Great. Thank you, everybody. Before we start, I'm just gonna go through some disclaimers. During this conversation, Amrita may make forward-looking statements, which may include statements about market trends and conditions and Block's preliminary expectations for its future financial performance. These forward-looking statements are subject to certain risks, assumptions, and uncertainties and have not been audited or reviewed. Amrita may also speak as to certain non-GAAP metrics, which are not intended to be a substitute for Block's GAAP results. Please review Block's filings with the SEC, as well as its investor presentation on its IR website for a discussion of the company's risk factors and for reconciliations of non-GAAP metrics to their most directly comparable GAAP financial measures. With that said, welcome to the Block Fireside Chat Presentation at the Goldman Sachs Communacopia and Technology Conference.
I have the privilege of introducing Amrita Ahuja, who's the COO and CFO of Block. My name is Mike Ng. I cover Block and Fintech here at Goldman Sachs. We have about 35 minutes for today's presentation, and we're looking forward to a great session. So with that, Amrita, thank you so much for participating, and coming out, and joining the stage with us today. It's a privilege to be able to host you here.
Thank you so much for having me, Mike.
So to start things off, I wanted to talk a little bit about business trends. Block has obviously found, you know, a tremendous amount of success in Square and Cash App, and there's ample runway for Block's other platforms like Afterpay. You know, what are you seeing in terms of the macro environment? What headwinds or tailwinds are you seeing across the two main ecosystems? And, you know, how are you positioned as we head into the second half of the year?
Sure. So, let's unpack some of the key trends that we shared at earnings related to Q2 in July. There are three key components to each of our Square and Cash App ecosystems, and I'll also speak a bit to our BNPL platform. For Square, the three key components are customer acquisition, churn, and GPV per seller, which you can think of as same-store growth. What we've seen has been relatively steady and healthy trends on customer acquisition and churn. We've seen customer acquisition improved, actually, from Q1 into Q2, as we orient more of our spend towards proven return channels. And from a churn perspective, what we've seen is relative stability.
What we saw from a GPV per seller or same-store growth sales is a moderation in growth over the past few quarters that generally aligns to the broader moderation in GPV growth for the Square business. We believe this is macro-related for a couple of reasons. First, we're seeing it play out across seller sizes. It's not just hitting micro; it's hitting larger sellers as well. We're seeing it play out across verticals. It's not a particular vertical that's impacted. We serve verticals across restaurants, retail, and services. And we're seeing it play out in terms of the number of buyer cards we process, as well as spend per buyer card. Now, we believe that we have meaningful opportunities to continue to grow our Square business through our strategic priorities, focusing on omni-channel, international, and upmarket sellers.
Each of those three areas growing faster than the blended average in Q2, and we'll continue to invest there. Then also, through continuing to invest in our sales and go-to-market motion, and I think we'll speak more about that later, I'm sure. That's a key area of growth opportunity for us, around customer acquisition for the Square business. Now, for the Cash App business, what we saw in Q2 was continued year-over-year growth across each of the three variables of actives, customer, you know, monthly active accounts, inflows per active, which is the amount of money that customers bring in to Cash App, and monetization rate. We see with core products like our Cash App Card, that we've been able to grow product attach, and we saw growth as well on a spend-per-card basis.
So even in the midst of an uncertain macro environment, our customers are spending more money across discretionary and non-discretionary verticals within their Cash App Card utility, providing strong utility, strong engagement, and growing product attach. And we think that there's more opportunity for us to lean into those high product market fit products, like Cash App Card. From a BNPL perspective, this is our buy now, pay later platform through Afterpay, we saw gross merchandise volume, GMV, growth in Q2 that outpaced the growth that we saw in Q1, 22% versus 17% growth year-over-year in Q2 versus Q1, with strong trends around North America GMV, as well as strong trends for some of the newer products that we're ramping, ads and single-use payment cards.
So obviously, each of these trends across all of our businesses are determined by the broader macro environment, but also by the engagement that we see for customers on our platform and our ability to attract new customers, and we're monitoring in real time trends across each of those various variables.
Great. That's a fantastic overview. Block continues to demonstrate investment discipline, as evidenced by the raised adjusted operating outlook for operating income outlook, excuse me, in 2023 of positive $25 million, versus a loss of $115 million prior, and a loss of $50 million at the beginning of the year. Can you talk a little bit about the areas where you're pursuing the most cost initiatives, why those areas, and some of the trade-offs that have been made to support that growth? How should we think about the outlook for AOI dollars and margin beyond 2023?
Absolutely. So the three key areas that we've driven efficiency and discipline in our spend are around sales and marketing, where we still make meaningful investments, but we're orienting more of the spend towards proven channels, personnel and corporate overhead. So to go a little bit into each of those, so sales and marketing, this is not only our performance marketing, but also our sales teams that speak to you know, small and medium-sized businesses on the Square side, as well as enterprise sellers on the Afterpay and, and Cash App side.
We still make meaningful investments here, but as we've oriented more of our discretionary sales and marketing spend, so excluding the Cash App peer-to-peer transaction costs, towards proven channels, we've actually been able to modestly find efficiencies and bring down some of the spend around discretionary spend in the first half of the year. Even with that, we're seeing strong customer acquisition in, in the first half of the year, and as I mentioned earlier, for Square, we're actually seeing stronger customer acquisition from Q1 into Q2. So we will orient more of our spend. We'll still be significantly investing here, but orient more of our spend to proven channels and less to experimental or brand channels that may have longer returns or more uncertain returns, and that is a significant opportunity for us to drive efficiency while still driving top-line growth.
Secondly, around personnel, now that we have an investment framework that guides all of the investments that we make across the business, but that includes stock-based compensation and our adjusted operating income metric, our hiring managers have the ability to look across all of the spend in their P&L with a fully burdened basis of the personnel spend, to be able to make better apples-to-apples decisions. Our hiring managers also have performance management tools, for the first time this year, to ensure that our teams are aligned, coordinated, and making the greatest impact towards our customers' growth. And as a result of this, we are pulling back on hiring in a much more meaningful way, than we had intended in this year, and certainly than in prior years. We had intended to grow headcount by about 10% this year.
We believe we'll come in south of that, given the discipline that we're seeing across our performance management tools and across hiring. We are still investing in certain teams, and we'll pull back in others. The third area around corporate overhead, what you've seen already in the first half of the year, is that we've pulled back on that we've wound down certain real estate locations on the West Coast. I think you'll see us make more decisions like this in the future, and there's greater opportunity for us to drive even more leverage as we think beyond 2023 in our corporate—across each of these areas, but certainly in corporate overhead, when we think about software fees, cloud fees, data fees, professional fees, travel and entertainment, additional real estate.
There are a number of different areas across discretionary spend, where we can get more efficient and still continue to invest in our business in ways that drive growth for our customers and therefore for our business. It's as a result of that, that we raised our guide for the full year of 2023, beyond where the implied outperformance came in Q2. And even in the early part of Q3, in these first few months, we've already identified incremental efficiency opportunities for this quarter and for the year. And you'll see us do more of that work as we're committed to driving efficiency while still driving growth for our customers and for our business.
That's great. I'd like to turn over to Cash App, and I was wondering if you could start by walking us through some of the current trends you're seeing in Cash App in the context of the inflows framework. And then, you know, as we think about the three levels of the inflows framework, the monthly transacting actives, the inflows per actives, and the monetization rates, what do you expect to contribute the most to Cash App gross profit growth over the near term and longer term?
Sure. So let's go through each of the three drivers of inflows. Remember, inflows is highly correlated to our gross profit growth for Cash App. So the three drivers, starting with actives, in June, we had 54 million monthly transacting active accounts in Cash App, which grew 15% year-over-year. We see a significant opportunity to continue to grow across our U.S. demographics, which is a significant base of customers, in which we're about only 25% penetrated of our primary demographics. Also within actives, we're looking to continue to grow not just new customers, but retention and win back. We see that customers who have four or more connections with their network within Cash App, as it obviously primarily a peer-to-peer network, have far stronger retention. They stay with us longer, and they're more engaged on our platform.
Over half of our quarterly active accounts in Cash App in Q2 had four or more connections within the service. So we'll be looking to drive greater network density to drive greater retention, and then network density plus additional products is what drives win back. So those are kind of the three key parts of actives: customer acquisition, where we use the network effects and the viral effects within peer-to-peer, along with performance marketing, retention, which is driven by our products and network effects, and win back. Inflows proactive is the second key element of our inflows framework. Inflows proactive was $1,134 in the second quarter, up 8% year-over-year. This is the amount of money people bring into Cash App and then move around to use across a number of different products.
If you think about that $1,100 on a quarterly basis, on an average basis, we're attracting $4,000-$5,000 in a given year, which is a fraction of U.S. household income. We believe we have an opportunity to significantly grow. In fact, to your question about what's the greatest driver of growth for Cash App across these three. We think inflows per active is a significant opportunity for us to continue to grow the amount of money people bring into Cash App and move around. We think product attach is a key way that customers decide to bring more money, more of their funds to Cash App.
And when we see like Cash App Card, which is our highest attached product, that product, you know, the average Cash App Card customer is bringing 2 times the amount of inflows into their accounts than a peer-to-peer customer. And when you think about walking up the product funnel, if you will, direct deposit, which is one of our stickiest products, is one where our direct deposit customers are bringing 6 times the amount of inflows into Cash App, as a peer-to-peer customer. We think we have so much more opportunity to continue to drive product attach across these existing products, let alone new financial services and commerce products down the road. The third lever is monetization rate, and this is one that was 1.44% in the second quarter. We've also continued to grow this over time.
It's a combination of growing the value that we can deliver to our customers, and we express that obviously through pricing. Some of our products are free, some are monetized, and over time, we have flexed the price on various products, and there are more that we could do over time as well. It's also a product of how the velocity of funds through our network, how customers are using those funds, potentially across multiple products. You may borrow some funds through Cash App Borrow, as an example, and then use those funds through Cash App Pay or through Cash App Card or through peer-to-peer, and that next customer then uses those funds in a different way through their account.
So the turns on an incremental dollar that we see is driven by the engagement, the utility, the products, and the attach on those products in our ecosystem. Now, the one thing I will say is we've said, as we said at earnings, we expect monetization rate to be relatively stable in the back half of the year as we're lapping, both some pricing changes that we made last year, as well as the ramp of some of our new products. But over time, we see growth opportunities across each of these three, levers of our inflows framework.
Great. I was wondering if you could talk a little bit more about the actives piece. How would you characterize where the Cash App customer base is today? You know, you mentioned 54 million monthly transacted actives, which is about 25% penetrated. But when you're driving, you know, new net adds and looking at retention, who are the most valuable customers to the Cash App platform, and how do you see that evolving over time?
Sure. We've assessed that in the U.S., there's 260 million addressable customers, and that's inclusive of teens as well, where we've seen very strong traction recently. Our core customers, which is Gen Z, millennials, and teens, we believe we're about 25% penetrated in. We see a significant opportunity to continue to grow across those core customer bases, along with the broader population in the U.S. Again, our focus is on building the network effects and building the product base that attracts a wide demographic. And I think building network density across new and existing markets is another key way that we not only bring in the customer, but we keep them engaged over time.
Those are some of the key elements that we think about as we think about how we grow our base of customers, and we can do that more efficiently as well, because we uniquely within Cash App, as a peer-to-peer service, have not only the peer-to-peer capability, which is the viral aspects of peer-to-peer that attract new customers to our base, but that we have the strong monetization capability around financial services and increasingly through commerce. So the combination of those two things enables us to see efficient customer acquisition with growing LTV, long, you know, lifetime value of those customers, that enables us to invest in the flywheel of bringing more customers through additional means to the viral aspects through performance marketing as well.
Excellent. So Block has made several announcements regarding the expansion of Cash App Pay across to the broader Block ecosystem. You can use Cash App Pay for Square Invoices, you can use Cash App Pay at checkout for select large Afterpay merchants.
Mm-hmm.
So how does Cash App Pay support Block's objectives to bring commerce to Cash App in a more meaningful way? And then, you know, what else do you think Block can do in commerce, and how can you leverage your assets across the entire ecosystem to help achieve that?
Yeah. I think one of the things that's truly unique about Block is our ability to see commerce across both ecosystems that are now at scale and have significant overlap, which is Square, seeing the seller side, and then Cash App, seeing the consumer side. I think Cash App Pay is one of the first ways that we're building out commerce capability into Cash App, in addition to some of the financial services capabilities that I've already spoken about. So Cash App Pay is effectively an easy, simple way to use your stored funds within Cash App at the participating retailers and merchants. We started with the rollout at Square Sellers over the past 18 months or so and have seen that nicely ramp, and again, get to see both sides of those transactions.
But we've expanded now to not only Afterpay, Afterpay's enterprise merchants, but also to new payment platforms like Adyen, Stripe, and PayNearMe. As a result of this more recent expansion, we've seen an annualized rate of $500 million in processing volumes for Cash App Pay in the second quarter, with 1 million active accounts within Cash App using Cash App Pay in the month of June. And we have a very compelling proposition to these merchants and retailers around the attractiveness and the scale of the Cash App customer base, tens of millions of active accounts that represent hard-to-reach millennial, Gen Z, and teen customers.
And, we have a full pipeline, frankly, for our sales team, where we get to leverage the, you know, significant capabilities and relationships that the Afterpay enterprise sales team has, has generated to, to leverage across Cash App Pay. But then when you think more broadly about the opportunity that this represents, which is bringing commerce into Cash App, as you said, and Afterpay, which, which already has the connections, the relationship on every transaction they fulfill between both the consumer and the merchant, and the success that you've seen, not only around the payment types, but also ad and affiliate fees increasingly as a growing revenue stream for, for Afterpay.
To bring that at scale into the 50 million+ active accounts we've got with Cash App is a significant opportunity, and further localizing it for the Square Seller base across the 4 million+ sellers we've got within our Square base. And enabling things like offer, search, discoveries, incentives through Cash App across those Square sellers is a significant, meaningful, and we believe, unique opportunity for us.
Great. That's a really great opportunity to pivot and talk more about Square Seller, the ecosystem for merchants.
Mm-hmm.
You know, Block has talked in the past about initiatives and omni-channel, and also upmarket to drive growth in Square Seller. Could you talk about the growth strategy with these upmarket merchants? And also, you know, discuss how much of a role software plays into, you know, differentiation there. And then within that, you know, what features do you think are resonating the most-
Yeah
... among some of these upmarket merchants?
Sure. Software plays a critical role for us because our larger sellers really value the seamlessness of our ecosystem, the real-time data that they get to see on their dashboards across locations, across customers, across channels, whether in person or online, and all the different social means of engaging with their customers, and across teams, across their employees, across inventory. Our ability to knit together this data for our large customers and then serve them with you know, more purpose-built software to address complex needs, whether through a vertical point of seller or developer platform, is really resonating with larger sellers. And as a result, we've seen 40% of our GPV now comes through mid-market sellers, and this has steadily grown on our platform over the past two years.
Mid-market sellers are $500,000 more or more in annualized GPV, and we see a significant opportunity to continue to grow with this larger seller base. These larger sellers tend to attach to more products. We've seen our vertical points of sale really resonate. Each of our three vertical points of sale: retail, restaurants, and services, which is through our appointments product, have now, you know, as of Q2, become $100 million run rate gross profit businesses for the Square business. And we are growing at faster rates of growth on a year-over-year basis relative to the broader blended Square base. And so these are areas that we're going to continue to invest in.
Getting the sales motion right to be able to talk to each of these specific verticals and sellers within them in a way that uses the language they understand and addresses their needs is really critical. Our developer platform is another key product area, which basically helps us address seller needs across not only our first-party APIs, but through third-party partners, where we can't address every complex seller need as we move increasingly upmarket. This is why we have hundreds of third-party partners whose APIs are enabled through our developer platform, and those larger sellers can build seamless integrations across our APIs, as well as our partners' APIs. This is a key focus for us, and from a product perspective, we continue to make headway.
Just in the past few months, we've released a few key products that we think will really resonate with larger sellers. We've enabled a franchise suite that enables larger sellers to look again, across locations. We've enabled offering subscriptions. Our sellers can offer subscriptions online through Square Online. For our Square Appointments product, we've just launched, so for our services and beauty salons, we've just launched Square Go very recently. We had 125,000 sellers and 80,000 buyers connect, make an appointment together through Square Go in just the past month. And every week, we're seeing a ramping pace of appointments through Square Go.
Obviously, still very early, but it's this sort of innovation, creating a marketplace for sellers and their customers through our platform, that helps build demand for our sellers, helps them grow their business, and we get to grow with them. And we also released a team management product feature that enables these larger sellers to communicate out to their employees in a more seamless way, and is, in fact, AI-enabled. So those are just four examples of very recent product launches that we've had, but we will continue to iterate on our platform and build it out in a way that continues to build product robustness for these more complex needs that larger sellers have.
... That's great, and I wanted to pull on a thread that you laid out there as it relates to some of the success in verticals like-
Mm-hmm
retail, restaurants, and services. You know, I know Square has made a decision to verticalize inbound and outbound sales teams. So could you talk a little bit about how that verticalization for sales plays into the growth strategy there? And maybe just talk a little bit more about the success that you've seen in this verticalization strategy.
Yeah, and this is an area where when we talk about where we wanna invest to drive future growth, but invest efficiently to drive future growth, I think the sales team is a key investment area for us for the future. So, historically, our sales team has been a smaller team that is largely generalist-based. So an account executive could have been talking to a beauty salon in the morning, a restaurant in the afternoon, a bakery in the evening, or a retailer in the evening, and would've been expected to know all of the various needs that each of those different sellers would have, and with our 30+ products and all the complexity that we enable. It was primarily inbound rather than outbound, and it was primarily payments-focused in terms of the messages that we delivered to those sellers.
What we are doing now is we've created both an inbound and outbound sales team, with account execs who are specialized in each of the verticals, to be able to go deep and understand not only what those sellers' needs are, with the language those sellers are used to speaking, but also our complex platform, which is meant to be simple from a seller perspective, but is actually quite complex on the back end to understand. So we're verticalizing those account execs. We're giving them the tools that they need. We're creating both inbound and outbound. And we're not just focused on telling a payment story. Now that we've got a, you know, broad range of customer-oriented, meaning buyer-oriented, financial service-oriented, software-oriented, hardware, and, you know, a much broader set of software enablement tools, that's the primary message that we can go out with.
We're in the early days of that verticalization, so in April, we completed the inbound U.S. verticalization, and in July, we completed the outbound U.S. verticalization. We have seen strong early trends on both in terms of gross profit per account exec and in terms of software attach per account exec. Those are the two key metrics that we'll be looking at as we assess efficiency and the ramp of our sales team in the back half of 2023. And as we see that ramp, we hope that it contributes to our growth in 2024 and beyond. And if we see that ramp, we will lean in to our sales team and the investments that we make to scale our sales team.
We're also looking at some of the newer areas of ramping our sales team or experimenting with two newer areas with ramping our sales team beyond verticalization. One is around contracts. We've never had contracts before, but we do see that some of our larger sellers value the ability to have stability in pricing, and the structure, and the framework of our relationship with them. And having that longer-term relationship enables us to be more flexible in our pricing as well, where we can, for instance, bring down the cost of our hardware and use hardware as really a go-to-market tool that brings that seller in the door but then builds back the lifetime value over a period of time. And so contracts, we are already seeing resonate very well with the sellers, and we've just rolled that out.
More work to do there, but we're excited about that one. And then the second is field sales. Again, with a smaller sales team, we've largely had them in hubs and on the phone. We want to have them out on the street, in restaurants, and at retail and, and speaking face-to-face. And again, I think this is one where we're experimenting today, but we can build at scale as we see those efficiency metrics continue to ramp.
That's great. One other area I wanted to explore was Square Banking. You know, growth in Square Banking has been very strong, right? It's been outpacing growth in the overall Square segment. You know, in your view, what Square Banking products are resonating the most with merchants? And then, you know, as you pursue this strategy to go upmarket and help serve larger sellers, maybe you can talk about how you expect Square Banking to resonate, particularly given that these larger merchants may, you know, have existing relationships with banks.
Yeah.
Yeah.
It's interesting. We've actually—as we've launched newer products, we've actually seen that they've really resonated in the early days with larger sellers. So the overall Square Banking platform today, I think in Q2, did about $167 million in gross profit, grew 24% year-over-year. Again, faster than the overall base for Square. And it was really driven by our Square Loans product, Instant Transfer, as well as our debit card, the Square Debit Card. These three tools enable... We also have a Square Savings product. These tools enable our sellers to manage their cash flow, to get effectively a line of credit, short, usually short in duration, to help them then grow their business over time, and we get to be a part of that growth through processing, through software attach, et cetera.
We've started to launch newer products. A couple of three newer products more recently or two newer products and one geographic expansion between our credit card beta, between a monthly fixed-term loan product, which is slightly different from the structure of our existing Square Loans product, and then through our Square Loans growth outside of the U.S. We have seen strong traction across each of these three in our early days. The beta for our fixed-term monthly product, we've seen about 25% of originations come from mid-market sellers, the larger sellers. Meaning that this is something where there's a predictable repayment that is really resonating with the larger sellers and may not be getting fulfilled through other means that they have.
The credit card is another one that we're seeing really resonate in the beta with larger sellers. This doesn't come with late fees. It's easy and integrated in terms of repayment, and really serves the business needs of now a much more professional business than, you know, the typical micro merchant. And so we're excited about the continued ramp of both of those products. And then launching our original Square Loans product outside of the U.S. has also shown very encouraging signs and traction, and has led to some of the outsized growth that I was mentioning earlier in our international markets, as we see the attach of not only software products, but financial services products to those sellers outside of the U.S. as well.
Great. And then across the lending opportunity more broadly, could you just talk about how you balance between top line growth and manage credit losses, not only for, you know, Square Loans and the, the fixed-term product that you talked about, but also Cash App Borrow?
Yeah
... and Afterpay?
Yeah. We have built a discipline now in our real-time models that are AI and machine learning enabled, that enable us to be agile in how we operate these products, and enable us to operate and ramp products at positive unit economics, which is what we're always gonna do. We're not gonna make these loss-leading products to benefit elsewhere. These are products that are expected to stand on their own two feet in terms of unit economics that are positive, inclusive of loss rates, but also become attached ecosystem products, if you will, that help our customers grow their financial livelihood. But I think there are some unique attributes to each of these products that enable us to have positive unit economics and to provide a unique offering to our customers while still being agile in an uncertain macro environment.
So first is the real-time data that we see across millions of customers in the economy. Whether it's small businesses, when we're underwriting a beauty salon in Seattle, we can do that not only knowing what that beauty salon in Seattle has had in terms of predictable cash flow, but also what other beauty salons around the world look like, and what other Seattle businesses look like, as an example. And that's true as well from the consumer perspective whenever you're looking at Afterpay, BNPL or Cash App Borrow. The amount of data and the real-time nature of that data is what enables us to be truly agile in how we think about eligibility across all of these different different products. Secondly, we enable easy repayment. It's usually embedded within the app. It's pulled from processing from a Square Loans perspective.
It's simplified, it's understandable. And then thirdly, these are short-duration products and relatively small in size. These are not car loans. These are not mortgages. These are not student loans. You know, the Square, the average Square Loan for a small business, sub $10,000. The average and relatively short in duration, less than a year. Cash App Borrow, you know, around $200, about a month in duration, and similarly for Afterpay BNPL. So it means that it, the dollar that we use towards these originations can turn multiple times over, and it gives us an ability to react very quickly to what we see in the broader macro environment.
These are some of the unique attributes, and why we are laser focused on providing this sort of empowerment to our customers through access to credit, but doing it responsibly, and doing it with positive unit economics in a dynamic environment.
Well, Square, I'm sorry, Block has certainly come a long way from serving micro merchants to becoming a, you know, multifaceted financial services platform today. As we wrap up, could you just talk about what you see as the most important next steps, and how does that change, you know, Block over the next three to five years?
I think the two most important things for us to execute on is continued product velocity, so continuing to launch remarkable products, whether it's features to enhance existing products or it's new products, new markets, new TAM opportunities for us longer term. And secondly, adhering to our investment framework, which is growth across existing customers through gross profit retention and Rule of 40. Rule of 40, which is growth plus margin on operating income, including SBC, enables us to make the right decisions that balance the trade-offs between growth and efficiency in our business, and that enable us to continue to grow our business, but do that responsibly. Those are the two key focus areas for us as a business.
Great. That was fantastic. It was such a privilege to be able to share the stage with you. Thank you, Amrita.
Thanks, Mike.