Block: The pace of investment will slow down in the near future, but the determination to diversify our long-term business remains unchanged. (Summary of phone meeting)

The following is a summary of Block (SQ.US) 2Q22 performance teleconference. For a detailed financial report review, please refer to "Block is "Embarrassed" Even Though the Money Comes Slowly.

Remarks From Management:

Drivers of Q2 Results:

1. The existing merchant base continued to be preserved and Square managed to achieve a positive GTV and gross profit retention in business;
2. Continued focus on the strategic development of medium to large-scale merchants. The gross profit margin of medium to large-scale merchants increased by 24% year on year, with a 40% compound annual growth rate over 3 years. The food and beverage industry continues to grow, and when calculated over a 5-year compound annual growth rate, food and beverage is the fastest growing vertical in terms of gross profit margin.
3. Cash App will focus on expanding its user base among new groups. As more friends and family use Cash App, the retention rate will continue to improve. Monthly transaction volume continues to grow and reached 47 million as of June, an increase of 18% YoY, with weekly and daily transaction volumes growing even faster;
4. By offering more complete financial products (such as Cash App Borrow), Cash App can attract more highly engaged customers, thereby bringing in more funds.

Investment Plans for Q3 and the Rest of the Year:

We recognize the importance of disciplined investment during uncertain periods. Therefore, we will reduce our planned investment for the full year of 2022 by $250 million; we will cut back on experimental and inefficient market expenditures, adjust risk loss estimation according to current trends, and slow down recruitment. Overall, since the beginning of this year, non-GAAP operating expenses have been reduced by $450 million, which represents a 20% reduction in planned expenses for 2022.

In 2022, we expect that non-GAAP operating expenses will increase by $1.85 billion compared to 2021, a decrease of about 10% from the previous quarter. Within this range, we expect AfterPay's operating expenses to be approximately $750 million this year. Excluding AfterPay, we expect non-GAAP overall operating expenses to increase by 30% YoY, or $1.1 billion. Based on US dollars, adjusted EBITA is expected to be higher in 2H 2022 than in 1H 2022. For Q3, we expect non-GAAP operating expenses to increase by $75 million from the second quarter, or $65 million if AfterPay is not included.

Analyst Q&A:

Q: How do you balance the demands of employees (who want to develop products by tightening the budget), the macro environment, and shareholder demands (maximizing profitability)? Q: How do you see the acceptance of Cash App Pay among non-Square or non-After Pay merchants?

A: In the second quarter, we expanded Cash App Pay to more AfterPay sellers. Since its launch for Square Sellers in September last year, there have been more than 2 million transactions processed through Cash App Pay. We have also signed partnership agreements with several After Pay merchants who have started using Cash App Pay as a payment option.

Q: In the context of macro uncertainty, especially Cash App, can you talk about the behavior of customers and consumers that you see across the entire business and reconsider your investment in Cash App?

A: From a product perspective, we are building connections in financial services, business, community, and encryption. An obvious example is that in the early days of COVID-19, we took quick action to enable customers to directly receive government cash subsidies.

We found that in recent months, user transaction engagement is at its strongest, with transaction volume for active users in July reaching 21 times the level before. Over time, the inflows of funds from each active investor are also increasing. Based on a three-year compound annual growth rate, the average inflow of funds in July increased by around 15%.

From the perspective of EBITDA, we will ensure that investments are made in areas that are most likely to generate returns.

Q: You have already seen good growth in the loan product and are expanding the scale of Cash App Borrow. Can you talk about how you view the credit risk of these products, especially considering macro risks, with regard to the issue of risk loss?

A: The loan product team focuses highly on two attributes: data-driven methods and unique structures.

Based on extensive customer data, we will update the risk of the underwriting machine learning model in real-time. Especially in lending and borrowing, we will establish qualification standards to protect customers and the company.

The unique structure of the product can simplify the process for customers to receive funding and help users repay more easily. These products usually have a short duration and a relatively simple repayment process, and some products have a higher repayment priority.

The duration of Square Loans is less than one year, the average repayment time for AfterPay is 4 to 6 weeks, and the average repayment time for Cash App Borrow is less than one month. We focus on managing risk and losing less than 3% on Cash App Borrow, while AfterPay has a loss rate of 1%, but has improved slightly from the first quarter to the second quarter, thanks to our enhanced risk loss model.

Q: It has been a whole quarter since the acquisition of AfterPay. What metrics should we observe for synergies? What should we pay attention to in terms of the integration path of AfterPay?

A: The main reason for this acquisition is to combine the existing Square and Cash App ecosystems. We are still in the early stages of integration, and it takes time to achieve such a large-scale integration.

But we will see a lot of synergies between Cash App and Square. We will continue to improve customers' ability to discover new products and services in Cash App, and make it easier for our sellers to use these features and achieve more sales.

Q: What measures will you take to keep active users on Cash App? These users may only be driven by stimulus factors to use the application. Obviously, "Discover Tags" is the key to this puzzle, but I am curious about what other means or plans you have

A: When considering customer retention rates, the most critical point is to strengthen the relationship between Cash App customers. This is the key to integrating into the community, making these products easier to discover on Cash App, thereby increasing awareness and retention rates.

We have established an ecosystem, such as transferring money to friends and family, distributing gift cards, and depositing salaries. We can create more daily use cases, which is our ultimate goal. "Discover Labels" brings users into daily use cases and is the most powerful acquisition and retention channel.

Secondly, through our Boost network, customers have the opportunity to receive different incentives and opportunities, such as trying to invest or make direct deposits to receive certain incentive gifts.

Finally, our product ecosystem enables us to cross-sell and have deeper contact with existing customers who have participated in our tax and other financial services products.

Risk Disclosure and Disclaimer for this article: Dolphin Analyst Disclaimer