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

Darrin Peller - Barclays Andrew Jeffrey - SunTrust Scott Devitt - Stifel Josh Beck - Pacific Crest Neil Doshi - Mizuho

I would now like to turn the call over to your host, Jason Lee, Head of Investor Relations. Please go ahead.

Hi, everyone. Thanks for joining our second quarter 2016 earnings call. We will have Jack and Sarah with us today. 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 some short prepared remarks before opening the call directly to your questions. During Q&A, we will take questions asked from our fellow shareholders in addition to questions asked 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 measures 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 and 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. I'm really excited to be here today and talk about our quarter. Before this call, we issued our quarterly shareholder letter with more detail, which I encourage you all to read. I'll take a brief moment now to highlight a few items that I think are really important. We're really proud of what we've accomplished this quarter. First, we continue to have strong growth at scale with gross payment value for the second quarter of $12.5 billion, up 42% year-over-year. We also hit a major probability milestone with positive adjusted EBITDA of $13 million. This improvement reflects our increased scale and operating leverage. Additionally, we continue to see positive dollar-based retention from existing sellers and momentum in driving new product adoption. Second, we continue to innovate on our core software and services. This enabled sellers to run their our business and get paid quickly and easily. Highlights in the second quarter include the launches of the scheduled invoices, recurring invoices and card on file. Either frequently requested features and they unlock a larger market opportunity for us in both, existing and with our new sellers. Today the convenience of invoices has made it enormously popular resellers, we have reached 2.3 billion cumulative GPV from invoices since the product launched in June of 2014. Third, we're continuing to see strong momentum as we move up market. We grew largest seller GPV, 61% year-over-year to now account for 42% of GPV while maintaining overall transaction revenue margin. Successful sellers is due to multiple factors including our product is of use, and the cohesion of our services on our platform. This cohesion can be attractive for larger sellers who typically do not want to stitch together hardware, software, and payment services from many different vendors. In addition, larger sellers benefit from fast access to capital. And finally, we're happy with the execution of Square Capital. Our relationship with millions the sellers continues to differentiate us at every step of the long process. In the second quarter, we spend $189 million in Square Capital, up 123% year-over-year and 23% sequentially. Square Capital's competitive advantages continue to attract additional investors to purchase our loan products and we added five new investors this quarter alone. We started Sqaure to enable sellers to always make the sale. We've grown by focusing on technology and design to create products that are accessible, intuitive, and easy-to-use. And our results this quarter demonstrate that we are driving strong revenue growth with increased operating efficiency. Now I'll turn it over to Sarah for some remarks.

Great. Thank you, Jack. We're pleased with our second quarter results and the momentum in our business. This quarter we continued our strong growth trajectory at scale and achieved positive adjusted EBITDA. In light of this we are increasing our guidance for the full year 2016. Let me dive a little deeper. Total revenue was $439 million, and adjusted revenue was $171 million in the second quarter, an increases of 54% year-over-year. This was comprised of $130 million in transaction profit from the products we monitzed through payments. $30 million in direct software and data revenue, and $11 million in hardware revenue. We're delighted to see ongoing stability in both, our transaction revenue and transactional profit as a percent of GPV at 2.93% and 1.04% respectively this quarter. Excluding the commotional processing credits for our new contactless and chip reader, these would have been 2.94% and 1.05% respectively. This stability underscores the value of the sellers of all sizes, and Square's unique and cohesive offering of software, hardware and payments combined. In addition to products monetized through payments, we also saw ongoing growth in direct software and data product revenue to $30 million in the second quarter, up 130% year-over-year and 25% on a sequential basis. This is mostly comprised of Square Capital, Cavier, and to a lesser extent, instant deposit revenue. Jack already touched on capital; so let me provide an update on Instead Deposit. Since launching Instead Deposit, less than a year ago, we've helped over 150,000 sellers complete over 2 million deposits. GAAP net loss was $27 million in the second quarter of 2016. This equates to a net loss per share of $0.08 compared to $0.20 in the prior year. In the second quarter we reached $13 million in positive adjusted EBITDA, a significant profitability milestone for the company. This represents seven points of margin improvement on a year-over-year basis. With that, let me turn to full year guidance and please see our shareholder letter for specific detail on our third quarter guide. As a reminder, our business is subject to the seasonal trends you see in broader commerce which historically results in strong sequential growth in the second quarter as we experienced, and flat sequential growth in the third quarter. Hence, we're raising our full year guide based on our strong first half of 2016 and ongoing momentum in our business. For the full year, we expect total GAAP net revenue to be within a range of $1.63 billion to $1.67 billion. Adjusted revenue to be in the range of $655 million to $670 million, that's up 6% at the midpoint from our previously guidance range. We expected adjusted EBITDA to be in the range of $18 million to $24 million, up from our previous range of $8 million to $14 million. That's a year-over-year margin improvement of 12 points at the midpoint. So with that, let me turn it back to the operator and we'll start the Q&A portion of the call.

[Operator Instructions] And your first question comes from the line of Jim Schneider with Goldman Sachs.

Good afternoon, thanks for taking my question. One question first on Square Capital, now that we have traditional loan product in the numbers or starting to come into the numbers, how big of an impact is that on your origination size per loan [ph] and your overall organization. And can you maybe talk about what the step-up in provisions you noted on the income statement was is, is that due to loans or just transactional losses.

Thanks Jim, I appreciate the question. So first of all, on the loan product versus our prior product which is a merchant cash event, it has now changed -- from a seller perspective, the product still very much looks as is it better. So -- and it's very unique in that regard. So we reach out to you proactively, you're on the Square platform and we provide you with an offer; with a click of a button those funds are in your bank account, immediately the next day. So in terms of the actual loan size versus MKA size, we really haven't seen much change at all. Our average long size today is around $6,000 so these are though small micro long going out into sellers to hours that don't have that it is sort of capital. From there nothing else really changes from a sellers. So they are still repaying based on every slide they forecast that they see, and house of match chain to their working capital and we know that's just one of the many reasons why they love the product. We continue to see -- our promoter score and we continue to see a really strong recurring element as well in terms of fellow who come back second or third time and get an offer. We see about a 90% renewal rate for those. With loans did bring to us was on the investor side was definitely investors who feel more confident in a loan product rather than merchant cash event. And I think that's just one of the many reasons why we saw so much interest, Q1 heading into Q2. And clearly, we ended by adding five new investors into the program and continue to get really strong interest around. So I would say not so much impact on what the seller themselves see; I think the town is still quite big, we still have a lot of surface area to go after where switching really helped with more on the investor side. In terms of the step up provision, loans, and sitting on our -- on the income statement. There was nothing incremental there that was different, we continue to see a 4% loss rate and then around that range. No change from Q1. Overall transaction loses as a percent of GPV came in below our kind our historical average. There was one prior period adjustment of $6 million that is in that total number. It was really going back to an adjustment since the beginning of Square. So each year it wasn't material, so we chose to take the full adjustment in the quarter rather than going back into every period. But underneath it, mostly incredibly impressed by the result from the risk area this quarter and how we should use that for modeling going forward.

Thanks. And then maybe a follow-up, can you maybe talk philosophically medium to long term about the pace of margin expansion you expect to see for Square. It's very encouraging to see the 12 points expansion over the course of '16 they are projecting now. But can you maybe talk about as we look longer term, should we expect that pace to continue or that pace to moderate as we go forward. And just how you think about the overall investor levels today?

Sure, thank you. We absolutely expect to see leverage as we move forward in terms of margins, and so ongoing margin expansion for Square. And I think it will come from multiple areas. First and foremost, as we scale, clearly we don't have to scale every function and then limit your way; so we just dealt operating leverage as we grow. Secondly, we continue to have this really healthy base of our lives. As you know, the payback period has not changed four to five quarters when a cohorts comes on the Square and then from there we continue to see a positive retention rate, a dollar based positive retention rate. And what we mean by that is, every cohort, whether you look at it from a revenue standpoint or gross profit standpoint continues to show growth year after year and that's true for even our earlier 2010 cohort. So that clearly continues to drive more profitability and to the model as well. As we're able to leverage that base and saw new products, that's another way that we can keep adding to the profitability extremes of the company. So I think as you look forward, you should continue to expect ongoing margin improvement, a 12 point increase year-over-year, certainly a big improvement, I don't know if we would sign out to keep doing it at that pace. But as you look into 2017 and 2018 our expectation is we'll continue to see solid margin expansion from Square.

Thank you.

And your next question comes from the line of Tien-Tsin Huang with JP Morgan. Tien-Tsin Huang: Great, thank you. Congrats on the EBITDA. Upside here, just -- I want to get an update on the contact with chip reader and the adoption there, any stats you can share in terms of units or what percent of your active base now has a contact with sweeter things and like that?

We've been really pleased with the momentum of the contact with chip card reader. So one of the things that we've been really pleasantly surprised is it's scale in terms of the smaller, and also the larger sellers. So we definitely see it being purchased from our small sellers who use it in the very mobile environment on the side of a road current since farmer stands all the way up to the multi-location countertop solution. The thing that we're most excited about though it is making sure that we continue to educate both the seller and also the buyer on what you can do with this reader. As you know, we're in the middle of a transition to authenticate payments EMV and NFC tap. And as you've seen the discussion EMV is rather slow, we have one of the fastest readers in the business but it really impacts the sellers ability to get through their lines and it really affects their customers own happiness as well. So we're going to push as much as possible into TAP, Apple Pay, Android Pay, tapping with the card and that's also reflective of some of the momentum we're seeing around the world. And we were able with just simple education to move an industry average of tap from 1% to 11% at [indiscernible] and more recently at the Bedrock Festival 14% tap of overall transaction. So we've been really confident in our ability to help educate both our sellers and our customers on the benefits and the speed of [indiscernible]. And we're going to continue to push out, this is also the first time the company has sold a reader and we're really excited about the momentum here. This is our fastest growing reader and it definitely benefits from ease of use but also a member of the market is transitioning and what customers expect. So we continue to see really health growth with the reader and we're going to continue to push it, you know the thing it allows for us to do it's a global platform which enables us to really look more globally around the world in terms of getting sellers in China and new markets too. So we’re pushing really hard on it.

So this is a follow-up to that and how about promotions, are more promotions likely? The saw the [indiscernible] the promotional credits were down so we should expect steady demand from here on the reader I'm asking because it sounds like some of your legacy competitors have been having issues with you know EMV certification and what not, seems like a good opportunity here to push it. So here's what you're thinking is here in the balance of the year. Jack Dorsey : We haven't been experiencing the challenges that are our competitors are mentioning and I think a big part of that is we've really focused on the on boarding experience so that when you use square you not have to think about anything but making the sale so you don't have to think about short vacation, you just think about your customer and when it's going to take a cell and hardware and software should work together. So we continue to see a lot of strength in the word of mouth and organic approach to both of our software and to our hardware and we benefit a lot from sellers meeting other sellers and asking what's working for them but also our retail presence being able to walk into an Apple store and see the LSTM [ph] the contact list and the chip card reader right away. Definitely helps continue to push a lot of people into the Square eco-system and we’re also seeing the benefits of our focus on reliability and security to retain those sellers as well. So all has been pretty healthy.

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

It's great to see the returns of meaningful sequential growth in the Square Capital so I just want to follow up again on I know last quarter there were some questions around the number of investors that you had but it seems like you definitely added some now. So be sure that you just to be sure that you have the capacity to keep growing at that rate given the new investors you've on boarded. Number one, and then I guess just as part of the overall software and data segment if you can give us a little more color on really the strength that we're seeing in terms of your ability to attach some of the other products kind of what percentage of merchants now have an attachment to other products and I'm assuming that opportunity still really large. Thanks guys.

So yes on the capital slide, delighted as I mentioned with the new investors that we have added, so we feel like we have a lot of capacity from a National Dollar perspective, what's coming into the program and then on the other side in terms of seller demand, still a lot of opportunity in our installed base. I think a couple of things driving that. First and foremost we continue to grow every quarter as we just showed our GPV grew 42% year over year so that’s all net new opportunity to us. I think in particular we move up markets where it's larger sellers and that also gives us an opportunity with capital to move into slightly long by this, we typically try to extend to about 10% to 15% of your GPV. I think that's a good amount to enable you to grow your business without getting over-burdened but clearly as we have larger sellers, 10% to 15% is a bigger number. On top of that I think there's also an ability to keep utilizing the muscle that we’re building, to many other elements in and out of Square so overall I think there's a lot of opportunity in the base. On your question on strength software data and other product attach rates. Rather than just thinking about it as a software data line, I don’t want to keep coming back to the fact that all of our products are software in effect, so we monetize through payments and you see that in the transaction margin portion of adjusted revenue and so we monetize directly. So if you look at attach rates across the Board, invoices is still a terrific example of a new product that we monetize through payments where we’re seeing about a 140,000 active sellers utilizing the product. In fact we just hit about 2.3 billion in GVP on that product alone and it's only about two years old. And Jack mentioned some of -- then your features and functionality added invoices which we think continues to expand in the addressable market there. If you look at capital about 60,000 loans in the first half of this year, that compares to the 70,000 done in 2015, so it's already about half way through the year whereas the same size that we were just a year ago for the full year on capital. Instant deposits, I think I gave you the number, but we’re now seeing 2 million deposits done and seeing a very nice number of sellers making use of that product which I think keeps underscoring the fast access to capital is according to [indiscernible] for our product. So I think overall you know for our base of millions we’re starting to see products get up into the 100, moving towards 200,000 seller attach rate and that starts to look quite good. Again lot of room to run, but still proving that those products have real substance and are actually being utilized by our base.

Just one quick follow up on the larger seller growth rate which again just continues to impress us and we've got 61%. Can you just give us I guess a little more thought process around the strategy and the business model, will that have to change at all to keep going at that rate with larger and larger merchants? Just again it's a great growth rate and specifically given the transaction margin being relatively stable maybe more color on that.

Our market is definitely been a key focus for us and we're finally at a place where our tools scale to any size of seller. So obviously we started with the smaller base and we're seeing more and more appetite from the larger sellers as well and specifically multi-location sellers and we're finding that they actually want the same things that we're seeing from the smaller sellers which is the pass access to capital being able to swipe the card and get access to that capital instantly in that instance public [indiscernible] or next business morning is really, really critical. The simplicity is key and also the cohesion. It's one system. It's one down and it's super simple to setup. We have been looking at being more horizontally focused as well. So as we indicated in the letter through [indiscernible] uses this to track employees and hours and sales which gives them a much better sense of their business cohesively and we also have been looking at going deep with certain industries like retail, services and food. Square invoices is a good example that's where we have the [indiscernible] can use invoices to bill their customers online and makes it very easy for them to manage their customer relationship but also gives more security to their customers because they're filling out the card details themselves. So it benefits the seller and their customers as well. On the marketing side, we're growing our salesforce and account management team to make sure we're assisting on onboarding. There's more questions as you get larger. So we've been applying a lot of our machine learning and data science towards making sure that we know exactly what type of seller would have those sorts of questions to improve efficiencies with actual people to talk with them so that we can be very effective and efficient in those conversations. And we’re finding the larger sellers mainly come to us because of the brand and they are seeing around their neighborhood and looking into well it will actually work for me and we're finally in a out of position where yes it does scale and we can continue to build off that.

And your next question comes from the line of [indiscernible] with Jefferies.

I just wanted to ask sort of a follow-up on large merchants because I bet it is interesting in the shareholder letter, you actually carved out the greater than 500,000 annualized GPV also which is now upto 14% of volume I think it was 11% a year ago, what kind of color can you give us there, which vertical is you having the most success in I mean presumably these are sellers that already were engaged in the electronic payment system in some way shape or form so you’re obviously having some competitive success. So just any other color around that slice of your business would be very.

I think there is nothing vertical specific that we’re seeing. I think generally we’re winning a lot from the competition because of our core differentiators. The cohesion really matters and being able to download an app and everthing you need to run the business and also scale business across multiple locations has really been important. I think the speed, the access to capital is also critical on something that larger sellers are usually used to, but I think that the biggest pain point for focus on [indiscernible] people switch to us is that a lot of competitors just offer one thing. So a terminal, point of sale, to go and get a different merchant acquisition account, you get analytics from somewhere else but we haven't seen else to offer an eco-system like this. Some have tried to carve it out together but ours is built together from the ground up, as we continue to build off the strength. So there hasn’t been anything in particular around [indiscernible] it's really just a the cohesive horizontal package that I think is attractive and we continue to see when small emerge [ph].

And just another question maybe you’ve some perspective on that, I mean you obviously are continuing to deliver some really nice upside to your guidance each quarter. So on the net revenue side of that, I mean would you say it's because more of outperformance in terms of the same store sales among your existing seller, is it better cross out than you had forecasted higher than expected rate of growth and the number of new sellers that are joining the platform. Which are the factors do you think are most contributing to the ongoing upside?

It's actually outperformance across the Board, so when I look at our numbers coming in everything I think, first of all there is net new coming to this core platform. We continue to see upside to what we were predicting internally in terms of new activations. I think a huge part of that is the word of mouth that Jack talked about, that people see the brand out there and they see that it can work for a business of their size. So we feel very good about net new coming on the platform. Under the hood in terms of the base, we’re continuing to see that really strong positive retention rate. I think it's surprise people when we talked about it originally on our IPO that a business like ours would actually be dollar positive on a year-on-year basis and that has continued and like I said when you go back to the youngest cohorts on Square coming from 2010 and I look at what they did in Q2 of 2016, we’re still growing year-over-year. Why we have kind of promised them that you will never miss a sale, your business will grow. I think second we see some survivor bias [ph] in there that typical small businesses when they survive and thrive they don’t just kind of grow at a pace of U.S. retail, they really outperform. So they start as a farmer's market stall and then they can become a multi-multi-location business that we must support in the U.S. and Japan for example. And I think the third piece that continues to help us as an underlying tailwind in the business is shifting from a partial use case where in the past people may have used Square as the thing you -- when you were doing more of a pop up like something that’s more femoral and now that the product has become much more sophisticated. They are able to use it for their entire business, so no longer just their mobile installation but instead they are coming back to their restaurants and they can use Square everywhere throughout their business. So I think those are the reasons why I think we continue to see that outperformance just in the payment piece and I think there are areas like capital instant deposit, even caveats that have all been nicely ahead of plan and I think again that speaks to the brand really resonates when we go back into our install base and when you remember there are larger sellers they are in their dashboard on a daily basis, 70% - 80% of them are touching the dashboard daily and they are finding new ways for Square to really help them run their business. As Jack talked about things like apparel for the winery is a great example of an add-on. I feel like right now the growth has been driven across many, many fronts and that’s a good place to be because there is no one place for depending on for that growth.

We will now take our next question from one of our seller shareholders, Jay Fleming at Casa Blanca [ph]. According to the latest Apple rumors, the new iPhone will no longer have a 3.5 millimeter headphone jack, do you foresee any conflict with this?

We believe our main reasonability and role as a company is to make sure that our sellers always make the sale and help them navigate all the changes that come with step ahead of everything that might change or will change in the future. So one of the reasons we’re super excited about our contactless and chip card reader is that it works over Bluetooth and that means it works with more and more devices and can work with more and more devices in the future. This is an open standard but every company is behind and something that gives our sellers confidence that no matter how the technology shifts they we will still always be able to make the sale.

And your next question comes from the line of Andrew Jeffrey with SunTrust.

I wonder if you can think a little bit about or talk a little bit about how you think about your business through the economic cycle especially as it pertains to the nice retention you’ve had and the trend this quarter in particular loss rates, is there something about where we are in the cycle that you think provides a tailwind and having not been through a downturn what are the kind of things that you continue to plan for internally as you think about that.

It's absolutely something that we think a lot about and plan for our internally because clearly we’re a large U.S. retailer, we are largely in eCommerce. I think what gets me excited for our business even in a tougher macro-downturn is our ability to take share. So first and foremost what I would say is what we do you is not discretionary, so unlike in tougher times where folks may cut back on their marketing spend for example payments are something you want to be able to take that electronic payments, you don't want to miss the sale. In fact if you think that overall the macro environment has gotten worse and so I think you need it to run your business. So I think that puts us in a stronger position in terms of the product that we offer. I think the second point is total cost of ownership. So today it is absolutely a reason why we win, so strictly as you look to larger sellers they are more sophisticated and thinking about the total cost to ownership of a product or a platform that they are buying into. So they are not just thinking about the cost to manage a charge back, something that we do for them. They are thinking about the PCI fee that they get charge somewhere else, or the monthly fee for the piece of hardware to their acceptance or the ongoing fee to pay out to their merchant acquirer and they're having to think about just the over lay of having to stitch that all together and probably pay employees to do that for them. So I think when they looked clear [ph] they see it's incredibly unique cohesive echo system but you’re paying for it and in an incredibly simple way, and I think our total cost of ownership could actually resonate even stronger frankly in a tougher environment. So those are really the two prongs of attacks that I think we have in our business. We continue to monitor. I think the growth in our base is a very strong indicator of the health of the economy. Right now it's saw a very strong traction in Q2, we feel very good about it but I think you're right that every company should always be planning for what a cycle will look like and we want to make sure that square meets that cycle kind of on its front foot.

And as a follow-up when you talk about larger salary recognizing that you have good attach rates, improving attach rates and other products to sell through the whole eco-system in fact that Jack discussed if you separate that out and you sort of look at list rate anything to call out as you go up market on just the sort of the pricing in the door versus the ultimate yield and dollar retention you get down from bigger sellers?

Sure. It really shows how different we’re that we don’t even use a lot of those terms internally but I think what you mean is whenever we talk to a bigger seller and the revenue rate that we would get as a percentage of GPV, how willing are we to be flexible on that. I will start there, so we have absolutely put in place what we call custom pricing, custom pricing doesn’t always that sort of mean less by the way, what we’re making is an economically rationale decision about what is the margin that Square will ultimately may come and making sure that’s fair but we will create a custom price for a larger seller and that’s a good place for our salesforce as Jack talked about. It's actually engage in a conversation, but I think quickly can turn that conversation to be much more holistic about that total cost of ownership. So it's not just about singular what's the take rate going to be, they also understand everything else but come, with the technology they are getting that they are paying via payment business model. So I think that was kind of your first question and then I think the second was about our ability to therefore maintain our own transaction margin is that right?

Yes, exactly. So I think that’s something we really are very, very focused on which is why you see that transaction margin be so consistent and their shareholder we showed you the last five quarters but in fact if you went back over the last 3 or 4 years, what you would see is that we have maintained a transaction margin and it's been above a 100 basis points, a 104 basis points this quarter. And certainly when you look elsewhere as those margin tend to be a lot lower and I think it comes back to speaking of the fact that sellers are getting much more, much bigger better products, they are getting access to a lot more technology, they are getting access to funds, they can now utilize other products like invoices and so on and I think that’s why we’re able to maintain that sort of margin. Does that answer your question?

It does. Thank you.

Great. Thank you.

Your next question comes from the line of Scott Devitt with Stifel.

The follow-up on the attach rate question from earlier but thinking about it in terms of where you're having the most success if you kind of carve the business up into newer customers coming onto the platform, existing customers and small versus large. I'm wondering where you are having success on that grid? When merchants begin adopting the ancillary products if it's deeper into the cycle of them being a customer or you're getting high attach rates on these new customer accounts now. Thank you.

So I think, I will take small versus large first because I think it depends a little bit on the product. So something like capital is very, very broad. We will go all the way down the capital loans [ph] that are $1000 so that will give you a sense of how small a merchant could be but we have taken capital all the way up to $100,000. So again it will give a good indication of how big of a merchant that we can go to. So capital is very broad based versus and invoice is actually a pretty broad based product to it, it's probably more dependent your merchant category vertical where you belong to rather than your particular size. If you look to a product like pay-roll not clearly you’re moving into larger merchants before you start to seeing attach rate happen because you got to employees to do it. So pay-roll is much more targeted. In terms of new versus existing, I think with bigger merchants who come in more through the sales channel, so they remember -- our merchants to come to us so there is kind of random lock-down main street that happens first. They head to the website and they self-declare that they are bigger merchant and then we utilize a lot of our [indiscernible] to say okay, is this going to be a merchant that we should, you know make sure we get back to asap with a person who is going to talk to them and I think when the sales person is involved. Often they are buying several products at once. There is no evolution that can happen and I think we even talked about this in the example of [indiscernible] in our shareholder letter where they came on as a very small business, so something like payroll didn’t make sense for them in the beginning. So our account management team is always going back again we utilize a lot of data science here to kind of parse through our base every day, every month, every quarter, every year to look at how it's changed and with that we’re very, very targeted and how we go back to say okay here is a merchant year-ago didn’t make sense to target them with for example payroll but now year on, clearly we can see they are utilizing like employee management so they must have employees so now we absolutely should be targeting with a product like payroll. So there is not a one size fits all Scott, it's kind of all of those things, because I think the net take away for is they are still a huge amount of running room in the base to attach these products into and as the products become more sophisticated and have all the table features we’re finding more and more opportunity, both in the base and new customers.

We will take our next question from one of our shareholders Gerry Griffin at Real Earth Creations. What are you doing to gain and keep the solid loyalty of your customers? For example I'm regularly approached by other companies offering lower rates and a free equipment and software. Since we are a relatively new business with other startup priorities, I have resisted changing at this time but to be honest the only thing keeping me from changing is reliability.

You’re right, reliability is incredibly important to our sellers and to us and going to focus for us and that’s through the software, through the payment sack and everything we do around hardware and this is definitely a reason why sellers choose Square and also why they stay with us and as a -- as Sarah mentioned, one of the things that we think about and we see a lot of our sellers different sizes think about the total cost of ownership. When you actually get into the weeds of what it takes to run a business Square, has the best value here and that’s because we’re not just offering one processing rate, the whole package is one app and one system. So we’re not breaking any hardware plan, any hidden payment fees, everything is in one simple rate and that started seven years ago for us so this is something that we’re really good at. And it's not just about the payments aspect but also the entire eco-system that you need to make really good decisions around your business and that starts with really best in class hardware, that looks great but also is affordable. It's easy to use in terms of the point of sale and everything that you need to grow your business and also we have fast access to tier capital. So after you swipe your customers credit cards we can get you that money the next business morning or you can actually get it instantly with our instant deposit service. So we believe all this adds upto a better cost of ownership that we think provides a whole lot more value than you get from anywhere else.

Your next question comes from the line of Dan Carlin [ph] with RBC Capital Markets.

I have is around you know thinking of Square Capital and the incremental GPV that it provides for you guys. So we've seen three significant you know ramp in both of these numbers I'm just wondering you know it's not like an attachment rate question so much is as you know I'm looking back over what your surveys you did about what your Square Capital customers are using, you know they are purchasing inventory at 50%, they are buying new equipment and marketing and those are all big drivers I would think GPV but I haven't really seen a statistics that you guys have produced, so can you just give us any color on that?

Yes, it's great question and I actually don't know have a precise answer for you right now but it is something that we do continue to do a lot of work on because really the underlying question is does the seller grow more once they receive Square Capital, so what is the seller GPV look like, you know pre and post and we absolutely can see in our data that our sellers do grow when they pick for capital, for all the reasons that you outlined because they are actually using that capital to do things that should help grow them their business, right inventory, new equipment etcetera. So that is certainly something that I think behooves us to get better and better being able to target that number and that’s a fact you will hear us begin to talk about it as we feel confident that we have a very clean, repeatable number that we can give you. I think the other thing in there as well that maybe we don’t talk about as much is when we do thinks like capital or add-on another product like pay roll it continues to keep the customer very, very sticky, so we have positive retention so we’re not dealing with churn. That said we want to do everything in our power to make positive retention, continue to be a thing and if we can increase that positive retention we want that to happen as well. So I think that there is another whole benefit to many of these products that you’re talking about where they do increase the GVP either because the seller grows or because we now have access to a portion of that sellers business that we didn’t have before and which is a great example or that we can keep the seller on the Square platform for even longer than perhaps they would have stayed without all of the incremental products they have added on.

Excellent. The other part of that question is, when you think about this argument, you talk a lot about flow cost of ownership -- when we think of Square Capital, I mean I suspect that's got to be a significant component to that. Would you say it's just one of the major drivers, that ownership or is it -- is there another I guess some sort of product that really is driving that?

I actually wouldn't put capital into that whole discussion on total cost of ownership because I think someone is coming on Square, what they are really looking at is what am I having to -- first of all, I don't even want to get on with the system. What Square really revolutionized is we got work differently, first still a large portion of course -- they wouldn't even get on the system to begin, so that wouldn't even have a conversation by total cost of ownership. But one fair on the system, they'd be paying monthly fees to motion acquirers, they'd be paying monthly fees to hardware providers, they'd be paying -- within that fee, every card that they take would have a different fee associated with it. They would then have all of the fees that go along side payments of UPIC, charge by fees etcetera. And so I think that's more where the total cost of ownership lesion really plays out. I think capital in some ways is -- it's own separate and if they are thinking about TTO because there is no doubt that -- mostly they just don't get access to capital alright, that's the need that we're serving if that at $6,000 average capital loan, no bank can do that profitability and they can do it profitably because they can't cover the cost of acquisition of the customer and they can't cover the risk loss that will take on that. We saw customer acquisition because this is our base that we've really acquired and we have access to data that's very real-time and actually told you about their business. So I think there it's about TTO for the seller and more about access and getting it. And then I think it's ease of use thereafter. Even if maybe they did have a choice to go elsewhere, we just make it so simple for them at a click a button, in your account the next day, you pay back on every slide isn't that -- so you don't have to think about having to make ancillary payments outside of what your core business is doing.

Excellent. Thank you.

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

Thanks. I wanted to go to the EBITDA upside in the quarter that was obviously really strong, I think $15 million above your point -- would have even been higher if you backed out some of those transaction loss adjustment. So just help us understand maybe what were the sources of positive surprise outside of the top line? I think you talked to that pretty well. And then also maybe as we move to the second half of the year, I think guidance applies, EBITDA margins will be down a little bit from Q2 levels. Maybe what are some of the major moving parts we should be thinking about there as well?

Sure, thanks Josh. So I think in terms of upside, you're right. A lot of it came from the top line. So we were very pleased with how the top line performed and that clearly the whole weight on the model in terms of then providing EBITDA upside. I think if you look at it our operating the line, it's really a comment about how you think about the first half of the year versus the second half. We did do a lot of recruiting and adding to do our headcount in Q1 in particular, and then it started to moderate in Q2 and it should continue to moderate through the year. I think I told you on the last call, we found ourselves in a great place where we were able to recruit all the people we wanted to go recruit, it seemed to be a tougher environment for other smaller private companies and so forth. I think we've actually had our best win rates as a company in terms of recruiting. And in the last couple of quarter our attrition rates are a lot, so from a people perspective, it feels very strong and that was again particularly true in the beginning of the year when we wanted to make sure we beefed up in all of our product areas because that's when you start building products that will impact not just the back half of this year, but frankly, it's really what's going to build your growth rate for 2017. So I think in Q2, it began to scroll a little which helped with the EBITDA upside, it's part of why we rate guidance for the full year. The other thing that is unique -- you need to square but it's hard for us to forecast at the moment is employer taxes. So I called that in the shareholder letter and I called to that when I talked about guidance in my prepared remarks. It's just hard to know exactly what will happen. We clearly will pay those taxes whenever an employee sells divested options, and we did our best to forecast in Q2, we didn't really see a lot of selling activity in Q2, we've done that same kind of analysis in Q3. We believe it's our best estimate. And so we really want you to take that guidance seriously for Q3, the $5 million to $6 million in EBITDA because that does incorporate a fairly hefty employer tax piece and I think we probably have the better information internally to Square to be able to forecast that. But I think the net of it is, we want to continue to show strong profitability improvement as we move through this year and as we look to next year, and I think you see that very definitively in the guide that we've given you for 2016 overall.

Thanks, Sara. And one follow-up for you Jack, I know build with Square has been out for little bit of time -- I know it's still early but just anything you can share, early progress and how you like to see that product evolve overtime?

Yes, thanks for the question. We're excited that we're finally in position where we can we can offer in a platform and we're seeing some really positive momentum. But I think those surprising thing that we're seeing is to take from larger sellers. And Howard allows them to really work into their workflow and build more custom solutions that that they need with us having to do a bunch of our custom work. So we're seeing a whole lot more optionality to give a solution to a larger seller that they won't have otherwise and it would be blocked by us, and that's really playing out. And we're continuing to add more partners in our marketplace as well, so even our smaller sellers can turn on partners that they want to use like Big Congress [ph], and others. So it's definitely a big part of our fundamental strategy around how to serve sellers of all sizes better but we're really pleased with our larger sellers have taken to it and hope that they've been in the approach that continues to focus back on our strengths around payments.

Thank you.

Your next question comes from the line of Bob Napoly [ph] with William Blair.

Thank you very much. The software and put data product revenue was about 18% of net revenue or adjusted revenue this quarter, up from 12% a year ago. I noticed that as we look out 2017-2018, need longer term; what would you expect that those group of products to represent as a percentage of your total revenue?

Thanks, Bob. I appreciate the question because I think it allows us to come back to you both, internally and externally, we really want focus on adjusted revenue; and adjusted revenue has the three components. It has transaction margin, from the piece of monetary payment; the data revenue which I think was direct revenue when someone is going to pay a license and then hardware revenue. In the first two, we actually want to stay a little bit more indifferent because in some cases like an invoice products, it's a software product, there is lot of lines of code building a really unique product and invoice it. And you get paid for through a payment tick rates which ultimately transcends to a transaction margin. And we want the team to feel like they have to create the freedom to either pay for three transaction, have our customer pay for the three transaction profit or have them a direct offer fee. So that's why I actually don't want to get too focused on what percentage will software data be at total adjusted revenue rather have you focused on how big can adjusted revenue be because I think that will be the true indicator of the success of our products and what our sellers are paying for them. Does that make sense?

Yes, that makes sense but there are some really unique products within those different lines and maybe -- they are all software, and we can talk about the different lines little differently but I think some of those products are so different that it's important to understand -- for investors to understand which of those software products -- call them all software related products, I mean capital is a lot different; invoice and some of that negative, some of these are very different than the others. But I do think it's important to understand for investors to understand those different products overtime.

So then -- maybe rather than as a percent then I would come back to each of those products, so within the line we're effectively -- we're getting paid on a more direct basis. That three big and really the two that are the majority are capital and caviar, and then tell us extend Instant Deposit which is another good example of software product, highly correlated to payment but we get paid as 1% of every transaction that happens via an Instant Deposit or every deposit that's taken. So on the capital side, to model that and to think about its trajectory going forward, I would come back to what is GPVS Square; it is available to the underwritten. And then from that you know you know we do about 10% to 15% of the GPV. So even kind of do the multiplication to get down to what you think the addressable market in the base. And then from there as you know we take a fee about the mid-single digit, so every origination and then a very small servicing fee because we keep that unique relationship to the customer. So I think you can actually get -- you can come up with a fairly good estimate of what you think that can grow out over the next couple years. In Caviar's case, we haven't given you as much to go with there but I think the Caviar is still growing at a very hefty rate, very pleased with the traction that we've seen, we do seeing any course of this where we're going for and right out there with leading products; New York and San Francisco. And so I would kind of base it on our growth rate and then something like Instant Deposit. Again I think you can back into a number of customers that can utilize the product where you think the average transaction is for Instant Deposit, and then the fee we take of it. I think if you model those three; you're going to get large way there in terms of software and data for the next couple of years.

Thank you very much, I appreciate it.

And now we have time for one last question.

And your last question comes from the line of the Neil Doshi with Mizuho.

Great, thanks for squeezing me in. In terms of PayPal working capital and American Express working capital; how do you view those as competing products? And then would you ever consider opening up Square Capital to non-Square hardware customers? And then if we could maybe just get an update on the Square e-commerce solution and Square marketing solutions for small businesses, that would be great. Thanks.

Sure. Let me talk a little -- first of all, in terms of competitive differentiation, vis-à-vis some of the others generally I would say and they all terms of lending space. I think coming back to what Sqaure's current advantage is, which is we are really selling Square Capital or providing Sqaure Capital into our installed base. And we know we have to trust with that base, we know that they engage with almost every single day, and so our ability to put our product in front of them and have them take it is quite strong. In terms of capital for non-core merchants, I think we look at all aternative here of how can we grow the overall portfolio, first core quarter capital. And it may using the muscle of what we now in terms of -- if we have payment data, how we're able to underwrite merchants; does that need not to be our payments data, not necessarily, it's certainly an option that we think about. And then I think beyond that it's just -- thinking about where is Square in the middle of commerce between a buyer and a seller, and there are other places where our score capital G&A can be put to use and I think there is many more places within this clarity that we can do that. And then in terms of Square…

Neil, this is Jack. In terms of e-commerce, we're putting a lot of our energy into API and a build-on Square platform, that's where we're seeing a lot of the growth and also it provides a number of marks for us and our sellers, so that they can really build custom solutions for themselves but still benefit from everything that we're doing around that. We're also partnering with folks like [indiscernible] to make sure that when the sellers are already using our solution, they can integrate that into Square dashboard. And we have seen merchants do that in a summer way for customer relationship management marketing. We think you know it's so early but we've definitely played a lot with receipts and that we deliver to customers and we have a customer directory that's available to our sellers as well. And we're figuring out exactly where the stakes are in that service and where we can improve but no update beyond that yet.

Great, thanks.

I'd now like to turn the call back over to you Jason Lee.

Thank you, everyone, for joining our call. I would like to remind everyone that we'll be hosting our 2016 third quarter earnings call on November 1. Thanks again for participating.

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