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

Okay. We are going to get started with the next session. We are very excited to have Amrita Ahuja here, CFO and COO at Block. Thank you for joining us yet again.

Thank you for having me.

All right. I'm going to read a quick disclaimer, and then we can get into it. During this conversation, Amrita may make forward-looking statements including about blocks expectations for its financial performance that are subject to certain risks and uncertainties. These statements are based on information available to Block and assumptions that believes are reasonable as of today's date. Block disclaims any obligation to update any forward-looking statements, except as required by law. Please refer to Block's most recent SEC filings for a discussion of the company's risk factors. She may also discuss certain non-GAAP financial metrics Reconciliations to the most directly comparable GAAP metrics are available on Blocks shareholder letters on its Investor Relations website. further any discussion of blocks lending and banking products refer to products that are offered through Square financial services or its bank partners. All right, Amrita. Thanks for being here. Again, I always look forward to hosting this. This year, it felt kind of like a harvesting year. We've been talking about a lot of the initiatives inside the organization to improve execution, growth product and distribution investments on the Square side, lending and banking on the Cash App side, broader operational excellence initiatives like rule of 40. Obviously, the firm's AI initiatives, and as a close follower of the story, it feels like we're starting to see those investments bear fruit this year. But maybe for those that hear all that's going on and see a lot of the execution-related initiatives to keep track of what's the state of the union and how do you think about where the company is on that journey?

Sure. So when I look back at what we said we would deliver this year at Investor Day in November, and where we are today. I think there is a lot to be incredibly excited about. In November, we thought we would deliver 17% gross profit growth and about $2.7 billion in adjusted operating income. Our latest guidance calls for 21% gross profit growth and nearly $3.5 billion in adjusted operating income for 2026 with 70% growth on adjusted EPS and 7 points of adjusted OI margin improvement year-over-year. And what's encouraging to me is that the incredible traction that we've seen so far this year is broad-based across each of our ecosystems. Whether you look at Square, where we had the strongest U.S. GPV growth in the second quarter that we had seen in 3 years. with compounding benefits across product velocity delivered 3x more features at 130 features in the first half of this year than we did in the first half of last year or it's the compounding benefits that we have of our scaling distribution channels across field sales, telesales, the ISO channel, and of course, tried and true cell onboarding, which continues to also grow at the fastest rate of growth that we've seen in 5 years. So that's Square. From a Cash App perspective, growth of 31% in the second quarter growth of 59% on our consumer lending originations growth of 17% on our primary banking act is. This is broad-based across commerce, banking and lending within Cash App. And we see an opportunity to do even more when we look at each of the systems. This is all fundamentally underpinned well by us refactoring and redesigning how we operate the company in an AI world that what you see is greater product velocity, our ability to start small, experiment and double down on what's working, whether it's products or its distribution channels, our agility and ability to move more quickly with a flatter organizational structure. This is the year, as you say, where we're harvesting all of those benefits, all those changes that we've been making over the past few years, and you see that bearing fruit. Maybe the final thing I'll say is, 3 years ago, we set out to be a Rule of 40 company. And that's inclusive of stock-based compensation expenses. We feel is a higher bar. And so far, what we've delivered is Rule of 52. And our guidance shows we should be at close to a rule of 50 company for the year. So we continue to push even above and beyond what our own internal financial targets are.

So then I guess, let's talk about the financial targets. The team has done a lot of work on the cost structure also on increasing the runway for growth. As CFO, can you tie that back to the financial growth algorithm the 30% growth on the bottom line, it's a big number. So for longer-term investors in the audience, how do you feel about the sustainability of that beyond a harvesting year?

Sure. We feel that there's a tremendous amount of leverage in our business. But first, before I get to the fixed cost aspects and what we've done there, I want to talk about how we run the business from a unit economic standpoint. And there are two key things that we think about: one, on a product by product and initiative by initiative, scale. We look at returns on investment, we look at payback periods, and we look at unit economics. We don't think about scaling loss leader products. We think about the health and the overall value of an ecosystem that we're delivering to our customers. And that then ultimately means that we can continue to invest in the business. We don't see it as a trade-off between investment and growth. The two need to move in tandem with each other. And that's only when we are able to hold ourselves accountable and deliver on the returns and investment for investments that we're making. And by the way, that may look different depending on the investment type. Go-to-market, very measurable, like deep years of data science underpinning those models where we can measure by channel and by customer type. Other types of investments like our AI investments, we need to come up with new forms of measure, things like developer velocity or time to customer value that we would be measuring and that we are now rigorously measuring on a week-by-week basis. The second key thing that we look at is incremental margins. And as we said at our Investor Day last year, our -- and as you saw in Q2, just this past year, we had incremental margins. That means that half of the incremental gross profit that we accrete to the business flows through to the bottom line. And it's only from those investments -- those focus and that rigor and that discipline in driving strong unit economics that we can drive the 50% incremental margin. And then finally, we think about the leverage of our fixed cost base and how we run the business overall, which has been, as I said, a big journey that we've been on and involved making ourselves a much smaller and flatter company earlier this year.

Makes sense. One of the most significant changes this year was the 40% head count reduction, which you talked about is largely impacting the second half of this year. One of the common questions we've received on the most recent quarter was just how much of that is being actively reinvested into the business. So could you talk about maybe a postmortem of how the exercise has gone and how much of that is being reinvested.

Yes. First, let's talk about why we did it. It was not about necessarily or specifically a cost-saving exercise. It was about fundamentally redesigning how we operate our business. And what we wanted to see was clear lines of ownership and accountability who was delivering what project and on what time line and extreme clarity on that. Two is a flatter organization. fewer layers between people making decisions and setting strategy and people fundamentally building. And what we needed to see was agility in our workforce. The ability to move quickly and think in 4- or 6-week increments, not 4- or 6-month increments so that pods of people are working on specific initiatives and can see near-term real-time results as they move those initiatives along and as initiatives may change over time, shift to other things. As I said, double down on the things that are working and pivot on the things that aren't working. So this reduction for us, the 40% reduction earlier this year was as much about refactoring how we work as it was about the overall size of the team required to deliver upon our road map. We took 3 fundamental principles to how we made the change. One was our products had to work as intended. We had to have resilience and uptime for our products throughout this pretty significant transition and we have seen that touch wood. We continue to see that. Second, we have major commitments as a public company, as a regulated company, from a compliance customer operations governance perspective, and we must honor all of those obligations. And third of all, we have a significant road map, 1 that we outlined at Investor Day on that we continually dialogue with our customers on, and we need to continue to deliver on that road map. And I would say our road map has only gotten more ambitious in the last 6 months. So as I look back on it, we have absolutely fulfilled those three principles from this reduction. And what it's shown us is that we have a tremendous amount of leverage in our business to be able to actually continue to make significant investments, but still deliver margin expansion. And so some of those investment areas for us have been around AI infrastructure how we're delivering AI to ourselves and also to our customers through things like manager bought on the seller side and money bought on the consumer side. Neighborhoods how we are connecting the two sides of our ecosystem to do things that we believe we can uniquely do and go to market. As we said, we have really brought ecosystems on both sides of the counter, and we want to be able to tell that story more and more to sellers and to consumers. And so those are the 3 incremental investment areas that we have been able to invest to while still delivering, as I said, that 7 points of margin expansion year-over-year.

Jack's made this point, the block is a tech company, not a point of sale or a financial services company. You can see that in a lot of the foundational tools that the company has rolled out to buzz for human and agent collaboration, builder, bird how do these capabilities fit together? And what differentiates your approach? And longer term, how should investors think about the impact on product velocity and customer experience?

Yes. So first, what I would say is that all of these capabilities and interfaces from an AI perspective are built on the same core infrastructure and built not in the last just 6 months, but based on the last 2 years. of deep work we've been doing from an AI perspective. We launched what we believe is the first identic harness with Goose in early 2024 and have now followed that up in 3 ways. So first, BERD, we love our names, our acute and quirky names at the company. BERD, BERD, is the next-gen version of Goose. It is -- allows personalization in greater automation and it is model agnostic. You don't get locked in to a particular vendor or a particular company when you're using goose or bird as you Second is buzz. This one, we are extremely excited about. Trending on GitHub, many customers outside of our 4 walls, but certainly everyone within block is using buzz. You can think of it as a co-working space for your team, whether your team is made up of humans or agents. And in fact, many of the team spaces that I'm in, in buzz put those humans and agents on a level playing field. And because it's co-working, it's a multiplayer AI space. You get to see how other people are using their agents. It's an incredible way of cross disseminating, cross-pollinating all of these automation AI opportunities. And then the third piece is Builder bot, which is primarily a tool for builders for engineers, albeit anyone within block can use builder bots. But it really supports developer velocity, and it supports really important elements, but oftentimes deterministic elements within the engineering realm around when something hasn't worked or when we see downtime in a particular area or when we need a triage, builder bot can find those things, can discover those things oftentimes much faster than a human. And so these are some of the reasons that we've been able to improve our product velocity as well as improve the reliability of our products with the increasing use of AI in the past many months.

Okay. I want to pivot and start talking about Cash App and in particular, on network growth. We've heard a lot more focus on growing the network and the user base in addition to kind of wallet share and monetization activities, which we'll get second, what are the strategies for growing the overall size of the Cash App network?

Sure. So what we've said overall is consistent this year with Investor Day, which is we expect to see low single-digit growth from a cash active perspective at nearly 60 million monthly active, 59 million monthly active by our most recent count. As we think medium to long term, we see some pretty meaningful opportunities to explore or expose, I should say, many, many millions more people to Cash App. I think of two new invention or product sort of 0 to 1 product-led opportunities as well as a number of core feature enhancements. Core blocking and tackling, if you will, in terms of the funnels for how the product works. First, neighborhoods. We have hundreds of millions of buyers who walk into our Square sellers, whether online or in person in a given year. Many of those are new to Cash App or not active within the Cash App ecosystem. In fact, what we've seen so far from a neighborhood standpoint, I'm sure we'll talk more about neighborhoods. But 50% of the buyers within our neighborhoods program are -- have not been recent actives or are brand new to cash up. So the opportunity to expose millions and more people to Cash App with a true value proposition where you can spend local cash, you can earn and then spend that local cash at a local square seller is incredible from an active growth perspective for Cash App. Secondly, managed accounts. So we've had a team account offering now for a couple of years, and we are making feature enhancements as well as go-to-market enhancements to that product. More recently, we introduced a managed accounts product, which is accounts for 6- to 12-year olds. Both my kids happen to be in that age range. And I will tell you, it is incredible to see how empowering it is for them to be able to spend their own money, their own allowance on a card that they personalize themselves that has their own self-expression on it, the pride they feel, the empowerment they feel from that. And that brings in the family around them as well. So we're incredibly excited about the managed account opportunity within Cash App. And then as I said, a whole bunch of tried and true blocking and tackling from core peer-to-peer flows to go-to-market enhancements and partnerships to other new products that we've introduced that just bring greater value into the broader cash up ecosystem, so people keep wanting to come back, whether it's things like tags for our new phone plans program. There's a whole sera after pay on Cash App card, adding incremental utility to these powerful distribution surfaces that we have, the fourth largest debit card in the U.S. these sort of tried and to product ecosystem expansion as well as funnel optimization. Those are the core focus areas in addition to neighborhoods and managed accounts, as that gets us very excited about the opportunity to grow active medium to long term.

So let's talk a little bit about neighborhoods. You see some good initial success. I think you recently announced that 30,000 new sellers have been added. I think investors have long viewed this as sort of like an option value in the story about bringing the two sides of the ecosystem together. What do you think is a reasonable window for this to show up in the model tangibly? And then what would you point us to as milestones or proof points along the way?

Yes. Look, we know this one is a long time coming, and we are incredibly excited now that it's here. We think that this is something the connection that's sitting at the counter in between the buyer and the seller, the buyer on Cash App and the seller on Square is a value that we can uniquely provide. It drives incrementality and demand generation into the seller and it drives incentives and a reason to be loyal into the consumer. What we are seeing for -- from our more recent cohorts of sellers onboarding auto enabled into the neighborhoods program is really encouraging. The metrics that we look at are things like retention. 90% retention of sellers who are auto onboarding into our neighborhoods program, which means many of our sellers want quick throughput. They don't want extra frictions. What that means is they're actually seeing value from this. They're actually seeing an opportunity to bring new customers or more loyal customers into the neighborhoods program. And that's part of the reason that we have decided the 10x the number of sellers in recent weeks involved in the neighborhoods program, and we're excited to continue to ramp that over the coming months and quarters. I think to your point about time lines and when it shows up, I think we will probably see it. What we expect is to see it show up from an active perspective, start to be a little bit more meaningful from a cash up active perspective in the back half of this year. And then as we prove out the demand incrementality to the seller, be able to actually make the case to the sellers to use it more and potentially for new sellers to join the ecosystem as we look into '27 and beyond.

Yes. Makes sense. Let's switch gears into cash up on the lending side. Lending has been a major driver of growth. Consumer lending originations grew over 80% in Q1, 60% in Q2. You've been clear that you expect that to normalize as you lap the really significant expansion of the borrower surface area last year. How do you think about a durable level of lending growth in the business? And then how do you balance that growth against risk loss and overall returns. And maybe if you can talk about near-term opportunities across Borland some of the new Afterpay products to keep growth rates elevated?