Dive Brief:

• Digital payments company Block is further shaving expenses for the year and will pull back on hiring as well as sales and marketing spending in 2023, executives said Thursday while discussing third-quarter earnings results.
• Although business trends have remained stable through October, the company has been “increasingly focused on our spend amidst an uncertain macro environment,” said Chief Financial Officer Amrita Ahuja during a webcast of the conference call with analysts. For 2023, “we're focused on operating more efficiently, and we expect to slow our pace of expense growth meaningfully compared to prior years,” she said.
• The San Francisco-based company reported a $15 million net loss for the third quarter, according to a letter to shareholders. Third-quarter net revenue jumped 17% year over year, to $4.52 billion. Excluding bitcoin and Afterpay revenue, net revenue increased 25% to $2.54 billion.

Dive Insight:

Companies across the industry are reacting to the worsening economic climate, as higher inflation and increased interest rates weigh on consumers.

Block’s losses on transaction, loan, and consumer receivables more than doubled during the quarter to $148 million as its business expanded, the company disclosed. “The increase was driven primarily from consumer receivables losses related to our BNPL platform, as well as growth in Square Loans volumes and Square GPV,” the letter said. That was the case even though losses remained consistent with historical rates. “We will continue to monitor trends closely given the dynamic macro environment,” the letter said.

The company is reducing investments this year by another $140 million, bringing operating expense cuts to $590 million for 2022, Ahuja said Thursday. Block, the parent company of Square, Cash App and Afterpay, is pulling back in areas where “we haven’t seen returns or where the returns are less certain,” Ahuja said. 

That follows spending cuts the company said it made when discussing second quarter results in August.  

"As the environment continues to evolve here, we want to remain agile to be able to adapt to what we're seeing,” Ahuja said.

Despite the cost trimming, the company expects fourth-quarter expenses to climb $206 million over the third quarter. Block’s third-quarter operating expenses soared 46% on a year-over-year basis, to $1.62 billion. That included $37 million of “amortization of customer and other acquired intangible assets, primarily related to the acquisition of Afterpay,” per Block’s shareholder letter.

Block, formerly Square and led by Jack Dorsey, said it was purchasing Australian buy now-pay later provider Afterpay in August 2021 for $29 billion. By the time the deal closed on Jan. 31, however, Block’s stock had fallen, making the acquisition price tag $13.9 billion. 

When an analyst pressed Ahuja on the possibility of Block attaining operating leverage next year, she emphasized that Block is focused on “driving long-term, profitable growth at scale.”

Ahuja acknowledged the company’s investments have climbed in recent years, as Block dialed up spending on products and marketing. But she underscored the company’s intent to rein in expenses next year, specifically in hiring and sales and marketing.

“Longer term, we will continue to moderate that expense growth to drive increased operating efficiency” and profitability, Ahuja told analysts.

The company intends on “maintaining the discipline you’ve seen so far this year with a pullback in discretionary operating expenses, particularly in those areas that are less efficient, or, conversely, lean in to areas where we are seeing attractive returns,” she told analysts. 

Headcount makes up the largest share of the company’s expense base, Ahuja said. Block had 8,521 employees as of the end of 2021, per its most recent annual filing with the Securities and Exchange Commission. Ahuja expects moderating Block’s pace of hiring, relative to recent years, will pay off in the latter half of 2023 and in 2024. 

In sales and marketing, Block intends to reduce investments in experimental areas and those where there have been lower returns, such as brand and awareness spending across Square and Cash App.

The company’s investors “may continue to question sustainability of growth, particularly if investments are being pulled back,” David Koning, Baird Equity Research analyst, wrote in a Thursday note.

Afterpay’s third-quarter gross merchandise volume was $5.4 billion, up 10% on a year-over-year basis, Ahuja said. She attributed a slowdown in its growth to the impact of consumers shifting their spending from online to in-person and to “competitive dynamics” and foreign exchange. She had the same explanation in the prior quarter.

Afterpay third-quarter revenue rose 6% over the year-earlier period to $210 million, the company said. That unit’s credit losses on consumer receivables during the quarter were 0.96% of gross merchandise volume, down from 1.02% in the second quarter, and better than the year-earlier quarter, Ahuja noted. That was due partly to “enhancements to our risk models and processes during the first half of the year,” she said. Consumer repayment behavior remains “healthy,” she added.