Jason Lee - IR Jack Dorsey - CEO Sarah Friar - CFO

Tien-Tsin Huang - JPMorgan James Schneider - Goldman Sachs Ryan Kerry - Jefferies Matt Roswell - RBC Darrin Peller - Barclays Bryan Keane - Deutsche Bank James Faucette - Morgan Stanley Josh Beck - Pacific Crest Neil Doshi - Mizuho Tom McCrohan - CLSA Andrew Jeffrey - SunTrust

And welcome to the Square First Quarter 2016 Earnings Conference Call. I would now like to turn the call over to your host, Jason Lee, head of Investor Relations.

Hi, everyone. Thanks for joining our first quarter 2016 earnings call. We have with us today CEO, Jack Dorsey, and CFO, Sarah Friar. First, we want to remind everyone on the format for our earnings call. We have published a shareholder letter on our Investor Relations' website, which was available shortly after the market close. We will begin this call with a few prepared remarks before opening the call directly to your questions. During Q&A, we will take questions asked from our seller shareholders in addition to questions from conference call participants. We would like to remind everyone that we'll be making forward-looking statements on this call. Actual results could differ materially from those contemplated by our forward-looking statements, and 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. Also, during this call, we will discuss certain non-GAAP financial measures. Reconciliation to the most directly comparable GAAP financial measure will be provided in the shareholder letter 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 will be available on our website shortly. With that, I would like to turn it over to Jack.

Thanks, Jason, and thank you all for joining us today. Before this call, we issued our quarterly shareholder letter with more detail, which I encourage you all to read, but I wanted to take a brief moment now to highlight a few key points from the letter. First, our core payments business remains strong and growing. GPV this quarter was $10.3 billion, an increase of 45% year-over-year. We had a solid quarter and are still on track to be adjusted EBITDA positive this year. Second, our contactless and chip reader continues to gain traction. We think there's a great opportunity associated with Square Logo with the fastest way to pay with your phone. In April, our reader was the exclusive point of sale at Coachella. Contactless payments at the festival accounted for over 10% of card transactions. When compared to the U.S. industry average of less than 1%, this demonstrates how the speed and simplicity of our reader can change by our behavior. Third, we launched new products that sellers need to quickly and easily grow their business. With Square Capital, we transitioned from cash advances to flexible loans and we introduced our chip and PIN reader in Australia. We also launched Builder Square, a suite of APIs that helps seller join the Square ecosystem. With our eCommerce API, sellers can seamlessly integrate their website with Square to accept online payments and track all their transactions in one dashboard. And with our [indiscernible] API, any iOS point of sale can now process payments through Square. Finally, in the first quarter, we maintained a positive risk trend across our entire business. Transaction losses for payment processing as a percentage of GPV reached an all-time low and was below our 0.1% historical average. We're laying the foundation for ongoing growth, increased scale and profitability. Now I'll turn it over to Sarah for some remarks.

I'll now provide additional color on our financial achievements for the first quarter of 2016, as well as our guidance for both the second quarter and the full year. In the first quarter, we saw adjusted revenue of 146 million, up 64% year over year. Our larger sellers, or those generating over $125,000 in GPV, continue to grow at a faster rate than our overall seller base, up nearly 70% from the first quarter of 2015. Software and data product revenue also had another strong quarter, tripling relative to the first quarter of last year. We're excited by the traction of some of our newer products such as Employee Management, Customer Engagements and Instant Deposits are demonstrating. Our first quarter adjusted EBITDA loss of $9 million, compared to a loss of $20 million in the first quarter of 2015, representing a 16 point improvement in margins year over year. With that, let me turn to guidance. For the second quarter, we expect adjusted revenue to be within the range of $151 million to $156 million and adjusted EBITDA to be in the range of negative 4 million to breakeven. Historically, our second quarter is seasonally our strongest in terms of sequential growth. We continue to see strong growth and improvements in operating leverage in our business and, as such, are raising our full year guidance for 2016. For the full year, we now expect adjusted revenue to be in the range of 615 million to 635 million and adjusted EBITDA to be positive 8 million to 14 million. So with that, let me turn it back to the operator to start the Q&A portion of the call.

[Operator Instructions] The first question comes from the lien of Tien-Tsin Huang of JPMorgan. Tien-Tsin Huang: Just wanted to ask on the distribution front, especially with the new contactless reader. Any change in your distribution and how sellers are engaging with you guys? Given the new reader, sounds like you've got some marketing planned for the rest of the year as well. Just want to get an update on that.

No specific changes. Our strongest channels have always been organic and retail and we continue to see that with our new reader as well. We're benefitting a lot from the fact that the whole industry is moving away from Mag Stripe and towards authenticated payments. That's EMV and that's NFC. We like NFC a whole lot better because of the speed and I think you're seeing a lot of commentary around the speed around EMV. That said, we have the fastest reader on the market for EMV. We beat the industry average by seconds, and we think we can get even more speed gains. The reason that speed matters is because it allows our sellers to see more customers and their customers to wait less around a payment. One of the things that we're looking at doing more of is what we did with Coachella where there exists a point of sale every single seller at Coachella over the three weekends during the festival has a Square contactless and chip reader. And we moved the industry average of 1% tap up to 10% with some education. Where we think the opportunity is anytime people see a Square logo on the countertop or in someone's hand, they know they can pay with their phone and their mobile device. And we want to continue to lead that charge and lead that education. I do believe we have an opportunity to associate our logo with paying with your phone and we're starting to realize that. Tien-Tsin Huang: Cool. Now just maybe real quick just a clarifying question on the capital side. Looks like capital stated was in line with our number. You mentioned tougher credit conditions. Sarah, is that a funding side comment?

Overall on core capital, as you saw in our numbers, we originated 153 million of volume in Q1 -- big number. It's starting to get to be a really scaled business, up three times year-over-year. From a sequential standpoint, the growth was 4%, and I think that's where we talked about the slightly tougher credit condition. That was much more -- that was from the investor side. From our sellers, we still see huge demand for this product, really kind of speaking to how unique it is. So we're able to get to our sellers; we don't have new customer acquisition costs. Clearly we already have an installed base of millions. We're able to target them right in that moment when they need capital to grow their business. Because we the signal of payments, we're actually able to keep a very low and consistent default rate. We talked about 4% and the fact that it's been trending a little bit better in Q1 because we believe we're doing better and better from a data-science perspective. I think on the investor side the highlight was adding two new investors in April because they're seeing that uniqueness of the product. When we look out through the rest of the year, we're real excited about being [ph] continued to build it from here.

Your next question comes from the line of James Schneider with Goldman Sachs.

One more on the Square Capital side if I could. Could you maybe talk about both sides in terms of the appetite of investors to put additional capital to work against this program? And then can you maybe talk about the appetite on the seller side in terms of any changes you've seen in willingness to take on loans. And then can you maybe talk specifically about how the general purpose loans you expect to accelerate the engagement of sellers in taking loans the next few quarters.

Sure. I'll actually start backwards. You called out a really important work that we did in Q1, which is we shifted Square Capital from being merchant cash offensive into being a loan product. We view that as a really important catalyst for future growth of the product because, for sellers, this really answers their number one request which is: how do I do an early repayment and hence want to renew to a bigger amount? Because they need a fixed amount to go buy the espresso machine, for example, if they're a coffee shop. So that MPA-to-loan shift was an important product move in the quarter. In terms of seller demand, we haven't seen any changes. There's still tremendous demand, and I think we're only beginning to scratch the surface of what's available to us in terms of the number of sellers in our base and how good a product this is for them. It's clearly an unmet need. Then thirdly, from an investor standpoint, at the top of the funnel we see more demand from investors. I think what the market is doing is it's starting to shake out the difference between all of these products. We're absolutely being seen as probably one of the highest quality products out there. I think that's because of the seller base that we have access to that no one else has access to, the fact that we're not having to go out and -- it's not costing us more to do customer acquisition because it doesn't cost us anything. We've already acquired them. And the fact that we're able to manage the default side of the equation as well. And so, net-net, we see more activity at the top of the funnel from an investor standpoint than ever before.

Maybe as a follow-up, can you maybe just update us on the metrics related to growth in the seller base? Are we still on track with 100,000 per quarter kind of level at this point? And at what point do you think the over 2 million is going to start rounding up to three?

Sure. We're trying to not give a metric every single quarter on this, rather keep talking to the fact that we have millions of dollars in our base. We haven't seen any change overall in the high growth that we've seen to date in terms of adding sellers.

The next question comes from Jason Kupferberg with Jefferies.

This is Ryan Kerry on for Jason. Thanks for taking my question. Just looking at the guide for the remainder of the year, it seems like it implies mid- to high-single-digit adjusted EBITDA margins exiting 2016. First, am I thinking about that correctly? And while it is obviously too early for 2017 guidance, should we think about this high-single-digit EBITDA margin as a good run rate entering 2017?

First and foremost, I think the most important thing with this guide is showing that we continue to be this path to profitability. So very pleased with the year-over-year improvement at margins even in Q1. Clearly when you look at the guidance for Q2, we're starting to show at the top end potential for breakeven, but I think most importantly when we look at the full year, the guidance that we've given is for overall breakeven at a Company level. That does leave us existing the year, as you pointed out, in single-digit type EBITDA margins. Of course, this is just -- we're on a long journey here. I think the Company -- we're trying to build an impactful company over the long run. I would take that moment, though, to say we are still very much an investment log too, right? This is a company -- our adjusted revenue grew at 64% year-over-year. So we're still in really hyper-growth phase. We want to keep doing the things that drive our products and keep driving our roadmap, and that includes being able to go out and hire from an engineering and data-science standpoint. So you will see us continue to lean into that. We're pleased with the growth that we're showing. We're real excited to keep raising that guidance and I think that just gives you the building blocks as you start thinking about the future next several years.

Can you provide some initial feedback from Build with Square? Is this targeted at new ecommerce focused merchants or existing customers looking to expand? And while clearly still early, any initial data points on either uptake or usage would be great.

Yes, we're supper excited to add more weight into our API and to our developer ecosystem. This is something we've heard from customers a lot. Our offline sellers; which is the majority of our base, are asking how they can easily sell online. And when you get the question behind the question, it's really around, I want to see my entire business in one dashboard. So they really love the dashboard, the analytics. We provide the insight, the understanding to help grow their business, but they want it for both their offline and their online business. We've also had a lot of online-only retailers come to us to ask about opening up pop-up shops, which has been the big pattern recently, and also actual brick-and-mortar stores to sell offline as well. The first thing that we did a few years ago was we enabled anyone to flip a switch on the register and actually build a webpage for them that they could embed anywhere or we could host it at Square and they could sell online. We learned a bunch from that. We moved that into a partnership with FIG Commerce and Weebly so that you could choose Square as a drop-down option to process your payments. What that also meant is that you could host your eCommerce site on Fig Commerce, for instance. You could see all your transactions in the Square dashboard and they would match everything that you were doing offline as well. We have extended that even further in a suite of APIs. There's three of note. One is the eCommerce Register and also customers. What we're doing is with just one line of code you can now have eCommerce ability anywhere. So you can actually build it into any offering that you want. Real exciting though is we've actually opened up our hardware so that any developer can utilize our hardware and our payment stock and they can build custom points of sale around our hardware. So with our new contactless and chip card reader, for instance, anyone can build a point of sale around that and accept Apple Pay. That really frees a lot of our sellers to build custom points of sale that attracts more and more sellers into our ecosystem. It's super, super early. We just launched this less than a month ago as an offering so we're still in learning mode. But we want to push this one fast because it solves a real customer need and it just continues to enrich the ecosystem and potential of Square.

The next question comes from Dan Perlin with RBC.

It's Matt Roswell in for Dan. I had a question on the growth and the larger merchants on GPV. I was wondering how much of that is competitive takeaways from competition and how much of that is kind of your cohort sort of growing into that level?

We did see that those larger sellers, those doing more than $125,000 on Square, grow at 70% year-over-year. I think it's really -- its multiple things, but what we can see on our side is maturation of the product. We've taken a much firmer view that Square's ecosystem and suite of products is now very capable of supporting sellers all the way up to about $20 million in sales. That's really starting to create more and more step function in the TAM that's available us, and there's clearly a very long runway ahead. As you know, with larger sellers as with all our sellers, we see really strong power in our brand. Fifty percent of new sellers come organically to the platform. They've never been touched by any form of paid marketing, been touched by any form of paid marketing, and that is true even for bigger sellers. We are meeting though those bigger sellers with sales, and we do have sales people picking up the phone. They're able to walk a seller through what an boarding would look like, and clearly we're having a lot of success with that. So there are many facets beyond just even pure physical product being available. It's having the sales, having the support, have the risk tools in place to manage this bigger merchant. We're clearly really happy with the growth that we're seeing and tons of runway ahead.

As a follow up to that, how should we think about transaction revenue and GVP going forward?

Do you want to clarify your question? As we look at our --.

As larger sellers become a bigger and bigger percentage, as they grow, should we expect additional pressure on transaction revenue?

Oh, sorry, take rate. I thought you said transaction revenue. Frankly, we've gotten all the way to 40% of our GPV. It's coming from larger sellers, and we've really seen almost no motion on the take rate. So this quarter, as you saw, it was 2.92%. If you exclude out the promotional credit for the new chip and EMV reader, it was 2.95%. So in effect, it's really not moved year over year despite that bigger increase in larger sellers and in larger seller GVP. That said, we always want to make the point that we're not afraid to do custom pricing. In many cases, larger merchants want to they think about it much more as a total cost of ownership where they are expected to have some sort of custom price, but that goes alongside their willingness and ability to pay for other services as part of our ecosystem. And so, we will look at it holistically as a total cost of ownership type equation. We'll think about it in terms of our margin that we'll make, and if we do a custom price against that, we do it very mindfully, always thinking about protecting our margin. But ne, net in our expectation is that we'll still see a lot of bigger sellers coming to Square and that they'll see true value in the proposition that exists today in terms of the price that we charge. Jason Lee : We will now take our next question from one of our seller shareholders, Kiva Smoothie in Fort Worth, Texas. Are you going to allow customer data to be pulled by third parties for analysis?

Thanks, Kiva, and thanks for being a Square customer as well. We want to make it easier for our sellers to understand their business, and a lot of what we've worked on in the past has really been through our dashboard. If you go to the Square dashboard, you can see everything that's happening in your business with your customers. We do think there's an opportunity to open up an API here and enable all of our sellers to manage the data in their own way. So, yes, we will be enabling our sellers to get access to their data so that they can use third party tools to actually understand their business better.

The next question comes from the line of Darrin Peller with Barclays.

The revenue growth was obviously very strong. I want to hone in for a minute on the expense side. I see in your letter to shareholders if you were to back out some items you'd have about 18% growth but I guess just looking at the overall growth rate, number one, I guess share based comp, it's running I think around $30 million or so. It's not sustainable. And then beyond that when I look at the cost growth overall in the business, even if I backed out the litigation, recurring, the nonaccrual, accrual, I think it was over 40%. Can you just give us some color on the acceleration expense there? I know product may have been a part of it.

Sure. Net-Net, we think about it at a high level from a company perspective. We're showing really strong leverage year over year from a margin perspective. And what leverage means is that clearly our time line is growing at a much faster clip than our expense base. That first and foremost is a fundamental. Secondarily, on your question of where we're investing, yes, product development year over year you can see that we leaned heavily into that in Q1. We talked about this actually when we gave guidance because it's important that you're building a roadmap for the year that you're really adding the engineering talent, the data science talent in as early as possible in the year so that those products can be built and you actually start to get the fruits of that labor, even in the full year and certainly as you think about 2017. That's when you're going to really see the benefit of that, an area such as Build with Square, our great example of that. Product development will always remain a key focus for Square, underscoring what we are at heart, which is a technology company. From an SCC standpoint, the first principle we start with is that everyone at Square is an owner. So we want to be able to use equity in order to compensate our employees. We think that's a great way to align incentive. It brings together all of our stakeholders, our employees, our sellers, our shareholders, where we're all aligned behind building a big impactful company. So from an SCC standpoint, in terms the expense line of that today, it's very aligned with what we see out there of companies that are our size, our scale, our age. What I go back to a lot is to look at share dilution and I think there we've seen very clear that we expect mid-single digit type share dilution, again, very much in keeping what you would expect from keeping what you would expect from a Company of our ilk, of our growth rate and at our stage.

Okay. So if we see 60 plus percent revenue growth going forward, is that 30%-40% expense? Is that about what we should expect?

I think a better way to look at it is we've given you the guidance on the topline in terms of the growth we expect. We've given you the guidance from an EBITDA perspective. So we're giving you a lot of what you need in order to, between that, figure out what the expenses are going to grow at. I think what we're showing is that as we grow, we can break into a profitable state and continue to show that [indiscernible] of a line of improvement as we look out over the next several years.

Makes sense. Just last one. One quick follow-up on the attachment rates of the additional products. Obviously, your other services beyond transaction is growing very well still. Just highlight again. Capital grows well, but Instant Deposit I saw from your release is very, very strong again. Can you talk a little more around the attachment rates you're seeing with some of the other products and how that's been trending?

Sure. As you know, we haven't given specific attach rates, but I think you're highlighting some of the great examples that we see in ecosystem. Square Capital, 23,000 loans and advances given out in this particular quarter, but if you look at it cumulatively based on what we've told you, it's now well over 100,000. You think about 100,000 though in terms of the millions of active sellers we have on the [indiscernible], you're still looking at single-digit type attach rates for probably one of our most advanced products. You're right -- Instant Deposits. We love the motion that we saw there in the quarter, effectively doubling in terms of cumulative payments sent and clearly you can imagine that underneath the hood seeing more and more attach from customers. Other areas that we've called out in the past, still seeing very nice traction with Invoices. We didn't update the number this quarter, but as of last quarter 135,000 sellers had used our Invoice product. It's a great example of yet more innovation on the payment side. Generally I'd say we're quite pleased. We see high engagement with our sellers. We need to keep building great products that they want to own to help them start, run and grow their business.

Your next question comes from Bryan Keane with Deutsche Bank.

Just had two clarifications, first on the revenue side. You clearly beat the revenue guidance, even beat the high end. What drove that upside in the quarter that kind of surprised you guys? Secondly, even though you beat revenue, you didn't beat the adjusted EBITDA line. Was there something that drove extra costs in the quarter?

First and foremost from an actual standpoint, you're right, on the topline we beat and we're very happy with that outcome. In terms of what surprised, frankly the core still remains incredibly strong at Square. So that's technology platforms that we're paying with through payments just continue see more and more sellers wanted to come and be on the Square ecosystem. Clearly, the new reader is helping. It's great to see that we're nearly at half a million deployed. It's an incredibly fast deployment for a piece of hardware. Being able to put in front of sellers, whether it be a Coachella or whether it through your small mom-and-pop local business, but showing that they can look as good as if not better than really big merchants by being able to take that latest technology. That clearly continues to drive them toward Square. So net-net on the topline we feel really good about the beat that we saw. From an EBITDA perspective, we actually ultimately feel like we did beat compared to our guidance. We guided negative 9 to negative 11. We came in at negative 9, so at the midpoint that was a beat as far as how we looked at it. And I think it goes back to [indiscernible] to remain mindful about our cost while still wanting to make sure we're putting enough investment into the business to keep driving really the strong growth that we're seeing.

Okay, that's fair. Just one follow-up. The software and data revenue line versus Street was a little bit softer. Is that directly just related to the delay in some of the capital funding from the investors or was there something else that didn't quite pick up where maybe you guys or the Street saw it first in software and data.

First and foremost, we don't guide for software and data, so we have to let you guys run with your numbers. Overall, we beat on the topline and that's what we guide to and that's what we drive toward. Secondly, the underlying trends in software and data were really healthy. The business grew 200% year-over-year; so we're super pleased with it. Capital, as you mentioned -- a really good quarter for capital. A lot of work done to be able to keep driving its growth. We talked about the two investors being added. We talked about the shift to loans. This is a really big quarter for laying a foundation for growth. Beyond that, we talked about Instant Deposit. We talked about early traction in areas like Customer Engagement and Employee Management. We haven't touched on Caviar, which is another big portion of that line item. Again, Caviar continues to do what we want it to do, which is bringing more sales to our sellers. And we continue to see triple-digit type growth even in a business like Caviar. So, net-net, we're very pleased with the outcome that we saw in Q1.

Your next question comes from James Faucette with Morgan Stanley.

I just had a couple of questions around Square Capital, to follow up on that. It seems like, two things, that there's been a lot of announcements of people and other merchant acquirers that are looking to emulate Square Capital so probably a pretty good validation of the interest there. But I'm wondering like what the opportunity set is to expand Square Capital to work with some of the other merchant acquirers firstly. Secondly, from a regulatory standpoint, it seems like these types of initiatives are starting to increase the regulators' interest and attention. So I'm wondering if the recent changes to move from cash advances to loans makes you feel like you're more in step with what the regulators may want.

I'll start with your second question around the regulatory environment. First and foremost, we will always comply with whatever regulatory environment that we're in. We take it very seriously. From the beginning of Square, we've moved money. Since we moved that first dollar, we're in a hyper regulated area. So because of that we've continued to build strong muscle there. We feel good about that being one of the competitive advantages we have when we move into areas like Square Capital. In terms of being able to do capital advances to non-Square sellers, which I think is really underlying the question behind your question of working with other processors, absolutely we continue to look at what other opportunities there are out there for growth for core capital. There's clearly still -- it's a huge runway in our installed base, and our installed base continues to grow at a really fast clip, so there's continued new opportunity. I think there's absolutely an ability to take what we have learned, whether it's the data science that goes behind keeping default rates in this 4%-type range or whether it's the UI that just makes it so easy for a seller to engage with the product, and then use that in ways that are not necessarily with a Square seller. It may be an onboard to someone that actually becomes a long term Square seller. And then, of course, the entire ecosystem of Square is available for the underlying kind of capabilities of Square Capital. So whether it's some of the links we might have on invoicing, purchase financing through consumers. There's definitely a lot of bright spots that can go to as we think about building the roadmap over three and five years.

We will now take our next question from one of our seller-shareholders, Kathy Koran [ph] from Fiber Art in Baltimore Maryland -- One of my frustrations have been support and transparency and it appears I am not alone. Would Square support the idea of a user group who would test new products, provide Square with feedback and serve to promote a healthy exchange of ideas.

Thanks, Kathy, and thanks for being a Square customer as well. Support is really important to us and we've grown our offering over the years, most recently with phone, email and social media support. One of the newest additions to our support offering has been what we call the Seller Community. It's a community of sellers like yourself that can actually connect with one another to actually talk about how to use Square and what's working, what's not working. This is something we actually participate in and monitor and make sure that we can reach out directly to sellers to help solve problems. We see a lot of sellers who are actually solving problems for one another and also continuing to share tips and tricks about how to build their business and grow their business. So we want to do more there. We do have a beta group and we do give beta software out to these sellers to help test what we're offering and also to make sure that we're doing the right thing and we're getting the right feedback from our customers directly. We are going to invite you to the beta group. So we're hoping to get some feedback from you on some of the software that arrives before anyone else gets it. So thank you.

Your next question comes from the line of Josh Beck with Pacific Crest.

I wanted to ask first on the first Build with Square. Obviously, once you get into these specialized software markets for iOS devices it becomes very specialized very quickly. From a distribution perspective, is there any shift in terms of your model? Will it mostly be organic? Just trying to understand how you go to market and really drive scale and adoption of Build with Square.

Great question. It's something we did just start with as a complete package but -- and that ecosystem is something we've had for a few years now. One of our biggest partners and third-party developers is Intuit. Intuit enables anyone to connect to QuickBooks directly with their Square register so they can easily account for their entire business. That's become so popular on the Square side that Intuit suggests Square as a point of sale, as a payment processor as well. So we do have a lot of attention in the developer community around helping small and up-market businesses and giving them better tools. We do like the specialization that developers will be able to provide to these sellers. It's something that we are not doing and they can build a customer point of sale. We can learn a lot from each one of these and then, potentially, help provide an even better solution as well in partnership with these developers. So, we're pretty excited about what people will be doing with this, but its super-super early. I think the most important takeaway here is we've actually opened up an API to our hardware and up an API to our hardware and that hasn't been done before. There's no one else in that space that enables a payment device and the actual accepting hardware to be programmed. This is entirely new so we're going to see some entirely new behavior. We're going to work very closely with both sellers and developers to make sure that they're providing great offering, which ultimately goes back to the Square payment rails and our business.

Okay, great. It sounds like it will definitely be an exciting one to watch. Sarah, I had a question for you as well, really on the balance sheet and thinking about Square Capital. I think the sequential growth in your Merchant cash advance line was much higher than the origination growth. Does that signal any type of shift in funding mix between your balance sheet versus third party investors? Is there noise? Anything to read through there.

The short answer is no. We still have the majority of our MPAs and now loans coming from third parties. If you take a step back, what we talked about on the last call is, post our IPO, clearly our balance sheet strengthened significantly. We wanted to be more thoughtful about what we'd be willing to put behind Square Capital. So instead of thinking about it as an absolute dollar amount, instead putting in place effectively a frame around as a percentage of liquidity. And that's the frame that we're using. Why we like being able to use our balance sheet is we can be very flexible on new products that we're building where we don't yet have history to take it to new investors but we Square have confidence because, clearly, we're building out the product. We did end up with 49 million on the balance sheet in MPAs, so it's just over 10% of liquidity, well within our parameters overall. But the real punch line is no, we want to continue to work with external third parties here to be the majority. We're a commerce ecosystem at the end of the day, not a financial institution that's lending. So we want to make sure that we're keeping enough of our balance sheet pristine to reinvest in the core business.

And just last one on Square Capital, have you seen any changes in the upfront fees that investors are willing to pay. I know some of the others in the ecosystem have seen some changes there, so just wondering if you're seeing anything worth calling out there.

No. No change at all, and I think that really speaks to the product that we have because we're not having any issues with customer acquisition costs because we don't have them. We've already acquired them, and we've seen complete consistency on the default rates at 4% and, as I said, even getting a little bit better in Q1. So that's allowed us to maintain the fee.

Okay, excellent.

Your next question comes from the line of Neil Doshi with Mizuho.

Sarah, could you maybe help us think about hardware units for the remainder of the year? I know you don't guide specifically to it, but how should we just be thinking about the cadence of hardware sales? And then I have a follow up as well.

As you've noted, we don't guide on hardware units so I don't think we're going to start. The new reader is clearly very top of line for us right now. It's a core strategy and push for us in 2016 is how do we make sure that the Square logo is what everyone sees and then knows that that's what they can use to pay with their phone. We're seeing ongoing demand, even post the promotion that we did at the tail end of last year. The good news is it's really quite a nice trajectory that we're seeing.

Great. I know you touched a little bit on Caviar, but competition seems to heat up in the online food ordering and delivery market. How do you feel Caviar's positioned and where do you think the growth will really come from over the next 12 to 18 months on the Caviar side?

We're really excited about Caviar's opportunity. What really sets us apart from the competition is the quality of our restaurants and the quality of our sellers and the food. We focus a lot on providing the best experience, and the best to us means we have a selection of the best restaurants. We have deep relationships with those restaurants. And we really focus on the courier experience as well to make sure that we're going above and beyond to deliver the food in an expected way, in a timely way, in a fast way to customers whether they're at work or they're at home. We're going to continue to invest in making sure that we do have the fastest and best experience and that we have the best restaurants. That's where we really have an advantage. We are in a number of markets around the United States, have a lot of strength in some of the biggest delivery markets, namely New York which we're really excited about. That's definitely a leading indicator for our success as a Caviar brand. Just as a reminder, one of the reasons we acquired Caviar in the first place is it helped us reach a type of seller that we weren't able to reach before, which is a restaurant. The biggest constraint a restaurant has in their business is the number of tables and how quickly they can turn them over. Delivery provides this amazing unlock, and a lot of restaurants just don't want to have to deal with a delivery infrastructure and staff. So Caviar can neatly fit into their workflow and give them new sales. Our whole thesis is if we help build tools to grow sellers, we grow our business. And Caviar fits very specifically into the restaurant category and we're going to continue to look for ways to provide more intersection between the Caviar ecosystem and the Square ecosystem so that any Caviar seller can also benefit from everything that we're doing on the Square side.

Your next question comes from Tom McCrohan with CLSA.

I just wanted to get some thoughts around headcount growth from here, what areas are you looking to add headcount and just the pace of growth.

In terms of headcount growth, what you saw in Q1 is a strong orientation toward engineering and data science. That's going to continue through the year, but Q1 is certainly a bigger quarter than most because we want to drive those roadmaps early in the year. Beyond that, we do continue to invest in areas like sales. Clearly, support growth as we grow, although we look to find more and more leveraged ways in that area. Our assumption is that you'll see headcount grow. I would like at how we have given you guidance for the topline growth and then overall EBITDA and between those lines you can get a sense for what overall headcount growth will look like, knowing that our most expensive headcount tends to be more in our product development area.

My only follow was on Square Cash. How should we be thinking about that as it applies into your other offerings on the Merchant side?

Great question. We're super excited about Square Cash because it really plays to a lot of Square's strengths. It's the fastest peer-to-peer network out there. Anyone can send any amount of money to a phone number, to an email address or to the app instantly. It kind of goes back to that core tribute which I think sets us apart from everyone which is speed. We see really, really strong growth in Square Cash, and we're going to continue to make that experience a whole lot better. We do have a Square Cash product and service for Merchants. It's called Square Cash for Businesses. It replaces a little bit of the invoicing aspects of what sellers tend to do so sellers can actually request money from their customers through Square Cash. We're seeing some interesting moves here, but a lot of the focus and the momentum is really on the peer-to-peer side. Where that goes and how it benefits Square Incorporated and the larger ecosystem we have a lot of designs around but nothing to share today.

Our final question will come from the line of Andrew Jeffrey with SunTrust.

Jack, it certainly appears from your results that the hardware message is resonating and certainly for anybody who has tried to dip in the EMV card at a lot of stores, facing low transaction times or sealed off card slots is a bad customer experience any way you cut it. What I'm wondering is the networks have recently announced the release of some software aimed at speeding DMV transaction and improving the consumer experience. How do you think as that software rolls out that the advantage that you may see as translating into faster terminal growth today may or may not be sustainable?

Back to that core [indiscernible], we are focused on speed, and speed has always been a winning proposition for Square. So whether that's transaction time or how quickly sellers can access their capital so they can build their business and reinvest in their business and grow, we are always looking for opportunities to speed up EMV in particular. With our new reader, we can actually do that over the air. So without a seller having to do anything we can actually update the hardware and continue to shave seconds and seconds and seconds off the transaction time for EMV. I think our real advantage is not just the payment device but the fact that we have a cohesive ecosystem. The hardware is definitely the lead-in and, as you stated, we want to push more and more people towards NFC because the transaction time is sub-second, a whole lot more convenient and more secure. But at the same time anytime people get our hardware, they open the doors to the entire ecosystem. So when they use us for payments, they can potentially get Square Capital they can use a payroll product; they can use analytics they can understand their customer base. That's really the core value of what we're offering is it's not just about payments but it's everything else you get to start running and grow your business. And more and more of those services being used by sellers creates a greater retention and a greater value for what they want to do. That's where we continue to set ourselves apart from a lot of competitors who are just providing one part of the equation, which is a terminal. They're not doing the point-of-sales software, they're not doing the network, they're not providing the analytics, and they're not providing anything for customer and sellers -- actually have to hook all this stuff up together, which is time consuming and a real pain and takes the focus away from their business. So we start with fast, simple, clean, affordable hardware that's best in class and is recognizable by both sellers and customers alike, and that's the lead-in to our ecosystem which we believe is a great reason to stick with Square and continue to grow around Square.

I would like to turn the conference back over to Jason Lee for any closing remarks.

Thank you, everyone, for joining our call. I would like to remind everyone that we'll be hosting our 2016 second quarter earnings call on August 3rd. Thanks again for participating.

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