Q3 2021 Square Inc Earnings Call
Your milestone this quarter in expanding our offerings to families by serving teams an entirely new demographic for cash out.
This launch customers in the U S between the ages of 13% and 17 could access to cash app's massive PDP network to cash card direct deposit and boost all with parental authority and approval.
By lowering the age barrier, we hope to expand access to the financial system to 2019 teams in the U S and equip them with the tools they need to participate in the cashless economy.
It is especially important now is transacting with physical cash becomes less relevant and increasingly digital world.
With cash that families can help their teams learn about how to manage them. The money. They earn for me allowance jobs insurers with the appropriate protections in place.
As we've talked about our strength lies in our ecosystem model, especially as our ecosystems connect together.
In the third quarter, we launched catch up here in the U S and new contactless payment method for online and in person transactions.
<unk> pay individuals can seamlessly pay with cash up account a square seller is using the QR code, we're tapping a button on their mobile device a checkout.
As contactless options into our because they become more mainstream ketchup has become a top requested feature at both cash app customers and square sellers.
This integration further expands catch ups commerce capabilities and helps us meet customers, where they are providing more flexibility entertainment options.
<unk> also enables us to offer sellers in new and innovative way to bring commerce to life for their customers.
Lastly, we continue to serve our purpose of economic empowerment, and although we do.
So we want to build on that strength to explore opportunities beyond our existing ecosystems to serve new markets.
We have a few emerging initiatives, we're investing behind into 2022.
For example, with the acquisition of title for building tools for artist starting with musicians.
Also recently created a business called TBD in order to build an open developer platform with the sole goal of making it easy to create non custodial pretty permissionless and decentralized financial services with a focus on bitcoin.
We plan to share our detailed plans with a white paper later this month.
We announced two more bitcoin and initiatives as well the consumer bitcoin hardware wallet bitcoin mining system.
Our focus on helping vickery and reach a mainstream audience, while at the same time strengthening the network and ecosystem.
We will build both in the open and collaboration with the community sharing all of our decisions progress and questions along the way with.
Each of these long term opportunities that we will be learning from over multiple years and with that I'll turn it over to Amrita.
Thanks, Jack and there are three topics I'd like to cover today first I'll look at our performance in the third quarter of 2021.
An update on our seller and cash App ecosystems in October and third I'll look at where we intend to invest in the fourth quarter of 2021, and then 2022, given the compelling growth opportunity ahead.
In the third quarter gross profit was one $1 3 billion.
An increase of 43% year over year for 51% on a two year CAGR basis.
Adjusted EBITDA was $233 million.
Both seller and cash option strong fundamentals during the quarter.
Seller generated gross profit of $606 million up 48% year over year or 29% on a two year Tinker basis.
Few growth drivers to call out here.
It was easier and more visible to customers.
Next we wanted to share an update on our business through October and what we're seeing real time as a reminder, we believed to your caterers will better reflect underlying trends in our business.
For seller he expect gross profit in October to grow by 45% year over year are approximately 30% on a two year cake or basis relatively in line with growth in the third quarter.
Hello G. P V was up 24% on a two year CAGR basis.
We've been encouraged by relatively stable growth rates in the past two quarters, but we recognize they're still in packs from COVID-19 in certain parts of the U S and our international markets, which could impact your T V trends.
For catch up in October, we expect gross profit growth of greater than 35% year over year or greater than 90% on it to your tager basis.
As we had expected, Utah normalization and a two year gross profit CAGR from July to October as government disbursements ended on.
On a year over year basis gross profit growth has been relatively stable around the 35% range from August through October.
We've seen strong engagement here across our border ecosystem of products and are enthusiastic about our recent launches in product roadmap.
Which brings me to our intended investment for the fourth quarter of 2021, and a preliminary review of our focus areas for 2022.
In the fourth quarter, we expect to increase non-GAAP operating expenses, excluding risk loss by approximately $115 million compared to the third quarter.
Looking to 2022, let me see significant investment opportunities across our business and remain focused on driving longterm profitable growth.
Next year, we expect to grow non-GAAP operating expenses by approximately 40% year over year compared to 2021.
Or approximately $1.3 billion of incremental spend across product development to build out our team sales and marketing to drive acquisition and DNA to expand support in each of our ecosystem.
This figure excludes impacts from after pig, which we expect to close in the first quarter of 2022.
Let's take a look at where we're focus what where where we're focusing our investment.
As a result, we are deliberately investing to reach new audiences increase the utility for existing customers and expand our product set as we have done over time.
I'll now turn it back to the operator to start the Q&A portion of the call.
The system that scale that focuses on sellers.
The channel Commerce, So it's easy for us to test a lot of these theories out.
And actually scale them up overtime.
Uhm.
We do believe having new software ecosystems is our ultimate superpower and differentiator so.
Have both ends of the counter two different audiences and sellers and and individuals is really important cause a thesis behind after pay as well and that probably represents the largest potential for connecting ecosystems, but any connection remake uhm between music a system strengthens your overall.
That you.
Of a broader ecosystem and we think our valued customers in the company generally as well.
In terms of direct deposit direct deposit is one form of and Coke we've done a lot to make sure that we are making it more accessible we're putting it more upfront and the interface you'll notice a bunch of navigational changes that we made.
For more of a focus on direct have it but.
But generally.
There's a number of ways people get money into.
Uhm Catsup mattress, there to paycheck, but uhm Patrick on stimulus checks.
And we want to make sure that it's intuitive and easy for all those and I'd be ready for when people on a scale.
You know the other announcement to look towards in a slight is what we can states for families.
Allowing any parent or guardian to.
Turn on ketchup for the kids.
Who can also use compeer direct deposit in the password uhm unlock some entirely new population plus and will still benefit from those base level uhm.
Uhm network effects the ground.
Brown and I can't shopping in the first place so we have I'll.
No. We're we're going after this problem in multiple ways interface.
Products and features I catch up for families and then taking every opportunity we have two connector ecosystem set.
The thing that I think is my assumption here and ketchup.
You see that in the teens, you see that with what we're going to be doing in the future with after pay and other new experiences to drive greater utility and engagement from a financial services perspective, we're expanding our banking capabilities, including new inflow channels into cash app and exploring new products like borrow to help drive engage.
<unk> and attract more inflows into the network.
From a health perspective, we're scaling support we're expanding access and we're doing it responsibly to encourage good behavior on our platform, which again further strengthens the network effects and the ability for people to bring funds and use them across multiple products and we're building a full stack team dedicated to each of these areas.
In 2022.
And you'll see that in our hiring plans and product development to drive continued product roadmap velocity from a marketing perspective, we're investing to drive acquisition for new customers with a focus on reaching higher lifetime value customers and newer demographics and as we've seen gross profit in lifetime value per customer.
Grow historically, we've begun to increase our customer acquisition costs above the historical $5 range, which.
Which we believe is too efficient given the opportunities that we see ahead to some of the levers that go into that to drive investment in 2022 and future growth.
Paid marketing this is where we can ramp our paid channels and has a growing portion of our spend referrals, which makes enhancements we're going to make an enhancement to the overall referral program and use it as a way to cross seller ecosystem as well and awareness, which grows the ability for people to come in and.
And adopt products beyond peer to peer.
<unk>, reaching cut new types of customers.
Beyond our existing demographics.
Advances cash up lifestyle lifestyle brand as a true differentiator and finally support the foundation on which our platform is built the growth with cash App has outpaced our investment frankly with customers are dropping adopting more and more products and in 2022, we're going to grow our health team.
Continue to build out our support and our infrastructure to align with cash up astounding growth.
Part of that is deposits and limits initiatives to reduce friction around inflows sources and add new inflow channels and.
And part of it is some of the more recent things you've seen like we recently launched in App support messaging to our customers and that has quickly become the majority of inquiries will be dynamic was the spend will track returns, but we're excited about these initiatives strategic initiatives and investment areas to drive future growth for us ultimately.
<unk> utility in engagement with the cash App ecosystem.
Thank you next question, we have a question from a square seller and the idea from the art of the Doughnut. Your line is now open you may ask your question.
Hello, My name is Sandra I'm, a business owner here in San Antonio, Texas, I owned crafted donut shop, and we use fee all square features available at the moment.
My question was like roaming from for truck to a brick and mortar location as we continue to expand one of the most important thing is to ensure that we have over integrated products, we need to roll up market.
And the U R.
Can we expect to see square introduce features as we look to expand.
100% and thank you for accretive square.
So we rebuilt or ecosystem.
Exactly this in mind, we started sort of of course of 13 years ago with very simple solution, but chipping critical.
So as non core.
Proprietors.
Smaller businesses.
We wanted to make sure that we.
We were able to scale.
Boats or chose ambitions, so decided to gateway physical location.
From ex U S markets and how fast that piece is growing and looking forward maybe for them read of where your priority investment areas are looking internationally as you look into 'twenty two thank you.
So maybe they'll start to soften a little follow.
So we as we looked at a new market for us. So it was we want to make sure that we're.
Number one looking at the market and understanding what the level of small businesses and entrepreneurship within each one.
And then we want to invest in brand and product awareness and then after that it's not just launching one product or get into parity.
Across all of our products across all over.
The corporate yes.
And then finally like look at expanding into new markets.
Where we think there's a high potential for success.
Because we do require a <unk>.
Partnership with a local bank then there's differences in local regulatory this has to be a very deliberate decision.
So we've made very conscious choices around what markets, we're in and why.
And Theres still a lot of opportunity for us to open more of our products.
Next and then global no scaling sales and marketing in these markets outside the U S, which is growing faster than the U S and where we've seen paybacks improve over time.
We'll be ramping our spend in these markets outside the U S. In 2022, given the new geographies that we're in you know, including France, Ireland and with the data in Spain, as well as potential new launches for the future. We expect these areas to have lower ROI in the early years and improve over time and you see them as a critical.
Strategic area for us for the future that we want to invest and two given the strong product market fit and how our products are resonating in these markets. It's also a key piece of the investments we make of course in product development to localize and expand these services and features for each of these markets.
Closing the product cap with Jack was talking about these international markets and from a support perspective to make sure that the seller can reach us with any of their needs across international as well as the U S. So a key focus area for us and very strategic for the future.
Thank you next question comes from the line of Thomas <unk> of Credit Suisse. Your line is now open you may ask your question.
Great. Thank you for taking the question I wanted to dig into the large seller approach in 2022 and beyond and I am really bringing this up in light of the potential for more bundled approach to work with those large sellers and thats, including some of the big online enterprise customers that have relationships with after pay so I was hoping we could talk just a little bit about that full suite or bundle offer.
That could be sold into those large seller, whether whether it's buy now pay later the cash out pay button or your more traditional payments processing or unbranded. If you will and then of course other services that square offers and really the thought being there as it might allow squared of a more competitive or sort of a unique angle when tau.
With those large enterprises.
Yes. This is exactly that.
As I said earlier this is one of our.
For the biggest strengths.
We do have.
Ecosystems are cool.
Great. Thanks, good afternoon, and I'll throw another one in on the cash App. So as we look at the size of your user base.
<unk> 40 million monthly actives.
Puts you at a scale that very few.
Thanks or close to.
I mean, how do you think of the benefits.
Of scale or what competitive advantage a larger user base gives you beyond just having more users to monetize I mean, you have network effects on the peer to peer side, but just trying to get at Palo larger user base can unlock a higher level of monetization on the benefit from when you plug in after pay.
That seems pretty clear, but just thinking more on cash app as a standalone today really what the scale advantages are thanks, so much.
Yes, I think.
I think number one.
Looks a lot more opportunity to strengthen our existing products, but also create new products on top of the catch up as a foundation.
And those can be products for.
Both individuals.
Customers, but also for sellers as well as more and more commerce moves online and purely digital.
Is that does not sound offline.
We do have businesses using flash up because capacity leeway.
For them to transact less familiar.
For their customers and even that builds upon the network effects.
But I guess.
Directionally point you back to discovery.
With a larger base of customers, we get more opportunity to introduce discovery features to our network.
And we have.
Starts of those things and boost for instance, where.
We can we can highlight a particular activity or a particular seller.
Whether it be in your neighborhood or nature.
Nationwide.
And I think Theres a lot more to come there and we have the benefit of having our seller network and ecosystem.
We can further turn on to all of our passionate customers.
And as we have.
No more.
Our compelling product experience around discovery.
Local.
This is around maybe become so important in the open access to them.
Moving greater degree so I think there was there was a lot of potential and having the sale results.
Thank.
So we can go much much higher and that's the intention and especially as we think about cash app.
Outside.
Decrypter beyond it's going by and said you know pick up or you know buy instead of other cryptocurrencies and also in the evening. It uses to get engaged in D. N. S. T V system. Thank you.
We're not for our focus is on helpings. According to become there's a crunchy for Villa and you wanted to you know we have a number of initiatives.
Towards that goal of ketchup interest one we're gonna be building a hardware wallet for exploring for calling my name is a consumer device to to mind the claim at home or in a business first of all businesses.
<unk>.
We believe this focus is important we believe it's right.
And a lot of it has to do it for the resilience the fundamentals the principles.
The decline offers and we also want to make sure that we're giving back to the community as much as possible and this is also reflected in our approaches Corbett Cornwallis decor, my name and a new business unit called T V D.
Which is focused on building a developer platform too.
To enable more ideas around decentralize finance on the big one SEC and civility that it offers.
No salt the Panthers, a check check over the over the over the tragic loss. So we're we're going to release more details on my T V D as doing with a white paper on November 19th.
And so we're really excited about the the direction an extended amount of focus.
With.
Things like declined and.
Savings account and cash card in stocks uhm as we as we have with the command ketchup. So ignore it always want to provide as much information as possible.
People can be responsible unhealthy with the financial system and I will definitely include probably think about uhm ketchup with families and curtains.
And I would just add that I think some of the key differentiating factors for cash up here is the scale of of network effects, which drives a utility ultimately for these teams and for their families and the aspirational brand that cash App has cultivated through the years, which is truly authentic <unk> certainly with Josie and certainly.
We are happy to take this one maybe it will hit balances quickly first can you start customer balances slightly down quarter over quarter up 143% on a year over year basis, we would really Orient you, though to look at inflows inflows more broadly.
As balances are just didn't measure of growth at a snapshot in time at the end of the quarter.
And so what we really Orient too as we think about the health of the network is of course as we said overall network size engagement, but also inflows what we've seen is that as we had expected as the government disbursements came to the end largely during the third quarter, we saw normalization in the two year CAGR rate on gross.
From July to October.
On a year over year basis, though we've seen relative stability from August to October in around that 35% range on a year over year basis in October we expect.
If the payment type that B N T L enables or even things like ketchup pay enabled really the strategic imperative here for US is the commerce enablement.
The integration of after pay enables for us with with both cash App and with our seller ecosystem of course, there will be opportunities to think about cost savings over time, but the street you need to focus is on e-commerce and in App discovery for us.
Thank you we have the next question comes from the line of George <unk> of Cowen. Your line is now open you may ask your question.
Great. Thanks for taking my question.
I just wanted to ask as it relates to.
The cash App and the importance of the cash card can you remind us how penetrated cash parties within the cash app.
Ecosystem and then maybe in Merida, you can kind of update us on the breakdown of different revenue sources within cash app, the instant PDP cash card and the like thank you.
Sure. So the hit cash card first we continue to see strong adoption here for cash card with our customers. It is our highest attach product outside of peer to peer.
And what we had shared back in March is that 7 million.
Customers within cash or using cash card on a weekly basis, we're seeing it drive regular utility for our customers.
That rate of weekly usage had nearly doubled year over year growing faster than the monthly active cash card customers.
Suddenly monetization and and regular engagement and.
And that is something that especially as we look ahead. When we look at the product roadmap ahead, we expect to see even greater diversification for time.
Thank you and we're gonna have time for one last question and deadline comes from Ryan coin of Missoula. Your line is now open you may ask a question.
Two six it's actually been to live here Oh, sorry for the mix up from doable. Thanks for taking my question, let them read a trick.
So you need to quickly you need to quantify the potential upside.
Credit card on tax for next year for for the Ketchup evening. Thank you.
Just to just to start we you know the reason we did this or that helps expand our direct deposit charges.
Brings more enclosed.
Uhm cause more information.
Two customers to understand.
<unk> will work on ketchup this is sexy.
And you know, we think there's a lot of opportunity to supply a bunch of password one has to do and the financial system taxes.
And we want to make sure that we have a successful product contra head of the tax refund Susan so customers over really seamless.
<unk>, we're we're highlighting direct bother them.
Other another potentially powerful in full force.
[laughter].
Thank you that would be the last question, ladies and gentlemen, thank you for participating in today's program. This concludes the program you may all disconnect.
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