Q3 2020 Square Inc Earnings Call

Jason Lee head of Investor Relations. Please go ahead.

Hi, everyone. Thanks for joining our third quarter 2020 earnings call, we have jakone and Rita with US today, if you're experiencing any technical difficulties accessing our third quarter 2020 showed a letter. It's it is also available on the Fccs web site.

We will begin this call some short remarks before opening the call directly to your questions. During Q inane, we will take questions from our customers. In addition to questions from conference call participants we.

The Internet and.

And how people around the world to better participate and thrive in the economy.

A few updates on our two ecosystems seller and cash up before I turn it over to Amrita and your questions let's.

Let's start with seller.

Now moving on to cash out.

Catch up we've continued to find ways to make financial services more related to oil and accessible for individuals.

We have seen strong adoption across the cash EPS ecosystem, including our stock brokerage product, which has seen the fastest adoption of any product to date.

Since launching at less than a year ago more than 2.5 million customers have bought stock season cash EPS and billions of dollars have been traded by the end of the third quarter.

<unk> third I look at where we intend to invest in the fourth quarter of 2020 and in 2021 across both ecosystems, given the compelling opportunities ahead of us.

In the third quarter gross profit was $794 million up 59% year over year or 63% growth. Excluding caviar net income was $37 million and adjusted EBITDA was $181 million.

Cash have delivered incredible gross profit growth of 212% year over year.

The $385 million and gross profit cash EPS generated was more than triple what it did in the third quarter of 2019.

Cash EPS results highlight our ecosystems ability to help customers manage their finances.

Omni channel remains a priority.

In our online capabilities complement our broader ecosystem. We saw continued strong GPV growth from our online channels up more than 50% year over year again. This quarter second we saw stronger growth from our international markets in the third quarter seller GPV in our markets outside the us grew 46% year over year in the third quarter.

That's a pretty covid bubble.

Looking ahead, while the team is continue to execute the remains a wide range of the outcomes related to government and clothes and how consumer behavior normalizes in 2021, which could lead to cash up gross profit decelerating during the remainder of this year and into 2021.

Given cash up incredible growth here to date in 2020, we will lap, particularly challenging comparisons in the second and third quarter of next year.

Turning the seller in October we expect our stellar ecosystem to achieve year over your gross profit goes slightly ahead of the 12% growth cellar reported in the third quarter seller G. P. V was up 8% year over year in October, which modestly improved compared to the third quarter, which was up 4% and our international markets. We saw G. P. P growth of 50 per.

Our 2021, we again are making the deliberate decision to invest in both ecosystems. As we believe we are in the midst of a transformative opportunity to reach new customers and expand each of our ecosystems.

Next year, we expect to invest an incremental $800 million to $850 million in non-GAAP operating expenses, excluding risk loss.

Presents growth of approximately 40% year over year.

Stability in its still a much younger business and earlier and scaling its margin profile than teller.

Certain states expanding Reopenings in September and October two additional verticals, we saw a corresponding improvement in GPV retention in those states.

Its adoption and engagement.

We've seen continued uhm strong attach on cash card, which is still at about one in four related to our monthly active until we think there's further room for growth there as well as a new products like Stockbrokerage, which has two and a half million customers now and and is is our fastest product to ramp.

I'm gonna be going forward.

Got it thanks for the complete answer good grill. Thank you.

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And your next question is from the line of Lisa L. S with Moffat Nathan. Please go ahead.

Hi, Good afternoon. Thanks for taking my question guys Uhm, Alright, I wanted to ask about cash for business.

[noise] exciting you broke out some new numbers this quarter, 10% of G. P. B, we love that because it's a little two sided network can you elaborate a little bit on where you're gaining this traction with cash for business and is it net new business or replacing some of your you know buy clothes tellers and then also.

So just a little bit more color on the economics I know that take rates. There are you know around that 2.75%, but is the funding mix here actually more attractive because it's funding you know out of out of store [noise] balances as well any any additional color there. Thank you.

It was so thanks for the question so the way to think of a couch for business in terms of like what we're seeing in Schiller adoption is it's very similar to the patterns. We saw early on in the company's history with the free reader.

So we so sellers sofa, so provider smaller sellers.

Pick it up and use it in a variety of ways.

What's different about customer business of course is a total digital it allows those colors to manage their business through peer to peer transactions to their <unk>.

And it also provides them higher weekly limits and roven touch reporting forms.

We we did see a new pattern emerge during COVID-19, because it allows for contact with transactions with their buyers and with our customers but received.

Repaired was like beauty online retail we've seen local businesses use it to collect donations.

We think there's a lot of opportunity here and we do believe the it's quite powerful.

As you as you mentioned and square point of sale.

The prerequisite functionality to support the future is in development.

So we're going to work as fast as we can to get up to you.

And definitely appreciate any feedback on.

Remaining caps that might help you serve your customers better.

Okay perfect. Thank you very much.

Thank you so much.

And your next question is from the line of Timothy showed all with credit Suisse. Please go ahead.

Thank you for taking the question Alright. My question is a follow up on the update you gave on the square card earlier. This afternoon. It's a topic. That's also somewhat related to my question last quarter around the SMB digital banking opportunity for square. So you noted the volume has ramped up to $250 million this quarter.

And that math suggests it's in the ballpark give or take about 1% of seller volume. So it seems like a long runway ahead and I was hoping you could give maybe some added thoughts on some of the things that either you have been doing or can do to address this opportunity. It does seem like a a long runway for a product that really seems to be a a win win for the sellers.

Then for square.

We agree completely.

And the way to think about the scorecard is kind of innovation of a use case of getting people, whether they be individuals or sellers faster access to their funds just matters. So much and Thats what square card represents is sellers get to utilize their money much faster.

Since launch we've seen we've seen adoption and growing with more sellers using it each quarter or we sell sellers using the card upon joining square and in the third quarter of 50%.

The scorecard sellers or what other card within the first month of Onboarding, which was which is pretty incredible.

And we're seeing sellers use the card for everyday expenses like gas stations and discount retailers.

Their own inventory. So we're we're watching very closely.

The the patterns in terms of how people are using it where we can improve it where we can build on top of the card or adjacent to the card.

But you know this vein this use case of cash flow management of enabling faster access to funds is very rich for us and it will come in many manifestations and scorecard.

As you know, it's just one of them, but one of the latest and the definitely excited about the performance recently.

And from a debt perspective.

Scorecards relatively small today, we expect it to ramp over multiple years old or new merchants and increased monetization of fund the existing base as we add those new features to help sellers manage their balance similar to that dynamic we've seen on the cash EPS ecosystem you know the car.

Third enable people they keep their funding from sellers to keep their fun within our ecosystem, which leads to higher customer lifetime value. So it's something we're encouraged on to keep building out.

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The next question is from the line of Darrin Peller with Wolfe Research. Please go ahead.

Hey, guys. Thanks, nice job on the quarter I wanted to just honing in on beyond just obviously catcher business being a big driver of volume right. Now we saw some some pretty material growth in the online side are really just card not present again, I think it was 24% versus 16% last quarter.

If you could just talk a little more on the strategy there and maybe just the other big driver being international which again you guys talked about I think it was 46%.

Maybe just if you don't mind honing a little more on the straight strategic initiatives on both those sides, how big can that get as a percentage of the mix in the next couple of years.

Maybe I can take us off sounds like you're looking for some more color around online and international and we've seen strong traction in both areas as you noted in the.

Third quarter, and we saw continued strength in GPV from on China, Our online channel, which grew over 50% year over year consistent with the growth we've seen on average over the past year and a half and then when you combine the two when you look at online channel growth outside of the U.S. in our international markets that was even stronger at over 60%.

In the third quarter, driven by strong adoption of ecommerce PPI invoices square online. Although you know the variety of online product that we provide that complement that broader ecosystem and as well as you look at and.

Square online at the front door now for US. We're also seeing encouraging trends there were one and two new sign ups to square online our new to square more broadly in October I think last quarter. We had told you one and three and so we've seen some improvement in that as well and where we can help our customers.

I'm, an omnichannel perspective, including through these online products and features.

And just on the Internet.

International side global growth remains a top priority for both ecosystems.

But just looking at solar for a minute.

Since the beginning of our expense.

And through the end of 2020, we we will have had 85 product launches and the four markets, we serve across hardware software and our financial service offerings such as for example, we recently won square for retail in the UK and Australia, It's grown line in Japan.

So we want to continue to make sure that our product offerings that we have in the us.

Are rolled out to the rest of our markets as well and of course always evaluating additional markets for Tim for potential expansion as well and catch up in terms of global growth.

It is it is also a priority for us.

Top priority for us.

We launched in the UK are we also launched cross border payments between us and UK.

And we think there is a lot of potential here, we acquired a company called verse in Spain, which allows it gives us an opportunity to learn from the peer to peer growth in European markets. So right now we're we continue to add all these ask.

Aspects to help us learn and to really make sure that we're expanding around the world in a smart way.

Yes, I mean, it does look like there has been an inspection internet that's great.

Hey, guys. Thank you.

Thank you so much.

Your next question is from the line of Rayna Kumar with Evercore ISI. Please go ahead.

Good evening, Jack and I'm right that thanks for taking my question can you discuss your recent thoughts on capital allocation and specifically your appetite for acquisitions.

Maybe what what types of acquisitions interest you the most today and which businesses would be most additive to square. Thank you.

Well I'll take the first part I mean, we we definitely have an appetite for acquisitions, both in terms of products and also great teams.

No.

We we've shown some examples of like the categories that were looking out we certainly want to continue to add more.

More force behind some of the trends that were seeing within our space such as official intelligence.

And also cryptocurrency and specifically decline.

Weve certainly looked at multiple products that we can learn from them and as we add to the company. We were much more from work completed offering. So we're constantly looking for great teams ore grade products.

To complement.

Or adjacent.

Two are our key ecosystems of solar and kasha.

And we want to make sure that we're we're pretty open not just with acquisitions in the U.S., but but also abroad because great companies are being more and more found all around the world.

And right now just to jump in on the capital allocation piece of it.

Addition, and win back we've we've already started deploying this year an increased investment around paid marketing and we've seen strong returns on that was paid back at less than a year.

And again with low customer acquisition costs in growing our lifetime value, we see strong returns on these investments.

From a support perspective cash EPS is rapidly scale this year and customers are increasingly using cash out for broader services.

On peer to peer so we intend on scaling our support and other operations infrastructure for the business in 2021, we expect the magnitude of the step up to be onetime in nature and we envision.

Operating leverage in this area in the future because of the investments in things like machine learning to drive automation and efficiency and then finally product development on cash up the team has delivered strong product velocity over the years with a mix of major new launches as well as adding feature development and weeks.

But to continue to do that into the future.

Very helpful. Thank you.

The next question is from the line of Peter Christiansen with Citi. Please go ahead.

Hi, Good evening. Thanks for taking my question and later thanks for the color on on you know the potential for top tougher comps in certain quarters and I know, it's challenging in stripping out the impact of stimulus that you've seen but I guess looking at growth in customer funds at least sequentially I think it was up 70%.

Yeah.

In the quarter or should we think of that as at least on a cash EPS side.

Is an underlying growth rate.

For for the existing base.

I'm trying to exclude the big ramp in spending and the new customer acquisition that you've set forth, but do.

Do you see that as it is at a good level that investors should think about going forward at least for the next quarter or two.

Hey, Pete.

Thanks for the question, maybe we can we can talk about the number I think you were talking about stored funds, which were up for catch up which were up 7% quarter over quarter.

Correct me, if you're wrong, if that's the number you know the rest that's correct yeah. Okay. Yeah.

Look stored fun for us is one indicator.

The use of the cash out platform and obviously its a factor of inflows into the platform and outflow has.

From the platform the more we can keep.

Our customer we can deliver value to our customer base through a variety of products, including cash card investing et cetera.

The more we have the ability to it gives people a reason to store their funds within cash up we do recognize as you noted the impact of stimulus.

Which drove us to sort of peak levels in terms of third fund we were at about $2 billion in stored fund in July before seeing a decrease in October at about $1.75 billion and stored funds down about 10% from July to October and we think that that's likely related to inflows relate.

To do these sorts of government funds.

And that's why we noted on the call that in the absence of a further government funds, we can see normalization around and we're already seeing normalization around that one driver of volume per active.

And could expect to see further deceleration there for the remainder of Q4 and into 2021.

And again would think about the cash out business on a on a two year basis here to help normalize for some of the acceleration. We saw this year catch up is delivered over 170% gross profit growth year to date on a year over year basis. This year.

And that and so may see those trends normalize over time, and we look at things from a 2019 to 21 basis to normalize for some of that growth.

Okay. That's helpful and just as a quick follow up.

I know there was a big discretionary spend this last quarter new acquisition growth. How are you seeing adoption of cash card I know that tip.

Typically a quick add up or a new cash app user. Initially are you seeing similar take up that pick up levels, when you're signing on a new cash app user converting to cash card.

Yeah, I think we noticed noted in our quarter.

On the earnings call last quarter that we had seen faster product adoption amongst new customers those new cohorts of customers as we noted in our Twoq call on cash up and that included for things like cash card you know as of the end of June we had over 7 million monthly actives on cash card and the majority of them spending over.

Five times per week in June and we've seen strong engagement since we obviously saw that play out in the quarter for us as well.

We think that there's more to do here cash card has achieved strong adoption at nearly one in four of our monthly actives.

Using cash card on a monthly basis in June.

We think that there's even more that we can do in terms of surfacing cash card in the boost products and the related features to our customers in an even greater way as we move forward.

Thank you really helpful. Thank you.

Thanks.

Ladies and gentlemen, as a reminder, please limit to just one question and no follow up questions. Our next question is from the line of Ramsey El Assal with Barclays. Please go ahead.

Hi, Thanks for taking my questions I wanted to ask about whether you have any initiatives or plans in place to build out a broader kind of beat it be product set I guess, especially in seller.

It seemed like that type of a thing like a P.A. our automation supplier payments would fit the gloves in terms of what you're already offering your customers. Just curious what your view is on the PDP opportunity for square.

Yes. Thank you for the question I think there's a lot of opportunity and we certainly were kind of pulling out this thread when we launched the square Kirk by Incentivizing square merchants to shop at other square merchants.

So there is something there that we're excited about.

And that is a pattern in the use case that we want to watch more closely but we have we have nothing nothing to talk about today right.

Right now we continue to focus on like the most critical aspects to run the business too.

Better serve customers and also a lot around customer relationship management, but as we continue to make that more robust. There's certainly adjacent cities that are very interesting and something that we'll look particularly at.

Terrific. Thank you.

Your next question. Your next question is on the line of James Friedman with Susquehanna. Please go ahead.

Hi.

[noise], it's Jamie just to add I notice Emory to you released some reserves. If you could describe where you are in that journey. It was a bigger conversation obviously earlier in the year any update there would be helpful. Thank you.

Sure happy to help with that and you.

Overall in the third quarter transaction and loan loss expenses were $15 million down 54% year over year with that decline, primarily driven by the $40 million release.

First question is from a lot of Josh Beck with K B C. M. Please go ahead.

Thank you for taking my question, Yeah, I found the commentary around really these new cohorts that you're bringing in on the cellar side or actually seem to be contributing more than the similar cohorts a year ago. It certainly seems like the number of products that cash at users are adopting this up.

So just would like to hear a little bit about maybe how that influences. The L. T V to CAC equation and really how that is influence in your investment philosophy as as we move forward.

Sure Uhm NATO, starting just on what my song how far with a set that and investment can go to market for the seller business.

Uhm, we increase our investment meaningfully in the third quarter and somebody had told you last earnings call. Excluding Kashyap other sales and marketing expenses, which is primarily reflective of the pace of cellar investments or up 63% year over here on a GAAP basis, what we were doing whereas we've watched an awareness marketing campaign okay.

Last a range of new channels, including T V radio podcasts et cetera, and we expect to reach the those channels 50 million people in the second half of this here Uhm. These campaigns really tell a broader story on the ecosystem and it's specifically speaks the larger sellers in terms of the range of products that we have to meet their needs.

Uhm. These campaigns do have longer payback period than performance marketing, but we've also seen that they drive type of funnel interest, which allows us to scale performance marketing, let me see further opportunity to do that in 21 as well and then similarly sales and account management teams have generated efficient paybacks in 2020 or doubling.

Five as I mentioned, a the sales team in 21, and that's been able that's helped us reach more and more larger sellers, which now account for 61% of sellers T. V. You know when we think about reaching these larger sellers, who can take on more products with us. That's certainly has an <unk>.

Impact on lifetime value, which is why we want to measure these investments against R. O Y and look at that sort of longer term duration of a partnership with a seller and how we can deliver valley to them and see increased value from the sellers, which enables us to <unk>, even further to that.

From a cash out perspective, where we've been investing you know it's been about a year now since our first paid ads for cash up we launched them for the first time in December of 2019.

And with our <unk> lifetime Pelles up you know three X over the past three years, we've seen significant room to scale marketing spend still it very strong R O y.

We ramped paid marketing for cash up in the third quarter and into October with low customer acquisition costs across a variety of new channels and we have seen compelling payback. So far on that acquisition standard less than a year of course, a key piece of that is related to the ability to drive stronger value into the ecosystem.

Therefore, stronger or poo and lifetime value of these customers, which becomes a flywheel. It enables us to invest more both into the product ended to go to market.

Really helpful fix your modem.

And your name so I shouldn't is from the line of Andrew Jeffrey with Joe Securities. Please go ahead.

Alright, you have a good afternoon I. Appreciate you taking the question I Wonder if you could talk a little bit about what you see as the role of QR code.

Retail generally been maybe in restaurants particular with the capability squares.

You're just bored at any point.

Yeah. So on the suicide, we had a sofa of ordering capabilities.

<unk>, one that integrates with the restaurant's kitchen in payment systems. We also have QR codes built in to the to the ketchup and she didn't really strong it option and you should Sir generally I I think it's just a function of.

The speed of the arrests and how how easy Uhm Bureau snakes. So this adoption obviously other markets whoop it up to the very strongly but we have all the functionality in place and if you know I suppose people get more and more comfortable using especially in the U S. I imagine, we'll see we'll see more.

But I I do think it is it's brought her a function of how fast it is versus other technologies, certainly competing with an F C as well, which is which is pretty fast.

But we we want to make sure the cellar and an individual using ketchup. Those every available tool to them. So that they can meet their customers wherever they happen to be.

I appreciate it thank you.

Thank you.

And the final question is found a lot of Brian <unk> with Georgia Bank. Please go ahead.

Hi, guys. Congrats on the results I I just wanted to ask or just follow up in in ask about further penetrating inside of of cash card and direct deposit what are some of the things you can do to help drive that penetration even higher I know couch card the 25 per cent today, but it feels like.

There's some room to push that higher I think you mentioned, maybe boost and some other things and maybe that's part of the spend next year to get that adoption up thanks. So much.

Maybe I can start off on this one no I think there's been a couple of different ways that we can approach driving cash card and you mentioned direct deposit you mentioned booth. We view. These products is working together as an ecosystem and.

No. It's part of our our work to surface these products and a straightforward and frictionless way to our customers with respect to direct deposit we have some 30 month over month growth in the number of customers depositing a recurring paychecks, which continued into the third quarter.

We know that direct deposit customers typically pull more funds that I have pulled more fun to catch up with store higher balance is if adopted more product, including cash card, where they typically spend multiple more than other cash card active too all of which is driven monetization lifetime value for that direct deposit customer.

So we do see strong correlation of of these products driving usage into other products and in this example, direct deposit into cash card uhm. So we continue to focus on developing the features around both products and the broader ecosystem together.

Great. Thank you.

And I'd like to turn to call back to the company for closing remarks.

Thank you everyone for joining a call I would like to remind everyone they'll be you'll be hosting or fourthquarter twenty-twenty or just hold on February 23rd 2021, Thanks again for participating today.

Ladies and gentlemen, this thank you for participating in today's program. This concludes today's program you may I'll disconnect.

Okay.

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