Block Inc.

Good day, ladies and gentlemen, and welcome to the block fourth quarter 2022 earnings conference call. I would now like to turn the call over to your host, Nikhil Dixit, head of investor relations. Please go ahead.

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 months of January and February. These represent our current estimates 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.

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 entry marks 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 to the business, including stock-based compensation. And number three, utilize industry standard conventions that are simple to communicate and to 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 want 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 squares 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've 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've focused on in the past, we recognize it excludes certain expenses like stock-based compensation, which is a real meaningful 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're 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 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 target 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 and our ecosystem model by allowing each business to make holistic decisions around their teams and roadmaps in parallel. It ensures the quick decisions of one ecosystem won't constrain the others. 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, in a 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. And now, over to Amrita, our COO.