Friday, March 29
5/5 (2)

Loading

Photo by Christiann Koepke on Unsplash

Square, Inc. (NYSE: SQ) Q4 2020 earnings call dated Feb. 23, 2021

Corporate Participants:

Jason Lee — Vice President, Head of Investor Relations

Jack Dorsey — Co-Founder, Chairman and Chief Executive Officer and Chief Executive Officer, Co-Founder of Twitter

Amrita Ahuja — Chief Financial Officer

Analysts:

Tien-Tsin Huang — JPMorgan Chase & Co. — Analyst

Presentation:

Operator

Good day, ladies and gentlemen and welcome to the Square Fourth Quarter 2020 Earnings Conference Call.

I would now like to turn the call over to your host, Jason Lee, Head of Investor Relations. Please go ahead.

Jason Lee — Vice President, Head of Investor Relations

Hi, everyone. Thanks for joining our fourth quarter 2020 earnings call. We have Jack and Amrita with us today. We will begin this call some short remarks before opening the call directly to your question. During Q&A, we will take questions from our customers in addition to questions from conference call participants.

We would also like to remind everyone that we will be making forward-looking statements on this call. Actual results could differ materially from those contemplated by our forward-looking statements and 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 gross profit, gross results for the month of January and February. These represent our gross profit, gross results for January and current estimates for February performance. These numbers are not final as we have not yet closed our accounting financials for the month of February and our monthly results are not subject to interim review by our auditors. As a result, actual January and February results may differ from these estimates. 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 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 audio webcast on our Investor Relations website. An audio replay of this call will be available on our website shortly.

With that, I’d like to turn it over to Jack.

Jack Dorsey — Co-Founder, Chairman and Chief Executive Officer and Chief Executive Officer, Co-Founder of Twitter

Thanks, Jason, and thank you everyone for joining us today. 2020 was a tough year for many. Our focus was to help our customers through it all, which required us to adapt and evolve quickly. I believe this is an important attribute for any organization and I’m proud we continue to demonstrate it.

We also took the opportunity to act more broadly by announcing our plans for our operations to be carbon net-zero by 2030 and launched our Bitcoin Clean Energy and net investment initiative, a $10 million commitment to support companies that will help drive adoption and efficiency of renewables within the Bitcoin ecosystem. We plan to reinvest any gains back into the funds and are exploring opening it up for participation by like-minded companies. We’ll share more details on our environmental and social initiatives next month in our 2020 Corporate Social Responsibility Report. In addition, today we announced $170 million purchase of Bitcoin on top of the $50 million we bought in the fourth quarter. Why are we doing this? We believe the Internet needs a native currency and we believe Bitcoin is it. We believe it has the highest probability of empowering more people in the economy in a fair way. We’re doing a lot to ensure this from a product open source development and open patent perspective and by us owning Bitcoin, our incentives are aligned with skin in the game.

And now for some updates on our business. Cash App continues to see strong adoption, both from new and existing customers. In December, Cash App had more than 36 million monthly active customers, up 50% compared to last year. We saw customers increase their usage of products beyond peer-to-peer transactions, including the use of our Visa Cash Card, Cash Boost, and Bitcoin. Boost is our instant rewards program within our Cash Card that enables customers to receive unique discounts based on their location and other attributes. In the fourth quarter, active Boost customers spend double that of other Visa Cash Card customers. We also recently launched a special Boost, which a customer unlocks after receiving their first paycheck in the Cash App and a Bitcoin boost, giving people a way to earn Bitcoin on all cash card purchases.

As more of the world has discovered the value of Bitcoin, Cash App continued its focus to make Bitcoin more accessible and more useful. One example of this is enabling people to change the default denomination unit from BTC and Satoshis, which is 100th million of a Bitcoin also known as SATs to help people realize, you don’t have to own a full Bitcoin and can stack SATs instead. In the fourth quarter, Bitcoin volumes per customer increased more than 2.5 times compared to the same period last year, mostly driven by buying activity of both existing and new customers. In 2020, more than 3 million customers bought or sold Bitcoin and Cash App and in January 2021 alone, more than 1 million customers bought Bitcoin for the first time.

Our seller ecosystem continue to grow upmarket and attract larger sellers as we saw mid-market sellers use 2.5 of our products on average in 2020. Nearly all mid-market sellers use our key management product to schedule staff and view real-time performance and sales analytics for their workforces. And in 2020, approximately half of our mid-market GPV came from sellers with integrations into our developer platform, which enables the data driven way to process payments using custom software, building e-commerce experiences and connect with existing business systems.

Our sales team has played an important role in our growth of market. In the fourth quarter, 40% of mid-market seller GPV came from sellers who had been engaged by our sales team. The team also focuses on educating existing sellers about our broader ecosystem. We use machine learning to identify sellers most likely to adopt more products and which of our solutions are likely to be most relevant. This help drive a 15% increase in product adoption among existing mid-market sellers in 2020. We plan to continue this work and intend to double our sales team in 2021.

So what’s our focus for the year ahead? For Cash App, we’re going to focus on increasing the transaction limits across the ecosystem, expand our deposit capabilities and increase the quality of our customer service, all in order to strengthen our foundation and reach new customers. We’re also going to double down on our commitment to Bitcoin and continue to look for new ways to connect our product lines within the Cash App. For the seller business, we will continue focus on growing our omnichannel capabilities, expand globally and increase our financial service offerings to sellers of all sizes.

And with that, over to Amrita.

Amrita Ahuja — Chief Financial Officer

Thanks, Jack. There are three topics I’d like to cover today. First, a look at our performance in 2020 and in the fourth quarter where we delivered strong gross profit growth. Second, an update on our business through mid-February and what this could mean for growth going forward. Third, a look at our cohort economics for Cash App and Seller, which give us confidence to invest for the long term.

Despite 2020 being a year of extreme uncertainty, our results in the fourth quarter and full year speaks to our ability to both help new customers adapt during a dynamic environment and reach new customers. In 2020, gross profit was $2.73 billion, up 45% year-over-year or 48% excluding Caviar.

It was a year of strong growth where we improved our gross profit growth rate over 2019 and also diversified our ecosystems. Seller generated $1.51 billion of gross profit in 2020, an increase of 8% compared to 2019. Our online channels delivered more than 50% GPC [Phonetic] growth year-over-year and became a growing portion of our mix. Cash App delivered incredible growth in 2020, up more than 2.5 times year-over-year to $1.23 billion in gross profit and now represents nearly half of the Company’s gross profit. We have continued to diversify Cash App business model with scale. In 2019, Cash App had only one revenue stream with $100 million in gross profit and in 2020, we had four with approximately $100 million or more each of which grew at over a 100% year-over-year.

2020 was also a year that we invested in our business and in our customers with compelling returns. We invested in our customers in a variety of ways including by accelerating critical product launches, allowing sellers to pause software subscriptions, helping sellers and individuals, access government funds and providing useful rewards for Cash App customers through Boost at a time they needed it most. We also invested in our business by continuing to build-out our teams to drive product innovation and by deploying go-to-market initiatives to expand our reach.

Let’s now turn to the fourth quarter, where gross profit was $804 million, up 52% year-over-year or 54% growth excluding Caviar. Looking at some of the drivers for the quarter, first, we’re seeing growing engagement and monetization with Cash App. In the fourth quarter, Cash App generated $377 million in gross profit, an increase of 162% year-over-year. Cash App benefits from the compounding effects of growing our customer base while also increasing engagement and monetization per customer. We saw these dynamics drive growth in the fourth quarter as we scaled our network to more than 36 million monthly transacting customers, an increase of 50% year-over-year. At the same time, we increased gross profit per monthly transacting active customer by 70% year-over-year to $41 in the fourth quarter.

By expanding the breadth of our product ecosystem, refining features and continuing to build on our foundation, we’ve driven greater engagement across our ecosystem. In 2020 and the fourth quarter, we increased adoption across all of our products beyond peer-to-peer for Cash App. Newer customers are coming to Cash App for our ecosystem and they have increasingly adopted multiple products such as Cash Card and Bitcoin within their first month after on-boarding.

Moving to Seller, where our omnichannel offerings are driving growth. Gross profit in the fourth quarter was $427 million, up 13% year-over-year with Seller GPV up 6% year-over-year. To help sellers adapt during the pandemic, we have continued to build-out our omnichannel capabilities and these offerings gain meaningful traction. Omnichannel and online sellers represented more than half of Seller GPV in the fourth quarter, which is up from one-third two years ago. Our mid-market category, which consists of Seller with more than $0.5 million in annual GPV is where we see our largest market opportunity for the Seller business and a focus area for our acquisition efforts. We saw strength here in the fourth quarter, despite the impact of the pandemic. Gross profit from our mid-market sellers grew 27% year-over-year, which is approximately 2 times the gross profit growth of our overall Seller business.

Looking at profitability, adjusted EBITDA was $185 million in the fourth quarter. The year-over-year increase was driven by gross profit growth and also benefited from the release of $43 million in transaction loss provisions related to our Seller business as actual loss rates trended more favorably than we had previously estimated.

Next, we wanted to share early trends in our Cash App and Seller businesses during the first quarter and what this could mean for growth going forward. In January, Cash App delivered gross profit growth of 164% year-over-year, a two-point improvement from the fourth quarter. We achieved strong acquisition of customers and drove increased product adoption with our highest monthly total of new transacting active customers for Bitcoin, stock brokerage and Cash Card. January growth benefited from government fund disbursements, which began during the last few days of December and led to an increase in fund pulled in to Cash App. These fund trends during the first three weeks of February, we estimate Cash App gross profit growth to be approximately 130% year-over-year. Growth in February decelerated compared to January or the impact from government funded disbursements normalized partly offset by continued strength in acquisition and peer to peer network volumes.

We are watchful of broader macro trends and any new policies, which could influence the pace of growth. As a reminder, we will start lapping particularly challenging growth comparisons in the second and third quarter of this year. In January, our Seller ecosystem achieved 15% gross profit growth, a 2 point improvement from the fourth quarter and GPV grew 5% year-over-year. Through the first three weeks of February, Seller GPV was up 2% year-over-year, a 3 point deceleration from January, but excluding the temporary impact of recent weather across regions in the US, we estimate seller GPV growth would have been comparable to January and we have seen an improvement in certain regions where restrictions have eased.

Looking ahead, we expect to continue to observe variability related to the macro environment and regional shelter-in-place restriction, which could impact our performance. We will also begin to lap the initial impact of the pandemic on the Seller business in late March. Seller gross profit grew faster than GPV in 2020, in part due to higher transaction margins, which benefited from a greater mix of debit card-not-present transaction, higher average transaction sizes and from our card present price change implemented in November 2019. We expect to lap these mix changes for transaction margins and for transaction margins to normalize towards the end of the first quarter, so GPV may grow faster than transaction profit as in person transactions resume in future quarters.

Finally, in 2021, we are investing for long-term profitable growth. Given the opportunity ahead of us, we expect to increase non-GAAP operating expenses excluding risk cost by 41% year-over-year or an incremental $800 million to $900 million compared to 2020 level. We intend on continuing to invest where we see attractive returns even in the face of variability in macro trends. And as a result, adjusted EBITDA margins may vary depending on top line growth. Both our Cash App and Seller ecosystems have delivered strong cohort economics including acquisition, retention, paybacks and returns on investments.

Cash App has proved out and scaled a strong business model. We have acquired new transacting active customers for less than $5 on average in paid marketing through 2020. For existing customers, we’ve increased their engagement over-time with gross profit retention of more than 130% for each of the last three years. As a result, we’ve achieved strong returns on investment at 6 times or greater over a three-year period with 2020 cohorts pacing ahead of even this and we intend to ramp-up investments into new marketing channels and strategies in 2021.

We have also been encouraged by Sellers’ cohort economics. We saw strong customer acquisition in 2020 on-boarding our largest cohort of new sellers on a gross profit basis, which is pacing at an estimated five quarter payback. In the midst of the pandemic in 2020, gross profit retention stabilized down approximately 10% year-over-year in the second half of the year. Our more recently acquired Seller cohorts have seen a stronger rebound in gross profit than older cohorts, which is partly driven by stronger acquisition of larger sellers in recent years. Prior to the pandemic, Seller had achieved positive gross profit retention and returns on investment of 3 times over three years as sellers stayed with Square and grew their businesses with us. Looking ahead to a recovery, we plan to continue investing behind these strong returns to reach new sellers and drive growth.

In summary, we remain committed to our purpose of economic empowerment by continuing to serve our existing customers and reaching those in new markets. We’re focused on driving long-term profitable growth and are eager to invest behind the compelling returns for both our Cash App and Seller ecosystems.

I’ll now turn it back to the operator to start the Q&A portion of the call.

Questions and Answers:

Operator

[Operator Instructions] Your first question is from the line of Tien-Tsin Huang with JPMorgan.

Tien-Tsin Huang — JPMorgan Chase & Co. — Analyst

Thanks so much. Nice to speak to you all. Just a lot of good information here. I have a big picture, maybe a simple question on priorities. If you’re investing a lot, it seems to make sense here. Are you prioritizing user acquisition first followed by improving engagement or product development across both ecosystems, given what you’re talking about here with low CAC and big ROI. I can definitely make the argument for you guys to spend more. So just your thoughts on acquisition versus engagement here in 2021?

Amrita Ahuja — Chief Financial Officer

Thanks for the question, Tien-Tsin. We have historically shown an ability to do both. When you think about our TAM expansion over the years from our last Investor Day in 2017 to our more recently disclosed TAM opportunity of $160 billion, we’ve grown TAM by $100 billion, $40 billion on the Seller business with new product launches, new geographic expansions and $60 billion on the Cash App ecosystem and we see an opportunity for further TAM expansion, investments in new products and in new markets and all of that is while also growing the base of our customers. Cash App grew by 50% in terms of monthly transacting customers at the end of this year to $36 million and we on-boarded our largest cohort of Square sellers during 2020 with each quarter growth on a year-over-year basis for our cohorts that we’ve added.

So we see an opportunity in both areas and we’ve shown again a track record of focus on both expansion of opportunity as well as going deeper in our existing markets. Maybe I’ll explain a little bit about what we’re seeing in terms of cohort economics that lead us to continue to want to invest in both areas. Dorsey mentioned, we’re planning to invest $800 million to $900 million in terms of incremental investments in 2021, that’s roughly 50% of that step-up will go towards sales and marketing and about a quarter of it will go towards R&D across both ecosystems. The final piece will go towards G&A, which continues to build on the foundation for the company. But as we think about that sales and marketing growth, what’s giving us the desire and confidence to lean in here are the cohort economics, which are really compelling as you think about the combination of both efficient acquisition and engagement on the existing products that we have let alone engagement on the products that we could be building in the future, we are building for the future.

With Cash App, we’ve seen a 6x ROI over three years on the back of efficient acquisition at less than $5 per customer, again calling upon our network effects — very strong network effects that where we’ve seen strong volumes in peer-to-peer and that continues to be a strong front door for us, but then also very strong gross profit retention at over 130% for each in the last three years as we’ve maintained the vast majority of our customers and they’ve grown on our platform. For the seller business similarly, we’ve seen cohort economics pacing at five quarter payback, 3x return on ROI over three years and historically prior to the pandemic, positive gross profit retention. So we see an opportunity in terms of the cohort economics that we’re driving to continue to lean in.

And finally, we do see an opportunity to drive further engagement with our existing products. When we think about as we mentioned within the Seller ecosystem continued increasing next to our mid-market sellers, larger sellers who tend to adopt more products — 2.5 products today, so we see an opportunity for uplift. When our sales team uses AI and ML technology, they see a 15% uplift in product adoption. And similarly for Cash App, we’ve seen in the first months that our Cash App customers on-board into our ecosystems, an increasing proclivity to adopt new products like stocks, like Bitcoin, like Cash Card, but there is so much more opportunity here, as we think about increasing product adoption for our current customer set to go even deeper to provide daily utility to those customers. So we’re really focused on both and have showed an track record here driving both acquisition engagement along with broader TAM expansion.

Tien-Tsin Huang — JPMorgan Chase & Co. — Analyst

For sure. Appreciate the thoughts and metrics.

Please rate this

Business news for strategic investors and leaders.

Leave A Reply

Hivelr

Better, Smarter, Wealthier. 

AI-powered analysis for investors and leaders delivering in-depth, thought-provoking, and actionable business, economics, investment, and technology insights.