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

Okay. Great. Welcome, everyone, to the afternoon keynote here on the second day of our 25th Annual Credit Suisse Technology conference. We're very happy to have with us today in the afternoon here, we have the full team from Square. First on stage with us, we have the CFO, Amrita Ahuja. Thank you for being here, Amrita.

Thanks for having me, Tim.

And also, I want to thank and acknowledge the IR team from Square. We have Nikhil, Tory and Thomas with us here on site in Arizona. Thank you, everyone, for making the trip. Okay, great. I'm going to start out just by reading a disclaimer, and then we'll get into some of the topics. During this conversation, Amrita may make forward-looking statements, including about Square's preliminary expectations for its financial performance in November. These statements are subject to certain risks and uncertainties. She may also speak 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 measures. Okay. So with that, Amrita, why don't we start just by clearing the air and giving a little context around the name change announcement from this afternoon.

Yes, a big day for us, Tim. Today, just a short while ago, we announced that we have a new corporate name. We're changing the name of the company from Square to Block. 12 years ago today, believe it or not, was when we first tweeted out from Square about the founding of our company. And 12 years ago, the founding of our company was about serving small businesses. Since then, we've grown so many different aspects of our company. Cash App is almost half of our company now and has its own brand, serves a different set of customers to make their money work for them, to make their money instantly available, universally accessible and relatable through sending, spending and investing. We also have TIDAL, which addresses the creator economy. And we have a new business unit called TBD, along with other crypto initiatives, that address the future of decentralized finance. So our company has grown tremendously in the past 12 years. And our new name reflects the multidimensionality but with a familiar shape to the company. Block means to us a couple of things, a couple of relevant meanings. There's building blocks as each of these businesses link together and connect and integrate into the future. There is blockchain. There's segments of code. There's block parties and neighborhood blocks and communities, local communities that we serve. There's obstacles to overcome. There are a number of different ways in which this name is meaningful to us. But first and foremost, it enables us to give the Square brand to the Seller business, the brand for which -- the business for which we built the brand. So Seller becomes Square, Square becomes block. Nothing else really changes. The way in which we run our business, how we operate, our organizational design, our ticker, none of that is changing today. Most importantly, what's not changing is our purpose, which is about expanding financial access and inclusion to our economy.

Excellent. Thank you for all that context around the name change, really exciting and congratulations.

Okay. Why don't we move into the first content topic of the day, which is really around, coming out of the last earnings call, you provided as you have been -- you provided updates around your monthly metrics for the month of October. To the extent that you're able to provide any additional updates on more recent trends, the audience would truly appreciate.

Yes. No, I'd love to provide some quarter-to-date metrics for you on our business performance. The short story is that both our Seller business, our Square Seller business and Cash App have shown stability through November with strong continued growth. Let's unpack that a little bit. With Cash App, what we've seen through November really since August is a year-over-year growth rate in excess of 35%. That's what we shared with you about October, and we expect that to be true through November as well. When you look on a 2-year CAGR basis, what we had shared about October was an expectation of greater than 90%. We expect some moderation on that 2-year CAGR in November. Remember, 2 years ago, we launched our tabs redesign, the redesign of the app, and we launched our investing product, both of which drove strong engagement in our business 2 years ago. But strong continued growth on a year-over-year basis, some moderation in the 2-year CAGR for Cash App through November. For our Seller business, what we shared with you in October were strong growth rates on a 2-year CAGR on a year-over-year basis that have been largely consistent since the second quarter, and those rates remain relatively consistent through November. That's even with variations in international regional restrictions that we've seen. We've continued to see strong and steady growth despite that. Now we're really encouraged by these trends and the momentum that we have heading into the back of the year. Recall that in the third quarter, our gross profit as a business is 2x where we were in the first quarter of 2020 prior to the pandemic. We have grown to a significant scale ahead of where we were with prior, but still at strong growth rates as we look to the future. Now of course, as we look at December, what we've seen so far through November doesn't have any material impact from variance related to COVID, but we'll be watchful as we look into December related to any impacts there.

Okay. Excellent. Amrita, thank you so much. I'm sure the audience appreciates those updates. So what we'll do with the remainder of our time is we'll walk through a series of questions, partially on the Seller ecosystem and partially on Cash App. So why don't we start with the Seller ecosystem. You really called out 3 really clear areas of focus heading into 2022, summed up as omni, global and upmarket. Maybe we can start by just recapping those 3 important areas.

Yes, absolutely. Our top 3 priorities for our Seller business in 2022, as you said, is deepening our features and functionality around omnichannel, growing globally and our focus on growing with larger sellers, moving upmarket which, by the way, is a new priority to our top 3 priorities for the Seller business and reflects the importance of larger sellers to Square moving forward. And by the way, those larger sellers are not only larger sellers who are coming -- whose business were winning, who are new to the Square platform, but also smaller businesses who we're helping to grow as part of our Square platform. So what does that look like in terms of the investments that we're making against those strategic priorities? Take it from a product development standpoint, and then we'll take it from a sales and marketing standpoint. From a product development standpoint, as we look at omnichannel, what we're doing is we're increasing the customization, features, functionality, design and branding that our sellers are enabled with through our product set, both through our online capabilities, e-commerce capabilities as well as in person. Our sellers will be able to do more with their brands and surface them with greater discoverability to their buyers through our omnichannel features and functionality that we're working on in 2022. From a global perspective, we're focused on increasing the product parity, closing the product gap for the 4 markets that we're in outside of the U.S. as well as launching in new markets. We expect by the end of this year to have over 80% of our products, which have reached product market fit in the United States, over 80% of those will be deployed in our 4 established market across Japan, Australia, U.K. and Canada. And of course, launching in new markets, with Ireland and France this year, Spain in beta and more to come for the future. And then from an upmarket perspective, and from a product development upmarket perspective, what we're focusing on is building out our developer platform, the API structure around each of our pieces of sort of Lego building blocks around each of the features within our products, whether it's a customer directory, inventory SKU level or a team management that a customer needs to plug into. Larger and more complex customers use our developer platform to create that more bespoke platform on which they can operate in a more integrated way with outside partners as well, 700 of whom we integrate through our developer platform as well as our vertical points of sale. Another key focus for us as we address upmarket, going deeper with restaurants, retail and services so that we can serve increasingly complex needs. From a sales and marketing standpoint, what these -- how these 3 priorities get expressed is growing our sales and marketing significantly next year as we ramp our established channels that we've been using as we go to market, continuing to push on a focus around ROI, which is lifetime value divided by customer acquisition cost. And as we do bring on higher lifetime value customers, larger customers, we can lean in here, and we have decided to lean in, as we shared on our earnings call, to stretch our payback up to 6 quarters as needed next year. So our focus next year will be an incremental mix shift towards brand and awareness campaigns that help tell that story of who we are, the 30-plus products that we have, no longer just the little white reader, no longer just payments but the Square brand for -- that serve sellers can now serve a whole gamut of large and small sellers alike across hardware, service -- financial services, payments and software. And that brand investment is a key part of telling the story, coupled with, obviously, our sales team and account management team as well as an incremental mix shift towards international where we are seeing that as we close that product parity gap, we're seeing more -- greater efficiency in our go-to-market spend. And in the 4 established international markets that we're in, are nearing the U.S. levels of payback and ROI. And so this is an area where we're seeing strong growth, reception, product market fit, a highly differentiated offering in those international markets across our omnichannel integrated suite of services. And we want to lean in there from a go-to-market perspective. We view it to be very strategic for the future.

Excellent. Thank you, Amrita. There's 2 minor follow ups. You covered a lot of it in terms of moving upmarket. I think you covered it quite well. One aspect that maybe we didn't touch on too much was the building out of the sales force, which you had previously talked about doubling this year. One question we often get about that move upmarket and with the increased size of the sales force, is the sales force, are they being deployed vertically? Is it geographically? Is it some combination of the 2? How do they go to market?

Yes, absolutely. There is a focus on increasingly moving from a generalist structure, which is what we historically had, to an increasing focus on getting deep within particular verticals. And it's not just about growing the size of the sales team, but it's empowering our sales team with the tools, the automation to be able to know the right seller to call at the right time with the right message. And that persists through the funnel, not just at the top of the funnel when we're bringing a new seller on, but later on with our account management teams as they continue that relationship with sellers and onboard them with more products. The average larger seller takes 2.5 products on average, a mid-market seller, which is more than $0.5 million in annualized GPV, that's now our largest segment, Tim. This is a larger segment for us than micros, which is obviously where Square has its roots. But as we've grown -- help those businesses grow and as we've made the compelling pitch to these mid-market sellers, we've been able to grow this to be our largest segment. Our mid-market GPV in the third quarter is 2x where we were 2 years ago on that segment of sellers. So we're seeing a sales pitch that is resonating with this class of larger sellers. It's about -- that sales pitch is about the unified data that the sellers can see across the platforms, across in-person, mobile and online in which they're serving their buyers. The ability to flex between those various platforms, you can order online and pick up in store, you can schedule a visit. The flexibility, adaptability and the 360-degree view of the data and the integration of these products is what we believe is the true differentiation for our Square Seller products for mid-market sellers, and that's what the sales team is out selling and, again, help drive efficiency with a greater vertical focus and with greater automation to be able to empower that sales team to make the right call at the right moment.

All right. That's great context. Thank you so much, Amrita. The second and last follow up before we move over to the Cash App is around international expansion. I think you covered that quite well, too. But often when we're talking about this with investors, we talked about how a few years ago, Interac wasn't enabled in Canada. A few years ago, JCB wasn't enabled in Canada, and you've recently talked about getting the international offerings much closer to product parity. So it seems like now is a great time to throttle up the marketing investment behind international. All of that's kind of come into place now. Maybe you could just talk a little bit about that history in terms of why it might not have made sense then, and it surely does now.

Yes. This is a key strategic area for us, our top 2 priority in the Square Seller business. The strategy with our international approach is, first, to close the gap on product parity, going to market in an international market where we couldn't serve local payment types like E-Money in Japan or Interac in Canada was not as efficient for us. So now that we're at about an 80% product parity with a scaled platform that's an omnichannel platform where these products are integrated and localized for their particular addressable market, we have the opportunity to secondly invest in the go-to-market. And that's across both sales and marketing. That's building our brand awareness as well as performance in product marketing, the 2 go hand-in-hand together. And as I said, we're seeing increasing efficiency in those international investments that we're making from a go-to-market standpoint. And then it's winning sellers. And what we're seeing is that we are -- as we are in the U.S., we're indexing the larger sellers in these international markets. And as we know, larger sellers tend to take on more products, which increases their ARPU and their lifetime value over time and ROI and therefore, enables us to invest more. When you think about the TAM that we're addressing, Tim, $85 billion for our Square Seller business in the United States, about $15 billion, $16 billion in the 4 established international markets that we're in, and not to mention the new markets that we're launching like Ireland, France, Spain to come and more in the future. About 1% of that is what we've addressed so far from an international perspective. About 1%, to your last question from a mid-market or larger Seller perspective, overall, we're about 2% to 3% penetrated against our $100 billion TAM. We see so much opportunity, so much of this international market that we're serving sits on legacy platforms with acquirers, banks or on paper and -- pencil and paper money. It's a fragmented solution in these international markets, and we think we can uniquely serve it, which is why we want to move quickly and invest to address these sellers.

Amrita, yes, completely aligned with how we often talk about the concept of software and payments and the integration of those 2 systems into 1 is much more nascent outside of the U.S.

That's right.

Which is fully aligned with your approach internationally. Okay. I think we should move into Cash App with the time we have remaining.

All right.

So let's start with an exciting topic. Our team thinks this is an exciting topic for next year, which is Cash App Pay and the overall commerce opportunity. So maybe we could start with a little bit about Cash App Pay, what it is and some of the things you guys are doing to increase the awareness and adoption.

Yes. So we talked about the Square seller priorities, top 3 priorities. Commerce is a top 3 priority for our Cash App business. And Cash App Pay is a key step towards that. Some of the seeds of commerce within Cash App that you've already seen so far and that have scaled and are continuing to scale are around Cash Card, which is our prepaid debit card as well as the Boost product, which is an instant rewards product that's attached to the Cash Card. Cash Card is, last we talked about 10 million monthly, it's about 1/4 attached to our overall 40 million monthly actives. Both those numbers have grown, obviously, since we last talked about them. But that attach at scale is a tremendous driver for us of our business as we see 70% of customers who are Cash Card customers bringing 70% more inflows to the ecosystem than noncash card customers. But the other interesting thing that we've seen through Card and Boost is that we have the opportunity to surface discoverability around merchants to our 40 million monthly actives. We have the ability to direct traffic into merchants via Cash Card and Cash Boost. And now with Cash App Pay, which enables our Cash App customers to seamlessly pay at Square sellers today, Square sellers, both in-person and online using a QR code. If you haven't done it yet, hopefully in your local community, there's a place where you can pay with Cash App. It's a seamless experience. It speeds up the flow, particularly online, but also in person, and it's a way to integrate sellers directly in loyalty programs and that sort of thing directly into the Cash App. And you don't have to have signed up for a cash card, all you have to have is a Cash App account. It's early days today. We only launched this a few months ago. We're really pleased with the traction we have seen so far and the growth, the steady growth that we've seen since we launched. And there is a bright and large future ahead for Cash App Pay, we believe, across platforms, not just obviously on the Square platform, but we're pleased that we started there. And then when you think about commerce in the future for Cash App, Afterpay is a huge part of the story for us. What Afterpay brings is a very complementary set of 16 million consumers globally, obviously, a portion of which in the United States also indexes to digital natives, Gen Z millennials with an aspirational brand, but with a more complementary sort of coastal higher-income set of consumers than what we see index do for Cash App across our 40 million monthly actives, 70 million annual actives. But what Afterpay has been able to do with their 16 million consumers and 100,000 largely enterprise merchants is drive 1 million leads a day from the Afterpay app into merchants. For some of those merchants, that's more than Instagram is providing for them. That's a real marketing vehicle. This goes beyond just being a payment type or a payment utility. Of course, that utility underpins the engagement and the daily utility of the app. But the potential for merchants here is around the marketing opportunity, is around the funnel of discoverability inside of Cash App for shopping opportunities and the unique incentives that we can provide as we begin to see more and more of both sides of the transaction. And what we see with Afterpay, of course, they do see both sides of the transaction. And what they see is opportunities for consumers to grow their frequency with Afterpay. The average of the 60 million consumers is transacting 15 times a year through Afterpay. Their Australian cohorts, which are more mature, are transacting 30 times a year through Afterpay and merchants who are seeing that traction through Afterpay, see 20% to 25% uplift in their average order volume, in their conversion and in the frequency with which those buyers are visiting those merchants. So again, at the scale of Cash App, you can imagine the future potential here.

Excellent. And a lot of what you just mentioned there around Cash App Pay and also Afterpay really relates to this next topic, which it relates to the potential for an enterprise e-commerce customer to work more closely with Square. We talked about this a little bit on the last earnings call in terms of the potential for a bundled sale. You can approach that enterprise merchant with Afterpay, buy now, pay later the Cash App Pay button and, of course, the ability to process unbranded payments. Maybe just talk about why that is such a unique offering to an enterprise merchant. And also, I would just put the caveat that, of course, the expectation there is that it's more of a longer-dated item, just given the time it takes to sell into an enterprise customer.

Yes. The great thing is that Afterpay has an enterprise sales team, something that we are still in the process of building today. Our sales team in the Seller business is still largely -- and the sweet spot is still sort of -- large businesses for us are still in the $2 million range, right, $2 million to $20 million. Afterpay has 100,000 relationships with largely enterprise merchants. They have a relationship that we can tap into, where we can jointly knock on the door together to not only offer the opportunity to access our 40 million monthly actives on Cash App, but also the -- and the Boost product that we have in that, Cash Card and the in-app discoverability around shopping that we'll be introducing in the future as we integrate Afterpay into Cash App. We'll be able to not only offer that compelling broad platform to enterprise merchants to increase the sales opportunity for buy now, pay later for Afterpay into those merchants, becomes even more attractive when they see that there's more consumers that come with Afterpay. But on the flip side of it, on the seller side, we'll have an opportunity to grow in to being able to sell to enterprise sellers. We've already had some traction. We featured SoFi Stadium on our most recent shareholder letter enterprise sellers like this are taking features, functionality, our developer platform, our vertical points of sale, our online store and e-commerce capabilities and plugging into them in bespoke ways into our Seller ecosystem. And now again, with that enterprise sales team that Afterpay brings us and with those relationships, we have the opportunity to cross-sell and to build in together our seller capabilities into -- with those Afterpay relationships.

Excellent. With the time we have left, I want to see if we can focus a little bit on Cash App MAUs. It's clearly a major focus area for investors. But as we look into 2022, it seems like there are a number of drivers that could quite simply reduce churn and also increase gross adds at the same time, which is a pretty powerful combination. Maybe you could talk about those factors?

Sure. So Cash App today, again, 40 million monthly actives, up 2x versus where we were 2 years ago. Gross profit up 4x versus where we were 2 years ago. In the third quarter, Cash App gross profit was 4x higher than we were at 2 years ago in the third quarter of 2019. So even as we've rapidly grown our actives population within Cash App, we've grown a more engaged, higher-performance population of actives with a much higher ARPU on the Cash App platform. What that means is it enables us to invest into bringing more people into Cash App and to bringing more people who are more likely to adopt more products into Cash App, who have potentially higher spending power into Cash App. Those are key investment areas for us as we think about the future. So I think there's 2 key priorities for us to outline as we think about growing our base of actives within Cash App. One is around marketing and the other is around reinforcing the health of the business, the foundation of Cash App. Around marketing, what we will continue to be doing is leaning in to ramping our existing channels that we've been investing in over the past few years, paid marketing, brand awareness, social. On social, we have millions of followers across Twitter, Instagram, Snap. We'll continue to do influencer partnerships that enable us to reach different types of demographics than those that we've reached in the past as well as continuing to go deeper with our current demographics, millennials, Gen Z, as we continue to broaden that. From a health perspective, what we're focused on within Cash App, as we grow our base of customers is promoting positive behavior on the platform. We want to be able to identify the positive behavior and encourage that, root out any negative behavior, such that we can grow the opportunities for those positive actors with greater limits. They can invest more. They can bring more money in. We can educate our base of customers about the bad actors that are potentially out there. We can invest in customer service and compliance to be able to handle the greater scale that we're now at as a network, and we can invest in automation and machine learning to be able to, again, incentivize the positive behaviors in our Cash App ecosystem that end up reinforcing the viral network effects that we see and have played out so successfully over time within Cash App. Those are the key 2 strategies for us as we think about future growth of the network. And again, leaning into higher product adoption in the first month of the new customers that we're seeing. Not every MAU behaves the same and some of our more recent new cohorts of customers are adopting products at faster rates, which ultimately drives higher lifetime value and higher ARPU, which enables us to invest more.

Okay, great. I'm glad we still have another minute or 2 to touch on this last topic, which actually is quite related. So we're coming up on tax season, and you've now had Credit Karma for almost a year or so. And we're anticipating that it will be ready to roll this year coming on to Q1. And maybe you could just talk a little bit about investors should expect to see with Credit Karma in Q1?

Yes. And if I may broaden that just to say that we've been really excited with the product velocity that we see with Cash App overall. When you think about the last 2 months, we launched Cash App Pay for Square sellers with the opportunity to scale that across other enterprise platforms. And we launched Cash App for family, serving teens now in the United States, 20 million teens between the age of 13 and 17, reinforcing the network effects between families and local communities as we can onboard teens who have largely been left out of the financial infrastructure today, using paper money, not being able to connect with family or friends who aren't in their community. Now they can participate via Cash App with peer-to-peer or with the debit card and the Boost functionality. Just in the past 2 months, those 2 launches, as we look ahead, we have a more integrated tax product now called Cash App Taxes, it's a free filing tax preparation product for us. It has first order effects, which enables our customers to bring more of their tax refunds seamlessly into Cash App. That's something we've seen historically. But now with the filing preparation service directly afforded to our customers via Cash App, we hope to drive that even further. And second order impacts, which is a greater -- a deeper integration with our customers that should serve retention, may enable further acquisition as customers come to us in part for the tax filing product, and it helps us go deeper with those customers as we know more about them and as they onboard more of their financial livelihood to Cash App. But even beyond that, as you look to Cash App Borrow, as you look to Afterpay, as you look to all of the things that we'll be launching in the future, we couldn't be more excited about the future ahead for Cash App.

Thank you, Amrita. I think that sums it up well with moving upmarket into higher income consumers also moving into teens and then with Cash App Tax ready to roll for Q1. There's a lot to be excited about. Again, I want to thank you and the full team from Square for making the trip out here to join us in Arizona. Thanks for joining me on stage as well.

Thank you, Tim. I appreciate it.