Block Inc (SQ) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Square Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded.

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

Hi, everyone. Thanks for joining our second quarter 2017 earnings call. We have Jack and Sarah with us today.

First, we want to remind everyone of the format of our earnings call. We have published a shareholder letter on our Investor Relations website, which was available shortly after the market 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'll 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'd like to turn it over to Jack.

Thank you, Jason, and thank you all for joining us. We're really proud of our work this quarter. We grew Square Capital loan volume 68% year-over-year, launched the physical version of the Cash Card and continued to attract larger sellers to the Square ecosystem.

One of the drivers of our results is our work on automation, which I've mentioned is an area of increased focus for us this year. Automation has always been a core differentiator for us. We've used machine learning and data science to manage risk since the beginning of Square. We're constantly looking for ways to make our services more automated and more self-serve, and machine learning is perfect for that.

This focus has allowed us to achieve several objectives. First, automation allows us to give more people access to the financial system. More than 90% of sellers are automatically approved and self-onboard to process payments, and we're able to onboard individuals to Square Cash with just a ZIP Code and an email address or phone number. We've extended this approach to risk management in Square Capital to provide financing to the underserved.

Our interests are aligned with our sellers. We want to provide a loan amount that is appropriate and will help them grow, not burden them with a loan that is too large. You can see this in our average loan size of $6,000. We're not competing with financial institutions. We're creating a new market where previously the only other option for a seller was asking for a loan from friends or family. We're able to serve this need because of our real-time data-driven understanding of our sellers.

Second, automation helps us scale as we grow. For example, we currently automate risk assessment for more than 99.95% of transactions. We're also able to make improvements to our manual handling. Our fraud models have already allowed us to resolve 40% more cases every week compared to the beginning of the year.

And third, automation allows us to help our sellers grow. You can see this in our unique suite of CRM tools. We leverage our deep understanding of the customer to build marketing and loyalty programs that are easy to use, measurable and effective. Our loyalty programs are tracked and managed by Square Point of Sale, and our technology automatically recommends programs optimized for the seller's particular business.

We've created something new and powerful. On average, Square marketing programs generate more than $10 in sales by our sellers for every $1 in spend.

The benefits of automation can sound abstract, so let me share a real life example. Keva Juice is a Square seller that makes smoothie and juice blends and uses Square's CRM tool in 22 retail locations across the United States. Keva uses Square's automated marketing campaigns to regularly send birthday promotions, encourage reviews and offer special discounts to its customers. Gary, the owner, said that Keva Juice will grow by more than 30% this year, and Square has helped him achieve this. The Keva story represents the best of our sellers and the best of Square.

Now I'll turn it over to Sarah for some more detailed remarks on our financials.

Thank you, Jack. We delivered another strong quarter. Top line results reflect our continued ability to attract larger sellers while maintaining ongoing growth in our core micro and small business space. In addition, we saw increased product usage from the entire Square ecosystem. As a result, adjusted revenue growth accelerated from 39% in Q1 to 41% in Q2.

GPV was $16.4 billion, up 32% year-over-year. Larger sellers, those that generate more than $125,000 in annualized GPV, grew 45% year-over-year and now make up 46% of total GPV, up from 42% a year ago. Mid-market sellers, who generate more than $0.5 million in annualized GPV, grew 61% year-over-year. We maintained both transaction-based revenue and profits as a percent of GPV on a year-over-year basis even while growing GPV from larger sellers, underscoring the value that our customers see in our core managed payments and point-of-sale offerings.

Just like smaller sellers, we continue to see the majority of larger sellers self-onboard to Square at our standard pricing rates. Additionally, we saw higher growth in products such as Invoices and Virtual Terminal that have a higher revenue rate than card-present transactions.

Subscription and services based revenue nearly doubled on a year-over-year basis as Instant Deposit, Caviar and Square Capital all benefited from stronger adoption both within our installed base and for bringing new customers to the Square ecosystem.

GAAP net loss was $16 million in the first quarter. This equates to a net loss per share of $0.04 compared to a net loss per share of $0.08 in the second quarter of 2016.

Adjusted EBITDA was $36 million this quarter compared to $13 million a year ago. On an operating margin basis, this equates to an 8-point improvement year-over-year. This is a result of strong top line growth, lower risk loss rates and ongoing operating expense leverage.

I'll now turn to full year guidance, and please see our shareholder letter for details on our third quarter guide. Once again, we are increasing our full year guidance to reflect our current business momentum. We expect full year 2017 total net revenue to now be within the range of $2.14 billion to $2.16 billion and adjusted revenue to be in the range of $925 million to $935 million.

Adjusted EBITDA is expected to be in the range of $120 million to $128 million. At the midpoint, this represents a 13% adjusted EBITDA margin, a 7-point improvement year-over-year.

We continue to balance our goal of mid-single digit margin improvements with ongoing opportunities to drive significant growth. We expect net loss per share to be within the range of $0.29 to $0.19, and we expect adjusted EPS to be in the range of positive $0.21 to $0.23.

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

(Operator Instructions) And we'll take our first question today from Tien-tsin Huang at JPMorgan.

Just I wanted to dig in on the take rate, maybe just that was stable -- actually, stable to up despite the mix shift to bigger sellers. Just curious, is this because the larger sellers are maybe using more of your point-of-sale tools and things like Square marketing, Jack, you called out? Just trying to gauge where the larger sellers might see the value beyond vanilla payments and maybe how much more there is to go in terms of them taking that value.

Sure. Thanks, Tien-tsin. So yes, we're happy to see that take rate just remain so stable and also the transaction margin. And that's even while GPV is still growing at over 30%. And your point on larger sellers is well taken. I think the reason for that, first and foremost, it's large sellers actually largely self-onboard. So just like small and micro sellers, they come to the website. They've heard of Square, and they're able to get onboarded and use our managed payments in minutes. So no difference. And they take the standard rate that you see there. I think that really underscores that they see the full value of our managed payment. So they understand, yes, it's about making sure money moves, but it's also about next-day settlement. It's about Instant Deposit. It's about not having to deal with charge-backs or getting help with charge-backs. There's no hidden fees in the back end. We hear over and over from all of our sellers that just that transparency is a huge driver for them. I think as well within the take rate, there's also, of course, the higher growth of products like Virtual Terminal, Invoices and our newer Square APIs as part of our Build with Square platform, all of which have a slightly higher revenue rate than our core 2.75%. So there's a nice balance going on there, and we're very pleased with the outcome.

Next, we'll hear from Dan Swenson-Klatt with Butter Bakery Cafe.

I've watched card use become the norm already this past 12 years, moving from 20% of my transactions to now over 75% and likely to keep climbing. With that changing culture comes an increasing cost to my business in fees for processing. So I end up needing to cut cost in other places to make up for these increases, what is Square's vision around promoting card use with customers while working with us, the sellers, to reduce the pressure of increasing fees? How do we keep the balance?

Well, thank you, Dan, for the question and also for using Square. We were one of the first to really simplify credit card pricing for everyone. And the reason we want to do that is because merchants were facing a pretty much byzantine maze of rate tables depending on the card that the buyer actually used. We simplified it down to one rate to start, which is 2.75%. And we also took out the fixed fee that you would normally be charged and associated with that charge because we don't want sellers to have to think about accepting cards. And the reason we don't want them to think about that is because their buyers and their customers wanted to use them. And we were seeing so many merchants being left out from participating in the economy just because they couldn't make a sale because they couldn't accept the credit card. So it was really the reason we started the company in the first place, was to really simplify the cost and also the mental burden of accepting credit card transactions. We also wanted to make sure that we continue to have a fair and simple price, and we believe we have achieved that. We are always looking for more opportunity to do that and to balance that. But we also want to make sure that people understand there is a real cost to accepting cash and accepting checks, and that has to be factored into how you run your business and everything you do. So net-net, we believe that being able to accept every form of payment enables a seller to make every sale. And we're going to do our work constantly to make sure that we have a fair, open, transparent price and you really see value in it. And there will always be opportunity as we grow and as we build to continue to question that and continue to push it.

Now we'll hear from Darrin Peller with Barclays.

Nice job. Just another strong quarter, but Square Capital clearly continues to outperform, I think, as you mentioned earlier. When you think about the growth of this business, can you just touch on any longer-term thoughts around the size, I guess, that you want this to be as a percentage of total? And then I also noticed during the quarter, you started the -- you mentioned the Square Installments, just loans to the sellers' customers. So if you could just touch on whether the risk profile of these are any different and whether pricing or risk is different than what you've done before with the merchant base and then the long-term strategy, consumer-facing loans, that would be great.

Sure. Great. Thanks, Darrin. I'll start and then Jack is going to jump in on the Installments side as well. So in terms of how big can this business be, I mean, we are super pleased with the results of Square Capital in the quarter, $318 million of loans facilitated. That's our largest quarter ever, grew 68% year-over-year. And I think importantly, and Jack kind of made this comment in his opening remarks, it's also about the loan size. So it's not just $318 million. It's a fact that it went to almost 50,000, sellers, 49,000 loans to be precise. And so we love being able to serve the underserved. In terms of how big can it get, well, it's really a function of it continues to grow both from the growth of our base, so as we add more sellers, right, the fact that GPV is growing over 30% right now, we're bringing more people onto the platform that can now take advantage of a product like Square Capital. So there's net new. There's also been a phenomenal renewal rate of this product, and I think that underscores that, a, it's adding tremendous value. It's well done, easy for sellers, like click of the button, the money is in their bank account the next day. So the NPS on this product remains incredibly high, and I think the renewal rate really speaks to us. And then I think beyond there is how can -- what are the other avenues that we can pursue in terms of places where there's clearly a need in the market for more working capital, whether you're a buyer or a seller. And that might be a good segue to Jack as we talk about Installments.

Yes. Darrin, just to amplify something Sarah alluded to, we do believe the market is massive because we do believe we have tapped into something that is new. We are -- we're serving merchants who typically would go to their friends and family to get this size of loan, and that's really who we're completing with. And we think that's a massive opportunity, and no one else is really going after it, especially with all the data that we have so we can make really calculated judgments and decisions around it. So we're really happy with the performance of Square Capital and its outlook. In terms of the Installments, we have approached this from a seller perspective, and we're constantly looking for opportunities to give the seller a new way to serve their customer in a better way. And we have this idea around offering installments to sellers so that they can enable their customers to pay in chunks and installments. And we had a bunch of conversations, and there was interest. And we rolled out a small test and they really resonated with folks. So we decided to continue to push it and continue to experiment. And we're in a learning phase right now. And it's just the start of us being able to do this for consumers, but it does -- it is grounded in the seller mindset and just making sure that we give our sellers a superpower that they can offer their customers. We've found that if we build for the customer of our customer, our customer benefits as well. So we think this is a really unique opportunity for us, and we're excited to see where it goes. But we're still in a learning phase, and we're trying to push it up as broadly as we can so that we can learn even faster.

Next, we'll hear from Jim Schneider with Goldman Sachs.

I was wondering if we can maybe talk a little bit on Square for Retail and how that rollout has progressed so far and give us any metrics on what percentage of some of your larger merchants might have that solution at this point and then how big a contributor that was to the subscription and services revenue in the quarter.

Thanks, Jim. So as you know, we just launched Square for Retail. So it's still pretty early for us. We're still learning what patterns make sense. This is a big move for us because we're moving away from being a purely horizontal point of sale to really focusing on a particular vertical, and this vertical is massive. There's 450,000 small- to medium-sized retailers just in the U.S., and they generate over $700 billion in annual gross receipts. So we're really excited about this category. And what really drives adoption here is, first and foremost, really focusing on retail needs, the largest of which is inventory. So the team is working really hard to make sure that we're addressing all the gaps in the product that we know we have to continue to unlock more of the market. But the thing that sets us apart from everyone else in this space that we're excited to see unfold is it's not just a point of sale for retail but it's a door to the larger ecosystem. So everything that we have done with Square Capital with Instant Deposit, with CRM, which is something I'm really excited about just to push and to unfold, is what any merchant can now have access to. And our goal is to help our sellers continue to -- continue to make more sales, not just make the sale. And we see retail point of sale as a gateway for that. So we have seen adoption at every level of merchant, from the very small one store to a larger base, but it's still too early for us to be definitive about particular results.

Yes. And Jim, I'd only add at the end there. In terms of contributor to subscription and services, it will actually show on both lines. So remember, as the retailer comes on the system, they're going to also have transaction-based revenue as part of that. So it's certainly one contributor to the 61% year-over-year growth we saw on those mid-market sellers as well as the monthly subscription fee that they would pay for retail point of sale. And it's an important nuanced point because we want to make sure we stay relatively indifferent. Ultimately, we care about growing adjusted revenue. And then how that revenue comes, again, is really up to what's best for the seller, how they prefer to pay and really making sure that, that part of the product also feels innovative and transparent, not just that we don't think of price as just ultimately dollars and cents, it's actually a core part of how the product itself has manifested.

And maybe if I could just ask a quick follow-up on the Square Capital and also the earlier question. Can you maybe talk about the loan loss rate in the quarter where there's transaction at 4%? And then more importantly, as you grow that business to the sellers' customers and the consumers in the end, how do you think about kind of managing that rate? And is it something where you feel like you're going to grow that within the envelope of that 4% loss rate? Or would you feel comfortable with that moving a little bit higher as you expand the program to grow?

Sure. In terms of loan loss rates for the quarter, they stayed very consistently at approximately 4%, so no changes there. I think how we do that, clearly, it starts with a lot of the automation that Jack talked about in his opening remarks. So Square was born using, at the time, what we call, software algorithms. Now we talk about machine learning and even deep learning. We have clearly moved on that continuum, and those models help us to really manage the risk prudently. And the models get better and better as the cohorts mature and we get more and more data on that. So no change to the core business on loss rates. As we think about a new business like Installments, it's just business as usual, right? It's exactly the same approach of making sure that we're utilizing the data that we have. That's why Jack talked about Installments, really coming at it from the lens of the seller. So by knowing the seller, what is the incremental information we now have on the buyer, right? If we know a seller has never had a charge-back, that's a pretty good signal as we think about what we want to do on installment plan for that customer's customer. We're not ready to give any sort of sense of default rates because, frankly, we're still in an early stage, as Jack talked about. But that's how we need to iterate and to learn. And I think we have access to just such a unique data set -- sets to do this with.

We'll now hear from Ramsey El-Assal with Jefferies.

I was wondering if you could fill us in on your take on the competitive environment right now. As you're moving upmarket, are you bumping into a new set of competitors? Or is there any development there you can share with us?

Yes. So as any company, we -- the thing I look to compete with is ourselves and making sure that we continue to get better than we were 6 months ago and a year ago and really push across that dimension. We have clarity of purpose. We have a clear road map and that we're moving faster and we're going deeper in terms of how we address our tools that we're giving to our customers. I think it's always been a little bit challenging for us to point to one particular competitor because our industry really considers itself in parts rather than what I think we've done really well, which is more of a cohesive whole. We talk a lot about ecosystem, and what we mean by that is a suite of tools that work together. So we intend for every one of our services to be acquisition and to be onboarding into the larger ecosystem. And that larger ecosystem helps with retention. It helps a seller make more sales, and it makes us a lot more valuable to every one of our customers. So there's nothing noteworthy that we are significantly concerned with. We continue to focus on our strengths. And our strengths are, again, the speed, the simplicity of our offering, the elegance of our offering and the cohesion. And really by that, we mean the ecosystem. So that's what we're focused on and we don't see that out in the market.

Josh Beck with KeyBanc Capital Markets has our next question.

So I had a 2-part question for Jack. I was just wondering on the physical Cash Card, who do you foresee as the major users of this? Is this maybe the employees of your sellers via payroll? Is that the prime audience? And then for Sarah, when we think about the guidance and kind of what's implied for second half margins, I think it's around 12.5% for the second half EBITDA margins versus the first half, where it was a little over 14%. So it's clearly implying some investments. So could you just maybe walk us through what are some of the major moving parts there that we should be thinking about in the second half from maybe an investment perspective?

Thank you, Josh. So with the Cash Card, I would focus us a lot more on situational aspect rather than the segmentation of market. We want to build a utility that scales to every segment and to every demographic. What we are seeing in the behavior, though, is we are reaching an underserved audience. We are reaching an audience that may not have a bank account or may not have a full suite of services from a bank, and this has been consistent with what we've done for the past 8 years. We aren't competing with the banks or the financial networks, but we are making what they have a lot more accessible to more people. So with Square Cash, we started with the most critical thing, which was being able to send money from one person to the other and really focus on getting it as simple and as fast as possible. And I think we have achieved that. We have questioned a bunch of the fundamentals that came before us, including what it takes to sign up and how easy and fast it can be to sign up. And through that, we saw a bunch of opportunities for adjacencies. We realized Square Cash wasn't just peer to peer, but it was a great way to spend and a great way to pay. And we introduced a stored value account, which enabled our customers to actually store money at Square. We introduced a virtual card, which allowed them to pay online. We added that to Apple Pay, which allowed them to pay offline at NFC-capable terminals such as our own. And then recently, with the Cash Card, we've enable them to pay anywhere Visa is accepted in the United States. So we see Square Cash as a simple, easy way to go from the App Store, download an app, get an app that you can actually request money from your parents or from your friends and then get a virtual card or a physical card and actually be able to spend online, offline for whatever you do on a daily occurrence. So we're building it with a very utilitarian mindset so that scales to multiple types of audiences and market segments, but we are seeing a significant uptick in folks that we believe have been underserved by the banks because of just not wanting to go to a branch, not wanting to go through the hassle or being denied for particular reasons. And again, this is consistent with what made us so successful with sellers in the early days.

Great. And then, Josh, let me take the question on guidance overall. So I'd start by saying overall, when we plan for the year, we plan in annual increment. Planning quarterly is just kind of nonsensical to be in 90-day cycles when you're growing a business and really develop -- and investing in new product development. So I think as we said in the beginning of the year, our aim has been for mid-single-digit margin expansion annually. Right now, at the midpoint of our new 2017 guide, that would about a 7-point improvement. So I actually feel like we're over-delivering on what we originally said. In terms of investment priorities -- and I think we're coming out of this quarter really feeling like we're on our front foot. When you see adjusted revenue growth actually accelerate quarter-to-quarter, you start to feel great about the momentum in the business. So as always, we will lean into product development. We've invested in areas like machine learning. Those initiatives go across the whole company. They help us develop new products. They help us make our current products smarter, and they frankly help us with our own operation so that we can drive much greater efficiency over time. From a sales and marketing perspective, Q2 was a very good quarter in terms of investments and then return on that investment. So I think you know that we always lead with a 3- to 4-quarter payback period. That includes all of our products, not just the payment part. And we talked about that at Analyst Day. And so we're very diligent on making sure we don't ever blow past that payback. But while we're seeing that payback, we will continue to lean in. So you saw it somewhat in Q2, but I think as we go into the back half of the year, we continue to see that great move upmarket. We are getting better at brand awareness with larger sellers but still have a lot of work to do to be known for not just managed payments but also a fully featured point-of-sale full-blown operating system to help you run your business. We clearly are quite young in a number of our international markets, so there's a lot of work to do there. U.K. just recently launched, it's particularly top of mind for me. And then third, e-commerce. So the Build with Square platform now has quite the momentum under it. We spent a lot of the last year bringing partners to that platform, and I think we just have more and more of that to do. So that's why the guide is the way it is. I'd go back to that point that we aim for mid-single digits. And right now, we are definitely over-delivering on that.

We'll now hear from Bryan Keane with Deutsche Bank.

I just want to ask about the international markets. Sarah, you touched about just getting into the U.K. market. But curious on the strategy in international and when we might see the U.K. market have an impact on results. I assume that's maybe a 2018 phenomenon. And then just secondly, what's the strategy to keep the growth going in the large and mid-market sellers? And I guess I'm wondering, do we need to increase the sales force in those particular markets to get the growth to stay at these sustainable levels?

Thanks, Bryan. I'll take your first question around international strategy. So we've approached every new market very thoughtfully because there is a significant work and friction to open a new market in offline payments. And a lot of what we were blocked behind was actually a reader that worked around the world and worked on the global platform. So with the contactless and chip card reader, we can now be in every single market. But we still have to work with local banks, local regulatory of being able to bring people on identity verification and work with just the local environment that is going to be different market-to-market. Australia was a huge step for us. We learned a lot around chip card and also NFC transactions, and the U.K. was the next obvious one. It's still early in the U.K., but we're seeing a lot of the same patterns that we saw in the United States, which makes us very happy. We are not the first mover in the market, and we don't believe that is critical. We just need to make sure that we are the best. And best for us, again, goes back to our cohesive ecosystem and our speed and simplicity and elegance. And we do see that, that is winning and continuing to win. We're also really happy that we have replicated what we thought -- what we think has been a huge driver in the United States for us, which is retail. So we're now available in Argos, which has 800 locations in the U.K., as well as Apple and Amazon. And the word of mouth and the organic spread of Square and being able to go to one of these common retailers and pick up a reader and just run your business is really important. So it is still early. We have a super energized team to continue to build on the market, and we're excited to continue to serve more and more sellers. But we're focusing on our strengths, and the #1 of which is our cohesion, which we just don't see any competition in that sense.

And then in terms of keeping the growth going in large mid-market sellers, I mean, first of all, we're really scratching the surface here, right? I think we talked a lot about just the opportunity in the U.S. at Analyst Day to be about $26 billion I think was the number we gave in adjusted revenue, and we're getting close to our first billion. So there's plenty of opportunity. In terms of how we do it, it's always product first because we view that as the most scalable way to get to market. That said, there are innovations that we can do around go-to-market, too, that really help with larger sellers. Part of that is larger sellers often do want to talk to a person as they're signing up and coming onto a new platform. And so we've certainly built out our sales force to be -- to enable that, and they've done a terrific job. It is a place where we use technology to keep ourselves maximumly efficient. So we don't want a ton of feet on the street. Instead, it's very, very targeted. It's a place where we use ML, in fact, to actually stack rank the inbounds that are coming in through the website where people want to call back to make sure that we are always orienting our sales force towards the biggest opportunity with the highest likelihood of conversion. So we will continue to build that, but again, always back to the point I made earlier with that 3- to 4-quarter type payback. We don't see that come down even when we're utilizing a sales force to really go after our larger merchants.

We will now take a question from a Square seller, [Alex Xu].

My name is [Alex], Square seller and owner of [Chi Pants]. I'd like to reach more customers with even stronger loyalty programs. Would Square consider expanding partnerships with other merchants to allow sellers to use as rewards similar to credit card reward programs where you can redeem points for hotels, flights, et cetera.

Thank you, Alex, and thank you for using Square. So we are -- we're really excited about our CRM offerings because we have approaches from a network mindset. It's not just individual sellers who have to fend for themselves but a network of sellers who can actually work together to continue to drive more sales. And we're just getting started on our understanding of what we can do with that. And a lot of that understanding is coming from interviews with sellers all over the world around what they need and what they'd like to see. We want to make sure that we're doing this in a really responsible way and a very transparent way as well. So we are spending the time to do it right, but we're really excited to evolve Square CRM. And we think we can do something interesting because of the network of sellers that we have rather than just focusing on point-to-point solutions, which have been the traditional answer. So much more to come and excited to talk with you about it.

Next, we'll hear from Dan Perlin with RBC Capital Markets.

So just 2 quick ones. One, I guess, Jack, can I just follow up on that CRM? I mean, when you guys are thinking about the network side of this, how are you envisioning monetizing that? Or is that going to just be driven by uplift in GPV? And then the second, the real question is, the transaction margin, you held it flat at 104 basis points year-on-year. It's down sequentially, though, a bit. And that is despite the fact that -- you called out Invoices, Virtual Terminal and the API payments all being big contributors in higher margin. And I'm just wondering if you have something to call out there for the sequential decline. Or is that just kind of small seasonal nuance?

Yes. So Dan, on the first question on CRM, we are focused on making this really simple for sellers. And we don't have an answer just yet, but we want to guide by what has made us successful in the past, which is fair, simple, transparent pricing. And we're testing a bunch right now. So still don't have an answer on exactly what it's going to be, but we're learning as quickly as possible.

Great. Thanks, Dan. And then really quickly on your transaction margin. Yes, honestly, no -- like nothing out of the ordinary for us. I think it's better to look at transaction margin on a year-over-year basis because then that accounts for any seasonality that you might see. So for example, for whatever reason, Q2 is often a quarter where we see more debit in the mix. We've often tried to figure out why, but I think you see it across the whole industry. We thought it might be something to do with tax refunds or something. People have many money in their accounts, so they use debit, not credit. I'm totally hypothesizing right now. But I would not look at it therefore sequentially. I would look at the fact that from Q2 '16 to Q2 '17, it was exactly flat.

We'll now hear from Dan Dolev with Nomura Instinet.

Two questions. First on the sales and marketing expense. I noticed that this was kind of the one expense that went up as a percent of -- in terms of basis points in the year-over-year, which kind of defies the trend. I wanted to know, how do you think about this for the remainder of the year? And the second question, more broadly speaking about the general retail and restaurant weakness that we're seeing elsewhere. Is there anything that you're seeing? I know you're in a lot of those markets in terms of same-store sales, et cetera.

Great. Yes. On sales and marketing expenses, we did lean in definitely in Q2. And I think that was a function of the fact that we had released a lot of product kind of if you look at the 6 months before. We do a lot of iteration in a market when we release something new. And then once we feel like we've hit the point where it's scalable, we will then put some real oomph behind it. Again, always watching that, that return is kind of in that 3- to 4-quarter type period. So no changes on the return. And hence, we felt really confident in going to market and pushing more in sales and marketing. There's a number of channels that we saw really high efficacy out of. I think areas like social, for example, were very strong in Q2, and we expect that trending to continue into Q3. I think international, I've probably already mentioned this, but it's worth reiterating and now we are live in the U.K. and even in Australia where the product is now very fulsome. It definitely is a place we want to keep going back and pressing. In the U.K., we came to market with a fulsome product suite. That was payment but we had Virtual Terminal. We launched our APIs. Each time we do that, that gives us a chance to go back in and build the brand awareness. So as we look to the back end of the year, we absolutely want to keep investing here, but all within the envelope of our guidance. In terms of overall macro shift, we're not seeing anything right now. You can kind of see it in our numbers, right, the fact that our overall GPV growth rates, even at $16.4 billion, is still over 30%. Clearly, when our whole value proposition is come to Square and never miss a sale, so our hope is that when sellers join the platform, they'll continue to grow and even perhaps accelerate their growth. And I think that's why products like Square Capital, Instant Deposit, CRM, they're all important because they make sure that a seller has more and more ways to invest in their business and continue to grow. So nothing that we're seeing from a macro standpoint. And I think from a micro Square perspective, we're very pleased with the growth rates across the board.

James Faucette with Morgan Stanley has our next question.

I just had a high-level question for Jack and then one for Sarah. First, Jack, from your perspective, should Square be participating in kind of the M&A-based consolidation activity that we're seeing in the industry right now, particularly among merchant acquirers? And -- or should Square ultimately be part of a larger organization? Or do you think it's better for Square to continue to grow more organically to achieve your aims and goals that you've set out? And then, Sarah, we noticed that your transaction losses seem to have been up sequentially and maybe above your long-term targets. Can you talk a little bit about what's going on there and whether that was a strategic decision? Or should we expect a reversion to more historical means?

Thank you, James. So I believe there's a lot of value in our network and that network being independent of any particular platform or any particular technology. So we are a network that can bring multiple financial institutions together, multiple platforms together and make it feel for the seller that there's really no distinction. They don't have to think about any of that complexity, and we can do all that work for them. So that was one of the founding principles of the company and it still remains true today. So we're building against that theory and that principle. We're always looking for teams and for products that can help accelerate and deepen our offering to our customers, both sellers and individuals. And we have a very healthy approach to looking at the market and asking questions and big questions about what we could do and what could make Square grow faster and really continue to get deeper into our sellers' day-to-day and also more and more into individuals with both things like Square Cash and Caviar. So as you would expect, any company, we're always looking for across the horizon for those opportunities to make us stronger and to move us faster.

Great. And then, James, on the transaction and advance losses, $18 million in the quarter, grew about 5% year-over-year. So to put it in context, our GPV grew over 30%. So I think that's just based off of the continued operational efficiency we see there. If you break it down into its component parts, pure payment to transaction-based loss continued its very normal trend, kind of in the 10 basis points or less. The reason why it's perked up in this quarter sequentially is we chose looking at our balance sheet to take a write-down through the P&L of about $2.7 million. You'll see that recorded in loan losses in the quarter when our Q hits. It should -- maybe it's out as we speak. Nothing that we're concerned about. As I said, our loan loss rates and capital have remained in this approximately 4% range. It's just every quarter from an accounting perspective, we're always making sure we keep the balance sheet pristine. And so we wanted to be prudent. We'll continue to watch those loans and payback can come in. So in which case, we'll always be looking at the write-down that we took. But nothing changing from an underlying trend perspective. This is just purely a one quarter $2.7 million charge.

Our last question will come from Brett Huff with Stephens.

My question is twofold. One, can you talk a little bit about the trends that you're seeing in what I think of as the cross-sales into the payment sort of base, whether the products you're selling are still higher margin? Any additional color on attach rates and things like that. And then the second question is just about the new functionality that you guys have been working on, so e-comm, large sellers, retail. What's the real focus now?

Great. Why don't I take the cross-sell question. Just always want to be mindful that when you look at the 3 revenue lines that come into adjusted revenue, transaction-based revenue actually comes in at 100% margin because we've already taken the interchange, the COGS, the effects we associated with payments. The hardware, as you know, and you can see the gross margin on it, we typically use it more effectively almost as a sales and marketing expense. We think about the TCO to the seller and then also the cost to Square. And then, of course, as we build new products like Square Capital, Caviar and so on, they have a mixture of margin profiles but generally still very software-technology-like type margin profiles. In terms of then your question of cross-sell into the base, it continues to do quite well. I mean, a couple of that in the quarter. As I said, we did 49,000 Capital loans. So 200,000 annualized. So that gives a good sense of we have millions in our base but we're getting up to 200,000 in terms of sellers utilizing Capital. We talked last quarter about 225,000 sellers using Invoices now, and that has continued to grow, particularly as the mobile applet part of Invoices has really gotten its feet under it, almost half of our Invoices now come through mobile. I think in areas like the CRM, you start to see those customer profiles building. And so that will give you a sense of how many sellers are utilizing a product like that. So the trends continue to be very strong. I think as we get better at both -- remember, we have a very unique advantage here and that we can sell to our sellers through their dashboard. We also know that they tend to open the emails they get from Square because those emails are telling them about their business every day. Those are channels that no one else has access to. And so we love that ability to get to millions with every new product that we bring to market. So growing -- nice trends here. And as Jack said, once someone is taking multiple products, that clearly helps with the retention as well. So it kind of compounds the overall growth of the model.

And our focus in terms of the new functionality is really on the platform and on the omni-channel opportunity. So one of the things that we've heard from our sellers consistently is wanting one dashboard that they can reference and check all the time to see everything that they're selling offline across multiple locations and everything that they're selling online as well. And we are not just focused on one particular vertical. We're focused on making sure that every seller, no matter the category, no matter the vertical can benefit from this. Now we do need to do things for specific verticals that speak to real needs. Retail is a good example of this, and we have built a specialized point-of-sale for retail. Restaurants are another good example of this, and Caviar is our answer because the restaurant -- a new superpower where they don't have to hire a delivery staff and they can get new sales that go outside their walls and also just added the option for pickup as well. But ultimately, our focus is around what we're hearing from sellers, which is omni-channel. I want to -- I'm an online seller and I want to sell offline or I'm an offline seller and I want to sell online. But most importantly, I want one dashboard to deal with. And again, we've taken a network open platform approach here. So we've partnered with online website builders as well for Square to be an option. And because our brand awareness is so high, we are picked because people, consumers and sellers certainly recognize our name and see it as a trusted brand that they want to work with and choose. So the focus still remains in omni-channel, and we continue to look for opportunities to specialize around verticals. But we're focused, unlike others, on making sure that every single seller can benefit from our platform. And that really increases the size of our market potential.

I'd like to turn the call back to the company for closing remarks.

Thank you, everyone, for joining our call. I would like to remind everyone that we will be hosting our third quarter 2017 earnings call on November 8. Thanks again for participating today.

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