Earnings Call Transcript - XYZ Q2 2023

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Block Second Quarter 2023 Earnings Conference Call. I would now like to turn the call over to your host, Nikhil Dixit, Head of Investor Relations. Please go ahead.

Nikhil Dixit, Head of Investor Relations

Hi, everyone. Thanks for joining our second quarter 2023 earnings call. We have Jack and Amrita with us today. We will 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. All statements other than statements of historical fact could be deemed to be forward-looking. These forward-looking statements include discussions of our outlook and guidance, as well as our long-term targets and goals, and we may decide to shift our priorities or move away from these targets and goals at any time. These statements are subject to risks and uncertainties. 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 our results to differ. Also, note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements except as required by law. During this call, we will provide preliminary estimates of gross profit growth, GPV, and GMV performance for the month of July. These represent our current estimates for July performance as we have not yet finalized our financial statements for the month of July, and our monthly results are not subject to interim review by our auditors. As a result, actual July results may differ from these estimates and may not be reflective of performance for the full third quarter. Moreover, this financial information has been prepared solely on the basis of currently available information and is the responsibility of management. This preliminary financial information has not been reviewed or audited by our independent public accounting firm. This preliminary financial information is not a comprehensive statement of our financial results for July or the third quarter. Within these remarks, we will also discuss metrics related to our investment framework, including Rule of 40. With Rule of 40, we are evaluating the sum of our gross profit growth and adjusted operating income margins. 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, historical financial information spreadsheet, and Investor Day materials on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety is being audio webcast on our Investor Relations website. An audio replay of this call and the transcript for Jack and Amrita's opening remarks will be available on our website shortly. With that, I would like to turn it over to Jack.

Jack Dorsey, CEO

Thank you for joining us today. I'll spend my time today highlighting the progress we've made on two themes: first, our investment framework, and second, our ecosystem of ecosystems model. You'll find everything else from the quarter in the shareholder letter we posted an hour ago. As we shared earlier this year, we define our investment framework as Block, and each ecosystem must show a believable path to gross profit retention of over 100% and Rule of 40 on adjusted operating income. Today, I wanted to share our progress towards this target and demonstrate how our investment framework forces us to make trade-offs and guides our decision-making across the company. Leaders across our company are now looking at the true full cost of their businesses, inclusive of share-based compensation. This has led us to pull back on our pace of hiring to be more targeted in hiring for critical roles and to focus more on performance management. For sales and marketing, we are focused on efficiency to drive acquisition while decreasing spend. We've pulled back on brand spends and more experimental channels across our ecosystems in favor of channels with more proven returns. This past quarter, we also decided to wind down operations in certain markets, including Cash App's diverse brands in the EU and our Buy Now, Pay Later platform, Clearpay in Spain, France, and Italy. These required significant investment, and the markets have not seen the growth and profitability we had expected over the past several years. We see an opportunity to shift these resources towards strategic areas that have a higher potential return on investment, and we continue to drive towards our goal. We may identify other areas where we aren't seeing the expected and necessary returns. We also continue to improve our cost structure for each of the ecosystems by identifying opportunities to expand our structural margins. These include the investments we make in technologies like automation and machine learning to manage risk, and finding ways to optimize our partnerships. As a result of our investment discipline, we are increasing our profitability expectations for this year, which Amrita will speak about. We'll continue to share updates with you as we make progress towards our target. As a company, our strength and resilience come from our diversified ecosystems, each serving different audiences and the connections we create between them. There are some notable examples of this work in the second quarter. In June, we turned on Cash App Pay as a payment method for Square invoices, giving customers the ability to pay outstanding invoices directly from their Cash App balance. In the second quarter, we launched Cash App Pay with several well-known Afterpay sellers, expanding the connection between Cash App and our Buy Now, Pay Later platform, and also recently launched strategic partnerships with payment providers Stripe, Adyen, and PayNearMe, which is an important step in reaching a wider range of merchants. We started enabling Square Payroll employees to file taxes for free by using automated W-2 import directly in Cash App Taxes. After receiving a notification from Square Payroll, employees simply log into Cash App Taxes, securely import their W-2, and complete and submit their tax forms. Earlier this year, we shared plans for the public beta testing of our Bitcoin Wallet, Bitkey. In June, we announced our first two global partners, Coinbase and Cash App, to allow customers to buy and immediately transfer Bitcoin from those custodial platforms into Bitkey's self-custody wallet. I'll now pass it to Amrita, who will provide more details on our financials.

Amrita Ahuja, CFO

Thanks, Jack. There are three topics I'd like to cover. First, an overview of our strong second-quarter results across growth and profitability. Second, trends we're seeing across our business in July. And third, a look at our investment discipline and profit expectations for the remainder of the year. In the second quarter, we had strong growth at scale with gross profit of $1.87 billion, up 27% year-over-year. Our strong profitability this quarter is a demonstration of our ability to drive leverage and operating efficiency in our business. Adjusted EBITDA was $384 million, more than two times year-over-year. Adjusted operating income, which, as a reminder, includes expenses related to stock-based compensation and depreciation, was $25 million compared to a loss of $103 million a year ago. Let's get into Square and Cash App. Square generated $888 million in gross profit, up 18% year-over-year. Looking at some of the drivers, gross profit from our vertical point-of-sale products was up 37% year-over-year, with each of our restaurants, retail, and appointments products delivering gross profit of more than $100 million on an annualized basis during the quarter. Square GPV was up 12% year-over-year, looking at the components of growth across retention, churn, and acquisition. GPV per existing seller, which effectively measures same-store growth, has stepped down since the third quarter of 2022 and has been the primary driver of the moderation in GPV growth since then. We achieved positive growth in acquisition and saw relative stability in churn of existing sellers compared to historical levels. We're seeing strength in our Square banking products, which totaled $167 million in gross profit during the quarter, an increase of 24% year-over-year. Banking products represented 19% of Square gross profit excluding PPP, up from 17% in the prior year. The four biggest drivers of Square banking during the quarter were Instant Transfer, Square Debit Card, Square Savings, and Square Loans. We saw benefits from raising pricing on Instant Transfer earlier this year, from recent launches of our banking products outside the U.S., and from interest on Square Savings balances. Lastly, for Square, growing up-market has remained strong with gross profit from mid-market sellers up 20% year-over-year. We believe the total addressable market for the larger sellers segment remains large and highly fragmented, and our recent shift in go-to-market efforts is intended to drive further growth upmarket. Cash App generated $968 million in gross profit, an increase of 37% year-over-year. Each component of our inflows framework, Actives, Inflows per Transacting Active, and Monetization Rate, grew on a year-over-year basis. During the month of June, we reached 54 million monthly transacting actives, up 15% year-over-year. We've continued to see significantly higher attention for actives with larger network sizes. During the quarter, those with a network of four or more represented more than half of Cash App quarterly transacting actives. Peer-to-peer functionality has allowed us to scale our network rapidly and has driven engagement. In the second quarter, peer-to-peer transactions per active reached an all-time quarterly high, which helped drive $53 billion in peer-to-peer volume across Cash App during the second quarter, an increase of 18% year-over-year. Inflows per Transacting Active averaged $1,134 in the second quarter, up 8% year-over-year and relatively stable compared to the first quarter, which typically has a seasonal benefit from tax refunds. We believe there is significant runway for growth in Inflows per Transacting Active over time through increased product adoption and growing share of wallet. This tax season, more than one-third of Cash App Taxes actives chose to receive their refund directly into Cash App, a meaningful increase year-over-year, driving new actives to direct deposit. Product adoption has been especially strong for our financial services products, both Cash App Card and direct deposit, which experienced strong growth in actives and volumes. The monetization rate, which excludes gross profit contributions from our BNPL platform, was 1.44%. Monetization was up 16 basis points year-over-year, driven primarily by pricing changes over the past year, and up 3 basis points quarter-over-quarter, driven primarily by the timing of strong first-quarter inflows during the tax season. Lastly, our BNPL platform contributed $84 million of gross profit to each of Square and Cash App in the second quarter. GMV from our BNPL platform was $6.4 billion in the second quarter, an increase of 22% year-over-year. Losses on consumer receivables were 1.01% of GMV, relatively consistent with the prior year. Next, an update on July trends. For the month of July, we expect total gross profit growth of 21% year-over-year, which we would orient you to for the third quarter and the remainder of 2023. Looking at each ecosystem, for the month of July, we expect Square gross profit to grow 15% year-over-year, which we expect to be relatively consistent through the third quarter. The moderation in gross profit growth from the second quarter is primarily due to transaction margin compression as we lapse certain benefits from more favorable interchange economics last year. Square GPV is expected to be up 12% year-over-year, consistent with the second quarter as we've seen stability in GPV growth over the past three months from May through July. For the fourth quarter, we expect gross profit and GPV growth to improve slightly compared to the third quarter as Square benefits from more favorable comparisons. For Cash App, we expect gross profit to grow 27% year-over-year in July, and similar to Square, we expect it to be relatively consistent through the third quarter. In 2023, we continue to expect growth on a year-over-year basis from monthly Transacting Actives, Inflows per active, and Monetization Rate. We expect Cash App's monetization rate in the back half of the year to be more consistent with the second quarter, and we expect gross profit to grow more in line with the overall inflows as a result. Given the focus on efficiency, the wind down of Verse will have an impact on monthly actives going forward, although we do not expect an impact on inflows or gross profit. For the fourth quarter, we expect a slight moderation in Cash App's gross profit growth, driven by stabilization in Cash App's monetization rate, and as we lapse stronger growth in the prior year period. For our BNPL platform, we expect year-over-year GMV growth in July to be similar to the second quarter's 22%, with GMV growing faster than gross profit due to regional mix. Turning to our progress against Rule of 40 and our profit expectations for the remainder of the year. Our investment framework sets up an ambitious goal, and we're focused on progressing towards it over the long term. We'll continue to share updates with you and hold ourselves accountable. Expanding on what Jack touched on, we've worked to deliver efficiencies through the first half of the year. On hiring, we drove leverage compared to our expectations entering the year by encouraging efficiencies among existing teams and prioritizing hiring in more critical areas. We expect our headcount growth in 2023 to be below the 10% target set out earlier this year. With sales and marketing, we've pulled back on lower ROI channels to increase our efficiency, while Cash App's variable sales and marketing expenses, namely peer-to-peer and Cash App Card issuance costs, were up year-over-year. Overall, company customer acquisition spend was down year-over-year, driving leverage across Square and Cash App. Despite this pull back, we saw healthy acquisition across each ecosystem as we shifted our mix of spend. And looking at corporate overhead spend, we began to identify cost savings opportunities by downsizing our real estate footprint across some of our West Coast office locations. Given some of these items, on a GAAP basis, operating loss was $132 million in the second quarter, which includes the impact of acquisition-related amortization expenses, as well as restructuring expenses for the wind down of Verse and Clearpay in certain markets, and write-downs for certain real estate facilities among other items. We expect to find further leverage opportunities in these and other overhead expenses over time. Moving to our full-year 2023 profit guidance. As we have progressed further into the year, we have better line of sight into our planned expenses, and our updated guidance today reflects this. We're increasing our expectations for profitability in 2023 and now expect to deliver adjusted EBITDA of $1.5 billion and adjusted operating income of $25 million for the full-year 2023. We expect to achieve profitability on an adjusted operating income basis for the year, which is inclusive of share-based compensation expenses. We continue to expect year-over-year margin expansion on both an adjusted EBITDA and adjusted operating income basis. Our updated full-year guidance represents a step-up of $140 million for each figure compared to our prior guidance. This represents both the gross profit momentum in our business during the second quarter and the focus on expense discipline we delivered in the first half of the year, which we expect to continue to drive in the second half of the year. Finally, touching on the third quarter, we expect third quarter non-GAAP operating expenses of $1.55 billion, and we expect share-based compensation to increase by approximately $25 million relative to the second quarter. As Jack mentioned, share-based compensation remains an area on which we are focused and expect to drive greater leverage over time. We're excited about the progress we've made towards our investment framework and Rule of 40 this quarter and are eager to continue to work. With that, I'll now turn it back to the operator to start the Q&A portion of the call.

Operator, Operator

Thank you. We'll take our first question from Tien-Tsin Huang at JP Morgan.

Tien-Tsin Huang, Analyst

Hey, thanks so much for taking my question. So, given your July month update tracking a little bit slower than the second quarter and also your profit update which you raised, just love to hear your updated thoughts on operating leverage. I know I asked that quite a bit, but just operating leverage here in the second half versus the first half. Is operating leverage going to be driven more by the top-line or by expense focus that you also talked about across the two ecosystems? Thanks.

Amrita Ahuja, CFO

Thank you for the questions, Tien-Tsin. We are pleased with our strong second quarter results in both revenue and profitability, which demonstrate our ability to manage operating expenses effectively while continuing to grow the business. We anticipate maintaining our focus on expenses in the latter half of the year, which has enabled us to increase our full-year profitability targets by $140 million. This adjustment reflects not only our strong second quarter performance but also an optimistic outlook for the rest of the year. In July, we expect a gross profit growth of 21% year-over-year, and we encourage you to consider this from both a third-quarter and overall 2023 viewpoint to observe stability in gross profits at the Block level going forward. We’ve noted some impacts related to pricing dynamics within Cash App and interchange economics within Square. Regarding operating leverage, we identify several areas for improvement, not only from our first half accomplishments but also looking into the future. Specifically, I want to highlight three key areas for leveraging our expenses: first, sales and marketing; second, our approach to hiring and headcount; and third, corporate overhead costs. In sales and marketing, we are concentrating on optimizing our spending, and we have reduced customer acquisition expenses year-over-year while still achieving strong growth in new customers for both Square and Cash App by focusing on proven channels. In terms of hiring, we have adopted a disciplined strategy for team expansion, achieving better leverage than we originally anticipated in the first half and promoting efficiency within our existing teams. We expect a gradual slowing in hiring pace, which will enhance leverage and reduce stock-based compensation over time. Regarding overhead, we made some real estate adjustments on the West Coast resulting in modest savings, and we plan to seek further leverage in significant spending areas such as software, data usage, facility costs, professional fees, travel expenses, and other discretionary expenditures. Ultimately, our investment strategy, aiming for the Rule of 40, will guide us in making these crucial trade-offs as we continue to invest for long-term profitable growth in the second half of this year and moving into 2024 and beyond, all while practicing prudence and discipline in managing our operating expenses.

Darrin Peller, Analyst

Hey, guys, this is Darrin Peller from Wolfe. You had 12% GPV growth into July, I think you just said, Amrita, right? And then, in comparison that was around 6% to 7% growth, so obviously, your share is still gaining and holding up versus the industry. If you could just touch on what's working well there? And then also maybe expand on the verticalization efforts in the segment? While we're on that topic though, I mean, the verticalization efforts obviously are going to come with some investments. So if you could just remind us your view on profitability levels beyond 2023, and I know the Rule of 20 there, but just without a time frame, it's hard to really handicap how to think about progress in 2024 and 2025?

Amrita Ahuja, CFO

Hey, thanks for the question, Darrin. So, I think what I'll do is I'll first hit what we're seeing in terms of Square GPV in the second quarter and into July, and then we'll hit upon the verticalization efforts for the Square business. So what we're seeing in terms of July trends was fairly consistent with what we've seen really through May. We've seen stability in GPV trends from May through July, with July coming in at that 12% year-over-year basis, consistent with the second quarter also at 12%. If you unpack that by vertical in the second quarter, food and drink TPV grew by 17% year-over-year. Retail GPV grew by 9% year-over-year. Services also by 9%. Services, of course, encompasses a number of sub-sectors, beauty, health and fitness, home and repair, and professional services. We have seen some moderation trends across the discretionary and non-discretionary verticals, which we have talked about since really that mid-Q4 timeframe, and that's really broad-based across a number of different verticals. From a geographic perspective, what we've seen is international markets continued to also see some of those macro-related headwinds, which were more pronounced in Australia in the second quarter, albeit with overall growth ex-BNPL, continuing to be at a much faster rate of growth in the overall base of the business at 35% year-over-year growth for those international markets in the second quarter. And again, from a month-to-month perspective, generally seen greater stability from May through July on those GPV trends for Square. Diving into your verticalization question now, which I think is a key question for us as we think about continuing to grow up-market, where we have seen outsized growth. From a gross profit perspective, up-market grew 20% year-over-year in the second quarter for us. This is a key area for us as we continue in our strategic focus on bringing larger sellers onto our platform and acquiring those sellers across our key verticals of restaurants, retail, and beauty. Within our sales team, our focus has been on providing our reps with the right tools, industry knowledge, and signals to prospect and to acquire sellers across those three verticals. Let's take inbound and outbound sales, within inbound, we began verticalizing our US inbound sales team last year. We completed that in April of this year, and since that completion, we've seen an improvement in gross profit added per account executive and in software attach rates, still early but encouraging trends there. Now for outbound, we finalized verticalizing our US outbound sales team in July, so just this past month. Our account executives have now completed their industry training programs, which enables them to really deepen their knowledge within the assigned vertical that they've got. And we anticipate our account execs will continue to ramp through Q3 and hopefully be fully ramped into Q4. With those changes, our goal is to increase gross profit account added per account exec and software attach rates as we've seen with the inbound sales team, and as we see those signals and gain confidence there on our processes and results, we'll look to continue to scale the outbound sales team over time. Ultimately, we will be iterating on this in the coming quarters and years as this is a long-term initiative for us to continue to go up-market and with our vertical points of sale and to drive those sustained results over time. We'd expect to see these results paying off and driving growth into 2024 and expect our overall go-to-market spend to target that three times ROI over four years.

Tim Chiodo, Analyst

Great. Thank you for taking the question. I want to talk about seller sales and marketing or Square sales and marketing a little bit. So this year's marketing expense, you mentioned, it's benefiting from some of the annualization of the pullback that you had on brand awareness, and some of the experimental stuff, so a shift towards more efficient spends. But sometimes there is a concern from investors that, because the dollar amount is lower, that the size and health of the new cohorts coming in might actually be a little bit smaller, but we gather that the payback periods have really come in more than the four to five range, and they had expanded to maybe six to seven at one point last year. So with all that context, maybe you could talk about the health and the size of the cohort that you're bringing in now for Square.

Amrita Ahuja, CFO

Sure, I’m happy to address that. Thanks for the question, Tim. Let me begin with the trends regarding payback periods and then we can explore what we are experiencing in the first half of the year in terms of spending and customer acquisition. For our 2022 cohort, we’re observing trends toward a payback period of six to seven quarters, which is slightly above our expectations as these cohorts have matured. Square's sales and marketing expenses increased by approximately 20% year-over-year in 2022 compared to 2021. Looking at the 2023 cohort, we are aiming for around a five-quarter payback, as we anticipate this will improve from last year and have a more significant impact on growth in 2024. Our longer-term goal for Square's go-to-market investments remains a three times return on investment over four years. In the first half of this year, we have reduced our sales and marketing spend. For this period, Square's sales and marketing expenditures are down 6% year-over-year, and we expect to continue this reduction for the rest of the year. We are concentrating on optimizing our investment mix across channels and enhancing efficiency, which has led to significant cutbacks in our brand and awareness channels as well as sales, and we have notably reduced team sizes while reorganizing and improving our data and incentives for the sales team. Despite these cutbacks, we have experienced strong growth in customer acquisition over the past two quarters, with year-over-year acquisition growth showing improvement in the second quarter compared to the first quarter, even with sales and marketing down slightly year-over-year in the second quarter and down 6% for the first half of the year.

Lisa Ellis, Analyst

Hey, good afternoon, thanks for taking my question. I was hoping to drill in a little bit on the initiatives you have underway to connect Block’s ecosystems. In the shareholder letter and prepared remarks, you called out a few different ones with Cash App Pay also I saw 15% growth in Cash for Business, and a couple of other highlights in there. Can you just kind of take a step back and update us on some of your current overall strategy for connecting ecosystems and maybe some data points on the benefits you see in the organization, the kind of network effects, as well as maybe some of the profitability that you see? Thank you.

Jack Dorsey, CEO

Yes, I can start with that. So, as we've talked about, we do believe our power and especially resilience in our business is the fact we have multiple different ecosystems serving different audiences, and I've been spending a lot of my time and focus on looking for opportunities with the teams to connect them. Some of the ones we mentioned earlier on the remarks are mostly between Square and Cash App, so Payroll and Cash App Taxes was a big one. Cash App and Square through Afterpay is the biggest part of my focus right now, and I'm really excited about the strategy. We continue to refine it and look for opportunities to build a really compelling experience within the Cash App that builds network effects and increases our network effects within Cash App, but also enables us to have an app that people are checking every day, because there's something interesting, and especially as we balance that with Square and our network of sellers, like it's even more unique and more compelling. Cash App and our Bitcoin hardware, specifically the Bitcoin Wallet, we announced a partnership in a launch. There will be a global first product. We will be launching in the most countries we've ever launched in to start. And we're constantly looking for other ones. There's a lot around Cash App Pay and Square, especially around local offers and local merchants, and we continue to find more and more connections. That doesn't speak to the future ones, which would be titled in looking at opportunities for Square, especially musicians looking forward to sell merchandise for ticketing, and TBD, we believe with its protocol will enable both Cash App and Square and even titled to move much faster and move much faster globally. So we're excited about that. So we have a mix of external products facing features that connect the two ecosystems and a lot of internal stuff as well. We're using more shared resources or shared learnings and can move much faster as an individual ecosystem because the work is already done by a peer ecosystem.

Ken Suchoski, Analyst

Hi, good afternoon. Thank you for the question. It's encouraging to see the strong growth in Square's international markets once again. I understand that Square recently mentioned many of its specialized software products are now available in some of its largest international markets. Could you discuss the opportunity for software penetration in these markets compared to the US, and how these specialized software products have contributed to maintaining the momentum of the international business in terms of GPV growth and gross profit growth?

Jack Dorsey, CEO

Yes, thanks for the question. I'll start. So our priority with Square is to achieve parity across each of our markets, meaning that we launch all our features in any one particular market globally. There are various challenges to doing that, Square Loans being an example, different regulatory environments, that just increases the workload. And every new market that we take on, it does have some cost to us doing more features for the general product, so we're always avoiding those costs and making sure that we're picking the right markets at the right time. We made a lot of strides in Q2 with the launch of 30 products across our global markets for Square. One of the most notable was Tap to Pay on Android, and that is available to sellers in the US, Australia, the UK, Ireland, France, and Spain. This is a big deal as TAP becomes the dominant way to pay. More and more people are using their phones, especially outside of the United States and Europe and Australia. And then, we also launched our second-generation Square Reader in the UK, Canada, Australia, Japan, France, Ireland, and Spain, and this improves the battery life, stronger connection, NFC performance, and it allows sellers around the world to take secure payments from just about anywhere. It's extremely affordable. Australia continues to be very strong in the 12 months ending in June; almost half of Square's gross profit in Australia came from sellers that used monetized products, which is up from less than one-third two years ago. And we've seen our Square banking products contribute to some of the strong gross profit growth we've seen in international markets as well. So we continue to push. Going international has to be more deliberate and therefore a little bit slower. We've learned a lot as we go into every market, and each market that we open, we can move much faster and ideally grow faster as well.

Amrita Ahuja, CFO

And I'd just add, Ken, that as you noted, this is a big opportunity for us. We believe that in these markets outside the US that we're in, we're less than 1% penetrated in the opportunity with a long runway for growth. So, as I noted, our gross profit growth for Square, excluding the BNPL platform, in our markets outside the US was 35% year-over-year in the second quarter, now at about 11% of Square's total gross profit ex-BNPL with GPV up 26% year-over-year and 32% on a constant currency basis, and that really encompasses, as Jack was saying, the rollout of additional products across the full suite, whether it's payments, software, hardware, as well as banking products now more recently, where we're seeing strong traction and where we've got our work to continue to build upon this momentum.

Bryan Keane, Analyst

Hi, guys, thanks for taking the question. We were excited to see the 1 million Cash App Pay Active user base, just curious on the timeline for merchant distribution and acquirer expansion for Cash App Pay. And then maybe you can just go over the revenue model for Cash App Pay in particular? Thank you.

Jack Dorsey, CEO

Yes. So with Cash App Pay, our goal is to provide a lot more flexibility for customers. And as I mentioned in my opening remarks, we have expanded our distribution recently with partnerships with Stripe, Adyen, and PayNearMe, which allows us to reach a much broader range of merchants and also industries. We launched some additional Afterpay merchants in Q2, including Steve Madden and Fenty Beauty, and we still see significant room to grow the adoption of Cash App Pay, and we're actively pursuing a pipeline of new merchants. Afterpay certainly helps with that. During the second quarter, nearly $500 million in annualized volume was processed through Cash App Pay, and nearly 1 million Cash App Pay monthly actives as of June. So it allows us to reach customers beyond those that the Cash App Card is serving. We've seen really strong adoption amongst our younger audience, the Gen-Z demographic. So, we've seen promising results, and we're still looking for opportunities to make sure that we continue to see those and push it.

Amrita Ahuja, CFO

I want to emphasize that merchants are enthusiastic about integrating Cash App Pay due to access to our attractive customer base, which includes 54 million monthly active users as of June, who are highly engaged and averaged inflows of over $1,100 in the second quarter. By using Cash App Pay as a payment option, merchants can reach customers even if they haven't signed up for a Cash App Card, which is the main value proposition we're offering to these large merchants who are finding a good fit with Cash App Pay.

Harshita Rawat, Analyst

Hi, good afternoon. Can you expand upon your comments around headcount growth in the business? It's been very strong over these past few years. How are you seeing potential for efficiencies, for example, in your engineering teams with AI? And Amrita, I know you talked about the headcount growth for this year, but how should we think about headcount growth trajectory over the medium term? Thank you.

Jack Dorsey, CEO

I believe the most significant change has been our investment framework, which has made all teams, leaders, and managers more aware of the true cost of the business, including stock-based compensation. As a result, we have slowed our hiring and focused on bringing in stronger talent. We are also closely examining performance management. While there are always efficiencies we can pursue, we want to ensure that decisions are made by those running the teams, allowing for a more effective operation. Everyone is now considering the investment model to help us achieve our desired growth while minimizing costs. It's still early since we've just implemented this investment framework, but it appears to be effective and is now part of our organizational mindset.

Rayna Kumar, Analyst

Good evening. Thanks for taking my question. Could you talk a little bit about the next steps in the Afterpay integration and could you discuss more broadly what are the next things to look out for as you integrate Afterpay?

Jack Dorsey, CEO

Yes, as I mentioned, this is where much of my attention is currently directed. I meet with the team members every day to ensure we create an engaging and unique experience. Much of this effort will take place within Cash App and the Cash App Discover tab, which acts as a small magnifying glass in your interface. Our goal is to develop an appealing experience that encourages users to return daily to discover offers, deals, items, and nearby merchants. This will also contribute to advancing our ecosystem model, benefiting both the Square ecosystem and Cash App. Consequently, this is likely where you'll notice the most significant changes. A lot depends on our ability to prioritize these items, merchants, deals, and offers based on relevance, and we will utilize machine learning and deep learning to achieve this leveraging all the signals we receive. We believe this is where the ecosystems come together most effectively, leading to numerous opportunities in the future, so that's where I would focus.

Ramsey El-Assal, Analyst

Hi, thanks for taking my questions this evening. I wanted to ask you to dive in a little bit deeper on the move up-market and seller, and just kind of comment on how the larger retailers and merchants are utilizing Block services maybe differently than the smaller merchants. How does the value proposition sort of change, what's resonating, and then just what strategy you might use to sort of lean into this move up-market?

Jack Dorsey, CEO

In terms of focusing on specific verticals and attracting higher-end clients, our main approach is to have a more concentrated effort in these areas while maintaining flexibility. Unlike many of our competitors who focus on a single vertical, we are engaged with all three major ones in commerce. The reasons that businesses choose Square often include the need for a solution that serves both restaurant and retail elements, or service-based businesses like nail salons that also sell products. We are witnessing significant overlap among these verticals, and since Square operates as a single ecosystem, everything connects through our operational utilities. This makes it easy for clients to select Square and to add new features to their offerings, setting them apart from competitors. If I had to highlight one aspect, it would be the flexibility we provide, which extends to larger clients, those with legacy systems, or those requiring custom solutions. Our Square platform allows clients to hire their own developers, utilize our tools, and create a tailored system that delivers the customer experience they desire. This level of flexibility is critical and helps distinguish us in the market. It also enables us to operate more efficiently since we use the same developer platform internally and externally. Many of our interfaces are based on that platform, allowing us to prioritize user experience while ensuring that all developers have access to the same resources we do. This means that our larger merchants can create their own enhancements using the same foundational tools.

Amrita Ahuja, CFO

And I'll just add, Ramsey, that if you think about, to your question, how the larger sellers use our platform differently from smaller sellers, I think one simple way to answer that is, they use more of our platform than smaller sellers. And I think the last stat we shared in 2022, the mid-market sellers who adopted more of our products had 15 times greater attention than those who only adopted one. They generally adopt more products than smaller sellers. So that ability to do take on more jobs on behalf of that merger seller ultimately builds a more retentive relationship with them. As Jack mentioned, that comes through not only in our vertical software offerings, each of which is now running at an annualized gross profit growth rate of $100 million or more during the second quarter but also a developer platform which provides third-party integrations, so the sellers can build more customized solutions and applications across a number of different aspects, not just payments but orders, inventory, customers, et cetera. The growth that we're tracking on our vertical points of sale, 37% year-over-year in the second quarter, and gross profit growth from our developer tools, which also outpaced overall Square gross profit growth, a real key area for us to continue to be tracking here along with our go-to-market orientation around a greater verticalized orientation from a marketing and sales perspective. We see this as being key elements of our platform and our go-to-market approach that ultimately helps us attract larger sellers.

Trevor Williams, Analyst

Great. Thanks for taking the question. I wanted to ask on the SNS line within seller. The disclosure on Square banking was helpful to see this quarter, but if you could just give us kind of a snapshot of current stack rank of the biggest revenue contributors to that line today? And then, the second part to that would be on Payroll. Jack, you mentioned in your remarks some of the integration there with Cash App Taxes, but any broader update on Payroll and how you're thinking about the longer-term opportunity to cross-sell into the existing sellers base there? Thanks.

Amrita Ahuja, CFO

I think the first question was on subscription and services within Square and helping stack rank some of the largest Square products within that line. I would orient you, Trevor, to our Square banking disclosures, where Square banking contributed $167 million in gross profit in the second quarter, the four biggest areas there being Square Loans, Instant Transfer, Square Debit Card, and now our Square Savings product as well, which we're now recognizing interest benefits from as part of our gross profit as well. So those are kind of the four biggest products from a banking perspective that I'd orient you to and that are driving meaningful growth in our Square banking initiative and more broadly across SNS for Square. I think the second question, Trevor, you had was on Payroll. I think we continue to observe, especially as we expand our sales initiatives and enhance our relationships with larger sellers, that there is a significant opportunity to increase software attach, whether it's Payroll or any of our other 30-plus products within the Square ecosystem targeted at larger sellers. This is a fundamental part of our initiatives. As I mentioned, it's still early days, as we have only recently verticalized our inbound US sales team, but we are seeing an increase in software attach from that verticalization. We are also in the process of ramping up our outbound sales team and aim to promote this through products like Payroll and other offerings as we establish stronger connections with larger sellers.

Jason Kupferberg, Analyst

Hey, thanks, guys. Just can you quickly review what you said about Square gross profit and GPV growth for Q4? And then just on the Cash App side, I think the inflows per active were up 8% in Q2; do you expect that to stay pretty stable in the second half? Thanks.

Amrita Ahuja, CFO

Jason, I'm glad to address that. Let's begin with Square and explore some of the trends in gross payment volume. Generally, we assess Square's growth through three key areas: customer acquisition, churn, and same-store growth. In the second quarter, we observed year-over-year growth in acquisition, while churn remained stable, and we noted a moderation in same-store growth, specifically relating to gross payment volume per seller. Let me elaborate on each of these points. In terms of customer acquisition, both the first and second quarters showed year-over-year growth, with acquisition growth in the second quarter improving compared to the first. Regarding churn, since the third quarter of 2022, we have experienced relative stability year-over-year among existing sellers, without significant changes. As for same-store growth or gross payment volume per seller, we’ve identified a few factors contributing to the moderation. Firstly, it appears to be consumer-driven. Secondly, this trend spans across multiple verticals. Thirdly, we see a retention dynamic affecting gross payment volume per seller. Teams contributing most of the gross payment volume growth have remained consistent since the third quarter of last year. Our data on gross payment volume per seller aligns with broader third-party metrics as well. To clarify each element, processing volumes at existing sellers related to same-store growth were lower in the second quarter of 2023 compared to the levels seen in the third quarter of 2022. We have observed consistent trends since mid-November, indicating potential consumer-related issues, as spending per card and the number of unique cards used remain below levels recorded in October, while churn continues to be relatively stable. Ultimately, while we focus on managing the business for gross profit, understanding these gross payment volume trends helps illustrate our position. Since the third quarter of 2022, Square's global gross payment volume growth has slowed by approximately 8 points, from around 20% to approximately 12%. We estimate that the gross payment volume per seller has accounted for the majority of this slowdown since last year. This trend has affected nearly all verticals and has been most pronounced among larger sellers. Comparatively, our US gross payment volume growth has slowed by 7 points since the third quarter, reflecting an 8 point deceleration in US retail sales and a 6 point decline in Visa and Mastercard volumes. These highlights provide insight into the trends we are observing in same-store growth and gross payment volume. For the fourth quarter of 2023, we anticipate a slight increase in gross profit and GPV growth compared to the third quarter. It's important to consider the July figures for the third quarter, which showed a 15% growth in gross profit for Square and a 12% growth in GPV for Square. We expect improvements in the fourth quarter due to more favorable comparisons. As I mentioned earlier, we began to notice some moderation in growth across these sectors around the mid-Q4 timeframe last year. Regarding your question about inflows per active users, we saw an 8% growth in the second quarter, and your inquiry was about the sustainability of this growth over time. Certainly. As I mentioned earlier, we anticipate overall growth in inflows per active for 2023. We experienced an 8% increase in the second quarter and noted relative stability from quarter to quarter, despite a significant impact from tax refunds in the first quarter. We are generally encouraged by the positive trends. Moving forward, I want to highlight two key factors in addition to the broader context of consumer health and spending. First, increasing product adoption is crucial. If we can promote more product usage and cross-sell our offerings, it could incentivize customers to deposit more funds into Cash App. Additionally, providing customers with more methods to add funds to Cash App, such as funding through money deposits, can drive higher inflow volumes and enhance customer engagement with our products. The only potential challenge is the mix-shift as we attract younger users to Cash App. While we have observed promising trends among younger demographics like Gen-Z, they tend to have lower inflows per active as they are still early in their financial journey. However, this is the demographic we aim to grow alongside in the long run. These two factors are important to consider when modeling inflows per active over time.

Jamie Friedman, Analyst

Hi. I was wondering, Amrita or Jack, how Afterpay is performing relative to your expectations from a credit perspective. I realize losses on consumer receivables were just 1.01%, essentially the same as last year, but is that more due to your treatment of the credit box? How, overall, are you thinking about that, the originations versus the profitability from a credit perspective? Thank you.

Amrita Ahuja, CFO

I can begin by addressing that. In the first half of this year, we have observed stability to improvement in the overall trend lines for Afterpay from a topline perspective, whether we consider GMV or gross profit, alongside consistent loss rates. We have maintained a disciplined approach to risk loss and are continuing to see stable trends in consumer health and repayment behavior. There has been stability in losses on consumer receivables on a year-over-year basis in the second quarter. Notably, GMV increased by 22% year-over-year in the second quarter, an improvement from the 17% growth rate in the first quarter. Likewise, gross profit rose by 13% year-over-year in the second quarter, up from 10% in the first quarter. We have identified stable to improving trends in our core BNPL products within Afterpay, while actively seeking larger opportunities for integration with our commerce pillar, linking our Cash App and Square ecosystems, while also maintaining healthy loss rates across the ecosystem.

Operator, Operator

Thank you. Ladies and gentlemen, thank you for participating in today's program. This does conclude the program. You may now disconnect.