Q2 2023 Block Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to the block of second quarter 2023 earnings Conference call I would now like to turn the call over to your host Nikhil Dixit head of Investor Relations. Please go ahead.
Hi, everyone. Thanks for joining our second quarter 2023 earnings call, we have Jack and Amrita with US today, we will begin this call with some short remarks before opening the call directly to your questions. During Q&A, we will take questions from our customers. In addition to questions from conference call participants, we would also like to remove.
And everyone that we will be making forward looking statements on this call all statements other than statements of historical fact could be deemed to be forward. Looking. These forward looking statements include discussions of our outlook and guidance as well as our long term targets and goals and we may decide to shift our priorities our move away from these targets and goals at any time.
These statements are subject to risks and uncertainties actual results could differ materially from those contemplated by our forward looking statements reported results should not be considered as an indication of future performance.
Please take a look at our filings with the SEC for a discussion of the factors that could cause our results to differ also note that the forward looking statements on this call are based on information available to US as of today's date, we disclaim any obligation to update any forward looking statements, except as required by law.
During this call we will provide preliminary estimates of gross profit growth <unk> and <unk> performance for the month of July . These represent our current estimates for July performance as we have not yet finalized our financial statements for the month of July and our monthly results are not subject to interim review by our auditors as a.
A result actual July results may differ from these estimates and may not be reflective of performance for the full third quarter. Moreover, This financial information has been prepared solely on the basis of currently available information by and is the responsibility of management.
Preliminary financial information has not been reviewed or audited by our independent public accounting firm. This preliminary financial information is not a comprehensive statement of our financial results for July or the third quarter.
Within these remarks, we will also discuss metrics related to our investment framework, including rule of 40 with rule of 40, we are evaluating the sum of our gross profit growth and adjusted operating income margins.
So we will discuss certain non-GAAP financial measures. During this call reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter historical financial information spreadsheet at Investor Day materials on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results.
This call in its entirety is being audio webcast on our Investor Relations website, an audio replay of this call and the transcript for Jack and Amrita is opening remarks will be available on our website shortly with that I would like to turn it over to Jack.
Thank you for joining us today.
Spend my time today, highlighting the progress we've made on two themes first our investment framework and second our ecosystem of ecosystems model.
You'll find everything else from the quarter in the shareholder letter, we posted an hour ago.
As we shared earlier this year, we define our investment framework as block in each ecosystem must show a believable path to gross profit retention of over 100% and.
And rule of 40 on adjusted operating income.
Today, I want to share our progress towards this target and demonstrate how our investment framework forces us to make tradeoffs and guides our decision making across the company.
Leaders across our company are now looking at the true full cost of their businesses inclusive of share based compensation.
This has led us to pull back on our pace of hiring.
To be more targeted and hiring for critical roles and to focus more on performance management.
For sales and marketing we are focused on efficiency to drive acquisition, while decreasing spend.
We've pulled back on brand spend and more experimental channels across our ecosystems in favor of channels with more proven returns.
This past quarter, we also decided to wind down operations in certain markets, including cash app's diverse brands.
In the EU and our buy now pay later platform clear pay in Spain, France and Italy.
He has required significant investment and the markets have not seen the growth and profitability, we had expected over the past several years.
We see an opportunity to ship these resources towards strategic areas that have a higher potential return on investment.
And we continue to drive towards our goal we may identify other areas, where we aren't seeing the expected and necessary returns.
We also continue to improve our cost structure for each of the ecosystems by identifying opportunities to expand our structural margins.
These include the investments we make in technologies like automation and machine learning to manage risk and finding ways to optimize our partnerships.
As a result of our investment discipline, we are increasing our profitability expectations for this year, which amrita will speak about.
We're continuing to share updates with you as we make progress towards our target.
As a company our strength and resilience comes from our diversified ecosystems, each serving different audiences and the connections we create between them.
Some notable examples of this work in the second quarter.
In June we turned on cash up pay as a payment method for square invoices, giving customers the ability to pay outstanding invoices directly from their cash balance.
In the second quarter, we launched cash up pay with several well known after pay sellers expanding the connection between cash App and our buy now pay later platform and also recently launched strategic partnerships with payment provider stripe Ardian and pay near me an important step in reaching a wider range of merchants.
We started enabling square payroll employees to file taxes for free by using automated W. Two important directly into cash up Texas.
After receiving a notification from square payroll employees simply log into cash up Texas securely imports their W. Two and complete and submit their tax forms.
Earlier this year, we shared plans for the public beta testing of our bitcoin wallet picky.
And in June we announced our first two global partners Coinbase and cash app to allow customers to buy and immediately transfer bitcoin from those custodial platforms into big keys, Seth self custody wallet.
I'll now pass the tomb Raider, who will provide more details on our financials.
Thanks, Jack there are three topics I would like to cover first an overview of our strong second quarter results across growth and profitability.
Tens of thing across our business in July .
Third our look at our investment discipline and profit expectations for the remainder of the year.
In the second quarter, we had strong growth at scale with gross profit of $1 $87 billion up 27% year over year.
Our strong profitability. This quarter is a demonstration of our ability to drive leverage and operating efficiency in our business.
Adjusted EBITDA was $384 million up more than two times year over year.
Adjusted operating income, which as a reminder include expenses related to stock based compensation and depreciation was $25 million compared to a loss of $103 million a year ago.
Let's get into square and passion.
Square generated $888 million and gross profit up 18% year over year looking at some of the drivers gross profit from a vertical point of sale products was up 37% year over year with each of our restaurants retail and appointment products delivering gross profit of more than $100 million on an annualized basis.
In the quarter.
<unk> was up 12% year over year looking at the components of growth across retention churn in acquisition.
PV per existing seller, which effectively measure same store growth has stepped down from the third quarter of 2022 and has been the primary driver of the moderation in <unk> growth since then.
Positive growth in acquisition and Tau relative stability in churn of existing sellers compared to historical levels.
We think strengthened our square banking products, which totaled $167 million in gross profit during the quarter, an increase of 24% year over year.
Banking products represented 19% of square gross profit excluding PPP.
From 17% in the prior year.
The biggest drivers of squared banking during the quarter, Brian and transfer square debit card, stating.
<unk> in square lung.
We saw benefits from raising pricing on instant transfer earlier. This year from recent recent launches of our banking products outside the U S and from interest on square savings balances.
Lastly for square growing up market has remained strong with gross profit from mid market sellers up 20% year over year. We believe the total addressable market for the larger seller segment remains large and highly fragmented and our recent shifts in go to market efforts are intended to drive further growth upmarket.
Cash flow generated $968 million in gross profit an increase of 37% year over year.
Each component of our enclosed framework active inflows per transacting and monetization rate grew on a year over year basis.
During the month of June we reached 54 million monthly transacting actives up 15% year over year.
We've continued to see significantly higher attention for Atkins with larger network sizes during the quarter or those with a network of four or more represented more than half of cash up quarterly transacting actives.
Peer to peer functionality has allowed us to scale our network rapidly and has driven engagements in the second quarter of peer to peer transactions per active reached an all time quarterly high.
Helped drive $53 billion in peer to peer volume across cash app during the second quarter.
An increase of 18% year over year.
Inflows per transacting actives averaged $1134 in the second quarter up 8% year over year and relatively stable compared to the first quarter, which typically is a seasonal benefit from tax rate times.
We believe there is significant runway for growth and inflows pretends acting active over time.
Increased product adoption and growing share of wallet.
This tax season more than one third of cash taxes active chose to receive their refund directly into cash app, a meaningful increase year over year, driving new active to direct deposit.
Product adoption has been especially strong for our financial services products, both catch up card and direct deposit experienced strong growth in active and volumes.
Monetization rate with exclude gross profit contributions from RMB NPL platform with 144%.
Monetization was up 16 basis points year over year, driven primarily by pricing changes over the past year and up three basis points quarter over quarter, driven primarily by the timing of strong first quarter inflows during the tax season.
Lastly, our be NPL platform contributed $84 million of gross profit to each of square cash app in the second quarter.
<unk> from our DN TNF platform was $6 $4 billion in the second quarter, an increase of 22% year over year.
Losses on consumer receivables were 101% of dnb relatively consistent with the prior year.
Next an update on July trends for the month of July we expect total gross profit growth of 21% year over year, which we would orient you to for the third quarter and the remainder of 2023.
Looking at each ecosystem for the month of July we expect square gross profit to grow 15% year over year, which we expect to be relatively consistent through the third quarter.
The moderation in gross profit growth from the second quarter is primarily due to transaction margin compression as we lap certain benefits for more favorable interchange economics last year.
Square G. P. D is expected to be up 12% year over year consistent with the second quarter as we've seen stability in G. P V growth over the past three months from May through July .
For the fourth quarter, we expect gross profit and <unk> growth to improve slightly compared to the third quarter.
Square benefits from more favorable comparisons.
For cash App, we expect gross profit to grow 27% year over year in July and similar to square, we expect this to be relatively consistent through the third quarter.
In 2023, we continue to expect growth on a year over year basis from monthly transacting actives inflows proactive and monetization rate.
We expect cash ex monetization rate in the back half of the year to be more consistent with the second quarter and we expect gross profit to grow more in line with the overall imposed as a result.
Given the focus on efficiency the wind down averse will have an impact on monthly active going forward, although we do not expect an impact to inflows or gross profit.
For the fourth quarter, we expect expect a slight moderation in cash after gross profit growth driven by stabilization in cash ups monetization rate and as we lap stronger growth in the prior year period.
For our B NPL platform, we expect year over year GMB growth in July to be similar to the second quarter's 22%.
<unk> growing faster than gross profit due to regional mix.
Turning to our progress against the rule of 40 in our profit expectations for the remainder of the year.
Our investment framework setup, an ambitious goal and we're focused on progressing towards that over the long term, we'll continue to share updates with you and hold ourselves accountable.
Pending on what Jack touched on we've worked to deliver efficiencies through the first half of the year.
On hiring we drove leverage compared to our expectations entering the year by encouraging efficiencies among existing teams and prioritizing hiring and more critical areas.
We expect our head count growth in 2023 to be below that 10% target set out earlier this year.
With sales and marketing we've pulled back on lower ROI channels to increase our efficiency.
While cash up to variable sales and marketing expenses, namely peer to peer and cash up card issuance costs were up year over year.
Overall company customer acquisition spend was down year over year driving leverage across square and Cassia.
Spices pullback, we saw healthy acquisition across each ecosystem as we shifted our mix has been.
And looking at corporate overhead spend we began to identify cost savings opportunities by down sizing, our real estate footprint across some of our west Coast office locations.
Given some of these items on a GAAP basis operating loss was $132 million in the second quarter, which includes the impact of acquisition related amortization expenses as well as restructuring expenses for the wind down of verse Sinclair Bay in certain markets.
And write downs for certain real estate facilities among other items.
We expect to find further leverage opportunities in these and other overhead expenses over time.
Moving to our full year 2023 profit guidance.
We have progressed as we've progressed further into the year, we have better line of sight into our planned expenses and our updated guidance today reflects this.
We're increasing our expectations for profitability in 2023, and now expect to deliver adjusted EBITDA of $1 5 billion and adjusted operating income of $25 million for the full year 2023.
We expect to achieve profitability on an adjusted operating income basis for the year, which is inclusive of share based compensation expenses.
We continue to expect year over year margin expansion on both an adjusted EBITA and adjusted operating income basis.
Our updated full year guidance represents a step up of $140 million for each figure compared to our prior guidance.
This represents both the gross profit momentum in our business during the second quarter and the focus on expense discipline. We delivered in the first half of the year, which we expect to continue to drive in the second half of the year.
Finally, touching on the third quarter, we expect third quarter non-GAAP operating expenses of $1.55 billion, and we expect share based compensation to increase by approximately $25 million relative to the second quarter.
You mentioned share based compensation compensation remains an area on which we are focused and expect to drive greater leverage over time.
We're excited about the progress we've made towards our investment framework and we will have 40 this quarter and are eager to continue to work.
With that I'll now turn it back to the operator to start the Q&A portion of the call.
Thank you I think I would like to ask a question on the phone lines. Today, you can press star one on your telephone keypad to remove yourself from the queue. It is star one again, we do ask that you. Please limit yourself to one question.
We will take our first question from Tien Tsin Huang of Jpmorgan.
Yeah.
Hey, thanks, so much here. So so given your July months update tracking a little bit slower than the second quarter and also your profit update which you raised just love to hear your updated thoughts on operating leverage I know ask that quite a bit but just operating leverage here in the in the <unk>.
Second half versus the first half is operating leverage going to be driven more by the top line or by expense focus that you also talked about across the two ecosystems. Thanks.
Hey, Thanks for the question Center and.
So obviously as we see strong second quarter results across both topline and profitability. We're pleased with our ability to show discipline in our operating expenses finding efficiencies, while continuing to strongly grow the business.
And we expect to deliver continued discipline on our expenses in the back half of this year and Thats whats led to raising our profitability targets for the full year by $140 million reflective of on each of adjusted EBITDA and adjusted operating income, which reflects not only the strong performance in the second quarter.
Raises our guidance for the remainder of the year.
And as you heard our second quarter, our July expected gross profit growth of 21% year over year growth.
<unk> urge you to look at from a third full third quarter perspective, and remainder of 2023 perspective as well so seeing some stability from a gross profit perspective at the block level from July forward. As we noted there was some lapping effects within cash App and square related to <unk>.
Pricing dynamics within cash App and related to interchange economics within square.
From an operating leverage perspective, we see a number of opportunities for us not only that we've.
Executed on in the first half of this year and expect to continue to drive into the second half, but also as we look forward longer term, namely three that I'd call out to you as the three biggest areas in our expense base leverage first sales and marketing second around hiring in head count and third around our corporate overhead.
<unk>.
From a sales and marketing perspective, we are focused on finding efficiencies and optimizing our spend what you saw in the second quarter was our overall customer acquisition spend was down year over year with leverage across square cash App and despite this we continue to see healthy acquisition across square cash App as we oriented more of our remaining spend too.
Towards more proven channels and more proven areas of return seconds.
Secondly, with hiring we've taken a more disciplined approach to growing our teams in the first half of the year, we drove leverage compared to our expectations and are encouraging more efficiencies out of our existing team over time, we'd expect to see a slower pace of hiring which drive leverage here as well as on stock based compensation.
From an overhead perspective, as we noted in the quarter in the second quarter, we downsized our real estate footprint on the West coast for some relatively modest savings, but longer term, we expect to drive leverage across a number of meaningful areas of spend here, whether it's software and data usage, our real estate facilities professional fees peony.
And a range of other discretionary areas ultimately our investment framework and our target of achieving rule of 40, which is a growth plus margin framework will help us make these important trade offs as we continue to invest to drive long term profitable growth in the back half of this year and into 2024 and beyond.
While doing so prudently and with discipline in our operating expense base.
Got it thanks I appreciate it.
We'll take our next question from will <unk> with Wolfe research.
Hey, guys. This is darrin peller on from Wolfe.
You had 12% <unk> growth into July I think you just said amrita rate in comparison, the networks around 6% to 7% growth. So obviously your share is still gaining and holding up versus the industry. If you could just touch on what's working well there and then also maybe expand on the verticals Asian efforts in the segment.
While we're on that topic, though I mean, the vertical location efforts, obviously, we're going to come with some investment. So if you could just remind us your view on profitability levels beyond 'twenty, three and I know the rule of 'twenty, there, but just without a timeframe, it's hard to really handicap, how to think about progress in 'twenty four 'twenty five.
Hey, thanks for the questions Darren.
So I think what I'll do is I'll first hit what we're seeing in terms of square G. P V. In the second quarter and into July and then we'll hit upon the vertical <unk> efforts for the square business.
So what we're seeing in terms of July trends.
<unk> fairly consistent with what we've seen really through May we've seen a stability in G. P V trends from May through July .
With July coming in at that 12% year over year basis, consistent with the second quarter also at 12%.
If you unpack that by vertical in the second quarter.
Food and drink TPB grew by 17% year over year retail G. P. V grew by 9% year over year services also by 9% services of course, encompassing a number of Subsectors beauty health and fitness home and repair and professional services.
We have seen some moderation.
Trends across discretionary and non discretionary verticals.
Which we've talked about since really that mid Q4 timeframe and not truly broad based across a number of different verticals.
From a geographic perspective.
We have seen is international markets have continued to also see some of those macro related headwinds.
Which are more pronounced in Australia in the second quarter, albeit with overall growth ex the NPL.
Continuing to be at a much faster rate of growth in the overall base of business at 35% year over year growth for those international markets.
In the second quarter.
And again from a month to month perspective have generally seen greater stability from may through July on those GPT trends for square.
Driving the.
Diving into your vertical <unk> question, now, which I think is a key question for us as we think about continuing to grow up market, where we have seen outsized growth from a gross profit perspective.
Market grew 20% and year over year in the second quarter for us.
This is a key area for us as we continue in our strategic focus of bringing larger sellers onto our platform and acquiring those colors across our key verticals of restaurants retail and beauty.
Within our sales team our focus has been on providing our reps with the right tools industry knowledge and signals.
<unk> until acquire sellers across the three verticals, let's take inbound and outbound.
Sales within inbound we began verticalizing our U S down sales team last year, we completed that in April of this year and since that completion, we've seen an improvement in gross profit added per account executive and in software attach rate, it's still early but encouraging trends there now for outbound we finalized verticalizing.
Our U S outbound sales team in July so just this past month.
Our account executives about completed their industry training programs, which enable them to really deepen their knowledge within the assigned vertical that they've got.
And we anticipate our account execs will continue to ramp through Q3, and hopefully be fully ramped into Q4. When those changes. Our goal is to increase gross profit account added per account exec and software attach rates as we've seen with the inbound sales team and as we see those signals and gain confidence there on our processes and results will look.
To continue to scale the outbound sales team over time ultimately will be iterating on this in the coming quarters and years. As this was a long term initiative for us to continue to grow up market and with our vertical points of sale and to drive sustained results overtime wed expect to see these results paying off and driving growth into 2024.
<unk>.
And expect our overall go to market spend to target that three times ROI over four years.
Okay.
Thanks, Amit.
We'll take our next question.
And we'll take our next question from Tim <unk> with credit Suisse.
Great. Thank you for taking the question I want to talk about solar sales and marketing or square sales and marketing a little bit. So this year's marketing expense you mentioned, it's benefiting from some of the annulus nation of the pullback that you had on brand awareness and some of the experimental stuff, so a shift towards more efficient spend but.
But sometimes there is a concern from investors that because the dollar amount is lower but the size and health of the new cohort coming in might actually be a little bit smaller, but we gather that the payback periods have really come in more to the four to five range and they had expanded maybe six to seven at one point last year. So with all that context, maybe you could talk about the.
Health and the size of the cohort that youre, bringing in now for square.
Yes.
Sure happy to take that thanks for the question, Tim Let me start with the cohort trends on payback periods and then we can dive into what we're seeing.
In the first half of the year in terms of spend and customer acquisition.
So in 2022 or 2022 cohort, we're seeing trends toward a 6% to seven quarter paybacks, which is slightly higher than our expectations. As these cohorts have cured square sales and marketing spend was up approximately 20% year over year in 2022 compared to 2021 from.
From a 2023 cohort perspective.
We're targeting approximately a five quarter payback.
As we expect payback to improve compared to last year and have a more meaningful impact to growth in 2024, and as I just mentioned our longer term target across our go to market investments for square remains the three X ROI over four years.
When you look at the first half of this year, we have pulled back on sales and marketing spend through the first half of the year square sales and marketing is down 6% year over year and we expect continued pull back for the rest of the year again, we're focused on optimizing our mix of investments across channels and driving efficiency. So we pulled back meaningfully on our brand and awareness.
Channels on a year over year basis, as well as sales and we've reduced the size of the team meaningfully as we focus on reorganizing the teams and enhancing our data and incentives as I was just speaking to on the sales team.
Despite the pullback we've seen strong growth in acquisition over the past two quarters with year over year growth and acquisition improving in the second quarter compared to the first quarter. This is with 12 square sales and marketing down slightly year over year in the second quarter and down 6% through the first half of the year.
Okay.
Okay.
And we'll take our next question is from.
Thank you and we'll take our next question from Lisa Ellis with Moffett Nathanson.
Hey, good afternoon, Thanks for taking my question.
Just hoping to drill in a little bit on the initiatives you have underway to connect blocks two ecosystems.
The shareholder letter in prepared remarks, you called out a few different ones with cash App pay also I saw 15% growth in cash for business.
A couple of other highlights in there can you just kind of take a step back and update us on your current overall strategy for connectivity ecosystems, and maybe some data points on the benefits you see in the organization.
The kind of network effects as well as maybe some of the profitability that you say thank you.
Yes, I can start with that so.
As we've talked about we do believe or power in especially resilience in our business due to the fact, we have multiple different ecosystem, serving different audiences and I've been spending a lot of my time and focus on looking for opportunities with the teams to connect them.
Some of the ones, we mentioned earlier on the remarks.
Our mostly between square in ketchup.
So payroll ketchup, Texas was a big one.
Ketchup and square through after pay.
It's the biggest part of my focus right now.
And.
I'm really excited about the strategy, we continue to refine it.
Look for opportunities to build a really compelling experience within the cash app.
Network effects and increases our network effects within cash App, but also enables us to have enough that people are checking everyday because theres something interesting, especially as we.
Balanced with square.
Their work is solar so I could see even more unique and more compelling.
Ketchup and.
Queen hardware, specifically the bitcoin.
Wallet.
We announced a partnership and the launch there will be a global first products, we'll be launching in the.
Most countries we've ever launched in.
To start.
And.
We're constantly looking for other ones there is theres, a lot around ketchup pay and square, especially around.
Local offers from local merchants.
And we continue to find more and more connections that doesn't speak to the future ones.
Which would be title.
And looking at opportunities for for square, especially musicians looking forward to sell merchandise.
<unk> and.
And TBD, we believe with this protocol will enable both ketchup and square.
And even entitled to move much faster and move much faster globally. So we're excited about that so we have a mix of external product fishing in future features.
Connect the two ecosystems.
A lot of internal stuff as well.
We're using more sure resources were shared learnings.
And able to move much faster as.
Individual ecosystem, because the work already done.
Appear ecosystem.
Thank you.
We will take our next question from Ken Zukowski with Autonomous research.
Hi, good afternoon, thanks for taking the question.
It's good to see the strong growth coming out of squares international markets, yet again, I believe square recently highlighted that many of its vertical wise software products.
Are now available in some of the company's largest international markets.
Just talk about the opportunity here from a software penetration perspective compared to the U S and how have I guess, how having these vertical software products in these local markets can help you sustain the momentum behind the international business in terms of <unk> growth and gross profit growth.
Yes, thanks for the question I'll start.
So our priority was with square is to achieve parity across each of our markets, meaning that we launch Oliver futures in any one particular market globally.
Theres various challenges to doing that square loans being an example different regulatory.
<unk>.
Increases the workload.
Every every.
Every new market that we take on it does.
We have some.
Cost to us doing more and more features for the general products. So we're always providing the costs and making sure that we're picking the right markets at the right time.
We made a lot of strides in Q2 with the launch of 30 products across our global markets for square.
One of the most notable was tough to pay on Android.
Available to sellers in the U S Australia, the U K, Ireland, France, and Spain. This is a big deal as tap becomes the dominant way to pay more and more people are using their phones, especially outside of the United States and Europe and Australia.
We also launched our second generation square reader.
In the U K, Canada, Australia, Japan, France.
And in Spain.
And this improves a better life stronger connection and ESG performance and it allows shows around the world to take secure payments from just about anywhere that's extremely affordable Australia continues to be very strong in the 12 months ending in June almost half of squares gross profit in Australia came from sellers that used for mono.
Those products, which is up from less than one third two years ago.
And we've seen our square banking products contribute to some of the strong.
Gross profit growth, we've seen in international markets as well so we continue to push.
Going going international is tends to be more deliberate and therefore, a little bit slower.
We've learned a lot as we go into every market and each market that we open we can move much faster and ideally grow faster as well.
And I'll just add Ken that as you noted this is a big opportunity for us where we believe that in these markets outside the U S. We're in we're less than 1% penetrated and the opportunity with a long runway for growth.
So as I noted our gross profit growth for square excluding of the NPL platform and in our markets outside of the U S.
35% year over year in the second quarter.
Now at about 11% of squares polo gross profit ex the NPL.
With <unk> up 26% year over year, and 32% on a constant currency basis, and that's really encompasses as Jack was saying the rollout of additional products across the full suite, whether it's payments software hardware as well as the banking products now more recently, where we're seeing strong traction and where we've got our <unk>.
To continue to build upon this momentum.
Great. Thank you both.
Take our next question from Bryan Keane with Deutsche Bank.
Yes.
Hi, guys. Thanks for taking the question.
We're excited to see the $1 million cash app pay active user base.
Just curious on the timeline for merchant distribution and acquirer expansion for cash pay and then maybe you can just go over the revenue model for cash App pay in particular, thank you.
Yes sure so.
With ketchup Hey, we're our goal is to provide a lot more flexibility for customers and as I mentioned in my opening remarks, we have expanded our distribution.
With partnerships with stripe, Audi and pay Nuomi, which allows us to reach a much broader range of merchants and also industries.
We launched some additional after pay merchants in Q2.
Including Steve, Matt and Fenty beauty.
And we still see significant room to grow the adoption of ketchup.
And we are actively pursuing a pipeline of new merchants after pay certainly helps us.
During the second quarter, and nearly $500 million and analyze volume was processed through cash outlay.
And nearly $1 billion cash or pay monthly actives as of June .
So it allows us to reach customers beyond <unk>.
So as the cash Upcard, serving we are seeing really strong adoption amongst our younger audience.
<unk>.
Demographic so.
We are.
We've seen promising results.
We're still looking for opportunities to make sure that we continue to see those and push it.
And I would just add Brian that we see merchants.
Eager to onboard with cash or pay because of the access to the very attractive customer base that we have 54 million monthly transacting actives as of June .
Who are highly engaged on our platform and inflows over $1100 during the second quarter.
And so with cash at PAA being present as a payment device on their platform.
They they get access to these customers, who don't even necessarily have to have been signed up by a cash up card.
And that's really the proposition that we're selling into these merchants. These large merchants who are finding real product set here with cash I think.
Great. Thank you.
Yeah.
We will take our next question from Harsha <unk> with Bernstein.
Yeah.
Hi, Good afternoon can you expand upon your comments around headcount growth into business has been very strong over these past few years how.
How are you seeing potential for efficiencies for example in your engineering teams could die and Rick I know you talked about the head count growth for this year, but how should we think about had kind of a good trajectory.
Thank you.
Yes, I think the biggest change has been our investment framework and making all of our teams and leaders and managers are aware of the true cost of the business and taking into account stock based compensation. So we have slowed hiring.
And we have targeted more.
We've been more targeted in our hiring.
To get much stronger talent and looking deeply our performance management as well.
Of course, there is always efficiencies to bring to the table.
But we just want to make sure that we're we're looking each ecosystem and really.
Putting the decisions in the hands of the.
The folks running these teams and really running the company with everyone.
Having the.
The investment model in their head.
To make sure that we're achieving the growth that we want to see.
Costs.
We want to minimize so.
It is early as we can.
<unk> rolled out this investment framework, but it does seem to be working.
This is something thats in the consciousness of the organization.
Great. Thank you.
We will take our next question from Reena Kumar with UBS.
Yes.
Good evening, Thanks for taking my question.
Could you talk a little bit about the next steps in the after pay integration and could you discuss more broadly what are the next.
What are then the next thing to look out as you get right after pay.
Okay.
Yes, as I said this is where a lot of my focus is right now are meeting the team almost on a daily basis to make sure that we come up with a compelling and differentiated experience a lot of the work is going to be found.
Ketchup and the catch up.
Discover tab.
Magnifying glass and your interface.
We want to build a compelling experience that people want to go back to <unk>.
Daily.
To find offers to find deals to find items defined.
Merchants around them.
And that would be that it would be a place that also continues to push on our ecosystem of ecosystem model. So that we're benefiting the square ecosystem in the square ecosystem benefits catch up so that will probably be.
Where you'll see the highest velocity changes a lot of it has to do with our ability to break.
Items and merchants some deals and offers.
On a relevant basis.
And obviously, we will be applying machine learning and deep learning to do that based on the signals we get.
But that's where the.
The ecosystem really come together in our highest impact we believe and it leads to many other opportunities down the line.
It's Robert.
Thank you.
We will take our next question from Ramsey El <unk> with Barclays.
Hi, Thanks for taking my questions. This evening.
Wanted to ask you to dive in a little bit deeper on the move upmarket and seller and just kind of comment on how the larger retailers and merchants are utilizing block services, maybe differently than the smaller merchants, how does the value proposition sort of change what's resonating and then just what strategy you might use to sort of lean into this move.
That market.
So.
In terms of.
For acquisition and attracting them.
Getting people more up market.
I think the biggest one is we just have a much more focused effort around these verticals.
Maintain it.
Flexibility.
A lot of our competitors are working on one vertical.
We're working on all three all three of the dominant ones.
You find.
Within Congress.
So a big aspect.
People to square for us because it.
It might be a restaurant chain, but I also have some retail elements or it might be a chain of nail salons and.
We provide services and retail so we're seeing a lot of crossover between all these verticals because square is one ecosystem.
They are it all connects together with all the operational utilities as well.
Very easy to choose and it's very easy to add these new dimensions to your offering to your customers, which ultimately differentiate you from your competitors in grocery sales so.
If I would point to one thing it would be the flexibility that we enable and that flexibility extends to.
As you do get bigger.
They're coming to us as a bigger entity.
Have legacy systems, or you might need to do custom work and Thats, where our R Square platform comes in.
Enables people to hire developers themselves.
Take tools offer for marketplace.
To actually customize their work and customers their own system. So that they can build the experience that they want for it for their customers. So.
But that flexibility is really significant and <unk>.
<unk>.
Continues to set us apart. It also allows us to move much faster because we're using the same developer platform internally.
As we're exposing external so a lot of our interfaces are built on that.
And it allows us to focus on on the interface and experience and make sure that all of our developers have access to the same tools that we do so they can build a really compelling additions and our larger merchants can build.
Compelling additions themselves on the same tools and that same foundation.
Thank you.
I'll just add Ramsey that if you think about to your question how to larger sellers use our platform differently from smaller sellers I think one simple way to answer that as they use more of our platform the smaller sellers.
I think the last stat, we shared in 2020 to the mid market sellers, who have adopted four or more of our products had 15 times greater attention and those who will be adopted one I mean are they generally adopt more products and smaller sellers, so that ability to do take on more jobs on behalf of that larger seller <unk>.
<unk> builds are right more retentive relationship with them.
And as Jack mentioned that comes through not only in our vertical software offerings each of which is now running at an annualized gross profit growth rate of $100 million or more during the second quarter, but also our developer platform, which provides a third party integrations.
Okay.
Sellers can build more customized solutions and applications across a number of different aspects not just payments, but orders inventory customers et cetera.
And so the growth that we're tracking on our vertical points of sale at 37% year over year in the second quarter and gross profit growth from our developer tools, which also outpaced overall square gross profit growth.
A real key areas for us to continue to be tracking here, along with our go to market orientation around greater verticalizing orientation from a marketing and sales perspective.
We see these as being key elements of our platform and our go to market approach that ultimately help us attract larger sellers.
Great. Thanks, so much.
We will take our next question from Trevor Williams with Jefferies.
Great. Thanks for taking the question I wanted to ask on the SaaS line within seller.
Closure on square banking was helpful to see this quarter, but if you could just give us kind of a snapshot of current stock rank of the biggest revenue contributors to that one today and then second part to that would be on payroll Jacky you mentioned in your remarks, some of the integration there with cash app taxes, but any broader update on <unk>.
<unk> role in how youre thinking about the longer term opportunity to cross sell into the existing seller base there. Thanks.
And your first question was on.
Okay.
Right.
I think the first question was on subscription and services within square and helping the stack rank some of the largest square products within that line.
And I would Orient you Trevor to R Square banking disclosures.
<unk> square banking contributed $167 million in gross profit in the second quarter the four biggest.
Sort of areas, there being square loans instant transfer our square debit card.
Now our square savings product as well, which we're now recognizing interest benefits from it as part of our gross profit as well. So those are kind of the four biggest products from a banking perspective that I'd Orient you to in that are driving meaningful growth in our square banking.
Initiative and more broadly across SMS for square.
I think the second question.
You had was on payroll was on payroll.
Exactly just the cross sell opportunity and of the existing merchant base. Thanks.
I think we continue to see as we especially as we grow our sales initiatives.
And deepen those relationships with upmarket sellers, we see significant opportunity to drive software attach whether it's payroll or any of our other 30 plus products across the square ecosystem to drive attach into upmarket sellers.
And so that's a key part of our initiative and as I mentioned, it's early days, we're only a few months into having verticalizing, our inbound U S sales team, but we are seeing higher software attach from that vertical ovation and we're now in the process of ramping our outbound sales team as well and hope to continue to drive that.
Through products like payroll and other products as we build those touch points with upmarket sellers.
We will take our next question from Jason Kupferberg with Bank of America.
Hey, Thanks, guys. Just can you quickly review, what you said about square gross profit and <unk> growth for Q4, and then just on the cash App side I think the influence proactive we're up 8% in Q2 do you expect that to stay pretty stable in the second half.
Jason happened happy to take that one I'll start on that one.
Start with square and we'll unpack some of the <unk> trends that we're looking at.
Generally we look at square growth across three high level components customer acquisition churn and same store growth.
In the second quarter, we saw acquisition acquisition grow year over year as I've mentioned already churn was relatively stable and.
And we saw moderation or where we have seen moderation in growth is in the same store growth element of those three elements are GTD per seller, well, let me kind of walk through and unpack each of those.
From a customer acquisition standpoint in both the first quarter in the second quarter, we saw a year over year growth in acquisition and based on trends to date acquisition growth in the second quarter improved compared to the first quarter.
From a churn perspective since the third quarter of 2022, we've seen relative stability and churn of existing sellers on a year over year basis, no material changes there.
From a same store growth perspective, or GTD per seller is kind of a couple of things that I'd unpack for you, where we've seen the moderation first it looks to be consumer related.
Second it looks to cross multiple vertical.
Third this sort of retention dynamic or GTA V per seller dynamic seems to account for the majority of the <unk> growth T cell that we've seen since the third quarter of last year and fourth we see similarity in our data here.
<unk> per seller trends too.
Broader third party data as well so let me kind of walk through each of those elements first processing volumes at existing sellers or again sort of that same store growth element were lower in the second quarter of 2003 compared to the third quarter of 2002 levels. We've noted seeing the similar dynamics since mid November which is kind of that Q4 timeframe that youre <unk>.
First thing.
We believe its consumer related as growth in spend per card and the number of unique cards remain lower than October levels, while churn as I mentioned remains relatively stable.
Ultimately, obviously, we manage the business to gross profit, but unpacking some of the GPT trend might be helpful to illustrate here since the third quarter of 2002, we've seen an eight point slowdown and squares global G PV growth from 20% or so it's a 12% or so we estimate that <unk> per seller or same store growth has been responsible for the vast majority of the slowdown.
Since the third quarter of last year.
Really impacting nearly all the verticals, we see in recent quarters and impacts broadly across the seller base by seller size as well, but perhaps more pronounced amongst larger sellers.
And similar to the data that we've seen in that we're tracking on third party data since the third quarter USG PV growth has slowed by seven points and we have seen an eight point slowdown in growth of U S retail sales and a six point slowdown in the growth of visa and Mastercard volumes in the U S.
So these are some of the key elements that I'd point, you to that kind of unpack, what we're seeing from our same store growth or GTD timeline perspective.
Alright.
All right.
For 2003, I just wanted to make sure I heard the commentary right there.
Sorry, say that again on 23 for the fourth quarter of 2003, the relative growth rate youre expecting on GP LNG PV versus Q3, 'twenty three sure yeah. What we shared for Q4 was that we expect to see a slight improvement in gross profit and <unk> growth compared to Q3.
Q3, remember we're sort of.
Hey, good to look at the July rates for Q3, the July rates being 15% gross profit growth for square and 12% G PV growth per square, but.
But we expect to see improvement in the fourth quarter, given some of more favorable comparisons again as I referenced we started to see some of the moderation in growth across the verticals and the mid Q4 timeframe of last year.
The second part of your question, Jason was on inflows proactive the 8% growth there.
And in the second quarter and I think your question was just sort of the sustainability or how we see growth on inflows proactive overtime.
For the second of your question, yes for the second half of this year. Thanks.
Sure Yeah.
As I noted in the remarks earlier, we'd expect from 2023 perspective to see overall growth and inflows proactive we saw that 8% growth in the second quarter as well.
And relative stability quarter over quarter, even though we have a greater impact from tax refunds in the first quarter Ulf.
Ultimately, we've encouraged here by the healthy trends as we look forward I think there's kind of two dynamics that I'd point out beyond the broader question of consumer health and consumer spend levels, one is product adoption.
If we can drive more product adoption and cross sell of our products that give customers more reasons to onboard more funds into cash up also if we give customers more ways that they can onboard their funds into cash App that also for example paper money deposits in the past couple of quarters that also give.
This.
Leads to incremental volumes on inflows and opportunities to engage customers through our products.
Mitigating element to that is the mix shift dynamic as we attract younger demographics and the cash up and we've seen strong.
And encouraging trends with younger demographics like Gen Z demographics that could put some pressure on inflows proactive as these customers are more likely to have lower inflows.
Proactive earlier in their financial journey, but this is the demographic that we want to be growing with over the long term. So those are kind of the two dynamics that I would I would share with you is as you think about modeling inflows proactive overtime.
Very helpful. Thanks.
And we have time for one more question, we'll take our last question from Jamie Friedman with Susquehanna International Group.
Hi, I was wondering ever either Jack how after pay is performing relative to your expectations from a credit perspective I realize.
Losses on consumer receivables were.
101% essentially the same as last year, but is that.
More due to your treatment of the credit box. How overall are you thinking about that.
The originations versus the profitability from a credit perspective. Thank you.
Okay.
I can start on that one what I would say is that what we've seen for after paying the first half of this year is stability to improvement and overall trend lines from a topline perspective, whether you look at GMB. Your gross profit with consistent loss rates and we've maintained a really disciplined approach here to risk loss.
We have continued to see stable trends in consumer health and repayment behavior with stability as you noted on losses on consumer receivables from a year over year perspective in the second quarter. This is while <unk> was up.
22% year over year in the second quarter, improving from the 17% growth rate in the first quarter and similarly, while gross profit was up improving from <unk>.
13% year over year in the second quarter improving from 10%.
In the first quarter. So we are seeing stable to improving trends on the core be NPL products. So then after pay while we continue to focus on the much larger opportunities on integration with commerce color connecting our cash up and square ecosystems, and while we maintain healthy loss rates across the ecosystem.
Perfect. Thank you.
Thank you ladies and gentlemen, thank you for participating in today's program. This does conclude the program you may now disconnect.
Okay.
Thank you ladies and gentlemen, thank you for participating in today's program. This does.