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

Tien-tsin Huang - JP Morgan Jason Kupferberg - Bank of America Merrill Lynch Dan Perlin - RBC Capital Markets James Schneider - Goldman Sachs James Faucette - Morgan Stanley Brian King - Deutsche Bank Ramsey El-Assal - Jefferies Josh Beck - KeyBanc Pete Christiansen - Citi Jeff Cantwell - Guggenheim Bob Napoli - William Blair Joseph Foresi - Cantor Fitzgerald Andrew Jeffrey - SunTrust Paul Condra - Credit Suisse

Good day, ladies and gentlemen, and welcome to Square First Quarter 2018 Earnings Conference Call. 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 first quarter 2018 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 closed. 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 it over to Jack.

Thanks, Jason. And thank you all for joining us. In the first quarter, we once again accelerated growth at scale. Total net revenue grew 45% year-over-year and adjusted revenue grew 51% year-over-year, up from 36% and 47% respectively in the fourth quarter of 2017. I also want to highlight our progress on omnichannel, global expansion and larger sellers. Enabling sellers to reach buyers wherever they are, omnichannel commerce is our top priority for 2018. Last week, we entered into an agreement to acquire Weebly, a technology company that allows anyone to easily build the professional website or online store. We’ve had a partnership with Weebly for several years, and our two companies are very aligned and that we both want to build powerful, accessible tools that help entrepreneurs succeed. Combining with Weebly, we will provide sellers with one cohesive solution to start or grow in omnichannel business. Additionally, nearly 40% of Weebly’s paid subscribers are outside the United States, which help us accelerate our global expansion. In the UK, we launched two of our fastest growing services this quarter, Instant Deposit and Cash App. With Instant Deposit, sellers in the UK can now receive their money in minutes at the tap of a button even outside business hours. We know that sellers everywhere value speed, particularly when it comes to their money. In the first quarter, Cash App was regularly a top 25 app in the free app store. This ranking along with the top cash card uses we see like McDonald’s and Walmart, demonstrate Cash App’s mainstream usage. Similar to the U.S., we see an opportunity in the UK to expand the suite of financial services we offer and we’re excited to bring Cash App to more people around the world. And finally, as we’ve grown up market, we found that larger businesses like other sellers choose Square because they value that cohesion of our ecosystem. More than half of our larger sellers used two or more Square products during 2017. This is important because as the sellers use more products, we deepen our relationship with them. And in turn, they drive meaningful growth for Square. In the first quarter, total net revenue from larger sellers grew 47% year-over-year, and adjusted revenue grew 60% year-over-year. We’re really proud of our first quarter results. And thank you as always to our Square sellers for making us better. I’ll now turn it over to Sarah for some more detailed remarks on our financials.

Thank you, Jack. In the first quarter, we continued to accelerate growth at scale. Q1 GPV was approximately $18 billion, up 31% year-over-year. Adjusted revenue increased 51% on a year-over-year basis compared to 47% in Q4 and 39% a year-ago. Adjusted EBITDA was $36 million this quarter, a 12% adjusted EBITDA margin as we continue to reinvest in the business to drive growth and scale. We continue to drive momentum and transaction-based profit. Transaction based profit as a percentage of GPV improved to 1.09% as we continue to benefit from higher margin products and improvements in our transaction cost profile. GPV from higher margin products, invoices virtual terminal and e-commerce API payments doubled year-over-year. We also saw strong momentum in subscription and services based revenue, which nearly doubled year-over-year and represented 32% of adjusted revenue, up from 24% a year-ago. Growth was driven by Instant Deposits, showing both seller and consumer traction, Caviar and Square Capital. Building on the momentum noted in Q4, Cash Card is also becoming a more meaningful contributor to subscription and services based revenue as consumers benefit from the utility of paying both online and offline. The recent launch of Square Register drove hardware revenue growth of 60% on a year-over-year basis. The product is resonating with larger sellers as the average annualized GPV of a Square Register seller is over $300,000. I’ll now take a moment to walk through our accounting treatment of Bitcoin. As a reminder, in January, we fully launched the ability for Cash App customers to buy and sell Bitcoin. In compliance with the U.S. GAAP, all Bitcoin revenue and costs related to Cash App activity are recorded as follows. Bitcoin revenue is a total sale amount of Bitcoin to customers. Bitcoin costs are the total amount of Bitcoin that we purchase in order to facilitate the buying of Bitcoin by customers. Our adjusted revenue from Bitcoin is our Bitcoin revenue minus our Bitcoin costs. Bitcoin revenue contributed $34.1 million to total net revenue in the first quarter. Bitcoin cost was $33.9 million resulting in a minor add to adjusted revenue of $200,000. GAAP net loss in the first quarter was $24 million compared to a net loss of $15 million in the first quarter of 2017. Net loss per share basic and diluted was $0.06 for the first quarter of 2018 compared to a net loss per share of $0.04 in the first quarter of 2017. Adjusted EBITDA was $36 million this quarter compared to $27 million in the first quarter of 2017, growing 33% year-over-year. I’ll now turn to full year guidance. For more details regarding second quarter guidance, please refer to our shareholder letter. We are raising our full year guidance for total net revenue and adjusted revenue to reflect the ongoing momentum of our business and the acquisition of Zesty which closed on April 19th. Full year guidance does not include the impact of the acquisition of Weebly. We will update our guidance after the completion of the transaction, which is expected to close during the second quarter. For full year 2018, we expect total net revenue to be within a range of $3.0 billion to $3.06 billion and adjusted revenue to be in the range of $1.40 billion to $1.43 billion. At the midpoint, this represents 44% year-over-year adjusted revenue growth, up from 34% growth in our previous guidance. Given the significant market opportunity ahead of us, we will continue to reinvest in our business to drive long-term growth and thus are maintaining our full-year adjusted EBITDA guidance of $240 million to $250 million. We expect GAAP net loss per share to be within the range of negative $0.04 to break even, and adjusted EPS to be in the range of positive $0.44 to positive $0.48. So, with that, let me turn it back to the operator to start the Q&A portion of the call.

[Operator Instructions] Our first question comes from the line of Tien-tsin Huang of JP Morgan. Please go ahead. Your line is open. Tien-tsin Huang: Hi. Thanks. Good afternoon. I wanted to ask on Weebly. I guess, big question is, just why own this asset versus being the partner with Weebly? And also, do you feel like you have the assets in place to be competitive in omni commerce? Do you need to add scale in other areas like maybe gateway or e-commerce platform or an app developer community et cetera? Just wanted to get your thoughts on that.

Yes. Thanks for the questions. So, we have been partnering with Weebly for quite some time and we realized that we had an opportunity to move much faster and deliver a much more cohesive and seamless experience if we were to get the two companies together. We only did this because we saw real alignment with our purpose. We saw an alignment in terms of roadmap and we’ve really battletested the relationship for quite some time. So, we feel really good about where that is and where it could go. In terms of other gaps that we’re looking to fill, we have a lot of strength around our Square platform. And we intend to move very, very quickly as we continue to look out and push on that roadmap. But, this is a huge building block for us that we can now offer our sellers an easy way with minimal hassle to sell both online and offline. So, this is a big step, but it is something that we’re going to have to continue to work and continue to reiterate but really proud of where we are.

Your next question comes from the line of Pedro [indiscernible]. Please go ahead. Your line is open.

Yes. Hi, Jack. Hey, guys. I’m a Square seller here and [indiscernible] San Francisco. One of the questions I really do want to ask here is, would Square consider partnering with commercial properties to create space for sellers to have more pop-ups for to bring back kind of the mom and pop here in the Bay Area?

Thank you for the question, Pedro, and also thank you for being a Square customer. We have looked at this in the past, in New York in particular and we’re certainly open to some creativity here. We’ll consider this more and figure out the right approach, but we want to make sure that we are supporting all of our sellers and sometimes that means getting deeper into the physical communities I’m not there in. But we’ll keep you updated. Thank you.

Your next question comes from the line of Jason Kupferberg of Bank of America Merrill Lynch. Please go ahead. Your line is open.

Great. Guys, good afternoon. So, I just wanted to ask about the -- obviously the updated guidance implies you’re basically taking the $100 million in upside on adjusted revenue for this year. You’re reinvesting it all back into the business. So, maybe just talk a little bit about the split of those investments between product development, sales and marketing, any other texture. And then, if you can also, Sarah, just give us a sense of what Zesty is going to contribute to 2018 adjusted revenue and EBITDA? Thank you.

Great, thanks, Jason. So, I think, it’s worth just noting, we’re so delighted with our top-line growth rate you saw in Q1, 51% year-over-year and the fact that we’re now guiding you to 44% on the top-line that’s actually up 10 points since the guidance we gave you about 90 days ago. I’ll answer your Zesty question in there. So, Zesty is probably one to two points of adjusted revenue growth, but the rest is just continued outperformance from the core. So, I think that’s an amazing outcome. We’re in this enviable position frankly right now where we have many strong ROI positive investment opportunities available to us. And the key for us as a team is always how do we sequence and prioritize those. So, that’s why you saw us talk about at the beginning of the year, omnichannel, financial services, and international as really what we wanted to focus in on for 2018. On top of that, in terms of where we’ll put our money, so, the first is always how do we build remarkable products that are going to drive customer growth and then ultimately revenue growth. So, you will of course see us come back to product developments. That’s usually hiring great engineers, great data scientists, great designers, like all of the pieces that come together to give us a remarkable product that give us things like a net promoter score of 70 here in the United States. So, that is one area focus for the investment. The second is sales and marketing. So, we continue to see a payback period of around three to four quarters, so, massive efficiency from sales marketing perspective. And so we want to go keep putting dollars back to work because again we can grow the ecosystem and we think that that over the long run is what will really maximize shareholder value frankly. Also within sales and marketing is the spend that we’re doing around Cash Approximately. So don’t forget that. Cash App, we talked about last quarter $7 million monthly active. We’ve continued to be a top 25 app in the App Store; if you look today, we’re right up into the mid-teens, so, becoming an app that people are using even daily. And so, we want to keep going after that ecosystem too. And so that’s another area of investment from a sales and marketing standpoint. G&A, our goal there is efficiency. You can even see in Q1 that G&A was our slowest growing, cost line item as it should be. That efficiency gets driven by investing in technology there too. So, places like customer success, sales, account management, we can utilize machine learning to drive more efficiency there, so that we are melding people and technology to give our customers a great ultimate outcome. So hopefully that helps with how we are thinking about that reinvestment back into the business.

Your next question comes from the line of Dan Perlin of RBC Capital Markets. Please go ahead. Your line is open.

I had a question also on Weebly. And in the context, it clearly helps you guys extend outside, you have 625,000 paid subs. One of the questions I have though is just thinking through their acquisition model a little bit, cost associated with their customer acquisition cost, how that might change, maybe even materially if you layer that on as opposed to partnership strategy versus -- that we have had in the past or ownership strategy or partnership strategy?

So, we have no plans to change the model currently. As we close the deal and complete the integration, we are going to make sure that we are putting our customers first and really understanding how to build off the channel they’ve already built. And there is obviously a lot of paths we can take and some options. But, we don’t want to get too deep into it until we start really understanding and looking at what is optimal for our sellers. And the whole goal of this ultimately is to introduce sellers to our larger ecosystem, to all of our suits of tools and services, and what is the fastest path to do that. We continue to see a lot of benefit from sellers, both small and large, utilizing two or more of our products and our services. And this is another great opportunity to serve even more customers around the world.

Your next question comes from the line of James Schneider of Goldman Sachs. Please go ahead. Your line is open.

Jack, I was wondering if you can maybe comment on the traction that some of your software packages such as Square for Retail or even maybe the back office functions of our Square Register are getting in the market. Any metrics you can provide in terms of how much uptick those particular packages have gotten? And then, as you look forward to what extent do you intend on rolling out additional vertical specific things such as for QSR or health and beauty and other verticals?

So, Jim, let me grab the question on traction. I think, one way you see that is in the growth of larger sellers. So, as we have talked about it before from a product standpoint as we go after our larger sellers, and they grew quite nicely in the quarter, almost 60% is the number that we put in on adjusted from an adjusted revenue perspective. There is multiple ways that we target and continue to resonate as we move upmarket. The first is through hardware. And we talked a little bit about the success of Square Register in the quarter, and actually pleasing to see a third of Square Register customers actually were net new to Square. So that’s actually opening up a whole new front door for us. Layer on top of that software and kind of where you’re going with your question, so, the need to be more vertical specific. One of the strengths of Square is clearly the diversity of the base that we have. So, we see customers in retail, it’s about 20% of GPV; we see customers in food, also about 20% of GPV; services, so professional services, health and beauty also kind of getting into high teens, and I could go on, but the point being lots of diversity in the installed base. As you get into bigger customers and each of those verticals, they have some very specific things they need for their setting. So, in the case of retail, more inventory, a much more CRM forward point of sale. That’s what we launched when we launched Square for Retail. And so, that manifests effectively in our subscription services line, one of the many reasons that it’s growing, almost doubling on a year-over-year basis. In terms of other verticals, that’s a place where we’ve used the partnership strategy. So, believe it’s a good example of us partnering on the e-com side. But if you were to look in areas like food, TouchBistro is in there; on the retail side Vend is in there. So, when we can fully satisfy the customer, we want to make sure they can still use Square’s platform. And so, that’s where the opening API strategy really comes into its own. So, it is a -- both a build and a partner. So first and the third party strategy that we think will be the most successful ultimately for sellers.

That’s helpful. And then, maybe could you follow up on the margin outlook? Clearly, raising revenues but not adjusted EBITDA. You talked about some of the growth potential you see and obviously the top-line growth is very strong. Any kind of commentary you can provide on the sort of longer term 500 basis points kind of margin expansion goals you would outlined over the past couple of years, and whether that’s changing at all.

So, I think it’s always a balance. When you’re growing at the pace that we’re growing at, so over 50% this quarter, clearly that’s signaling that we have a lot of potential ideas in front of us right now. And so, we don’t want to go short on the investment there, because the more we grow the ecosystem, bring sellers onto the platform, that provides a base that we can then go upsell and cross sell into. So, as Jack mentioned, particularly as larger sellers, they are using two or more products. And we think we have a lot of greenfield opportunity to go back in with products like loyalty or appointments if you’re a services customer or payroll broadly. And so, getting folks into the ecosystem first and foremost is incredibly important to building the long-term platform for Square. So, I want to balance that out. We’re still showing for the year, I think a very healthy margin expansion for 2018, so growing at 44% and yet still giving you $240 million to $250 million of EBITDA. There is lots of ways to change that EBITDA over time. One is continuing to accelerate on the top-line and the second of course will be to get more efficient from a cost perspective. And I think depending on where our growth is panning out, we will pull those levers in different -- to different degrees, depending on the environment that we’re in. But right now, we just feel so good about our business that we think the right thing to do is to keep reinvesting for that long-term platform growth.

Your next question comes from the line of James Faucette of Morgan Stanley. Please go ahead. Your line is open.

Hi, thanks. I have a question related to the ILC application. I’m wondering if you can give us an update on that process, and when we maybe get some additional news. And I think as part of that you’d always talked about it was important to you to get that if you could to improve your relationship with regulators et cetera. But how are you thinking about the opportunities from incremental business perspective and the things that you could do differently if you had that ILC license? Thanks.

Yes. So, we don’t have an update to provide you today. But just to remind folks of the goal of the ILC. So, the ILC, the reason we’re doing this is to create more efficiencies within the Square Capital potentially, bring lending capabilities of a bank in-house and allowing us to engage directly with regulatory bodies. However, I will note that like our business is not dependent upon us getting it. It is one such strategy that we’re pursuing. We’re also working with bank partners, investors and agencies to facilitate the continued growth of the Square Capital business. So, no update today, but we continue to push and make sure that we are creating more efficiencies and giving ourselves a lot more optionality to grow the Square Capital business, That’s the goal.

Your next question comes from the line of Brian King of Deutsche Bank. Please go ahead. Your line is open.

Hi, guys. I just want to ask about subscription and services; it accelerated again on a year-over-year basis. So, just thinking about what’s pushing that growth rate higher? And then, one clarification on the guidance. I think, at the Analyst Day, almost a year ago, you talked about long-term revenue growth of 20% to 25%. I’m guessing if you’re making these investments and that number is probably a stale number and the growth rate goes higher based upon looking forward on where the growth could go? Thanks.

Yes. So first, just on the subscription services business, yes, I mean, kind of an amazing outcome to see it accelerate to 98% year-over-year. If you look within that line item, the top three contributors today are Instant Deposit, Caviar and Capital. Instant Deposit, as you know is something that we offer both to our sellers and to the consumers within Cash App. And speed just is important, regardless of who you are. Whether you’re a small business, a large business or a consumer, people want to access to their money. And so, it’s been a really good monetization engine for Cash App and it’s just been a great way to make sure our sellers are getting capital more quickly, so they can invest in their business. Caviar continues to perform very strongly. We’re seeing growth in both in the number of orders and in the average ticket size. It’s the reason why we continue to go back and invest in that business because we think we’re doing something very different here. We’re partnering with our sellers. And delivery and pick up become another way for them to grow their business. It’s effectively the omnichannel play for food. And then, on the Square Capital side, as you saw in the quarter, originations of $339 million grew 35% year-over-year. What I’m actually even more proud of with Capital is that we have now facilitated about $2.8 billion of loans into those small businesses and they just don’t have another way to get access to that sort of capital. And when they get it, they invest in their business; when their business grows, our business grows. So, three really strong areas overall that is driving that continued acceleration. In terms of the guidance question, for sure, like when you look at the long-term revenue growth rate target of 20% to 25%, but we’re telling you for this year that we can grow at 44% just at the midpoint of guidance, we’re well ahead of anything that we talked to you about a year ago. In fact at 44% at the midpoint for 2018 what that would actually mean we would grow faster in 2018 than we did in 2017. And that’s really I think amazing scale. So, happy with how the ecosystem is building right now.

Your next question comes from the line of Ramsey El-Assal from Jefferies. Please go ahead. Your line is open. Ramsey El-Assal: Hi, thanks for taking my question. I had a couple on Bitcoin. Could you walk us through your sort of broad approach to risk management with that functionality, whether it’s risk of fraud or currency volatility that you might be holding or legal regulatory risk or impact on liquidity or any way that that sort of affects your model? And then, as a follow-up, Jack, you’ve been pretty vocal on the future utility of cryptocurrency outside of this Bitcoin App, are there other corporate uses for blockchain technology that you’re excited about or that you’re looking at internally?

Sure. Ramsey, let me take the first question around risk management and so on from a Bitcoin perspective. So risk management just generally at Square, right, it’s where we began. I think, we had a very unique view of risk, which allowed us to onboard sellers in minutes. And we invested in that from the get-go to kind of deep machine learning. And it’s one of the reasons why you’ve seen core loss rates stay in the sub kind of 10 basis points of GPV. We take it super seriously. Form an overall -- from a Bitcoin perspective, there is really no difference to the approach, right. We are constantly investing from a security and infotech standpoint. There is never kind of end to that journey. It’s coastally iterating to make sure that we are staying one step ahead in terms of the fraud vectors that could happen. From a regulatory standpoint it’s the same answer. We do everything we can to make sure we are staying close to all of the different regulatory bodies that we work with across all forms of money movement, and I don’t think Bitcoin is any different there.

And in terms of the blockchain, yes, I mean, there is no other technology apart from artificial intelligence and machine learning and deep learning that affects the way we can operate our service and the way we can build our business. [Technical Difficulty] out and we’ve built a service that individuals can use, providing more access to more people around this technology and this implementation. And because we are connected directly to the blockchain and using it every single minute of every single day, we have been able to learn quite quickly and how it could impact the rest of our business as well. There is certainly a ton of applications around creating more efficiencies within our business, but also creating new opportunities as well. So, we are still in a learning phase of where we can apply it in the right way because we don’t just want to purely apply the technology where it doesn’t fit but making sure we are actually solving a real need and a real problem whether that be internal or external. But, we do carry a lot of -- we do have a lot of excitement for what it can do. And we are building a significant expertise within the Company to do that.

Your next question comes from the line of Josh Beck of KeyBanc. Please go ahead. Your line is open.

I wanted to ask a higher level industry question on small business tech suppliers. So, do you envision sellers working with a brick-and-mortar specialist and then separately in e-commerce platform or do you think with Weebly you can become a bit of a one-stop shop and address all of their needs?

Our intention is to become one place, so they don’t have to think about brick and mortar or online, all they have to think about is what they are selling and how they attract more customers. So, we recognized an opportunity with Weebly through our partnership over the years to bring these two things together. And we see it as an opportunity both to accelerate towards that goal of not having our sellers think about where the customer is coming from, but also a way to deepen that as well. So, we were really inspired by the team and the potential that they brought to the Company, and we think we bring a lot to them as well. So, definitely excited about where that ends up but ultimately goal is that a seller never has to think about where a customer comes from, whether it would be online or offline, they are just going to a shop or seller they love and purchase it.

Yes. And Josh, I’d just add to it. I wouldn’t think of it as something net new. Recall, if you’re a hair salon, today you can already book an appointment online. In fact, we know that 50% of the buyers on our appointments app, book outside of business hours. So, they are effectively coming to that seller in an online mode. But then of course, they walk into the salon in order to get their haircuts or whatever. But on top of that they may not buy shampoo or conditioner or whatever they want. So they’ve become almost a pseudo retail store. And if they want to buy that in the store, we can be there to help take that payment. If they want to buy it online and get shipped, we can be there to take that payment. So, a lot of this is already happening. And I think one of the things with omnichannel is people overly define it as retail and it’s not happening regardless of what’s seller you’re in. And they overly define it as e-commerce and it’s not. Your buyer is going to be everywhere. In offline mode, they might be in your store, they might be at your pop-up, you might be in their house if you’re a plumber. They also are showing up in not just your e-commerce store, but they might show up in a marketplace like Caviar. So, it’s really multi-dimensional. And I think Square’s strength here is the breadth that we bring across all of those dimensions.

Very helpful. And maybe if you could just quickly give us an update on the international opportunity and where we are and what milestones we should be watching for there?

Yes. So, one of the goals we set at the beginning of the year is to make sure that we continue to add strength in the markets that we’re currently in. So, we have a significant focus on Canada, the UK, Australia and Japan, completing the offering in all the markets, bringing more of our ecosystem to each one and that will continue to be the focus. Weebly does add a new dimension, given that so many of their customers are outside of the United States. In fact, 40% of their paid subscribers are outside the United States. So, we’re definitely going to make sure that we can benefit and serve more people. It may accelerate some of our thinking. But right now, the focus is on those top markets to make sure we see continued building strength in each one.

The next question comes from the line of Pete Christiansen of Citi. Please go ahead. Your line is open.

Good afternoon, thanks for the question. I’d just like to clarify, Jack, what’s the opportunity here? Is it Square users moving to Weebly or to an e-commerce platform, promoting it that way or is it the other way around, more Weebly users coming on to the Square platform? And then, on top of that, I guess, as it relates to reports that Amazon is going to offer discounts to merchants on their cost of payments, does that change your calculus at all as how you think about building out an e-commerce arm?

So, to answer your first question and to bit of both, we don’t see a lot of overlap between our seller base. So, we do see a lot of potential in terms of strength of getting the two companies together. So, with every one of our services, we see it as a potential acquisition channel to introduce the people to the broader ecosystem. And that is our key differentiator. As Sarah said, it’s not just about retail sellers but anything that you sell, we have an offering for and Weebly enables that on the online side. And obviously we have a number on the offline side. So, bringing these together allows us to benefit both. Sometimes we’ll have offline sellers come in and they want to sale online and vice versa. So, we’re also excited that the fact that we don’t already see a huge overlap in our seller base. In terms of our Amazon Pay and the impact, we have seen a lot of competitors and peers enter into our space with the one particular dynamic. And we continue to see a lot of strength around our core differentiator, which is the cohesion of our ecosystem. So, we haven’t seen a lot of folks match that. And when we do have new entrants and newer approaches, we see some sellers try it, but then ultimately come back to us because of cohesion. So, we’re going to continue to push out and build into the cohesion of our services because we’re optimizing around what are the most critical needs for a seller and how do we make that easy for our sellers without seeing any SEMs whatsoever, so they can just focus on their customer base.

The next question comes from line of Jeff Cantwell of Guggenheim Securities. Please go ahead. Your line is open.

I appreciated the new disclosures on Square Register. I was just wondering if you comment a little bit in terms of how to move upmarket is going so far. In other words, is there anything in particular that you hear from merchants, maybe just qualitative feedback as to how, and why the Register is differentiated, is it useful for us to be able to compare Register versus other products? Just curious what the qualitative feedback is that you’ve got on so far.

Sure. So, really nice to see hardware growth, as I mentioned growth of 50% year-over-year. Now part of that is Square Register, but clearly the other hardware products continue to resonate well in the base and then bringing in new sellers. I think, what we’re seeing in our move upmarket is large merchants are really not different from the small and the micro. They’re coming to Square because of the one stop, the cohesiveness that Jack talked about. They value that, they value speed, they value kind of the elegance and the simplicity of the whole offering. We see that because, first of all, they want that hardware. And what they’ve loved about Square Register has been speed. So, really fast speed in line, so you can swipe, tap, dip whatever it is you want to do to pay, but do it probably the fastest of any technology out there. Second, they’ve really liked the buyer facing screen because it really draws the buyer into much more of an engagement with the seller, with the seller’s brand. We’ve added in things like loyalty and some of our other software solutions to kind of really emphasize that connection between the buyer and the seller. And then, I think the third thing that they have liked is just that it is one stop that they’re not having to deal with putting hardware and software together, it’s all coming from Square. So that has really resonated. Beyond that, I would remind you that larger sellers also tend to just come to Square like micro. So, over 80% self-onboard, which is a huge stat that tells you of how seamless and how easy to use the technology is. And that’s great for us because that means that they’re just getting up and going quickly and they’re not having to engage per se with our sales or our account management team, and we love that. About a third of the orders are net new to Square. The fact that the GPV is about $300,000, that means that they’re relatively larger seller, relative to our base right now. And then, if you look at the categories that we’re selling into food, we’re selling into services, we’re selling into retail. So, again, it’s doubling down on the diversity that we see overall in the installed base.

Your next question comes from the line of Bob Napoli of William Blair. Please go ahead. Your line is open.

Thank you. I’ve got a follow-up on the crypto strategy, if you would. Can you give some color on who that is attracting to your bringing it -- is the reason to bring people into the ecosystem or is there -- what is the broader long-term strategy? Who are the customers coming? There’s obviously a lot of places to trade cryptocurrencies, why Square and who are these people, why they come into square and what’s the strategy with the overall ecosystem?

Thank you for the question. So overall, our strategy is to provide access to complex financial systems. That is what made the Company relevant in the first place and we continue to see that not just from the seller side, but also in individual side. So, we have built this into Cash App. This is a very different demographic and very different customer base than the majority of the crypto exchanges. We have focused on one cryptocurrency which is Bitcoin. And we wanted initially to provide a safe way to participate in this, if people chose. So, it’s a demographic that typically would not be able to use other exchanges or would find those complicated and something that we wanted to make super easy, but at the same time, continue to protect and make it safe. In terms of the strategy long-term, the first step we wanted to take is to learn as quickly as possible, to offer something that people would find valuable. And we do see that -- we did see -- reason we started this initially is because we did see cash customers wanting to buy crypto, utilizing their cash accounts. So, we made that a little bit easier. But we want to learn what this meant for us as a company and also for our industry and really pushed ourselves a lot to make sure that we were best in class in terms of providing a simple easy of exchange and then we can build off of that. There is obviously a lot of benefits as more of the spreads and we can better utilize blockchain technologies, both internally and externally. But also made -- the strategy was to provide a simple service that people would value and also be able to learn as quickly as possible. So, we’ve become experts in how this technology is going to impact our world and our industry and also that we continue to be leaders in that.

I guess a follow-up question, the sub and services revenue, as you pointed, Sarah, has grown pretty dramatically, but even quarter over quarter, $79 million in the fourth quarter to $97 million in the first quarter. And the Square Capital only added about $2 million as we think of that incremental. Is Instant Deposit looking sequential momentum base, is that the main driver of that type of growth or what is it?

So, Instant Deposit is definitely a key area of growth and that is because it’s working both for our sellers, but it is also part of the growth that we’re seeing in Cash App. And so, I think that’s definitely an indicator of just how well that Cash App ecosystem is growing. But, I wouldn’t underestimate just the growth that we are seeing in areas like Caviar, for example. And then beyond that clearly, there is a lot of other line items in there from our other software products, so whether it’s products like our CRM, our loyalty, employee management, payroll, there is a lot of pieces of the puzzle that we are bringing together now for sellers; to Jack’s point, to make sure they can focus on what they do, which is making their product and then selling their product. And so, we just want to make sure that when they come to Square, they can hand over all of the operational components and really just get on with what they do best.

Your next question comes from the line of Joseph Foresi with Cantor Fitzgerald. Please go ahead. Your line is open.

I was wondering if you could talk about any progress you’re making moving upstream. It seems like you continue to widen your competitive market. Maybe you could talk about the average size of the customers as well.

Sure. So, I mean, to add to some of the color that I’ve given, on the larger seller side, in totality, we’re not seeing larger sellers comprised about 47% of GPV. Typically, actually, as you go from Q4 into Q1, some as you can see a little bit of a sequential downtick on that just because larger sellers, they see a bump coming through the holiday period, and some of them may tip back into being more seen as smaller seller. So, the fact that it’s stayed consistent Q4 to Q1, I actually view as a really strong data point on that move upmarket. Beyond what I talked about before in terms of remarkability of products and so on, I think we’re also starting to build some better awareness. I think, Jack and I have talked on this call before about if there was one thing to really go after is to making sure that larger sellers think of us not just as the place you go to, to start accepting payments, because they would accept digital electronic payments, but to make sure they know of Square as the place you can go to when you have multiple locations, when you have multiple employees and when you have a much more complex business. So, I think that that is definitely improving, although I still think we have a lot of work to do there and that it’s definitely true when you go outside of the United States, making sure that in our newer countries that we are known for all of that too. I think the UK is a good case and point where we launched with the really fully featured product set. So, not just kind of offline beautiful elegant hardware, great easy to use software but we also launched with our full API platform, so, really letting sellers know that they can be both online and offline with Square. And I think the UK is a good example of a market where the awareness on the online piece is much higher and we can kind of see that in the split between card present, so kind of offline and card not present online business. So, a good example of when we start from there, we can build the brand of being a much broader offering for a customer of any scale.

Okay. As a quick follow-up, any change in customer behavior given the market volatility? And do you expect any changes in loan fees, based on any interest rate movements? Thanks.

So, in terms of customer behavior, I’m not quite sure exactly what you meant by market volatility. But we just see real strength in the base. So, fact that we’re growing 51% year-over-year underscores both the strength of our product set, the fact that I think we are taking share, but also the fact that our customer’s business is quite strong at the moment. I think the NFIB index is something I look at fairly frequently and it continues to show strength on a period-to-period basis. In terms of interest rates rising, coming back to Square Capital, it’s such a unique product. I think, what we got into there was recognizing the small businesses just do not have access to capital. But, when we survey them, what they would have fallen back to would have probably been friends and family or frankly just not getting the money. The fact that we can now offer them the loan that’s a scale that feels right for their business is incredibly -- it helps build trust for them. And when they get that loan, they’re doing what you’d expect. They’re buying inventory, they’re hiring new employees, they may be taking any lease hold and opening that second location. And when they do that, their business grows and hence our business grows. So, we still think we have a unique product that no one else can really follow us into. We continue to watch interest rates, but we like the pricing that we have in the product right now. And we think customers continue to really benefit from it.

Your next question comes from the line of Andrew Jeffrey of SunTrust. Please go ahead. Your line is open.

Hi. Thanks for taking the question this afternoon. It’s around the Square Cash Card and the ability with or without bank ownership perhaps and partnership with the bank to offer more enterprise type solutions using that product. I know there are some other players in the market that are doing just that. Is that a potential extension of that card -- card’s functionality?

When you say more enterprise, like what do you mean by that?

Well, for example, there is a company that is permitting Uber drivers to deposit their fares directly into an account, that type of thing which would create a ready ability to spend, which conceivably could be done in partnership with a bank rather than by virtue of owning a bank. I didn’t know if there were extensions to the product beyond its current functionality you might be thinking about.

Yes, definitely. So, we’re definitely looking as a financial service to make it easier for individuals to see us as a primary spending device. And we do have evidence to show that people are using it as their primary account. We have launched a suite of features, such that you can download the app and you have a place to store your money, you get a Visa card that can be used online or offline, that card can also be used at any ATM. You get a routing number to actually deposit your paycheck too, directly. And we continue to look for ways to make that even more valuable. One of the things that we added just yesterday was a rewards program, built right into the card. So, you can choose a particular merchant or a category of merchants such as coffee or hamburgers, and every time you use the cash card at one of those categories or one of those merchants, you get a discount whether it would be $1 off or 15% off. And we haven’t seen this done for a debit card anywhere before. So, giving things that you would normally associate with a more premium card to everyone is exactly what we want to do. In terms of spreading that out elsewhere beyond consumers, one of the things that we benefit from is all the infrastructure that makes the Cash App work and Cash Card work. The rest of the Company benefits from as well. So for instance, Instant Deposit, which we have ship to our sellers is a lot of the infrastructure that cash developed internally. And so as we continue to develop these products, we see opportunities for our other services. Even if it’s individual product, we see benefits to enable sellers to utilize this is as well. And we will continue to look for those opportunities where we continue to blur the line between an individual and the seller and what infrastructure can we take from the Cash App that we can actually apply to our seller customer base as well. And you’ll continue to see developments as we go through the year on that.

This will be the last question. Paul Condra of Credit Suisse, please go ahead. Your line is open.

Hey, good afternoon and thanks for taking my questions. I guess, I just wanted to ask about the transaction cost because it was down, it was really positive in the quarter. So, I wondered if there was anything specific to the quarter or how should we think about it, staying at that rate?

Sure. Thanks, Paul. So, yes, we were really pleased with where transactions came out. Transaction profit margin at 1.09% was actually up from 1.07% in Q1 of a year ago. What’s driving that? As we’ve talked about before, overall, just the take rates as you all love to call it, does end up being a balance between places where we perhaps want to be more aggressive, so with larger sellers often -- or not often, but sometimes will offer a custom price. If you don’t hit our website just naturally onboard but you do engage with sales, it’s a place we might custom price. But going against that is the inflationary effect of higher revenue products like invoices, virtual terminal, e-commerce APIs, all of which have been really improving in the quarter. So, that’s one driver of why transaction profit margins are up. And then the second piece is the cost profile itself. So, recall that as we get to scale. And I think what we’re proving to a lot of our supply chains is that we are bringing a lot net new onto the system. So, whether it’s small businesses, who maybe previously didn’t want to take cards and we know that there is still a lot of cash only businesses out there. We are able to bring them onto the system. We see it in places like the UK where folks have struggled because bank branches have been closed. And now, we can bring them up with electronic payments to never miss that sale. But that’s a really good story out to the partners that we work with and the reason why they continue to work with us as we negotiate the cost of side of the equitation. And it’s a great place where we can stand in front of our sellers to negotiate the best rates for them. So, net-net, we are pleased with our profit margins and about for the quarter and we will continue to do all that we can whether it’s from a technology standpoint, how we negotiate standpoint or just new products that we can bring to bear to continue to drive that to a better and better place.

Just on the focus more on larger sellers and I’m thinking about how you categorize the sort of the complex seller group with multiple locations. How are you thinking about sales and customer service and different kinds of needs of those sellers relative to the more self serve model that you use for some of the smaller sellers.

Yes. So, I do think that this is a place for the industry loves to talk about the need for lots of people to engage. And the reality is that customer support you will ever have is the one that no one ever needs to call. So, I do love the fact that over 80% of our sellers self onboard, get up, get running, get going on Square and actually never need to talk to us. With that said, we understand that for folks who might have multiple locations, they do want to talk to our sales person as they onboard to get confidence. And we absolutely have built an organization to do that. But we do constantly do it hand in glove with some technology. So, a good example would be when you self identify on our website as a larger seller, overnight we score all of those inbounds, we use machine learning in place there to make sure that the folks that -- our sales forces reaching back out to have a really high propensity to convert and that we are confident that they will bring with them the margin that we want for our business overall, but keep Square able to keep reinvesting. If you don’t fall back into our call back, we are absolutely happy to put back into a flow that feels very pertinent to your business. So, we speak to you as a hair salon or we speak to you as a retail store. And so that’s the ways that we use technology to be able to make people feel really comfortable, whether they’re talking to a person or whether they’re just going through the technology piece. I think from an account management perspective, our customer success standpoint, I could make all of the same sort of comments. But, our goal is how do we build the most efficient, scalable company over time that has people in the places where we need people to talk to our sellers but more and more where we can utilize technology to make that feel really effortless. And I think, it’s something that a lot of the rest of the industry is trying to catch up on. I’m not sure if they ever will catch up on, just given the length that they come up this with.

I’d now like to turn the call back over 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 2018 earnings call on August 1st. Thanks again for participating today.

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