Block, Inc. (SQ) Q3 2023 Earnings Call Transcript

Block, Inc. (NYSE:SQ) Q3 2023 Earnings Conference Call November 2, 2023 5:00 PM ET

Company Participants

Nikhil Dixit – Head of Investor Relations

Jack Dorsey – Block Head, Square Head, Chairman, and Co-Founder

Amrita Ahuja – Chief Operating Officer and Chief Financial Officer

Conference Call Participants

Tien-Tsin Huang – JPMorgan

Timothy Chiodo – UBS

Darrin Peller – Wolfe Research

Ramsey El-Assal – Barclays

Harshita Rawat – Bernstein

Trevor Williams – Jefferies

Alex Markgraff – KBCM

Bryan Keane – Deutsche Bank

James Faucette – Morgan Stanley

Dan Dolev – Mizuho

Jason Kupferberg – Bank of America

Pete Christensen – Citi

Andrew Jeffrey – Truist Securities

Operator

Good day, everyone, and welcome to the Block Third Quarter 2023 Earnings Call. Today’s call is being recorded. All lines have been placed on mute to prevent any background noise, and after the speakers’ remarks will be a question-and-answer session. [Operator Instructions]

I would now like to turn the conference over to Nikhil Dixit, Head of Investor Relations. Please go ahead.

Nikhil Dixit

Hi, everyone. Thanks for joining our third 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 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 a preliminary estimate of performance for the month of October. This represents our current estimate for October performance as we have not yet finalized our financial statements for the month of October, and our monthly results are not subject to interim review by our auditors. As a result, actual October results may differ from this estimate and may not be reflective of performance for the full fourth quarter.

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 October or the fourth 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 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 the website shortly.

With that, I would like to turn it over to Jack.

One moment. We’re just getting Jack to reconnect.

Jack Dorsey

I’m sorry, I was on mute. So, we’re going to do something a little bit different this year. Thank you all for joining us. We wrote — I wrote a shareholder letter to you all, which you’ll find on our website, and we’re going to focus our call to maximize questions. So, we’re going to start with Amrita providing more detail into what I wrote, most notably, reaching our Rule of 40 goal in 2026 and authorizing a repurchase of $1 billion in shares to offset a portion of dilution from share-based compensation. If you haven’t yet, please read that letter for all the details and what I’m focused on going forward.

And with that, I’m going to turn it over to Amrita.

Amrita Ahuja

Thanks, Jack.

There are four topics I’d like to cover. First, our strong performance in the third quarter and increased profitability expectations for the remainder of the year. Second, a preliminary view of 2024 and where we’re demonstrating discipline on our investments to drive margin improvement. Third, our path to achieving Rule of 40 in 2026. And lastly, our capital allocation strategy to deliver value for shareholders.

In the third quarter, gross profit was $1.90 billion, up 21% year-over-year. We delivered our highest-ever quarterly adjusted EBITDA of $477 million, or 25% margin on gross profit.

Adjusted operating income, which as a reminder includes expenses related to stock-based compensation and depreciation, was $90 million and 5% margin on gross profit, compared to $32 million a year ago. Our strong profitability during the quarter demonstrates our focus on efficiency in pursuit of our investment framework.

Cash flow generation has also been strong and improving. Adjusted free cash flow was $427 million in the quarter compared to $88 million in the prior period. For the last 12 months, adjusted free cash flow was $945 million, up from negative $99 million in the prior period.

Let’s get into Square and Cash App. Square generated $899 million in gross profit, up 15% year-over-year. Square GPV grew 11% year-over-year, or 12% on a constant currency basis. We’re committed to serving sellers locally and through our banking products. In the third quarter, we experienced strong growth from our vertical points of sale products with gross profit up 29% year-over-year and our banking products up 20% year-over-year.

Cash App generated $984 million in gross profit, an increase of 27% year-over-year. Looking at the components of the inflows framework, as of September, there were 55 million monthly transacting actives, up 11% year-over-year, with growth driven by our peer-to-peer network. Inflows per transacting active averaged $1,132 in the third quarter, up 8% year-over-year, and relatively stable compared to the first half of the year. Monetization rate, which excludes gross profit contributions from our Buy Now Pay Later platform, was 1.43%, up 8 basis points year-over-year, driven primarily by pricing changes over the past year and relatively flat quarter-over-quarter.

Turning to our BNPL platform, which contributed $94 million of gross profit to each of Square and Cash App in the third quarter. GMV from our BNPL platform was $6.7 billion in the third quarter, an increase of 24% year-over-year. Losses on consumer receivables were 0.84% of GMV, an improvement quarter-over-quarter and year-over-year.

As Jack noted in his letter, in the fourth quarter, we restructured our commerce efforts, moving our BNPL platform into Cash App, as we believe combining the two ecosystems enables us to provide consumer experiences others can’t, especially for commerce. From a financial reporting perspective moving forward, we will no longer split 50% of our BNPL platform into each of Cash App and Square. Instead, to reflect the recent organizational change, we’ll include 100% of our BNPL platform in Cash App’s results beginning in the fourth quarter.

During the quarter, we experienced an outage to our services across Block, which impacted both Square and Cash App systems. We know the reliability of our systems is crucial for our customers and are working hard to rebuild trust. The outage lasted about 15 hours on certain products and we estimate it impacted gross profit by less than 1% during the quarter. Our offline capabilities for Square and Cash App enabled our customers to continue to process some transactions during this time. Looking ahead, we are accelerating our efforts to expand offline capabilities to all of our Square products, so sellers won’t be worried about missing a sale and are prioritizing building our technical infrastructure with greater redundancy and resilience.

Turning now to the fourth quarter of 2023. We are shifting away from monthly trend disclosures in favor of reinstating quarterly and annual gross profit and profit guidance. We expect to continue with this updated approach until we achieve and sustain the Rule of 40. We expect to deliver between $1.96 billion and $1.98 billion in gross profit or 19% growth at the midpoint.

For Square, we expect gross profit growth to improve from the third quarter’s 15% growth rate as we lap more favorable comparisons from the prior year, and we get the first full quarter benefit from pricing changes on Square Invoices we implemented in the third quarter. For the month of October, we estimate Square GPV was up 9% year-over-year. Our growth has moderated due to both GPV per seller and lower contributions from new cohorts of sellers. We believe GPV per seller has been impacted by macro trends, in discretionary verticals, which continued through October. Although we’ve achieved positive customer acquisition through the first three quarters of the year, gross profit from seller cohorts onboarded over the past two years are not contributing as much to growth as anticipated, and we’re focused on evolving our go-to-market strategy to improve this.

For Cash App, we expect gross profit growth to moderate on a year-over-year basis from the third quarter’s 27% as we lap stronger growth from the prior year. We continue to expect all three components of the inflows framework to grow on a year-over-year basis in 2023. From a product perspective, we’ve seen particular strengths in Cash App Card and Borrow, as we drive continued growth in our financial services products. While we’ve experienced softness in growth from Cash for Business accounts and expect Cash App Business GPV to decline in the fourth quarter. Compared to our prior expectations, growth in the fourth quarter was primarily impacted by expectations for our BNPL platform and, to a lesser extent, Cash App Business GPV and Square GPV.

Looking at profitability, we expect to deliver $430 million to $450 million in adjusted EBITDA, and $40 million to $60 million in adjusted operating income in the fourth quarter. And we are raising our full year 2023 profit guide. We expect adjusted EBITDA of $1.66 billion to $1.68 billion, and adjusted operating income of $205 million to $225 million. These are increases of $170 million and $190 million, respectively, at the midpoint compared to our prior guide.

For the full year 2023, the midpoint of our guidance implies gross profit growth of 24%, and adjusted operating income margins of 3%, leading to Rule of 27 this year. This reflects meaningful margin expansion in 2023, with the midpoint of our guide reflecting 5 points of adjusted operating income margin improvement and 6 points of adjusted EBITDA margin improvement compared to 2022.

Turning now to our path to achieving Rule of 40 in 2026. As a company, we remain focused on balancing growth and profitability. As we look longer term, we’re bringing a renewed focus to efficiency, exercising discipline with our expenses, and thinking critically about how we operate to drive leverage. We’re going to do all this while also focusing on how we can continue strong top-line growth to capture more of our addressable market.

We introduced our investment framework at the beginning of the year and, today, we want to provide more context on when and how we expect to reach our goal. As Jack shared in his Shareholder Letter, we plan to reach Rule of 40 in 2026 with an at least mid-teens gross profit growth and approximately mid-20% adjusted operating income margin. This guidance is based on current trends in our business and does not factor in changes to the macro environment. As we learn more and trends change, our expected mix of growth and profitability may change over time as well. We will continue to monitor trends as we periodically update this view.

We see a long runway for continued growth ahead, and in our long-term planning, we’ve refined our priorities for each of our Square and Cash App ecosystems, which are captured in Jack’s Shareholder Letter. We believe we are still less than 5% penetrated against our $200 billion total addressable markets, one which we will work to expand over time in a disciplined way with new products and audiences.

In balance with our growth priorities, what you’re hearing from us today is a significant commitment to profitability and efficiency across three key initiatives.

The first area is through the efficiency of our teams. As Jack outlined in his letter, we are implementing an absolute cap on the number of people we have at our company. We expect to be a smaller team by the end of 2024 compared to where we are today. Our cap of 12,000 people compares to our current size of just over 13,000 people as of the end of the third quarter. We believe constraining team size will enable us to be more effective in how we drive performance and service of our customers and accountability on our business strategies.

We expect to reach this cap by the end of 2024 with steps towards this goal throughout the year through a combination of performance management, centralizing teams and functions to reduce duplication, and strict prioritization of our scope, aligned with the priorities outlined in Jack’s letter. We expect to hold firm at 12,000 people until we feel the growth of the business has meaningfully outpaced the growth of the company. With greater constraints on team size, we expect to drive meaningful leverage on stock-based compensation as a percentage of gross profit in the years to come, starting in 2024.

Second, we are also in the midst of a broad-based effort to reduce our spend across corporate overhead areas. We’ve identified a number of areas where we expect to find savings such as real estate, process improvements using automation, discretionary spend areas like T&E, and certain vendor relationships across software, data, cloud, consultants, and contractors.

Third, within our ecosystems, as we’ve shared in the past, we’ve been identifying opportunities to continue improving our cost structure as we optimize unit economics and partnerships by leveraging our scale.

Moving to our initial outlook for profitability in 2024, which we expect to be our strongest year of profitability yet. While we are still in the planning process for next year, we expect significant margin expansion as we implement these constraints. We expect to achieve profitability on a GAAP operating income basis in 2024 and to deliver $875 million in adjusted operating income, up approximately 4 times compared to our 2023 guide. We expect to deliver $2.4 billion in adjusted EBITDA, an increase of more than 40% relative to our 2023 guide, and to deliver strong adjusted free cash flow growth next year as well. We plan to share more about our gross profit growth expectations for 2024 during our fourth quarter earnings call in February.

Lastly, I wanted to touch on capital allocation and our focus on prioritizing shareholder return. As we progress towards Rule of 40 in the coming years, we expect our margin profile and free cash flow generation to improve, which means we can return more to shareholders over time. Today, we are announcing an initial share repurchase program of $1 billion, which will offset a portion of dilution from share-based compensation and allow us to act opportunistically when we believe our shares are undervalued. We consider share-based compensation in our financial targets as we measure our progress towards Rule of 40, and we want to be responsible in managing the impact of dilution as our company grows.

What you hear from us today is an increased commitment to delivering value to our customers and to our shareholders as we execute on the opportunity ahead of us.

And with that, I’ll turn it back to the operator to start the Q&A portion of the call.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll take our first question from Tien-Tsin Huang with JPMorgan.

Tien-Tsin Huang

Hey, thanks so much. Really appreciate the cost discipline comments here. Jack, question for you. Just with all this cost framework now laid out, do you think there’s still room here for innovation and outsized growth that we’ve come to know from Block for quite some time? Especially with all the changes and the focus, can we see gross profit growth accelerate between now and 2026? Love to hear your thoughts. Thanks.

Jack Dorsey

Yeah, I think there’s even more room for innovation and invention and growth. To be very frank, I believe we’re getting in our own way throughout the company. As I’ve dug in through both the lens of Square and also our investment framework, I just found a lot of silos, a lot of redundancy, a lot of kind of a lack of desire for teams to work together. So, I think a lot of what’s been holding us back is cultural in that we need to reinvest in why we’re building an ecosystem of ecosystem model and how powerful that is.

And then number two is around just our structure. We had unclear decision-making throughout the company which led to a lot of slowness especially on the Square side. So, we’ve been spending the past few weeks just looking at all of that and looking at all of our intersections with our foundational teams, that’s our HR and council and financial teams, and making sure that we approach that work very lightly so that we can focus a lot more on getting products and features to our sellers and to our Cash App customers much, much faster.

So, I believe we’re about to enter a phase of re-acceleration as we look to really hit our goals in R40. And I want to maintain that we’re looking to really focus on our customer and retaining our customers as well. So that will always be a checkpoint on all the moves that we make and ultimately how we think about shifting and iterating and experimenting much more.

Amrita Ahuja

Tien-Tsin, I’d just add that, in many ways, we think constraints can make us stronger. I think that’s what you’re hearing from Jack. And this people cap, the absolute number cap on the number of people we have is meant to address and enable these key decisions around our priorities, around our structures, centralizing teams to reduce redundancies in places, enable faster decision-making with clearer accountability, and help us create higher-performing teams across our ecosystem. We’ll release the team size cap constraint when we feel it constrains growth of our customers or our business or when the growth — when our top-line growth outstrips the growth of these teams. We’re not there today.

Our focus also is on cost areas outside of the personnel costs that don’t touch customers, such as with corporate overhead. And we think there’s lots of opportunity here to address, to streamline our operations without impacting the customer experience.

And then finally, just a word from me on our planning process. We have more to do. So far, during our planning process, I think we’ve been appropriately focused on cost efficiency opportunities, but we have so many opportunities from a growth perspective across our ecosystems as well, some of which from a strategic prioritization perspective, Jack outlines in the letter. So, what you see here with 2026 growth, what we’ve shared so far really is based on our current run rate trends. And of course, we’ll periodically update this as we learn more, whether it’s from a macro perspective or based on our own execution and ability to accelerate.

And relative to that current view of at least mid-teens growth, we’d expect Cash App’s growth to be slightly above that and Square’s growth slightly below. But our focus is on exploring new growth initiatives, and then we’ll incorporate those as appropriate into our outlook over time. We have a history here of unlocking new innovation on products and across new audiences to continue driving outsized growth and we’ll continue that work.

Tien-Tsin Huang

Great. Thanks for the candid reflection. Thanks.

Operator

We’ll take our next question from Timothy Chiodo with UBS.

Timothy Chiodo

Great, thank you. I want to touch on some of the local sales efforts and the move up markets for the Square ecosystem. In the context of the 12,000 headcount cap, do you feel that there is ample room to show meaningful leverage on both product development and G&A, but at the same time, again, leaving that room to really lean into sales and marketing and specifically in building out some of those local in-market sales teams to help drive seller up market?

Jack Dorsey

Yeah, I do think there’s room. I do think there’s a lot of areas that we can make more efficient within Square. And I think where we’ve been lacking on the go-to-market is much more experimentation, and experimentation driven by AI tools as well. We put a focus, as you saw in the letter, it’s our number three priority is to utilize and grow with AI. For us, that means increasing the probability of positive outcomes for sales, customer service, which is focused a lot on retention and sales within the ecosystem, and also marketing to make all of those efforts much more efficient in terms of reaching sellers where they are. And it allows us with those efficiencies to experiment a lot more.

So, we made a really good move with verticalization of our sales force. We’re going to prioritize two verticals in particular, food and beverage, and also services such as beauty. They’re inherently local. Our strength is in local. And when we have that in-person strength, whether that be an upmarket seller or a small seller, we can expand our ecosystem through that relationship.

So, we’re going to continue to focus on that strength. And then, through all those efficiencies that we create with these new AI tools, we’ll continue to roll out to our sales staff, to our support staff, and to marketing. I do believe we can experiment and experiment with new things that we haven’t tried yet, such as field sales, and learn from them quickly so we can iterate to really good answers.

Timothy Chiodo

Thank you, Jack.

Operator

We’ll take our next question from Darrin Peller with Wolfe Research.

Darrin Peller

Hey, thanks, guys. It’s great to see the outlook going all the way into the Rule of 40 in ’26. But really for now, we get a lot of questions on the sustainability of your Square, the seller business, really just understanding the drivers to the double-digit growth we hope to see. International verticalization, software services, cross-sell, just give us a sense of what the building blocks are to keep that up to those rates?

And then also just an add-on to that would be to touch on where you see the success. I know, Jack, you alluded to the company’s culture working on the ecosystem. But I guess we’d love to hear more about where you see the success on ecosystem potentially kicking in, where you can see the benefit of that? Thanks, guys.

Jack Dorsey

Yeah. So, I think first and foremost, this goes back to the prioritization that we laid out. So, my first two weeks with Square, again, running Square was focused on like what are we working on and why, and doing a significant stack rank so that we — as an organization, we know what’s most important, why it’s most important, and how it’s going to impact. But the platform that we’re building is critical, not only for enabling new features that have left us out of the conversation for some sellers and not market sellers, but also to make sure that we’re realizing our ecosystem of ecosystem strategy and especially around our third-party developers so that they can continue to build where we’ve left off and we have more information on what we can partner with and build next as well.

So, the platform is going to be, I believe, a huge unlock for us, and we’re going to be seeing a lot of those unlocks next year — into next year. And then I do believe that the focus on these local efforts, whether that be local merchants, local sales, is going to bear a lot of fruit for us. We have a very compelling product, but we’ve been hampered a bit in the past around experimenting with more novel approaches to sales that we see in our competitors. We’re removing those constraints so that we can learn much faster and invest more deeply into the things that do actually work.

I think a lot of what’s holding us back from a product side is actually onboarding. We still get a pretty significant chunk of sellers from self-serve and those are of all sizes, whether that be going to our website or buying hardware from an Amazon channel, for instance. And our flow, our onboarding flow, it just takes way too much time, hence, we’re taking time away from our sellers completely. So, those will be significant focus areas for us and something that I think we’ll provide pretty quick results over the next year.

AI, I talked about in the last question. The final thing I want to point on that really sets us apart is banking. We have a number of products for sellers within banking out there, and we’ve seen banking — we see banking today as more retaining our customers and when someone comes into the Square ecosystem, signing up for a loan or a card, a debit card or credit card or savings account, helps keep them. In the future, we do believe that this will become more and more an acquisition channel for us as well. And I think it’s one of our strongest differentiators. And one I think we’ll look back at as being the most proud of. And we have some pretty unique advantages in how we approach people banking with Square and how we enable sellers and how that ultimately positively reinforces our ecosystem and also the Cash App ecosystem.

So, in terms of bringing these ecosystems together, I think the place to look at is going to be commerce. And the most notable within commerce is how we really bring in local commerce, especially within a Cash App view. That is our superpower. And I think the world is going to want more local experiences. A lot of retail is becoming more and more monotone on the internet, and people are looking for more unique experiences and that’s where we fit in and that’s where our strength is, and those connections will be coming to bear more and more — especially early next year, so you will be able to see something early next year.

And there’s an obvious intersection between Cash for Business and also Square. And you can see that potentially as a graduation task, for instance. But people may want to start simpler and smaller and utilize Cash. And then as they grow, Square is there to grow with them.

Darrin Peller

All right. Very helpful. Thanks, Jack.

Operator

We’ll take our next question from Ramsey El-Assal with Barclays.

Ramsey El-Assal

Hi. Thanks for taking my question. And this question dovetails a little bit with a couple of the prior ones, but I wanted to ask about Square Go and the progress you’re sort of making connecting consumers to merchants on the platform. If you can kind of talk about the progress you’re making on this theme more broadly and what other ways you’re exploring to create that sort of consumer demand within the app and ecosystem?

Jack Dorsey

Yeah, I mean, it’s great you brought up this question because this is exactly how we’re thinking about crossing the two ecosystems between Cash App and Square. So, for those of you who are not aware, Square Go is — right now focused on services. It’s focused a lot on beauty. It allows you to open up, download an app, on Square Go, open it up in your local city, and this is mainly in the U.S. right now, and see all the services around you and book an appointment and then get all the information that would be critical for your appointment in real-time. So, we’re seeing it as a way to provide discovery, because we’ve had to start it organically and market it as such and get people to download it.

We have actually seen a very strong start, surprisingly, which points to the intent and the desire. Now, if you imagine what that might look like in a much larger canvas with a much larger audience, such as Cash App, those are the questions that we want to explore more. And that’s where we think our strength really lies is when we look across these ecosystems for the use case specifically that go is going after, which is discovery, hence, discovery of merchants around you and building up a resilient and retentive relationship for a seller and their customer. We think we can amplify that especially with everything that we’ve learned with Square Go being in the market thus far.

Ramsey El-Assal

Great, thank you.

Operator

We’ll take our next question from Harshita Rawat with Bernstein.

Harshita Rawat

Good afternoon. Jack, I want to ask about Square leadership. You recently took over the leadership of that business after Alyssa’s departure. How you thinking about that going forward? Are you looking for a replacement for Alyssa, or should we expect you to continue to lead? Thank you.

Jack Dorsey

Thank you for the question. I’m going to lead Square until we hit some milestones. I want to see a significant return to growth, number one. I want to see us be a lot more innovative and inventive, and I want to see us connect our ecosystems better, not just with Cash, but also with TIDAL and TBD. TBD is going to enable us to go more global faster, both Square and Cash App. And with TIDAL, we do believe that there’s parallels between what a musician faces and what a small seller just starting out faces. And a lot of the same tools are going to be useful.

So I’m thinking about more — I’m thinking about this more from a milestone perspective. And I’ll know when it’s time and when Square is set up in a way that we look to find a dedicated lead. But this move has enabled me to see a lot of the problems, not just within Square, but across the company, and work to fix them very, very quickly. So, our pace of addressing some of the issues that we’ve had for quite some time, but maybe ignored, the lack of collaboration between ecosystems, the silos that we built in the past, all those are a thing of the past, and we’re immediately moving to something that is much stronger and is going to deliver a whole lot more value for our customers, and everything else will follow from that.

Harshita Rawat

Okay. Thank you.

Operator

We’ll take our next question from Trevor Williams with Jefferies.

Trevor Williams

Great. Thanks a lot. I wanted to ask on the path forward for Cash App gross profit and the monetization rate specifically. I think within the guidance for Q4, if we back out Afterpay, it looks like it’s embedding a pretty big step-up just in the pace of quarter-over-quarter gross profit dollar growth for Cash App. Amrita, if you could unpack where that improvement is coming from? And then, on the monetization rate, how we should think about its progression over the next year or so? And if there’s anything you’re able to share on product pipeline specifically there would be great. Thanks a lot.

Amrita Ahuja

Sure. Thanks for the question. On monetization rate, what we’ve said in the past, which we’ve reiterated today as well, is that we are now lapping some of the pricing adjustments that we made last year. So, we expect to see greater stability in the monetization rate in Q4 relative to Q3.

And as we said from a Q4 guide perspective, we also expect to see a moderation in Cash App’s growth rate in the fourth quarter relative to the third quarter as we’re lapping, again, some of those more difficult comparisons from last year. This is on the back though of strong results in the third quarter with — if you look across our inflows framework, strong growth across each of the three aspects of Cash App’s inflows, whether it’s active, which grew 11% year-over-year to 55 million on the back of continued viral growth in our peer-to-peer network mechanisms, or it’s inflows per active, which were $1,132 in the quarter, and we’re up 8% year-over-year, relatively stable with the first half of the year. Again, this one is really a factor of both our customers’ spending power, as well as their adoption of our products and engagement with our platform. And you see with products like Cash App Card and Cash App Borrow that we’ve been able to build awareness and deepen engagement with those products over time with now 22 million customers on Cash App Cards and strong spend on a year-over-year basis with Cash App Card as well.

And then thirdly, monetization rate as you know, which was 1.43% in the third quarter and that was up 8 basis points year-over-year, relatively stable from a quarter-over-quarter standpoint, which, as you noted, that monetization rate excludes the gross profit from our BNPL platform. We do expect, as I noted earlier, that monetization rate to stabilize as we lap the pricing changes over the past year.

Trevor Williams

Got it. Thank you.

Operator

We’ll take our next question from Alex Markgraff with KBCM.

Alex Markgraff

Hey. Thanks for taking my question and all the kind of financial targets provided in the Shareholder Letter. Outside of the more explicit Rule of 40 targets, just curious, how we should evaluate some of the progress you’re making on the product side of things and kind of tying the ecosystem together as you’ve laid out priorities in the letter. Is there a north star to kind of orient folks around to kind of follow along with that progress?

Jack Dorsey

I think the biggest one to look at is going to be commerce and it’s going to be through the lens of Cash App that we spent the past few months looking deeply at the Afterpay integration restructuring, that team moving things to Cash App. Because a lot of the value is going to be created there, especially as we bring commerce opportunities, both internet-based and e-commerce-based to local, right to the surface. So that’s probably going to be the most notable in terms of connecting these ecosystems.

And as I mentioned before, the second one will be the intersection between Cash App for Business and the Square ecosystem. There’re some obvious connection points there, especially as Cash App for Business customers grow and how they utilize our tools. And I think a big theme between both ecosystems is going to be around banking use cases, both on the on the Square side and the Cash App side, actually throughout our entire ecosystem and all our business units. But those would be the three that I’d point to watch.

Alex Markgraff

Thanks.

Operator

We’ll take our next question from Bryan Keane with Deutsche Bank.

Bryan Keane

Hi, good afternoon. Thanks for taking the question. I guess, Jack, my question is just when you assess the seller volumes, how much do you feel like it’s pure economic volume that discretionary spend that’s slowing some of the volume versus maybe a competitive pressure from the market that you guys can do a better job at? And then I guess going forward, as the comps get easier, do you factor in a little bit more of an economic slowdown in the fourth quarter if that’s in the guidance? Thank you.

Jack Dorsey

I’ll take the first part of the question. I do believe that by focusing more on the product or features and also getting to parity on particular verticals especially within food and beverage and services, will unlock a lot more growth. There’s been certain features that just blocked us out of conversations from restaurants, for instance. And a lot of those will be unlocked soon with our focus on the platform. And I do believe that we can be much smarter and more efficient with our go-to-market.

Most importantly, as we’ve made this move to verticalization, looking for more opportunities to automate through AI, but also to experiment more. I want to make sure that we’re experimenting with things that we had not tried before, smaller scale, so we can see what works, and then make better informed decisions about investing more fully in them. I think there’s a lot of room there. And that of course has to match what we’re doing when a seller no matter the size gets to our website, gets to our dashboard, and they find something simple, intuitive, and they, most importantly, find all the other products that we offer them, not just the one that came on board for. So, the combination of that I think gets us back to a place of growth that we’ll be very proud of.

Amrita Ahuja

And Bryan, I can help fill in just some of the numbers that we’re seeing in real-time and kind of what’s embedded in our Q4 guide. So, if we look at Square GPV in the third quarter, we grew 11% year-over-year. And again, based on our estimates, we believe excluding the impact from the outage, growth would have been more in line with the second quarter’s growth rate of 12%. Looking at October, we estimate GPV to grow 9% year-over-year. This is obviously — that’s lower than our 11% from the third quarter. This primarily driven from the U.S., as international markets have been more stable.

But looking at some of the drivers, if we think about the three high-level components of Square’s growth, customer acquisition, churn, and same-store growth. We’ve seen stability in churn through this period, but ultimately, our growth is moderated due to both same-store growth and lower contribution from new cohorts of customers. Now we think same-store growth, the slow down there, is relatively in line with broader macro trends across discretionary verticals. And that, as Jack has noted, we have work to do to shift our customer acquisition trends, which the team is laser-focused on.

Just to provide maybe a little bit more granularity on the same store growth, when you look at GPV per seller, this is where we believe the recent moderation we’ve seen has been macro-related. Processing volumes at existing sellers were lower in the third quarter compared to the prior year. We believe it’s macro-driven as the recent results that track directionally with other third-party spend indicators that we measure when we adjust for our mix of verticals given our greater mix of discretionary spend. For instance, we don’t serve grocery or gas as an example. And in October, we saw broad-based softness in consumer spending trends in those discretionary verticals, food and drink and retail.

So, we’re watchful here, and these trends are factored into our Q4 guide. Ultimately, a lot of the work that we’re doing to close feature gaps and iterate and experiment and move quickly on our go-to-market is where we expect to see opportunities for growth in the future.

Bryan Keane

Great. Thanks for the color.

Operator

We’ll take our next question from James Faucette with Morgan Stanley.

James Faucette

Thank you so much. I wanted to follow-up on kind of Cash App and the intention to grow there and provide more of banking-type services per the letter, et cetera. How do you think about like the life cycle of a typical customer, a, that you’re onboarding, and clearly you’re able to deliver peer-to-peer, and that seems like the easiest first thing, but then bank card or debit card, but — and you’ve got some other products. But walk us through like how you think about the evolution of other products that those customers need and how to evolve with them, and as particularly as they increase their own spending capacity?

Jack Dorsey

Yeah. So, as I said in the letter, Cash App is interesting. It sits at this intersection of three very distinct use cases, which are financial services, community-based transactions, which is effectively peer-to-peer, as you mentioned, and commerce. And our approach is ultimately to bring these three together in a very seamless way, define an entirely new product category which reinvents banking for customers.

So, a lot of — what we started obviously was peer-to-peer and it has inherent network effects and that you’re receiving money from friends and sending money to families. So, it is inherently social and inherently has this incredible word of mouth factor. But as you get into it, as you receive money and you see that you can also get a card, that you can use that card in ATM, that you can invest in Bitcoin or stocks, you start seeing it more and more as a bigger part of your financial spend, in your financial activity and financial life.

And our goal now, as we mentioned, is to win more of a banking use case relationship with our existing customers. And what that means is ultimately getting to direct deposit and winning a majority of their direct deposit, because that really indicates that they’re seeing this as a financial home for them and they’re able to use it in entirely new ways that they weren’t be able to in the past.

So everything that we’ve built, again, goes back to this concept of an ecosystem where these tools positively reinforce one another, either through new use cases or through retention or through entirely new features that they can’t find elsewhere, and that helps not only drive new customers but also helps us keep them.

I think that as I said before earlier in this call, I think the one that we’re really excited about because it is fundamentally new to us is around commerce. And as we really deliver against these three financial services, community-based, peer-to-peer transactions and commerce, we have something that I believe is very, very powerful and very unique in the world and continues to build on our strengths, and lends itself to add strength to our other ecosystems, most notably Square.

Amrita Ahuja

And I’ll just add, James, as we see customers taking on more products within our ecosystem, within Cash App, we see a multiplier effect on the amount of inflows that they bring into Cash App. Whether they start as peer-to-peer and then they take on a Cash App Card, maybe they participate on our free stock investing program or Bitcoin investing, and then eventually getting them to direct deposit their paycheck, which is a significant opportunity from a primary banking relationship standpoint. And that’s been a big driver of the growth that we’ve seen in inflows per transacting active over time as we bring customers greater awareness around the broader set of financial services and commerce products across the ecosystem.

What we saw in the third quarter was continued to drive growth in these newer inflow channels. Customers received more than $8 billion in direct deposits into their Cash App accounts in the third quarter, and more than $2 billion of paper money deposits in the third quarter. Both grew approximately 40% year-over-year, which is nearly 2 times as fast as the growth of overall inflows into Cash App.

So obviously, more opportunity for us to do here as we see the direct deposit attached still in that sort of 10% range to Cash App Card monthly actives through September, although we’ve obviously continued to grow our Cash App Card attached through this period of time, we think we have an opportunity to improve both attach rates to Cash App Card as well as direct deposit and this broadening ecosystem of financial services products for Cash App.

James Faucette

Thanks a lot. Appreciate it.

Operator

We’ll take our next question from Dan Dolev with Mizuho.

Dan Dolev

Hey, guys. Thanks for taking my question. Maybe more for Jack. I think that the Analyst Day and, obviously, you’re very prominent talking about Bitcoin. Bitcoin is now having a renaissance. What is kind of the role of Bitcoin right now in terms of your vision of connecting the ecosystem, the holy grail, and specifically the Cash App? I’m really interested in hearing your views on that. Thank you.

Jack Dorsey

The reason we have a focus on Bitcoin is because we believe the internet will have a native currency. We believe the internet needs a native currency to enable micro payments globally. And we started very simply by providing an exchange for people to buy and sell Bitcoin. But ultimately over time, we do believe there’s a significant market and significant opportunity and remittance using Bitcoin. And that’s exactly what TBD is focused on. Not only is it a really incredible business that’s quite large, but it enables our other ecosystems, Square and Cash App, to move much faster globally as we build out that functionality and as we build out the primitives we’re working on for developers.

So I do — I believe that Bitcoin will continue to increase in value, not just in monetary value, but in use case value to the world. And I do believe that it will be a big part of the future of commerce. And since we have such an early lead and understanding on it, we’ll be set up for success. We always knew that this was going to be a long-term play and it still will be, but there’s no doubt that the internet will have a native currency and there’s no doubt right now that Bitcoin is the best candidate for them.

Amrita Ahuja

Now, I’ll just add, Dan, that — I’ll just add that, obviously, you’ve heard from us today an increasing focus on not only our aspirations and growth for the business, but also discipline in how we operate our business. And similarly, we’ll be disciplined around our Bitcoin initiatives, holding our emerging initiatives to a specific investment envelope and will track progress relative to those key milestones on a recurring basis.

Dan Dolev

Great. Really good results, and I love the long-term vision. Thank you.

Operator

We’ll take our next question from Jason Kupferberg with Bank of America.

Jason Kupferberg

Thanks, guys. I wanted to come back to the vertical point of sale in Square. You had the gross profit of 29% there. Is that growth rate sustainable over the next few quarters? And I’m curious what percent of Square’s total gross profit is now coming from vertical point of sale?

And then separately, if you could just make a quick comment on what you’re expecting for stock-based comp expense both this year and next year? Thank you.

Amrita Ahuja

So, Jason, I can start. So, in the third quarter, yes, we had a strong growth in our vertical point of sale and developer solutions, where gross profit from our vertical point of sale products across retail, restaurants, and appointments was up 29% year-over-year, and gross profit growth from our developer tools also outpaced overall Square gross profit growth.

As we said last quarter, each of our vertical point of sale products delivered gross profit of over $100 million on an annualized basis during the third quarter as well. And there’ll be key pieces of how we optimize our go-to-market strategy, improving onboarding flows and experimenting with new channels.

I won’t give you a specific number for vertical point of sale going forward, but we did note that we expect Square gross profit growth from the Q4 perspective to improve relative to Q3, partly because of the more favorable comparisons as well as the full quarter of a pricing movement that we take on — we took on Square Invoices during the third quarter.

And your second question was related to stock-based compensation?

Jason Kupferberg

Right, for 2023 and 2024, just in the context of the AOI targets?

Amrita Ahuja

Sure. So, stock-based compensation in the fourth quarter, we expect to be relatively flat relative — on an absolute dollar basis relative to the third quarter. And as I said on the call earlier, we expect to drive meaningful leverage on SBC over time starting in 2024. And here we’d measure it as stock-based compensation as a percentage of gross profit as we implement the absolute number cap on the number of people that we have at the company and look to drive operational leverage and efficiencies across our business. This is a key focus area for us.

Obviously, SBC is an important tool for us in how employees, our shareholders align our incentives as owners of the business, but it’s one that we’re very mindful of and have deliberately included in our financial targets and adjusted operating income to be measuring and watchful of the amount of dilution. That’s also part of the reason that we’ve got our $1 billion buyback that we’ve announced today is an intention to offset a portion of dilution moving forward.

Jason Kupferberg

Thanks, Amrita.

Operator

We’ll take our next question from Pete Christensen with Citi.

Pete Christensen

Good evening. Thanks for the question. Jack, I wanted to dig a little bit into the go-to-market on the Square side. Connecting a few dots from earlier questions, conversations, sounds like Square may be more interested in participating with the [ISO] (ph) channel to distribute Square products. Is that something on the roadmap? Is that something where you’ve experimented before? Do you believe that Square needs to embrace the ISO channel more to scale against competitors? Thank you.

Jack Dorsey

We have experimented with it before from a financial partnership perspective. Specifically, we had a partnership with JPMorgan Chase and gave out score readers at all of their branches as a distribution point. Not [indiscernible]. I think the most important thing is like we need to experiment more and we need to experiment with different models. I think the answer is not going to be generalized, it’s going to be specific to the vertical. This looks different in terms of distribution for a restaurant than it does for services and beauty and then that’s completely different from retail. So, I think the most important point to take away is like we want to be open to a lot more experimentation that’s on a smaller scale for a bit of time so that we can see what’s working and then invest in a much heavier way.

We are looking more deeply at just some immediate experiments such as contracts, which we’re seeing some early success from some local campaigns, more partnerships and specifically referrals, which we think there’s a lot to it. It kind of hearkens back to our earliest day in terms of how Square spread, which was entirely by word of mouth referrals, helps push that even more. And then, just making sure that we’re focused on the experience the sellers have when they get in to the service or when they go to our website. So those I think are the biggest drivers.

Pete Christensen

Thank you. That’s helpful. A lot of good stuff here. Thank you.

Jack Dorsey

Thank you.

Operator

And we’ll take one more question. And we’ll take that question from Andrew Jeffrey with Truist Securities.

Andrew Jeffrey

Thanks. I appreciate you sneaking me in here at the end. Amrita, the Cash App monetization framework has always been really helpful. Could you unpack a little bit sources of monetization within Cash App? I’m thinking specifically about Instant Deposit versus Interchange, and how that’s changed over time? And how you think about the Instant Deposit product in particular in a real-time payments world?

Amrita Ahuja

Sure. Thanks for the question, Andrew. We’ve had a growing set of products across Cash App, and some of which are free and some of which are monetized, and have grown the pace of monetization of some of the products outside of Instant Deposit even faster than Instant Deposit. So, the mix of the business relying on Instant Deposit has declined over time, despite the fact that that continues to be a growing product for us and has unique use cases around customer utility.

Of course, our focus is as much as possible delivering value within our ecosystem across a number of products. And that’s where you’ve seen the strong growth of things like Cash App Card with 22 million, 40% attached to our 55 million monthly active base, and where we’ve seen strong growth from per-active spend perspective, which continues into the third quarter with growth on a year-over-year basis there.

So — and along with greater utility around obviously peer-to-peer within the broader ecosystem of Cash App, the ability to deposit paper money deposits, the ability to receive your direct deposit, the ability to extract money through an ATM, the ability to invest money, the ability now to save money within Cash App. And all of these provide a greater utility for — a lot of these inflows that are staying within the Cash App ecosystem are moving throughout the Cash App ecosystem.

Now what we’ve seen historically when we look outside at other countries where instant rails are available, for instance, in the UK where Square also has an Instant Transfer product, as the attach rate in those areas for that product continue to be strong, and generally about as strong as what we see in the U.S., meaning that people are willing to pay for seamless integrated product experiences that provide them with value. So obviously this is one that we’ll continue to watch, but even pleased with the continued growth of Instant Deposit, but even more pleased with the growth of the other products across Cash App.

Andrew Jeffrey

Appreciate that. Thank you.

Operator

Thank you. And that does conclude Block’s third quarter earnings call. Thank you for your participation.