Block: Increasing users' credited amount and wallet share is the top priority (3Q22 conference call minutes).

Below are the minutes of the Q3 conference call for Block (SQ.US). For financial report reviews, please refer to ' Client Borrowing and Spending, while Block Goes Big '.

Q: Given the uncertain macro situation and the considerable amount of capital the company has invested, is there a plan to optimize leverage for the 2023 outlook?

A: We are focused on driving long-term scaled profitable growth and balancing growth and profit margins within our investment framework.

Our preliminary plan for 2023 is to slow expense growth in order to drive operational efficiencies and profit-making capacity. Specifically for CashApp, we do hope to see an optimized operating leverage next year. We'll have more to share in February and we're still in the planning phase. We will continue to reduce discretionary operating expenses, especially in areas where efficiency is low.

So far this year, we've cut nearly $600 million in investment in businesses with no or uncertain returns, accounting for about 10% of our planned operating expenses.

Q: What is the nature of Cash card users? How many Cash Card users currently consider the Cash Card as their primary debit card and what measures are you taking to further expand Cash card wallet share?

A: Active users of the Cash App Card made an average of 16 purchases this month. Over time, spending per user has been increasing. The Cash App Card customers account for a higher monetization rate of Cash App users' money flow.

Cash App Card enhances Cash App users' recognition of financial services and their wallet share.

At the same time, the Cash Card can also serve as a traffic entry point for other banking products within Cash App.

Q: Both Cash App's user base and gross profit margin trends are moving in a positive direction. However, which financial services opportunities do the company think is the largest? How is the path and prospect of ARPU growth?

A: In terms of ARPU, the gross profit per active user in Q3, excluding the BNPL platform, was $57, which is higher than Q2's $53 and Q1's $50. The reason for the growth is that our monetization rate is improving, in addition to increased usage of the platform by users.

We believe the three major drivers of Cash App's continued growth are: financial services products, network growth (Cash App user base and applicable merchants), and user trust in the platform.

From a financial services perspective, our primary task for 2023 is to continue to promote financial products, including not only the Cash App Card and Instant Deposit, but also newer products. Currently, 60% of Cash App Pay users are non-Cash App Card users. This indicates that Cash App Pay is still attractive even without the Cash App Card inflow. In addition, loan products such as Cash App Borrow, although still in the early stages of development, have already seen strong growth and unit profit potential.

From the perspective of network growth, the priority is to leverage the inherent network effects in Cash App and increase customer engagement, allowing customers to have more touchpoints within Cash App's network, including bringing their friends and family into Cash App.

Then from a trust perspective, we have quickly evolved from a P2P application to a financial service application. Trust is crucial because the platform involves users' funds. The company will focus on improving the fund inflow system and promoting ARPU growth.

Q: Cash App's customer acquisition cost. How can we control customer acquisition costs? What is the overall trend of Cash App's user base growth and loss?

A: Currently, Cash App's customer acquisition cost is consistent with the acquisition cost of net new user activities seen in 20/21, within the range of $10 customer acquisition cost. We are expanding to new age groups and seeking customers who are able to use more products to bring higher lifetime value.

Millennial customers from Generation Z make up a large portion of Cash App's customer base, but we have only penetrated 20% of the Gen Z and millennial customer base among the US population. In the past few years, this has been the fastest growing group in our monthly activities, but 80% of this group still needs to enter the Cash App ecosystem.

Q: Cash App's fund inflow strategy. In a difficult business environment, what is the outlook for driving fund inflows and direct deposit activities next year? Are there any improvements to drive participation in Cash App Taxes next spring?

A: There are two key drivers for the average deposit per active user: 1) our customers' spending power, and 2) our share of the customer's wallet.

In the third quarter, each active user had more than $1,000 in fund inflows, and the three-year compound growth rate was 17%. Most of this year's growth came from the middle-aged and young user groups, demonstrating the healthy trend of Cash App's customer base.

We believe the driving force behind the growth in inflows comes from multiple channels and cross-selling between customers, particularly for financial products such as Cash App Card and direct deposits.

As for direct deposits, we have noticed that the direct deposit volume in September was over $2 billion, an increase of more than 65% year-on-year in September, as we have started to reduce the friction cost of account creation brought about by customer registration for Cash App Card.

Cash App Card and direct deposits are the two main channels for fund inflows. Q: How has the growth trend been for the combination of Cash App Pay and Afterpay, and what are the next steps for comprehensive integration?

A: Our long-term vision is to establish a dynamic checkout experience. We recently launched the discovery tag in Cash App. It can be seen as a search engine that ensures people find what they're looking for, or displays relevant content based on their location, ultimately leading to a purchase. But this takes some time. And it will ultimately benefit both Square sellers and Cash App users.

Q: Regarding profit margins, especially for Square, is more growth coming from large merchants or the international side, both of which I think have relatively high CACs? How should we balance growth and profitability? Do we need to do more investment in these markets, including sales teams or brand marketing?

A: Our Square business is a business with a relatively high structural profit margin. As shared on Investor Day, the structural profit margin in 2021 was 69%. We are able to extract a significant portion of profit from every dollar of growth. Our primary focus now is on developing the high-end market and working with large sellers.

Medium-sized and above sellers now account for 40% of our GPV, with a YoY increase of 22%, and international revenue has also increased by 40%. Some key products that support large merchants have grown by 45%.

It is expected that in 2023, investment in sales and marketing, as well as product development, will slow down in order to continue balancing growth and profitability. Whether in hiring, sales and marketing, we will reduce some brand marketing and focus on optimizing efficiency.

Q: For the Square business, a considerable investment was made in expanding sales last year. Looking ahead to 2023, how important is expanding sales in Square's entry into new markets?

A: Our current investment strategy on Square is to maintain a return period of about 6 quarters and about 3 times return on investment (ROI). In 2022, we will withdraw from some areas with low ROI and adjust our spending mix to more mature channels with higher ROI.

Our sales team will be the long-term core engine of business growth. There are three key strategies to enhance growth utilizing the sales team.

First, verticalization of teams, creating teams around specific vertical areas, such as dining, retail, and so on.

Second, expanding our purchasing capabilities, in order to reach more large sellers and help them better understand Square and its products.

Third, more automation of our products to provide better information to sales team and sellers.

From an international perspective, our four oldest international markets are developing at a healthy return rate as we expected.

Q: Is there a long-term plan to expand the number of vertical industries you support? A: We currently have three vertical industries: Square for Restaurant, Square for Retail, and Appointments. We are seeking opportunities to add more functionality.

One trend we see is that the boundaries between vertical industries are not clear cut. We see restaurants adding retail-like services, and retail businesses adding restaurant-like services.

Our goal is to help sellers make more sales. In some cases, these vertical works make more sense.

But the most striking trend we continue to see is the integration of all of these things. And this is where our ecosystem thinking really shows our strength.

Q: Can we be more proactive in using customer account balances to drive more cash flow revenue? The company retains a lot of cash in the currency market, will the company generate interest income in the future?

A: Most of our customer funds are matched to volatility through a fairly diversified portfolio, the vast majority of which is relatively short-term. Therefore, in the third quarter, interest income increased due to the rise in interest rates.

Part of our investment is lagging in confirming interest income. From the perspective of the enterprise balance sheet, interest income in the third quarter was $15 million. The second quarter was $9 million,

From the perspective of customer funds, Cash App customer funds also generate interest income. We had $7 million in the third quarter, and less than $1 million in the first and second quarters. Most of these funds are invested in very short-term accounts and money market accounts, which will affect CashApp's "revenue" and "gross profit".

Q: Can you share the Square business and competitive environment, the way market competition evolves, and how the company is positioned?

A: We haven't seen a competitor that threatens our entire ecosystem. In fact, our diversity of products, vertical channels, and customer types, especially during macro fluctuations, makes us the most resilient.

In the United States, especially for those vertically integrated industries that are freely disposable, we are particularly concerned about the stability of retail, catering, and services based on the compound growth rate of three years.

From the perspective of foreign exchange, we see some unfavorable factors, but this is not a competitive issue.

We offer a wide range of services that are easy to integrate, from loans to customer relationship management to local payments to hardware. When a business comes to Square, they can get all the services they want.

We have spent a lot of money investing and saved sellers a lot of time. Therefore, we see better retention rates than many of our peers.

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