Block Investor Day 2022 - Q&A

Welcome back, thank you all for joining today. Now before we start the Q&A session, we wanted to let you know that we have posted slides to go along with several of the sections that we covered today as a helpful resource, and a video replay will be up shortly after the event. Now with that, let's open it up to Q&A with our analysts. We'll take our first question from Tianjin at JP Morgan. Go ahead, Tianjin.

Great, thanks. Thanks Nikhil, thanks for the question, and thanks for the presentation. You gave us a lot of good data, called a cheat code to help us figure out these markets that you're in, so appreciate that. So I'll ask maybe two if you don't mind, I'll sneak them all together. Just thinking about the structural margin being quite high and obviously very encouraging, but what about the OpEx side that's required to grow? And I'm ready to like how you talk about it, right, grow ambitiously but also in a disciplined way given the current market focus on profitability. So how should we think about that, and of course EBITDA margin progression maybe over the next three to five years, what's the view there? And then the second question if you don't mind for any of the leaders, Jack, Melissa, Brian, or even Nick. I know Jack we've talked about this before, right, connecting ecosystems. Building the ecosystem is hard but connecting them is even harder. So how do you motivate the teams to do that, to work on cohesion when they're also busy trying to build their own big businesses themselves? So those are my two questions, thanks for the time.

These are great questions, thank you so much Tianjin. I'll kick off on structural margins. So let me first start by grounding everyone in what we shared today. The structural margins that we shared today represent Square and Cash App margins net of variable costs like sales and marketing, customer service. Those are the costs that drive growth or typically scale with the incremental dollar gross profit. So you can think of a structural margin as being like an incremental margin for our business. And in 2021, that was 69% for Square, it was 37% for Cash App, which was up from 4% by the way in 2018. So really nice to see that progression. Now where we invest beyond those variable expenses is in our fixed expense space, which is at our discretion. These are deliberate decisions that we take on where to invest across product, design, engineering, and our corporate infrastructure. And those are the investments that help drive our product innovation and our long-term growth over time. That's part of how we've been able to expand our TAM as you saw earlier today. Now we've also seen that we've been able to get leverage from these fixed expenses over time. As you saw in the presentation, they were 60% of gross profit at our IPO in 2015, and they were 30% of gross profit in 2021. Now while we don't expect to see leverage on the fixed expenses in the near term as we invest for continued profitable growth and to absorb and integrate Afterpay, we see a longer-term opportunity to drive further leverage over time, particularly through corporate overhead over the long term. Moreover, I think there are ways in our structural margins to drive efficiency, that's 69% and 37%, over time as we scale and as we optimize our cost structure, particularly with Cash App where we're still earlier in optimizing the cost structure. Ultimately, Tianjin, as you know, our investments are guided by cohort and unit economics and the returns on investments that we see. So if we remain in an environment where we have visibility to those metrics and we continue to execute in a way that enables healthy metrics, we will invest to drive long-term profitable growth. We have pulled back at moments in our past where we've had lower visibility, like at the start of the pandemic or in January of this year as we just mentioned. So we're focused on being prudent in how we put our dollars to work in an efficient way. And with all of this, we envision a pathway ahead that looks very attractive over time and scales a large, profitable, and efficient business. And maybe finally what I'll share in margins before we get to your second question is that a lot of what I just said was focused on what lays ahead as we're still so early in our journey. But I'd reiterate that what we've already demonstrated is strong profitability. We shared those fully burdened profit margin figures: 34% for Square, 12% for Cash App in 2021. Those are burdened with all the relevant non-GAAP expenses for each ecosystem, including allocations for corporate overhead. So we already are showing our discipline in how we operate, and that we continue to strive to operate with discipline as we build long-term profitable growth. I think we'll take your second question now.

Yeah, I'll start with the... so the question is around how do you incentivize ecosystems working together. I think even before that we had to incentivize product teams within our ecosystems to work together in the first place. So even with Square we had product teams that naturally wanted to do their own thing and didn't always look for opportunities to utilize each other. Alyssa came in and solved a bunch of this for us, and she can speak to how she did that. But one of the things she said is we need to build seductive adoption. So we need to make a product, a platform that people want to use because it just feels right, it feels amazing, and it's going to take my own service, my own product to the next level. And be able to demonstrate that, so have an understanding of the internal customer before anything else. So we were able to incentivize our own ecosystems to work together internally. And then we started to see, and Brian can also speak to this, we started to see Cash App wanting to use some Square products and infrastructure, and vice versa. And we tried to force a bunch of these connections which ended up being quite small. Some of them worked, some of them are still working, some of them are early. But there was one in particular that made sense to both of our leaders of our biggest ecosystems, Cash App and Square, Brian, Alyssa, and that was Afterpay. This was like the ultimate connection between ecosystems. And they determined that it was the right thing to do, not just for their own ecosystems, which it was, but for Block in total and also for Afterpay. But I'll let Alyssa speak to more of that first. But the net of it is like we're still figuring out how to incentivize it into a framework structure, but we've proven we can do it both internal to the ecosystem and also across ecosystems.

And I have just one more point to add, which is you know you can create structures that drive cohesion bottoms up through seductive adoption, but we can also organize our organization in order to create the right incentives. So as it relates to the Afterpay acquisition, we've been very deliberate about integrating how we're integrating the Afterpay business and organization into Cash App and Square. We're being very deliberate about not leaving that to the side. So we've taken the organization, we've created reporting lines, organizational structure where Afterpay is reporting into both Cash App and Square. We're building one kind of perspective on commerce because commerce really is that intersection and it's a glue that's kind of starting to form a network around how we're building and how we're integrating and how we're collaborating. So that's just one final point to add.

Great, thanks Tianjin. Now we'll hear from Tim at Citi. Go ahead, Tim. Tim, we'll come back to you. Apologies for the technical difficulties. We'll take the next question from Darren at Wolf. Darren, go ahead.

Hey guys, thanks. You know, look, I just want to touch on the globalization of the business. There's been, I know, about four to five markets built out for Square and Seller over the years. And it would absolutely seem now that internationalization is much more tangible and material than opportunity post-Afterpay. So if we could just touch on your ambitions globally relative to the five to six markets that Seller's done, and now maybe even adding the eight to nine markets with Afterpay, what kind of time frames do you think we can actually see in terms of real global build-out? And then what kind of KPIs would we look for, whether it's users moving outside the U.S. for MAUs in Cash App and then Afterpay being combined, or the cross-border opportunities beyond? Thanks guys.

Yeah, so going and growing global, obviously one of our three key priorities. We've accelerated our pace of global launches over the last 12 months and we've got more work in the pipeline. We do think Afterpay is a medium-term accelerant there. Market expansion, there's a whole pipeline that we have of that. And so some of our pipeline up next predates the Afterpay acquisition. But we do think that there is opportunity for a little further down the road to make sure that we've got Square and Afterpay in the same markets and then expanding further from there. We have broad global ambitions. You know, we think that we obviously still have room to grow in the regions that we're in and see opportunity in new regions that we're not yet in. Ultimately, it kind of goes back to that question of growth versus profitability in terms of how quickly we expand. Each new market that we launch is effectively a J-curve of investment where it takes multiple years of losses before you break even and then before you're ultimately accruing. So in the past and the future, our pace of international expansion is really just gated by the rate of burn that we want to take and how many markets we want to have in the earlier stages of the J-curve at once.

Thanks Darren. Now we'll try again with Tim at Citi. Go ahead, Tim.

Great, thank you Nikhil. Thanks everyone for the great presentation today and thanks for taking my question. I wanted to talk about Cash App Pay. So really strong on the consumer side, you mentioned 80 million trailing 12-month actives already, pretty comparable to Venmo. But I want to touch on the merchant acceptance side. You mentioned some pretty exciting things today. You talked about building out a sales team to help Cash App Pay gain more merchant acceptance. You also have a good early start with merchants even beyond Afterpay. You talked about Expedia, Etsy, ASOS, and some others that you've already gained traction with in terms of the large merchants. Maybe just expand upon that approach and how you plan to get broader merchant acceptance of Cash App Pay. And as a brief follow-up that's very related, if to the extent you could touch on it, any of a bundled sales approach where you could sell to that same merchant Afterpay, unbundled processing, and of course Cash App Pay.

Yeah, for sure. Okay, firstly, there's an incredible team I think that sits in the organization that we've had the opportunity to mobilize around. In my mind, you know, post kind of deal closing, there was a couple of key components that played into the conversation with these enterprise retailers. The first is incrementality. And so when we shared some data points around 6% of Cash App actives being Afterpay consumers, you know, that represents a very significant incremental base that retailers can get access to to drive growth of their platform. So it's looking at very significant incrementality beyond Afterpay's core base. The second point is the Cash Card actually represents a very meaningful portion of retailers' transaction volumes, you know, organically through the card network. And so to be able to have conversations with retailers to talk to them about the value that's already been created organically and to talk to how do we kind of flick the switch where Afterpay drives a million leads per day, but the opportunity to engage the Cash App audience to significantly elevate that exposure to retailers, that's kind of the core opportunity. As we've spoken to our retail partners, there's certainly two buckets. There's the existing Afterpay base of merchants to be able to bundle that from the perspective of very simple integration, like no extra integration beyond what we already have, existing settlement and contract flows makes it a very limited amount of lift for a retailer to turn live. But then there's a very significant base that are not part of the Cash App, they're not part of the Afterpay ecosystem, sorry, that haven't been verticals that we might have traditionally serviced just as a function of where Cash App is incredibly strong. And so I just think there's a very diverse opportunity here at play. And we've certainly started with the biggest retailers on the Afterpay platform. To get that resonance from a very significant portion of our top 20 retailers in such a short period of time has certainly exceeded our expectations. But excited as to where this goes from here.

Great, thank you. We'll now open it up to Lisa at MoffettNathanson. Lisa, go ahead.

Hey, terrific, thank you. And thanks for the great presentation today. Two from me. First one is probably for Amrita, just a question about how should we think about the time to monetization and scaling of TBD and the Bitcoin-related projects. And also which one or two on the list in there do you guys anticipate might be the next home run like Cash App? And then my second question is for Alyssa. Can you just elaborate in your investment priorities for Square, what you're doing to ensure that you win against the big SMB-focused e-commerce platforms that are starting to integrate payments into their platforms? Thank you.

Thanks Lisa. Let me start on your question on our emerging initiatives, and of course Jesse, Mike, yours should feel free to weigh in as well. So where I would bring you back to start is how we operated Cash App in the early days, which was also an emerging initiative for us if you can believe it. And it's instructive in terms of the playbook that we take here as well. In those early days prior to monetization with Cash App, we experimented with discipline and with a defined investment envelope with rapid iteration and small ways to gain feedback quickly. And we intend to do the same thing here with the creator economy and with our Bitcoin ecosystem initiatives. The envelope of investment this year on our emerging initiatives amounts to about 3% or less of non-GAAP OpEx. And we meet regularly to discuss various aspects of the business from product to team to mechanics to be able to do that right, quickly where we need to. How to ramp from 2013 as a hack week project to 2017 with our first real monetization and scaling, and now nearly half of Block's business. And we're prepared to be patient with these new initiatives as well, so long as the milestones we've set out along the way continue to prove out. The final thing I would note here is that the TAM that we sized here today at nearly $200 billion does not include these emerging initiatives, just as back in 2017 at our last Investor Day our TAM didn't size, and frankly probably couldn't have sized at that time, Cash App's impact on our business and opportunity. And so now as we look at the next five years, we see tremendous opportunity to grow into really a transformational opportunity across both the creator ecosystem and the Bitcoin ecosystem. And then following up on your second part of the question, Lisa. So earlier today I talked through Square's four key capabilities: so commerce, customers, staff, and banking. And the key to all that, and one of the things that's unique or important I should say for in-person commerce, is that staff capability. You know, we obviously omnichannel is growing, we're going from in-person to online, e-commerce companies going from online to in-person. But in-person, that staff capability is really key. And we've spent years building out the functionality there. You know, whether it's scheduling, shift scheduling, it's payroll, it's staff communication, or even things like deep permissions and audit functionality. Those are capabilities that you don't typically see with e-commerce because e-commerce doesn't really have a concept of an employee, right? You know, it's a website and there's orders and items and all the commerce capabilities, there's customers capabilities, and many have added banking capabilities as well too. But that staff capability is incredibly important for success in-person. And you know, we have a rich set of things there. And so that's part of how we're winning there. Like I could go on, there are more nuances there in terms of not only employees but also location management that are really unique to in-person. But that's a key differentiator. The number two is it's really our elegant and fast hardware is a key differentiator for us relative to what had traditionally been e-commerce pure plays that are moving into omnichannel. So with in-person, if you've got a line of folks in your store, you know, milliseconds matter in terms of how the speed of the app works. And that deep integration between the software and the hardware, and again something that you don't see necessarily and folks haven't spent the years optimizing if you're coming from an e-com world into an in-person world. So that beautiful hardware coupled with deep integration with the software leading to fast checkout speed in order to optimize the business and increase the number of sales that you can do makes a big difference. And you know, I think the proof point that we had as well too with Sofia and the Super Bowl, part of that was the omnichannel capabilities, but another part of that was just our fast transaction speed. And so that's where both transaction hardware and then staff capabilities I think where we're well positioned against players that are coming to in-person from an online world.

Thanks Lisa. We'll take the next question from Josh at KeyBanc. Josh, go ahead.

Thank you, thank you so much for the day. It's been great to get a little bit of insight into the organization and how you run it. So with that in mind, I wanted to ask a higher-level question. If you think about Cash App, you know, I think it's about 2%, Square something similar, very low single-digit percentage of the TAM. And it's both been, you know, 10 years or less. When we think about doubling the penetration from here, obviously the network effects seem to be a really important part. It seems like in some ways it could accelerate the pace at which you penetrate the TAM. So I know there's a lot behind that, but you know, are there really critical obstacles or connections between the ecosystem that you feel like you have to make in the next couple of years to really elevate the penetration to a much higher level?

Yeah, and I'd just add, Josh, that you know, as Brian said, the network effects are not just what drives efficient customer acquisition for us, which is important as we scale to new demographics and eventually to new geographies. But the network effects are critical to how we present awareness and discoverability to new product areas within Cash App. And it's been critical to how we've been able to drive increasing product adoption, which ultimately drives increasing utility and drives increasing inflows and therefore monetization. And as we've seen over time, those network effects, as people build more connections throughout the Cash App ecosystem, improves retention and improves product adoption. So it's really critical to your point in how Brian and team have operated Cash App, and I think is instructive for us as we build connections into Afterpay and into the broader commerce platform.

Thanks Josh. Now on to Mike at Goldman Sachs. Mike, go ahead.

Hey, good afternoon. Thank you very much for the question. I just have two on Cash App. First, could you talk a little bit about your ambitions and the product roadmap to expand Cash App Borrow's offering to larger personal loans or even secured loan products? What are some of the factors you're weighing as you evaluate something like that? And then second, I was wondering if you could talk a little bit more about the Cash App OS redesign. What are you seeing in early testing as it relates to engagement and retention? And what does the timeline for that rollout look like? Thank you very much.

And we'll take our last question from Harshita at Bernstein. Go ahead.

Thanks for taking my question. Brian, Amrita, I have a question around instant deposits, the biggest revenue stream within Cash App. So what do you think is misunderstood about instant deposits within the investment community? And then instant deposit effectively results in outflows from your ecosystem. So how should we think about the growth of that revenue stream in the context of your inflow strategy? And I'm rather just a follow-up question, any framework we can kind of think about in terms of long-term structural margins within Cash App vis-a-vis Seller? Thank you.

And to just follow on to Brian's answer. First on instant deposit, you know, we think about multiple use cases for how people want to send and spend money. Instant deposit is one of them, in addition to a plethora of others. So as Brian said, we're here to solve our customer use cases. We see some of these cases like Cash Card growing disproportionately, but we're still seeing growth on instant deposit. We're still seeing a unique use case about moving money quickly outside of the ecosystem. Now what I think is really remarkable about Cash App over the past few years is initially we only monetized inflows when they left the ecosystem, whether through instant deposit or Cash Card. Now with Bitcoin investing, with Cash App Pay, Cash for Business, and with our products to come around commerce and financial services with Cash App Borrow, we can monetize inflows that are money that stays within Cash App and moves around because we're providing that incremental utility to our customers. So for us this is really a journey about solving multiple use cases for a customer and ultimately which gives us an opportunity to monetize in different ways. The second point about margins, what I would say for Cash App is that we are earlier relative to your question, I think was relative to Square, where obviously earlier in our journey in Cash App. As I mentioned earlier in Tianjin's question, I think that we have opportunity to improve upon our structural margins over time as we optimize our cost base. But I think the focus for us right now, as you heard throughout the presentation, is on healthy, strong cohort economics. And so the greatest similarity that I see between how we run the Cash App business with discipline and efficiency and how we run the Square business is that orientation to returns on investment and to strong customer retention and efficient customer acquisition. Those three pillars of how we invest in the Square business are just as true for how we invest in the Cash App business over time.

Great. That concludes the time we have for Q&A today. Jack, over to you.

Yes, I just want to thank you all for the time you've given us and for your partnership in building this amazing service. So on behalf of all of us at Block, thank you for the time and we hope to talk to you soon.