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

Great. Welcome, everybody. Welcome to this Block fireside presentation at the Goldman Sachs Communacopia and Technology Conference. I have the privilege of introducing Amrita Ahuja, who's been CFO of Block since 2017. My name is Michael Ng, I cover Block and fintech here at Goldman Sachs. We have about 40 minutes for today's presentation. Before I start, I just wanted to read a disclaimer. During this conversation, Amrita may make forward-looking statements, which may include Block's preliminary expectations for its future financial performance which are subject to certain risks, assumptions and uncertainties and have not been audited or reviewed. Amrita may also speak as to certain non-GAAP metrics, which are not intended to be a substitute for Block's GAAP results. Please review Block's filings with the SEC as well as its Investor Day materials and investor presentation on its IR website for a discussion of the company's risk factors and for reconciliation of non-GAAP metrics to their most directly comparable GAAP financial metrics. So first, Amrita, thank you so much for making yourself available and for participating at our conference.

Of course, thank you for having me.

So Block has found a tremendous amount of success in Square and now Cash App. And I wanted to begin by asking you what you're seeing in terms of the macroeconomic environment, what headwinds or tailwinds you may be seeing across these 2 main ecosystems and how you're positioned as we head into the second half of this year?

Sure. So let me start by talking about the near term and what we're seeing in very real time, and then we'll come back and talk thematically about the long term. So what are we seeing in the near term? In August, we expect to see growth rates that are relatively in line with what we shared in our Q2 earnings call in August and earlier in August. And that's a cross block inclusive of Square and Cash App. Let's break it down into the component pieces. For Square, excluding Afterpay, on a 3-year CAGR basis, we expect to see gross profit that's in line in August with what we saw in July and Q2. On a GPV basis, we saw 22% 3-year CAGR, which is also in line with what we've seen year-to-date from a Square GPV perspective. For Cash App, what we shared in early August was that we expect the year-over-year growth rates to improve in the back half of the year relative to what we saw in the first half of the year. And for the 3-year CAGR to slightly moderate moving forward through the remainder of the year. And what we saw in August was also consistent with what we shared there. So we've seen resilience in our ecosystems. And we believe, as we look to the longer term, that it's really the diversity of each of these pieces of our business, each of these ecosystems that we believe can enable further resilience. Within the Square business, we offer, obviously, multiple products across payments, financial services, software, hardware and commerce. Across omnichannel means across verticals, not just restaurants, not just retail, also services, and in a deeper way increasingly. And across geographies, increasingly across seller sizes as we move upmarket. From a Cash App perspective, we've also grown our product portfolio across financial services and now increasingly across commerce with multiple monetization means. If you look at a particular product within Cash App with Cash App Card, we also get to see spend types across all sorts of categories. What we've seen with Cash App Card, as we've said, again, in early August was in Q2 a diversity of spend across discretionary and nondiscretionary spend areas, where 33% of our customers spend on Cash App Card came from utilities, gas and travel, 30% came from food and restaurants and 22% came from retail discount, big-box means. And so we see a diversity there, and we are closely monitoring the health of our customers across both ecosystems. Within Cash App, we saw spend per active on Cash App Card in July and August to be slightly ahead of what we saw in Q2. But again, these are metrics that we're monitoring closely. And across the diversity of our products, we get exposure to our consumers' utility in a broad way that we believe, again, provides resilience to our ecosystem.

Great. That's a fantastic overview, and I certainly appreciate the update on the near-term trends. Just shifting gears a little bit. Block as mentioned, reducing OpEx relative to your original expectations early in 2022. And that's certainly a trend that we've seen across many companies in tech. Can you share a little bit more about where you're pulling back and how you arrived at the amount that you're pulling back and why those areas?

Sure. So year-to-date, we've pulled back about $450 million of expected operating expenses, non-GAAP operating expenses for 2022. This is about 8% of our initial OpEx guide and about 22% of the initial planned step-up for 2022 relative to 2021. So these are meaningful numbers. These -- the number, as we arrived at it was really in a bottoms-up way based on, one, wanting to show the ability to pull levers in our business with discipline and with increased rigor and scrutiny. And also to pull back in certain areas where we have less visibility of returns, which is something that we've always done in our business. And we believe that we, on a continuing basis, have the ability to do. So the 3 areas of a pullback or a slimming down of operating expenses for in go-to-market where we brought down some of the experimental spend areas and some of the brand and awareness spend areas, which tend to have longer return profiles. Secondly, risk loss where we have made incremental improvements to our risk loss models, which use real-time data signals to help us underwrite across a variety of products, including Afterpay, Cash App and on Square as well. And so we've seen trend lines there that support the reduction in the expectations there. And then the third area is a more deliberate pace around hiring. We're still investing in our business. We're still building out our product portfolio, but we're doing that in a deliberate way across our employee base. So those are the 3 primary areas, and we'll continue to bring rigor in the scrutiny to these areas moving forward.

That's great to hear. Turning now to Cash App. Could you talk a little bit about the inflows framework that you outlined at the Investor Day in May? And also talk about how you see some of those recent trends playing out?

Sure. So the inflows framework comes down to really 3 simple variables that we've unpacked to component drivers. So let me walk you through that. Gross profit for Cash App is driven by 3 variables. Active, which we measure on a monthly basis. Inflows per active. This is the amount of money that our customers bring in to Cash App and then monetization rate. Let me break down each of these variables. So Active, on a monthly basis -- and by the way, we measure Active as our customers who are moving money or completing a transaction through Cash App, not just someone who's opened the app. In June, we had 47 million monthly transacting actives within Cash App. That's 3 million improvement since the start of the year. And this is an area where when you double-click on the component pieces, we see 3 real drivers where we measure our team against performance. One is new joiners in the Cash App. So attracting new people who haven't experienced Cash App before, new demographics and a broadening base of customers coming into Cash App. Second is retention. Making sure that we see that these customers continue to use Cash App over time. And then third is win back customers who maybe were lapsed or aren't using it as frequently and giving them reasons to find daily and weekly utility out of Cash App. The second component piece is inflows per active. And this is one where, as we disclosed, we had our customers in Q2, bringing over $1,000 on a per active basis. So across that 47 million monthly actives. On average, we saw them bring in over $1,000 in Q2. This is really a factor of two things. which, again, we drive accountability towards and our teams and how we run -- how we think about the business and how we run it. One is spending power, which is obviously determined by the makeup of our customer base across demographics, and where we see an opportunity to continue to grow and broaden over time; and two is share of wallet, which is oftentimes determined by product adoption and engagement. We're measuring transactions and how useful our products are and how we can make our customers aware of those products over time should drive that increased spending power for -- spending power and share of wallet for us over time. And then the third piece, monetization rate, just to complete is about with 1.28% on in the second quarter. That has grown over time. We saw inflows per active grow in the mid-teens rate on a 3-year CAGR basis. So even though we saw some year-over-year normalization because of the stimulus in the prior comp period on a 3-year CAGR basis, we've seen some nice healthy growth there. We've also seen monetization growth over time. So each of these 3 variables compound to the growth that we've seen in the Cash App business. And monetization rate is really driven by both pricing and the mix of our products. And increasingly, what we've seen is inflows, that same dollar getting monetized in multiple ways as it moves through our ecosystem.

Great. I've always been impressed by Cash App's scale when measured by users. As you mentioned, 47 million monthly actives. Could you talk a little bit about how you would characterize the Cash App user base today? Perhaps can we double click onto how the business drives new user acquisition and retention? And how do you see that evolving over time?

Sure. So 47 million monthly actives. Obviously, we started when we first started building Cash App, 7 years ago or so, with an underserved population, primarily in the Southeastern part of the United States. Now at 47 million, obviously, we're much broader in terms of appeal and believe in the same way that we've grown our Square business from serving micro merchants to serving increasingly larger with more complex needs, we have the ability to address additional customer demographics, including coastal digital natives, but also increasingly families and older demographics over time. And this is really about having a broader set products that address and are meaningful across financial services and commerce to these customers and also having a go-to-market approach that resonates. From a -- if you think about the component pieces, there's a new actives and how we attract them. There's also the retention piece that drives our monthly active numbers and our engagement on our platform. And that's where I think Cash App has been very strong from a retention standpoint. A key piece of that are the embedded network effects in Cash App. So what we see is that our customers who have 4 or more connections to their social graph within Cash App have a stronger retention within Cash App, 31 points stronger, in fact, than customers who only have 1 connection within Cash App. And that's a key piece for us to know as we run this business so that we can layer the social graph and really the embedded network impact within Cash App into the additional products that we launch over time.

Great. Let's hit another area of the inflows framework, which is the inflows per active. You've done some incredible things to help drive inflows, direct deposit, Cash App taxes. Could you talk a little bit about some of the trends there? And any specific ways that the team can broaden the use cases and improve inflows over time?

Absolutely. So again, as I mentioned, over $1,000 in Q2 on an inflow per active basis is money our customers are transacting actives of bringing into Cash App. If you annualize that, that's $4,000 or so in a year, which is if you look at the U.S. median income at about $40,000 is about 1/10 of the median U.S. income. We believe we have an opportunity to drive incremental share of wallet with our existing customers as well as to reach more customers over time. which can drive inflows up. And again, we see inflows being highly correlated to gross profit as we've demonstrated more recently as we started sharing more about the inflows framework. So an opportunity for us to really go deeper in terms of doing more for our customers, adding more utility across financial services and commerce, more discovery around these products. So thinking about Cash App from an operating system mentality, which means that you can have search functionality within the app to discover more things that you can do. And many of these financial services products still being relatively early for us. When you think about Cash App Pay, which is the ability to use your Cash App balance to pay at Square sellers and now recently this month outside of the Square seller platform, but also Cash App Borrow, direct deposit, Cash App Card, which continues to grow at a strong pace. So a number of these financial services products, which are ramping and we believe have opportunity for future growth, but also to launch future products and then improve the discovery and navigation towards those products, which ultimately enhances both adoption and engagement and ultimately, that drives more inflows in the Cash App.

Peer-to-peer and spending have obviously been big success areas for Cash App. Since the Investor Day, I think there's been a greater emphasis around an exciting area, which is commerce. Could you talk a little bit more about the commerce opportunity? What does that mean for Cash App? And then how is the integration of Afterpay helping to accelerate that network?

Sure. Even before Afterpay came into the Block business, we saw the seeds of commerce planted in Cash App through Cash App Card, which I spoke about earlier, but also Boost, which is the instant rewards program that we built within Cash App Card, where we really have seen over the year is an ability to drive consumers into merchants, to create demand for those merchants. So the commerce platform that is now catalyzed by bringing Afterpay increasingly into Cash App. And we're still very much in the early days of the build-out on this is something that where we see the opportunity to build out really at scale. Afterpay would drive 1 million leads of consumers into merchants in the Afterpay stand-alone app, the integration of Afterpay in the Cash App, both in terms of the cash flow management of repayment of buy now, pay later, but also in terms of relationships with 100,000-plus enterprise merchants, but also with the affiliate sort of sales platform into merchants where we don't necessarily have a relationship today is an incredible opportunity for us, particularly when you think about leveraging that capability across Cash App 80 million annual active. So what we've got built today is a very, very early iteration of this with the Discover Tab, which has now rolled out to most of our customers within Cash App and is organized by payment type. So through the Discover Tab, you can see relevant and interesting offers across Cash App Pay as a payment type or Afterpay as a payment type. Of course, we know that the true offering that we're building towards is not organized by payment type. It's organized by personalized and dynamic offers for that customer based on what we know about them. And then enables a more dynamic checkout flow that we know is most likely or a potential opportunity from a payment mechanism, whether it's Cash App Pay or Afterpay or something else, Cash App Card. And so that's the vision we're building towards, and we're still in the early days, but we're incredibly excited about it.

Great. Let's shift gears and talk about Block's most established ecosystem, which is the Square ecosystem for merchants. Square has had a tremendous amount of success among merchants with its point of sale, and I think there's increasingly emphasis around omnichannel and going upmarket for Square, which really go hand in hand. Can you talk a little bit about your growth strategy as you work with these larger merchants? How software plays a role in that? And what features within the Square product is resonating most as you go upmarket?

Absolutely. So our growth strategy starts first and foremost for the Square business as it does for all of our businesses, with remarkable products. And this is where software truly provides the glue between integrated payments and all the various software, hardware, financial services products that work seamlessly together. It's about investment, in particular as we look up market in our developer API platform as well as in our vertical points of sale across retail, restaurants and services. And as a result, our software and integrated payments category of product is our fastest-growing category within Square over the past 5 years, growing at over a 50% CAGR for the Square business. Software it's truly that glue that not only mix a cohesive product ecosystem together with 30-plus products that we've got work seamlessly because of the backbone around the infrastructure that we've built. But it also creates real-time insights for our sellers so that they can see their business, their customers, their buyers, their inventory, their employees on one platform and make -- create the most decisioning for them on how to run their business as they can focus on their craft. So software is really a key part of the ecosystem. And we see that increasingly for mid-market sellers, our largest category, our category of largest sellers of over $0.5 million in annual GPV, where over 75% of the gross profit from mid-market sellers comes from software and integrated payments. And these sellers, we know, take on 4 or more products within the Square ecosystem. And I think there's an opportunity here to increase that over time as we can drive greater cross-sell for these larger merchants. So this is a key focus area for us in terms of our product build-out for -- to address mid-market and really the full gamut of sellers. From a go-to-market standpoint, we're continuing to iterate on how we address our market. And I think the shift that we're making now for our sales team, which is to move from a generalized sales force to a verticalized sales force that can address retail in a deep way, restaurants and food and beverage in a deep way and services in a deep way with specialized account executives is something that we intend to drive further delivery of new customer cohorts for mid-market.

Great. Beyond going to mid-market and upmarket. One of the drivers of Square seller is certainly global expansion. Could you just talk a little bit about where you are right now for Square sellers global expansion initiatives? How are the product parity initiatives going? And what are you learning as you go into these new markets? And how does that inform how you operate your domestic business as well?

So just as the prior answer, it starts with a great product and it starts with a product that's a more fulsome offering in these international markets. And this has been a key focus for us. We're now at about 80% product parity across our more tenured markets, markets that we've been in for 2 years or more. We launched 44 products in the first half of this year in -- across our international markets. And for the new markets that we're launching in Spain in Q1 of this year, France and Ireland last year, we're launching with a more fulsome set of products at the outset than we ever have before. And that's a learning that we want to continue into the future. And we continue to see that as we launch more products, we have greater product adoption over time. We're launching -- we've more recently launched Square Loans in Australia and Canada. QR codes through PayPay in Japan. And with each of those product launches, we see incremental product adoption, which drives lifetime value for us and that more retentive customer relationship and give new customers more of a reason to come in. And I think these strides that we've been making are part of what's led to the outsized growth that we've seen for international markets. Our international GPV growth in Q2 at 45% was more than 2x the growth rate on the overall Square business, similar dynamics that we're seeing with upmarket. So each of these strategic areas for us that start and are led by product innovation really drive outsized growth potential for the Square business over time.

Great. Since you touched on Square Loans, can we talk a little bit more about the lending space more broadly? Investors have certainly been increasingly focused on the trade-offs between top line growth and managing credit losses in this increasingly uncertain operating environment. What is Block's philosophy here with respect to all of its lending products, right, Afterpay, Square Loans, Cash App Borrow? And how do you manage that to achieve sustainable growth in these businesses?

Yes. So first, let me say, we recognize that we sit in an environment that has uncertainty ahead of us. And so we are just in the same way that I spoke about OpEx earlier. With respect to our lending products and with respect to risk loss, we work in a coordinated fashion across the company with real-time data and with discipline and rigor about how we use risk, not only as an output to each of these products, but deliberately as an input to each of these products and how in an integrated fashion and how we run these products. We believe that there's two things that are unique about the products that we've got. One is the real-time data-driven insights for the models that we operate across these products, and I'll speak a bit more about that. And two, is the frictionless way in which the product works from a customer and repayment standpoint. So on the data-driven insights, each of these products are underpinned by data across millions of sellers and consumers that enable us to see not only from a macro perspective, the health of a particular category, a particular geography or particular customer type, but also that individual customer. That enables us to be incredibly nimble in terms of how we underwrite in each of these businesses. And then for many of these products, we determine eligibility based on those real-time data-driven insights, which we can fine-tune. That was something that we saw in the early days of the pandemic with our Square Loans business, where we were able to pause that business quickly shift the team to delivering PPP and then reramp that product, which we're now back at above pre-COVID rates in originations there. And I think it's something that we can prove out across our Afterpay business as well as our Cash App Borrow business. The second piece of it is the unique attributes across these products. They are short in duration. So Afterpay and Cash App Borrow are less than a month in duration, turning multiple times a year, an individual dollar turns multiple 15-plus times a year across each of these products. And Square Loans is less than a year in terms of duration. And again, we determine eligibility there. Repayment flow is as frictionless and simple. And oftentimes, we are inserted into the repayment flow as we are with Square Loans, where it's set ahead of time and the seller doesn't even need to think about it in terms of how we get repaid. And we've got a similar mechanism with Cash App Borrow. And ultimately, what that's enabled us to do is to build products where we can be incredibly agile, fulfilling our purpose of economic empowerment because we know these customers need access to credit in a simple, fast and responsible way and enables us to leverage what's unique about the attributes of our data-driven insights to underwrite these customers and underpinned by the flexible balance sheet that we have and the rigor that we put as using risk loss, as I said, as an input into these products. We see growth opportunities here, but we'll be doing that and operating in an incredibly disciplined way.

That's great. Why don't we talk a little bit more about Afterpay. When you did the acquisition, you obviously talked about some of the complementary opportunities for both the Cash App ecosystem and the Square ecosystem. We talked a little bit about their commerce opportunities within Cash App. Could you talk a little bit about how Afterpay integrates those 2 ecosystems and some of the initiatives and products that helps for with the Square seller ecosystem?

Yes. So we've now seen in Q2 36,000 Square sellers take their first Afterpay buy now, pay later transaction. One of the first things that we did as a joint company together was day 1 turn on Afterpay for Square sellers online across U.S. and Australia. We then added in-person. More recently, we've added U.K. both online and in-person, and we're testing in Canada. And as I said, in Q2, we've seen thousands, tens of thousands of merchants take buy now, pay later as a transaction type for their buyers. So this is really about enabling and furthering really each of the 3 square top strategic priorities. Omnichannel, clearly, because of the online components as well as now in-person, we see in the Australian market with the Afterpay business for about 1/3 of the market is in person, transact in person, the omnichannel transactions customers who use omnichannel transactions transact at much higher frequency. It becomes a part of how they manage their money. And that's something that we believe the Square business and Afterpay can help each other towards. It enables upmarket, clearly because we're addressing enterprise needs with Afterpay and mid-market needs. And it enables global where Afterpay about half of their business comes from markets outside the U.S. So it helps us plan to flag for both Square and Cash App outside of the U.S. market and Square and Cash App can in turn help Afterpay in the U.S. We're very much in the early days here. There's a lot more for us to do together. But Afterpay sits at the nexus of both the consumer and merchant relationship. We, as a company, have scaled consumer and merchant ecosystem. And Afterpay really helps us bring those 2 together increasingly in a connected way. And I think we're in the very early days of a much broader vision that we're executing on from a commerce perspective that Afterpay will help us execute towards.

We started out today's conversation about obviously, the near-term updates and also some of the OpEx management. As you think about those savings, how are you thinking about allocating those savings? What are your capital allocation priorities?

We continue to invest in our business and where we see opportunities to from a go-to-market perspective, from a product innovation perspective, we will continue to do that. As we said at our Investor Day, over the medium to long term, we want to see leverage in our business across particularly corporate overhead and fixed expenses. And I think there are other areas as well where we see opportunity, but there are also investment areas for us. And we have an aspiration to grow our business and take share across a $190 billion TAM, as we said at our Investor Day 1 that we're only 3% penetrated in. And one that has 85% of the business today sits with merchant -- legacy merchant acquirers, banks, traditional infrastructure, where we believe we have a remarkable product that can enable our customers to get more out of our product. So we do have an incredible opportunity ahead of us. We're going to operate with discipline as we all would have. So that aspiration has to be paired with discipline. And that's where you see us incrementally scrutinizing every dollar of investment we make to ensure that it goes towards a customer in some way or a product that will ultimately impact that customer in some way. And so ultimately, for us, capital allocation comes down to how we execute on those share gains across a large and growing market, that TAM at $190 billion is 3x higher than it was 5 years ago, in part because the market has grown and in part because our product portfolio surface area has grown as we've launched more and more products. We want to continue that pace of innovation and build towards a much, much larger company for the future.

That's great. So I think a lot of people have been very impressed by how far Block has come along from having a dongle that enables card acceptance to being the multi-business financials and technology company that it is today. At Block's Investor Day, you guys provided an incredibly valuable look under the hood of Cash App, Square and Afterpay. As we wrap up today and look ahead, what are the most important steps that you're looking forward to? And how does that change for Block over the next 3 to 5 years?

Yes. I think that there is just with the pieces of what we have today in our company, we have so much opportunity for runway ahead. And we've seen -- we've demonstrated an ability to grow the pieces that we have at play in our company in terms of the product set. And even in terms of the business lines and customers that we serve. Obviously, started with serving sellers in the Square business, not only has that business grown in terms of the types of sellers that we can serve and the ways in which we can serve them in the geographies, but also now serving consumers. And over time, we believe that there could be future opportunities to serve additional customer types. But again, we'll be introducing those with focused prioritization and with a view towards execution with discipline. But within each of the pieces that we have today with the Square ecosystem and cash ecosystem, I think there's 3 key areas of growth for us. One is continuing to reach new customers. As I said, we're 3% penetrated across the TAM for each of these 2 ecosystems. There's so much more that we can do with the product market fit that we have today across the products that we have today to bring more customers onto our platform. The second thing is to drive cross-sell. As I said, our mid-market customers take on 4 or more products within Square, we've got 30-plus products. There's so many more things that we can be doing to make those products, make those customers aware of the incremental products and to increase the ease of use across these product types. And similarly on the Cash App ecosystem. We've got more than half a dozen products now 4 of which at meaningful scale and more products on the horizon to continue to scale and cross-sell. Ultimately, that drives lifetime value at a very high incremental margin for us. And then third, as we just talked about connecting these 2 ecosystems. There are things that we can uniquely do because of seeing both a seller and a consumer across so many different transaction types things that we can uniquely both underwrite and incentivize across these 2 ecosystems that we are still in the very early days of. I think Afterpay helped catalyze that for us, but there's so many more even beyond buy now, pay later, so many more opportunities for us to share these insights and to benefit our customers because of the 2-sided ecosystems that we have at play within Block. And so I think the growth opportunities for us over a 3- to 5-year horizon to operate with discipline and to take share over time are very fruitful for the future.

Great. I'm certainly looking forward to seeing you guys execute against that. That's a great way to cap off the session. So thank you so much. And would you please join me in thanking Amrita for her time thoughts and insights.

Thank you.