U.S. Markets closed
  • S&P 500

    3,699.12
    +32.40 (+0.88%)
     
  • Dow 30

    30,218.26
    +248.74 (+0.83%)
     
  • Nasdaq

    12,464.23
    +87.05 (+0.70%)
     
  • Russell 2000

    1,892.45
    +43.75 (+2.37%)
     
  • Crude Oil

    46.12
    +0.48 (+1.05%)
     
  • Gold

    1,842.20
    +1.10 (+0.06%)
     
  • Silver

    24.33
    +0.19 (+0.78%)
     
  • EUR/USD

    1.2120
    -0.0029 (-0.2424%)
     
  • 10-Yr Bond

    0.9690
    +0.0490 (+5.33%)
     
  • Vix

    20.79
    -0.49 (-2.30%)
     
  • GBP/USD

    1.3430
    -0.0022 (-0.1665%)
     
  • USD/JPY

    104.1910
    +0.3310 (+0.3187%)
     
  • BTC-USD

    18,820.58
    -137.44 (-0.72%)
     
  • CMC Crypto 200

    369.33
    -9.92 (-2.62%)
     
  • FTSE 100

    6,550.23
    +59.96 (+0.92%)
     
  • Nikkei 225

    26,751.24
    -58.13 (-0.22%)
     

Edited Transcript of SQ.N earnings conference call or presentation 5-Nov-20 10:00pm GMT

·45 min read

Q3 2020 Square Inc Earnings Call San Francisco Nov 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Square Inc earnings conference call or presentation Thursday, November 5, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Amrita Ahuja Square, Inc. - CFO & Treasurer * Jack Dorsey Square, Inc. - Co-Founder, Chairman, President & CEO * Jason Lee Square, Inc. - Head of IR ================================================================================ Conference Call Participants ================================================================================ * Andrew William Jeffrey Truist Securities, Inc., Research Division - Director * Bryan Connell Keane Deutsche Bank AG, Research Division - Research Analyst * Darrin David Peller Wolfe Research, LLC - MD & Senior Analyst * James Eric Friedman Susquehanna Financial Group, LLLP, Research Division - Senior Analyst * Josh J. Beck KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst * Lisa Ann Dejong Ellis MoffettNathanson LLC - Partner * Peter Corwin Christiansen Citigroup Inc., Research Division - VP and Analyst * Ramsey Clark El-Assal Barclays Bank PLC, Research Division - Research Analyst * Rayna Kumar Evercore ISI Institutional Equities, Research Division - MD * Tien-Tsin Huang JPMorgan Chase & Co, Research Division - Senior Analyst * Timothy Edward Chiodo Crédit Suisse AG, Research Division - Director * Jared Sorensen ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen, and welcome to the Square Third Quarter 2020 Earnings Conference Call. I'd now like to turn the call over to your host, Jason Lee, Head of Investor Relations. Please go ahead. -------------------------------------------------------------------------------- Jason Lee, Square, Inc. - Head of IR [2] -------------------------------------------------------------------------------- Hi, everyone. Thanks for joining our third quarter 2020 earnings call. We have Jack and Amrita with us today. If you're experiencing any technical difficulties accessing our third quarter 2020 shareholder letter, it is also available on the SEC's website. We'll begin this call with some short remarks before opening the call directly to your questions. During Q&A, we will take questions from our customers in addition to questions from conference call participants. We would also like to 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. 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 the 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'll provide preliminary gross profit growth results for the month of October. These represent our current estimate for October performance as we have not yet closed our accounting financials for the month of October, and our monthly results are not subject to interim review by auditors. As a result, actual October 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 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 would like to turn it over to Jack. -------------------------------------------------------------------------------- Jack Dorsey, Square, Inc. - Co-Founder, Chairman, President & CEO [3] -------------------------------------------------------------------------------- Thanks, Jason, and thank you all for joining us today. We know this is a busy time for everyone, especially with the U.S. election this week, so we'll keep our opening comments focused so we can get to your questions. As a company, we're continuing to take action to further our purpose of economic empowerment and commitment to financial inclusion. Since last quarter, we announced 2 strategic investments that aligned with that purpose. The first was a $100 million investment in support of minority and underserved communities and towards our commitment to ending racial justice. The second was a $50 million investment into Bitcoin, which we believe will be the native currency of the Internet and help people around the world better participate and thrive in the economy. A few updates on our 2 ecosystems, Seller and Cash App before I turn it over to Amrita and your questions. Let's start with Seller. We're focused on providing sellers with fast and flexible access to their funds, which has proven to be especially important this year. Square Card, our business debit card, which we launched last year, provide sellers with a way to immediately access and spend earned funds without setting up a bank account. Adoption of Square Card has increased each quarter since launch. And in the third quarter, sellers spent more than $250 million on their cards. We also work to provide employees easier access to funds. In the third quarter, we launched 2 new features for Square Payroll: Instant Payments and On-Demand Pay. Instant Payments allows Square Payroll merchants to pay employees using earned funds next business day with Direct Deposit or instantly when employees use Cash App. On-Demand Pay gives employees a way to get their compensation faster by transferring up to $200 of earned wages per pay period into their Cash App accounts. This strengthens the integration between our Seller and Cash App ecosystems and is a great example of what we can do when we connect the 2 ecosystems together. We continue to believe our ecosystem is a key differentiator for sellers and see an opportunity to educate businesses who are looking to adapt. During the quarter, we also ran our largest brand awareness campaign to date, with a focus on how our offerings can help sellers globally through the COVID-19 pandemic. We expect to reach more than 50 million people in the U.S. through our campaigns in the second half of 2020. Now moving on to Cash App. With Cash App, we've continued to find ways to make financial services more relatable and accessible for individuals. We have seen strong adoption across the Cash App ecosystem, including our stock brokerage products, which have seen the fastest adoption of any product to date. Since launching it less than a year ago, more than 2.5 million customers have bought stocks using Cash App, and billions of dollars have been traded by the end of the third quarter. With the stock products, we're focused on expanding access to investing for more customers, many of whom likely have never purchased stocks before. This quarter, we launched Auto Invest, which allows for dollar cost averaging from recurring daily or weekly purchase of Bitcoin or stocks. We also added the ability for customers to find stocks based on industry and performance and to get relevant news about their stocks right in the app. In closing, we have scaled not 1 but 2 ecosystems focused on expanding access to financial services for sellers and individuals. We intend to continue looking for opportunities within each ecosystem and to expand into new adjacencies beyond Seller, and so we're investing for the long term and we're energized by what's possible. And with that, over to Amrita. -------------------------------------------------------------------------------- Amrita Ahuja, Square, Inc. - CFO & Treasurer [4] -------------------------------------------------------------------------------- Thanks, Jack. There are 3 topics I'd like to cover today: first, a look at our performance in the third quarter, where Cash App delivered strong growth and Seller achieved positive gross profit growth and showed stability on GPV; second, an update on our business in October and what this could mean for growth going forward; third, a look at where we intend to invest in the fourth quarter of 2020 and in 2021 across both ecosystems, given the compelling opportunities ahead of us. In the third quarter, gross profit was $794 million, up 59% year-over-year or 63% growth excluding Caviar. Net income was $37 million and adjusted EBITDA was $181 million. Cash App delivered incredible gross profit growth of 212% year-over-year. The $385 million in gross profit Cash App generated was more than triple what it did in the third quarter of 2019. Cash App's results highlight our ecosystem's ability to help customers manage their finances. Looking at the 3 main drivers: first, we continue to see strong acquisition of new customers to our platform each month, with our highest number of new customers added in a quarter. Second, we continue to efficiently cross-sell our broader ecosystem, increasing adoption of higher-value products such as Cash Card, Bitcoin and Direct Deposit. We saw that customers who adopted 2 or more products tend to have 3 to 4x more gross profit compared to those who only use peer-to-peer payment, and this adoption allowed customers to find growing daily utility within Cash App. In the third quarter, daily transacting actives nearly doubled year-over-year and represented nearly 1/4 of Cash App's monthly transacting actives. Third, we saw volume per active peak in July as we benefited from increased inflows into Cash App. This is a dynamic we've observed in the past related to seasonal tax refunds as well as direct deposits of recurring paychecks and saw, to an even greater extent, through July with the introduction of government stimulus funds. As expected, inflows stepped down from July although remained relatively steady in August and September as we continued to benefit from greater inflows into customers' accounts compared to pre-COVID levels. For our Seller ecosystem, gross profit was $409 million, up 12% year-over-year. Excluding 4th of July and Labor Day, Seller GPV growth was relatively consistent on a year-over-year basis from July to August, followed by a modest improvement in September. Three factors to call out here in the third quarter across key strategic areas for our Seller business: first, omnichannel remains a priority and our online capabilities complement our broader ecosystem. We saw continued strong GPV growth from our online channels up more than 50% year-over-year again this quarter. Second, we saw stronger growth from our international markets in the third quarter. Seller GPV in our markets outside the U.S. grew 46% year-over-year in the third quarter and represented 11% of total Seller GPV, up from 6% 2 years ago. Growth in the quarter was primarily driven by easing of restrictions in various regions as well as our strong acquisition of new sellers. Third, we remain focused on broadening our sales and marketing strategy for our Seller ecosystem. Overall, across our increased go-to-market investments, we drove strong acquisitions similar to last quarter. We track acquisitions looking at the first 5 weeks of gross profit from a new cohort, and our Seller cohorts in the third quarter generated greater gross profit compared to those who joined our platform a year ago. Adjusted EBITDA of $181 million in the third quarter was primarily driven by top line growth and also benefited from a $40 million release of 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 with you what trends we are seeing in real time and implications on growth going forward for each ecosystem. In October, we expect Cash App gross profit growth of more than 160% year-over-year. We continue to grow the network through strong new customer acquisition, drive adoption of our products and see healthy engagement and daily utility. As expected, we saw a reduction in transaction volume per active customer in October, driven by moderating inflows and stored funds, albeit still well above pre-COVID levels. Looking ahead, while the team has continued to execute, there remains a wide range of outcomes related to government inflows and how consumer behavior normalizes in 2021, which could lead to Cash App gross profit decelerating during the remainder of this year and into 2021. Given Cash App's incredible growth year-to-date in 2020, we will lap particularly challenging comparisons in the second and third quarter of next year. Turning to Seller. In October, we expect our Seller ecosystem to achieve year-over-year gross profit growth, slightly ahead of the 12% growth that we reported in the third quarter. Seller GPV was up 8% year-over-year in October, which modestly improved compared to the third quarter, which was up 4%. In our international markets, we saw GPV growth of 50% year-over-year in October. However, 2 of our largest markets, the U.K. and Canada, recently implemented more targeted shelter-in-place measures, which could affect growth in the fourth quarter. Card-not-present transactions were up 23% year-over-year in October, relatively consistent with what we saw during the third quarter, while card-present transactions were up 1% year-over-year, an improvement from the third quarter. Regional trends on card-present transactions have varied depending on the extent of shelter-in-place restrictions. We expect to continue to observe variability related to the macro environment, pace of recovery and stricter shelter-in-place restrictions through the winter months, which could impact our performance. Our Seller gross profit has grown faster than GPV this year, in part due to higher transaction margins, which benefited from a greater mix of debit, card-not-present transactions and higher average transaction sizes. We recognize these dynamics driving transaction margins in 2020 could normalize in 2021. Finally, we intend on investing for the long term across both ecosystems in the fourth quarter and in 2021, and we'll share a preliminary view of where we see the greatest opportunities. In the fourth quarter, we expect to increase non-GAAP operating expenses, excluding risk loss by at least $30 million compared to the third quarter as we continue to invest in go-to-market and hiring, particularly for engineers driving product development. As we plan for 2021, we again are making the deliberate decision to invest in both ecosystems as we believe we are in the midst of a transformative opportunity to reach new customers and expand each of our ecosystems. Next year, we expect to invest an incremental $800 million to $850 million in non-GAAP operating expenses, excluding risk loss, which represents growth of approximately 40% year-over-year. We expect the overall impact to our profitability next year to depend on top line growth trends in 2021, which will be determined in part by a variety of macro factors where we see a wide range of potential outcomes. For what is in our control, let's look at where we are investing in each ecosystem. For Cash App, we plan to focus on investing in sales and marketing to drive acquisition of customers and new demographics and to engage former customers. We also plan to invest in product development to continue adding value to our customers and support in operations as the business scales. For Seller, we plan to invest in sales and marketing to drive new Seller acquisition and hiring among engineers to further our product road map as we grow upmarket to serve larger sellers and as we look towards global expansion. We expect our blended company margin to be affected by the mix shift to Cash App. As a reminder, Cash App represented nearly 50% of our business in the third quarter, up from 25% a year ago. For the full year 2020, we expect Cash App to deliver more than 10 points of margin expansion and reach profitability on an adjusted EBITDA basis. So far this year, Cash App has demonstrated strong unit economics and the ability to scale efficiently. However, as we look at the needs of our customers, the size of the addressable market and our team's ability to move quickly, we see compelling opportunities to invest further. While Cash App has significantly improved its profitability, it is still a much younger business and earlier in scaling its margin profile than Seller. In summary, we are excited about the opportunity ahead of us to serve a wider set of needs for both new and existing customers across our ecosystems and intend to invest, given a significant opportunity ahead of us to deliver long-term profitable growth. I'll now turn it back to the operator to start the Q&A portion of the call. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question is from the line of Tien-Tsin Huang with JPMorgan. -------------------------------------------------------------------------------- Tien-Tsin Huang, JPMorgan Chase & Co, Research Division - Senior Analyst [2] -------------------------------------------------------------------------------- Really strong gross profit growth here. Just thinking about the drivers, I was wondering if maybe you can comment on customer acquisition versus higher customer engagement, not only in the quarter but just looking ahead for both ecosystems. I mean I just heard you talk about sales and marketing stepping up. That makes sense. But I'm just curious how you're balancing this customer acquisition versus the engagement equation. -------------------------------------------------------------------------------- Amrita Ahuja, Square, Inc. - CFO & Treasurer [3] -------------------------------------------------------------------------------- Sure. Thanks for the question, Tien-Tsin. Let me start by telling you where we are in the third quarter and in October on both business units in terms of these drivers, and then we can talk about where we're continuing to invest into 2021. So first, on the Seller business. In the third quarter, GPV was up 4%. Monthly growth was relatively stable throughout, improved in September and October and then with a modest improvement to that 8% in October. Some of the key drivers there, so first, obviously, COVID restrictions helping many of our businesses as they eased throughout the quarter. And we saw that impact to our GPV but we do want to be mindful of continued variability related to restrictions. Second, retention. So you mentioned engagement. We kind of look, on the Seller business, at GPV retention for existing sellers where we compare how sellers did in the prior year -- from the prior year are doing this year. And what we saw that -- was that GPV retention for existing sellers was down approximately 10% to 15% year-over-year in the third quarter and October and has held relatively stable since July. We're seeing improving retention in verticals where restrictions were eased during the third quarter in October, such as beauty, professional services and health and fitness. And clearly, we believe the primary driver of retention trends has been state-by-state restrictions and the impact on sellers' ability to fully reopen. When we saw certain states expanding reopenings in September and October to additional verticals, we saw corresponding improvement in GPV retention in those states. And the third key driver was new customer acquisition, as you noted. We've seen encouraging trends in the Seller business in the second and third quarter as we've seen growth in terms of new cohort sizes in aggregate gross profit. And we've been able to attract larger sellers over the past 2 quarters. You saw larger sellers increase to 61% of the share of total Seller GPV in this last quarter, up 5 points year-over-year. And we want to lean in here behind the strong ROIs historically over 3x on sales and marketing investments over 3 years as well as new business formation, which is up strongly quarter-over-quarter. Let me move next then to Cash App to telling you sort of the key drivers, some of which we talked about in the prepared remarks. And clearly, acquisition is a part of that. So Cash App saw very strong growth in the quarter, up 212%. The 3 key main drivers there of that growth, first, new customer acquisition as well as win back. We've already attracted a lot of customers, and bringing them back to the platform can oftentimes be more efficient. And with the network effects that we have, we have the ability to lean in and scale more quickly, particularly as we've seen lifetime values go up, we can invest differentially into this network. Second, product adoption and engagement. We've seen continued strong attach on Cash Card, which is still at about 1 in 4 related to our monthly actives. And so we think there's further room for growth there as well as on new products like stock brokerage, which has 2.5 million customers now and is our fastest product to ramp. And then third key driver of Cash App growth is strong volume per active, which as I mentioned, we saw peak in July before slowing down, as we expected, related to the falloff of government inflows. Now as we look at 2021 based on all of that, where do we want to invest? You definitely heard from us that we want to lean in further to grow the networks of both of these businesses while continuing to work with existing customers, bringing them more value through additional products. We will, as I mentioned, be investing. We expect to invest an incremental $800 million to $850 million in non-GAAP operating expenses, excluding risk loss, which is growth of about 40%. The way we expect that to break down, that incremental spend, is about half of it to go towards go-to-market investment, sales and marketing to both bring back lapsed customers as well as to focus on new customer growth across both ecosystems. That includes growing the sales team for Seller and leaning in further to our network effects on Cash App. About 1/4 of that stepped-up investment will go towards product development, continuing to refine our existing products as well as building new products into both ecosystems with a global focus. And then the final quarter, it goes towards G&A, including support and operations infrastructure to scale our businesses and particularly building in automation, AI and ML capabilities so that we can scale these sustainably going forward. -------------------------------------------------------------------------------- Operator [4] -------------------------------------------------------------------------------- And your next question is from the line of Lisa Ellis with MoffettNathanson. -------------------------------------------------------------------------------- Lisa Ann Dejong Ellis, MoffettNathanson LLC - Partner [5] -------------------------------------------------------------------------------- I wanted to ask about Cash for Business. Very exciting. You broke out some new numbers this quarter, 10% of GPV. We love that because it's a little 2-sided network. Can you elaborate a little bit on where you're gaining this traction with Cash for Business, and is it net new business or replacing some of your micro sellers? And then also just a little bit more color on the economics. I know the take rates there are around that 2.75%. But is the funding mix here actually more attractive because it's funding out of stored balances as well, any additional color there? -------------------------------------------------------------------------------- Jack Dorsey, Square, Inc. - Co-Founder, Chairman, President & CEO [6] -------------------------------------------------------------------------------- Lisa, thanks for the question. So the way to think about Cash for Business in terms of like what we're seeing in Seller adoption is it's very similar to the patterns we saw early on in the company's history with the free reader. So we saw sellers, saw providers, smaller sellers pick it up and use it in a variety of ways. What's different about Cash for Business, of course, is it's all digital and allows those sellers to manage their business through peer-to-peer transactions to their $Cashtag. And it also provides them higher weekly limits and relevant tax reporting forms. We did see a new pattern emerge during COVID-19 because it allows for contactless transactions with their buyers and with their customers. But we see proprietors like beauty, online retail, we've seen local businesses use it to collect donations. We think there's a lot of opportunity here. And we do believe that it's quite powerful. The customers using Cash for Business transacting much more frequently across our ecosystem compared to other customers in Q3. So it again just strengthens the Cash App ecosystem. And more broadly, as some of those sellers graduate, they can also use the tools offered by the Seller business as well. -------------------------------------------------------------------------------- Amrita Ahuja, Square, Inc. - CFO & Treasurer [7] -------------------------------------------------------------------------------- And Lisa, just to weigh in on your question with respect to economics. So Cash App business GPV, which is composed primarily of Cash for Business volumes as well as a small piece from peer-to-peer funded by credit card, Cash App business GPV was $2.9 billion, as you noted, about 9% of Square's total reported GPV. And we see transaction revenue here of about $81 million. Both of those metrics were up more than 300% year-over-year in the quarter. We monetize Cash for Business at 2.75% of volumes, and these Cash App volumes did provide a benefit to our transaction margins as well, given the funding mix, as you noted. We're doing more work to understand our customer needs here, as Jack mentioned, and we recognized some of this uplift in growth may be related to COVID-specific trends that we will -- that could potentially normalize and we'll continue to monitor. -------------------------------------------------------------------------------- Operator [8] -------------------------------------------------------------------------------- And your next question is from a Square Seller, Jared Sorensen. -------------------------------------------------------------------------------- Jared Sorensen, [9] -------------------------------------------------------------------------------- Yes. My business is about selling large gourmet cookies and my business name is Texas Cookie Shop. Currently, when a customer comes into the store, they can buy cookies, either like one at a time or in boxes of 6 or a dozen. When I do sell a half dozen or a dozen, the POS will automatically add the volume discount. However, the website that I have does not. So I wanted to know, is it on the road map to provide the shopping cart with similar automatic volume pricing options? -------------------------------------------------------------------------------- Jack Dorsey, Square, Inc. - Co-Founder, Chairman, President & CEO [10] -------------------------------------------------------------------------------- Yes. Thank you, Jared. Thank you for being a customer as well. We do plan to enhance this on Square Online Store to provide similar automatic pricing options, as you mentioned, in sort of point of sale. The prerequisite functionality to support the feature's in development. So we're going to work as fast as we can to get it out to you and definitely appreciate any feedback on remaining gaps that might help you serve your customers better. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- And your next question is from the line of Timothy Chiodo with Crédit Suisse. -------------------------------------------------------------------------------- Timothy Edward Chiodo, Crédit Suisse AG, Research Division - Director [12] -------------------------------------------------------------------------------- My question is a follow-up on the update you gave on the Square Card earlier this afternoon. It's a topic that's also somewhat related to my question last quarter around the SMB digital banking opportunity for Square. So you noted the volume has ramped up to $250 million this quarter. And that math suggests it's in the ballpark, give or take, about 1% of Seller volume. So it seems like a long runway ahead. And I was hoping you could give maybe some added thoughts on some of the things that either you have been doing or can do to address this opportunity. It does seem like a long runway for a product that really seems to be a win-win for the sellers and for Square. -------------------------------------------------------------------------------- Jack Dorsey, Square, Inc. - Co-Founder, Chairman, President & CEO [13] -------------------------------------------------------------------------------- We agree completely. And the way to think about the Square Card is kind of in the vein of a use case of getting people, whether they'd be individuals or sellers, faster access to their funds. It just matters so much, and that's what Square Card represents, is sellers get to utilize their money much faster. And since launch, we've seen adoption growing with more sellers using it each quarter. We saw sellers using the card upon joining Square. And in the third quarter, 50% of the Square Card sellers ordered their card within the first month of onboarding, which is pretty incredible. And we're seeing sellers use the card for everyday expenses like gas stations and discount retailers, their own inventory. So we're watching very closely the patterns in terms of how people are using it, where we can improve it, what we can build on top of the card or adjacent to the card. But there's a vein in this use case of cash flow management, of enabling faster access to funds is very rich for us. And they'll come in many manifestations, and Square Card is just one of the latest, and definitely excited about their performance recently. -------------------------------------------------------------------------------- Amrita Ahuja, Square, Inc. - CFO & Treasurer [14] -------------------------------------------------------------------------------- And from a revenue perspective, Square Card is relatively small today. We expect it to ramp over multiple years, both for new merchants and increased monetization from the existing base as we add those new features to help sellers manage their balance. Similar to the dynamic we've seen on the Cash App ecosystem, the card enables people to keep their funds and sellers to keep their funds within our ecosystem, which leads to higher customer lifetime value. So it's something we're encouraged to keep building out. -------------------------------------------------------------------------------- Timothy Edward Chiodo, Crédit Suisse AG, Research Division - Director [15] -------------------------------------------------------------------------------- Yes. That all makes a ton of sense. A brief, brief follow-up. We don't have to spend too much time on this, but you did mention the retention ratio is kind of similar to July and for the Seller business at down 10% to 15%. And when I just look at the positive volume growth, it just implies that that gap there, it really implies a pretty big new cohort that's come on. And you characterized it a little bit talking about how they're generally larger sellers, higher gross profit. And I know it's hard to say because most of these sellers are self-onboarding. But if you could give any context that you might have around what these sellers might have been doing before. Given their size, I'm assuming that they were probably already accepting payments in some way. -------------------------------------------------------------------------------- Amrita Ahuja, Square, Inc. - CFO & Treasurer [16] -------------------------------------------------------------------------------- Well, look, when you look at the opportunity ahead of us, we've sized our TAM in materials earlier this year. We think the vast majority of the market, especially a larger seller market, being addressed today on legacy platforms, legacy infrastructure and platforms that we believe aren't as flexible as ours can be with integrated payments, financial services, hardware, software. And we did see growth in our larger seller cohorts. And if you look at larger seller GPV, it's about 13% growth year-over-year relative to the entire base at 4% growth year-over-year. And we do believe that's related to stronger acquisition of larger seller cohorts, as we mentioned, onboarding in both the third quarter and second quarter. So we believe that our unique platform has a real opportunity to address these larger, more complex seller needs through multiple different products that we can offer. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- The next question is from the line of Darrin Peller with Wolfe Research. -------------------------------------------------------------------------------- Darrin David Peller, Wolfe Research, LLC - MD & Senior Analyst [18] -------------------------------------------------------------------------------- Nice job on the quarter. I wanted to just to hone in on beyond just obviously cash for business being a big driver of volume right now. We saw some pretty material growth in the online side or really just card-not-present again up, I think, it was 24% versus 16% last quarter. If you could just talk a little more on the strategy there and maybe just the other big driver being international, which again, you guys talked about up, I think it was 46%. Maybe just if you don't mind honing in a little more on the strategic initiatives on both those sides, how big can that get as a percentage of the mix in the next couple of years? -------------------------------------------------------------------------------- Amrita Ahuja, Square, Inc. - CFO & Treasurer [19] -------------------------------------------------------------------------------- Maybe I can kick us off. It sounds like you're looking for some more color around online and international. And we've seen strong traction in both areas, as you noted. And in the third quarter, we saw continued strength in GPV from our online channel, which grew over 50% year-over-year, consistent with the growth we've seen on average over the past 1.5 years. And then when you combine the 2, when you look at online channel growth outside of the U.S. and our international markets, that was even stronger at over 60% in the third quarter, driven by strong adoption of e-commerce API, invoices, Square Online, all the variety of online products that we provide that complement that broader ecosystem. And as you look at Square Online at the front door now for us, we're also seeing encouraging trends there where 1 in 2 new sign-ups to Square Online are new to Square more broadly in October. I think last quarter we had told you 1 in 3. And so we've seen some improvement in that as well where we can help our customers from an omnichannel perspective, including for these online products and features. -------------------------------------------------------------------------------- Jack Dorsey, Square, Inc. - Co-Founder, Chairman, President & CEO [20] -------------------------------------------------------------------------------- And just on the international side, global growth remains a top priority for both ecosystems. But just looking at Seller for a minute, since the beginning of our expansion and through the end of 2020, we will have had 85 product launches in the 4 markets we serve across hardware, software and our financial service offerings. And just for example, we recently launched Square for Retail in the U.K., in Australia and Square Online in Japan. So we want to continue to make sure that our product offerings that we have in the U.S. are rolled out to the rest of our markets as well, and of course, always evaluating additional markets for potential expansion as well. And Cash App in terms of global growth, it is also a priority for us and a top priority for us. We launched in the U.K. and we also launched cross-border payments between the U.S. and the U.K. And we think there's a lot of potential here. We acquired a company called Verse in Spain, which allows -- gives us an opportunity to learn from the peer-to-peer growth in European markets. So right now, we continue to add all these aspects that help us learn and to really make sure that we're expanding around the world in a smart way. -------------------------------------------------------------------------------- Darrin David Peller, Wolfe Research, LLC - MD & Senior Analyst [21] -------------------------------------------------------------------------------- I mean it does look like there's been an inflection in international. That's great to see, guys. -------------------------------------------------------------------------------- Jack Dorsey, Square, Inc. - Co-Founder, Chairman, President & CEO [22] -------------------------------------------------------------------------------- Thank you so much. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Your next question is from the line of Rayna Kumar with Evercore ISI. -------------------------------------------------------------------------------- Rayna Kumar, Evercore ISI Institutional Equities, Research Division - MD [24] -------------------------------------------------------------------------------- Can you discuss your recent thoughts on capital allocation and specifically your appetite for acquisitions? Maybe what types of acquisitions interest you the most today and which businesses to be most additive to Square? -------------------------------------------------------------------------------- Jack Dorsey, Square, Inc. - Co-Founder, Chairman, President & CEO [25] -------------------------------------------------------------------------------- Well, I'll take the first part. I mean we definitely have an appetite for acquisitions, both in terms of products and also great teams. We've shown some examples of like the categories that we're looking at. We certainly want to continue to add more force behind some of the trends that we're seeing within our space such as artificial intelligence and also cryptocurrency and, specifically, Bitcoin. We've certainly looked at multiple products that we can learn from. And as we add to the company, we learn much more from we're completing offering. So we're constantly looking for great teams or great products that complement or are adjacent to our key ecosystems of Seller and Cash App. And we want to make sure that we're pretty open not just with acquisitions in the U.S. but also abroad because great companies are being more and more found all around the world. -------------------------------------------------------------------------------- Amrita Ahuja, Square, Inc. - CFO & Treasurer [26] -------------------------------------------------------------------------------- And Rayna, just to jump in on the capital allocation piece of it, obviously, a key piece of that is where we're investing internally and ensuring that we maintain discipline and that we're going after the biggest opportunity. So I had mentioned earlier that step-up of investment next year, $800 million to $850 million. We expect the majority of that to go towards our ecosystem, about 60% directed to Cash App and about 40% directed to Seller while also leaving some room to test and learn around other new strategic investment areas. Within Seller, we expect to grow our sales and marketing investments by 40% to 45% year-over-year in 2021 across brand and awareness marketing to drive top of funnel demand, doubling the size of our sales headcount next year and our account management team to address larger Seller needs and where we've seen efficient returns even during COVID this year. And that -- an increasingly global focus that we've mentioned, deploying these campaigns across international markets. From a product development standpoint within Seller, we want to build out those engineering data science design teams who can expand the ecosystem and, amongst other things, focus on some of the products that reach larger sellers like the vertical-specific features and developer APIs as well as bringing those products more globally. And then finally on Cash App, the step-up of investment there. We talked about acquisition and win-back. We've already started deploying this year an increased investment around paid marketing, and we've seen strong returns on that with payback at less than a year. And again, with low customer acquisition costs and growing our lifetime value, we see strong returns on these investments. From a support perspective, Cash App has rapidly scaled this year, and customers are increasingly using Cash App for broader services beyond peer-to-peer. So we intend on scaling our support in other operations infrastructure for the business in 2021. We expect the magnitude of the step-up to be onetime in nature. And we envision operating leverage in this area in the future, because of the investments in things like AI and machine learning, to drive automation and efficiency. And finally, product development on Cash App, the team has delivered strong product velocity over the years with a mix of major new launches as well as adding feature development, and we expect to continue to do that into the future. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- The next question is from the line of Pete Christiansen with Citi. -------------------------------------------------------------------------------- Peter Corwin Christiansen, Citigroup Inc., Research Division - VP and Analyst [28] -------------------------------------------------------------------------------- Amrita, thanks for the color on the potential for the tougher comps in certain quarters, and I know it's challenging in stripping out the impact of stimulus that you've seen. But I guess looking at growth in customer funds, at least sequentially, I think it was up 70% in the quarter. Should we think of that as, at least on the Cash App side, as an underlying growth rate for the existing base? I'm trying to exclude the big rapid spending and the new customer acquisition that you've set forth. But do you see that as a good level that investors should think about going forward, at least for the next quarter or 2? -------------------------------------------------------------------------------- Amrita Ahuja, Square, Inc. - CFO & Treasurer [29] -------------------------------------------------------------------------------- Pete, thanks for the question. Maybe we can talk about the number. I think you were talking about stored funds, which were up -- for Cash App, which were up 7% quarter-over-quarter. Correct me if -- you're wrong if that's the number... -------------------------------------------------------------------------------- Peter Corwin Christiansen, Citigroup Inc., Research Division - VP and Analyst [30] -------------------------------------------------------------------------------- Yes, that's good. Yes. -------------------------------------------------------------------------------- Amrita Ahuja, Square, Inc. - CFO & Treasurer [31] -------------------------------------------------------------------------------- Okay, yes. Look, stored funds for us is 1 indicator of the use of the Cash App platform and, obviously, as a factor of inflows into the platform and outflows from the platform. The more we can keep our customers, we can deliver value to our customer base through a variety of products, including Cash Card, investing, et cetera, the more we have the ability to give people a reason to store their funds within Cash App. We do recognize, as you noted, the impact of stimulus, which drove us to sort of peak levels in terms of stored funds. We were at about $2 billion in stored funds in July before seeing a decrease in October at about $1.75 billion in stored funds, down about 10% from July to October. And we think that that's likely related to inflows related to these sorts of government funds. And that's why we noted on the call that in the absence of further government funds, we can see normalization around -- and we're already seeing normalization around that 1 driver of volumes per active and could expect to see further deceleration there for the remainder of Q4 and into 2021. And again, we think about the Cash App business on a 2-year basis here to help normalize for some of the acceleration we saw this year. Cash App has delivered over 170% gross profit growth year-to-date on a year-over-year basis this year. And so we may see those trends normalize over time and we'll look at things from a 2019 to '21 basis to normalize for some of that growth. -------------------------------------------------------------------------------- Peter Corwin Christiansen, Citigroup Inc., Research Division - VP and Analyst [32] -------------------------------------------------------------------------------- That's helpful. And just as a quick follow-up, I know there was a big discretionary spend this last quarter, new acquisition growth. How are you seeing adoption of Cash Card? I know that's typically a quick add for a new Cash App user initially. Are you seeing similar take-up levels when you're signing on a new Cash App user converting to Cash Card? -------------------------------------------------------------------------------- Amrita Ahuja, Square, Inc. - CFO & Treasurer [33] -------------------------------------------------------------------------------- Yes. I think we noted in our quarter -- in the earnings call last quarter that we had seen faster product adoption amongst new customers, those new cohorts of customers, as we noted in our 2Q call on Cash App, and that included for things like Cash Card. As of the end of June, we had over 7 million monthly actives on Cash Card and the majority of them spending over 5x per week in June. And we've seen strong engagement since. You obviously saw that play out in the quarter for us as well. And we think that there's more to do here. Cash Card has achieved strong adoption at nearly 1 in 4 of our monthly actives, using Cash Card on a monthly basis in June. And we think that there's even more that we can do in terms of surfacing Cash Card and the Boost product and the related features to our customers in an even greater way as we move forward. -------------------------------------------------------------------------------- Operator [34] -------------------------------------------------------------------------------- (Operator Instructions) Our next question is from the line of Ramsey El-Assal with Barclays. -------------------------------------------------------------------------------- Ramsey Clark El-Assal, Barclays Bank PLC, Research Division - Research Analyst [35] -------------------------------------------------------------------------------- I wanted to ask about whether you have any initiatives or plans in place to build out a broader kind of B2B product set, I guess, especially in Seller. It seems like that type of a thing like AP, AR automation, supplier payments would fit like a glove in terms of what you're already offering your customers. Just curious what your view is on the B2B opportunity for Square. -------------------------------------------------------------------------------- Jack Dorsey, Square, Inc. - Co-Founder, Chairman, President & CEO [36] -------------------------------------------------------------------------------- Yes. Thank you for the question. I think there's a lot of opportunity. And we certainly were kind of pulling at this thread when we launched the Square Card by incentivizing Square merchants to shop at other Square merchants. So there is something there that we're excited about. And it is a pattern and a use case that we want to watch more closely, but we have nothing to talk about today. Right now, we continue to focus on the most critical aspects to run the business, to better serve customers and also a lot around customer relationship management. But as we continue to make that more robust, there are certainly adjacencies that are very interesting and something that we'll look deeply at. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Your next question is from the line of James Friedman with Susquehanna. -------------------------------------------------------------------------------- James Eric Friedman, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [38] -------------------------------------------------------------------------------- It's James with Susquehanna. I noticed, Amrita, you released some reserves, if you could describe where you are in that journey. It was a bigger conversation, obviously, earlier in the year. Any update there would be helpful. -------------------------------------------------------------------------------- Amrita Ahuja, Square, Inc. - CFO & Treasurer [39] -------------------------------------------------------------------------------- Sure. Happy to help with that. Overall, in the third quarter, transaction and loan loss expenses were $15 million, down 54% year-over-year, with that decline primarily driven by the $40 million release of an existing provision for Seller -- the Seller business related to the first half of the year, which more than offset the increase in provisions related to the third quarter. And when you look on a year-to-date basis for Seller in 2020, transaction losses as a percent of GPV is trending at about 1.7x what we would have seen in terms of a quarterly average in 2019. This is above the 3x that we had estimated back in the second quarter. And that reflects our current provision levels for risk loss on these cohorts year-to-date. To break that down across the various cohorts, first quarter and then second and third quarters: for the first quarter where transaction risk loss trends have now matured, transaction losses represented an increase of about 1.2x year-over-year on a dollar basis; and for the second and third quarters, we're now provisioned at about 2x greater on a year-over-year basis on a dollar basis, given the ongoing uncertainty for those more recent cohorts. Let me know if that answered your question, Jamie. Obviously, future provisions here are going to depend on a bunch of puts and takes that we're going to continue to monitor related to broader macro environment. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- Your next question is from the line of Josh Beck with KBCM. -------------------------------------------------------------------------------- Josh J. Beck, KeyBanc Capital Markets Inc., Research Division - Senior Research Analyst [41] -------------------------------------------------------------------------------- I found the commentary around really these new cohorts that you're bringing in on the Seller side are actually -- seems to be contributing more than the similar cohorts a year ago. It certainly seems like the number of products that Cash App users are adopting is up. So just would like to hear a little bit about maybe how that influences the LTV to CAC equation and really how that is influencing your investment philosophy as we move forward. -------------------------------------------------------------------------------- Amrita Ahuja, Square, Inc. - CFO & Treasurer [42] -------------------------------------------------------------------------------- Sure. Maybe starting just on what we're seeing so far with the stepped-up investments in go-to-market for the Seller business. We increased our investments meaningfully in the third quarter as we had told you last earnings call, excluding Cash App other sales and marketing expenses, which is primarily reflective of the pace of Seller investments, were up 63% year-over-year on a GAAP basis. What we were doing was we launched an awareness marketing campaign across a range of new channels, including TV, radio, podcasts, et cetera, and we expect to reach, through those channels, 50 million people in the second half of this year. These campaigns really tell a broader story on the ecosystem, and it specifically speaks to larger sellers in terms of the range of products that we have to meet their needs. These campaigns do have longer payback periods than performance marketing, but we've also seen that they drive top-of-funnel interest, which allows us to scale performance marketing, and we see further opportunity to do that in '21 as well. And then similarly, sales and account management teams have generated efficient paybacks in 2020. We're doubling the size, as I mentioned, in the sales team in '21. And that's been able -- that's helped us reach more and more larger sellers, which now account for 61% of Seller GPV. When we think about reaching these larger sellers who can take on more products with us, that certainly has an impact on lifetime value, which is why we want to measure these investments against ROI and look at that sort of longer-term duration of a partnership with a seller and how we can deliver value to them and see increased value from the sellers, which enables us to lean in even further to that. From a Cash App perspective, where we've been investing, it's been about a year now since our first paid ads for Cash App. We launched them for the first time in December 2019. And with ARPU and lifetime values up 3x over the past 3 years, we've seen significant room to scale, marketing spend still at very strong ROI. We ramped paid marketing for Cash App in the third quarter and into October with low customer acquisition costs across a variety of new channels. And we have seen compelling payback so far on that acquisition spend at less than a year. Of course, the key piece of that is related to the ability to drive stronger value into the ecosystem and, therefore, stronger ARPU and lifetime value of these customers, which becomes a flywheel. It enables us to invest more both into the product and in the go-to-market. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- Your next question is from the line of Andrew Jeffrey with Truist Securities. -------------------------------------------------------------------------------- Andrew William Jeffrey, Truist Securities, Inc., Research Division - Director [44] -------------------------------------------------------------------------------- I wonder if you could talk a little bit about what you see as the role of QR code in retail generally but maybe in restaurants, in particular, and whether that's a capability Square is going to move progressively to support at any point? -------------------------------------------------------------------------------- Jack Dorsey, Square, Inc. - Co-Founder, Chairman, President & CEO [45] -------------------------------------------------------------------------------- Yes. So on the store side, we had a self-serve ordering capabilities by QR code, and that integrates with the restaurant's kitchen and payment systems. We also have QR codes built into the Cash App and are seeing really strong adoption and usage there. Generally, I think it's just a function of the speed of the OS and how easy the OS makes this adoption. Obviously, other markets have adopted it very strongly. But we have all the functionality in place. And as people get more and more comfortable using it, especially in the U.S., I imagine we'll see more. But I do think it's a broader function of how fast it is versus other technologies. It's certainly competing with NFC as well, which is pretty fast. But we want to make sure that a seller and an individual using Cash App has every available tool to them so that they can meet their customers wherever they happen to be. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- And the final question is from the line of Bryan Keane with Deutsche Bank. -------------------------------------------------------------------------------- Bryan Connell Keane, Deutsche Bank AG, Research Division - Research Analyst [47] -------------------------------------------------------------------------------- Congrats on the results. I just wanted to ask or just follow up and ask about further penetrating inside of Cash Card and Direct Deposit. What are some of the things you can do to help drive that penetration even higher? I know Cash Card's at 25% today, but it feels like there's some room to push that higher. I think you mentioned maybe Boost and some other things, and maybe that's part of the spend next year to get that adoption up. -------------------------------------------------------------------------------- Amrita Ahuja, Square, Inc. - CFO & Treasurer [48] -------------------------------------------------------------------------------- Maybe I can start off on this one. I think there's a couple of different ways that we can approach driving Cash Card, and you mentioned Direct Deposit, you mentioned Boost. We view these products as working together as an ecosystem. And it's part of our work to surface these products in a straightforward and frictionless way to our customers. With respect to Direct Deposit, we have seen steady month-over-month growth in the number of customers depositing their recurring paychecks, which continued into the third quarter. We know that Direct Deposit customers typically pool more funds. They have pooled more funds in the Cash App, they stored higher balances. They've adopted more products, including Cash Card, where they typically spend multiples more than other Cash Card actives do, all of which has driven monetization and lifetime value for that Direct Deposit customer. So we do see strong correlation of these products driving usage into other products, and in this example, Direct Deposit into Cash Card. So we continue to focus on developing the features around both products and the broader ecosystem together. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- And I'd now like to turn the call back to the company for closing remarks. -------------------------------------------------------------------------------- Jason Lee, Square, Inc. - Head of IR [50] -------------------------------------------------------------------------------- Thank you, everyone, for joining our call. I would like to remind everyone that we will be hosting our fourth quarter 2020 earnings call on February 23, 2021. Thanks again for participating today. -------------------------------------------------------------------------------- Operator [51] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for participating in today's program. This concludes today's program. You may all disconnect. .