Earnings Call Transcript - XYZ Q4 2022

Nikhil Dixit, Head of Investor Relations

Hi, everyone. Thanks for joining our fourth quarter 2022 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 long-term targets and goals, which are subject to risks and uncertainties, and we may decide to shift our priorities or move away from these targets and goals at any time. 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 performance for the month of January and February. These represent our current estimate for January and February performance as we have not yet finalized our financial statements for the months of January and February, and our monthly results are not subject to interim review by our auditors. As a result, actual January and February results may differ from these estimates. Moreover, this financial information has been prepared solely on the basis of currently available information by, 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 January and February or the first quarter. 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 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 all for joining us. During our last earnings call, we committed to sharing our investment framework. We'll spend the majority of our interim remarks on that instead of a review of our last quarter, which you'll find in our shareholder letter we sent out about an hour ago. There are three principles guiding our investment framework. Number one, ensure our investments are focused on customer retention and growth; number two, account for ongoing costs of the business, including stock-based compensation; and number three, utilize industry standard conventions that are simple to communicate and understand. Using these principles, our investment framework can be articulated in a single sentence. Block, in each of our ecosystems, must show a believable path to gross profit retention of over 100% and Rule of 40 on adjusted operating income. This is an ambitious goal, especially at our scale, and one we aren't meeting today. We're sharing this today to provide full transparency into how we want to drive the business, and how we want to be held accountable. In the coming quarters, we'll provide more details into our strategies and plans for how we're moving the company towards achieving this goal. I wanted to take a moment to share why we believe this is so important, before Amrita dives into where we are today and what it means for operating our business. Our ability to retain a customer over time tells us a lot. It says we found product-market fit, we have the right set of services and features, we're providing the right customer support, we're able to efficiently cross-sell into more products, and we have the right pricing. In the simplest terms, it means that our customers find value in our offerings and want to stick with us. Historically, both Cash App and Square have delivered positive gross profit retention. We may not achieve this in every period due to macro shifts. For instance, we saw Square's retention dip in 2020 due to the pandemic, before recovering the next year. But over the long term, we expect the average annual gross profit retention of our ecosystems to be above 100%. To complement retention, we'll continue to measure customer cohort economics, to assess each stage of the customer journey. We assess our efforts to efficiently attract new customers by looking at returns on investment, a factor of both growing customer lifetime value and appropriately aligning our customer acquisition costs. Together, the combination of efficient acquisition and retention leads to greater gross profit growth for our ecosystems. Turning now to the second component of our investment framework, which is Rule of 40. We want to further raise the bar on our growth rates and our efficiency. We believe measuring our ecosystems on growth plus margins is the best framework to enable this. A growth plus margin framework provides flexibility for products and businesses at different stages of maturity. It's a useful and universal formula for evaluating each of our ecosystems with different growth trends and margin profiles today, and for those we might launch in the future. It also ensures accountability. When we increase our investments, this framework forces us to think critically about the expected returns. And if growth slows, it encourages us to adapt, to operate with more discipline or to pursue different investments. It pushes us to think creatively using new technologies or distribution models to create efficiencies and do more with less. Historically, we have looked at gross profit growth plus adjusted EBITDA margins. In 2022, Block's gross profit growth plus adjusted EBITDA margin was 52%, or 42% when excluding Afterpay, which provided a one-time benefit to growth last year. While adjusted EBITDA margin is one of the key profit disclosures we focused on in the past, we recognize it excludes certain expenses like stock-based compensation, which is a significant ongoing cost to operating our business. It isn't a cash expense, but it's a real expense. So we're going to include it in how we assess our investments and performance. And to do so, we are developing better signals around it. As a result, we're shifting our focus to an adjusted operating income margin. With this metric, profit margins will include certain non-cash expenses like stock-based compensation and depreciation and amortization. With the Rule of 40, we are targeting the sum of our gross profit growth and adjusted operating income margins to be at or above 40% over the long term. This target applies to Block at the overall company level, as well as each of our ecosystems. By comparison, for 2022, Block's gross profit growth plus adjusted operating income margin was 33%, or 23% excluding Afterpay. Finally, we want to be able to communicate this in a way that's easy to understand, using methods that have been widely accepted by the investment community. Gross profit retention and the Rule of 40 targets are both clear and balance each other in a way that aligns our customer interest with those of our investors. They provide a clear way for us to determine what's working and what's not working as we seek to serve more and more customers around the world. We believe this investment framework will ultimately enhance our ecosystem around the world in our ecosystem model by allowing each business to make holistic decisions around their teams and road maps in parallel. It ensures the quick decisions of one ecosystem will constrain the others. And this model will help us move quicker and be more dynamic with our investments to grow Block overall. And this framework has already informed some decisions for us. As you may have seen in our 10-K, we're consolidating our corporate teams, people, legal and finance into one organization that Amrita will lead as our Chief Operating Officer. This will allow us to be far more focused and efficient as we work to achieve our goals. Amrita will continue to serve as our CFO as well. So now, over to Amrita.

Amrita Ahuja, CFO & COO

Thanks, Jack. I'll start with how we're executing against our investment framework before moving to our expectations for 2023 and recent trends. Let's start with gross profit retention. We are a customer-led company, and gross profit retention is an effective way to reflect this. In 2022, Cash App and Square experienced positive gross profit retention compared to 2021, which is in line with our long-term target that Jack outlined. We measure gross profit retention on a net basis, factoring in gross profit growth from existing customers as they increase engagement or adopt more products, net of any churn from customers who leave our ecosystem. It's a similar definition to the net revenue retention metric many other companies use, but adapted to our main top line metric, which is gross profit. We look at retention alongside broader cohort economics to both assess the health of the customer base and our ability to efficiently acquire new customers. In 2022, we experienced strong returns on acquisition spend, which gives us confidence in our ability to invest for long-term profitable growth. For Cash App, in 2022, we achieved an efficient cost of acquisition of $10 or less on average, as we grew to 51 million monthly transacting actives in December, adding our largest annual cohort of customers on a gross profit basis. Our historical Cash App cohorts through 2020 have achieved ROIs of 6x or greater over three years, while our most recent annual cohorts in 2021 and 2022 are pacing at an estimated payback of less than one year. For Square, each of our annual cohorts onboarded through 2020 are pacing at an estimated ROI of 3x or greater over four years, with our 2021 and 2022 cohorts pacing at an estimated payback of six quarters or less. There have been periods over the past year where expected paybacks on our 2022 Square cohort stretched beyond our six-quarter target, primarily because of increased spend in our international markets, an experimental area. We then pulled back on these areas and are now seeing paybacks trend in line again with our targets. In 2023, we're focused on refining Square's go-to-market approach and strengthening our sales and marketing motion. Taken together, we believe these fundamentals of positive retention, efficient acquisition, and strong returns on acquisition spend drive sustainable business models. Moving to our long-term goal of Rule of 40. We expect our path to achieving this 40% growth plus adjusted operating income margin benchmark will be driven by a few key areas of opportunity. From a growth perspective, we're just getting started. We have less than 5% share of a nearly $200 billion gross profit opportunity across our addressable markets, with much of the landscape sitting on legacy infrastructure. We'll continue to invest with discipline to unlock growth in each of our ecosystems. For Square and Cash App, this includes launching new products for our customers, expanding into new customer segments, and refining our go-to-market approach across our global audiences. For our emerging businesses, our principles are the same, though they are at an earlier stage. We're constraining investment for these businesses to less than 3% of operating expenses in 2023 in aggregate, and we'll look for these ecosystems to show a path to achieving and sustaining Rule of 40. From a margin perspective, key opportunities include finding greater efficiencies and share-based compensation and our overhead expenses. We intend on slowing our pace of hiring across the company in 2023. Within our overhead expenses, we plan to drive leverage across our software and data consumption, real estate footprint, professional fees, and other discretionary areas. Within our reporting disclosures, we want to bring more transparency to our performance against these targets and intend on introducing new disclosures around profitability on an adjusted operating income basis and sharing more about segment-level profitability for Square and Cash App over time. Our priority remains driving long-term profitable growth at scale, and we believe this balance of compounding growth and margins will help us achieve this. Now let's shift gears to look at our plans for 2023. Over the past several years, we've significantly grown our business and our expense base. We're focused on operating with efficiency in 2023 and expect to slow our pace of expense growth meaningfully compared to prior years. We expect to deliver approximately $1.3 billion in adjusted EBITDA in 2023 for a growth of more than 30% and at least a 1 point margin expansion year-over-year. On an adjusted operating income basis, we are targeting a loss of approximately $150 million for 2023 and expect our adjusted operating income margin to modestly improve year-over-year. This incorporates the run rate of trends we've observed in our business up until earnings and our current estimates for performance through February. In 2023, we expect Cash App to expand its margins on a year-over-year basis, while we expect Square's margins to be relatively consistent year-over-year. While this is our base case entering the year, we recognize that we are in an uncertain macro environment. Amidst this uncertainty, we intend to hold to our stated profit targets for 2023. If growth slows, we'll exercise discipline and look for cost initiatives to pull back within our planned expense base. As we shared on our last earnings call, we are moderating spend in our two biggest discretionary areas. First, hiring. Headcount makes up the largest driver of our expense base. In 2023, we expect to increase our headcount by 10% compared to the prior year period, a significant change compared to 46% growth in 2022. However, given the pace of hiring last year, we expect overall personnel expenses to increase in the mid-20% range year-over-year, with greater leverage on headcount costs expected in the back half of 2023 and into 2024. Second, sales and marketing. We expect overall sales and marketing growth to be 5% to 10% year-over-year in 2023, moderating compared to approximately 25% in the prior year period. Breaking this line item down, we expect variable Cash App expenses, including peer-to-peer costs and Cash App Card issuance costs, to grow faster. And the remaining portion of our sales and marketing expenses across the business to be relatively consistent with the prior year, as we drive efficiency on acquisition spend. Consistent with our remarks last quarter, we'll continue investing in channels with more proven ROI and intend on pulling back in other go-to-market areas. As we shared last quarter, about one-third of our overall non-GAAP operating expense base is made up of variable expenses, which have historically grown more in line with overall gross profit. These not only include peer-to-peer costs and Cash App Card issuance costs in sales and marketing, but also transaction losses and expenses related to data and our platform infrastructure. Next, an update on recent trends and some highlights from the fourth quarter. For the month of January and February, we estimate overall company gross profit growth to be approximately 33% year-over-year on a reported basis, and we expect growth for the full first quarter to be a few points below this. As a reminder, we are now lapping the acquisition of Afterpay, which closed on January 31, 2022. And as a result, our reported growth rate for January should be greater than that of February and March. If we look at our performance on a combined company basis, which would include a $51 million contribution from our BNPL platform to January 2022 results, we see stable to improving trends. In particular, we see an improvement in January and February gross profit growth compared to the fourth quarter of 2022. On a combined company basis, we estimate overall company gross profit growth in January and February of approximately 25% year-over-year, an improvement from 21% in the fourth quarter. And we expect a combined company growth rate of 25% in January and February to be relatively stable for the full first quarter. We have continued to see the diversity of our ecosystem model provide resilience in this dynamic environment. Through January and February, Cash App saw continued strength with stable consumer trends. Square saw some moderation in growth rates for certain discretionary verticals with greater stability in other verticals. Let's get into some of these trends by ecosystem. As a reminder, gross profit includes a 50% allocation from our BNPL platform across each of Square and Cash App. For Cash App, we expect gross profit growth to be greater than 50% on a reported basis year-over-year for the months of January and February. In March, we expect gross profit growth to slow as we lap pricing changes made in the prior year period. Cash App's early momentum this year has been a continuation of our strong fourth quarter. We continue to build out our banking offering by introducing savings, which has been one of our fastest-growing products on Cash App. Cash App Card achieved strong growth in monthly actives and spend per active and delivered more than $750 million in gross profit for the year, up 56% year-over-year and making up more than one-quarter of overall Cash App gross profit. For Square, we expect gross profit growth to be approximately 15% on a reported basis year-over-year through January and February. Looking at recent volume trends, we saw a moderation in the GPV growth rates for discretionary verticals in the US beginning in November, primarily for food and drink and retail. And we have seen these trends continue into the first quarter. Even with these shifts in macro trend line, the Square ecosystem, excluding PPP and our BNPL platform had a gross profit growth rate of 17% year-over-year in the fourth quarter and is expected to grow 21% year-over-year in January and February. As a reminder, for the full first quarter of 2022, we recognized $51 million of nonrecurring PPP gross profit. And lastly, an update on our BNPL platform, which was also embedded in the figures I just noted for Cash App and Square. Through the months of January and February, we expect GMV growth of 19% year-over-year, an improvement compared to 14% growth in the fourth quarter. We have been encouraged by our ability to manage loss rates, as losses on consumer receivables remained below 1% during the fourth quarter and improved on both a year-over-year and quarter-over-quarter basis behind consistent repayment trends. In the first quarter, loss rates typically see a seasonal increase compared to other quarters, though are expected to remain around 1% for the first quarter. To conclude, our potential is profound across our significant addressable opportunity, the ability to grow with our existing customers, and the longer-term path to grow new ecosystems. With all this opportunity, we have found that constraints are clarifying and can help us execute responsibly and creatively. With the components of our investment framework, we believe our teams will be able to continue driving product velocity, while prioritizing agility, accountability, and long-term thinking paired with near-term feedback loops. With that, we'll open it up to your questions.

Operator, Operator

Your first question is from Tien-Tsin Huang with JPMorgan. You may proceed.

Tien-Tsin Huang, Analyst

Hi, thanks so much. I like the investment framework, especially the inclusion of the adjusted operating income margin. I think it will be well received. So, I wanted to ask on that, if you don't mind, just focusing on the margin and cost side which you have more control over. Can you just discuss or talk about the broader opportunity for operating leverage longer term? I know, you gave some thoughts for '23. But just beyond that operating leverage overall or maybe even across the two ecosystems, how should we think about that? Thanks.

Amrita Ahuja, CFO & COO

Thanks for the question, Tien-Tsin. I'll start us off. Our investment framework here is around Rule of 40 is really about helping to build profitable long-term growth. And just as important as achieving Rule of 40 is a sustained Rule of 40. So we're looking to make investments in our business that can accrete returns both for our customers and ultimately for us and our business model. From a leverage perspective, specifically to your question, there are a couple of key things that we're looking at that I'd point you to in terms of opportunities for us to find increased leverage across our fixed expense base. The first key areas that we're looking at are hiring and sales and marketing. As you heard on the call today, we're meaningfully slowing the pace of our hiring, growing about 10% in terms of headcount in 2023, compared to 46% growth in 2022. We're putting our teams to work across key important areas to build out our product ecosystem to address a sizable market opportunity ahead of us, $200 billion in gross profit opportunity, about 5% were penetrated in. But we're doing it in a way that enables them to be smarter with their work, more efficient and effective in their work. Now, in terms of how you'll see that roll through our P&L, because we're run rating the hires that we made in 2022, we'd expect you to see more of the impact of that slower hiring and that pace of hiring in the back half of 2023 and into 2024. The second piece in terms of sales and marketing is around, again, orienting our spend towards areas that are more proven and that can impact our customer base and potential future customer segments that we can serve. So expect to slow our pace of sales and marketing spend to 5% to 10% in 2023 relative to where we were at about 25% last year. And I think this is an area for us to find continued improvement on in refining our sales and marketing motion across each of Square and Cash App. From an overhead perspective, we're going to be looking across all of our corporate overhead expenses, from software and data utilization to real estate facilities to professional fees and a range of other discretionary areas. Now what that all means for 2023 is we expect to see 1 point or greater of margin expansion on an EBITDA basis, and we also expect to see margin expansion on an adjusted operating income basis. But again, if we're going to sustain, not just reach, but sustain Rule of 40 over the long term, we need to continue investing in our business. And that's where we see opportunities around reaching new customer segments through our go-to-market motions, continuing to take share in our TAM and building new products that enable greater TAM expansion and unlocking new audiences through our emerging initiatives, and we'll continue to invest with discipline across each of those areas to ultimately build growth opportunities, profitable growth opportunities over the long-term.

Timothy Chiodo, Analyst

Great. Thank you. I want to focus a little bit on the restaurant vertical given the competition there. So you have the Square for Restaurants vertical offering. At the May 2022 Investor Day, one of the big themes was the build-out of the vertical sales teams and the move upmarket to larger sellers. At the time, you talked about verticalizing the sales team, starting with the inbound teams and then building out further from there. Was hoping you could give an update on the progress there, the feet-on-the-street effort, how many people we're talking about, and how the LTV to CAC look for that type of a go-to-market effort relative to the historical Square approach?

Amrita Ahuja, CFO & COO

Hey, Tim, thanks for the question. So let's talk about our go-to-market approach for the Square business. We have targets that we look to maintain across both payback and returns. And that encompasses the full set of our costs across sales and marketing across the US as well as international. And those blended rates, obviously being 3x ROI over four years and a six-quarter payback. And we've seen us over the past few years, be dynamic with that spend and our approach to the sales initiatives that you mentioned specifically throughout the year, and I think we'll continue to be dynamic here as we read our results in the environment in 2023. Specifically to our sales efforts, we're in the early stages of building out a software-led with embedded financial services sales team. And this sales team not only has inbound capabilities but also outbound capabilities. We're building verticalization into our team. So where in the past, we had a more generalized sales team, we've started to now verticalize across our three key areas of restaurants, retail, and services and expect this to benefit deal cycle times and win rates over time. From an outbound perspective, we're also enhancing our capabilities here around targeting specific verticals and seller sizes using better data and signals that enable our team to reach those sellers at the right time with the right message. And we expect outbound sales to be a bigger contributor to sell our acquisition over time. Now this is a multi-year journey that we're on, on reorienting and building up the sales team, and we'll continue to iterate on our processes and tooling, but we are encouraged by the traction that we've had in building our upmarket success through mid-market sales. And what we're seeing is that our mid-market sellers have grown twice as fast in the fourth quarter compared to the total Square gross profit, excluding BNPL. Mid-market gross profit was up 16% year-over-year, excluding BNPL. So these go-to-market initiatives are starting to resonate, and we'll be making more progress over time as we continue to reorient the sales team and pair that with our marketing messages.

Unidentified Analyst, Customer

Hi. Yes, my name is Austin. I use Cash App as my primary bank account. I get my paycheck direct deposited. I use my Cash Card every day. And I love the app, but I still have a legacy bank account for no other reason than auto bill pay. And for me, personally, this problem could be solved if I had the ability to schedule recurring payments just to other Cash App customers. But yes, so I guess the question is, are there any plans to enable scheduling recurring payments within the Cash App?

Jack Dorsey, CEO

Austin, first of all, thank you for using Cash App and seeing us as your primary banking tool. That's exactly the relationship we want to have with all of our customers. We're seeing more and more of that. We're always going to be looking at things that people are trying to do with Cash App that we didn't build. We have a mindset of looking at the broadest patterns. And I'm sure we've seen a desire for recurring payments to friends and to other Cash App customers across the board. And as we see more and more of that, we tend to prioritize it. But right now, we're really focused on making sure the basics are rock solid for every type of customer that we have, whether you're just starting with a bank account or a savings account or you've had one. And really, that's a question of looking at the limits we placed onto Cash App and what we enable to make it super easy for people. So we've been focused on savings accounts. We've been focused on unlimited free withdrawals at ATMs and paper money deposits. So we don't have any immediate plans for recurring, but I'm sure it will be on the roadmap at some point in the future. But thank you so much.

Darrin Peller, Analyst

Hey, guys. Look, it's great to hear your confidence around the $1.3 billion of EBITDA in pretty much any macro scenario. But if you could just give us a little bit more color on your assumptions for the base case macro backdrop embedded. And then just on that note, I'd love to know a little more specifically gross profit growth embedded in that base case. I guess relative to the 20% to 25% rates we're seeing through January into February, if you could just frame it in that way. And then, Jack, just a bigger picture question on the sustainability of Cash App. Obviously, Cash Card was called out quite a bit, and we're seeing a lot of success there. But can you just revisit some of the drivers of sustainability medium-term with Cash Card now 25%, 30% of the mix? I think we'd just love to hear more on that. Thanks again guys.

Amrita Ahuja, CFO & COO

Hi Darrin, thanks for the questions. I'll begin with our 2023 EBITDA guidance and the assumptions we've made regarding growth. Our outlook for 2023 is grounded in our observations thus far, particularly from the end of 2022 and the growth rates we saw in Q4, as well as the early part of this year. We anticipate that Cash App will grow at a faster rate than Square, continuing the trend from Q1 where consumer behavior for Cash App remained relatively stable, in contrast to some moderation in a few discretionary sectors for Square, which we believe is related to macroeconomic conditions. Within Cash App, we foresee ongoing year-over-year growth in active inflows per active user and our monetization rate throughout 2023. However, we do expect some slowdown in gross profit growth for Cash App starting in March and into Q2 as we compare against last year’s pricing changes. For Square, our ongoing focus is on enhancing our sales and marketing efforts and capitalizing on our success in attracting larger sellers and meeting their omni-channel needs. We have seen software combined with integrated payments represent a significant part of Square's business, accounting for 75% of gross profit, excluding the PPP program. Our strategic focus remains on upmarket growth, omni-channel capabilities, international expansion, and refining our sales and marketing strategies for Square. Regarding profitability in 2023 by ecosystem, we are prioritizing efficiency. We are intentionally slowing growth, but we have various options available to remain flexible based on macro conditions. We expect Cash App margins to continue expanding, reflecting a sustained trend of improving profitability. In contrast, we anticipate Square margins to remain stable year-over-year due to macro-related growth moderation beginning in mid-Q4, considering its high incremental margins that we detailed during our Investor Day last year. Despite potential macroeconomic fluctuations, we are committed to our profit targets and have various tools available to adjust our approach prudently while still funding our planned expenses. Can you clarify the second part of your question, Darrin?

Darrin Peller, Analyst

…but it's now, as you guys pointed out, almost 30% of the mix of revenues. And so what do you think about that business longer term in terms of the driving force of it to keep growing well? What's going to drive that? Thanks again guys.

Jack Dorsey, CEO

Yes. I mean, just to start off, Amrita can opine here as well. But I think the most important thing for us to grow the Cash App ecosystem is to continue to find adjacencies, adjacent financial services that complement one another. And there are certainly aspects to everything that we're doing around inflows, direct deposit, all these utilities and functionalities that we're building. One of them gets people into the ecosystem and drives them in. And then our goal is to really cross-sell and make sure that people are able to find the other services quite easily, and there might be one that resonates even more, like Cash App Card. So, I do believe that Cash App Card has a ton of room ahead of it. And I do believe that it's a great marketing device for us, in the same way that the original Square Reader was. When people see it, whether they see their friends use it or they see pictures over social media of how they designed it, it tends to effectively encourage people to download the app and make their own. In the same way that the Square Reader seen at farmers' markets saw other sellers, who quickly were able to recognize what the power of that thing was and then decided to download for themselves. But it's just one part of the equation. And success to us means that it's not just Cash App Card that drives the ecosystem growth, but there are multiple entry vectors that all complement each other and encourage one another.

Amrita Ahuja, CFO & COO

Darrin, I'll just add that Cash App now has five revenue streams at $100 million or more in annualized gross profit. Instant Deposit, obviously, Cash App Card, as you've heard, at $750 million in 2022. Our Bitcoin revenue stream, business accounts, and Cash App Borrow with several others that are smaller but scaling. Like Cash App Pay, as an example, and other banking and commerce products. And even within Cash App Card, we're at about a 36% attach of Cash App Card monthly transacting actives to overall monthly transacting actives in December. That's about 18 million actives on Cash App Card on a monthly basis. And we're seeing that Cash App Card is increasingly top of wallet to our customers with a broad use case in terms of everyday payments. But to Jack's point about adjacencies, maybe one recent product launch to call out that's an example of that is our recent launch of peer-to-peer gift cards, where we allow customers to send a gift card from a wide range of merchants to their friends and family, who can then receive it and spend it through their Cash App Card. It's an example of a product that, for us, spans multiple development pillars. There's a community aspect, there's a peer-to-peer element, and there's a banking aspect that ties in utility of Cash App Card, all while ultimately promoting more commerce within our ecosystem, which is a longer-term focus for us, particularly with Afterpay and our efforts there. So, that's an example of an adjacency. There are numerous others like our savings accounts, which we just launched in January and is one of our fastest-growing products, which is yet another reason for people to bring money into Cash App, and you link a debit card and use roundups and a number of other features that end up creating an everyday experience for our customers through Cash App and our banking offerings.

Lisa Ellis, Analyst

Hi. Thank you for taking my question. And thanks for all of the detail on Block's investment framework. This shift from the focus on adjusted EBITDA to adjusted operating income is an important one, and I think one that will be welcomed by a lot of investors. Can you just elaborate a bit more on the why now behind that shift and how it's being operationalized by the BUs? So for example, should we expect that we would see these non-cash items, SBC and D&A, et cetera, sort of decline or slow in their growth over time with the differential there narrows? Thank you.

Jack Dorsey, CEO

Thank you for the question. I'll begin and then Amrita can add on. At a high level, we want to explain why this is happening now. As we mentioned during our Investor Day and in the last quarter, our business is quite unique. We started with the Square ecosystem and have added others like Cash App, Title, and TBD. Two of these are already large-scale, while the other two are just starting out. We plan to create new ecosystems, either organically like TBD or through acquisitions like Title. Our goal is centered on economic empowerment, aiming to serve new audiences and provide them with simple tools to engage more effectively in the economy. This is a complex business, distinct from many others you might cover. We felt it was important to communicate our investment strategy clearly, aligning the interests of our shareholders with those of our customers. A priority for us is to focus on a customer-centric metric, specifically gross profit retention, ensuring we retain the customers we attract to our network. We are also focused on seeing them purchase more services within their original ecosystem, such as Square, or explore other ecosystems like Cash App. Additionally, we want to account for genuine business costs. We've listened to feedback from the investment community regarding the accounting of stock-based compensation (SBC) and have decided to report it as a true cost for added clarity. Ultimately, we aim to use familiar terms and metrics like gross profit retention, net revenue retention, and Rule of 40, but in a way that sets a higher standard. This is a long-term goal for us, and although we’re not there yet, it will help guide our investments across both established ecosystems like Square and Cash App and newer ones like Title and TBD. We’re focusing on customer needs, balancing investments across these ecosystems effectively, and fulfilling our vision of a connected ecosystem where each component positively influences the others. We expect some ecosystems, particularly TBD, to disrupt our current operations within Cash App, which is a strategic approach we want to take before facing external competition. This model embodies resilience, and we plan to adopt this investment strategy while making rapid adjustments to meet our goals consistently. Amrita, would you like to add anything?

Amrita Ahuja, CFO & COO

Yes, Lisa, thanks for the question. We agree with you that it is a meaningful shift to include stock-based compensation and D&A, but particularly stock-based compensation and our profitability metrics. And what we wanted to do here was align our external disclosures and targets with how we're actually running the business internally. So to now include SBC as a part of how our leaders are measured and our business units and business models are measured internally is we think the right level playing field across our businesses and across whether it's maturity type or business model. SBC is an important part of our compensation model here. We want our employees to be shareholders. And ultimately, that structure enables us to attract and retain amazing talent and invest in high-performing teams. So this shift to adjusted operating income to account for SBC and D&A brings increased rigor to how we manage those costs, those SBC costs. And we want our teams to consider SBC as an expense when they are hiring and making those investment decisions. Over the long term, we expect to drive efficiencies and leverage from SBC. And historically, our share count dilution, just to get into some of the tactics around what we expect to see. Historically, our share count dilution from SBC has been in the low single-digit percent range, excluding impacts from converts, and we expect this trend to continue of low single-digit dilution for normal run rate across our business.

Josh Beck, Analyst

Thanks for taking the question, and also thanks for collapsing your investment philosophy into one sentence. That's not easy to do for anyone. But I wanted to ask a little bit about Cash App. Amrita, I believe that you said pretty much all of three core drivers would be up in 2023. The one that I wanted to ask about was the inflows per MAU. You certainly did cite some, at least in the Square business, slowdown in discretionary spend. But I assume there are offsets things like obviously, Cash App Card attach, which I'm assuming is going to lead to higher direct deposit, which obviously had a really nice step up on the metrics you gave at 3Q. So I'm curious to hear a little bit just about the drivers there as well as the monetization rate. Certainly, you mentioned the pricing changes and that's had a sizable impact. But as we look forward, should we be thinking about Borrow as a bigger driver or other items around the monetization side? Thank you.

Amrita Ahuja, CFO & COO

Thank you for the question, Josh. Let’s discuss our inflows framework for Cash App, particularly focusing on one of the measures, inflows per active. Starting with our monthly transacting actives, we had 51 million in December, reflecting a 16% year-over-year increase, with weekly and daily actives growing even more rapidly. We've utilized marketing to enhance the natural virality in our peer-to-peer network, which has helped us with customer acquisition and product adoption. Notably, two-thirds of these 51 million actives are using Cash App weekly on average, indicating strong growth in our product ecosystem and increasing everyday usage. For inflows per active, we reported $1,048 in the fourth quarter, which remained stable both quarter-over-quarter and year-over-year, even as we compared it to a prior period that included government disbursements amidst an uncertain macro environment. We see promising trends in inflows per active and identify two key growth opportunities. First, in terms of product adoption, we can enhance inflows by cross-selling existing products and introducing new ones. As customers engage with more Cash App offerings, we typically see higher inflows per active. We've observed that Cash App Card users generate inflows twice as much as peer-to-peer users, and this increases further with deeper financial services like Direct Deposit. We're also expanding the inflow channels, making it easier for users to deposit funds into Cash App through methods like paper money deposits. Additionally, we're focusing on trust by enhancing access and raising limits for customers wanting to deposit more each week, which we believe will help increase our share of customers’ finances and expand into new demographics. However, we anticipate a mix shift as we target younger customers, particularly Gen Z, who may initially have lower inflows per active reflecting their early financial journey. Nonetheless, these young users are likely to become significant spenders as they grow older, and we aim to support them throughout their development. Lastly, monetization rate plays a crucial role here, which relies on our pricing structures and how customers use our various products. We provide both free and charged products, and we view monetization rates across the entire ecosystem. Regarding Cash Card, its broad utility continues to grow, with increased spending across both discretionary and nondiscretionary categories, such as gas, utilities, and groceries, which accounted for about a third of total spending on the Cash App Card this past year.

Mike Ng, Analyst

Hey good afternoon. Thank you for the question. I just have one housekeeping item and then one follow-up. First, it was helpful to get all the January and February gross profit pacing for Cash App and Seller on a reported basis. I was just wondering, if you'd be able to discuss those pacing figures, excluding Buy Now, Pay Later? And then second, could you just give us an update on the integration of the ecosystems, not only Afterpay across Cash App and Seller, but also things like Cash App Pay on Square Seller. Thank you.

Amrita Ahuja, CFO & COO

Thanks for the questions. I'll kick off on our Q1 top line trends so far. So what we've seen so far this year, I think there are two sets of numbers to orient you to. There is on an as-reported basis, which is 33% year-over-year growth estimated for Jan and February. And as we move into March, what we expect to see for the full first quarter is growth, that's a few points below this, of course, as we lapped the acquisition of Afterpay from Q1 of last year. I think the second way to look at overall company gross profit growth so far this year is on a combined company basis, which would then include the $51 million contribution from a gross profit perspective for Afterpay in January of 2022. And when you look at that combined company growth, what we see is overall Block gross profit growth of approximately 25% year-over-year in January and February, which we expect to be relatively consistent for the full quarter as well and which is an improvement from what we saw in Q4 of 21% year-over-year growth on a combined company basis. Within each of those, Cash App, we expect to grow at more than 50% on an as-reported basis in January and February, albeit March, we expect to see a slower growth rate as we lap the pricing changes. Really the drivers of Cash App growth are continued strength in active, inflows per active, and monetization rate. From a Square perspective, we expect to see gross profit growth of 15% on an as-reported basis in January and February. I think it's important to unpack the numbers further on Square here to see what's going on in the core Square ecosystem, ex BNPL and ex PPP. So just as a reminder, in Q3, Square, ex PPP and ex BNPL, grew 19% year-over-year. We saw some softening in discretionary verticals in Q4. And so that same rate of growth for the same Square, ex PPP and ex BNPL, was 17% in Q4. And now we're seeing growth for Square, ex PPP, and ex BNPL, in January and February of 21%. So those are some of the puts and takes that we see across the Square ecosystem so far this year.

Jack Dorsey, CEO

In terms of ecosystem integrations, our primary focus is Afterpay, which connects Square and Cash App. We are still in the early stages of product integration, and Cash App’s Discover Tab in the marketplace is where you'll see developments. We believe we are just beginning to understand the potential here. Currently, it seems like a straightforward search, though the user interface could use some improvement. We plan to iterate quickly to seize this significant opportunity. There is considerable potential not only with Afterpay but also with Cash App Pay, as we are starting with some Afterpay merchants, allowing customers to browse and take advantage of finance and discount offers at those who accept Cash App Pay. We will continue to expand our efforts within the Square ecosystem. The integration and merging of the companies have put us in a stronger position, and we are now concentrating on how these products will work together. We anticipate more integrations with other ecosystems, specifically TBD, and are also focused on supporting artists and musicians to aid their career development, similar to how we have helped sellers.

Operator, Operator

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