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

Thanks, everyone, for joining our afternoon keynote with Square. My name is Tien-Tsin Huang. I cover the payments and IT services sector at JPMorgan, and very thankful and so pleased to have the Square team back with us. Since the same event last year, I was thinking about it. The company's changed quite a bit. It's created a lot of value against this mission of economic empowerment, helping both sellers and individuals navigate the pandemic and a lot more than that, right, using modern tech solutions. So really excited to get an update from the team and hear what's next for Square. With us from Square, we've got Jack Dorsey, CEO and Co-Founder; Amrita Ahuja, the CFO. We're going to do a fireside chat. We'll take questions from the Ask a Question portal as well. So if you have any, feel free to use that. But before we get started, let me just read a quick disclaimer. During this conversation, Jack and Amrita may make forward-looking statements that are subject to certain risks and uncertainties. They 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 the way, welcome. Thank you, guys, again for joining us out of your busy schedules.

Thank you. Thanks for having us.

So let's get right into it. I think Jack, I always start out asking you for sort of an update or a state of the union, what's changed in the last year. But I thought maybe I'd ask you a little bit differently, sort of how are your -- have your strategic priorities changed as a result of the pandemic? Where have you pivoted the most? Let's start with that, if that's okay.

None of the priorities have changed. We did, over the year, pull a bunch of things from our strategy forward just to meet the demands of the times, specifically COVID. So we pulled a lot of our work on our platform and online much sooner and got it out much faster to people. And I believe our customers and certainly, we, have benefited from that decision. With Cash App, the same thing. Like we pulled a lot of work around direct deposits up, so that we could handle the stimulus checks going out to Americans. And again, I think that benefited our customers and benefited us as well. Where we made the most progress over this past year is really further connecting the 2 ecosystems together. We're -- just for those of you who are new to Square, we're building a series of ecosystem. And by that, we mean something that ultimately can -- hold on. By that, we mean a series of services that can positively reinforce one another. So we have that in seller, where if you use one tool, it reinforces another. And we've been building that over Cash. And the most powerful thing is when you connect those 2 ecosystems together, and we believe we can create a ton of value that is unique to us because we have both sides of the counter. And we're able to see so much behavior and so much data in terms of how people are using these financial tools. And anything that we learn in the Seller side, we can push to Cash App, for instance. So everything we learn from Square Capital will go into how we think about a lending product for Cash App customers, which we're currently testing. So our ecosystem strategy continues to get stronger, and we added a third ecosystem in title not too long ago. But the real work and the real magic is how we combine all these things together, and that has not changed.

Yes. It does seem like there's quite a bit of synergies, and we're starting to see a lot more of that. And of course, a lot of good work on the stigma front as well. Before you get into direct deposit and some of those things, I wanted to just start with Cash App. There's a lot of questions I've been getting on that front, Jack and Amrita. And I've always liked this phrase that Cash App is a lyric. You guys have done an amazing job of connecting with the music industry, working with influencers and driving a lot of really clever marketing and usage around Cash App. I think we talked about this last time as well. I think I wrote down, what, 36 million monthly actives, 80 million cumulative customers already. So how do you think about appealing to new audiences or to deepen your engagement of a target demo, which we've seen you do quite a lot in the last year or so? And just to bring it up to a higher level, Jack and Amrita, what is Cash App? I get this question a lot. Is it a bank alternative? Is it a super app? Or is it a financial experience app? What are your thoughts on that?

I think a lot of the -- I hear the question, but I think a lot of those categories are ultimately limiting to us. I mean when we look at the past in terms of Amazon, it started out as a bookstore. I don't know how you would categorize it right now. And ultimately, we want to make sure that we are looking at what our customers are trying to do and building ahead of that, looking at the most critical needs and building something that is intuitive and, more importantly, building utilities that is cohesive across multiple use cases. So we started as peer-to-peer. We started in the South that we really resonated in the South America, Southeast America specifically. And we're resonant with people who try to get a bank account, tried to use other peer-to-peer services. We're not eligible for whatever reason. We had a good understanding of risk. We had a good understanding of security, and we opened a lot more doors than our peers in the industry. And it took off in places like Atlanta. And what was interesting is also like it was a big part of, not just community there but also the culture. So to your -- to the first part of your question, like Cash App is a lyric, like we've had songs named Cash App. I think there's over 30 songs named Cash App. And it's a lot of hip-hop country. But more importantly, like people feel that it's so valuable and provides so much utility to them that they want to sing about it. They want to spread it in that way. And through that, as we've continued to add services like the cash card, like the ability to store money, the way to get money out of your ATM buying Bitcoin, investing, lending, we continue to add features that appeal to a much bigger audience in a more mainstream audience. And what's amazing about it is it's not just focused on investing. Like I use this every day to send money to my friends and my family. I use it to tip, but now I can also invest in a company that I love or I can get a card that I can design. So it goes back to this ecosystem model of having multiple services that positively reinforce one another. And that, we found, just resonates with a bigger and bigger audience as we continue to build these services out and, more importantly, we intuitively connect them together. So I don't know what you call that combination of all those things, but we call it Cash App, and we think it's a new definition. We think it's rather unique, and we're going to continue to add surface area to it to make it something that people want to use every day. And there's a lot of use cases in Cash App that we haven't tapped into yet. Cash App is inherently social. It's inherently social. Just a peer-to-peer money, that peer-to-peer aspect of sending money from one person to another is a social activity. And we've done very, very little to seize that opportunity, but we certainly will.

That's how my kids know Cash App. They know it from the music. They know it from Roddy Ricch, not because dad covers the stock. So...

#1 song in the world for a while.

I could definitely appreciate the social side of it. So Amrita, let me bring you into the conversation. And we get this question a lot around monetization and ARPU. I think you're running around, what, $40 in gross profit per user today. I think some of the fintechs and even the banks on the transactional side are generating triple digits in ARPU or revenue per user. How do you think about that? How do you benchmark that?

Sure. We think we're really early in the opportunity for growing our ARPU over time. Ultimately, ARPU is going to be related to our customers finding increased value in our ecosystem of products. So as you mentioned, in Q4, gross profit per active customer was $41. It was -- it grew 70% year-over-year. And in Q1, we've continued to increase monetization of new customers and our existing base. I really see 3 opportunities for us to continue to grow our gross profit per customer over time. First, on cross-selling our existing products to our base of customers. Second is increasing the daily utility that our customers find from these products. And third is launching new products and potential new revenue streams into the ecosystem. Just to maybe unpack that a little bit more, within cross-sell, we see a significant opportunity here to drive continued adoption of the broader ecosystem of products. Today, our highest attached product is Cash Card, which, in March, we noted we had 10 million monthly actives on Cash Card, and that's still about 1 in 4 of our overall monthly active base, about 7 million we're using it on a weekly basis. While that attach has steadily grown over time, we see an opportunity here to scale Cash Card adoption and adoption of the broader ecosystem of products, including our investing products and other products. For the customers within Cash App, where have adopted 2 or more products, they've generated 3 to 4x the gross profit compared to customers who are only using peer-to-peer, as we noted a couple of quarters ago and, I believe, the third quarter. So those customers are generating annual gross profit of about $100, in some cases, much more than that. And we see an opportunity here with our marketing efforts, our notification efforts to target higher lifetime value customers and cross-sell into those customers over time. From a utility perspective, as we've increased network effects within Cash App and the utility of those products, that's driven increased engagement with each of these products over time. We've seen volumes per customer on peer-to-peer on Cash Card and investing increase over time. As we noted this past quarter, we had 40% growth on Cash Card spend per customer in Q1 on a year-over-year basis. And then finally, launching new products. Each of the recent launches that we've had in the Cash App has scaled meaningfully. And now Cash App, as of 2020, had 4 revenue streams with $100 million or more in gross profit. And each of those growing at over 100% year-over-year. That's up from just 1 revenue stream at scale in 2019, really showing the strong product market fit of the newer products in the ecosystem and the power of network effects within each of those products to become self-reinforcing. So we have a number of products that we're testing in our pipeline, including a more integrated tax preparation product as part of our acquisition of Credit Karma Tax as well as pay with cash and lending product. And still early, but we think that there's further opportunity from the launch of new products like these in the Cash App ecosystem.

Yes. And I know getting inflows in, money coming in is pretty important as a lifeline. You guys have, again, done amazing work in terms of helping individuals get access to stimulus. But as that correlates to engagement in gross profit growth inflows, that is, what are you doing today to sort of unlock more inflows into Cash App? And how does direct deposit fit? I know you mentioned that we did a survey recently, guys. And I was amazed by the interest level of users for direct deposit, instant deposit of their payroll checks or the wages. I was really surprised by, again, the high interest level there. So talk us through that.

Yes. I mean so we started on this path and catch up with direct deposit. And it was a big focus for us during COVID, especially around similar check and tax refunds and unemployment benefits. We surfaced it much higher in the interface, which proved to be -- to do really well in terms of people finding it and be able to get utility out of it right away. Right now our focus is more on 2 things. One is limits, and the second is other ways to deposit money. So in terms of limits, like, right now, people can only put in $7,500 a week. And we've had a lot of interest for much more than that, tens of thousands of dollars. So we're looking at all of our machine learning, all of our deep learning, all of our risk, compliance efforts to make sure that we can raise our limits across the board. So we can see a lot more activity there. And then second, right now, you can't do an ACH. You can't do a wire. You can't deposit money in a particular physical location to get into your Cash App account. So we're going to enable all those. And the more we can facilitate easier ways for people to get their funds in and also like really look critically at our risk and just the controls we have on the system to make sure that we can see more activity and we can support people in what they want to do more and meet them where they are, everything in their ecosystem gets better, whether that be Cash Card usage, Bitcoin investing, peer-to-peer. So inflows in deposit and the limits in deposit and just like making sure that we allow for every way possible for people to put that money in, I think, we'll reap a lot for our customers and for us.

And just to add to that, Tien-Tsin, there's a -- direct deposit is a piece, a small but growing piece of the multiple ways that people can inflow their funds into Cash App, in which, as Jack mentioned, we're looking to grow the number of ways that people can inflow funds into Cash App. But today, you can fund your account by receiving a peer-to-peer transfer or by adding cash from your bank account to complete a transaction through Cash Card or through a stock product, et cetera. Cash App as a direct deposit, as I said, is a small but growing piece of how customers bring their money into Cash App. When we think about how we continue to grow inflows into our ecosystem, we see 3 primary opportunities. First, growing the overall base of customers who use Cash App, the overall network. And as you've noted, with 36 million monthly actives in December, which grew 50% year-over-year, and a growing ability to bring, win back and engaging existing customers who transact more frequently, we see a meaningful opportunity here just through network growth. Second product adoption, as I spoke about earlier, customers have adopted multiple products, have higher engagement and typically inflow more funds into Cash App. And then third, spending power. When spending power of our customers increases, they pull more funds into Cash App to transact across the ecosystem. We've seen this with things like government fund disbursements historically with tax refunds and more recently with stimulus. And with the work that Jack mentioned, in terms of deposits and limits and with the strength of newer products like investing in Boost, we see an opportunity to further broaden the base of customers that Cash App serves, including with higher income customers.

Yes. I mean there's a lot of ways to win, it sounds like. But just maybe honing into the numbers from the first quarter. I know stimulus did prop up the growth. I think, what, 171% growth in Cash App gross profit in the first quarter, a pretty incredible rate. Is there a way if you thought further about unpacking that between stimulus, reopening, return on some of the investments that you're talking about?

Sure. It really is a combination because each of these tailwinds end up reinforcing each other. We had impressive growth in the first quarter, as you noted, through a couple of things. First, strong acquisition of customers, engagement across the ecosystem and then growth of our customer spending power. We believe Cash App's strong performance that you saw over the past few quarters provides a strong foundation upon which we can build throughout 2021 and beyond. But if you just break down the growth from Q1, in terms of growing the network, we're continuing to invest behind strong returns that we've seen for Cash App. Historically, we've had ROI of more than 6x on acquisition spend over a 3-year period, and recent 2020 cohorts have paced even well ahead of this. From an engagement perspective, in the first quarter, monthly actives transacted in average of 18x per month. That's up 40% year-over-year with March reaching an all-time high for us in terms of engagement. And then spending power, as you noted, in March, we saw a significant increase in spending power for our customers with inflows up 55% month-over-month. Before decreasing from this elevated level in April, we came down about 16% month-over-month in April from that high point in March. In the near term, our customer spending power has been impacted by government disbursements to the positive. But looking at more recent trends, as we said in earnings, Cash App achieved 130% growth in April on both a year-over-year basis and a 2-year CAGR basis. For the remainder of the second quarter, we keep 2 things in mind as you think about our growth trajectory. With the moderation of inflows since March, we'd expect gross profit growth to also moderate in the second quarter on a 2-year CAGR basis. And for year-over-year growth, comps will get tougher, of course, in May and June, given Cash App's very strong growth last year. And we're remaining focused on investing to grow the network, to drive engagement, to grow off this larger base that we've been able to build over the past year.

That moderation makes sense, but either way, it's brought in a lot of new users that have tried the product. So I'm sure you wouldn't change it in any way. So let's shift gears quickly. I don't want to -- we're losing time here. On the Seller side, we've had a lot of different players speak at the conference. Sellers is recovering nicely for Square. It's some of the metrics that we track is accelerating faster than some of the Visa, MasterCard benchmarks that are out there despite a lot of sluggish SMB, SME data. So why is that? Why are you outperforming the market on the SMB side?

Sure. I'll call out a couple of drivers for improving GPV trends. First, Seller has -- did achieve improving trends in recent months with GPV growing at a 2-year CAGR of 21% in April, up from 16% in Q1. Again, some of the key trends to call out here are existing seller retention, new seller acquisition and then growth in key strategic areas like mix shift to larger sellers online and international to unpack some of that from an existing seller retention perspective. We've been really encouraged with the trends that we've seen on retention, which have effectively normalized to pre-pandemic levels. In March and April, with the loosening of regional restrictions, GPV from our existing cohorts of customers was nearly back to 2019 levels. And recent cohorts have shown better improvement, in part, because of the larger mix of larger sellers and more omnichannel sellers. And on a gross profit basis, retention was positive year-over-year in Q1 for the first time since the pandemic began, benefiting from both improving GPV trends and the year-over-year increase in transaction margins. From a new Seller acquisition standpoint, we onboarded our largest cohort of Sellers to date in 2020 on a gross profit basis, with growth year-over-year in Q1, again on a cohort level as well. These newly acquired 2020 cohort sellers have contributed the greatest amount of gross profit in Q1 among all annual cohorts, which we expect will continue to ramp. Those new sellers have indexed to a greater mix again of larger and omnichannel sellers. And then finally, thematically, we're driving progress and growth in key strategic focus areas that are ultimately driving mix shift for us, one, with larger sellers, which we've seen particular strength from mid-market sellers where GPV from mid-market sellers is up 43% year-over-year in Q1, growing twice as fast as overall Seller GPV and now accounting for a 30% of Seller GPV. So growing in terms of the mix of the overall seller base. Secondly, online, channels have continued to sustain over 50% GPV growth over the past 2 years, including in Q1. And we've seen growth -- even as in-person activity has resumed, we've continued to see growth through online. And then finally, international. Strong growth from markets outside the U.S. where gross profit was up nearly 80% in Q1 and where we continue to drive strong acquisition and growth from larger sellers in those global markets.

Yes. No, that's great. And I appreciate that. So maybe you mentioned omni. You mentioned moving up to service larger merchants. I think the one learning I've had, right, from the pandemic is that we've seen a rapid shift to online, obviously, but also a shift towards bigger merchants and to marketplaces to some degree. We'll see how that changes over time. But Jack, I think when we first met, I remember talking to you about what I have observed, which is that it's harder for a lot of the traditional players to move away from their core or where they're rooted. So when I think about Square, it was rooted in physical world SMB. And here you are moving upmarket and also moving more towards online through omni. So my question is, is that. Like what's driving the success and your ability to sort of break that trend and service bigger merchants and going into this online world is -- I'm imagining that omnichannel is really changing the game for you. I know you pivoted hard there, but can you elaborate on that?

Yes. I think the -- I mean, number one, I just think it's sort of quality of our tools and the breadth of the ecosystem. Like you would assume like as you look at how broad our suite of services is that it's more fit for smaller sellers, but larger sellers are the ones that really appreciate how all these things connect together. I mean, typically, any seller, whether it be small or large, has to go to 17 different vendors just to run their business. Whereas with us, like you download the app and you have everything you need, and that doesn't matter if you're small or big. There was a conscious decision we made as we thought about our platform and our API. And that was that our API would also be used by our customer-facing products. So our internal team was going to use the same API that we give to external developers. And that really set a quality bar pretty high, which means that any external developer, whether it be a large company or a small developer shop health in some small businesses have access to the exact same tools that we do. That's how we build our register. It's how we build all of our interfaces. And it allows them a lot of flexibility in terms of like building the business and customizing it for whatever their work is and wherever they want to go. So I think it's the quality of the tools, the high bar we hold in terms of remarkability of the features and the products and also like how cohesive everything is. I don't need to hook up multiple other vendors. I can just go to 1 place. And there's 4 attributes of development that we look at to build and making sure that we're fast, we're cohesive, we're elegant and that we're self-served so that people can just take it and do what they need to. So as we build up those attributes, it doesn't matter if it's a small seller, Cash App customer, larger seller, we see growth by just strengthening each 1 of those 4.

Yes. No, it seems to be working. And then another change from what I remember from, let's call it, the old Square is that you're taking a more traditional approach to selling, bringing on a more traditional sales force, paid advertising. I'm definitely seeing it a little bit more here. So why the change? And is it working?

Yes. And as we've expanded the Seller ecosystem, we're also evolving our approach to market to drive incremental business into the Seller platform. Historically, we focused, as you've noted, on organic acquisition and inbound leads from word of mouth and from referrals and performance marketing. We're now increasing the aperture and driving spend across a range of new areas to drive incremental growth, reaching sellers who wouldn't have self-onboarded otherwise into the seller ecosystem. In 2021, we expect to grow Seller sales and marketing spend by 45% year-over-year. And looking at the mix of spend that we're investing into, there's 3 primary areas. First, continued growth of performance marketing. This lever really helps generate direct leads and conversion for us. But what we found is that performance marketing, in combination with the second aspect, is really powerful. That's brand and awareness marketing. Telling our story to more businesses about Square and driving awareness of the broad ecosystem of 30-plus products we now have helps increase awareness of the broader offerings beyond just payments and hardware. And for larger sellers, we've launched campaigns focused on developer platform or vertical points of sale, which speak to their more complex needs that we can help serve. And then the third area is our sales team. We intend to double the size of the sales team in 2021. We're shifting to a greater mix of outbound sales beyond just inbound historically. And for existing sellers, we're using things like machine learning models to help cross-sell, which helped drive a 15% uplift in product adoption among existing mid-market sellers in 2020. Even with these new or expanded efforts, we remain data-driven in our approach and regularly evaluate the efficiency of our spend. We look at returns on seller cohorts on a weekly and monthly basis and by mix, by channel, seller size and vertical. And we can shift our spend dynamically, if needed, based on the returns that we're seeing. We've continued the pace of that 5-quarter payback on our 2020 sales and marketing spend. Overall, these channels are -- and our investments are intended to drive growth with larger sellers, where we believe we're less than 1% penetrated in that broader upmarket seller opportunity. And we see a significant runway ahead to scale with that market.

Yes. And I know you've committed a lot of a formidable amount of money to invest and to do what you're talking about. I think you just did a notes offering as well. Maybe I'll wrap it up on Seller just asking on international, right? 8% of gross profit today. I think it was up, what, 80% is what I had written down. I think I always say that it's probably a sleeping giant for Squares to get bigger internationally. Where are you? I know that's been a priority for both of you.

Yes. I mean it is a big part of our strategy, and we're really excited to be more and more of a global company. So on the Seller side, we're focused on 2 things, opening new markets. We just opened Ireland. And then also making sure that we have the products launched in the U.S. at parity in every market that we're in, so bringing all of our products to every market. On the Cash App side, there's a ton of potential. We're only in the U.S. and the U.K. We continue to be a top 10 finance app in the U.K. and #1 in the U.S. So we're looking at creative ways of expanding versus a good example of this for Spain. And there are many more opportunities there. But especially as we look forward towards Bitcoin and what that enables, especially with regards to Cash App, I think we can move much faster than we traditionally have with the Seller business.

All right. That's good. Something that we'll look out for. We're almost out of time. I can't let you guys get out here without asking something around title. I know you mentioned third ecosystem. I know there's a lot of symmetry or you can go withdraw a parallel with the music as we talked about earlier with Cash App. But I have to ask, is there an NFT angle in there with title as well, Jack?

So I think NFTs are -- there's a lot of -- there's some interesting stuff out there. There's a lot of noise and trash out there at the same time. I think the spirit of it is correct. There's questioning how an artist turns revenue and what capabilities they have in doing so. So that is the spirit that we're also interested in, in cash. And I know, to a number of you, probably all of you, that title looked like a weird one. And I fully admit, it's a weird one. But when we really get into it, we saw an opportunity because we saw artists being underserved in the exact same way that sellers were underserved. We saw that they require more or less the same tools in order to build their career instead of building their business, although a lot of artists today think about building themselves as a business in order to fund their art and fund their work. So you see artists today experimenting with things like NFTs. You see them experimenting with e-commerce, with sponsorships with Cash App in order to spread their message and grow their fan base. We -- the streaming market is saturated, but artist tools is not, and that's where the real opportunity is, is to give artists better tools with which to grow their fan bases and better their craft. And we just saw a ton of intersections with the Seller business, obviously, with Cash App, given how culturally relevant it is all the time. And we're most excited about how we can expand not just from serving sellers to individuals but now this whole new class of people and creators and artists and musicians. So you should just expect us over this year to be really focused on the tool side and then doing some really innovative things as we can intersect both the Seller business and also the Cash App. And there's a ton of natural intersections that I'm sure all of you can imagine. But as you take it down a few more years, it gets even more exciting. So we're really excited to do the work. We're really excited to prove to everyone that this was a smart move and one that enriches certainly our customers and listeners and artists but also our company as well.

Yes. No, I'm really sincerely excited to see what you do there for the artists and the greater community. So thanks for that. We'll wrap it up. I'll -- Jack, I'll let you go, and I'm ready to go with the last question. Just there's a lot going on. You just mentioned title. I know you're going to -- you said you're going to spend quite a bit of effort there and on top of everything else that's going on between the 2 other ecosystems, where are you going to be spending your time? What excites you the most, Jack, sort of in the next year and hopefully have you come back and tell us more. But where are your priorities now?

Yes. I mean, number one is just like continuing to find ways to combine our ecosystems, to connect our ecosystems. I'll be spending a lot of my time focused on those connections and making sure that we're making good on the thesis behind title and that use case and looking for opportunities to add to our business units or add to our overall ecosystem. But both Seller and Cash App have really strong strategies. The teams are moving very fast. They're being very inventive. And I'm focused on just making sure that we continue to increase the surface area in a smart way that positively reinforces what we already have.

All right. No, that's great. And we're just about out of time, sadly. But again, so thankful to have both of you, and thanks again for sparing some time out of your busy schedules. And thanks for everything you guys do, of course, for all your stakeholders and everything you're doing against the mission. And I sincerely hope that we can do this in person next year. So thanks again for the time.

Thank you. Thank you.

Thank you for having us.