Block Inc (SQ) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Square fourth-quarter 2015 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 fourth-quarter 2015 earnings call. We have with us today CEO, Jack Dorsey, and CFO, Sarah Friar.

First, we wanted to outline the format for our earnings presentation. For this earnings call and going forward, we will publish a shareholder letter on our Investor Relations website shortly after the market close. Then we will begin with just a few prepared remarks, before opening the call directly to your questions. Our hope is that this format will result in greater clarity and additional time for Q&A, so that analysts and shareholders can drive the conversation.

During the Q&A, we will take questions asked from our seller shareholders, 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, and reported results should not be considered as an indication of future performance.

Please take a look at our filings with the SEC for a discussion of the factors that could cause our results to differ. Also note that the forward-looking statements on this call are based on information available to us as of today's date. We disclaim any obligation to update any forward-looking statements, except as required by law.

Also, during this call, we will discuss certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measure will be provided in the shareholder letter on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results.

Finally, this call in its entirety is being audio webcast on our Investor Relations website. An audio replay of this call will be available on our website in a few hours.

With that, I'll turn it over to Jack.

Thank you, Jason, and thank you all for joining us today, as we report our quarterly and annual financial results for the first time as a public company. We're off to a great start, with fourth quarter financial results that demonstrate both high growth and strong operating performance. This afternoon, we issued a shareholder letter with longer remarks, which I would encourage all of you to read.

But on this call, I would like to share my three main take-aways from our quarter. First, our core payments business is at scale and growing fast. We had record GPV this quarter of $10.2 billion, a 47% increase from the previous year. That's more than $10 billion in commerce that sellers are contributing to local economies.

Second, we're seeing strong demand for our contactless and chip reader. As of the end of the fourth quarter, we already had received over 350,000 pre-orders, and we have been shipping the readers since December. It is also for sale online, and in Apple stores around the country for $49. The shift to both chip cards and contactless payments in the United States is just starting, and we believe we are in an ideal position to win this industry-wide shift.

And third, we're developing new products that our sellers love. You can see the traction of these new services in the numbers. For example, with Square Capital, we've extended over $400 million through more than 70,000 advances in 2015, with nearly $150 million advanced in the fourth quarter. We're seeing similar traction with services such as Square Invoices and Instant Deposit, and you can learn more about those products in our shareholder letter.

Our sellers are our partners, and when they grow, we grow. That's one of the greatest things about Square. We can build a strong, growing and profitable business by putting our sellers first.

And now I'll turn it over to Sara for some remarks.

Great. Thank you, Jack.

Let me provide a bit more color on our financial achievements for the fourth quarter and full year, as well as provide guidance for Q1 in 2016. Our fourth quarter financial results demonstrated high growth at scale, increased breadth in our revenue streams, and improved operating leverage. In the fourth quarter, we saw $10.2 billion in GPV, up 47% year-over-over year, and adjusted revenue of $135 million, up 64% year-over-year.

We were especially pleased with the growth in our software and data products. In the fourth quarter, revenue from these products was $22 million, growing 52% sequentially, from $15 million in the third quarter of 2015, and growing more than 3 times from $6 million just a year ago. This growth underscores the strength of our base of over 2 million active sellers, and the cohesive commerce ecosystem we've built, and continue to extend to help them grow their businesses.

Our fourth quarter adjusted EBITDA loss of $6 million was a steady improvement from our loss of $11 million in the fourth quarter of 2014. Adjusted EBITDA for 2015 overall was a loss of $41 million, compared to a loss of $68 million for 2014, representing 15 points of EBITDA margin improvement year-over-year, and demonstrates that we can drive operating leverage in our business, while generating strong top-line growth.

Next, I'll turn to guidance. For the first quarter, we expect adjusted revenue to be within a range of $132 million to $137 million, and adjusted EBITDA to be in a range of negative $11 million to negative $9 million. Historically, the fourth quarter has been our strongest revenue quarter, as sellers typically generate additional GPV during the holiday season.

In contrast, our first quarter is seasonally our slowest, in terms of transaction revenue sequential growth. For the full year of 2016, we expect adjusted revenue to be in a range of $600 million to $620 million, and adjusted EBITDA to be positive $6 million to $12 million.

So with that, let me turn it back to the operator to start the Q&A portion of the call.

(Operator Instructions)

Your first question comes from Jim Schneider with Goldman Sachs.

Good afternoon. Thanks for taking my question. A good job on the quarter.

I was wondering if you could maybe give us a little bit of color around Square Capital? Clearly, the growth trend is very strong there in the quarter.

So can you maybe help us understand, within the context of your guidance for the full year, what kind of contribution do you expect from Square Capital? Or alternatively, what kind of originations, do you expect throughout the full year, or maybe exiting 2016?

Sure. Thanks, Jim. I appreciate the words on the quarter. So overall, in terms of Square Capital, we continue to feel very good about the traction that we've seen there. As we talked about, $150 million advanced in Q4, 70,000 advances, and that's on a base of over 2 million actives.

And as we've talked about with you before, we continue to see a lot of breadth in Square Capital, in terms of being able to go in, and penetrate that install base. On top of that, the renewal rate remains strong, with 90% of all of our sellers who get offered a second advance, or a third advance, taking it. So it really speaks to the strength of the product, and how it resonates for them.

We have not chosen to break out, [part] guidance. So we would rather just stick with giving you the adjusted revenue number of $600 million to $620 million. However, we do continue to expect good growth in our Software and Data products line, but also our payments business continues to show very high growth, too.

Thanks. And then, as a follow-up, could you maybe just talk about the overall trajectory of profitability and margins as we head throughout the year? Clearly, the guidance implies a breakeven sometime in the middle of the year.

Can you maybe talk a little bit about some of the factors that are going to drive those margins higher or lower? And how you are thinking about modulating the investment levels throughout the course of the year to kind of achieve margins, and maybe any kind of color you could provide on where you expect to end out the year?

Absolutely. So first and foremost, as we think about our business, the underlying platform that we've built, that we've paid for with the payments business model, we've talked about the underlying profitability of that, and it is continuing to shine through. That's why you see that year-over-year improvement in adjusted EBITDA margin, that 15 points that I talked about in 2015 over 2014.

So the base we've talked about, the four to five quarter pay back period of the base, at that point is effectively paying for itself, of just on payments. And then that cohort, those cohorts continue to grow at that 110% type clip that we talked about while we were on the road. So the core itself, is a very good, strong, healthy business, and we expect that to continue.

And then clearly, as we're now layering on new Software and Data products, that continues to add to our ability to cross-sell, upsell, and see the operating leverage that you're seeing. So together those combined, could give you this path to profitability that we're on.

And I think you're right, in terms of the guidance for the full year, we're definitely intimating a steady improvement quarter by quarter, with a breakeven somewhere in that mid point of the year. With all of that said, I always want to remind, that what we see in front of us is a huge opportunity, whether it's to go back into our core markets, where there's still 20 million small businesses that don't accept credit cards. Or whether it's to continue to go up market into bigger businesses, or whether it's to keep adding on new services into our ecosystem, there's absolutely a lot of room to keep investing, keep growing at these sorts of rates.

Thank you.

Thank you.

Your next question comes from Tien-tsin Huang with JPMorgan.

Hey, thanks, good quarter here. Just on the upside in the Software and Data line, can you give us some details on the components of revenue, and maybe what's performing better than planned? And as we look to 2016, if there could be a reordering, and what's going to contribute to the growth in Software and Data?

Sure. Thanks, Tien-tsin. So overall, within the Software and Data line, the Capital and Caviar continue to be the majority of that line. So clearly, a lot of the growth that we saw in Q4 were driven by those two particular product. So I won't go through Capital again, but even on the Caviar side, we continue to see good momentum, about 4 times order growth on a year-over-year basis in Q4, for example.

But I certainly don't want to downplay a number of the new products that we launched through 2015 in Q2 and Q3. So we called some of them out in our shareholder letter. Products like Instant Deposit, for example, that really make use of some of the innovation we did on the Square Cash side to now allow our sellers, to not just get next day settlement of funds, but to get instant settlement of funds. And so, those products, when we build them, show really immediate resonance for the base.

And so, overall we would expect that to continue to build as we get through the year. So from that [math], confidence in what we're seeing currently in Software and Data. Again, I don't want to call out specific guidance though, for that line.

Okay. That's fair enough. If you don't mind, just a quick follow-up. Just the demand for contactless readers, maybe after the promotion period, any color you can provide us, now that we're in March on the contactless side?

I'm assuming that maybe that could accelerate growth in GPV from larger sellers. I am assuming the -- that the higher take rate right there with the contactless readers? Thanks.

Yes, we're seeing some real positive patterns here. We're really excited that the reader is in Apple stores and that's offline and online, and we're seeing a huge demand for the reader, and we're taking full advantage of the shift to chip cards and contactless. And we have a best-of-class hardware, and it's the fastest out there, both for accepting chip cards, and also accepting a mobile phone.

And we think that really wins. We want to be able to associate our logo with the ability to pay with your phone. So we think there's a huge potential for us to really win the behavior, but there is also a lot of education that comes in the United States with this shift.

So we're still teaching both sellers and buyers around the chip cards, and also paying with their devices. More signage on counters certainly helps, but we don't see it just as a sale, and then we're done. We have to educate as well, and we're seeing some positive returns from that.

But we're putting a lot of effort into getting this reader out fast. We've shipped all the pre-orders, and we're really excited that we're seeing sales from even our micro merchants, all the way up to the small and into the mid market merchants as well. So it's a device that works mobile-ly, and also on the countertop, which we're excited to see the demand for.

Good stuff. Thanks.

Thank you.

Your next question comes from Darrin Peller with Barclays.

To start off, if you can give us a sense, as to what percentage of, or maybe the number of your merchants that have now taken on some of your other services? I know that you mentioned some data points in your release, but maybe if you can give us a little bigger picture, a cross-selling overview on what's done, what's to be done, and inclusive of Capital, Instant Deposit or others like Caviar. It seems like there's a lot of runway.

Yes. Thank you, Darrin. We have not given a percent attach rate, but I would bring you back to two products that today are showing the most momentum, in terms of number of Square sellers who are [now] utilizing them.

Invoices, we talked about in the shareholder letter, so 100,000 sellers now utilizing Invoices. That's an online way to pay, at a distance, a good experience for both the buyer and the seller. And a good example I think of, when we create innovation close to payments, that we're able to see quick click adoption, so getting to 100,000 in just a 1.5 year.

The second is Square Capital. So we talked about 70,000 advances, probably about 50,000-ish sellers. So if you think about the 50,000 as a percentage of our over 2 million active, we're still in small single-digit type attach rate.

Wow.

So for sure, I think that's one of the big competitive advantages of what we've built, is this very cohesive ecosystem, a very engaged seller base. They're in that dashboard every single day.

And then, a brand that's resonating, has a net promoter score of over 70. So clearly, they have need of these products, and they want to take them from Square.

All right. That's really helpful. Just one follow-on to that on a related topic, I mean, the incremental margin on adding on those cross-sold opportunities, just given again -- I mean, it's -- [some of those are] already on a -- most of these are on an existing relationship already to some extent.

And so, is that margin accretive to you, as you add on and grow those Software and Data products overall, would you say? It's getting pretty big -- increasingly sizable as a percentage of your mix.

Yes. The way I would think about the incremental margin, or maybe if I talk about it more in terms of the cost to bring those products into the world, into sellers' hands, there still is a big R&D element generally across the whole Company. So we certainly don't view payments innovation as done, right? We're proving that with products like Instant Deposit and even Invoices that I just spoke to.

So there's certainly still a lot of investment going back into payments. But then there clearly are engineers, designers and so forth required to also bring about new products, like a Square Capital. So from an R&D perspective, I would expect us to continue to invest there, I think where you do see incremental margin is clearly on the go-to-market.

So the great thing about having today put in place, that 2 million-plus active base, is that we don't have to go out, and do more customer acquisition. So products like Square Capital, we've grown to the scale with almost zero customer acquisition costs.

It doesn't mean at some point, we won't do customer acquisitions, maybe use Square Capital as its own on-ramp to Square. Maybe not payment processing, but starting out with something like Capital to bring you onto the platform, to then do things like payments. However, you're right, that at the moment, from a sales and marketing standpoint, those products require a lot less sales and marketing than what you would see, if they were stand-alone companies and stand-alone products.

Okay. Thanks. Just a last quick one. On the international front, any quick update before I turn it back to the queue?

So we're in the US. We went to Canada after that. We went to Japan.

We learned a lot from Japan. Japan was not traditionally a market that accepts credit cards. It's cash-driven.

We made a recent announcement that we are live in Australia, and we're excited about that. One of the things I would point you to is our chip card and contactless reader.

It's a global platform, it's a global standard, global technology. So it allows us to move much, much faster around the world, and we definitely have more markets in sight coming up.

All right. Nice job, guys. Thanks.

Thank you.

We'll take our next question from one of our seller shareholders. Beth of Kirby Vacuums in Pittsburgh, Pennsylvania. The question is, what kind of security do you have to keep someone from hacking, stealing and disrupting the system?

Thank you, Beth. Security is a really big focus for us, and we have a whole team that wakes up every day, figuring out ways to keep us ahead of the game, to make sure that we continue to be a trusted brand. We use the most modern technologies.

And we also go above and beyond, not just for Square security, but alerting our sellers when there might be security concern around their particular OS, or their devices. So that we can keep them safe, and also the customer safe. I believe fundamentally that security is not an endpoint.

It's something that you have to constantly improve, and get better and better and better at. And it's really a question of who you have on your team to push it forward. And I have a lot of confidence in the ability of our security team and the engineers, who protect all of our sellers, and also Square more broadly.

Your next question comes from Jason Kupferberg with Jefferies.

Thanks, guys. So just a question on the adjusted net revenue growth outlook for 2016. It looks like it's about 33% to 37% year-over-year growth.

Obviously, quite a solid number, but it is a bit of a slowdown from 64% in 2015. So I mean, how much of this is just kind of law of larger numbers, maybe some conservatism? Are there other factors that we should be thinking about?

Sure. Thanks, Jason. So overall, I think we remain really pleased with the sustained high growth at the scale that we're at.

You saw it in the quarter, 47% year-over-year growth on GPV, compared to [38]% in the September quarter. So really maintaining high growth at scale. I think underpinning that, the core itself continues to be quite strong and growing.

We talked about that retention rate, positive -- but we continue to see really good momentum with new sellers. So I think in our core market, still got strong opportunity to go target those 20 million sellers that they don't accept electronic payments. And I think we're also, as our register becomes even much more fully-featured, and a true-up point of sale that you're running your entire business on, it's really opening up the aperture to sellers, the whole way up to those doing $20 million of revenue.

So plenty of opportunity ahead of us. I think 2015 was definitely a foundational year for new products, many of them are young. They're going to be volatile.

They're still scaling. And so, I think with all of that in mind, we wanted to just take a solid approach to our guidance.

We feel comfortable with how we've guided. [Trust that] we'll continue to go drive at those opportunities.

Okay. That's helpful color. Jack, just a question for you, about how you've been spending your time.

I know your target was to be about 50/50 between Square and Twitter, and I know Twitter has been keeping you busy as well. So have you been able to achieve the kind of balance that you've been hoping for?

Yes, yes. I benefit a lot from consistent schedule and a consistent structure. So Monday, I meet with both leadership teams for about four hours each, and we set the week ahead, and commit to what we are doing, and we have check points on Wednesday and Friday.

And the balance of my time is spent reviewing with product teams, and also recruiting. So I feel really confident in that ability right now. As a reminder, both companies are across the street from each other, so that allows me to be at both companies every single day, and be present.

And I'm always connected to both leadership teams, so that if something does come up, that meaningfully requires more of my time, I can be flexible as well. So it's been working out really well. Thank you for asking.

Okay. Well, I appreciate your comments, guys.

Thank you.

Your next question comes from Ben Holton with RBC Capital Markets.

Thanks. I just had a question in regards to Square Capital.

Not so much from the demand side, I suspect that's quite significant. I'm wondering, there's a lot of concerns, rightly or wrongly, about credit in the US, and some of those trends. And so, I'm wondering, your investment partners, where are they in that process?

Can you give us any update about their thinking? And then also, you just mentioned the provision expense, I think in the investor letter. I was wondering if you would be willing to give us more detail, around how much you actually took on your own balance sheet this quarter, versus outside investors?

Sure. So thanks, Dan. So you're right, there is two sides to capital, and we feel very good about the demand coming from our seller base, and we're fulfilling a real need that they have.

On the investor side, I think a couple of points. First of all, we started to work with investors, so that we could both accelerate the products, but it also helped us manage the risk on our balance sheet, and we want to continue that motion. We are absolutely going to keep working with third-parties, as well as utilizing our balance sheet to some degree.

What's interesting in the current environment is I think, Square is being seen, certainly as the good guys. I think the investors that we work with are able to understand first and foremost, a flight to quality almost for Square Capital.

So our low customer acquisition costs, low to nil. Those are not [below those seen just] with other alternative lenders.

Second, our ability to manage risk. So we do have the data that you want, if you're going to underwrite, and underwrite well. And that is the payment data.

So we're really able to understand how someone's business is trending, and it's almost a daily mark that we get, right? We get to see almost every single day, how business across the United States is trending.

And so, for those reasons, we have a lot of inbound interest, and a lot of discussions going on, in terms of partners to work with, with what's going on the macro side. We're still trying to be mindful of that, and make sure that we don't get ahead of our [skis] in any way.

We are utilizing our balance sheet. And you can see, that I think in particular post the IPO, we want to think about the usage of our balance sheet as a percentage of overall liquidity, rather than a fixed amount. That will allow us to flex up and flex down, as our balance sheet changes over time.

And then finally, I think we want to be strategic about when to use that balance sheet, in moments where the market may be a little tighter, to make sure that we are able to keep growing the product, given the demand and the overall trends that we see in it.

That's great. And then, just a follow-up real quick, can you just -- I just want to flesh out the commentary around transaction revenues, percentage of GPV being depressed in kind of the first and second quarters.

Is that simply the mechanics around the processing credits that you're giving on the hardware sales? And is that somewhere around $8 million -- $8 million to $9 million that we should be fleshing through the first two quarters? Thank you.

Yes. So you're exactly right, that as we now fulfill all of those pre-sales, those 350,000. We did some free readers, but then a lot of processing credits, because we don't want to just put readers out there. We want to put readers out there that are getting used. And so, you see that as a net -- netting against overall revenue.

Mostly in Q1, you'll see a little tail of it, going into Q2. And so, that does weigh on transaction revenue as a percent of GPV.

It's, it's not major. I mean, we're talking about small basis points of impact, but we would expect it then to rebound, as we get into the third quarter.

Thank you.

We'll now take our next question from one of our seller shareholders. Thomas of MDR Solutions in Reynoldsburg, Ohio. The question is, when is Square going to open up its services, so that it will allow payment integration with other apps and platforms?

Thank you, Thomas. We actually have an app [marketplace] today, and one of our biggest featured third-parties on it is Intuit. So if you use QuickBooks to run your accounting, you can flip a switch, and it just works with your Square register system, and you can do that right in your dashboard.

If you want to sell online, you can use Square in Bigcommerce or Weebly. So we're focusing on making sure that we continue to build a really, great cohesive and integrated experience. We realize we're not going to build everything. So we opened up a bunch of APIs, and in that marketplace for third-parties to actually build functionality and services that extend our ecosystem.

And that's good for our sellers, but also good for those third-party developers and those companies. And again, a big focus for us here, is around providing a unified dashboard for our sellers.

So if you do sell offline with Square, and you want to move online, you see it in one place. It all comes into your dashboard on the web, or in our dashboard app that you can take with you, and actually keep track of your business on the go.

Your next question comes from Brian King with Deutsche Bank.

Hi, guys. Congrats on the quarter. Just wanted to ask, is there any thoughts on how to model the GPV growth going forward in FY16?

And then kind of thinking about GPV, I think you guys quoted 39% of it coming from larger sellers, which is a growing percentage. How is that pipeline looking to go up market to the mid to large retailers? Thanks.

Sure. Thanks, Brian. So I think overall when you think about GPV growth, we really split it into two pieces. The first is just the base itself.

So we gave you a lot of details, as we were on the road, about how our cohorts typically manifest themselves on a year-over-year basis. So what we see is that ongoing growth, cohort over cohort. And that's true for our oldest cohorts, if you go all the way back to Q2 of 2010, up to our youngest cohorts, we still see that same positive retention rate on a year-over-year basis.

And so, no real shift in that trend. Then I would think about net new sellers that you're adding to the mix. Again, no real -- I wouldn't bake in any real change of trend.

We still see a lot of opportunity out there. It ultimately comes down to our marketing spend to drive 50% of that. We're still seeing about 50% who come to Square, not touch [phone] in marketing, so it's really a choice on driving overall growth, but we expect the same, similar trends to continue.

In terms of larger seller traction, you're right, that in Q4, what we saw is that now almost 40% to 39% of our GPV is coming from sellers that do more than $125,000 on Square. So they probably are doing about [$250,000]-plus on total revenue. And we like that shift. That's up from about 33% year-over-year.

Again, our product continues to become more and more fully-featured. We absolutely begin to see some verticalization going on with things like Square Appointments, really speaking to sellers that are in the services space. Clearly, from a food perspective, our register is very well-formulated for folks like QSRs.

So we will continue to drive on that. And I think also, as we add new pieces, Instant Deposit, Invoices and so on, that continues to allow us to continue this up market move. So yes, you should expect that to continue.

Okay. And just a quick follow-up, the 2 million active sellers, that number seems pretty similar to last quarter. Did that number move a lot, and how important is that number going forward? Thanks so much.

Sure. So on a quarterly basis, we would rather not get into reporting out on our active sellers. I think last we spoke, we talked about over 2 million active sellers.

We're still at over 2 million active sellers. You could go back, if you looked at some points on the line, you would see that Square adds about 100,000 active sellers a quarter. And so, we still see a continuation of that sort of trend.

Okay, great. Congrats, guys.

Thank you.

Your next question comes from Josh Beck with Pacific Crest.

Hi. Thanks for taking the question. I wanted to ask about Square Capital. Have you seen any changes in fees from third-parties, or any developments along those lines? Any other type of metrics or other data that you'd share that you're seeing in terms of delinquencies or charge-offs, just given the focus on macro credit? That's it.

Okay. So Josh, you're a little quiet, but what I think I got, is any changes in fees in third-parties, and any changes and charge offs and so on from the macro? So you can follow up, if I didn't capture it completely.

So on the first note, no changes in fees from third-parties that we work with from Square Capital's perspective. On the second, in terms of default rates, we have not seen any change currently in our business. We still see low single-digit default rates.

We believe we're able to do that, because there is some really unique advantages at Square. First and foremost, a merchant base that we already know, and we have longevity on the platform.

Second, our access to the unique data, the payment data. It is [their] key data, that you want to be able to look at to understand how someone's business is trending. And then, we have an ability to do a daily cash draw.

Effectively every time a merchant swipes a card, we're taking a cut of that to do a repayment for Square Capital. Overall, in terms of managing risk, I think two things I would really call your attention to. The first is short duration, and the size of the events that we do.

So typically our duration of our NPAs is around eight to nine months, and our event size is about $6,000 per merchant. So we are able to stay quite nimble, as the macro environment shifts around. And then, the second piece is clearly, working with third-parties, so that we are both taking some risks on our balance sheet, but the majority of that is at true sell-off to the third-parties that we work with.

Thanks. And one follow-up question.

When you look at merchants with greater than $125,000 of revenue, I think, as the previous question highlighted, that's moved up nicely. How much of that is from basically growing with Square, so coming onto the platform, opening up new stores, versus maybe a new customer to Square that starts with a higher kind of payment volume?

Any color you could give us there? And what's the time of time horizon, when maybe this metric could approach 50%? Just kind of thinking longer term?

So we, we have seen a really healthy pattern of sellers growing on Square. We don't have any specific breakouts of that number to share with you. But over the seven years, we have consistently seen both the small and the micro, and the very, very large come to our website organically.

The majority of our growth is still organic, and that's a really good signal, but they come to us sometimes with four locations, sometimes with one location, growing to four. We do believe, our biggest job on the seller side, is to make sure that we're building tools that help them grow.

So we love when a new location is added, and we're building services to help them do that. Square Capital is an obvious a big one, but just a deeper understanding of what their business is doing allows them to make better decisions about it.

So we're consistently seeing, both the very, very small to the very large come to us, and want to use the services. And we have also seen pretty significant growth, and actually keeping those sellers as well. So we want to make sure that we build tools to grow our sellers.

And if they grow, our business grows as well. And that has stayed true for seven years.

Great. Thanks.

We'll now take our next question from one of our seller shareholders. Bristol of Jala Studio in Providence, Rhode Island. The question is, I've been targeted by a pretty hard sell from Bank of America's merchant services and [encouraged] to switch to their system.

Their rates do seem to be lower, if you're selling in larger volumes. I am obviously going to stick with Square, as I prefer your system. But I am curious as to how Square plans to compete with their lower rates, and aggressive marketing?

Thank you, Bristol, and thank you for using Square as well. One of the things we believe has been fundamental to our success has been the speed of our transactions, and how quick it is to start processing payments with Square, the transparency and also the simplicity, that's how we started.

And what we built from that, is a suite of services and an ecosystem, that not only helps our sellers make the sales, but also helps grow the sales as well. And things like analytics, Square Capital, Payroll, these are all things that give a seller a better way to understand how to grow their business, how to serve their customer better, how to manage their business a whole lot more efficiently so they can grow. What we have seen from our competitors is, they are all going after parts of the system, and we believe we're the only ones that are actually going after a cohesive whole end-to-end.

So starting with the most critical thing, the nondiscretionary item, which is making the payment, and carrying that transaction, but building off that into services that actually help you grow as a seller. Buying a new salon chair, open a new location, hiring a new employee, whatever it is, so that we can do it in one package. So the net result of that is all you have to do is download Square, and you have everything you need to start running, to grow your business.

We have seen consistently that is the biggest competitive advantage that we have, and the rate actually matters less to our sellers than we had first imagined. That was a big learning. It's the suite of services and the cohesion that matter a whole lot more, and how well they work.

Your next question comes from Bob Napoli with William Blair.

Good afternoon. Thank you for taking the question.

The question on your net transaction revenue yield is around 100 basis points, 104 basis points this quarter. As we think about your target margins for the long-term, 35% to 40% EBITDA margins, it seems like you should be able to get some leverage off of that revenue yield. What are your thoughts around growing the revenue yield, or is the margin increase primarily going to come from the other, the Software and Data products revenue?

Sure. Thank you, Bob, for the question. Let me just take a step back, because I want to make sure we're articulating our long-term margin target off of the same kind of base, which is off of adjusted revenue.

Sure.

So we do that, to exclude out things like interchange in the system. So typically where a payment [processor] would go, would be straight to net revenue.

So we wanted to create some comparability. When we talk about [inter]-margin, we really talk about it as a percentage of adjusted revenue, which is kind of where you were starting from. (multiple speakers)

Great. I understand.

Yes. On that basis, our -- the overall technology platform that we have, the payment piece is already starting out with a greater than 90% gross margin. So about a 93% gross margin. The Software and Data products overall, actually start with a lower gross margin because they are a blend.

Products like -- our software products have more traditional software gross margin, products like Caviar clearly have a lower gross margin. So it's actually when you think about profitability, it's getting those to catch up to where payments is at, is certainly a starting point. Overall, when I think about what will drive profitability for Square and those long-term margins that we have spoken to, I think it is ongoing kind of profitability of the core.

It is, it is the growth of the new products that you articulate, particularly the software Capital type product. And then, I think the third thing is just the leverage that comes with scale. So first and foremost, we are a technology company.

We will continue to invest in R&D. However, like every technology company, as you grow, the percent of your adjusted revenue that would go to R&D clearly come down. And we've seen that in our numbers already.

G&A as a percent of adjusted revenue, absolutely needs to become more efficient. That will be a big part of my focus over the next couple of years. And then, sales and marketing is a little bit more what we call a variable expense for us.

When we see opportunity, and we have articulated a lot of that I think on the call, we will continue to invest in sales and marketing. But that is a decision that we can make almost quarter to quarter.

But we clearly, want to show profitability as we go through 2016, and that's why we provided the adjusted EBITDA guidance that we did. I hope that helps.

Yes. Is Square Capital, the highest margin product for you?

No, actually our core payments business at a 93% gross margin is probably our highest margin product. We haven't split any of them apart, but core payments is a very good product.

Okay. Thank you very much. Appreciate it.

Thank you.

Thank you.

We have time for one final question. And that question comes from the line of Andrew Jeffrey with SunTrust.

Hi, good afternoon. Thanks for taking the question. Jack, I think you made a really interesting comment at the outset in your prepared remarks about EMV, and Square's position in the EMV market.

Obviously, there are a lot of much larger companies going after the EMV opportunity. Could you elaborate a little bit on what you think Square's key advantage is, and if that advantage in EMV might really leverage you into bigger merchants? Or are you thinking more about those merchants which heretofore have accepted cash, and really being the sort of go-to provider for EMV solutions among that, that base?

Thank you for the question, Andrew, a great question. So we believe the opportunity for us is first and foremost, to associate our logo with the new behavior, and that's something we've been doing for seven years. So any time a customer saw a Square logo plugged into a phone, they knew they didn't have to go to an ATM.

They knew they didn't have to find a check. They didn't have to find cash somewhere. They could actually use their credit card.

We think there is another opportunity now, not just with chip cards and EMV, but actually with paying with your phone. So I think the biggest shift around NFC is an education, that this works, it's going to work every time, and it's super, super fast. One of the complaints that we have heard around chip cards is they're a little bit slow.

We're the best-in-class hardware. We have the fastest implementation of a chip card read, but Apple Pay and Android Pay is even faster. So this matters to merchants, because if they can increase, if they can increase the number of people they see in the lines, they make more sales.

If the transaction is slow, they see less sales, and people get frustrated. So we think there is a really significant opportunity there. We have a hardware team in-house.

So a lot of our competitors outsource this. They build it elsewhere. We have recently acquired a company called Kili in Toronto that actually makes chipsets for EMV and NFC, and that allows us to move super-fast and super-focused on providing best-of-class implementation around this hardware.

And we just don't see that with our competitors. So certainly, with the smaller and the micro merchants who hold this reader in their hands, it's a wireless reader, so it can be mobile, and we still get the farmer market, where someone is selling fruit on the side of the road, but all the way to someone who is plugging into the countertop. I think the biggest transformation, the biggest opportunity for us, is we get to associate with the logo.

If you see a white square, you know you can pay with your phone, and you just don't have that predictability with any of the other hardware. You don't know if you can do it, and you don't know if it's going to work. And we're betting big on NFC, because of the speed of the transaction.

It's sub-second, and we have a perfect implementation of Apple Pay, in that it doesn't require a signature as well. So any amount, no signature, all you have to do is just tap your phone, and you get a receipt sent to you automatically, via SMS or e-mail. So it's a pretty fantastic customer experience.

Sellers love it, because they get to see more customers, and so we're pushing fast into it. It's also a global platform, so it allows us to move much faster internationally around the world. We're super-excited about it. And it opens the door for all of our other services like Square Capital, analytics, employee management, Square Payroll, Invoices, and everything a seller needs to run their business.

Okay. And so, in light of all of that, and I appreciate the clarity, would Square ever consider reintroducing the Wallet, or is Apple Pay sort of the de facto standard in your mind?

We really love what Apple and Google and Samsung are doing with the Wallet, because people have these devices in their hand. Where we, where we think, we have a different sort of utility is around Square Cash, and we have a much stronger technology now in Square Cash. And we're focused on the fastest way to pay another individual, to pay a group of individuals or even to pay a business.

So we have Square Cash for business, but the main utility of Square Cash is around peer-to-peer. We were super-innovative here, in that we were the first peer-to-peer payment platform that allowed an instant settlement. So if I send you $5, you get to use that $5 instantly, because it pushes directly to your debit card or to your bank account.

And we -- again, it goes back to our core differentiator of speed and simplicity, and we're playing a very long game here. We think those two attributes will win.

Thanks a lot.

Thank you.

I would like to turn the call back to Management for closing remarks.

All right. Thank you, everyone, for joining our call. To recap, our financial results reflect our strong execution.

Our core payments business is at scale and growing fast. We're seeing strong demand for our contactless and chip card reader during an important shift in our industry, and we're developing new products that our sellers to love -- that our sellers love. Thank you again for your time today, and thanks for your support.

This concludes our call. I would like to remind everyone that we will be hosting our 2016 first quarter earnings call on May 5. Thanks again for participating.

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