Block, Inc. (NYSE:SQ) Q1 2024 Earnings Call Transcript

Block, Inc. (NYSE:SQ) Q1 2024 Earnings Call Transcript May 2, 2024

Block, Inc. beats earnings expectations. Reported EPS is $0.85, expectations were $0.72. Block, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen, and welcome to the Block First Quarter 2024 Earnings Conference Call. Today’s call will be 45 minutes. And I would now like to turn the call over to your host, Nikhil Dixit, Head of Investor Relations. Please go ahead.

Nikhil Dixit: Hi, everyone. Thanks for joining our first quarter 2024 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 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. These forward-looking statements include discussions of our outlook, strategy and guidance as well as our long-term targets and goals. We may decide to shift our priorities or move away from these targets and goals at any time. These statements are subject to risks and uncertainties.

Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered 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. Further discussion during this call of Cash App’s banking services referred to those offered by our bank partners. Within these remarks, we will also discuss metrics related to our investment framework, including Rule of 40. With Rule of 40 we are evaluating the sum of our gross profit growth and adjusted operating income margin.

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 and our historical financial information spreadsheet 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: Thank you all for joining us. In the last two quarters, I focused my shareholder letter on our priorities for Square and Cash App strategy to become one of the top providers of banking services. This quarter, my letter was focused on the Bitcoin strategy. If you haven’t yet, please read that letter for details. Before Amrita talks about our performance, there was a news report yesterday I wanted to address directly. In general, these sorts of stories can lack full context. First, we do not believe that there are any new investigation in the Block, but rather that these reports relate to the existing inquiry by the DOJ that we’ve previously disclosed. Second, there was critical information omitted from the article when it was first published.

In 2022, our compliance engineering risk team who proactively investigate threats identified signals that lead us to conduct a thorough review of transactions potentially associated with sanctioned countries. We voluntarily reported these to the Office of Foreign Assets Control, OFAC, where we were transparent with them, and we stand by the scope of the transactions that were included in the report. OFAC then issued us in no action letter in which they determine no further investigation or action was needed at the time. This is how the process is supposed to work and this outcome was originally not originally included in the article. Third, as it relates to preventing tariffs financing via Bitcoin, we have a robust control environment in place to mitigate exposure from adversaries.

For instance, we use industry-leading blockchain analytics firms to screen transactions in real time. We also maintained some of the most restrictive limits in the industry for on chain Bitcoin withdrawals, which are deliberately calibrated to prevent bad activity. And of course, we require identity verification for customers engaging with our Bitcoin products and FIU suspicious activity reports when warranted, which is an important contributor to keeping the broader financial ecosystem safe and secure. We take compliance seriously at Block. A culture of compliance is foundational to our work. We have a radically transparent culture that supports us. Employees are empowered to raise issues through multiple channels, including directly to me or anonymously through our Whistleblower hotline.

We continuously improve our compliance program based on the number of different inputs, including self-identified issues, audits and guidance from our regulators. Adversaries have always and will continue to try to exploit the global financial system. No company is perfect at preventing this. Our work is to constantly be steps ahead of their attacks through better use of technology. This includes leveraging industry-leading machine learning models and product controls aimed at detecting and preventing bad activity in real time. It’s an always-on part of our business, and it always will be. And with that, I’ll turn it over to Amrita to talk about the quarter.

Amrita Ahuja: Thanks, Jack. I’ll keep my remarks brief, as we’ve included information on our performance and guidance in the financial discussion of our shareholder letter. We delivered strong results during – across the company during the first quarter. Gross profit was $2.09 billion, up 22% year-over-year, consistent with the fourth quarter. Adjusted EBITDA was $705 million, nearly doubling year-over-year and adjusted operating income was $364 million, up seven times year-over-year. By business, Cash App’s gross profit was $1.26 billion, up 25% year-over-year. And Square’s gross profit was $820 million, up 19% year-over-year. Gross profit outperformance compared to our guidance was mostly driven by Cash App. We saw strength across Buy Now Pay Later, Bitcoin, Cash App Borrow and Cash App Card, where we had 24 million monthly actives.

Inflows per active were up 11% year-over-year in the quarter for our highest growth since the fourth quarter of 2021. Square’s GPV growth in the quarter was in line with our expectations as we saw continued moderation in same-store sales growth. This was more than offset by strong attach rates on our broader ecosystem of software and banking products. Our profitability improved as we showed discipline across a range of expenses ending the quarter below our 12,000-person cap and achieving leverage on corporate overhead expenses. For the 12 months ending in March, adjusted free cash flow was $1.1 billion, up more than 2.5 times compared to the prior 12 months and represented 50% of adjusted EBITDA, an improvement compared to the 36% conversion rate in the prior period.

Turning to our expectations for the remainder of the year. We are raising our full year 2024 guidance for both gross profit and profitability, not only reflecting the Q1 outperformance, but also reflecting our raised expectations for the remainder of the year. For full year 2024, we are now expecting gross profit of at least $8.78 billion or 17% growth year-over-year. We expect Cash App’s gross profit growth to moderate slightly from the first quarter’s 25% as we lapse some meaningful pricing and structural cost benefits with relatively stable growth from the second quarter through fourth quarter. For Square, we expect gross profit growth to moderate from the first quarter’s 19% growth rate as we lapped strong banking performance and pricing changes from the prior year.

In the back half of the year, we expect GPV growth to be stable to improving behind more favorable same-store growth comparisons with a narrowing delta between gross profit and GPV growth rates. We continue to focus on initiatives that improve our product velocity. These include several upcoming launches that further our strategies for Cash App and Square, most notably testing and rolling out Afterpay on Cash App Card. And for Square, completing the orders migration this summer and conversion to a single app by year-end. These initiatives remain on track, and we expect them to benefit our growth into 2025 and beyond. For profitability in 2024, we are now expecting at least $1.3 billion in adjusted operating income or 15% margins on gross profit.

With efficiency initiatives underway to improve our structural costs and corporate overhead, we also see opportunities to invest in the back half of the year in high-return areas like sales and marketing that can drive future growth. Our updated guidance now implies a Rule of 32 for full year 2024. This is an improvement compared to 2023 and compared to our prior guidance of at least Rule of 29 and progresses us towards our goal of achieving Rule 40 in 2026. With that, I’ll now turn it back to the operator to start the Q&A portion of the call.

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Q&A Session

Operator: [Operator Instructions] And your first question comes from Tien-Tsin Huang at JPMorgan. Your line is open.

Tien-Tsin Huang: Hi. Thanks for your comment Jack and Amrita. I wanted to, Jack follow up on a question I asked you last quarter, and I think you mentioned that expect much higher or faster product velocity from Block across the board. So just wondering if you can give us a progress report on that? And are you close to where you want to be in launching and enhancing products. And I’m curious if some of the unannounced products that you’re focused on are more about entering new categories is what I call it? Or are they more incremental to what you already have in place? I know a lot of investors have asked me about that, I’ll ask you. Thanks.

Jack Dorsey: Yes. So we’re focused on our development velocity in two main ways. One is making sure that we’re much stronger in our engineering and design disciplines. We’re putting much more focus on that work. This is what did a big change here with Square just recently to reorganize the team, to be more focused on engineering and design. And we’ll start seeing that play through more and more in our work. And the second way we’re doing is scoping, making sure that we’re focused on the most important things. On the Square side, the most important thing that I want us to focus on right now is reliability, making sure that we stay up for sellers and that we have ways for them to work even if their networks fail such as the off-line mode.

The second most is what we’ve talked about in the past is that this focus on local and food and beverage. And there’s a number of things that we’re doing immediately to help not only with retention, but with acquisition. Amrita mentioned a single app, which is on track to launch this year. So that we have a very simple call to action, download Square and you have everything you need, including all of our banking products within one app. And then onboarding is another big one. We have successfully taken our onboarding flow for Square sellers from about 15 steps and something that took people close to 20 minutes to complete down to two steps and takes under five minutes. We rolled it out to a small audience and watch what they’re doing. And we saw all positive results, some much more positive than we’re expecting.

So we’re going to be rolling out that in the coming months. And that should have a pretty great effect on how we sign up new merchants. And most importantly, that they see more of our ecosystem and they want to stick around. And as we’ve talked about in the past, I think the best differentiator for us is the banking aspect of our ecosystem on the Square side. To the second point of your question, I think both on Cash App and Square. There are new products, of course, but there’s a lot of work to get to parity with some of our competitors. There’s a lot of work to put some of the features that we’ve had into the hands of millions such as After Pay on the cash card which is going to continue to expand out this year and something we’re super excited about.

So a lot of work that is more iteration. And of course, we have some new products that we’re thinking about as well. But the iteration stuff is really going to unlock a lot of new customers for us, we believe.

Tien-Tsin Huang: Sure. No, Looking forward to it. Thanks.

Operator: And we will take our next question from Timothy Chiodo with UBS. Your line is open.

Timothy Chiodo: Great. Thank you for taking the question. I want to dig in a little bit on Cash App direct deposit net adds and the run rate that you might see for be seeing for new users. So last quarter, you mentioned that the addition of overdraft protection was helping to drive record gross adds for DD users. So I was wondering if the combination of that plus high-yield savings and live phone support and maybe some other features have really helped to maybe step up that run rate. So part of it is where is the run rate gone to today? And then the second part is, if it could potentially step up further with the addition of maybe some new products around bill pay or as you mentioned, Afterpay being worked into the cash card or cash card, BNPL, as we call it. Thanks a lot.

Amrita Ahuja: Hi, Tim, thanks for the question. Our top strategic priority, as you know, for Cash App is banking our base, which is about bringing more financial services or 57 million monthly actives. Banking is not a new concept for us, but it is one that we started prioritizing in a more meaningful way recently. The last few years, we’ve been seeing organic adoption of direct deposit. Now we’re focusing our efforts on driving this higher and winning that longer-term relationship with our customers. What we saw in March that Paycheck deposit actives grew on a quarter-over-quarter basis with Paycheck volumes growing faster than overall inflows. And as we think about continued growth here, there’s two key areas of focus: one, around the product and second, around how we go to market with those products.

From a product perspective, we’re not only prioritizing table stakes features, but also how we can make those offerings more compelling than what you can get at a bank. We’re hearing our customers say they want products that allow them to bank without any worries. That’s paying with checks, that’s bill pay, that’s a web offering. And we’re hearing from our customers that they want to achieve their financial goals. That’s initiatives around card spending insights around our savings initiative, around Afterpay on Cash App Card. From a go-to-market perspective, with all of these products and as we bring them together, we’ll be looking to package these products in a way that makes it easier for customers to discover and understand our offerings through the app that’s again, that’s bundling that’s packaging.

And then it’s testing incentives and other ways to drive conversion. We haven’t done much of that yet in terms of our go-to-market efforts with direct deposit. But you’ll see us do much more of this as the features come together in the back half of this year and into next year. Similar to what we’ve seen with Cash App Card or with Cash App Borrow, it takes time. It takes some time several years to get these to scale to where they are today. And we think similarly with bank or base and direct deposit, it’s a multiyear effort, but it’s 1 that we have deep conviction on and are very excited about.

Timothy Chiodo: Thank you.

Operator: We will take our next question from Darrin Peller with Wolfe Research. Your line is open.

Darrin Peller: Guys, thank you. It’s great to see the ongoing improvement in EBITDA and the guide you guys gave now a more notable increase than we expected so far, while at the same time, balancing it with growth being strong. So I guess in that context, if you can just give us a little more color on what you’re identifying in terms of efficiencies now that was able to drive that uptick? And maybe what’s on the horizon? What else do you see in the model that can drive further progress on efficiencies for EBITDA going forward?

Amrita Ahuja: Hi, Darrin, thanks for the question. I’ll start with the first quarter and then talk about what we’re looking at for the full year. Obviously, what you saw with the first quarter was our highest profitability metrics ever and a beat at the high end of our guidance of about $119 million from an adjusted OI perspective. With, again, nearly doubling in terms of EBITDA on a year-over-year basis. I think there’s kind of three key things to point out. Obviously, there’s continued strong growth and momentum across each of the two ecosystems Square and Cash App with 19% growth and 25% growth, respectively. But from an expense discipline perspective, three key things I’d call out. First is our personnel cap, which is driving the right level of sharpening our strategy and prioritization and scoping our work, as Jack mentioned, and we remained under our 12,000-person cap at the end of the first quarter.

Second, it’s driving leverage across each of our areas of corporate overhead, whether it’s T&E or professional fees, real estate, software and data fees, and third, it’s around our structural costs and continuing to focus on ways that we can improve there. And do want to note, as we’ve called out in our shareholder letter in the first quarter, we also benefited from $52 million in out-of-period items in Q1, mostly related to the releases of risk loss provisions established in prior periods. So that’s an important thing to note for the first quarter. More broadly, when we look at the full year from a profitability perspective, we’ve raised our profitability expectations both in EBITDA and adjusted OI basis, not only for the full amount of outperformance relative to the high end of our guidance for Q1, but also an improved expectation for the remainder of the year, where we expect to keep screws tight in terms of discipline and efficiency in how we run our business.

But where we also see the flow-through of strong incremental margins in each of our businesses as we continue to grow Square and Cash App strongly for the remainder of the year, but also leaving room for us to invest in growth initiatives in the back half of the year, that should benefit our future growth, particularly around sales and marketing. So those are the different levers that we’re looking at and why we think we can drive continued profitability through the remainder of the year.

Darrin Peller: That’s great to hear. Thanks, Amrita.

Operator: And we will take our next question from Harshita Rawat with Bernstein. Your line is open.

Harshita Rawat: Hi, good afternoon. Amrita, can you elaborate on the drivers and quarterly cadence of the gross profit growth of 17%. You gave some first half, second half color earlier, but just maybe talk a little bit more there and also about the assumptions for Cash App and Square. And then also, just as a follow-up, bottle and square loans scaled nicely over the past year and year or so. What determines your ability and willingness to continue to grow this revenue stream credit to benign. Thanks.

Amrita Ahuja: Sure. So let me start on our gross profit growth assumptions for the remainder of the year. So Obviously, we’ve raised our full year guidance on both gross profit and profitability. We now expect gross profit of $8.8 billion, at least $8.78 billion for the full year, that equates to about 17% growth year-over-year that reflects both the outperformance during the first quarter, mostly from Cash App with a modest beat from Square as well as improved expectations for the remainder of the year. If you look at sort of breaking that down into its component parts, we expect Cash App will grow slightly faster than Square this year. We are going to be lapping some of the structural cost improvements in the back half of the year and our implied guidance for the second half demonstrates at a block level, mid-teens gross profit growth expectation with these changes around structural cost and pricing mostly behind us.

Many of the key growth initiatives and strategies that we’re planning – that we’re hard at work at now and plan to be ramping through the back half of this year, whether it’s Afterpay on Cash App card, orders migration or the single app model, we expect to benefit our growth into 2025 and or less of a 2024 impact. Those are kind of – that’s sort of the cadence in the puts and takes around the remainder of the year. I think the second question that you asked was around Borrow. We have seen strong growth on Borrow the first quarter with originations up more than two times year-over-year. This is while we’ve been able to scale this product responsibly with loss rates in line with what we’ve shared historically. This is growth that’s primarily driven by increasing the number of loan actives while maintaining strict eligibility requirements.

And not only does Borrow have strong positive unit economics on its own, net of risk loss as a standalone product, but it drives a really compelling ecosystem benefit through greater inflows into Cash App that are then spent or invested across a number of different monetized products. In fact, we see nearly 40% of Borrow monthly actives making a transaction on Cash App card after receiving a borrow loan and we’ve seen strong conversion rates from those offered loans and repeat usage similar to what we see on a Square loans product or Buy No Pay Later product, we see that these products are very short in duration. And act as sort of cash flow management or working capital products. So similarly with Borrow we see repeat usage across Borrow monthly actives.

And it’s an area that we feel very strong about our machine learning and risk loss capabilities behind the growth of this product, and so we’re excited to continue to keep ramping it for our customers.

Harshita Rawat: Thank you.

Operator: And we will take our next question from Ramsey El-Assal with Barclays. Your line is open.

Ramsey El-Assal: Hi, thanks for taking my question this evening. I wanted to ask about the integration of Afterpay and Buy No Pay Later with the Cash App Card. How should we think about sizing the opportunity? In other words, which cash card customers or how many card customers would be eligible to use the Buy Now Pay Later capability. And also, do you have any preliminary view of what the product might look like? Will users be able to toggle between credit and debit in the app, for example, are there any other integrations like that, that you could share with us? Thanks.

Jack Dorsey: Yes. I mean so we’re really excited about this integration. Just some context for you. We acquired Afterpay some time ago. And I would say that we forced an integration way too quickly. And now having a fixed a bunch of those issues. The team is really executing on two main things. One is discovery. And that is within the Cash App bringing our Cash App network to – and bring the Square merchant network together. So a lot of visibility around local and a lot of what we hope to achieve with the power of our combined ecosystems, both on the merchant and the seller side. On the other side of that is the Cash App Card and how large that is and Cash App Pay, how large that network is growing to and putting Afterpay on top of that as well.

Afterpay on the Cash App Card, as I said earlier, is super exciting. We have started rolling it out as within any product, we’re looking at how people are using it. and we’ll be making decisions on what it ultimately looks like when we roll it out 100% over time based on how people perceive it, how they use it, how they find it valuable or not valuable. But we think it’s really exciting, and it’s taken us some tend to get here, but we’re here. So excited to see it roll out and for you all to be able to use it.

Amrita Ahuja: And I’ll just add a couple of points of data around that, Ramsey. First, with the opportunity that we’ve got with bringing Afterpay to Cash App card. This is having an already built-in audience of 24 million monthly actives who have spent more than $100 billion in total over the past year. Of course, we’re going to start small and as with any lending sort of product starts small and ramp based on the signals that we see, where eligible actives will be able to easily convert certain purchases into an Afterpay transaction. As Jack said, we’ve begun testing here already. We’ve seen strong attach rates and we’re excited to scale this in the coming months. This brings visibility and the utility of Afterpay into cash up much more directly than we’ve done so far.

And drive engagement around Buy Now, Pay Later, which on its own is growing nicely for us, 25% GMV growth, 32% gross profit growth in the first quarter on a year-over-year basis. And it helps merchant partners who have access now to a much bigger network of customers across the Cash App ecosystem. Just the second piece, as Jack mentioned, Cash App Pay. The strength in the growth of Cash App Pay wouldn’t have happened if it wasn’t for the enterprise sales team that Afterpay has built through the years, driving it across its network of merchants. And it’s now Cash App Pay is an example of a payment tool that customers can use regularly and so we’re giving customers the Cash App more and more ways that they can spend their funds and more reasons to inflow funds into Cash App.

We ended the quarter, March had 4 million monthly actives across cash at pay, adding $1 million monthly active each of the last three quarters, while GMV was up 40% – more than 40% quarter-over-quarter. So very strong growth here. And I think more milestones towards proving out the integration between Cash App and Afterpay.

Ramsey El-Assal: Really exciting stuff. Thanks.

Operator: We will take our next question from Trevor Williams with Jefferies. Your line is open.

Trevor Williams: Great. Thanks very much. I wanted to dig into Seller GPV. The card not present in retail growth rates, those have lagged overall GPV growth pretty consistently over the last few quarters. If you could just unpack what some of the dynamics have been within both of those? And then Amrita, on your comment that GPV growth could potentially accelerate in the second half – how much of that is comp driven versus potentially starting to see some benefit from some of the go-to-market changes you guys have made? Thanks, again.

Amrita Ahuja: Yes. I mean just to very directly answer the end of your question, I think most of it’s likely more comp driven in terms of more favorable comp but we’ve got a tremendous amount of work underway that we hope will and intend to shift the tide on Square GPV into 2025. Now just to back up, in the first quarter, Square GPV in the first quarter was up 9% year-over-year, which was in line with our expectations that we shared on the Q4 call, again, gross profit growth ahead of that based on the strength of our banking products and our SaaS attached products. U.S. growth was 6% in the quarter, while non-U.S. growth was 23% or 26% at constant currency. And as you noted, we expect, as we look ahead, to see stable to slightly improving GPV growth in the back half of the year.

But we’re not satisfied with these growth rates, and we want to turn the tide. We think that increasing product velocity, as Jack shared earlier, and some of our go-to-market changes can improve growth in 2025. Specifically, I would point to orders migration, which helps us with critical features for food and beverage sellers and beauty in salons like preauthorization of bars or deposits for services sellers. That work, as I mentioned earlier, is on track to be completed this summer or onboarding flows, where we’re reducing the friction for new sellers to join the Square ecosystem from 10-plus minutes to a much more faster and intuitive onboarding experience. We began testing that new onboarding flow with quick service restaurant sellers. And as Jack noted, those results are encouraging.