Q3 2023 Block Inc Earnings Call
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Good day, everyone and welcome to the block third quarter 2023 earnings call today's call is being recorded.
All lines have been placed on mute to prevent any background noise and after the Speakers' remarks, there will be a question and answer session. If you would like to ask a question you May 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.
I'd now like to turn the conference over to Nikhil Dixit head of Investor Relations. Please go ahead.
Hi, everyone. Thanks for joining our third 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 conference call participants. We would also like to remind 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 that anytime. These statements are subject to risks and uncertainties actual results could differ materially from those contemplated by our forward looking statements.
<unk> 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 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 estimate of performance for the month of October.
Represents our current estimate for October performance as we have not yet finalized our financial statements for the month of October and our multi results are not subject to interim reviewed by our auditors as a result.
Actual October results may differ from this estimate and may not be reflective of performance for the full fourth quarter. Moreover, This financial information has been prepared solely on the basis of currently available information by and is the responsibility of management. This preliminary financial information has not been reviewed or audited by our independent public accounting.
This preliminary financial information is not a comprehensive statement of our financial results for October or the fourth 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 some of our gross profit growth and adjusted operating income margins also 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.
Finally, this call in its entirety is being 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 the website shortly with that I would like to turn it over to Jack.
One moment, we're just getting Jack to reconnect.
Okay I'm.
I'm, sorry, I was on mute.
So again, we're going to do something a little bit different this year. Thank you all for joining US we wrote I rode a shareholder shareholder letter to you all.
Which you'll find on our website and we're going to focus on.
Our call.
To maximize questions. So we're going to start with amrita, preventing more detail under what I wrote.
Most notably reaching a rule of 40 coal in 2026.
After raising our repurchase of 1 billion insurers to offset a portion of dilution from share based compensation.
You haven't yet read that letter for all the details and what I'm focused on going forward.
I'm going to turn it over to Amrita.
Thanks, Jack there are four topics I'd like to cover first our strong performance in the third quarter and increased profitability expectations for the remainder of the year.
Second our preliminary view of 2024, and where we're demonstrating discipline on our investments to drive margin improvement.
Third our path to achieving rule of 40 in 2026, and lastly, our capital allocation strategy to deliver value for shareholders.
In the third quarter gross profit was 1.91 billion up 21% year over year.
We delivered our highest ever quarterly adjusted EBITDA of $477 million or 25% margin on gross profit.
Adjusted operating income, which as a reminder includes expenses related to stock based compensation and depreciation was $90 million and 5% margin on gross profit compared to $32 million a year ago.
Our strong profitability during the quarter demonstrates our focus on efficiency in pursuit of our investment framework.
Cash flow generation has also been strong and improving.
Adjusted free cash flow was $427 million in the quarter compared to $88 million in the prior period.
For the last 12 months adjusted free cash flow was $945 million up from negative 90 $999 million in the prior period.
Let's get into square in cash App square generated $899 million and gross profit up 15% year over year square.
Square G. P V grew 11% year over year or 12% on a constant currency basis.
We're committed to serving sellers locally and through our banking products.
In the third quarter, we experienced strong growth from a vertical point of sale products with gross profit up 29% year over year, and our banking products up 20% year over year.
Cash app generated $984 million in gross profit.
An increase of 27% year over year.
Looking at the components of the inflows framework as of September there were 55 million monthly transacting actives up 11% year over year with growth driven by our peer to peer network inflows per transacting actives averaged $1132 in the third quarter up 8% year over year and relatively stable compared to the.
First half of the year.
Monetization rate, which excludes gross profit contributions from our buy now pay later platform.
Was 1.43% up eight basis points year over year, primarily driven primarily by pricing changes over the past year and relatively flat quarter over quarter.
Turning to RMB, NPL platform, which contributed $94 million of gross profit to Egypt square cash app in the third quarter.
<unk> from RMB NPL platform was $6 $7 billion in the third quarter, an increase of 24% year over year.
Losses on consumer receivable were 0.84% of G M D and improvement quarter over quarter and year over year.
As Jack noted in a newsletter and the fourth quarter, we restructured our commerce efforts moving our the NPL platform into cash App and we believe combining the two ecosystems enables us to provide consumer experiences others cant, especially for commerce.
From a financial reporting perspective, moving forward, we will no longer split 50% of our be NPL platform into each of cash App and square.
Instead to reflect the recent organizational change will include 100% of our be NPL platform in cash app's results beginning in the fourth quarter.
During the quarter, we experienced an outage to our services across block, which impacted both square in cash up systems. We know the reliability of our systems is crucial for our customers and are working hard to rebuild trust.
The outage lasted about 15 hours on certain product and we estimate it impacted gross profit by less than 1% during the quarter, our offline capabilities for square cash App enabled our customers to continue to process transactions. During this time.
<unk> ahead, we are accelerating our efforts to expand offline capabilities to all of our square products with sellers won't be worried about missing a sale.
Our prioritizing building, our technical infrastructure with greater redundancy and resilience.
Turning now to the fourth quarter of 2023.
We are shifting away from monthly trend disclosures in favor of reinstating quarterly and annual gross profit and profit guidance, we expect.
To continue with this updated approach until we achieve and sustain rule of 40, we expect.
To deliver between $1 96, and $1 nine $8 billion in gross profit or 19% growth at the midpoint.
For square, we expect gross profit growth to improve from the third quarter's 15% growth rate as we lap more favorable comparisons from the prior year and we get the first full quarter benefit from pricing changes on square invoices, we implemented in the third quarter.
For the month of October we estimate square <unk> was up 9% year over year.
Our growth has moderated due to both GPT per seller and lower contributions from new cohorts of sellers, We believe GTA V for seller and then impacted by macro trends in discretionary vertical which continued through October.
Although we've achieved positive customer acquisition through the first three quarters of the year gross profit from our seller cohorts on boarded over the past two years are not contributing as much to growth as anticipated and we're focused on evolving our go to market strategy to improve this.
For cash App, we expect gross profit growth to moderate on a year over year basis from the third quarter is 27% as we lap stronger growth from the prior year.
We continue to expect all three components of the inflows framework to grow on a year over year basis in 2023.
From a product perspective, we have seen particular strength in cash half card and borrow as we drive continued growth in our financial services products, while we've experienced softness in gross from cash for business accounts and expect cash app business GPC to decline in the fourth quarter.
Compared to our prior expectations growth in the fourth quarter was primarily impacted by expectations for RMB NPL platform and to a lesser extent cash app business GTD and square GTD.
Looking at profitability, we expect to deliver $430 million to $450 million and adjusted EBITDA and $40 million to $60 million and adjusted operating income in the fourth quarter.
And we are raising our full year 2023 profit guide, we expect adjusted EBITDA of $1 six six to 168 billion.
And adjusted operating income of $205 million to $225 million. These are increases of $170 million and $190 million, respectively at the midpoint compared to our prior guide.
For the full year 2023, the midpoint of our guidance implies gross profit growth of 24%.
And adjusted operating income margins of 3% leading to roll a 27 this year.
This reflects meaningful margin expansion in 2023 with the midpoint of our guide, reflecting five points of adjusted operating income margin improvement and six points of adjusted EBITDA margin improvement compared to 2022.
Turning now to our path to achieving rule of 40 in 2026.
As a company, we remain focused on balancing growth and profitability.
As we look longer term, we're bringing a renewed focus to efficiency exercising disciplined with our expenses and thinking critically about how we operate to drive leverage.
We're going to do all this while also focusing on how we can continue strong topline growth to capture more of our addressable market.
We introduced our investment framework at the beginning of the year and today, we want to provide more context on when and how we expect to reach our goal as.
As Jack shared in his shareholder letter we plan to reach rule of 40 in 2026 within at least mid teens gross profit growth and approximately mid 20% adjusted operating income margin.
This guidance is based on current trends in our business and does not factor in changes to the macro environment.
As we learn more and trends change our expected mix of growth and profitability may change over time as well, we will continue to monitor trends as we periodically update this view.
We see a long runway for continued growth ahead and in our long term planning, we've refined our priorities for each of our square and cash App ecosystems, which are captured in Jack shareholder letter.
We believe we are still less than 5% penetrated against our 200 billion dollar total addressable market, one, which we will work to expand over time in a disciplined way with new products and audiences.
And balance with our growth priorities, what youre hearing from US today is a significant commitment to profitability and efficiency across three key initiatives.
The first area is through the efficiency of our teams.
As Jack outlined in his letter we are implementing an absolute cap on the number of people we have at our company we.
We expect to be a smaller team by the end of 2024 compared to where we are today.
A cap of 12000 people compare us to our current size of just over 13000 people as of the end of the third quarter.
We believe constraining team size will enable us to be more effective and how we drive performance and service of our customers and accountability on our business strategies.
We expect to reach this capped by the end of 2024 with steps towards this goal throughout the year.
Combination of performance management, centralizing teams and functions to reduce duplication and strict prioritization of our scope aligned with the priorities outlined in Jack's letter.
We expect to hold firm at 12000 people until we feel the growth of the business has meaningfully outpaced the growth of the company.
With greater constraints on <unk>, five we expect to drive meaningful leverage and stock based compensation as a percentage of gross profit in the years to come starting in 2024.
Second we are also in the midst of a broad based effort to reduce our spend across corporate overhead areas.
We've identified a number of areas, where we expect to find savings such as real estate process improvements using automation discretionary spend areas like <unk> and certain vendor relationships across software data cloud consultants and contractors.
Third within our ecosystems as we've shared in the past we've been identifying opportunities to continue improving our cost structure as we optimize unit economics and partnerships by leveraging our scale.
Moving to our initial outlook for profitability in 2024, which we expect to be our strongest year profitability yet.
While we are still in the planning process for next year, we expect significant margin expansion as we implement these constraints we expect.
To achieve profitability on a GAAP operating income basis in 2024.
And to deliver $875 million and adjusted operating income.
Approximately four times compared to our 2023 guide.
We expect to deliver $2 $4 billion in adjusted EBITDA, an increase of more than 40% relative to our 2023 guide and to deliver strong adjusted free cash flow growth next year as well.
We plan to share more about our gross profit growth expectations for 2024 during our fourth quarter earnings call in February.
Lastly, I wanted to touch on capital allocation and our focus on prioritizing shareholder return.
As we progressed towards rule of 40 in the coming years, we expect our margin profile and free cash flow generation to improve.
Which means we can return more to shareholders over time.
<unk>, we are announcing an initial share repurchase program of $1 billion.
Which will offset a portion of dilution from share based compensation and allow us to act opportunistically. When we believe our shares are undervalued.
We consider share based compensation in our financial targets as we measure our progress towards we were 40.
And we want to be responsible and managing the impact of dilution as our company grows.
What you hear from US today is an increased commitment to delivering value to our customers and to our shareholders as we execute on the opportunity ahead of us and with that I'll turn it back to the operator to start the Q&A portion of the call.
Thank you as a reminder, everyone that is star one to ask a question on that we do ask you to please limit yourself to one question. We will take our first question from Tien Tsin Huang.
With J P. Morgan.
Yes.
Hey, Thanks, so much really appreciate the cost discipline comments here.
Jack a question for you just just with all this cost framework now laid out do you think there is still.
Room here for innovation in outsized growth that we've come to know from.
From block for quite some time.
Especially with all the changes and the focus can we see gross profit growth accelerate between now and 2026 would love to hear your thoughts. Thanks.
Yes, I think there's I think there's even more room for.
Innovation and invention and growth.
To be very Frank I believe we were getting in our own way throughout the company.
Duncan through both the lens of square and also our investment framework.
I just found a lot of.
Silos of auto.
Redundancy.
A lot of.
<unk>.
Kind of a lack of desire for teams to work together.
I think a lot of what's been holding us back.
Cultural and.
We need to.
Reinvest in why we're building an ecosystem of ecosystem model.
How powerful it is and then number two is around just our structure.
We had unclear decision, making throughout the company, which led to a lot of slowness.
Especially on the on the square side.
So we've been spending the past few weeks just looking at all of that.
<unk>.
Our intersections with our foundational teams or HR and counsel and.
Our financial teams.
I'm sure that we approach that work very lightly so we can focus a lot more on getting products and features to our sellers and to her.
Okay, so customers much much faster so.
I believe.
We're about to enter a phase of re acceleration.
As we look to.
Really hit our goals.
Our 40.
And I want to maintain that.
We're looking at.
To really focus on our customer and retaining our customers as well so that will always be a checkpoint.
All the moves that we make them.
How do we think about shipping and iterating and experiments and much more.
Tien Tsin I'd, just add that in many ways, we think constraints can make us stronger I think that's what you're hearing from Jack and his people cap the absolute number cap on the number of people. We have isn't meant to address and enable these key decisions around our priorities around our structures.
Centralizing teams to reduce redundancies and places enable faster decision, making with clearer accountability and help us create higher performing teams across our ecosystem.
We'll release the team size cap constraint, when we feel it constrains growth of our customers or our business or when the growth.
Our topline growth outstrips the growth of these teams were not there today.
Our focus also is on cost areas.
Outside of the personnel costs that don't touch customers, such as a corporate overhead and we think there's lots of opportunity here to address it.
To streamline our operations without impacting the customer experience.
And then finally, just a word for me on our planning process, we have more to do so far during our planning process I think we've been appropriately focused on cost efficiency opportunities, but we have so many opportunities from a growth perspective across our ecosystems as well some of which from a strategic prioritization perspective, Jack outlet.
In the letter.
So what the what you see here with 2026th growth what we've shared so far really is based on our current run rate trends and of course, we'll periodically update this as we learn more whether it's from a macro perspective are based on our own execution and ability to accelerate.
And relative to that current view of at least mid teens growth, we would expect cash app's growth to be slightly above that and squares growth slightly below.
But our focus is on exploring new growth initiatives.
And then we'll incorporate those as appropriate into our outlook over time, we have a history here of unlocking new innovation on products and across new audiences to continue driving outsized growth and we'll continue that work.
Great. Thanks for that Kevin reflection. Thanks.
We will take our next question from Timothy Chiodo with UBS.
Great. Thank you I wanted to touch on some of the local sales efforts in the move up market for the square ecosystem in the context of the 12000 head count cap do you feel that there is ample room to show meaningful leverage on both product development and G&A, but at the same time again, leaving that room.
To really lean into sales and marketing and specifically in building out some of those local in market sales teams to help drive seller of market.
Yes, I do think there is room.
I think there is a.
A lot of areas that we can make more efficient.
Square and.
Where we've been embarking on the go to market is more much more experimentation.
And experimentation driven by AI tools as well, we put a focus so as you saw in the letter for number three priority is to utilize and grow with AI for us I mean.
Creasing the probability of positive outcomes for sales customer service, which was focused a lot on retention.
Sales within the ecosystem.
And also marketing to make all of those over its much more efficient.
In terms of reaching sellers.
They are.
And it allows us.
With those efficiencies to experiment a lot more so we made a really good move with virtualization of our sales force program prioritize.
Two verticals in particular food and beverage and also services such as beauty theyre inherently local.
Our strength is in local.
When we have the in person.
When we have that in persons strength, whether that'd be an upmarket solar or a small seller, we can expand our ecosystem through that relationship. So we're going to continue to focus on our strengths and then.
Through all of those efficiencies that we create with these new AI tools, we will continue to rollout to ourselves Dr Christoph into into marketing.
I do believe we can experiment and experiment with new things that we haven't tried yet such as field sales.
And learn from them quickly. So we can iterate so really good answers.
Thank you Jack.
Okay.
We will take our next question from Darrin Peller with Wolfe research.
Hey, Thanks, guys.
Great to see the outlook going all the way into the rule of 40 in 'twenty six but really for now where do we get a lot of questions on the sustainability of your squares the seller business.
Really just understanding the drivers to the double digit growth, we hope to see.
International vertical ovation software services Cross I will just give us a sense of what the building blocks are to keep that up to those rates and then also just an add on to that would be the touch on where you see the success I know Jack you alluded to the Companys culture working on the ecosystem, but.
I guess, we'd love to hear more about where you see the success on ecosystem potentially kicking in.
You can see the benefit of that thanks, guys.
Yes.
So I think first and foremost this goes back to the prioritization that we laid out so.
My first.
Two weeks.
With square again, turning square was focused on like what are we working on in wine.
And doing a significant stack rank.
As an organization, we know whats most important why it's most important and how it's going to impact.
The platform that we're building is critical.
Not only for enabling new features that have.
Left us out of the conversation for some sellers and our market shares, but also to make sure that.
We're realizing our ecosystem of ecosystem strategy.
And especially around our third party developers so that they can continue to build where we left off and we have more information on what we.
Can partner with and build skill mix as well. So the platform is going to be I believe a huge unlock for us and we're going to be seeing a lot of.
Those unlocks next.
Next year into next year.
And then I.
I do believe that the focus on.
These local efforts whether that be.
Local merchants.
Local sales is going to bear a lot of fruit for us.
We we have a very compelling products, but we've been hampered a bit in the past around experimenting with more novel approaches to sales that we see in our competitors, where we're removing.
Constraints, so that we can learn much faster and invest more deeply into the things that do actually work.
I think a lot of what's holding us back from a product side, it's actually onboarding.
We still get.
Pretty significant chunk of sellers from self serve and those are of all sizes.
That would be going to our website or buying hardware from an Amazon channel for instance.
And our slower Onboarding flows.
It just takes way too much time.
We're taking time away from from ourselves completely so those will be significant focus areas for us and something that I think will provide pretty quick results over the next year.
I talked about in the last question, but the final thing I want to point out that really sets us apart is banking.
We have a we have a number of products for sellers within banking.
And we've seen banking, we see banking today it was more.
<unk>.
Our customers and when someone comes into the square ecosystem.
Signing up for a loan or a card a debit card or credit card or savings account.
Keep them in the future. We do believe that this will become more and more in acquisition channel for us as well and I think it's one of our strongest differentiators and one I think we will look back as being the most proud of and we have some pretty unique advantages in how we approach.
People banking with square.
And how we enable sellers and how that ultimately positively reinforces our ecosystem and also.
The cash app ecosystem, so in terms of bringing these ecosystems together.
To play silica is going to be commerce.
And the.
The most notable within Congress.
Is how do we really bring in local commerce.
Especially within our cash out to you.
That is our Super power and I think the world is going to want more local experiences at a lot of.
A lot of retail is becoming more and more monitoring on the internet and people are looking for more unique experiences.
And that's where we fit in and that's where our strength is in.
Those connections will be coming.
They're more and more especially early next year. So you won't be able to see something early next year.
And there is an obvious intersection between cash for business customer business.
Square and you can you can see that potentially is.
<unk> for instance.
But people.
You may want to start.
<unk> and smaller.
And utilize cash and then as they grow.
Squares there too.
Grow with them.
Sure.
Got it very helpful. Thanks, John.
We will take our next question from Ramsey El <unk> with Barclays.
Hi, Thanks for taking my question and this question dovetails, a little bit with a couple of the prior ones, but I wanted to ask about.
<unk>.
Square go and the progress you are sort of making connecting consumers to merchants on the platform. If you can kind of talk about the progress youre, making on this theme more broadly in what other ways, you're exploring to create that sort of consumer demand within the app and an ecosystem.
Yes.
That's great you for this question because this is exactly how we're thinking about crossing the two ecosystems between cash app.
And square so for those of you who are not aware squacco.
Is right now focused on services, it's focused a lot on beauty.
As you to open up to download an app.
Squacco open it up in your local city.
And.
This is mainly in the U S right now.
And see all the services around you and book an appointment.
And then all the information that would be critical for your appointment in real time.
So we are seeing is the way to provide discovery.
Because we haven't started organically.
And market it as such and get people to download it.
We have actually seen a very strong start surprisingly which points to the intent.
Saar.
Can you imagine what that might look like.
Larger canvas with a much larger audience, such as cash App business.
The questions that we want to explore more and that's where we think.
Our strength really is when we look across these ecosystems for the use case, specifically that goes going after which is discovery.
Discovery of merchants around you.
Building, a resilient and retentive relationship for a seller.
Their customer we think we can amplify that especially with everything that we've learned with <unk> being in the market thus far.
Great. Thank you.
We will take our next question from Harsha <unk> with Bernstein.
Good afternoon.
Jack I wanted to ask about square leadership recently took over the leadership of that business after him with his departure.
Are you thinking about that going forward are you looking for replacement for our listeners should we expect you to continue.
Okay.
Okay.
Thank you for the question I'm going to lease square.
So we hit some milestones, but I want to I want to see.
Significant return to growth.
Number one I wanted to see us be a lot more innovative.
And then incentive and I wanted to see us connector ecosystems, better not just with cash, but also with title and TBD.
<unk> is going to enable us to.
Go more global pressure, both both square in ketchup.
And where title we do believe that there's parallels between water musician faces in water.
I'll sell or just starting out spaces and a lot of the same tools, we're going to be useful so.
I'm thinking about more I'm thinking about this more from a milestone perspective.
And I'll know when its time and win square setup in a way that we.
We look to find the dedicated lead but this.
This move has enabled me to see a lot of.
Some of the problems not just with some square but across the company.
And work to fix them very very quickly so our pace.
Addressing some of the issues that we've had for quite some time, but may be ignored.
The lack of collaboration between ecosystems the silos.
<unk> in the past all of those are a thing of the past.
Immediately move into something that is much stronger and that's going to deliver a whole lot more value for our customers.
Everything else will follow up on that.
Great. Thank you.
We will take our next question from Trevor Williams with Jefferies.
Great. Thanks, a lot I wanted to ask on the path forward for cash App gross profit in the monetization rate specifically I think within the guidance for Q4, if we back out after pay it looks like it's embedding a pretty big step up just in the pace of quarter over quarter gross profit dollar growth for cash App Emirate, if you could unpack where that improvement.
It's coming from and then on the monetization rate.
We should think about its progression over the next year or so and if theres anything youre able to share on product pipeline, specifically there would be great. Thanks a lot.
Sure. Thanks for the question on monetization rate well, we said in the past, which we reiterated today as well as that.
We are now lapping some of the pricing adjustments that we made last year. So we expect to see greater stability in the monetization rate.
In Q4 relative to Q3.
And as we said from Q4 guide perspective, we also expect to see a moderation in cash app's growth rate in the fourth quarter relative to the third quarter as we're lapping against some of those more difficult comparisons from last year.
And this is on the backfill of strong results in the third quarter with if you look across our inflows framework strong growth across each of the three aspects of cash apps inflows.
Other its active which grew 11% year over year to $55 million on the back of continued growth in our peer to peer network mechanisms or its inflows per active which were $1132 in the quarter.
And we're up 8% year over year relatively stable with the first half of the year again. This one is really a factor of both our customer spending power as well as their adoption of our products and engagement with our platform and you'll see with products like cash card and cash or borrow.
Been able to build awareness and deepen engagement.
With our with those products over time with now 22 million customers on cash App card.
Strong spend on a year over year basis with cash up card as well.
And then thirdly monetization rate as you know, which is 1.43% in the third quarter and that was up eight basis points year over year relatively stable from a quarter over quarter standpoint, which as you noted that monetization rate excludes the gross profit from our BNP L platform.
We do expect as I noted earlier that monetization rate to.
Stabilize as we lap the pricing changes over the past year.
Got it thank you.
We will take our next question from Alex Mark Graf with KBC them.
Hey, Thanks for taking my question.
<unk>.
Kind of financial targets provided in the shareholder letter outside of the more explicit rule of 40 targets. Just curious how we should evaluate some of the progress youre, making on the product side of things and kind of time ecosystem together.
As you've laid out priorities in the letter is there a northstar or two to kind of Orient folks around.
To kind of follow along with that progress.
I think the biggest wanted to look at is it's going to be commerce.
It's going to be through the lens of Cassia.
We spent.
Past few months looking deeply at the after pay integration restructuring.
Moving things to catch up.
Because a lot of the value is going to be created there, especially as we.
Brian Commerce opportunities both.
Internet based and e-commerce space to local.
Right right to the surface. So that's probably going to be the most notable in terms of connecting these ecosystems and as I mentioned before.
One will be the intersection between cash out for business and the square ecosystem.
There's some obvious connection points, there, especially as catch up for business customers grow.
And how they utilize our tools.
And I think a big a big theme between both ecosystems is going to be around banking use cases.
On a square foot and the cash upside actually throughout our entire ecosystem and all our business units, but those would be the three that I'd point you to to watch.
Thanks.
We will take our next question from Bryan Keane with Deutsche Bank.
Hi, good afternoon. Thanks for taking the question I guess Jack My question is just when you assess the seller volumes how much how much do you feel like it's pure economic volume that discretionary spend that's slowing some of the volume versus.
Maybe a competitive pressures from the market that you guys can do a better job at and then I guess going forward.
As the comps get easier.
Do you factor in a little bit more of an economic slowdown in the fourth quarter.
That's in the guidance. Thank you.
Well I'll take the first part of your question I do believe.
Alright by focusing more on the product our futures and also.
Getting to parity on particular verticals, especially within food and beverage and services.
We will unlock a lot more growth there.
There has been certain features.
Locked us out of conversations from restaurants Triptans.
And a.
A lot of those will be unlocked.
Soon with like our focus on the platform.
And I do believe that we can be much smarter and more efficient.
With our go to market.
Most importantly, as we've made this move to virtualization.
Looking for more opportunities to automate through AI, but also to experiment more I don't want to make sure that we're experimenting with things that we have not tried before.
Waller scale.
So we can see what works and then make better informed decisions about investing more fully in them.
I think theres a lot of room, there and that of course has to match what we're doing.
Seller no matter the size.
Two are our website gets to our dashboard.
Find something simple intuitive.
Most importantly find all of the other products that we that we offer them not just the one that came on board for it so the combination of that.
I think gets us back to a place of growth that will be very proud of.
And Brian I can help fill in just some of the numbers that we're seeing in real time and kind of what's embedded in our Q4 guide.
So if we look at square and <unk> in the third quarter, we grew 11% year over year and again based on our estimates we believe excluding the impact from the outage growth would have been more in line with the second quarter's growth rate of 12%.
Looking at October we estimate <unk> to grow 9% year over year.
This is obviously a bit slower than our 11% from the third quarter is primarily driven from the U S. As the international markets have been more stable.
But looking at some of the drivers.
When you think about the three high level components of squares growth customer acquisition churn.
<unk> and same store growth we.
We've seen stability in churn through this period, but ultimately our growth has moderated due to both same store growth and lower contribution from new cohorts of customers. Now we think same store growth and the slowdown there is relatively in line with broader macro trends across discretionary verticals.
As Jack noted we have work to do to shift our customer acquisition trends, which the team is laser focused on.
Just provide maybe a little bit more granularity on the same store growth.
When you look at <unk> per seller. This is where we believe the recent moderation. We've seen has been macro related processing volumes at existing sellers are were lower in the third quarter compared to the prior year. We believe it's macro driven as the recent results of track Directionally with other third party spend indicators that we measure when.
And just for our mix of verticals, given our greater mix of discretionary spend for instance, we don't serve grocery or gas as an example, and in October we saw broad based softness in consumers trending consumer spending trends in those discretionary verticals food and drink and retail. So we're watchful here and these trends are factored into our Q.
Core guide ultimately a lot of the work that we're doing to close feature gap and iterate and experiment more quickly on our go to market is where we expect to see opportunities for growth in the future.
Great. Thanks for the color.
We will take our next question from James Fawcett with Morgan Stanley.
Thank you so much I wanted to follow up on on kind of cash up in and the.
The intention to grow there and provide more of banking type services.
The letter et cetera.
How do you think about like the lifecycle of a typical customer that you're Onboarding and then clearly you were able to deliver peer to peer and that seems like the easiest first thing, but then.
Bank card or a debit card, but and you've got some other products, but can you walk us through like how you think about the evolution of other products that those customers need and how to evolve with them and that's particularly as they increase their own spending capacity.
Yes.
So.
As I said in the letter ketchup is interesting in that.
Sits at this intersection of three very distinct use cases, which are financial services.
Community based transactions, which is effectively could appear though as you mentioned and commerce.
Our approach is ultimately to bring these three together in a very seamless way to define an entirely new product category, which reinvents banking for our customers.
A lot of what we started obviously was peer to peer.
Has inherent network effects and that youre, receiving money from friends and spending money to families. So it is inherently social and inherently.
Has this incredible word of mouth factor.
Factor, but as you get into it as you receive money and Youll see that.
You can.
Also get a card.
You can use that card and ATM that you can invest in decline or stocks.
You start seeing it more and more as a bigger part of your your financial spend.
Financial activity in financial lines, and our goal now as we mentioned is to is to win more.
Sure.
Banking use case relationship with.
With our existing customers.
And what that means is ultimately getting to direct deposit.
And winning.
A majority of their direct deposit because that really indicate.
Seeing this as a financial home for them.
And they are able to use it in entirely new ways that they wouldn't be able to.
Past so.
Everything that we've built.
Again goes back to this concept of an ecosystem where these tools.
Positively reinforce one another.
Through.
New use cases or through retention.
Or through <unk>.
Entirely new features that they can't find elsewhere.
And that helps not only drive new customers, but also helps us helps us keep them.
And I think the as I said before earlier in this call I think the one that we're.
Hum.
We're really excited about because it is fundamentally new.
To us is around commerce.
As we.
Really deliver against these three financial services community based peer to peer transactions and commerce.
We have something that I believe is very very powerful and very unique in the world.
And continues to build on our strengths and lends itself to add strength to our other ecosystems must most notably square.
And I would just add James that you know as we see customers taking on more products within our ecosystem within cash App, we see a multiplier effect on the amount of inflows that they bring into cash app, whether they start as peer to peer and then they take on a cash upcard maybe.
Participating on our free stock investing program or bitcoin investing.
And then eventually.
Getting them to direct deposit their paycheck, which is a significant opportunity from a primary banking relationship standpoint, and thats been a big driver of the growth that we've seen in inflows per transacting active over time as we bring customers greater awareness around the broader set in financial services and commerce.
Products across the ecosystem.
We saw in the third quarter was continue to drive growth in these newer info channel.
<unk> received more than $8 billion and direct deposit into their cash up accounts in the third quarter and more than $2 billion of paper money deposits in the third quarter. Most grew approximately 40% year over year, which is nearly two times as fast as the growth of overall inflows into cash app.
So obviously more opportunity for us to do here is we see the direct deposit attached still in that sort of 10% range to cash up card monthly active since September <unk>.
Although we've obviously continued to grow our cash up cart attached through this period of time, we think we have an opportunity to improve both attach rates to cash a card as well as direct deposit and this broadening ecosystem of financial services products for cash App.
Thanks, a lot appreciate it.
We will take our next question from Dan <unk> with Mizuho.
Hey, guys. Thanks for taking my question, maybe more for Jack I think at the analyst day, and obviously, a very prominent and talking about bitcoin Bitcoin is now having a renaissance.
What is kind of the role of bitcoin right now in terms of your accretion.
Connecting the ecosystem, the Holy Grail, and specifically the cash up I'm really interested in hearing your views on that thank you.
The reason we are we have a focus on bitcoin is because we believe the internet will have a native currency.
We believe the internet needs, a native currency to enable micro payments globally.
And we.
We started very simply by providing exchanged for people to buy planes so pick one.
But ultimately over time, we do believe there is a significant market.
And significant opportunity in remittance using correctly and Thats exactly what CBD is focused on not only is it a really incredible business.
Quite large right.
Enables our other ecosystem square cash app to move much faster globally.
As we build out that functionality and as we build out.
The permanent we're working on for developers.
I do.
I believe that.
<unk> will continue to increase in value not just in monetary value but.
Use case value to the world.
I do believe that it will be a big part of the future of commerce and since we have such an early lead and understanding on it will be set up for success. We always knew that this was going to be.
A long term play.
And it still will be.
But there is no doubt, but the internet will have in their native currency.
There's no doubt right now that bitcoin is the best candidate for them.
Now I'll just add in Canada yet.
I'll just add that obviously, you've heard from us today and increasing focus.
Not only our aspirations and growth of the business, but also discipline in how we operate our business and similarly, we'll be disciplined around our bitcoin initiatives holding our emerging initiatives to a specific investment envelope and we will track progress relative to the key milestones on a recurring basis.
Great really good results and I love the long term business. Thank you.
We will take our next question from Jason Kupferberg with Bank of America.
Thanks, guys I wanted to come back to the vertical point of sale and square you had the gross profit up 29%. There is that growth rate sustainable over the next few quarters and I'm curious what percent of squares total gross profit is now coming from a vertical point of sale and then separately. If you could just make a quick comment on what you expect.
<unk> for stock based comp expense, both this year and next year. Thank you.
Well, Jason I can start.
So in the third quarter, Yes, we had a strong growth in our vertical point of sale and develop developer solution.
Where gross profit from a vertical point of sale products across retail restaurants, and appointments was up 29% year over year and gross profit growth from our developer tools also outpaced overall square gross profit growth as we said last quarter each of our vertical point of sale products delivered gross profit of over $100 million on an annualized.
Basis during the third quarter as well and there will be key pieces of how we optimize our go to market strategy, improving onboarding flows and experimenting with new channels.
I won't give you a specific number for vertical point of sale going forward, but we did note that we expect square gross profit growth from a Q4 perspective to improve relative to Q3, partly because of the more favorable comparisons as well as a full quarter of our pricing.
Movement that we take on we took on square invoices during the third quarter.
And your second question was related to stock based compensation.
Right for 2023, and 2024, just in the context of the.
Targets.
Sure So stock based compensation in the fourth quarter, we expect to be relatively flat relative on an absolute dollar basis relative to the third quarter.
And as I said on the call earlier, we expect to drive meaningful leverage on FCC over time, starting in 2024 and here. We measure it is stock based compensation as a percentage of gross profit as we implement the <unk>.
Absolute.
Number of cap on the number of people that we have at the company.
And look to drive operational leverage and efficiencies across our business. This is a key focus area for us obviously SBC as an important tool for us and how employees are shareholders.
And align our incentives as owners of the business, but it's one that we're very mindful of and have deliberately included in our financial targets and adjusted operating income to be measuring and and watchful of the amount of dilution. That's also part of the reason that we've got our $1 billion buyback that we've announced today is an intention to offset a portion of <unk>.
Moving forward.
Thanks Amrita.
We'll take our next question from Pete Christiansen with Citi.
Good evening. Thanks for the question Jack I wanted to dig a little bit into the go to market on the square side connect connecting a few dots from some earlier questions conversation.
Mike.
Square may be more interested in participating with the ISO channel.
Distribute square products.
Is that something on the road map.
Is that something where you would experimented before.
Believe that.
Square needs to embrace the ISO channel more to scale against competitors. Thank you.
We have experience we've experimented with it with it before from a financial.
Partnership perspective, specifically, we had a partnership with Jpmorgan Chase.
And gave us.
Square.
<unk> readers at all of their branches distribution great.
Closed off to I think the most important thing is like we need to experiment more and we need to experiment with different models I think the key.
The answer is not going to be generalized it's going to be specific to the vertical.
In terms of distribution.
Our restaurant than it does for for services in beauty and then that's completely different from from retail. So I think the most important point to take away is like we want to be open to a lot more experimentation. That's on a smaller scale for a bit of time. So that we can see what's working and then invest much heavier way.
We are looking more deeply some.
Immediate experiments such as contracts, which we're seeing some early success from.
Some local campaigns.
More partnerships and specifically referrals, which we think.
There's a lot to kind of harkens back to the earliest day.
In terms of how square spread which was entirely by word of mouth referrals.
Helps.
Push out even more.
And then just making sure that we're focused on the experience the sellers have when they get in to the service or when they go to our website.
What I think are the biggest drivers.
Sure.
Thank you.
Helpful. While good steps here. Thank you.
Thank you.
And we will take one more question, we'll take that question from Andrew Jeffrey with <unk> Securities.
Thanks Appreciate you sneaking me in here at the end Amrita the cash App monetization framework has always been really helpful.
Could you unpack a little bit sources of.
Monetization within cash App, I'm thinking specifically about <unk>.
Instant deposit versus interchange and how that's changed over time and how you think about the instant deposit product in particular in a real time payments world.
Sure. Thanks for the question, Andrew we've had a growing set of products across cash app and some some of which are free and some of which are monetized and have grown the pace of monetization of some of the products outside of instant deposit even <unk>.
After that instant deposit so the mix of the business relying on instant deposit has declined over time. Despite the fact that that continues to be a growing product for us and has unique unique use cases.
Around.
Around customer utility of.
Of course, our focus is as much as possible delivering value within our ecosystem across a number of products and that's where you've seen the strong growth of things like cash card.
With 22 million, 40% attached to our 55 million monthly active base and where we've seen strong growth from <unk>.
For actives.
Spend perspective.
Which continues into the third quarter with growth on a year over year basis there.
So and along with greater utility around obviously peer to peer within our within the broader ecosystem with cash app the ability to deposit paper money deposit the ability to receive your direct deposit and the ability to extract money through an ATM.
Ability to invest money the ability now to save money within cash App and all of these provide a greater utility for amount you know a lot of these inflows that are staying within the cash app ecosystem are moving throughout the cash app ecosystem now what we've seen historically when we look outside at other countries, where instant rails are.
<unk> <unk>.
For instance, in the U K, where square also has an instant transfer product is the attach rate in those areas for that product continue to be strong and in generally about a strong as what we see in the U S. Meaning that people are willing to pay for seamless integrated product experiences that provide them with value.
So obviously this is one that we'll continue to watch.
But you know we've been pleased with the continued growth of instant deposit, but even more pleased with the growth of the other products across cash app.
I appreciate that thank you.
Thank you and that does conclude blocks third quarter earnings call. Thank you for your <unk>.