Block warns of investment slowdown

Block shrugged off the crypto meltdown with better-than-expected Q3 results but is not immune to the tech slowdown and announced that 2022 investment would be $519m less than originally planned. There are more cuts to come. 

Heading into 2023, Amrita Ahuja, CFO said “We’re focused on operating more efficiently, and we expect to slow our pace of expense growth… we expect to significantly moderate our pace of hiring … we intend on pulling back on lower ROI, more experimental areas, including brand and awareness spend across both our Square and Cash App ecosystems.”

The company is now genuinely a business of two halves. Cash App, a wallet and financial ecosystem, has proved very popular in the US and is generating as much profit as the original Square merchant business. 

Block sees After Pay (the Australian BNPL provider acquired for $29bn) as the bridge between the consumer facing Cash App and the merchant-facing Square. Connecting the ecosystems will be complicated and management admits it is “early in our evolution of Cash App as a shopping destination…. This is a multi-year journey.” There are signs that Jack Dorsey could build the super-app that Elon Musk has been dreaming about but After Pay’s financial performance has been modest so far – GAAP revenue up 6% and gross profit down 3% in Q3. Block will stop breaking out BNPL financials after the anniversary of the purchase which might be a wise move.

At Square, gross payment volume (GPV) was up 20% to $50bn, US growth was 17% but the emerging international business grew at 40% or 55% at constant currency. This indicates that international payment volume was c.$5bn in Q3 or around 10% of total. Amrita Ahuja, CFO said “Australia and Canada remain strong while we saw a macro related slowdown in the UK.” The UK comment is consistent with feedback from other processors including FIS. 

Profit from international operations grew to $121m, up 40% excluding the maiden contribution from After Pay.

Recognising that the rest of the world is not like the US, Square will now focus “on improving product parity in both new and existing markets.” For example, it will now process QR payments in Japan (PayPay). It has launched After Pay (called Clear Pay) in the UK at a very chunky merchant fee of 6% plus 30p per transaction. 

While many competitors are focused solely on partnering with POS software vendors, Square has written its own products for three vertical markets – retail, restaurants and appointments. Profit from these solutions was up 45% in Q3 compared to a year earlier. CEO Jack Dorsey said Square’s freemium model “gives a more accessible offering to sellers has improved our top of funnel and provided a strong path to monetization.”

Square is one of the first partners of Apple to launch Tap to Pay (softpos) on iPhones. This eliminates the need for a payment terminal although as a Square Reader is just $49, it’s only the very smallest business that will notice the cost saving. No data was disclosed about Tap to Pay’s performance.

As its business matures, Square is steadily moving upmarket. Merchants processing more than $500K annually now account for 40% of volume with an annual growth rate of 45%. Dorsey puts this down to Square’s developer platform “which plays a significant role in allowing us to scale our ecosystem” and allows it to integrate processing with 3rd party POS software vendors. Dorsey highlighted an auto dealership in Colorado with 12 locations which used Square’s Terminal API and went live with new locations in 2 hours compared with six days for its previous supplier.

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