Cash App has grown rapidly this year, up 171% in gross profit growth year-to-date through the third quarter, with growth outpacing, frankly, our ability to scale investment. And as we see more customers using more products beyond peer-to-peer, we need to invest to support that and to invest in our operations, infrastructure. We expect this step-up in investment here to be onetime in nature, particularly as we build in AI tools and machine learning tools to create efficiency and drive leverage over time. And then from a product velocity standpoint with Cash App, similar to Seller. We're focusing on hiring engineers globally for continued product innovation with both new launches and enhancing features of our existing products. Now where does that bring us from a margin perspective. Look, given the large addressable market we're going after here, $100 billion on the Seller side, $60 billion in the Cash App side, we're not focused on near-term profitability targets. We're focused on building long-term sustainable growth on the back of strong unit economics and on the back of strong ROI in the areas of investment that we're ramping, which we'll measure throughout the year, with a discipline to pull back or invest further, depending on what we see. In 2021, as I said, we're growing our non-GAAP OpEx, excluding risk loss, by 40%. So that would put us at about $2.95 billion in OpEx next year, excluding risk loss, compared to an estimated $2.1 billion this year. Of course, EBITDA margins will largely depend on top line performance, which will be determined by a variety of factors, where we see a continued wide range of potential outcomes here. And to be clear, we are preparing for EBITDA margins to go down in Q4 and in 2021 and intend on investing despite the near-term uncertainty so long as we see those strong metrics around unit economics and ROI. And maybe the final point to make here on margins, Pete, is that keep in mind that Cash App's rapid growth. Cash App has doubled in mix, as a mix of our business. Cash App was nearly 50% of our company's gross profit in the third quarter, up from 25% a year ago. This mix shift will have a meaningful impact to the overall company margins in 2021 as cash is much younger and obviously much earlier in ramping its profitability than Seller.

I think that makes a ton of sense. You've talked about payback in Cash App less than 1 year, return on investment 3x over a 3-year period. I think investors understand, let's make the pie bigger, we can make it sweeter later. That dynamic. But as I think longer term, how do you think about the longer-term margin trajectory here? I would imagine that there's an opportunity for Cash App by itself to be accretive to the overall business. Would you share that view?

Yes. Look, Cash App's earlier in its life. And so it's hard for us at this point sitting here today to tell you what that long-term margin looks like. We have seen each year that Cash App has improved its profitability. And this year, we expect it to be profitable on an adjusted EBITDA basis, on a fully burdened adjusted EBITDA basis, advancing in margin by about 10 points year-over-year. But frankly, given how early Cash App is in its life, given the size and the attractiveness of the opportunity we're going after, we think in many ways, that ramp was too fast, and we want to invest to bring on more customers under our platform, to adopt more products and to continue to grow the value that we can provide customers and therefore, grow this business over time.

That's helpful. I want to shift to Seller briefly. So I guess if we look at underlying GPV trends, larger sellers seem to be recovering more quickly than smaller sellers. Has this been more of a function of retention trends rather than that same-store sales across the different seller sizes? How has this dynamic influenced your go-to-market strategy in attracting new cohorts?

Sure. So during COVID, we've seen resilience from our larger seller base. Larger seller GPV was -- achieved positive growth, up 13% year-over-year compared to the blended 4% on overall Seller GPV growth in the third quarter. Part of this has been driven by continued strong acquisition for us of new larger sellers. That new customer acquisition has indexed towards larger sellers coming to Square for our omnichannel ecosystem, whether e-commerce APIs, contactless hardware, Square Online. Our online GPV grew again by over 50% in the third quarter. And in Q3, larger sellers accounted for 61% of Seller GPV, up 5 points from a year ago as we continue that march of market. In terms of how we're directing our spend next year, we do expect the sales and marketing investments for Seller to grow by 40% to 45% year-over-year, with larger sellers being the main focus, whether through expanding product awareness or doubling the size of the sales team. Our developer platform from a product perspective is a key area of focus and one of increasing importance to larger sellers. Year-to-date, 43% of GPV from Sellers with over $0.5 million of annualized GPV, 43% came from businesses that use our open platform, our APIs. That's up nearly 3x since where we were in 2016. So we want to continue to invest in that to make that even more robust. Now looking at recent trends. We are seeing in very recent trends, shelter-in-place restrictions tighten in certain regions, major U.S. cities, indoor dining in San Francisco, early closures in New York. And even in international markets, U.K. and Canada more recently. So while we have big -- we see it -- we know we have a big long-term opportunity ahead, we are cautious about GPV trends in Q4, especially when you think about retention in some of these cities and markets that are becoming -- seeing higher restrictions at this point.

That makes a lot of sense. One of the things that really stood out to me last quarter was the Cash for Business growth now representing 9% of GPV. Can you talk about what are the underlying trends that you're seeing there? And I would imagine that's almost self-reinforcing on the user side because obviously, you need a balance on your Cash App to pay somebody via cash tag. Can you talk about what is driving that business? And where do you see that going over the coming quarters?

Yes. It's interesting. In many ways, Cash for Business reminds us of -- it's following a similar pattern to what we saw when we first launched the Square Reader in the early days, with customers using it in a variety of ways. So what's the product. We still have to educate and increase the understanding around Cash for Business. Cash for Business makes it easier for customers to manage their business. It enables peer-to-peer transactions sent through a cash tag. And relative to the base peer-to-peer service within Cash App, you get higher weekly limits and you get relevant tax reporting forms. The product is similar in experience to the Cash App customer experience today, but we have seen new patterns emerge during COVID, likely because it allows for contactless transactions between buyers and their customers. And to clarify, because we have heard some confusion around this, Cash for Business customers are completely separate from our Seller business. But those payments are reported, as we noted, as a part of our overall reported GPV figure, 9% of that figure in the third quarter. We do see some overlap with micro sellers on the Seller side. But there are also unique use cases in many ways with Cash for Business. Many Cash for Business customers are using it as a side hustle or to adapt during COVID. This can play out as artists or musicians posting their cash tag on Reddit or on Twitter to collect funds. It plays out as charities and religious organizations posting cash tags at virtual events. And we recognize the strong GPV growth we've seen from Cash for Business. It grew 300 -- over 300% year-over-year in the past 2 quarters. We recognize that some of this growth is related to COVID-specific trends that could normalize going forward. Similar to what we talked about on the earnings call, while engagement continued to be strong in October for Cash for Business, we saw a slowdown in the volumes transacted per active compared to Q3 in October. So we're doing more work to understand these customer needs and how we can best serve them during COVID and beyond.

I think if we look at Cash App growth, even pre-COVID after the big tabs redesign, you did see a pretty interesting growth there. Store funds obviously bumped up. Part of that, I would imagine, with the tax refund season fueling some of that. Now going forward, you have another tax season, potentially another round of stimulus, but I won't ask you to opine on that, of course, on top of scaled go-to-market which you just talked about, and that leads some people to believe in the coming quarters, you've got an interesting load, spend cycle potentially happening here. But how would you -- I mean, obviously, taking out the potential for stimulus, how would you think about the cadence of growth in Cash App overall over the next few quarters? How should investors think about that?

Sure. So the 3 underlying drivers that we look at for Cash App are customer acquisition, growing the network; product adoption, how are those customers taking on more products within the ecosystem; and then spend per customer. We saw continued strength in acquisition and product adoption in the third quarter -- or strongest quarter of net new customers added cohorts in the third quarter, adopting more products in their first month than prior cohorts and certainly compared to the second quarter. But we did see a slowdown. Where we saw the slowdown from July to October is in spend per customer. Looking at those monthly trends and kind of helping you dissect a little bit kind of what we saw and what that could mean, we saw year-over-year gross profit growth peak at 276% in July, well ahead of our expectations, before decelerating to the 180% range in August and September, and then further decelerating in October. So we expect Cash App growth to continue to decelerate in November and December and into 2021 in the absence of additional government fund inflows. We know that there is a strong relationship here between the amount of funds customers pull in the Cash App and to our gross profit. Historically, as you know, we've seen this during tax refund season or through our direct deposit customers. As some of those government-funded programs ended in July, we've subsequently seen that slowdown in spend per customer, albeit above pre-COVID levels. And this then led to the deceleration in gross profit from July to October. As we look ahead, another key reminder for you in 2021, cash will be lapping some very tough comps with gross profit, as I noted, 171% year-over-year through the third quarter. So we'd encourage you to look at this business on a 2-year stack because of that strong acceleration that we've seen so far this year. And longer term, we're going to continue to focus on giving customers more reasons to use Cash App for that broader range of financial tools. And we think there's a significant opportunity to cross-sell both existing tools and new tools that we launch over time to our customers, which gives people more reasons to inflow and store funds in Cash App when we think about that longer arc.

You've talked about the velocity of product development, particularly in Cash App, 1 to 2 new features perhaps per year, that kind of thing. Do you see that cadence pretty much staying for the foreseeable future on the new product front? And how would you think about that between engagement and monetization?

Yes. The interesting thing is that when we launch new products, because of the broader ecosystem that we're looking at with Cash App, we don't have to monetize every single product that we launch, at least certainly not on day 1. An example of that could be Bitcoin investing, where initially, we launched it as an engagement driver. And we did see that Bitcoin customers became more engaged with the broader Cash App ecosystem and, therefore, delivered higher gross profit. And as that business has grown for us, it has grown in scale and is now a healthy monetized product from a contributing standpoint, $32 million in gross profit in the third quarter. So we can see other products making that arc. Boost is another example of that. Where today, the Boost, the instant rewards program on our Cash Card, is primarily funded by us as a contra-revenue to drive engagement with Cash Card and with a broader Cash App ecosystem. Over time, you can see that transitioning to a partner-funded product and potentially even a profit center as we continue to prove to large merchants that we have the ability to move customers and to drive traffic and drive engagement with their platforms. And so similarly, new products that we launched under the Cash App ecosystem over time could follow a similar arc where they start as engagement drivers or top-of-funnel drivers and then over time, migrate to monetization drivers. And that's why we think about measuring the breadth and the value of the overall ecosystem that we're delivering for Cash App customers. And look, from a product velocity standpoint, the team is working hard. It's a key investment area for us in 2021 to continue to add designers, engineers, product managers to the Cash App ecosystem, so that we can continue to build on the value that we're delivering for our customers.

I think it's interesting. What I've learned as being an analyst covering Square is don't discount some of the little announcements that pop up. Because 2 years later, it ends up being something quite extraordinary and certainly driving the narrative. And in that vein, I think about -- I'm going to pivot here to international. Things like cross-border functionality that you have on Cash App. You acquired a peer-to-peer platform out of Spain. How do you think about the Cash App opportunity exporting that abroad? And how should investors think about the strategy there in bringing Cash App?