Block (Minutes): Expectation: 1Q will be the low point of growth, and will gradually improve thereafter

The following is the minutes of the earnings call for $Block(XYZ.US) for Q4 2024. For the earnings interpretation, please refer to Block: Performance Guidance Double Miss, No Highlights!

1. Core Financial Information Review

2025 Financial Guidance: Gross profit is expected to grow at least 15% year-on-year, targeting $10.22 billion, accounting for an additional 50 basis points of unfavorable foreign exchange factors compared to the preliminary guidance in November; Q1 2025 is expected to be the low point for gross profit growth and adjusted operating profit due to leap year effects and significant foreign exchange impacts.

For the full year 2025, adjusted operating profit is projected to be $2.1 billion, with a profit margin of approximately 21%, an increase of 240 basis points year-on-year; while maintaining cost efficiency, spending on Square and Cash App is expected to grow by 20% year-on-year; the number of employees will remain below the cap of 12,000.

2. Detailed Content of the Earnings Call

2.1 Key Information from Executive Statements

In the fourth quarter, Square's Gross Payment Volume (GPV) grew by 10% year-on-year, with improvements in same-store sales and customer retention rates. The year-on-year growth rate in the U.S. region increased by 200 basis points, reaching 6.9%. In December, the number of active users for Cash App's paycheck deposit reached 2.5 million, a year-on-year increase of 25%, with stronger growth momentum in the second half of the year.

Technology investments: AI automation, open-source innovation, Bitcoin infrastructure.

With the expansion of the borrowing feature (Cash App Borrow) in Cash App, the launch and promotion of the Afterpay feature on Cash App Card, and increased marketing investments, we expect Cash App to achieve more significant growth acceleration. The Cash Card has provided more value to customers over the years by improving product turnover and successfully layering new growth curves on existing products, continuously achieving strong gross profit growth.

We will continue to invest resources in partnerships and on-site sales strategies, expecting these initiatives to contribute more to growth compared to 2024. Last year, our platform investments in customer onboarding, order processing, and a single application are expected to continue driving the development of Square's business this year

2.2 Q&A

Q: Besides data and performance guidance, what other evidence do you focus on to measure the execution progress for 2025? How is this year different from the past few years from an execution perspective?

A: In 2025, the company's goal is to double the growth rate, which is largely related to the company's structural adjustments. Most of last year was spent on the company's reconfiguration and organization to prepare for rapid growth this year. The biggest evidence is the speed of development, namely the speed at which the company is acting, launching products, and whether it can quickly see impacts and make changes. For example, the project codenamed "Goose," which is an AI assistant for engineers, was developed and launched by a team of fewer than 10 people within a few months, and now many developers are building extensions for it. This indicates that the company has made foundational progress in collaboration with many AI companies and is expected to take a leading position in some areas.

Additionally, the company has become clearer and more outstanding in market promotion, especially in the Square business, and the same goes for Cash App. The company has reconsidered the way Square products are released, making the product roadmap more public, and allowing sellers more time and information to make decisions.

For the first time, the company has a prioritized roadmap covering all product services and business areas, with each task having a directly responsible person, which enhances accountability and provides a clearer understanding of internal investments, experiments, accelerations, and improvements, as well as clarifying projects that need to be stopped and resources reallocated. This will help improve product development speed and better adapt to market and customer needs.

For the two most mature businesses, Square focuses on the accelerated growth of Gross Payment Volume (GPV), while Cash App focuses on the growth of active users for paycheck deposits and broader user engagement with products across platforms. From an investment framework perspective, the company aims to become a "Rule of 40" company by 2026 and believes it can reach the corresponding operational level by the end of this year while achieving positive retention of customers within each ecosystem.

Q: What do the growth factors for Square GPV in 2025 mean, and what does the exit growth rate of GPV within the seller ecosystem at the end of 2025 signify?

A: In the fourth quarter of 2024, Square GPV grew by 10% year-on-year, with the U.S. market growing by 6.9%, both improving compared to the third quarter. The accelerated growth in the fourth quarter was primarily driven by same-store growth and improved seller retention rates, especially in the key verticals of food and beverage and retail. Assuming a stable macro environment, GPV is expected to accelerate from current levels in 2025, thanks to product and marketing initiatives that have been advancing over the past few quarters. Customer acquisition is expected to significantly improve throughout the year.

From the first quarter to the fourth quarter, there were some disruptive factors in the first quarter. After excluding fixed currency and leap year factors, Square GPV growth in the first quarter is expected to be in the high single digits, increasing to low double digits by year-end. The core potential growth level is expected to be roughly in line with the fourth quarter. In terms of customer acquisition and retention, **marketing expenditures have significantly increased over the past two quarters, with high early returns on investment, and in 2025, the company will continue to invest in sales, marketing, and partnerships to drive new seller acquisition ** The coordination of strategies in these three areas is better than ever. Currently, the retention rate is relatively high, and further improvements are expected through account management and product investment. For example, the Kiosk product is expected to increase wallet share, and more products will be launched in 2025 to drive important retention metrics.

Q: Discuss the gap between GPV growth and gross profit growth, and the expected composition of gross profit growth for the year

A: In the fourth quarter, there was an overall gross profit growth of 12%, with the banking business (Square banking) growing by 13%. In the fourth quarter of 2023, the banking business products achieved a growth of 28% due to a high increase in loan volume, so the comparison base for the banking business in the fourth quarter is relatively high.

In the first quarter of 2025, there are some special adverse factors. The leap year is expected to have an adverse impact of about 1 percentage point on the gross profit growth of Square and Cash App, and foreign exchange factors will additionally bring about 1 percentage point of adverse impact on Square's gross profit growth. Additionally, Square Banking grew by 36% in the first quarter of 2024, which makes this year's first-quarter comparison base relatively high;

For Cash App, due to the changes in Bitcoin pricing, the base in the first quarter of last year was also relatively high. For Square, the trend of gross profit growth in 2025 is expected to closely align with the GPV trend, and with market promotion investments and new products gaining momentum throughout the year, it is expected that gross profit will accelerate from the level of the first quarter.

Marketing expenditures continue to grow supported by high investment returns, and sales and partner resources are also increasing, which is expected to accelerate new customer acquisition. For Cash App, the acceleration of growth throughout the year will be more pronounced, with the gross profit growth rate by the end of 2025 expected to be significantly higher than that of the first quarter. Cash App has unique growth opportunities in the Afterpay features on Borrow and Cash App Card, with Afterpay on Cash App Card launching this week. Cash App Card had 25 million monthly active users in December, making it a premium channel for launching such product features, with nearly $150 million in initial volume during the testing phase with just the Beta version.

The Borrow product has achieved significant scale growth in 2024, and this year it will expand to more states by improving underwriting, enhancing unit economics, and enabling more customers to access higher loan limits. It will also become a driver for payroll deposits through strengthened integration. Additionally, the Bitcoin mining project Proto is expected to have a positive impact on growth starting in the second half of 2025.

Q: The long-term vision and strategy of the open Bitcoin mining system Proto and its potential upside.

A: We believe this market has a large scale, and we can capture a significant market share, as this field is currently dominated by one company, and customers need more choices. We have conducted extensive research and communicated with many customers, discovering that they cannot find the reliability and customization they need in existing products, nor can they upgrade mining equipment or build their customized systems around the equipment Some customers only want a ready-to-use complete system, and they hope it is made in the USA. Our products are open-source and use a 3-nanometer process, which gives us a performance advantage and a clearer future development path. Therefore, we believe we are fully prepared. We are currently producing chips, which will be launched together with the complete system this year.

I believe this business will bring surprises this year. Due to the excellent performance and high configurability of our system, it will significantly change the market landscape. So in this field, we indeed see this as a huge opportunity, one that should have been seized long ago.

Q: Cash App MAUs, growth drivers (incremental marketing spending, new products, etc.).

A: In the long term, Cash App has significant growth opportunities. The recent monthly active users (MAUs) maintaining at 57 million is based on prudent decisions made under a bank-based strategy, with December MAUs growing 2% year-over-year. The company has invested in key areas such as compliance support and risk, driving more active users to complete identity verification, and allowing them to use more financial tools. From a product growth perspective, this has promoted user engagement and attachment rates for products like Cash App Card, Direct Deposit, and Borrow, improving unit economics and reducing risk losses in operating expenses. This year, the biggest driver of Cash App's gross profit growth is expected to be the inflow of funds and monetization rate (ARPU) per active user, with the number of active users growing relatively steadily year-over-year. In the long term, there are significant growth opportunities among digital-native user groups such as millennials and Generation Z, while integration with brands like Afterpay and Square can also promote growth through network effects.

Q: After integrating Afterpay functionality into Cash App Card, how does the potential of this business compare to previously launched innovative products? Can you provide some targets regarding user attachment rates, monetization contributions, etc.?

A: This is a huge opportunity, and the entire company is focused on it. The various features of Cash App and Cash App Card complement and promote each other. The company has a large number of Cash App Card customers, allowing for the rapid deployment of Afterpay functionality, providing users with new practical features, thereby driving the use of other Cash App features, deepening and expanding the Cash App ecosystem, and connecting with the Square ecosystem.

In terms of promotion, it will start on a small scale like the promotion of Cash App Borrow, with millions of monthly active users expected to qualify this year, gradually expanding based on user adoption and improvements in risk assessment models. Afterpay and Cash App Card are expected to increase gross profit, and this revenue will continue to grow throughout the year, contributing more to growth in the second half of the year. Cash App Borrow has also achieved good growth and appeal, with 43% of borrowing active users stating that loans help them pay bills, and 38% indicating it helps smooth cash flow during pay intervals The inflow of funds from active borrowing users is 13% higher than that from non-borrowing active users, with 6% more transaction occurrences. Excluding the profits generated from borrowing, the variable profit actively brought to the company is 10% higher. In 2024, about 25% of active users chose to borrow after receiving borrowing invitations, with this ratio being even higher among salary deposit active users, indicating that credit services are an important component based on banking strategy, with further expansion opportunities in the future.

Q: Gross profit guidance for each segment market (Q1/annual) and measures to promote GPV growth in 2025?

A: It is expected that the annual gross profit growth will show an upward trend, with Cash App's accelerated growth being more pronounced compared to Square, although the overall growth trend for the year will improve. The first quarter is the low point for annual gross profit growth and profitability. Sales and marketing, product launches, and the promotion of products like Borrow or Afterpay on Cash App Card are key factors driving more significant growth by the end of the year compared to the first quarter.

For Square, first, simplify the marketing strategy by changing teams to improve efficiency conducting more open collaborations, and adopting new marketing methods; second, integrate the five Square applications into one for easier user access and customization based on user information and usage; third, complete the transformation from the technology sector to make the platform more reliable and faster in development, shifting from a pure payment platform to an order and business platform; fourth, launch features such as bar tabs, QR code payment functions, and in-store accounts to strengthen the food and beverage business, and introduce instant payment functions for market delivery orders; fifth, advance the neighborhood network plan, using Cash App to attract more users to Square merchants and provide new tools for merchants, such as cashback for customers, building loyalty, and remote ordering, with the plan currently in the testing phase and continuing to expand this year.

Q: Neighborhood network strategy—scale, investment, and timing.

A: The company is the only one with a business model serving both buyers and sellers and in the past, it failed to fully leverage this opportunity due to insufficient scale on the consumer side. Now, Cash App has sufficient scale. The neighborhood network can address issues for sellers regarding pickup, reservations, and orders, providing new tools to attract Cash App users and help sellers retain customers. The main construction work focuses on establishing the right connections, emphasizing converting existing Square customers into online customers, which benefits all parties and makes the neighborhood network more feasible.

In terms of timing, testing is currently underway in several cities, ensuring a good experience before expansion, to achieve self-service, allowing sellers to start their business and gain new traffic with one click. More results will be showcased from early to late this year. Regarding investment, significant investments have been made across ecosystems, focusing on strategic integration to support the collaboration of the two ecosystems, such as forming a field sales team in Square, prioritizing cities with high Cash App user density and strong collaboration strategies, like Atlanta, to promote ecosystem connectivity, not merely increasing investment but adopting a coordinated approach and strategy for deploying investments

Q: Feedback from suppliers on the preliminary testing of the Square for Restaurant point of sale experience.

A: The company received very positive feedback. The features built from the transition from a payment platform to a business platform, such as bar tabs, are functioning well, as the company has created features that previously could only be found with competitors in the food and beverage sales sector. The company has been able to close these gaps and also bring people into the broader Square ecosystem, including all of the company's banking services.

Square continues to excel in product offerings, as the high quality of products is more suitable for self-service, allowing business owners and their employees to complete necessary tasks without seeking support or assistance from sales or executive account representatives, which is the advantage of a technology-driven approach. The company will continue to advance, providing better tools to automate some mechanical tasks in business, allowing them to focus on customers and business expansion.

Currently, the company has established a stronger feedback loop between customer support, sales, product teams, and development teams, enabling quicker actions based on feedback, rapid changes, learning from experiments, and deploying technology in ways that meet customer needs and stay ahead of competitors. Additionally, after the transition from a payment platform to an order platform, the speed of product launches has accelerated, with features such as self-service kiosks, bar bills, QR code payments, account receivables, item splitting, and instant payments launched in the past six months, and more features targeting the restaurant vertical will be introduced this year. Through on-site sales demonstrations, people have seen the broader product offerings Square provides for quick-service and full-service restaurants, and the results of collaborations with some large merchants are beginning to show, but there is still much work to be done, and the product launch speed is expected to further accelerate after the platform transition.

Q: How did Afterpay perform this quarter, and what are the profit prospects for Afterpay in cash cards as it scales?

A: Regarding profitability, the company can determine Afterpay's user eligibility and growth pace on the Cash App Card based on metrics such as risk loss rates and adoption rates. During the testing phase, the company saw high attachment rates and good risk loss rates, feeling excited about the compound growth for the year, and can review metrics daily and adjust based on performance.

In the fourth quarter, which is seasonally important, Afterpay's total gross merchandise volume (GMV) grew by 19% year-on-year, and gross profit increased by 23%. The growth was primarily driven by core payment and lending businesses, similar to growth in previous quarters, with acceleration in the second half of the year, especially in the fourth quarter, due to the company's expansion of gift card applicability to the UK globally. There are significant growth opportunities in the "buy now, pay later" business. This week, the company launched a combined service of Afterpay with the Cash App Card, with global revenue retention rates for the core "buy now, pay later" business increasing year-on-year, particularly with good trends in the enterprise sector. By 2025, many enterprise merchants are signing on in the company's transaction pipeline to expand the value proposition. In terms of gift cards, the company expanded the applicability of more merchants in the UK at the end of last year and in the US in early 2025, while maintaining loss rates for these products within historical ranges In the fourth quarter, consumer accounts receivable losses accounted for 0.97% of GMV, below the target of 1%. The company will maintain a cautious and responsible approach while promoting.

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