Block: What is the future growth path?

Here is a summary of the Block 3Q23 earnings conference call. For a review of the financial report, please refer to the article " Surging 15% after hours, will overseas Alipay Block skyrocket?"

I. Management Discussion

1.Share Repurchase: To achieve our 40 goals by 2026, we have authorized a $1 billion stock repurchase to offset the dilution caused by equity incentives. We had a strong performance in the third quarter and raised our profit expectations for the remaining time of this year. Additionally, we will demonstrate our investment discipline in the preliminary outlook for 2024 to drive profit margin improvement.

2. Cash Flow: Our strong profitability this quarter demonstrates our focus on efficiency in pursuing our investment framework. Adjusted free cash flow for this quarter was $427 million, compared to $88 million in the previous quarter. Over the past 12 months, adjusted free cash flow was $945 million, higher than the negative $99 million in the previous period.

3. Cash App Inflow Framework: As of September, the monthly active transaction volume reached 55 million, a YoY increase of 11%, driven by our P2P network. The average inflow of active transaction funds in the third quarter was $1,132, an 8% YoY increase, and relatively stable compared to the first half of the year. The monetization rate (excluding gross profit contribution from the "buy now, pay later" platform) was 1.43%, an 8 basis point YoY increase, mainly due to pricing changes over the past year and a relatively stable MoM performance.

4.BNPL: The platform contributed $94 million in gross profit to Square and Cash App in the third quarter. The GMV of the BNPL platform in the third quarter was $6.7 billion, a YoY increase of 24%. The consumer accounts receivable loss accounted for 0.84% of GMV, showing improvement both MoM and YoY.

5. Organizational Restructuring: In the fourth quarter, we restructured the organizational pricing, moving the BNPL platform to Cash App. By combining these two ecosystems, we are able to provide consumer experiences that others cannot, especially in the business sector. From a financial reporting perspective, we will no longer allocate 50% of the BNPL platform to Cash App and Square separately. Instead, starting from the fourth quarter, the performance of the BNPL platform and Casa will be included at 100% to reflect the recent organizational changes.

II. Outlook for the Fourth Quarter

Square: We expect an improvement in gross profit growth compared to the 15% growth rate in the third quarter. We anticipate a 9% YoY growth in Square's GTV for October. Our growth has slowed down due to lower GPV per seller and contributions from new seller groups. We believe that the GPV of each seller has been influenced by the freely disposable macro trends in the industry, which has continued until October.

Although we have achieved positive customer acquisition in the first three quarters of this year, the contribution of the new group of sellers who joined in the past two years to the growth of gross profit has not been as expected. We are focusing on developing our marketing strategies to improve this.

Cash App: We expect the year-on-year growth of gross profit to slow down from 27% in the third quarter, as our growth is stronger compared to the previous year.

Cash App inflow framework: We expect all three components to grow year-on-year in 2023.

Profitability: We expect adjusted EBITDA for the fourth quarter to be between $430 million and $450 million, and adjusted operating revenue to be between $40 million and $60 million.

We expect adjusted EBITDA for the full year of 2023 to be between $1.66 billion and $1.68 billion, and adjusted operating revenue to be between $205 million and $225 million. The median values have increased by $170 million and $190 million, respectively, compared to our previous guidance.

We expect to maintain a staff of 12,000 employees until we see significant business growth that exceeds the company's own growth. As the team size is more restricted, we expect to have meaningful leverage in stock-based compensation. This will account for a percentage of future gross profit in the coming years starting from 2024.

Reduce expenses in the area of company management. We have identified many areas where we hope to save, such as real estate, process improvement through automation, and relationships across software, data, cloud, consultants, and contractors.

We expect to achieve profitability in 2024 as calculated under GAAP. We will achieve adjusted operating profit of $875 million, approximately four times the growth compared to the 2023 guidance.

We expect to achieve adjusted EBITDA of $2.4 billion, a growth of over 40% compared to our 2023 guidance, and strong growth in adjusted free cash flow next year. We plan to share more information about the expected gross profit growth in 2024 during the fourth quarter earnings conference call in February.

III. Q&A section

Q1: I would like to talk about some local sales work in the Square ecosystem upgrade market. With a limit of 12,000 employees, do you think there is enough room for meaningful impact in product development?

A: I do believe that Square has many areas where efficiency can be improved. I think what we have been lacking in entering the market is more AI-driven initiatives. Our focus is to leverage AI and grow together with AI. For us, this means an increased possibility of increasing sales and achieving positive results in customer service. Customer service mainly focuses on retention and sales within the ecosystem, as well as marketing, to make all these efforts more effective in reaching sellers. It allows us to conduct more experiments with higher efficiency.

Therefore, we have taken a very good step in verticalizing our sales team. We will prioritize two vertical industries, especially food and beverage, as well as beauty and other services.

Q2: Regarding the situation of Square Go and the progress you have made in connecting consumers with merchants on the platform. Can you talk more broadly about the progress you have made on this topic and what other methods you are exploring to create this consumer demand in the application and ecosystem?

A: This is exactly how we are thinking about bridging the two ecosystems between Cash App and Square. For Square, when you open the Square App in your local city, it can help you view all the service stores around you and make appointments. Providing real-time appointment information is crucial.

Therefore, we will market and encourage people to download the Square App to achieve the above usage scenarios.

If you imagine what more business opportunities there would be within a larger app with a larger audience (such as Cash App), it is a question we want to further explore.

The user ecosystem, especially what GO pursues, is the discovery and exploration of businesses around you and the establishment of flexible and retained relationships for sellers and their customers.

Q3: After Jack Dorsey (CEO) stepped down, you took over the leadership of the Square business. What are your thoughts on the future? Are you looking for a replacement for Dorsey?

A: I (CEO) will directly lead the Square business until we achieve milestone achievements. I hope to see significant growth recovery, more innovation and creativity, and I hope to see better connections within our ecosystem.

We do plan to find a dedicated leader for the Square segment in the future, but it will take time to observe.

Q4: I would like to ask about the specific development direction of Cash App's gross profit and monetization rate. How should we consider its progress in the next year or so?

A: Regarding the monetization rate, we are now adopting some pricing adjustments that were made last year. Therefore, we expect the monetization rate in the fourth quarter to be more stable than the third quarter. However, as our guidance indicates, the growth rate in the fourth quarter will be slower compared to the third quarter.

This is partly because our growth in the third quarter was relatively strong. Through products such as Cash App Card and Cash App Borrow, we have been able to establish visibility through these products. Currently, there are 22 million customers using the Cash App Card. Monetization rate for the third quarter was 1.43%, an increase of 8 basis points YoY. From a MoM perspective, it remained relatively stable, as you pointed out, this monetization rate does not include the gross profit of our BNPL platform. As I mentioned before, we do expect the monetization rate to stabilize with the pricing changes over the past year.

Q5: When evaluating the changes in seller transaction volume, is the slowdown purely due to macroeconomic factors or could competition also have some impact?

A: I believe there will be more growth in specific verticals, especially in the food, beverage, and service sectors. Most importantly, as we move towards verticalization, we are looking for more opportunities to automate through artificial intelligence and conducting more experiments. I will see which methods are effective and then make wiser decisions and invest more fully in them.

Square's GPV in the third quarter grew by 11% YoY. Again, based on our estimates excluding the impact of power outages, the growth will be closer to the 12% growth rate in the second quarter. Looking ahead to October, we expect a 9% YoY growth in GPV. This is obviously lower than the 11% in the third quarter, with the main drag being the United States, while the international market remains more stable.

When considering the three components of Square's growth - customer acquisition, customer churn, and same-store growth - the slowdown in growth is mainly due to a decrease in same-store growth and the contribution from new customer groups.

We believe that same-store growth is relatively consistent with macro consumption trends.

When observing the GPV of each seller, we believe that the recent slowdown is related to macro factors. In October, we saw a general weakness in consumer trends - consumer spending trends in non-essential vertical industries, food and beverage, and retail. Therefore, we remain cautious about this and will incorporate these trends into our fourth-quarter guidance.

Q6: I would like to follow up on the development intentions of Cash App. How do you view the typical customer lifecycle? Obviously, you are able to provide P2P services, but the simplest first step, then there are bank cards or debit cards, and some other products. How do you see the evolution of these customers' needs for other products?

A: Our Cash App consists of three intersecting segments, including P2P, banking, and Bitcoin & investing.

As we see customers using more products within the Cash App ecosystem, we see a multiplier effect in terms of the inflow of funds they bring to Cash App. New users typically start with the P2P feature and then begin using the Cash App debit card. They may also use our free stock or Bitcoin investment feature and eventually have their wages deposited into Cash App, which is a significant opportunity.

Over time, as we increase customers' awareness of a wider range of financial services and business products within the entire ecosystem, this is what we see as a key driver of growth in active transaction inflows. What we saw in the third quarter was these new inflow channels continuing to drive growth. In the third quarter, customers' Cash App accounts received over $8 billion in direct deposits, and cash deposits exceeded $2 billion, a YoY growth of about 40%, which is twice the overall inflow growth rate of Cash App. Obviously, we have more opportunities, and the utilization rate of our direct deposits is still within the range of 10%. I believe there is room for further improvement.

Q7: Bitcoin is now experiencing a revival, especially in terms of Cash App's vision. What role does Bitcoin play now?

A: We focus on Bitcoin because we believe that the internet will have a native currency. We believe that the internet needs a local currency to enable global microtransactions.

Over time, we do see significant market and opportunity in using Bitcoin for remittances, which is what TBD is focused on.

So I do believe that the value of Bitcoin will continue to increase, not just in terms of its monetary value, but also in terms of its use cases in the world. I truly believe it will become an important part of the future of commerce. Similarly, we will adhere to our Bitcoin plans, keeping our emerging plans within specific investment ranges and regularly tracking progress related to these key milestones.

Q8: Square's gross profit margin is 29%. Can this growth rate continue in the coming quarters? What percentage of Square's total gross profit now comes from point of sale?

A: In the third quarter, our verticals of point of sale and developer solutions saw strong growth, with a 29% YoY increase in gross profit for our vertical point of sale products in retail, restaurants, and appointments. The gross profit growth of our developer tools also exceeded Square's overall gross profit growth. The annualized gross profit for each of our vertical point of sale products in the third quarter exceeded $100 million.

We expect Square's gross profit growth to improve relative to the third quarter from a fourth-quarter perspective.

Q9: Will the current stock-based compensation targets continue in 2023 and 2024?

A: We expect stock-based compensation in the fourth quarter to be relatively flat compared to the third quarter in absolute dollar terms. As I mentioned earlier on the conference call, we expect meaningful leverage on SBC over time, starting in 2024.

Additionally, we have set limits on the percentage of gross profit allocated to stock-based compensation and the absolute number of equity grants, which is an area of focus for us.

Clearly, SBC is an important tool for us to help employees become shareholders and align our incentives as business owners. We also incorporate stock-based compensation into our financial goal planning to measure and monitor dilution. This is also part of the reason for the $1 billion share repurchase program we announced today, to offset some of the future dilution.

Q10: Going deeper into Square, is Square more interested in participating in the ISO (independent sales organization) channel to distribute Square products? Do you think Square needs to embrace the ISO channel more to scale up and compete with rivals? A: We have already collaborated with ISO from the perspective of financial partners. Specifically, we have established a partnership with JPMorgan Chase and provide Square terminals in all of their branches.

I don't think there is a one-size-fits-all answer. Different verticals have different situations. We are open to smaller-scale experiments for a period of time so that we can see what works effectively and then invest on a larger scale.

Q11: The monetization framework of Cash App has been very helpful. Can you unlock some of the monetization sources in Cash App? For example, the monetization rate of instant deposits and how they change over time? How do you view the instant deposit product?

A: Cash App has more and more products, some of which are free and some are monetized, and the monetization speed of some products other than instant deposits is even faster. Therefore, the business portfolio relying on instant deposits has declined over time, but in fact, it is still a growing product.

Of course, our focus is to provide value across products as much as possible within our ecosystem. This is where strong growth like Cash App Card comes in. It has 22 million users, accounting for 40% of our 55 million monthly active user base.

Clearly, as the Cash App application becomes more widely used in the broader ecosystem, it has stronger utility, the ability to deposit funds, the ability to receive direct deposits, the ability to withdraw funds through ATMs, and the ability to invest. All of these provide greater utility for funds to flow throughout the Cash App ecosystem.

In the UK, Square also has an instant transfer product because the usage rate of this product is also high in these regions, similar to the United States, which means people are willing to pay for this product.

We are satisfied with the continued growth of instant deposits, but the growth of other products in Cash App is even better.

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