good day ladies and gentlemen and 00:02 welcome to the square second quarter 00:04 2020 earnings conference call 00:06 i would now like to turn the call over 00:08 to your host jason lee 00:10 head of investor relations please go 00:12 ahead sir 00:15 hi everyone thanks for joining our 00:16 second quarter 2020 earnings call we 00:18 have jack and rita with us today 00:20 we'll begin this calls and short remarks 00:22 before open call directly to your 00:24 questions 00:24 during q a we will take questions from 00:26 our customers in addition to questions 00:28 from conference call participants 00:30 we would also like to remind everyone 00:32 that we will be making forward-looking 00:34 statements on this call 00:35 actual results could differ materially 00:37 from those contemplated by our 00:38 forward-looking statements 00:40 and report results should not be 00:41 considered as an indication of future 00:43 performance 00:44 please take a look at our finds with the 00:46 sec for a discussion of the factors that 00:48 could cause a result to differ 00:50 also note that the four looking 00:51 statements on this call are based on 00:53 information available to us as of 00:55 today's date we disclaim any obligation 00:57 to update any foreign working statements 01:00 except as required by law during this 01:02 call we will provide preliminary gross 01:04 profit gross results for the month of 01:05 july 01:06 these represent our current estimate for 01:08 july performance as we have not yet 01:10 closed our 01:10 accounting financials for the month of 01:12 july and our monthly results are not 01:14 subject to interim review by our 01:16 auditors 01:17 as a result actual july results may 01:19 differ from these estimates 01:21 also we will be discussing certain 01:23 non-gaap financial measures during this 01:25 call reconciliations to the most 01:27 directly comparable gas financial 01:28 measures are provided in the show of the 01:30 letter 01:30 on our investor relations website these 01:33 non-gaap measures are not intended to be 01:34 a substitute for our gap results 01:37 additionally in the second quarter of 01:38 2020 we changed our offering segments to 01:40 reflect 01:41 how we review and assess our operations 01:43 and began reporting on seller and cash 01:45 app 01:45 as separate segments as such we 01:48 introduced additional disclosures in the 01:49 shareholder letter on our investor 01:51 relations website 01:52 as well as our quarterly report on form 01:54 10q 01:55 the quarter ended june 30th 2020 for 01:58 revenue and gross profit 01:59 for our seller and cash app offering 02:01 reporting 02:02 segments as a reminder we just 02:04 discontinued the use of adjusted revenue 02:06 in the third quarter of 2019 02:08 following the receipt of and comment 02:10 letter from and discussions with the fec 02:12 our statement of operations continues to 02:14 disclose total net revenue 02:16 transaction based costs and bitcoin 02:18 costs determined in accordance with dow 02:20 which are the key component of adjusted 02:22 revenue 02:23 there are no changes to any other gaap 02:25 or non-gaap metrics 02:27 we have posted a spreadsheet on our 02:29 investor relations website with our 02:30 historical financials and additional 02:32 details related to our income statement 02:35 finally this call in its entirety is 02:37 being audio webcast on our investor 02:38 relations website 02:40 an audio replay of this call will be 02:42 available on our website shortly 02:44 with that i'd like to turn over to jack 02:48 good morning everyone and thank you for 02:49 joining us so earlier today 02:51 uh due to the media's early release of 02:53 our quarterly financials 02:54 we moved up to our investor call to this 02:56 morning we're conduct 02:58 conducting an investigation into this 03:00 early release in consultation with both 03:02 internal 03:03 and external counsel coven 19 continues 03:06 to be at the top of our minds 03:08 as economies closed reopen and close yet 03:10 again 03:11 this has been extremely hard on the 03:13 people we serve our sellers 03:15 their employees and all the individuals 03:17 who use kasha 03:18 folks right now are struggling to keep 03:20 their businesses open pay their 03:21 employees 03:22 pay rent and even buy food for their 03:24 families 03:25 we're doing our best to learn and build 03:27 to support our customers but this is 03:29 obviously much bigger than us at square 03:32 parts of the world lack a coordinated 03:33 strategy to get out of this crisis 03:35 and that hurts more people every single 03:37 day it's up to all of us to take 03:39 whatever action we can to end this 03:41 from wearing a mask to protect ourselves 03:43 and our families 03:44 to using whatever platform we have to 03:46 demand that our elected officials 03:48 coordinate better just can't wait for an 03:50 election day 03:51 on top of that the fear pain and 03:53 suffering our black customers 03:55 employees and neighbors have felt every 03:57 day for the past hundreds of years due 03:58 to racist systems and policies 04:01 must be acknowledged and fixed we're 04:03 seeing a bit more acknowledgement 04:04 but not nearly enough change we also 04:06 can't wait for an election day 04:08 we're taking action as an employer we're 04:10 investing in black and racial and ethnic 04:12 minority communities 04:14 and we're looking for ways to drive 04:15 racial justice through our business 04:17 and products i will also be personally 04:19 putting more funds into organizations 04:21 driving policy change 04:22 through the start small initiative i 04:24 announced months ago 04:26 we're always open to feedback and ideas 04:28 on ways we can do our part 04:29 on these issues please let us know if 04:32 you have any 04:33 and now some updates on your business 04:34 before i turn to amrita in your 04:36 questions 04:37 starting with the cash up in june cash 04:40 app had more than 30 million 04:41 active customers transacting on our 04:43 service and in july we expect to achieve 04:46 gross profit growth 04:47 of more than 200 percent year-over-year 04:50 we saw our customers increasingly use 04:52 their cash card as their primary 04:53 spending device 04:55 seven million people paid with their 04:57 cash card in june 04:58 double compared to last year we also saw 05:01 an increase in people using direct 05:03 deposit for recurring paychecks 05:05 strengthened by stimulus and 05:06 unemployment checks 05:08 and tax refunds cash up his culture 05:12 and continue to show this with creative 05:14 approaches to marketing 05:16 we announce we ride with bubba wallace 05:18 and you'll see his cash up design car 05:20 in uniform throughout the nascar season 05:23 and we partnered with hood by air a 05:25 phenomenal streetwear brand to create a 05:27 limited edition 05:29 hba cash cards you can purchase with 05:31 proceeds going to black 05:33 and lgbtqa communities 05:36 as i mentioned earlier our sellers have 05:39 had to navigate an immense amount of 05:40 uncertainty and challenges 05:42 they've used our ecosystem to reach 05:44 their customers in new ways 05:45 and in the second quarter gpb from 05:47 online channels was up more than 50 05:49 percent year-over-year 05:51 one in three new online sellers 05:53 onboarded in the second quarter were 05:55 entirely new to square 05:57 and many of these sellers adopted other 05:58 parts of our ecosystem 06:00 including in-person commerce for example 06:03 the coffee tree roasters in pittsburgh 06:05 joined square 06:06 by launching an online store previously 06:08 never having a website 06:10 this quarter they converted their five 06:11 locations to square hardware 06:13 for their in-person point-of-sale system 06:16 we're also seeing an increase in contact 06:18 with payment 06:19 as customers don't want to use paper 06:20 cash during due to covert risk 06:23 in march 1 in 12 of our sellers were 06:25 cashless 06:26 and by the end of the june that shifted 06:29 to one in four 06:30 of our sellers operating cashless we 06:33 launch on-demand delivery functionality 06:35 which enables sellers to take control of 06:36 their fulfillment process by offering 06:38 delivery to their customers 06:40 directly from their websites and our 06:42 sellers gain the benefit of square scale 06:44 by retaining more 06:45 of the economics compared to using a 06:47 third-party delivery service 06:50 during the quarter we facilitated 06:52 paycheck protection program loans 06:54 providing a financial lifeline to more 06:56 than 80 000 small businesses around the 06:58 country 06:59 for a total of 873 million in ppp loans 07:03 through the program we reached 07:05 traditionally underserved sellers 07:07 the average ppp loan through square 07:09 capital was less than 07:10 eleven thousand dollars or one-tenth the 07:13 average small business administration 07:14 loan 07:16 and finally we're saying goodbye to 07:17 aaron zamas our head of communications 07:19 and people 07:20 who's been helping us not only with this 07:22 call since our rto 07:24 but has been helping us build square for 07:26 close to nine years 07:27 aaron made us better every day we love 07:29 you aaron and we thank you 07:31 hey marina thanks jack 07:34 there are three topics i'd like to cover 07:36 today 07:37 first a look at our performance in the 07:39 second quarter where 07:40 trends for both cash app and seller 07:42 improved each month during the quarter 07:45 second an update on our business in july 07:48 where sellers showed signs of stability 07:50 and cash growth further improved third 07:53 the compelling opportunity we see to 07:56 invest in each of our ecosystems 07:59 overall in the second quarter gross 08:01 profit was 597 million dollars 08:04 up 28 percent year over year or 32 08:06 percent growth 08:07 excluding caviar net loss was 11 million 08:10 dollars 08:11 and adjusted ebitda was 98 million 08:13 dollars 08:14 let's take a look at performance of each 08:17 ecosystem 08:18 in the quarter for cash app we saw 08:21 strong growth 08:22 with gross profit of 281 million dollars 08:25 increasing 167 percent year-over-year 08:29 as our teams continue to focus on 08:31 network growth 08:32 and driving engagement as jack mentioned 08:35 we saw an uplift in customer acquisition 08:37 with more than 30 million monthly 08:39 transacting active customers in june 08:42 in the second quarter these customers 08:43 were transacting more than 15 times per 08:46 month 08:46 on average or every other day which is 08:48 up nearly 50 percent from a year ago 08:52 we saw customers join cash app for our 08:54 ecosystem of products and features 08:57 in the second quarter new cohorts of 08:58 cash up customers 09:00 had higher attach rates to products 09:02 beyond peer-to-peer payments 09:04 such as cash card boost direct deposit 09:07 and bitcoin 09:07 investing this adoption has driven 09:10 higher lifetime value 09:12 customers who use two or more products 09:15 generated two to three times the revenue 09:17 of customers who only use peer-to-peer 09:20 for our seller ecosystem gross profit 09:22 was 317 million dollars down nine 09:25 percent year over year 09:27 stellar gpv trends improved sequentially 09:30 each month from april through june 09:33 three factors to call out here first 09:36 we've invested in building out 09:37 our omnichannel capabilities over the 09:39 past few years 09:41 and have seen sellers utilize our 09:43 broader ecosystem particularly in these 09:45 dynamic times 09:47 our online strategy includes a variety 09:49 of channels that serve sellers of all 09:51 types and sizes 09:52 connecting them with buyers through web 09:54 and mobile 09:55 in the second quarter gpd from online 09:58 channels was up more than 50 percent 10:00 year over year and made up more 10:02 than 25 of our seller gpd up from 14 10:06 of seller gpd a year ago second 10:09 while card present volumes were down 38 10:12 year rare in the quarter we saw 10:15 significant improvement 10:16 in card present volume sequentially each 10:19 month as certain states relaxed 10:21 shelter-in-place restrictions third our 10:24 contactless hardware has empowered our 10:26 sellers to adapt to social distancing 10:28 measures 10:29 and has been an important differentiator 10:31 for our ecosystem 10:33 beginning in mid-may we offered 10:35 promotional pricing on our hardware 10:37 and saw significant uplift and unit 10:40 sales per square register 10:41 and square terminal through the end of 10:43 the quarter these products continue to 10:45 serve as an important acquisition tool 10:47 bringing in new sellers 10:49 to square it justin ebitda's 98 million 10:52 dollars was primarily driven by a 10:54 stronger recovery than anticipated in 10:56 our seller business and out performance 10:58 in our cash up business 11:00 adjusted ebitda on the quarter also 11:01 benefited from the release of 11:03 transaction loss provisions 11:05 or reserves for risk loss primarily 11:08 related to transactions in our seller 11:10 business during the first quarter which 11:11 trended more favorably than our 11:13 provisions had 11:14 assumed as a reminder our overall 11:17 company profitability margin profile is 11:19 driven in part by the mix of our 11:21 business 11:22 the seller business has high margin 11:24 revenue streams and changes in growth 11:26 can have an outsized impact 11:28 impact on profitability whereas cash up 11:30 is still early in its profitability ramp 11:33 as we began monetizing cash app only 11:35 four years ago 11:37 we recognize there could be a wide range 11:38 of outcomes for our financial results 11:40 during the remainder of the year 11:41 depending on regional restrictions 11:43 of business reopenings and government 11:45 stimulus efforts 11:47 therefore we are not providing third 11:49 quarter or full year financial guidance 11:51 at this time 11:52 instead similar to last quarter we 11:54 wanted to share with you what we are 11:56 seeing in real time in july we saw 11:58 impressive growth in cash up and signs 12:00 of stability 12:01 in our seller ecosystem cash up we saw 12:05 gross profit grosses jack said of more 12:07 than 200 12:08 year-over-year in july showing continued 12:10 momentum from the second quarter 12:13 the strength in our cash app business in 12:15 july was broad-based 12:16 including growth in our network with our 12:19 highest monthly 12:20 increase in that new transacting act of 12:22 active 12:23 and an increase in new product adoption 12:27 we also saw an uplift in monetization 12:29 with our highest 12:30 monthly volume per active customer 12:32 across peer-to-peer payments 12:34 cash card and bitcoin investing 12:37 while we are encouraged by these results 12:39 we recognize government stimulus 12:41 programs contributed to the uplifting 12:42 growth and spend per customer 12:45 if stimulus programs are either reduced 12:47 or not renewed 12:49 or if we see an impact to customer 12:50 consumer spending 12:52 we would not expect cash apps growth to 12:54 sustain at these levels 12:56 there is a lot that is unknown here and 12:58 growth could normalize 13:00 as a reminder pre covid we saw cash out 13:02 gross profit growth of more than 13:04 100 percent year-over-year in the first 13:06 quarter 13:08 in july we expect our seller ecosystem 13:10 to achieve 13:11 gross profit growth of more than five 13:13 percent on a year-over-year basis 13:16 looking at the main drivers solar gpv 13:18 was up five percent year-over-year in 13:20 july which was a modest improvement 13:22 compared to results 13:23 in june in the u.s we saw a step up 13:26 around the fourth of july but excluding 13:28 this holiday gpd was relatively flat on 13:30 a year-over-year basis 13:32 and trends were relatively stable from 13:34 june to july 13:36 in our international markets we saw 13:38 strong gpd growth of 40 percent 13:41 year-over-year which improved moderately 13:43 compared to june 13:45 regional trends have continued to vary 13:47 depending on the extent of shelter and 13:49 place restrictions 13:50 and we expect variability given the 13:52 ongoing uncertainty 13:54 seller subscription and services gross 13:55 profit was down year over year in july 13:57 primarily driven by square capital 13:59 paws of coreflex loans while square 14:02 capital revenue was immaterial in july 14:04 in the past few days we reopened core 14:06 flex loans under stricter 14:08 eligibility criteria given we have 14:11 insight into real-time data we are 14:13 closely watching trends and we believe 14:15 we are taking a conservative approach 14:17 to relaunching this product seller 14:20 subscription and services based revenue 14:22 from our other products achieved 14:24 positive growth year over year in july 14:27 we allowed sellers to pause their 14:28 subscriptions starting in may and at the 14:31 end of july less than 10 percent of our 14:33 sellers with subscriptions had elected 14:34 to pause 14:36 finally we believe now is a compelling 14:39 opportunity to invest 14:40 in both of our ecosystems compared to 14:42 the second quarter we are investing an 14:44 incremental 100 million dollars in the 14:46 third quarter 14:47 across non-gaap operating expenses for 14:49 product development 14:50 sales and marketing and general and 14:52 administrative expenses 14:54 the significant majority of this 14:55 investment will be on sales and 14:57 marketing 14:58 as we have continued to be encouraged by 15:00 recent acquisition trends 15:02 and see a compelling opportunity to 15:04 acquire new customers 15:05 we intend to closely track performance 15:07 to be dynamic with our spend including 15:09 increasing spend if we see strong 15:11 results across both 15:13 ecosystems we have historically seen 15:15 strong returns on our acquisition spend 15:17 of at least 15:17 three times within three years of 15:19 acquiring a cohort 15:21 for cash app we'll look at new and 15:23 creative marketing strategies to reach 15:25 more customers 15:26 and further engaging existing customers 15:29
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