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

All right. I know it's a quick transition. Appreciate everyone stick around so you can hear my views on politics in the world and inflation and everything else. I'm sure that's on top of everyone's minds. But really, really excited and grateful to have the Block management team, the afternoon keynote. So we've got Amrita Ahuja, COO and CFO of Block and of course, Jack Dorsey, Co-Founder and Chief Block Head. And it's been a bit. It's been since COVID since we've had these guys. And I was telling Jack before following the payment sector, I've learned a ton just following Square and now Block for over the last 10, 12 years. And a lot of the themes that we've been talking about, software taking over payments and consumer and merchant platforms trying to bank their users, right? I think a lot of that was inspired by what we learned from Jack and team. So super grateful to get the chance here, just spend a few minutes and go through a list of questions I've gathered from you. So again, my name is Tien-Tsin Huang. We'll try and get to some questions from the audience at the end, but I'm hoping we'll cover a lot of this -- the important topics upfront. So welcome. Thanks for being here.

Thank you.

I'm excited to begin.

Thanks for having us.

No, for sure. So I thought we'd start if it's okay, Jack, you introduced this investment framework last quarter. What inspired it? Love to hear you're thinking around that. You heard some questions from the audience that's somewhat relevant to it. And I'm curious, is it still allow for what I call breakthrough to happen within Block like we've seen over the last decade or so?

Yes. First, it's really hard to follow Jamie Dimon, but I didn't know that we could cuss on stage, so that opens the door for everything for me. Thank you for spending some time with us and allowing us some time. The main thing is we wanted to be able to articulate how we make decisions around our investments in one single sentence that anyone could remember in the company and our investors and our analysts could also articulate back to us, without having to think that much. That was the ultimate test. And the reason that was important is we wanted to distill what we are trying to do from an investment perspective and have a significant -- have a significant focus on making sure that we're doing the right thing that we have a checkpoint on it. So the thing that we always want to maintain is that we're customer-first, and we're focused on that. Everything else follows from us being able to serve our customers that they want to stay with us that we build a resilient relationship and that resilient relationship creates a word of mouth that enlarges our customer pool and the size of the markets that we're in. And then the second is that we wanted -- we heard a lot of feedback since being a public company. We borrowed a lot from our predecessors and silicon -- SGI and Microsoft and Google about how they did things and specifically the conversation around SBC and the cost of stock-based compensation. And we wanted to reflect that it is a real cost in the company, and we wanted to measure ourselves against it. So we came up with what we thought was an industry standard way of describing that, which is a Rule of 40 over operating income, which accounts for SBC. So that you truly know and we truly know how we -- what our costs are and how we're delivering innovation against that. We're only going to increase the resilience of our customer base or their desire to -- or more desire for more customers, if we continue to be innovative. And we want to make sure that we have a check on our own efficiencies so that we had this principle back in the day when we saw the company start small. And some of the follow-up to it over some time was stay small as well. And as you grow, you get bigger and you start doing things just out of momentum instead of out of need. So that Rule of 40 on OI handles the checkpoint on do we actually need this? And how do we stay small but continue to do big things and be more innovative? And technology is certainly going to help us in this regard. I'm sure we'll be talking about it, but like the field of AI which I'm sure all of you have heard and been on the tip of our tongues. More so in this quarter than any prior quarter in history, which is crazy because just 2 last quarters, you probably didn't hear the term from most companies. But I'm so thrilled that there exists in open source model competition for the space because it means companies like ours, whose first priority is not building AI models, can actually compete on a level playing field. And we can compete because we have very specific data around our sellers and around consumer financial activities. And that is the true heart of what makes any AI model great is that data. So when I saw that leak from Facebook and how quickly the community iterated on it, getting to the point of being past GPT-3 and approaching GPT-4, and the fact that it's completely open and we can self-host it. I'm like, "Damn, this is phenomenal." This is a huge boon for our company and a company like ours where we don't need to focus on just building pure AI technologies. We have a huge labor force in the open source world that we can push our data to and get the same outcomes, if not better, in our space, which is finance.

Great. And I do want to dig in to generate AI a little bit more. But just to round out the conversation, around the investment framework, just the Rule of 40 and the pathway to get there. Can you elaborate a little bit more on that? Especially around operating leverage, not only this year but longer term.

I can start on that. What's more important than achieving Rule of 40, Tien-Tsin, is sustaining Rule of 40. And you see some of the most impactful, scaled, profitable companies in the world have sustained Rule of 40 year in and year out. That's not only through seeking discipline and efficiency and operating leverage, but that's making well-placed high-return investments to build new revenue streams to compound growth over time. And so for us, it's important to balance both efficiency and operating leverage, which I'll go into in a bit but also with investments against this immense market opportunity that we're pursuing. So this year, from an operating leverage standpoint, we've guided to margin expansion, both on an EBITDA and adjusted OI basis. And there's 2 primary ways that we're seeking efficiency. First, hiring. We're deliberately slowing and meaningfully slowing the pace of our hiring. And as Jack spoke, our metrics now include SBC. So our managers or general managers across the company as they look at their P&Ls as they look at their targets, have the ability to weigh personnel expenses in an apples-to-apples way with other investments that they'll be making across sales and marketing, customer service, et cetera. Secondly, sales and marketing. We pulled back spend in the first quarter, and we still saw customer acquisition growth in each of our Square and Cash App businesses because we're orienting the mix of our spend to higher ROI areas, more proven areas, less experimental for now. And those are the things that we're going to be pursuing as we look for efficiency and as we seek that margin expansion. We raised our profit guide in this last quarter for the year, even in the midst of this macro uncertainty. And even in the midst of a slowdown, intend to hit that higher profit guide. Now longer term, in addition to hiring in sales and marketing, what we're looking at is broader corporate overhead expenses, everything from software and data, real estate, travel, other discretionary expenses that don't necessarily impact growth, but they help us operate in a small way. They help us be lean and they help us be efficient. And those are the areas that we're going to be pursuing as we look to not only achieve Rule of 40 over the long term but sustain it importantly.

Okay. Good. So digging into the business and ultimately up into the tech. The investor perception is that Block is a very cyclical company, right? That you're over-indexed to SMBs, you're over-indexed to lower-income consumers. What's your response to that? And how cyclical is the business?

Well, you have to start somewhere. And our start was the fact that a lot of SMBs and lower income individuals were like left out of the economy because -- not because banks wanted to not have them as customers, but they may not have had the means of the technologies to assess their own risk and their ability to bring them in a safe way. So the only reason we're here as a company is because we were able to bring 99% of merchants who applied to accept credit cards got through our system. And we changed from a model that was traditional in the space, which was a credit check on the merchant to one that is transactional and looking at every single transaction, looking at behavior and taking some bets on people. And we had a very similar approach with Cash App. And this becomes more of a function of the data we have and the data we can access as people transact in different ways within our ecosystem and then the models that we build around them. And those things are always evolving. They're never, never, never static. So I think we've proven that we can move from an SMB independence, someone at the farmer market selling flowers, to a multinational multi-location retailer or a restaurant or a service organization. And we have desire in the Cash App space for higher net worth individuals to use Cash App. Why? Because it's super simple, and it's super easy and it's clean and fresh. And they have kids, and they can -- with one tap, now give a card to their kids and also control it. in a way that you just can't find that experience with most major retail banks. So our strength is designing something down to its base essence and just making it feel easy so that we're not taking anyone's time away and they can just focus on what is most meaningful to them. So I do believe we have shown and proven an ability to move more and more upmarket in both businesses, and that will continue to be the case. And the big challenge for us going forward is we're a financial institution that is regulated in the same way as Jamie spoke to. Often through proxies and our partnership with JP Morgan Chase and other banks, sometimes directly. And it means that we can't act like an Internet company. We can't just launch an app in every single App Store in the world and expect people to find it and use it. We actually have to have a banking relationship within each market. So it really slows down our global adoption. But there are technologies out there that we're very interested in pushing and building which enable us to be more like an Internet company and actually release an app that has global value and global usage. And those are some -- that's represented by some of our future business units, which we can talk about.

Let me also share a little bit of what we're seeing in terms of our business performance in real time. And of course, our business performance is composed of not only our execution but the health of the underlying consumer and small business. So from a Cash App perspective, continuing to see healthy trends. In Q1 and April, we had $20 million Cash App Card. That's our free debit card. Cash App card customers at the end of -- in the month of March that grew 17%. Our overall actives growing 17% year-over-year, and our card actives growing faster. Importantly, spend per active grew year-over-year, both in Q1 and in April. So even in the midst of a potentially challenged consumer, we believe that Cash App has the ability to gain share of wallet in this environment. From a Square perspective, as we've talked about for some months now, we believe we started to see a macro deceleration, macro-related deceleration from about the mid-November time frame through Q1. What we've seen quarter-to-date, so the first 7 weeks of Q2 is Square GPV grew 12% year-over-year where we saw an improvement in May relative -- so far in May relative to what we saw in the month of April. And if you think about the components of our growth, there's really 3 key components. There is new customer acquisition, which as I mentioned, has continued to be strong, even in the midst of pulling back spend. Secondly, it's churn, where we've continued to see actually stable trends from a Square perspective, over the past 6 months with respect to churn. And third, it's GPV per seller or retention per existing seller. And that's where we've seen the moderation in the growth rates from sort of mid-November into April. When we think about the broader economy, this pattern directionally is consistent with what we've seen from the larger banks, whether it's JPMorgan or BofA. And when we think about the proxies in our business that we look at, the number of unique cards visiting our sellers or the spend per card at our sellers, what we've seen is a deceleration consistent with that macro slowdown sort of from November to April. Ultimately, the way we operate our business though is on a gross profit basis. So we're sharing all these trends around GPV for transparency. But when you look at gross profit, you see not only payments volume, but you see software, you see financial services and banking. You see the full breadth of the 30-plus products that we offer these customers and ultimately, that's what provides greater value to those customers in these times, and that's what provides greater resilience to our business in these times.

Yes. So digging into Square, first, if that's okay, right? 14 years ago, basically invented the market. We've seen a lot of competition come in. I'm curious from here with the 30 products Amrita just talked about, is there still a lot of room for innovation on the Square side? Is it going to be more incremental and focusing on distribution and marketing, that kind of thing? I'm curious, what can Square do better here?

I think we had some ideas in the past as we built this. We were very, very much technology-focused and technology first in a world that was mainly traditional sales-focused. And we saw a lot of predatory practices in those outbound sales practices. And that really turned us off from doing much with sales at all. I think our competitors have like seen that and definitely taking advantage of the fact that we have a gap, specifically in outbound sales. And we're figuring out more of a balance there and not being so stubborn about being technology-first and focused. But doing so in such a way that isn't predatory, which we still see our peers doing. We have competitors that are locking people into 2-year contracts. And it looks really good in the first month, but after month 2 or month 3, if you talk to these sellers, they want to get out and they hate it. So it's a question of like making sure that we have that visibility in that consideration. But ultimately, I don't think that is the winning play. I think it still has to do with building technology and building products that are fundamentally new and do something extremely valuable and people want to stick with. We certainly need to do better at getting our foot in the door. But once people are in, like we have a lot of love and a lot of resilience in our relationships because of the quality of our products, because of how innovative they are, which we would equate to being simple and straightforward and self-serve, and that they connect with this much broader ecosystem. I don't need to have a relationship with 7 vendors. I only download 1 app and I'm done. I just flip switches. And as we now bring in these new technologies, such as AI and expand past deep learning algorithms, we get even stronger potential and stronger relationship with those folks. So I think there's a ton of innovation within the seller space because they have to. They have to be creative. They have to be flexible. The number of restaurants today that also are -- like have a retail aspect of what they do, just so that they could survive through the past few years is immense. And if we're a company that only serves restaurants like some of our competitors, they either have to hook that up or they fire that restaurant company and then go to a retail company because that's where the money is for them. We're both. We're providing services for all verticals, and we provide all the fundamental business services as well. So I think that it's a long-term model, and it's a slower development model but I think it has a lot more depth to it than what we see in our peers. And it's purely a function of how innovative we can be and how creative we can be about the tools and the quality of those tools.

Yes. So just to build on that, just to round it out. We always debate this depth versus breadth. You just talked about it, Jack. But the success started out horizontal. You've added a couple of verticals like you mentioned. Restaurant and retail, but it is starting to blur, right? It may not matter. And then, of course, you've moved up market, as you've alluded to, but where are you placing your bets? Is it more on going deeper with the seller? Or is it about adding more breadth and surround services?

I think the Holy Grail is doing both. Like we should be presenting the -- as much breadth as possible, but really quality, depth for the things that truly matter and having an API for where we are not both in the breadth category, but also the depth category. So like if we're able to pay someone with a third party that goes through our API or with a developer that can build it very quickly because our API is so simple, then everybody wins. And we don't need to prioritize one versus the other. We're actually doing both. And then we get all this insight in terms of this is how -- this is where we're failing. This is where there's gaps, this where people are filling in with an API, and we can actually build that or acquire companies that have done that. But we just get all this information to make our next move about what is the next most critical thing to do, both in the Square side and also on the Cash App side.

But we see it play out in the numbers, too. Our vertical points of sale, which really provide immense depth, but we have 3 of them, so breadth across different categories grew at 42% year-over-year in the first quarter, 2x to 3x faster than the overall Square seller growth rate. And within that, even restaurants grew even faster amongst our 3 product offerings within vertical points of sale. Our [ upmarket ] sellers with restaurants are attaching at 6 products across our ecosystem. We've got many more that can serve them, but 6 products on average, which means that we can have more attentive relationships. We can serve them in more ways and ultimately grow with them as they grow their business. So these vertical points of sale are important and a deliberate part of our strategy, both in going upmarket and broadening the ecosystem.