Block : Prepared Remarks from Earnings Call

Block, Inc. Third Quarter 2022 Earnings Call - Prepared Remarks

Nikhil Dixit, Head of Investor Relations

Hi, everyone. Thanks for joining our third quarter 2022 earnings call. We have Jack and Amrita with us today.

We will begin this call with some short remarks before opening the call directly to your questions. During Q&A, we will take questions from our customers in addition to questions from conference call participants.

We would also like to remind everyone that we will be making forward-looking statements on this call. All statements other than statements of historical fact could be deemed to be forward-looking. Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance.

Please take a look at our filings with the SEC for a discussion of the factors that could cause our results to differ. Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements, except as required by law.

During this call, we will provide preliminary estimates of gross profit growth performance for the month of October. These represent our current estimates for October performance as we have not yet finalized our financial statements for the month of October, and our monthly results are not subject to interim review by our auditors. As a result, actual October results may differ from these estimates. Moreover, this financial information has been prepared solely on the basis of currently available information by, and is the responsibility of, management. This preliminary financial information has not been reviewed or audited by our independent public accounting firm. This preliminary financial information is not a comprehensive statement of our financial results for October or the fourth quarter.

Also, we will discuss certain non-GAAP financial measures during this call. Reconciliations to the most directly comparable GAAP financial measures are provided in the Shareholder Letter, Investor Day materials, and Investor Presentation on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results.

Finally, this call in its entirety is being audio webcast on our Investor Relations website. An audio replay of this call and the transcript for Jack and Amrita's opening remarks will be available on our website shortly.

With that, I would like to turn it over to Jack.

Jack Dorsey, Block Head

Thank you all for joining us.

As we've discussed before, we are building multiple ecosystems to serve different audiences. Square for sellers, Cash App for consumers, TIDAL for musicians, and TBD for developers. What makes Block unique is our ability to connect all of these together. We've made a lot of progress on each, and I'll share some highlights from Square and Cash App before Amrita's remarks and your questions.

We'll start with Square. We realize there are some significant challenges all businesses are facing today, and so giving sellers simple and intuitive tools that remove complexity from running their businesses is critical. We're focused on three priorities to achieve this: enabling omnichannel capabilities, growing upmarket, and expanding internationally.

Core to our strategy is building integrated solutions that give larger sellers a cohesive view of their operations, so that they can easily manage every aspect of running a business. Our developer platform extends our software capabilities by allowing integrations with hundreds of third-party products built by developers and partners using our open platform. We enable customized solutions for sellers with more complex needs and provide a single platform for developers to take payments from Square across mobile, in-person, and web.

We're also continuing to build out our vertical point of sale solutions that serve our largest verticals of food & drink, retail, and services, with Square for Restaurants, Square for Retail, and Square Appointments. Together, gross profit from these solutions grew 45% year over year, much faster than Square overall in the quarter.

In Q3, we also expanded the payment methods we support. In the U.S., we launched Apple's Tap to Pay on iPhone, giving Square sellers a simple way to accept contactless payments with no hardware needed, and customers a convenient way to pay. In Japan, sellers can now accept PayPay QR code payments, the most popular QR code wallet in the country.

And now Cash App. As we shared during our Investor Day earlier this year, we are focused on building seven development pillars to drive Cash App's business. I'll touch on progress we made this quarter in Financial Services and Commerce.

Within Financial Services, we want to strengthen our relationships with customers through a full suite of banking products. This starts with customers being able to easily fund their Cash App accounts. Overtime we've expanded the ways customers can do this, whether through direct deposit, paper money, check deposits, or bank transfers.

Cash App Card and direct deposit are two of our most important banking products and we're focused on growing usage of both. Cash App Card is usually our first financial services product that customers try, and often their introduction to banking with Cash App. As of September,

there were nearly 18 million actives using Cash App Card, making up more than 35% of our monthly actives and bringing in half of all inflows across our platform.

In Q3, we made it easier to bank with us. Customers can now receive an account and routing number instantly when ordering a Cash App Card. This reduces friction for those who need banking services and has driven meaningful growth in direct deposit customers.

As we continue to deepen the connections between our ecosystems and undertake the complex integration of Afterpay, one of the long-term opportunities we are most excited for is in Commerce.

In Q3 we completed the rollout of our first iteration of the new Discover tab, making it seamless for customers to search for people and businesses and find offers, including instant discounts from merchants who accept Cash App Pay. Cash App Pay lets customers checkout through a simple QR code payment whether online or in-person. After testing Cash App Pay at Square sellers over the past year, we're beginning to broaden Cash App Pay acceptance outside of the Square ecosystem, starting with select Afterpay merchants.

We're still early in our journey to transform Cash App into a commerce destination that bridges our seller and consumer ecosystems. We believe it will take some time to achieve this vision, and doing so will bring us back to our original mission to help sellers make more sales.

Finally, we know a lot's changed in our business over the last year, including with the acquisition of Afterpay, and we recognize that understanding our business today may seem complex, especially in a changing macro environment. We're working to distill how we invest and operate into a clearer and more cohesive framework to help you better understand our business in 2023 and the longer-term. Amrita will be addressing some of our current thinking for 2023 today in her remarks but we plan to do so more comprehensively in our fourth quarter call in February.

With that, here's Amrita.

Amrita Ahuja, Chief Financial Officer

Thanks Jack. There are three topics I'd like to cover today.

First, an overview of our third quarter results. Second, trends we've seen across our business in October. And third, our discipline around expenses.

In the third quarter, we delivered strong growth across our ecosystems with gross profit of $1.57 billion, up 38% year over year and 46% on a three-year CAGR basis. Gross profit includes a $19 million impact from the amortization of acquired technology assets primarily related to Afterpay, and excluding these non-cash expenses, gross profit was $1.59 billion.

We delivered strong profitability during the quarter, with Adjusted EBITDA of $327 million.

In the third quarter, our BNPL platform, which we acquired through the acquisition of Afterpay, contributed $150 million of gross profit split across Square and Cash App; and excluding this, gross profit for the quarter was $1.42 billion, up 25% on a year-over-year basis and 42% on a three-year CAGR basis.

Cash App generated $774 million of gross profit in the third quarter, an increase of 51% year over year, and 84% on a three-year CAGR basis. Excluding our BNPL platform, Cash App gross profit was $700 million, up 37% year-over-year and 78% on a three-year CAGR basis.

This quarter, overall inflows into Cash App totaled $52 billion, for growth of 19% year over year, and represented our highest quarterly inflows into Cash App. Let's look into the drivers using our inflows framework, across actives, inflows per active, and monetization rate:

First, our network reached 49 million transacting actives in September, up 20% on a year over year basis, with daily and weekly actives growing even faster. With Cash App's Community pillar, we remain focused on enhancing the viral growth of peer-to-peer with complementary marketing programs that target new audiences.

Second, inflows per active averaged $1,046 in the third quarter, which was relatively consistent with the first and second quarters, and was also stable on a year over year basis. Inflows per active have been driven by continued product adoption, with Cash App Card and direct deposit as Jack mentioned, and by expanding our inflow channels.

We believe driving inflows per active starts with customers' ability to easily fund their Cash App accounts through a variety of channels. Together, direct deposit and paper money deposits have made up a growing share of overall inflows, reaching 14% of inflows in the third quarter, up from 9% a year ago.

In September, customers received more than $2 billion in direct deposits into their Cash App accounts, driven by strong growth in direct deposit actives and direct deposit inflows per active compared to the prior year.

Paper money deposits crossed nearly $3.5 billion in cumulative deposits through September, only a year since launch.

Square generated $783 million of gross profit in the third quarter, an increase of 29% both year over year and on a three-year CAGR basis. Excluding $75 million of gross profit from our BNPL platform, Square gross profit was $708 million, up 17% year-over-year and 25% on a three-year CAGR basis.

Square GPV grew 20% year over year in the quarter, or 22% on a constant currency basis with a 2 point headwind to growth from foreign exchange rates.

Looking at our cohort economics, we continued to see healthy retention trends across our existing seller base. In the third quarter, we achieved positive GPV and gross profit retention for our Square business.

Looking into the drivers of Square's third quarter performance. First, we continued to drive growth with larger sellers. Gross profit from mid-market sellers was up 22% year over year, and 39% on a three-year CAGR basis. Our developer tools have helped us serve the needs of larger, more complex sellers, allowing us to grow upmarket. During the third quarter, nearly 50% of mid-market GPV was generated by sellers connected to our open developer platform.

Second, we've continued to expand globally. In the third quarter, GPV from our markets outside the U.S. grew 40% year over year, or 55% on a constant currency basis, as foreign exchange was a significant drag on our year over year growth across all international markets. Looking at volume trends by market in the quarter, growth in Australia and Canada remained strong while we saw a macro-related slowdown in the UK.

Now to provide an update on our BNPL platform, which we acquired through the Afterpay acquisition. In the third quarter, GMV for our BNPL platform was $5.4 billion, up 10% year over year, or 60% on a three-year CAGR basis.

For overall growth trends, we've experienced an impact from spend shifts from online to in person, competitive dynamics, as well as foreign currency, which slowed year over year GMV growth by five points in the third quarter.

As we integrate Afterpay, our teams are focused on bridging commerce across Cash App and Square, and are making steady progress towards our longer-term vision.

On a GAAP basis, revenue for our BNPL platform was up 6% year over year, growing slower than GMV given mix shifts to enterprise sellers and newer markets. Gross profit was down 3% year over year, impacted by $12 million in amortization of intangibles within cost of sales. Without this impact, gross profit growth would have been more in-line with revenue growth.

Losses on consumer receivables were 0.96% of GMV during the third quarter, an improvement quarter over quarter compared to 1.02% in the second quarter, and an improvement year over year -- driven by mix shifts as well as enhancements to our risk models and processes during the first half of the year. We continued to see healthy consumer repayment behavior with more than 95% of installments paid on time.

As we enter into 2023, we intend on simplifying many of these disclosures. We don't intend on speaking to our BNPL performance separately once we anniversary the acquisition of Afterpay, and we'll also shift our focus away from three-year CAGRs and towards year over year growth rates as we lap the onset of the pandemic three years ago.