Block, Inc. (XYZ) Earnings Call Transcript & Summary

Thank you all for joining today's call. We have Jack and Amrita with us today, along with Owen Jennings, our Business Lead; and [ Juan Hernandez ], Head of Credit and underwriting. Today's discussion includes forward-looking statements regarding our strategy guidance and long-term goals. Actual results may differ materially due to risks and uncertainties described in materials filed and furnished with the SEC and should not be considered an indication of future performance. These statements speak only as of today, and we undertake no obligation to update them, except as required by law. Reconciliations of any non-GAAP financial measures that we discuss to the most directly comparable GAAP measures are available in our shareholder letter. Further any discussion of our lending and banking products refer to products offered through Square Financial Services or our bank partners. As you did last quarter throughout the call, I will ask questions based on topics our shareholders ask us to explore. With that, over to you, Jack.

Thank you all for joining us. We had a strong third quarter, exceeding our guidance and raising our outlook for the year. We had a strong quarter in Cash App, and we continue to accelerate in [ Square ] with U.S. GPV growth more than doubling over the past 2 years as we've expanded distribution and accelerated product velocity. In my letter this quarter, I focused on the intelligence capabilities we're building for our customers across [ Square Kiosk, Square Met and Moneybot ]. I also shared more about the path we're going down to make our company an intelligence and how we plan to enable others to do the same. Buzz is an environment for building and collaborating that brings all of our ideas together into one surface. We're not bringing -- beginning to bring Buzz and the related tools we've built for Block to other companies through Builder Lab, our new ecosystem. We're excited to share more about Builder Lab at our November 10 event, and I hope you tune in. We're also building new ways for people to interact with intelligence. We believe voice is the most natural interface to interact with intelligence. And a few weeks ago, [indiscernible], our full duplex speech model. It captures the emotion nuance and natural cadence of conversation and [indiscernible] to listen to the samples we shared 2 weeks ago. We're transforming our company from one that creates traditional financial products and one that streams intelligence as people need it. Thank you for your support on way, and thank you for investing in our future. And with that, I'll turn it over to Amrita.

Thanks, Jack. We delivered another strong quarter, outperforming all our guided metrics. A few of the highlights. Gross profit grew 22% year-over-year to $3.24 billion. Adjusted operating income grew 92% year-over-year to $923 million or a record 29% margin. And adjusted [indiscernible] more than doubled, growing 109% year-over-year to $1.13, also a quarterly record for us. Square GPV growth accelerated to 14% year-over-year in the third quarter, our strongest growth rate since the first quarter of 2023. Our go-to-market strategies are working. And through September, we've launched new products and features at a faster pace than we have in the past 2 years combined. We have also ramped investments across each distribution channel this year. Year-to-date through August, self-onboarding new volume added grew at its fastest rate in over a decade. Field sales won upmarket sellers in the U.S. and internationally, and we have more than 400 ISO partners expanding the number of sellers we can reach. Square gross profit grew 14% year-over-year, in line with GPV growth, driven by volume growth, increased software adoption and square loans growth. We expect gross profit to grow roughly in line with GPV in the fourth quarter. Cash App gross profit grew 27% year-over-year in the third quarter. Monthly transacting actives grew 4% year-over-year to $60 million in September with Neighborhoods a key contributor. We have conviction in our Actives growth strategies and expect to grow actives by at least low single digits in 2027, with Neighborhoods, Cash App families, product innovation like tags and go-to-market investments all contributing to our growth expectations. We continue to be focused on deepening engagement as we grow Actives. Cash App commerce enablement gross profit grew 27% year-over-year, driven by higher Buy Now Pay Later adoption on Cash App Card. Financial Solutions gross profit grew 36% year-over-year on borrower origination growth and strong returns. Cash App consumer lending origination volume grew 40% year-over-year to $19 billion, with Afterpay Post-Purchase origination volume more than tripling year-over-year, and prepurchase origination volume more than tripling quarter-over-quarter. Returns on our lending products continue to be strong in the third quarter. Variable profit margins were consistent with the prior year period even on a much larger base. In our investor slides this quarter, we shared monthly cohorted returns for mature borrower customers. This is an improved important metric we use to evaluate our performance. And as you can see, we observed consistent strong returns as we've dramatically grown originations. We also shared target unit economics for Cash App's consumer lending products while changes to our product mix have driven shifts in aggregate risk loss rates, what we optimize for is variable profit returns and product unit economics. And the products that are scaling originations, the fastest and, therefore, growing in our mix have the strongest targeted variable profit margins and returns. We delivered record adjusted operating income this quarter while continuing to invest in the long-term growth of our business. Margins expanded more than 10 percentage points year-over-year, and we grew adjusted operating income 92%, even as we leaned into investments across go-to-market, Neighborhoods and AI. Our core go-to-market motions continue to deliver strong ROI across Cash App and Square as we scale investments, and we're excited to keep investing to sustain long-term growth. Annualized GPV of sellers on Neighborhoods increased nearly 5x from June to September, and we expect to continue to grow Neighborhoods further. We're also leaning into investments in AI and expect to generate our first AI revenue in the fourth quarter as we begin to externalize Block's AI capabilities and interfaces across Builder Lab and Buzz. We're raising our 2026 guidance across gross profit, adjusted operating income and adjusted diluted EPS. Flowing through Q3 outperformance and raising our expectations for the fourth quarter. For the full year, we now expect gross profit of $12.626 billion, up 22% year-over-year. Adjusted operating income of $3.519 billion or a 28% margin. We also expect adjusted diluted EPS of $4.15, up 75% year-over-year. For the fourth quarter, we expect year-over-year gross profit growth of over 15%, adjusted operating income margin of 30% and year-over-year adjusted diluted EPS growth of 77%. In past years, we've given some early visibility into our preliminary expectations for the following year on our third quarter earnings call. This year, we wanted to provide deeper insight into our growth and margin expectations for next year. A year ago, we initially guided to achieving Rule of 40 in 2026, with 17% gross profit growth and 23% adjusted operating income margin. Our updated guidance reflects meaningful outperformance compared to those initial expectations, implying Rule of 50 with 22% gross profit growth and 28% adjusted operating income margin. In 2027, we expect to sustain the momentum we've observed in 2026, with at least 15% year-over-year gross profit growth, adjusted operating income margins of 32% or 30% year-over-year adjusted operating income growth. This growth in margin expansion is a strong demonstration of our commitment to delivering durable, profitable growth at scale. As always, we strive to outperform our preliminary growth expectations. In 2026 and 2027, gross profit outlook is 5% ahead of our Investor Day expectations. And our 2026 and 2027 adjusted operating income outlook are both 1 year ahead of schedule compared to our Investor Day expectations. Given the strong incremental margins and high return investment opportunities we see, we plan to reinvest profit upside and long-term strategic growth initiatives like Neighborhoods and Builder Lab where we -- which we believe will shape Block in the next decade. We'll seek fast feedback loops and scale these new growth vectors with the same discipline and rigor we apply to our core growth investments. We'll share more about our financial expectations for 2027 on our Q4 earnings call in February. Our path forward is clear. We're moving faster, delivering more for our customers and connecting our ecosystems while delivering margin expansion and profitable growth. With that, I'd like to open up the call to Q&A.

[Operator Instructions] Our first question comes from the line of Tien-Tsin Huang for JPMorgan.

All right. I hope you can hear me now. Hello? Awesome, sorry about that, guys. So thanks for the preliminary '27 look and some of the new disclosures. Slide 13 is great. So thanks for that. Jack, I want to ask you about Builder Lab, if you don't mind, just as that new ecosystem, as you called out, sounds really intriguing. Tell us,how should investors think about the size of that opportunity over time? I assume what we see now in terms of what you're externalizing is just a small sample of what's to come. So can you tell us a little more about the vision, the product strategy, the target clients, revenue model? Anything else you can share would be great.

We gave a preview of what this is going to be like at [indiscernible]. And I would definitely encourage folks to watch Brad's keynote on Buzz, but we have a full event on November 10 to talk about everything Builder Lab, and this is a way for us to collect everything that we're doing in the AI tool space into 1 narrative, 1 event that we'll talk about how everything fits together. But most importantly, to introduce people to Buzz 1.0. And this is a surface that brings everything we've been working on for the past 2 years in the AI tooling space together into one really easy to understand and super powerful interface that we intend to use internally to replace a bunch of third-party vendors. And we also believe it enables other companies of our size larger than us and also much, much smaller than us to do very similar things. One of the things that's been interesting as I talk with more and more sellers out there is how many of them use WhatsApp or iMessage or e-mail or something that they hate to communicate with their staff and we've introduced them to some early views of Buzz and how it might integrate with [indiscernible], which I talked about in the letter. And they love it because it allows them to communicate and organize and collaborate with their team, but also enables them to build with agents with them as well and build with AI. And you would assume that like a lot of sellers, especially smaller sellers aren't up on this technology, but they all are. They want something that's really easy to use, and they want something that's immediately accessible and where can deliver that. So what this foundation enables us to do is go from the very smallest of sellers, smallest of businesses all the way up to our size and beyond. And we are experimenting with a number of monetization paths, but we do expect to have our first monetization of our AI tools in Q4 of this year. We want to make sure that we're being flexible with how we're putting these things out in the world and how we charge for them because we want to learn on what works. But Denver that you can imagine that you've seen other others, including the labs utilized that we can take on and push that as well, but we're just going to make sure that we're getting all the feedback and learning from it and then locking in it.

Our next question comes from the line of Darrin Peller from Wolfe Research.

It's great to see the outlook for '27 with 15% year-over-year gross [indiscernible] growth even on a tougher comp -- against a tougher comp year. So maybe, Amrita, if you could just help us with the building blocks there a bit, maybe breaking down as much as you're willing to right now on Cash App versus [ Square ]. And then even the margin going up, I think it looks like 400 basis points year-over-year. Help us just understand a little bit more around where the operating leverage is primarily coming from in what parts of the business and the investments you're looking to make as well to offset?

Darrin, yes, happy to unpack our preliminary look of '27 here. And obviously, we'll have a lot more to say as we get into the year next year. First, just taking a step back, what I would say is that we feel a tremendous amount of momentum as you see in our results in the back half of this year, carrying us into '27. We're outperforming our outlook on a Rule of 40 basis by 10 points we expect to outperform by about [ 10.5 ] points on growth and 5 points of margin in 2026. And exiting the year in that 15% plus range from a gross profit perspective. So as we look to '27, delivering on the growth rates that we set out at Investor Day for 2027 with 15% growth on gross profit, 30% on AOI is as a tall order because we're coming off a much larger base in 2026. Along with, as you noted, 3.5 points of margin expansion relative to 2026, a year where we've vastly outperformed our expectations with respect to margin. A lot of this comes down to what we're seeing across our business. First, when we think about gross profit, I'll share with you a little bit about our process. We first estimate our run rates across the core book of business that we have today, our existing products and features. We then layer on top of that, build the building blocks of growth, which include a probability-weighted set in our portfolio of new initiatives. And so as we look across each of Square and Cash App, we see a number of things, whether they are newer initiatives that are already out there and beginning to compound and ramp or newer initiatives that we think could continue to drive growth into the future. When you look at Square, we have investments across a number of different distribution channels that are really just beginning to compound. We have product velocity growth, 180 features so far released this year more than in all of 24 and 25 combined. And then some of our more recent launches like Kiosk and [ Square Mats ], which we believe can drive growth in our priority verticals and really across all sellers into the future. That's part of what gives us the confidence to believe that we're going to accelerate our GPV growth for Square for the third consecutive year in 2027. We're also focused from a gross profit perspective as we look at Square is driving higher attach rates into our SaaS and banking products, where we think we still have a lot of room to run. From a Cash App perspective, as we noted earlier, we expect at least low single-digit actives growth, some of this coming from our Neighborhoods contributions which we're pretty excited about as we ramp that to thousands of more sellers in the back half of this year and also strong growth in attach across our top verticals within Cash App, Commerce Enablement and Financial Solutions. As you saw in our investor slides, we're scaling consumer lending across high targeted returns and have the ability to continue to do that into 2027 along with ramping newer initiatives that are just getting out there now and like Cash App Tags or upmarket strategy or strategy to go deeper with modern earners that we believe we can do so much more on in 2027. So each of these different pieces going at that sort of probability weighted portfolio of new initiatives that layer on to our existing run rates to believably drive profitable growth into the future. And that's part of what's flowing through to the bottom line, as you noted, with an AOI outlook for '27 that's 30% higher over $1 billion higher on an absolute basis than our implied Investor Day guide from last year. I think it's maybe notable finally just to say, as you've heard from us, there are a lot of ramping -- very nascent initiatives in our portfolio from Cash App Score and being able to externalize it to Builder Lab to [ Square Mates ] each of those investments that we'll be leaning into, but our 2027 growth guidance does not rely on those initiatives. We're excited about them and encouraged about the early signs that we see but -- and we'll be investing into them. But our growth outlook for next year does not rely on those initiatives.

Our next question comes from the line of Dave Koning from Baird.

Nice job. I wanted to talk a little bit or ask about the Square business acceleration and just what you're investing in with new sales reps, ISO relationships. We hear more in the field about you gaining a lot of momentum. Maybe just describe the investments there if you're going to make more and how that should drive the future?

Sure. Dave, look, I think '26 is obviously have been strong so far. And what's really great to see is the strategy is working across our priority vertical. Each of food and beverage mid-market and international growing at rates at 20% or higher in terms of the volumes that we see in the third quarter. I think a lot of that, if you unpack it, is a combination of, as you've noted, our go-to-market channels. as well as the product innovation, where we're really seeing that that's resonating with our sellers is taking on more jobs to be done as we roll out more and more features. From a go-to-market perspective, what I'd say is we're pretty excited about the traction that we have year-to-date through August self-onboard, which has always been a core motion for Square, has seen some of the highest rates of growth that we've seen over the past decade in terms of new volume added and that's as we're ramping newer channels like the ISO channel, where new sellers joining through our [ ICE ] partners grew 90% quarter-over-quarter. This is a channel that's gone from 0 to 400 partners in the past year. And it's still early. It's still a relatively small basis in contribution to the overall pie for Square and so we think we have more opportunities, particularly to grow that, not only in the U.S. but in markets outside the U.S. And meanwhile our first-party field sales and enterprise motion continue to drive new customer acquisition in the U.S. and internationally. We have some big name sellers like [ Tonsan and Public House Group ] in London that we're excited to track and be a steward that brings in other sellers as well. So continuing to expand that both field sales feet on the street as well as enterprise motion is a core focus for us. Those are some of the key things that I think are driving the acceleration of growth that we saw in the third quarter for both PV as well as gross profit that's particularly aided by not only the volume growth, but the higher software adoption that we're seeing and the simplified pricing and packaging motion that we introduced over this past year. Again, early days on some of that. We think there's a lot more room to run. Only 16% of U.S. sellers use monetize software on our platform as of September, a lot more opportunity for us to continue to drive product attach there as we think about gross profit growth into '27.

Our next question comes from the line of Will Nance from Goldman Sachs.

You talked around the overall philosophy centered around returns and variable profit margins on the lending side. Can you talk specifically about how that philosophy informed the change in the duration profile in Cash App Borrow? And we can see from the slides, the 6-week loans are higher. And I know there's a slight negative impact on volume. So when you kind of pull way up, how does that philosophy kind of inform the changes made and how you think about the impact that these changes are having on the outlook for variable profit dollars and originations over the next year?

Yes, thanks for the question. Happy to share some thoughts. So the shift that we're seeing, we saw like a large growth in originations and also a large growth in risk loss. These shifts come from deliberate economic decisions, obviously. And I think it's worth talking about it. So we saw a 40% origination growth, and that included this intentional mix shift into higher margin, higher loss products, as you called out. So borrow move from primarily being 4 weeks with a 5% fee to 6 weeks with a 7.5% fee. We also have been scaling other 6-week products that have a 7.5% fee on Cash App. And so that just gives us a lot more margin to work with. And so to get into the philosophy of like how we think about this, if we have that margin to work with, we have to make like the right risk loss decision. And so you can imagine on one side we could hold losses constant and we could have made this shift to 6 weeks and held loss constant or you can think alternatively based with this set of options, how do you grow long-term customer value and maximize responsible credit access. Obviously, we're aiming to do the latter. And there's a lot that goes into how we think about this. So here maybe talk a little bit about like what is our technical sophistication that goes into this and a little bit of the unique culture, I think that we have at Block. So first off, I don't think that we have like the typical credit team. I think we have like a really special credit team built around machine learning engineering as a discipline. Machine learning is also my background. I tend to think -- I can't help but think of the business itself as a learning algorithm where we have an objective function that we're trying to maximize value according to like a definition. I'll get into that in a second, but one of the things that are unique about Block and especially in our credit teams, is that our ML engineers are not purely just focused on training models, lobbing them over the fence, et cetera. We're very deeply embedded in the business. We work directly with the product teams. We also work directly with the finance teams in terms of trying to determine as Amrita was sharing, like what is our optimal definition of value for the business and how do we maximize. So we're trying to build something that maximizes credit access responsibly for our customers and then also maximizes variable profit returns. And so RL teams working with our finance and product teams we do a lot of experimentation. We have very tight feedback loops. We have a great set of proprietary data. We use all of that to run experiments constantly to try to identify what is the efficient frontier, the optimal way that we can trade off between risk loss and growth/credit access. So all these experiments and feedback loops they really go beyond just developing these models and they're informing us in real time as we launch each new product and as we think through things like even duration. The goal that we have behind all of this science is can we move the efficient frontier upwards over time. And I think that we've been doing that. So getting back to the economics, we've upgraded our target variable profit margin on borrow from 2% to 2.8%. And I think we have -- as far as I know, our return on capital of 37% target, that's the best I can think of, of any fintech lender out there. And all the while, we're growing at a really impressive rate, where consumer originations grew 45% compound annual growth over the last year with variable profit growing nearly as fast. So I think we have -- it's kind of like a core part of our DNA at Block. And we have a track record of we've been doing this for over a decade on the Square loan side, where over the 10 years -- over the prior 10 years plus Square loans have been growing at 27% compound annual growth. And each year, still beating its 4% loss target. So we definitely like kind of built a really strong system around this. Not only that, but like external partners, they're interested in applying the same models that we're using the same data as we've been sharing about Cash App score. I think that this is just creating like a lot of validation that I'm very bullish on it. I am so convinced in the way that we approach risk and underwriting that we're actively trying to build a new credit system in new rails that we want to externalize outside of our company. And we're seeing a lot of great feedback from partners there.

Our next question comes from the line of Dan Dolev from Mizuho.

Guys, congrats on a really, really nice quarter. So I wanted to ask you about the very strong improvement in Cash App [indiscernible]. I mean very nice to see that. I wanted to know, I mean, you highlighted a little bit in the shareholder letter on the drivers, but maybe can we unpack a little bit more what's going on there? What's driving that? Obviously, Neighborhoods and congrats again on really strong results.

Thanks for the question, Dan. I appreciate it. Yes, we're quite pleased with actives growth in Q3. We hit $60 million [ MAUs ] in September. That was up about 4% year-over-year. This is roughly the fastest pace that we've seen in year-over-year growth since the middle of 2024, and it was slightly above our internal targets for September. I think the key contributors for September were really Neighborhoods and teens and families in terms of the incremental impact on growth. And now we feel really good about the trajectory going forward. So I think we mentioned, we now expect at least low single-digit growth in actives as we head into Q4 and 2027. And of course, we're always striving to do better. I'm always striving to do better. The key drivers as we look ahead are kind of 4 key areas, I think. One is just ongoing investments in peer-to-peer network enhancements and our go-to-market motion. We've talked about this quite a bit over the past few quarters. And I see this as just an always on motion for the development teams and the go-to-market teams. I think Neighborhoods is going to be a really meaningful driver and a really meaningful tailwind for us as we continue to scale to more and more sellers. We rolled out Neighborhoods to a cohort of about 30,000 sellers in late August, and that contributed meaningfully to the September [ MAUs ]. But of course, we serve millions of sellers. So we see a huge a huge opportunity here to continue to scale. And then on the family side, we're continuing with product improvements, go-to-market partnerships and then also leaning into tags. I think you can actually start to see the impact of the active acceleration playing out in inflows proactive, where inflows per active grew at about 6% year-over-year on the quarter. But then if you strip out some of these cohorts that are teens and family specific or neighborhood specific, inflows proactive actually would have run about 2 points faster. And so now from this perspective, I think it's more about an engagement story from my perspective. So for instance, when we look at PDAs, it's pretty clear that PDAs and our focus on primary banking actives is working, inflows from primary banking actives were up about 23% year-over-year and inflows per active for the PDA cohort was up 8% year-over-year. I have confidence that the strategy and the focus is working, but I also think that we can do more here. So it's both about driving more incremental actives to Cash App overall but then also converting a higher share of those actives into primary baking actives, and we do continue to be focused there. I expect to grow PDA sequentially in the last month of Q4, and we continue to see a huge opportunity where we're at a place now where we have 60 million monthly actives. We have about 28 million card actives on a monthly basis and we're both increasing the top of the funnel and the customers coming in to Cash App in the first place, but then also driving Cash Card to Cash and also driving more folks into that primary banking actives category.