Block, Inc. (NYSE:SQ) Q4 2023 Earnings Call Transcript

Block, Inc. (NYSE:SQ) Q4 2023 Earnings Call Transcript February 22, 2024

Block, Inc. misses on earnings expectations. Reported EPS is $0.45 EPS, expectations were $0.58. 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 Fourth Quarter 2023 Earnings Conference Call. 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 Fourth Quarter 2023 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 and guidance, as well as our long-term targets and goals and 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 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. Further discussion of — during this call of Cash App’s banking services referred to those offered through 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 some of our gross profit growth and adjusted operating income margins.

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. Last quarter, I focused on Shareholder Letter on how we’re going to grow Square through four priorities. This quarter our letter is about Cash App strategy and our goal to become one of the top providers of banking services to households in the U.S. If you haven’t yet, please read that letter for details. As we did last quarter to maximize time for your questions, we’re going to focus our opening remarks on Amrita providing more details on the financials. Over to Amrita.

Amrita Ahuja: Thanks, Jack. There are two broad topics I’d like to cover. First, where we’ve been, in particular our performance for the full year and fourth quarter of 2023, where we saw strong growth and meaningful improvements in profitability, driving progress against our investment framework. Second, where we’re headed. Our expectations for 2024, our guidance for the first quarter, recent trends we have seen, and ways we will look to drive improvements on Rule of 40. Let’s start with our strong growth and efficiency in 2023, as we continue to drive toward our Rule of 40 target in 2026. We ended 2023 with $7.5 billion in gross profit for the year, up 25% year-over-year, or 24% on a combined company basis. Our heightened focus on efficiency, helped us improve profitability during the year.

Adjusted EBITDA was $1.79 billion, up 81% year-over-year and 24% margin on gross profit, our highest-ever. Adjusted operating income, which as a reminder includes expenses related to stock-based compensation and depreciation was $351 million, our highest yet, representing a 5% margin on gross profit and compared to a loss of $145 million, a year ago. Cash flow generation also improved this year as adjusted free cash flow for 2023 was $515 million, up from negative $346 million a year ago. Taking the components together, we achieved Rule of 29 in 2023 on a combined company basis, which was a few points higher than our guidance as of the third quarter. The other component of our investment framework is gross profit retention, which shows our ability to retain a customer over time and is an indication of whether our products, pricing, and support are valued by our customers.

During 2023, Square and Cash App each achieved positive gross profit retention in aggregate across our annual cohorts, Square cohort saw strength in software and banking, offset softness in processing volumes during the year. Cash App benefited from growth in inflows per active, driven by financial services products and monetization from pricing changes. In the fourth quarter, gross profit was $2.03 billion, up 22% year-over-year. Adjusted EBITDA was $562 million and adjusted operating income was $185 million, both higher than our guidance, driven by continued discipline in discretionary spend. On a GAAP basis, operating loss of $131 million was impacted by a goodwill impairment of $132 million, severance expenses of $70 million, primarily related to our recent organizational restructuring, and lease impairment restructuring expenses of $34 million.

Also as a reminder, starting in the fourth quarter, we restructured our commerce efforts by moving our BNPL platform fully into Cash App. We are reflecting this change in our fourth quarter and 2023 gross profit results, as well as prior periods. Let’s get into the drivers for each of Square and Cash App in the fourth quarter. Square generated $828 million in gross profit, up 18% year-over-year. Square GPV was up 10% year-over-year in the fourth quarter. While we experienced positive acquisition and stable churn of existing sellers compared to prior periods, GPV per seller continued to be affected by slower discretionary spend in the U.S. And consistent with what we shared last quarter, we’ve also seen a lower gross profit contribution from ramping cohorts of sellers.

Within our card-not-present volumes, we saw solid growth in online volumes up 11% year-over-year. This was partially offset by a decline in manual keyed entry or MKE volume. Where a seller manually enters card information into a payment device, either in person or over the phone. This has been an ongoing trend with MKE volume now representing just 13% of Square GPV in the fourth quarter of 2023 compared to more than 16% two years prior. We expect the headwind from MKE transactions to remain for some time although its impact should moderate as we expect software-enabled payments to become an increasing driver of our business. While Square GPV growth has moderated, driven by GPV per seller and MKE declines, our banking products and vertical point-of-sale solutions delivered strong growth, with gross profit from these products up 18% — 28% and 27% year-over-year, respectively.

Cash App generated $1.18 billion in gross profit in the fourth quarter, an increase of 25% year-over-year. Looking at the components of the inflows framework, which as a reminder, does not include our BNPL platform. As of December, Cash App had $56 million monthly transacting actives, up 9% year-over-year. Inflows for transacting active averaged $1,137 in the fourth quarter, up 8% year-over-year, driven by increasing adoption of our financial services products over the past year. Cash App Card continued to increase its scale and introduce customers to financial services within Cash App. Cash App Card reached 23 million monthly active, representing more than 40% of our total active base in December and going 20% compared to the prior year, more than twice as fast as overall monthly transacting actives.

Monetization rate was 1.48%, up 9 basis points year-over-year and 5 basis points quarter-over-quarter. Improvement from the third quarter was driven by a number of factors, including an increase in Bitcoin gross profit from pricing changes implemented during the quarter. Turning to our BNPL platform, which contributed $242 million of gross profit to Cash App in the fourth quarter. GMV from our BNPL platform with $8.6 billion in the fourth quarter, up 25% year-over-year, driven by strength across our Pay-in-Four offering as well as Single Use Payments, which allows customers in the U.S., UK, and Australia to shop by the Afterpay app at merchants we don’t have a direct relationship with and pay using BNPL. Losses on consumer receivables were 1% of GMV, consistent with historical ranges.

As Jack included in his letter, integrating commerce payment tools is a key focus for us next year. And we see powering BNPL through Cash App Card as a significant opportunity. Turning to our guidance. We have committed to achieving our Rule of 40 target in 2026. Our primary objective in 2024 is to deliver an improvement from the Rule of 29 we achieved in 2023, on a combined company basis. To achieve this, we have put forward an initial guidance that we intend to exceed, by at least one point of outperformance during the year, either on gross profit growth or adjusted operating income margin, or both. As we did last year, we are working to identify growth opportunities and additional efficiencies that further progress us towards Rule of 40.

For the full year 2024, we are expecting at least $8.65 billion in gross profit or at least 15% growth year-over-year. By ecosystem, we expect Cash App to grow faster than Square but for growth to moderate from 2023 as we lap pricing changes and other initiatives that improved our cost structure. As we look to 2024 and beyond, we are focusing our efforts on driving engagement through product adoption and product velocity. Within Square, we expect software and integrated payments and banking to be continued drivers of growth. We believe the work we put towards our new strategic priorities and the investment behind several go-to-market initiatives can improve seller acquisition over the next few years. On profitability, we are raising our full-year guidance and now expect adjusted operating income of at least $1.15 billion compared to our preliminary guide of $875 million and adjusted EBITDA of at least $2.63 billion versus $2.4 billion.

This represents a year-over-year margin expansion of approximately 9 points on adjusted operating income and 7 points on adjusted EBITDA. As we continue to focus on managing costs, we expect to achieve leverage on share-based compensation expenses as a percentage of gross profit compared to 2023. This guidance on growth and profitability is based on the visibility we have into our business today, with no significant changes to the macro-environment. Lastly, our guidance for the first quarter of 2024, we expect to deliver between $2 billion to $2.02 billion in gross profit, or 17% growth at the midpoint. For Square, we expect gross profit and GPV to moderate slightly compared to the fourth quarter of 18% and 10%, respectively. So far this year weather has periodically impacted Square GPV in the U.S. and particularly in January where we saw it driving 3 to 4 point moderation in growth.

And certain regions experienced impacts to in-person volumes particularly within food and drink, and retail. For Cash App, we expect growth to be driven by actives and inflows per active in the first quarter. We expect the gross profit growth rate to moderate compared to the fourth quarter’s 25% and will be lapping tougher comparisons. Looking at profitability, we plan to deliver both quarter-over-quarter and year-over-year growth with adjusted operating income of $225 million to $245 million and adjusted EBITDA of $570 million to $590 million. The respective midpoints represent margin at 12% and 29% and year-over-year growth of 361% and 57%, demonstrating our continued focus on driving profitable growth. With that, I’ll now turn it back to the operator to start the Q&A portion of the call.

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Tien-Tsin Huang from J.P. Morgan. Please go ahead.

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Q&A Session

Tien-Tsin Huang: Thank you. Thank you. So, you acted really quickly here on costs. So I want to ask how quickly you can just add growth in 2024. Really product velocity is the question here. In your letter, Jack, you talk about closing product gaps and Cash App and reclaiming leadership in engineering and design at Square. How quickly can you get there? And when might we see some measurable benefits to growth in 2024? Thanks.

Jack Dorsey: Yes, across the Board in every one of our business units we’ve been going through an exercise in order to simplify how we work, so we can move much faster. And that’s inclusive of Square and Cash App and TIDAL and TBD. So you should expect a much higher product velocity across the Board. With Square in particular, we’ve been doing a lot of platform work. This is our number one priority to ensure that we can move much faster with some features and feature gaps that have held us back from certain customers, namely with food and bev. We have, for example, [pre-off] (ph) coming this year. And when those platform elements unlock, it just kind of unlock a whole bunch of speed across restaurants, retail, services. And I believe we’ll be able to push really hard and see really good outcomes.

On the Cash App, where we’re going to benefit a lot from is the focus on the banking relationships — Hello. We’ve been focused, we’ve been focused a lot of our — we’ve been pulling this threat, I should say, on banking relationships for quite some time. And we have proven out the model with the success of the Cash App Card. And it’s really focused a lot of our efforts in order to — as I said in the shareholder letter bank or base. So our strategy is to make sure that we are the best choice and the first choice for anyone looking who’s making $100,000 or $150,000 to see Cash App as their primary bank. And that has to do — one of the biggest signals is that the majority of their direct deposit is going into Cash App. So we’re going to move very fast because we have a much more focused roadmap and the roadmap against banking in particular.

And as we said in the letter in a lot of detail, I think we’ll see very positive outcomes from that focus and it allows us to go to parts two and three of that strategy, which is on families and also becoming a Social Bank. Cash App is inherently social. We have this incredible network effects through starting with peer-to-peer. And we have this opportunity to make it even more social. And really look deeply at the local payments in local commerce in particular, and that’s where the intersection with Square comes into play. We’re going to start putting our Square customers first and foremost in the Cash App and you really see the power of our combined ecosystems and the combined network.

Amrita Ahuja: And I’d just add, Tien-Tsin. Just, tie this together with our 2024 outlook. Our guidance philosophy is to guide based on our current run rate trends in our business. What we’re seeing in the business quarter-to-date as of earnings and known expense and growth levers that we’ve incorporated into our plan entering the year. So a lot of the refocused strategy and key growth initiatives that we’re discussing are not included in our 2024 expectations, given how recent they are. And they provide us with opportunities to outperform relative to this initial guidance, whether it’s the product platform or go-to-market experimentation within the Square business or the Cash App bank the base strategy, we’re hard at work at each of those elements. And we expect those to deliver for us as we get into later into the year in 2025 and beyond, but still early days.

Operator: Your next question comes from the line of Timothy Chiodo from UBS. Please go ahead.

Timothy Chiodo: Great. Thank you for taking the question. I wanted to dig in a little bit to the Square distribution approach. You’ve talked about building out the vertical outbound sales team and also potentially experimenting with local in-market sales teams. And also saw in the shareholder letter, you mentioned the revamped referral program. But maybe you could expand upon how Square views the potential to partner with banks and ISOs. So adding bank partners for distribution, adding ISOs to get broader coverage across the nation, and the various considerations and how you sort of view the potential for that in the future? Thank you.

Jack Dorsey: Yes. We’re definitely open to this, we’ve tried this in the past — in our first few years as a company. As many of you know, J.P. Morgan Chase was one of our earliest investors of Series B. And we had Square readers in every single branch in the United States. It wasn’t that effective. I think the — that particular strategy just did not work because the expectation of the customer coming in, especially for business banking for whatever reason was off. That’s not to say that all these channels don’t work obviously, it does work for a few of our competitors. And we’re certainly open to them and open to exploring them. I think the biggest thing that is really important for Square is certainly the — our go-to-market approach, but our product itself.

It’s where I want to put a lot of our focus. One of the things that we’re doing soon is we’re — right now we have about four or five apps in the App Store. It’s pretty confusing to direct people to the app store and when they get there, really it’s a function of Apple’s search results. So as to whether they find us or not, the app they need, especially for restaurant or retail or services organization. So what we’re going to do is, we’re going to go back to having one app, which just can be called Square. And we can easily say that anyone that you can go to Square or you can download Square. You have everything you need. The interface and navigation and features will dynamically shift based on the type of merchant you say you are. And shift over time as you get more and more sophisticated with the software.

And we can also obviously help folks with our sales team to guide them through, but I think generally it would be a whole lot simpler. We have massive success with self-serve. And as we do add referral engines and be more targeted with them, specifically within food and beverage and restaurants having a much simpler way to get the app to use it and to get up and started, whether you’re a micro merchant, just one person so proprietorship or all the way up to multi-location, multi-country. So that’s the goal and will realize all that this year. And I think that’s really going to unlock a ton of growth and make anything that we do from a distribution standpoint, whether it be through ISOs or bank partnerships. What I think is more important through very targeted channels for restaurants and services and retail, it’s going to make it that much better.

And most importantly, we will focus on retaining, which is a big aspect. The other thing that I think will help us retain, which is a core part of our strategy number four is banking. We have nine products within the market, they’re only going to get stronger. It’s the thing that truly differentiates us from our peers. And we’ll — we not only have an ecosystem that serves their entire business, but we have the equivalent of business banking income, just like this J.P. Morgan Chase branches that they’re going to in the past, they can get a card, they can get a credit card, they can get a line-of-credit, they can get a loan, as we’ve been doing for quite some time. And that it’s integrated all under one stack with one app download is hugely unique and also hugely important to our sellers.

So, I think it’s — I think it’s going to be amazing.

Timothy Chiodo: Thank you, Jack.

Operator: Your next question comes from the line of Darrin Peller from Wolfe Research. Please go ahead.

Darrin Peller: Hey, guys. Thank you. Just to hone in a little bit more on direct deposit, it obviously is moving to the forefront around Cash App for your strategy on it. And look, I mean, we obviously see a notable set of banking assets you’ve been able to package for your MAUs. But if you can just expand on what you see actually driving adoption or accelerated adoption of direct deposit, now getting that 2 million to say, 5 million or 10 million users versus I know there’s been some prior attempts to make that happen. And then, Jack, maybe just what timeframe would you consider a success on this front in terms of an incremental, maybe 5% or 10% of Cash App users taking on direct deposit?

Jack Dorsey: I think the biggest driver is going to be easy connected banking features that just work and that people can trust. We want to make sure that people see Cash App as reliable, as dependable, as something that they trust their money within their full direct deposit of their pay check with. And trust is the one input, but a big factor of that is the output. What can I actually do with it? And the Cash App Card has been one of our most successful products, within Cash App. It’s extremely easy to get a card. It’s extremely easy to personalize it, to use it, to change it, to give it to family members. So there’s a lot that’s attractive there. There are some gaps that we’re missing that traditional banks offer that we do not.

But really, the roadmap is filling those gaps and doing so in an intuitive, well-designed way, that feels fresh and benefits from technology to give time back to the customer. And then as people see that and as people use it and they talk with their friends and their family about it, that’s the growth. That’s how direct deposit grows. And people, again trust us more and more to put more of their pay check in the Cash App, because they know they can use it in very traditional ways that are reliable, but also entirely new ways. And it all fits together perfectly and seamlessly. So, expectations, we want to move as fast as possible. The fact that we’re no longer focusing on expanding globally, for right now, we’re focusing on banking. Our base in the United States is going to allow us to move much faster, and I think we’ll see outcomes much faster than we have traditionally.

And this is the base foundation for our other two priorities, which is moving more upmarket with families, which we’ve seen some early positive signs from. And then really going after being at the social bank, starting with peer-to-peer, but expanding beyond that and really getting into neighborhoods and local communities and focusing a lot more on commerce. So all these tools add up to desire we believe to put more of my money with Cash App and use it there, and hopefully more and more it becomes 100%.

Amrita Ahuja: And Darrin, just to go a little bit deeper on some of the actual features that we think will be compelling for customers. We’ve got a bunch of features, we’re rolling out more features to give customers an experience beyond what’s available in the market today. So today, we think our direct deposit offering is differentiated with no fees or minimums, early direct deposit availability, and the benefit of our active money being in the broader Cash App ecosystem, where they can send, spend on Cash App Card or Cash App Pay, invest it, et cetera. We’re also focused on the new products and features that drive engagement. So, for example, we recently launched free overdraft coverage up to a certain amount. We introduced yield on savings balances and allowed for automatic paycheck distributions.

So we’re prioritizing launching products that customers expect from us before they start bringing in more of their money. Today, it’s about 2 million paycheck deposit actives as of December, about 3% of our monthly actives. But this will be one of the key KPIs, along with broader inflows proactive, that we’re focused on driving forward as part of our bank-to-base strategy.

Darrin Peller: That’s great. Thanks, guys.

Operator: Your next question comes from the line of Mike Ng from Goldman Sachs. Please go ahead.

Mike Ng: Hey, good afternoon, and thank you very much for the question. I think your 2024 outlook implies OpEx growth of about 4%. Would you just discuss your confidence in being able to achieve that atleast 15% gross profit growth against the backdrop of this tight cost management? And then what signals are you looking for in deciding whether to invest in OpEx more aggressively again? Thank you.

Amrita Ahuja: I can start maybe with a reminder of kind of the key areas of operating expense leverage that we’ve been pursuing and which we believe still continue to have opportunity against. And that those constraints are clarifying for us, actually in supporting further scoping, prioritization, and operational excellence in how our teams operate. But the key categories being one personnel, obviously, you heard from us last quarter our constraint around people, which at the 12,000 person cap, which we’re currently operating under and expect to for some time, that unlocks a tremendous amount of leverage for us, both from a non-GAAP operating expense perspective as well as leverage from an SBC perspective. And you see that reflected in our expectations for 2024.

And that constraint, again, is what leads to stronger prioritization and focus in the areas that will impact our customers the most and ultimately lead to profitable growth. The other key focus area for us is around corporate overhead expenses, where we’ve already seen opportunity to get more efficient, whether it’s things like third-party spend with vendors, real estate, T&E data and cloud fees, professional fees, et cetera. We have an opportunity to continue to refine how we operate, to make sure that we are operating with the greatest amount of discipline, constraint, and efficiency. And then as we look longer term, of course, there are new technologies like AI, that we can be leveraging in-house, not only in terms of the products that we’re serving our customers, but that deliver efficiency to our teams internally, whether it’s customer service or sales or engineering and design.

And then, of course, structural costs, which we’ve already made some headway on with some partner renegotiations last year, but will continue to pursue in terms of unit economic improvement across our base of products. So there are a number of different areas for us that we’ve already been digging deep into, and for us to continue to do that, that actually support our opportunity to continue to grow our platforms and grow our overall gross profit.

Mike Ng: Great. Thank you, Amrita.

Jack Dorsey: The two things — sorry, the two things I would add to that is just to emphasize what Amrita said about AI. I mean, you all have been hearing AI constantly in all these calls in terms of efficiency, but it’s going to be extremely impactful for us, as we look at everything that we’re doing and all the tools that we’re building and how much more productive it makes all of our engineers. And I think in the very near future, our designers as well, that allows us to learn much faster, it allows us to ship faster, allows us to correct mistakes much faster, and really be ahead of the market where we think our strength is, which is creativity, and bringing all these very complex systems together. And the second thing is about three years ago, we were more in a mode of letting as many flowers bloom as possible, and it created a bunch of inefficiencies between all of our ecosystems.

We had a lot of duplication between Square and Cash App. And these tools and these costs just weren’t really great at all. And we’ve taken a — we’ve done a ton of work to clean that up, and I believe there’s even more to go. So I believe we can actually move much faster, ship much faster because of those two things and because we don’t have such a dependence on this multitude of tools that are all different, but effectively doing the same thing or solving the same use case.

Mike Ng: That’s very helpful. Thank you, Jack. Thank you, Amrita.

Operator: Your next question comes from the line of Harshita Rawat from Bernstein. Please go ahead.

Harshita Rawat: Good afternoon. I want to ask about Cash App and it’s commerce. Cash App is growing rapidly, although from a small base. Can you give us some color on the composition of these volumes? For example, within Square merchants that are online. You’ve had some very interesting merchant acquirer partnerships to enable Cash App Pay recently as a payment option online. What are some of the most salient things you can do to kind of grow Cash App Pay penetration in e-com? And also just related to Cash App overall, can you also talk about your compliance investment of KYC at [indiscernible]? Thank you.