Jason Lee - Head, Investor Relations Jack Dorsey - Chief Executive Officer Sarah Friar - Chief Financial Officer

Tien-tsin Huang - JPMorgan Darrin Peller - Barclays Matt Roswell - RBC Capital Markets Bryan Keane - Deutsche Bank Josh Beck - Pacific Crest Jim Schneider - Goldman Sachs Dan Dolev - Instinet Bank Ramsey El-Assal - Jefferies Paul Condra - Credit Suisse James Faucette - Morgan Stanley Brett Huff - Stephens Bob Napoli - William Blair

Good day, ladies and gentlemen and welcome to the Square First Quarter 2017 Earnings Conference Call. I would now like to turn the call over to your host, Jason Lee, Head of Investor Relations. Please go ahead, sir.

Hi, everyone. Thanks for joining our first quarter 2017 earnings call. We have Jack and Sarah with us today. First, we want to remind everyone of the format of 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 sellers in addition to questions from conference call participants. We would also like to remind everyone that we will be making forward-looking statements on this call. Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance. Please take a look at our filings with the SEC for a discussion of the factors that could cause our results to differ. Also, note that the forward-looking statements on this call are based on information available to us as of today’s date. We disclaim any obligation to update any forward-looking statements, except as required by law. Also, during this call we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are 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 over to Jack.

Thanks, Jason and thank you all for joining us. We are off to a great start this year and we are proud of our work this quarter. We entered our fourth international market with our launch in the UK, built a new wave for sellers and chip-and-PIN countries to accept payments and added more industry-specific features for our sellers. A lot of this progress stems from our work on integration which I have mentioned is an area of focus for us this year. We placed a lot of emphasis on integration, because of tools that work seamlessly together, create a better experience for our customers. And we hear from our sellers that the cohesiveness of our services is why so many sellers choose Square to start their businesses and stay with us as they grow. For example, this focus enabled us to launch Square in the UK with what was by far our biggest product launch in the new country to-date. We launched with payments and point-of-sale, but also with invoices, employee and location management, analytics, customer directory, integrations with third-party apps and our Build with Square APIs. Our integration of hardware and software also allows us to address market needs in innovative ways. For countries such as the UK and Australia, we needed to enable acceptance of payments that use PINs to authenticate chip card transactions. We invented a new secure way to enter PINs into the Square app on a mobile device, eliminating the need for expensive hardware PIN pads. We will continue to work alongside industry partners to make card acceptance more accessible for businesses of all sizes. We are also working to integrate Caviar with Square and expand Caviar from a food delivery service to a food ordering platform. For example, we now use technology from Square Cash to complete delivery payouts to all new Caviar careers. Square’s expertise in payments, point-of-sale and order management sets Caviar apart from other food delivery services and Caviar helps Square reach more restaurants, which is a key vertical for us. As we grow and add more services, it becomes more important to maintain the cohesive ecosystem for our sellers. One of these sellers is Sam, who runs a flower stand in Northborough Station in South London. Sam was one of the first merchants using Square in the UK. She attended our launch event, where she spoke about how she used analytics to track her sales and figure out the best hours for her to be in the station. We talked a lot about the importance of focus and she told us her goal was to ultimately open a physical location. A week later, Sam sent us a note that she was finally taking the leap. She wrote, I have been halfheartedly saying I want to shop for ages while not really doing much about it. It’s time to focus. Sam’s focus is our focus. The dream Square represents is the ability to grow a hobby to a small pop-up to a physical store and the growing business. Sam is just one of the millions of entrepreneurs around the world pursuing this dream and we will be there to support her as she does. I will now turn it over to Sarah for some more detailed remarks on our financials.

Great. Thank you, Jack. We started 2017 demonstrating our continued ability to grow at a meaningful rate even at significant scale. Our continued growth, combined with operating efficiencies and ongoing risk loss rate improvement, enabled adjusted EBITDA margin expansion of 19 points year-over-year. Gross payment volume for the first quarter was $13.6 billion, up 33% year-over-year. We saw strong momentum across our product base with both transaction-based and subscription and services based monetization, resulting in a 22% year-over-year growth rate in total net revenue and a 39% year-over-year growth rate in adjusted revenue. Transaction based profits as a percentage of GPV was 1.07% in the quarter, up from 1.03% in the prior year period. Excluding processing credits for preorders for our contactless and chip reader in Q1 of 2016, transaction-based profit as a percentage of GPV has been quite stable. Our continued ability to grow GPV at scale, including the ongoing growth in larger sellers while maintaining transaction-based profit margins, demonstrates that our sellers valued the full extent of our managed payment solution and our cohesive integrated ecosystem. GAAP net loss was $15 million in the first quarter. This equates to a net loss per share of $0.04 compared to a net loss per share of $0.29 in the first quarter of 2016. Adjusted EBITDA was $27 million this quarter. We saw strong quarter in improving our risk management driven by our ongoing investments in machine learning as transaction loss rates continued to decline and are trending below our 0.1% historical average. With that, let me turn to full year guidance and please see our shareholder letter for details on the second quarter guide. For 2017, we increased our full year guidance to reflect our strong Q1 results and the ongoing momentum in the business. We now expect full year 2017 total net revenue to be within the range of $2.12 billion to $2.16 billion and adjusted revenue to be in a range of $890 million to $910 million. Adjusted EBITDA is expected to be in a range of $110 million to $120 million. At the midpoint, this suggests a 13% adjusted EBITDA margin, which translates into a mid single-digit percentage margin increase year-over-year. We expect net loss per share to be within a range of $0.24 to $0.20. This includes a negative $0.04 impact from our recently raised $440 million convertible debt instrument, which was not previously anticipated in our guidance. We expect adjusted EPS to be in the range of $0.16 to $0.20. Finally, as a reminder, we will host an Investor Day on May 16. We encourage you to watch live via webcast or on our Investor Relations website. And so with that, let me turn it back to the operator to start the Q&A portion of the call.

Thank you. [Operator Instructions] We will take your first question from Tien-tsin Huang from JPMorgan. Tien-tsin Huang: Great. Thanks. Good results here. I just wanted to ask actually on the UK opportunity. I am just curious how you might approach this market entry differently than other markets like say, Australia or Japan and some of the others. Is it, kind of, move the needle in revenue expenses in 2017, really curious to hear how you might lean in with any investments in marketing in the UK? Thanks.

Yes, thank you for the question. So we are – one of the things that we were really proud of is our ability to launch multiple products in the market. Traditionally, we have only focused on payments and point-of-sale and this really speaks to how good we are getting at internal platform and moving much faster to launch fuller suite of products within market. The UK is also really interesting for us corresponding to our hardware. Our contactless and chip card reader was built to be a global platform, but the UK is interesting because over 70% of transactions are top transactions and are fee-based. So, we had a really perfect product market fit. And everything that we have learned from launching Canada, Japan, Australia and now the UK is going into this launch and we are going to work really hard to make it successful. But one of the biggest things that we were able to do this time was really launch with an ecosystem instead of launch with a part.

Great. And then Tien Tsin on your question on investments and the impact overall to financials, clearly we have fully anticipated the UK in the guidance that we gave and we are very comfortable with that. A launch is the tip of the iceberg. A lot of the product development is already in place, as Jack has talked to. From a sales and marketing perspective, a launch usually involves a lot of experimentation to figure out which channels are going to be most efficient, every market is slightly different. However, we bring a lot of the learning clearly from markets like the U.S. and Australia as we go to the UK. So for now though, guidance fully reflects our expectations of what that market will mean for Square. Tien-tsin Huang: Got it. Thank you.

Great, yes. Thank you.

Thank you.

We will hear next from Darrin Peller form Barclays.

Great. Thanks guys. Nice job again. I just want to start off first, the take rate again, I mean it looked pretty strong, better than our expectations despite, obviously very strong trends and again larger merchants, I know you have done well with that before, there has been an upward trend, can you just remind us again the sustainability there, the drivers of that strength. And then I guess just a quick follow-up on the cash, the potential for cash deployment given the debt, I am not sure if I remember hearing the use of proceeds for that? Thanks guys.

Sure, great. Thanks so much, Darrin. So first on that take rate, so as you saw in the quarter, 2.96%. It’s why we called out a little bit the year-over-year. So from a year-over-year perspective, it’s actually quite stable when you account for the free processing credits that happened in Q1 that actually lowered the take rate in Q1 of last year. So overall, it’s about flat when you look at Q1 to Q1. Q1 tends to have some seasonality and that naturally lifts the take rate. So for example, card presence tends to be a little lower, as you would expect seasonally slower quarter, less going on in stores and we see a little bit more of card not present, so that clearly impacts it. From a more broader perspective, as we have talked many times here, we want to continue to be able to have the flexibility around custom pricing as we move up-market and often that will mean that we offer a more competitive take rate, but we are always mindful of the overall margin that we can make from that larger customer. At the same time, there are products like invoices where we charge $0.29 and $0.30 or even the Build with Square API platform, where clearly that’s priced as a card not present transaction, that will continue to bolster the take rate. International is yet another fluctuation that we add into the mix. And so I think that’s like ultimately what we drive to is adjusted revenue because it will take out all of that fluctuation over time. In terms of use of proceeds from the convertible debt instrument, nothing to talk about on this call right now. Really, the rationale for that was first, a company at our scale behooves us to have a balance sheet that matches that, so we have always the maximum amount of flexibility. Second, we wanted to be opportunistic. So we have been watching the convertible debt market for a while, very low issuance at the beginning of the year. We knew we would be seen as a very high quality issuer and we felt that, that would bring us together to give us a very good outcome in terms of the terms and I think that’s what we saw. We are delighted with our 0.375% interest rate on that debt, for example. So it’s really the combo of always being mindful to financially plan our balance sheet well, to give us flexibility, combined with an ability to be very opportunistic at that point in time.

Okay, that makes sense guys. Thanks. Nice job.

Dan Perlin from RBC Capital Markets, please go ahead.

Yes. This is actually Matt Roswell stepping in for Dan. Congratulations on good numbers. Let me talk about the subscription and services growth, it came in better than we were expecting, can you sort of disaggregate what the main drivers were and whether there was any sort of one-time capital sales?

Sure. So the growth rate in the subscription and services revenue line was 106% year-over-year. So it was a very nice quarter for products that we monetize in that way. I think in terms of highlights in that area, capital, certainly one. So capital grew 64% year-over-year and we facilitated the origination of $241 million worth of loans, so feel great about that product. Clearly, we are answering a big market need and very few, if any others can really follow us into that market. Caviar continued to scale. Q1 ‘17 orders more than doubled year-over-year. And then I think the other one we would call out is instant deposit, so clearly benefiting from awareness across our ecosystem for both sellers and for Square Cash users as well, so those three are probably the biggest components. And no, there was no one time capital sale in the quarter.

Okay. And should a similar type of growth rate continue for the rest of the year or is there a seasonality in this?

So we – when I look at the drivers of each of those businesses, clearly at our scale and given that a lot of it we face U.S. commerce, there is always seasonality. However, Q1 tends to be somewhat a seasonally slower quarter. Q2 is our seasonally strong quarter. So we will see some of that shift quarter-to-quarter. But the underpinning growth components, whether it’s for capital, Caviar, instant deposit really remain intact and we feel very good about the continued momentum there. I would draw you back to the overall guidance for 2017 that we gave on adjusted revenue, which has a 31% overall growth rate across all the adjusted revenue line items for the year.

Excellent. Thank you.

We will move next to [indiscernible] from Square seller.

Hey Jack. Hey Sarah. Thanks for taking this. The numbers of the [indiscernible] in the UK, it sound great, but my question is, what has the Apple Pay adoption been like, I feel like some users might be slow to adopt it, because they are more comfortable with the swipe and they incorrectly associate Apple Pay with EMV, which usually has slower wait times?

Yes, great question. And thanks Steve, for using Square. So we think it’s our responsibility to make sure that people are moving towards authenticated form of payments. EMV is that standard that both chip cards and NFC are based off of. And we built our contact-less reader to serve this purpose and this is, again a global platform, so the same hardware every market. In terms of adoption of NFC and Apple Pay in particular, outside the United States, predominantly NFC is used and it’s growing much, much faster than its peers, especially around EMV cards, chip cards. Inside the United States, we still have a lot of work to do in educating both sellers and consumers. So we are working with our partners like Apple to make sure that we are doing – giving our best effort to help consumers understand the value of Apple Pay and of NFC. And the main value is speed. Security is underlying everything, but being able to move through a line much faster, being able to transact much faster means that whatever you are buying, you get to enjoy much faster as well. So we are focused on our part, which is helping to educate sellers, but also working with all of our partners to help educate consumers around the value of moving to more digital payments and more authenticated payments.

Thanks so much. Congrats on the great quarter.

Thank you, Steve.

Thank you.

Bryan Keane from Deutsche Bank, your line is open.

Hi guys. Congrats on the quarter. Sarah, I just want to ask again on EBITDA, once again, you guys have vested your estimates, can you just talk a little bit about the leverage points you are seeing and then sequentially in 2Q, it looks flat from 1Q, I would have thought there would be a little more leverage in the model in 2Q, but the guidance kind of looks like it’s more flattish, so just interested in your thoughts there? Thanks so much.

Sure, great. Thanks Bryan. So we were very pleased with the overall outcome of Q1. If you look at what is the driver of the EBITDA be, it really does start at the top line. And we saw good growth across all of our products. I think always reminding that the core trends continue. So when we bring on a new cohort of sellers, we see a four to five quarter payback period and from there, positive retention. So just underpinning the growth of the base is this very kind of profitable growth from sellers who are already onboard this ecosystem. In addition, clearly new services like invoices, virtual terminal, API and so on are growing well. We are taking more and more of the book of business off the current base of sellers and its drawing new sellers in the front door. And so that also tends to drive better top line performance which then falls through to the bottom line. In addition, I would call out and I said it in my prepared remarks, transaction and advanced losses, again another quarter of out-performance there. We have been doing a lot of work, as you know, from the get go of Square to invest in machine learning to make sure that we can deal with risk in a highly automated, machine intense way rather than people. And I think that is giving us the advantage of helping improve our EBITDA margins, but also be able to launch products like instant deposit that you couldn’t do if you didn’t have real-time risk review. So those are the drivers that we saw in Q1. As we go into Q2 and really I would look at the full year, we have been very consistent in saying that we would see a mid single-digit year-over-year EBITDA margin improvement. That’s why we have continued to guide to, and I think that gives us the right balance of being able to continue to invest for growth. And as you can hear already on this call, we believe there’s a lot in front of us right now, whether it’s new countries or new products, to be able to continue to invest on that top line.

Okay, super. Thanks so much.

Thank you.

Josh Beck from Pacific Crest, your line is open.

Thank you. I had a question on Caviar and I think part of it might be for you, Jack, in terms of the pickup launch, if that’s really oriented towards new customers or really a cross-sell to existing. And then also along those lines, for Sarah, if I look at the subscription and services gross margin, I think it was up over 500 bps year-over-year, so what would you point to there? Is it better profitability within Caviar, higher mix of deposit, any call-outs along those lines? Thanks.

Yes. So to start on the high level with Caviar, we acquired Caviar in order to drive more sales to a type of seller we weren’t able to reach, which was a restaurant, full-service restaurant. Along the way, we learned that not only was delivery important, but offering more types of fulfillment of food was critical as well, and it would continue to open us up to new types of restaurants as well, including QSRs. So we have learned a bunch from delivery but the biggest learning is that we think we have an opportunity to go beyond just delivery and to really be a food platform anytime you are hungry. And sometimes you want that food to come to you, sometimes you want to go to it. So the pickup launch represents an extension of the fulfillment type, which has been asked by us from our sellers because they do have people coming by and picking up food, and gives us a more complete and cohesive view for the restaurant so they can use us for more and more things. So the big focus for us this year is to make sure that we continue to highlight everything that Square has to offer from all of our services, inclusive of Caviar. And pickup allows us to reach new customers but also to cross-sell to existing customers. But everything that we – we are focused on is really continuing to go after newer customers and bigger customers that have different needs, and Caviar is really focused on the food vertical. And with pickup, we get to serve a whole lot more in new ways as well.

Great. And then, Josh, on your question on the gross margin, for subscription and services that year-over-year improvement, you are right, it’s about 600 basis points. It’s really to do with the mix of what’s in that line. So clearly, products like Capital and Caviar remain key contributors, but I think what is more – not net new, but starting from a smaller base and now becoming more material is Instant Deposit. So as you recall, that’s a product we originally launched for sellers, really speaking to sellers that needed money more real-time. So, if you are a hair salon and your biggest day is Saturday, waiting until Monday to get paid can really put a dent in your working capital. And so we found great product market resonance with that to date, and we think there’s a lot more opportunity by the way. And then on the Square Cash side, that’s also become a really big value proposition for Square Cash, is the ability to get your money instantly as you partake in P to P. And so it’s that mix, that list of Instant Deposit that is having probably the biggest impact on the gross margin of software and services – of subscription and services. I will get it right this time.

Okay, thanks.

We’ll hear next from Jim Schneider from Goldman Sachs.

Good afternoon. Thanks for taking my question. I was wondering if we can start maybe in terms of the merchant additions that you saw in the quarter. In terms of the profile, I am assuming that the largest seller group grew the fastest, followed by the midrange merchants. But if you can give us any kind of color in terms of where you are seeing the greatest traction in terms of growth of those sellers, and specifically, can you give us a sense about whether you have kept pace with the prior quarters and whether you are now over 3 million in total?

Great. Thanks, Jim. So in terms of the profile and the growth rate of each of the kind of striations of sellers that we give, you are right that larger sellers continue to grow faster. Part of it is just that we are still younger in being able to go out after that seller base. So today, large sellers now comprise 43% of total GPV and that compares to 39% a year ago. And what’s driving that is the continued evolution of our product. I think releases, like retail point-of-sale, are really going to help a lot here because we know as sellers get larger in areas like retail, they want a more sophisticated point-of-sale around elements like inventory management, for example. I don’t want to underestimate, though, the growth in micro because they do think that this continues to be a real home ground for Square. We think there’s still a lot of untapped market opportunity and just more and more for us to do, keep building our awareness, keep building on things like word-of-mouth referrals, for example. So still a lot of opportunity even in some of the smallest merchants. And then in terms of new sellers added, I think, is your question, yes, we still have millions active on our platform. And in terms of quarterly adds, no change to what we have talked about previously.

That’s helpful. And then maybe just kind of shifting over to capital for the second, it looks like the loan losses were pretty muted in the quarter, maybe even less, if you could clarify that number. But more broadly speaking, I think credit quality is obviously becoming an issue for the broader market given what we have heard from Synchrony and even some of the big banks. So can you maybe just give us a sense about what you are seeing in terms of credit quality trends across the seller base and whether you would factor the point of actually typing some of those levels as is happening across the broader industry or do you think your levels are sufficient as they are?

Great. Thanks for the question. So loan losses, you are right, were maintained at 4%, even slightly lower. We think we have a very unique asset here in terms of being able to see point-of-sale data, and with that, we are able to manage the risk as we help originate those loans. So that is, number one, it’s just the uniqueness of the data that we have. In terms of broader credit quality and how we would adjust, because our risk loss is model-driven, and in fact, the models are always readjusting because they are readjusting to seasonality, they are readjusting to payment velocity, as we get more data points, things like as we see your inventory, as we see are you adding new employees, all of this creates an even richer complexion of the seller from which to help facilitate that loan. So net-net, we haven’t made any adjustments right now but our models are constantly adjusting. And I think for us, it’s ultimately about the output, what is the loss rate in a given quarter and we are very happy to see it maintained in this 4% or even lower type range.

Great, thank you.

We’ll hear next from Dan Dolev from Instinet Bank.

Hi, thanks for taking my question. So just two questions. First one is there anyway you can quantify the investment you made internationally and maybe how much of that is actually baked into the second quarter EBITDA guidance?

We are not calling it out specifically. I think, generally, as I talked about, when we go into a new market, a lot of the product development work is always ongoing, but a lot of it is clearly done before we can hit that launch button. In terms of – so the real investment tends to come more around the go to market. We are in full test mode in the UK at the moment. As I said, we are bringing learnings that we have seen in countries like Australia and even in the U.S. that have a lot of similarities to U.K. market. But at the end of the day every market is very different, and so we will go test Google AdWords, we test Facebook, we test many – DirectMail, many, many different channels in order to see where we can see most efficiency in a channel, always being mindful of that payback period that we look to here in the U.S. as well. So I don’t want to call it a specific number, but we also want to make sure we can be successful in the UK. It’s very front and center for us right now.

Excellent, thank you. And my last question is again on that transaction-based profit, which accelerated sequentially. It looks – it goes a little bit against sort of the fact that largest – your largest seller is actually accelerating in terms of percent of GPV. So, two questions. Is this – is it just because of that, I think, you laid out like the card presence, etcetera or is there something else? And is this kind of the new normal? Should we think about those rates going forward like that? Thank you.

Yes. So, as it’s – one of the reasons why we wanted to call out the seasonality of it, and so when you look at Q1 of a year ago and you take out the deferral that we put on the balance sheet, or actually the free processing credits when we launched the new reader, that number would have been more like 2.95ish from Q1 of a year ago. So net-net, I think of it as more flattish and that is normal seasonality that in Q1, you will always see this slight uptick in that take rate, that transaction revenue as a percent of GPV because of the seasonality of card present versus card not present. As you think about Q2, Q3, Q4, I would model it much more year-over-year rather than thinking of it sequentially. I think the meta point that you made about larger sellers and so forth, it’s come back to that we believe our value proposition is much greater. We do manage payments, so we help you get on board a system, we help you make sure that you can take the payment and then get paid the next day. We handle all of the risk and all of the charge-backs behind it. So it is a much greater service than someone simply doing payment processing. And I think that’s why, for the vast majority of our merchants, our take rate continues to stay very, very stable.

Understood. Thank you so much.

We’ll now take a question from one of our sellers, Bryan from [indiscernible] Studios. For Square for Retail, will you provide updates so that I can better manage my inventory like a more detailed items page that includes unit cost or the ability to create SKU codes and print price tags?

Thank you, Bryan and thanks for being the Square customer. Yes, we have a very fulsome roadmap for Square for Retail and the team is working really hard to get it out as quickly as possible. And we also benefit from feedback from our customers through our sales channel, through our support channel and through watching what people are saying about our launches. So we are learning quickly and we are focused obviously a lot on with retail on inventory. So, you should continue to see our inventory system get more sophisticated and help you better scale as you grow your business.

We will move to the next question from Ramsey El-Assal from Jefferies. Ramsey El-Assal: Hi, guys. Can you elaborate on the process by which you cross-sell new services to existing clients? I am assuming there is some detailed targeting and offers that go out. Is the process fully automated? Are there – is there manual intervention? Are there levers you can pull to accelerate the kind of cross-selling process, just looking for a little more color there?

Yes, I will start and Sarah can add some comments as well. One of the benefits of starting with the most critical thing being payments and sales is, we have a customer base that’s constantly checking how they are doing and they are constantly checking how they are doing on our dashboard, for instance and this is a great – the dashboard being on the mobile app or on the web. This is a great opportunity for us to show everything else that we have to offer and how easy these tools are to use. Again, there is no integration or hooking things up for a seller. They just go to that section of the website or that section of the mobile site. So, we have something very unique in that we have a very – a base of customers, who are checking daily, if not hourly, on how they are doing and it gives us plenty of opportunity to show everything else we have to offer. This is one of the areas we are focusing a lot of our machine learning efforts on, is to get a whole lot better at making sure that we are showing people things that are valuable in the moment when they need them, so that we get better conversions every time and we are actually providing more value to that particular seller. So that’s probably the biggest opportunity is where we can automate more of that and really be in front of where the seller’s naturally looking.

Yes. And I think from a numbers perspective, Jack’s kind of spoken to the investments that we make that is a place where ML, for example, is very efficient. In terms of the output, we are always looking at every channel. So we look at cross-sell in the same way as we look at a new channel to compare and make sure that we are putting our dollars in the right place. And then the only final place in the numbers I think it really shows through is in the positive retention rate. So historically, we have talked a lot about retention rates on payments alone to really underscore how profitable payments can be. But as we go forward, we’re starting to see more and more impact of the ability to cross-sell and up-sell into the seller base. It has a twofold impact clearly on the ROI, a), customers tend to be more sticky with products that they’re using and two, they have a greater LTV to the extent that they are using more products. And I think it’s the place you will see us dive into more in our Investor Day as well, a teaser for Investor Day, right. Ramsey El-Assal: Okay. One last one for me, you just entered the UK, can you comment on other attractive markets you might be evaluating? And if you can’t go that far, can you just help us think through what you look for in a geographical market that makes it a good fit for your offering?

Yes, I’ll start there. One, we are looking for, obviously, mobile adoption and a high degree of entrepreneurship in small businesses within the market. And one of the things I’d point to is we are really proud of the markets that we are in, but there is a lot more to complete in those markets as well that opens up more of the market to us and to consumers as well. So right now, we are focused on making sure that our markets are as strong as they could be, with a particular focus on Canada and Japan and our launch of the new market in the UK. So, as we – we are using the UK as a way to really understand deeper the European market and are looking for the next, but right now, our focus is making sure that it’s not just about launch, but we are really successful in each one of the markets that we are in, we are completing and have a cohesive offering in each one. Ramsey El-Assal: Great. Thanks for taking my questions.

Thank you.

Paul Condra with Credit Suisse, your line is open.

Great. Thanks and afternoon everyone. Guess kind of a follow-up on that question you focused a lot on those large cities where you have a lot of small business activity. I am curious kind of in the U.S. what you are seeing in more rural parts of the country, how you penetrated those regions and how important is the strategy to expand in those parts of the country?

Sure. Thanks for the question. I think, for me, one of the most interesting and uplifting things about Square is that we are everywhere that commerce happens. So we are not just about large cities. Instead, if you just look to the map of the U.S. at any given point in time, you can see transactions happening all over the country. In terms of how we have done that, I think part of it has been building a brand that really resonates and that people recognize. And so even to this day, a large portion of our activations come from, effectively, word of mouth. We call them organic. So, we haven’t been touched by any form of paid marketing. Instead, it’s a seller telling a seller or a seller sees it in a cab but when they return to their cupcake shop, they want that same ease-of-use, that same kind of delightful experience. So, that has really helped a lot in terms of proliferation across all parts of the U.S. And by the way, this also is the same trend we see in Canada, which has massive landmass and where we see transactions happen everywhere in Canada as well. So it’s – I wouldn’t say that there is one particular thing that we have done, rather, it’s being about building a brand that continues that referral that word-of-mouth and then utilizing really large scalable go-to-market channels, like SEO, SEM, direct mail campaigns and so on that can be done in a very low-touch, no-touch way, but at broad scale and then ensuring that we are always very diligent about the payback period. So whatever channel we push in a given quarter that we are always maintaining that 4 to 5 quarter payback period.

Okay. Thanks for that. And just as a follow-up on that, I was surprised the stock compensation was flat and I wondered if you could just talk about how that will look for the year? Thanks.

Sure. So from a stock comp perspective, we gave you our GAAP EPS guidance. I think that should give you a lot of color on both what SBC should be for the year. And then even as we think about the fully diluted share counts and we can clear this all up if you need more depth on that. At a high level just to remind, in terms of SBC, we give a velocity of ownership at the company. We think that aligns the interests of Square’s with all of the investors in our company. Secondly, we are starting to trend towards more cash compensation though, because we do want to be mindful of dilution. And we have done, we have moved from options to largely our shoes for most of the company at this point in time and we are airing more into cash. And that’s just part of the maturity of the company. If you look at any of the larger tech companies that have been around for decades, they have made this same move. In terms for the year, we would continue to expect SBC as a percent of adjusted revenue to continue to trend down in the same way that we see with all of our other operating expense lines.

We will hear next from James Faucette from Morgan Stanley. Please go ahead.

Great. Thank you very much. Just a couple of quick follow-up questions for me, first you mentioned transaction losses staying below, staying low and the low comp the way that you have formulated in the guidance last couple of quarters, how do you roll that forward into your forecast, are you now looking at a permanently lower level or have you – do you still have built-in expectations that those losses could increase. And then my second question is, I understand that at the movement to the UK, you have kind of built that into the guidance, but should we anticipate any impact on some of the other key performance indicators that people track perhaps given the difference in interchange rates, etcetera, in that market? Thank you very much.

Great. Thanks James. So first on transaction losses, so we have typically talked about transaction losses being around 0.1% of GPV. And when we think about forward guidance, we tend to go back to that number. We have put a lot of investments in, in order to maintain that level of transaction loss, but it’s also a way for us to be able to open the top of the funnel and allow as many sellers as possible to come to Square to be accepted on to the platform. And it’s very, very different from anyone else in the industry. And we think it’s a core competitive advantage to do that. So we don’t want to overly constrain the top of the funnel by getting too myopic on the transaction loss rates. In terms of the UK guidance and impact on other KPIs, I think what you are alluding to is, if you look at pricing in the UK, our fee is 1.75% for card presence and then 2.5% for card not present. We can go to that fee rates because interchange in the UK, it’s a very regulated market. So for context, for those that maybe haven’t looked at it, interchange on card presence is capped at 20 basis points on debit and 30 basis points on credit. And that compares to about 160 basis points to 180 basis points in the U.S., so it’s a very, very different market from a cost perspective. I think it will take a while for the UK to really impact things like take rate or things like transaction margin profit. Just given the scale of the rest of the business, but we will definitely update you at a point where that makes sense.

Thanks.

We will hear next from Brett Huff with Stephens.

Good evening and thanks for taking my questions. Can you talk a little bit about competition both in the U.S. and the UK, there is lots of folks, who topped up to try and imitate what you have done, some focused on card presence, some on more card not present, how do you, sort of think about as you develop your products and also try and get capture more share of wallet, how do you defend that franchise that you guys have going?

Yes. So as you said, we have seen a lot of imitation. We have – we are very proud that we continue to invent and others follow. And we can’t just rest on those laurels. We need to make sure that we are really clarifying what sets Square apart. And we think it comes down to four things. Number is our simplicity and that’s due to a lot of because of number two, which we spoke to on the opening remarks of cohesiveness. Our tools work together and we are focused on the most critical tools first and then the next most and the next most and the next most. So I feel really good about how cohesive our ecosystem is and how well it works together. The other big defining aspect for us has always been how self-serve our tools are and this is another focus for us this year in terms of using machine learning to make sure that we continue to be more self-serve, that our sellers can do what they need and they can do it very, very quickly. And the more self-serve we get for every seller type, the more customers we get to serve. And then finally is speed and this is not just how fast our apps are or how fast we have made our hardware, which we put a lot of emphasis around, for instance our chip card reader, we brought down from an industry average of 11 seconds to 5 seconds to now 3 seconds. But it’s also how we give access to sellers’ funds. So as Sarah spoke to instant deposit, for instance, it’s really important that sellers have instant access to their funds and have that option available. And if they have faster access to their funds, they can grow faster. So our whole goal is to help drive more sales to our sellers and that comes in a multitude of ways. So we have continued to innovate, continued to be the first to market for everything that we have offered, but building into those four aspects cohesiveness, simplicity, self-serve and speed, really helps us make sure that we stay ahead of the curve as we continue to invent new things as well.

That’s helpful. And just the second question is as you think about your ecosystem and maximizing, sort of what you provide for folks, how are you delineating what you want to do and build yourself in terms of functionality and how do you determine what you are going to partner with in order to both provide the most value to your merchants, but also maximize the stickiness and value of your ecosystem over time?

Yes. So it’s all a matter of like prioritization in terms of like what a seller actually needs and what is most critical. We started with the most critical need, which is being able to accept the sale in the first place and that’s payments. The next most critical was understanding my business. So that’s where point of sale came in to help organize someone’s business and understand what’s going on in the business. And that allows me to make better decisions as a business owner. The next most critical thing was access to capital. And the next most critical thing is access to new customers, be it in the form of existing customers and building more loyalty or new customers and driving new sales. So you see this in what we do with Caviar, allowing us to reach a restaurant seller, driving new sales to restaurant. And as we add a dimensionally pickup, we get even more types of restaurants and more individual consumers as well. So that has been great and I feel really good about our ability to focus and prioritize. But we do have an escape hatch, which is our Build with Square platform and APIs. So that allows partners to join and to build on top of us and with us so that we can serve every type of seller with solutions that we don’t have or are not prioritizing gives us an ability to learn as well and allows us to help promote our partners, but also especially around larger sellers, make sure that Square is always in the solution set no matter the size. So I feel really good, again about our focus, but also our ability to understand what our sellers need at any size because of our API and because of the focus on our platform.

And at this time, we have time for one last question that will come from Bob Napoli from William Blair.

Thank you and good afternoon. Can you talk about the attach rates, the trend in the attach rates and what you feel like you can get to for some of these products for Invoices, Instant Deposit, Square Capital, I mean obviously those products are growing at a much faster pace than payment volume overall, so the attach rate is going up, but can you give some color on where you think that those attach rates could possibly get to over time? Thanks.

Sure. Thank you, Bob. So if you look at a product like invoices, Q1, very nice quarter for that product, 225,000 active sellers driving $700 million of GPV in the quarter, so almost getting close to $3 billion on an annualized rate. I think that’s a great example of a product that has really – can hit a seller of any scale or size, any type of business and so has a lot of ability to go in and penetrate the installed base. Capital similarly, I think we have always been very proud of the fact that with capital, we can go right down into micro merchants that really have no other avenue to get capital to help them grow their business. So a seller like Sam that Jack mentioned in his opening remarks, how she goes from a pop-up in a station to a store, we can get her capital to do that even at her scale. And so I think that’s a product that also has a wide applicability to our seller base. There is others like retail point-of-sale where clearly, we are going to double down more into retail as a vertical, which retail as a percent of total GPV on our base is more in the kind of 20%-ish type range. So it’s not broadly applicable. So it’s kind of a tension of where we do we want to go deep because we believe that vertical specificity will allow us to go into our merchant base that we don’t have access to today, maybe a larger full service restaurant, for example, with Caviar or a partner with a point-of-sale or where do we want to go really wide and make sure that the products like the speed of access to capital of instant deposit is available to all. So invoices is the best example since it’s the furthest along right now, but I think we still have a ton of running room even in a product like invoices.

Any numbers on attach rates where you are today and where you think you can go as a...?

Yes. I mean I don’t want to get into percentages because then I think in some products it will look like a really small number when we are talking basis points to begin with. Invoices, you know that we have millions in our installed base, but you also know we now have 250,000 actives on Invoices. So you are starting to see a product that’s getting to a more meaningful attach rate. And so that’s why I kind of pointed to it as a good example of where other products can get to. Invoices itself, I still think can really go quite far from here.

Great. And just a clarification on a number, the capital business where you see – I guess the question was already one-time, I mean that business, the way the business model works as you originate and you sell each quarter, so those are normal, so it’s not you didn’t have any gains. It’s just nothing abnormal just in the normal course of business.

Yes, thanks for the clarification if that wasn’t clear. That’s exactly right. So, the core part of our strategy with capital is to sell those loans on to third-party investors. That helps us to continue to fuel our growth and also help manage our risk at the same time. So, as you can see, sitting on our balance sheet right now, we have loans held-for-sale at around $52 million, but when you compare that to the $251 million that we originated, that we facilitated the origination of in the quarter, clearly, that third-party investor is a core part of how we grow.

And are the margins stable on that product? What are the gain-on-sale margins? Are they mid to high single-digits is what I think you have said in the past?

They haven’t changed. They remained very stable. And I think as we continue to build that business, we see more and more investor interest. And so as you get more investor interest, clearly, that starts to give you more and more ability to negotiate from a rate perspective.

Great. Thank you very much. I appreciate it. I will see you in a few weeks.

Great. Yes, see you soon. Thanks.

That does conclude our question-and-answer portion of today’s conference. I’d like to turn the call back to the company for closing remarks.

Thank you everyone for joining our call. I would like to remind everyone that we’ll be hosting our second quarter 2017 earnings call on August 2 and our Investor Day on May 16. Thanks again for participating today.

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