Block Inc (SQ) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Square Third Quarter 2017 Earnings Conference Call.

Today's conference is being recorded.

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 third 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 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.

We're really proud of our work this quarter.

Top line growth accelerated from second quarter 2017.

Total net revenue increased 33% year-over-year, up from 26%, and adjusted revenue increased 45% year-over-year, up 41%.

This growth demonstrates that our core payments business remains strong, and we continue to provide both small and large sellers with the tools they need to grow the business.

We were excited to launch our new hardware product, Square Register.

We designed and built Square Register in-house, and for the first time, combined our hardware, software and payments into 1 product.

Square Register doesn't require a third-party mobile phone or tablet, and the sleek and functional design is based on years of insight working with millions of sellers.

The dedicated hardware consists of 2 screens, 1 for the seller and 1 for the customer, which has a reader that accepts contactless payments, chip cards and older magstripe cards.

Square Register fits our sellers' needs as their businesses grow and become more complex.

You can see this growth in our seller mix.

In the third quarter, gross payment volume from larger sellers, those that generate more than $125,000 in the annualized GPV, accounted for 48% of total GPV.

As we continue to grow our market, we've learned that more complex sellers often have established systems that they've tailored to their businesses, such as e-commerce websites, custom points-of-sale or inventory software.

With our open platform, developers can connect these systems with Square and give sellers the ability to manage them in 1 place.

Our open platform strategy is working.

Sellers using business systems that are integrated to Square contributed nearly 20% of third quarter GPV.

These integrations are more important than ever as online and off-line commerce emerge and sellers need to provide a seamless omnichannel experience for their customers.

From a self-serve kiosk to a brick-and-mortar store to online sales, omnichannel management is a particular need for marketplaces, which is why this quarter we partnered with Eventbrite to process payments for its online, mobile and in-person transactions.

Importantly, any marketplace will be able to build their own solutions on top of our platform and the functionality we build.

Our platform also enabled our internal teams to build upon existing functionality.

As we mentioned earlier this year, we used our e-commerce API to build and launch Virtual Terminal.

It is now the fastest product to reach $1 billion in cumulative GPV.

We'll continue to leverage our platform to enable external developers and our internal teams to move quickly and build more services that our sellers need to grow.

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

Great.

Thank you, Jack.

Q3 was a strong quarter for Square with top line growth accelerating.

Total net revenue increased 33% year-over-year, up from 26% in the second quarter, and adjusted revenue increased 45% year-over-year, up from 41% last quarter and 39% in Q1.

Our third quarter benefited from growth in both our transaction-based and subscription- and services-based revenue.

GPV was $17.4 billion, up 31% year-over-year.

Midmarket sellers, who generate more than $500,000 in annualized GPV, grew 64% year-over-year, also accelerating from 61% in the second quarter.

Transaction-based profit as a percentage of GPV improved to 1.05%.

This was driven by strong growth in products such as Invoices, Virtual Terminal and online payments, which all have higher rates than our current present transactions.

We also benefited from improvements in our transaction cost profile.

We continued to see strong momentum in subscription and services-based revenue which grew 84% year-over-year.

Instant Deposit was a highlight with volume of $2 billion in the quarter, driven by increased usage by both Square Sellers and cash app individuals.

GAAP net loss was $16 million in the third quarter compared to a loss of $32 million in the same quarter of 2016.

This equates to a net loss per share of $0.04 compared to a net loss per share of $0.09 in the third quarter of 2016.

Adjusted EBITDA was $34 million this quarter, an improvement of 195% year-over-year.

On an operating margin basis, this equates to a 7-point annual improvement.

This is a result of strong top line growth and ongoing operating expense leverage.

I'll now turn to full year guidance, and for details on our fourth quarter guide, please refer to our shareholder letter.

Once again, we are increasing our full year guidance to reflect our current business momentum.

We expect 2017 total net revenue to now be within a range of $2.18 billion to $2.19 billion, and adjusted revenue to be in the range of $963 million to $966 million.

Adjusted EBITDA is expected to be in the range of $132 million to $135 million.

At the midpoint, this represents a 14% adjusted EBITDA margin, which is an improvement of 7 points year-over-year.

This target improvement allows us to appropriately balance margin expansion while investing for growth.

We expect net loss per share to be within a range of $0.20 to $0.19, and we expect adjusted EBITDA to be in a range of positive $0.24 to positive $0.25.

And so with that, let me turn it back to the operator, and we'll start the Q&A portion of the call.

(Operator Instructions) Our first question will come from Tien-tsin Huang with JPMorgan.

Just on the net spread, that stood out to me, I think 1.05.

I was curious if the dynamic between the benefit of the higher-yielding products you called out versus the pressure from custom pricing to larger sellers, is that changing at all?

I'm also curious if this -- the launch of Square Register changed the outlook for yields or take rates here in the shorter midterm?

Sure.

Thank you, Tien-tsin.

So first of all, on the net spread, or as we call it, the transaction-based profit that we're making, 1.05 was a really nice outcome, and expanded nicely from 1.01 a year ago.

It is that balance that you talk to of products like Virtual Terminal, Invoices, Square APIs, they all have higher revenue rates, and so that is definitely offsetting custom pricing that we will do often for larger merchants.

Recall, when we bring on a larger merchant, we want to optimize for total adjusted revenue, and ultimately, total margin.

And so in many cases, it will be both what they pay to process on Square for all of managed payments, plus they may take a vertical point-of-sale where they pay a monthly fee, plus they may pay us more for hardware now with something like Square Register.

In terms of the Register launch, we did choose different pricing there.

So $0.025 and $0.10 cents, that really has the impact of -- -- for merchants with smaller ticket sizes, more of an uplift in the price that they will pay, and we're comfortable with that because ultimately, we feeling they're getting more value.

It's much faster, it's going to move your line along superfast if you're a quick service restaurant.

On the flip side, for larger merchants, it's actually going to feel a little bit more like a price reduction.

And again, that's good because we want to really orient this product towards larger merchants particularly those that have larger average ticket sizes as well.

Thank you.

Our next question comes from Darrin Peller with Barclays.

I just want to touch on the guidance change on the revenue side.

It was obviously a good amount more than that beat in the quarter itself.

So just looking ahead now, what do you -- what really can we attribute that to?

Is it part of the subscription services side?

And if so, what are your expectations in terms of the outperformance for the rest of the year above and beyond what you previously saw?

Sure.

So thanks, Darrin.

I think generally, on the guidance, we feel great with the momentum in the company right now.

I think at the midpoint, current 2017 would be 41% year-over-year growth.

So seeing a 40 handle on that growth rate for the year is something we're incredibly proud of.

What's driving it is outperformance across the board.

So first of all, the core itself, remember, we still have that positive dollar-based retention.

So we just see this mighty engine underneath our business model that continues to perform.

On top of that, we are continuing to move upmarket.

You saw that growth in the midmarket sellers, all the way up at 64% year-over-year.

Beyond that, adding in all of the products from Ecosystem, right, we just see more and more virtual loops being created -- I get it for capital loan, it helps my business grow, I, therefore, am doing more in payments -- we love those inter linkages.

That integration is really helping us.

And then finally, I think international had a good quarter, you saw the growth rate kick up there in Q3, and we continue to expect ongoing momentum from our international markets.

We'll move to our next caller, [Jacob Craftsman] with [Whitney's Burgers and Fries].

I own 2 restaurants here in the Memphis and North Mississippi area.

Currently, I use Square to process my payroll at my location in the state of Tennessee, but I'm wondering if there's a timeline available for when I'll be able to process my payroll for my restaurant located in North Mississippi.

Thank you, Jacob.

Thank you for using Square as well and thanks for the question.

We are really excited about Payroll as a product.

One of the things that gets us most excited is the fact that a seller hasn't -- doesn't really have to do much to turn it on because it's built right into the point-of-sale, which goes right into our ecosystem and it feels a lot more cohesive.

We are currently in 28 states and they represent about 80% of the employer market.

We brought Square Payroll for contractors to all 50 states, but this is something we want to move much faster on to make sure that we cover every state in the United States, and we are working really hard to complete.

We don't have a timeline to share today, but thank you for the push.

We'll continue to be urgent.

And our next question will come from James Schneider with Goldman Sachs.

I was wondering if you could maybe address the application for the bank charter or the ILC in Utah.

What do you see longer-term as kind of strategic purpose of that?

Is that more on the Square Capital side?

Is it also potentially down the road on the Deposit side?

Do you think it gives you -- become more flexibility terms of funding?

Maybe just kind of philosophically talk about your approach to banking for SMBs broadly speaking?

Yes, thank you for the question, Jim.

We are -- so from a high level, we want to make sure that we continue to build services for an underserved market.

That has been what has really tied the company together for the past -- close to 9 years now.

We saw underserved sellers who are not able to participate in the economy because they couldn't accept credit cards.

We see underserved buyers that we believe we're serving through Square Cash and other products that we've talked about in the past.

The ILC represents an efficiency for us.

It allows us to go faster, create more efficiencies in the model, but also allows us to just take a different tack on our business and make sure that we're constantly doing the right thing.

We can bring the lending capabilities of a bank in-house, allowing us to be more verticalized and to make stronger and faster decisions.

So we have stated that this is typically a year-long process and don't have any update to the timeline, but we're pushing really hard to make sure that we get to clarity here.

And this does help the capital business, but looking down the line, we believe that we can offer more and more financial services to the underserved, both on the seller standpoint and also individuals as well.

Thanks.

And maybe if I could ask you a follow-up on the Square Capital side.

I think originations declined sequentially a little bit.

So I'm wondering, Sarah, what might be going on in that business?

Is it just a little bit less seasonal demand?

Did you see something about the credit quality you didn't like?

Or was there a hurricane impact or something else going on in the quarter?

Thanks, Jim.

So the Capital, as you pointed out, $303 million in the quarter, up 45% year-over-year, but down a little sequentially.

I think we saw a couple of things go on.

First, seasonality is a factor in Q3.

You have the 2 summer months in there.

In addition, the hurricane that happened in Texas and Florida actually can have a negative impact on capital because we see our seller's business slow and payments -- that can be a couple of days, a week or so of impact, but in Capital, the model itself resets because it sees your payment.

So we offer less and we may offer to fewer.

So it takes a while to kind of reset itself.

When you look at capital in the future though and growth, I think there are 2 areas we're really focused on.

One is partnerships, and the team has done a great job in the last 12 months building a capital partnerships platform, and we announced the second big partner there, BigCommerce, just in the last few weeks.

And the second area is consumer installments.

So recall, we want to bring that superpower to small businesses that often big businesses have, which is the ability for them to finance a purchase for their customer so it makes the customers purchase a little easier to decide upon and we think that ultimately grows their business.

The net of it though is we see our broader ecosystems -- so subscription services where capital fits -- still growing 84% year-over-year.

And in my mind, that speaks to just a broad ecosystem of many products.

It's not just capital, capital is very important, we're going to keep growing it.

But there are many, many more pieces that we're now adding into that portfolio, all of it which is helping our sellers to do what they do best, which is getting out there and selling their products.

Our next question will come from Dan Perlin with RBC Capital Markets.

So Sarah, I just wanted to ask a question, the net revenue growth is inflecting up, and I guess, in response to an earlier question, you talked about the cycle of the products.

What I'm, I guess, wondering is, as you're increasingly moving upstream and we continue to see that kind of quarter after quarter, is the absolute dollar retention or the basket of products and revenues that those clients are taking helping to also kind of drive this inflection forward?

Thanks, Dan.

So as we move upmarket, in terms of the positive dollar-based retention from existing sellers, that has stayed fairly consistent across all cohorts.

So we've talked to you about specific numbers back in our Analyst Day.

So we're seeing double-digit type dollar-based retention rates.

That has -- we've seen that be maintained.

I don't think that large sellers act particularly different from our smaller sellers here, except perhaps more inclined to take certain products, like retail point-of-sale is clearly oriented towards a larger seller group.

A product like Capital, we've actually seen it have applicability from the very smallest micro the whole way up to large.

So the answer is, I don't think larger sellers, per se, changes the trends, but what I'm delighted with is that the trend is continuing because that gives us a lot of momentum and predictability as we go into 2018 just from the base business.

And moving on, we'll hear from Jason Kupferberg with Bank of America Merrill Lynch.

Sarah, maybe a question for you.

Just the EBITDA margin expansion, obviously, extremely impressive this year.

I think you're on track to maybe do upwards of 750- basis points in 2017.

So a lot better than you what you had envisioned at the outset of the year.

You've talked in the past about a longer-term annual average trajectory of maybe 500- basis points a year.

I mean, is that still the right ZIP Code?

I mean, just given all the momentum you have?

Or is that potentially conservative?

Thanks, Jason.

So you're right that this year, we'll see close to 7 points, so 700- basis points at the midpoint of our guide for EBITDA margin expansion, and that is 200- basis points ahead of coming into the year, we said look for mid-single digits.

Part of that is really just driven by the great outperformance we've seen almost every single quarter.

However, we do want to keep investing in our business.

I think we're proving to you that we're building a really large platform of sellers.

And as we build out that platform, we're able to upsell and cross sell them many, many more pieces of that platform.

And it's -- and each piece that we add helps with things like churn, so sellers get stickier on our platform, they grow faster, and so all of that integration really builds on itself.

We want to keep investing there.

The other product on the buyer side, Square Cash, is now starting to get to a very meaningful size for us, and we want to make sure we can invest in Square Cash, too, as a way to get to those underserved on the buyers side.

So as we look into next year, we're still holding to mid-single digits, but if we could still continue to put out this sort of growth rate, I'm inclined to keep investing and making sure that we can grow to something at scale.

It doesn't make sense to hold back on investments when you see the ROI that we see, the 3 to 4 quarter payback period and the positive dollar-based retention, right?

We should be putting those dollars to work.

Okay.

And just quickly on Eventbrite, an interesting deal there.

When does the processing start?

And what's the annual run rate there in terms of the GPV?

So it will take some time to bring Eventbrite up and running on the platform.

This is really about a play on Marketplaces.

So we want to make sure that we can build functionality that any marketplace can use.

Caviar is a marketplace that we run here internally, and Caviar has taught us a lot about what marketplaces need, from payments to catalog, to support, order management -- that is a lot in the food vertical.

Eventbrite gets us into ticket sales.

And remember, Eventbrite has that nice online and off-line component, because clearly when you get to an event, there's a lot of off-line commerce that occurs.

So great kind of omnichannel possibility.

So with Eventbrite, our goal is to build a really -- a general marketplace platform that any marketplace could come on to.

In terms of guidance for next year, we will, at that point, update you on where we will get to with Eventbrite, but I would expect it to take some time.

But we're getting going and moving as fast as we can right now.

Our next question will come from Josh Beck with KeyBanc.

I wanted to ask about Build with Square.

I know that it's approaching 20% of your GPV.

So as we think about that meaningfully improving from here, is it mainly about adding new software partners?

Is the software architecture more or less set?

And then maybe one for you, Jack, just on the importance of AI initiatives when you look at kind of everything that you have on the platform roadmap, would be helpful.

Yes, Josh, thank you for the question.

I'll take both.

The -- so we continue to add new software partners.

We still believe we're in the early phases of Build with Square.

We've been focusing a lot of the efforts on omnichannel, making sure that we can help sellers who want to sell online and off-line.

And there's a series of developers that they hire or come to us to provide third party products to help them along the way.

The software is certainly not set.

We have a bunch of evolution we want to make.

We're really focused on the developer experience right now.

We just had a small conference right after Money 2020 with our developer partners to get their feedback on how we're doing and what we need to improve.

So there's a lot more to come there.

And we do believe this is a really critical aspect of our work.

And we're showing that's working, but we believe there's a ton more potential that we're excited about.

In terms of AI and machine learning and deep learning, this is a huge investment for us as a company, has great impacts across our business and across the industry, obviously.

We've been looking over the past year at internal efficiencies first.

We have been using data science more broadly since the start of the company to manage risk, which is at the core of our business.

But we're now looking at more broad-based to -- how to approach every single problem with machine learning and deep learning in the solution set.

That's both internal efficiencies, such as how we handle support and also sales to providing newer experiences for sellers.

Where we get the greatest benefit from applying machine learning and deep learning is giving more access to more people.

So being able to include more sellers, being able to include more buyers on things like Square Cash, for instance, is where we're focusing the majority of our efforts.

In terms of the platform specifically, we're certainly looking for opportunities to utilize this technology there, but it is one solution out of many and just one consideration, but we are -- we're building up our discipline within the company and have also gone through a training with the company to make sure that we have a best-of-class scale available in-house that we can utilize.

And moving on, we'll hear from Jim Faucette with Morgan Stanley.

I wanted to ask about, as your efforts around large merchants, obviously, you've just introduced the new Square Register.

In the past, you talked about being able to pursue large merchant opportunities largely through inbound interest.

I'm wondering if there is coming or there will come a time that it makes sense to pursue those opportunities more proactively, especially as you add capabilities.

And then just a housekeeping question.

You mentioned impact of hurricanes, et cetera, on Square Capital, but how much of an impact on your overall results was there during the course of the quarter?

Sure.

So on larger sellers, we are definitely seeing tremendous momentum as we move upmarket.

Getting to larger sellers is really a function in my mind of 3 things: It's making sure that we have the product that satisfies what they need; it's making sure that we can sell it to them in the right way; and then ultimately that we can support them.

So we put a lot of investment on the products side because ultimately we want to have an intuitive product that even a larger sellers could self-onboard to.

And one of the stats I am most proud of and excited about for Square is that 80% of larger merchants still self-onboard to Square, they hit our website, they self-onboard, they don't have to talk to someone, and that really speaks to just how well the product has been brought to bear in the market.

From a hardware perspective, the new Square Register, I think, is going to have a step change here.

It brings together the best of Square in terms of hardware, software and managed payments that are all combined.

We talked about Best Beverage Catering in our shareholder letter, an example of a merchant that will roll out Square Register to up to 100 venues.

So that just starts to speak to the scale that we can build for.

In terms of then servicing those sellers once they come on board, we've definitely done a lot to make sure we have the right support and the right account management.

It's a great place to also put things like ML and automation to work on.

We want to help a seller get to the answer as fast as possible and often that doesn't need to involve an actual person.

Often that can be self-serve on our website it can be self-served through our help center, it can be going to our community, and it can be even proactively responding.

And I think this is going to be an exciting place for bots and so on in the future.

In terms of sales, your question on do we need to build an outbound sales channel?

Today, we been very successful with inbound.

And as we've talked to you about before, we allow sellers to self-identify when they do get to that sign up page and we absolutely will reach out to them.

Again, we use ML there to make sure we're reaching out to the warmest leads, the folks most likely to convert.

However over time, we're willing to do both, and we'll continue to evolve the sales go-to-market as long as we can keep the strong ROI that we see, which is a 3 to 4 quarter payback period.

Quickly, on the hurricanes, frankly, not a lot of effect on payments overall.

I think one of the things you see is, it tends to happen quickly.

We will do what we can to help our sellers prepare, making sure they know about things like off-line mode, are really important.

It seems like a small feature, but if your lights are out and you have no power, you may need to just run that Square Register without being able to do the call back through the Internet.

In that case, we're still there for our sellers, making sure they never miss a sale.

And we often see, given just the spread we have by MCC, by merchant size, some merchants actually will see more sales in that period, right, if you're selling, I don't know, camping gear or things that people might fall back to, your sales might actually balloon.

So net-net on payments, very little impact.

Capital, we just see it because of how our models work in terms of the number of payments that are taken in a given period.

Our next question will come from Ramsey El-Assal with Jefferies.

Can you guys comment on your product roadmap at this point?

Are you now primarily focused on sort of leveraging and improving and extracting yields from the product set that you have today?

Or should we expect kind of continued innovation in terms of new product categories kind of coming online?

And then just as a quick support follow-up to that, I want to ask about Square Cash and just, can you just give us a read on how this service is sort of evolving in terms of -- does it feel -- does it look and smell a lot like Venmo in terms of the use cases?

Or is it sort of a different animal, is there more to B2B a different customer demographic with Square Cash?

Or is it -- is it something that's sort of stacked pretty squarely against Venmo, just those 2?

Thank you, Ramsey, for the questions.

So we are -- the approach we've taken on our roadmap is to quickly identify the most critical need for our customer, whether that's a seller or an individual, and to make it best of class -- our solution best of class.

And we start obviously with credit card acceptance and then identified the most -- the next most and next most and next most, and that got us to places like Square Capital, which we believe are hugely innovative.

And got us to a place like Instant Deposit, which we believe is also extremely innovative as well.

So we're going to continue to look at critical needs and solve them in very creative ways, and we do believe that these will create potentially entirely new product services and product lines and potentially business lines.

So we are focused on creating more.

But they have to make, they have to serve a critical need for a seller or an individual.

And we have been focused, the majority of our efforts in the early days, and throughout today, on the underserved, but we have built with a utility mindset.

So anyone, whether you're a seller that's just getting started or you have 200 locations across multiple markets, Square should be extremely valuable to you.

And we want to build a utility that scale us to both ends.

And I believe that we have proven that we can do that.

On Square Cash, we're really excited about the performance of this service and the uptick and how people are using it.

We're thrilled that we've seen Square Cash break into the top 20 of the U.S. iOS App Store and Google Play on a regular basis now, puts it up there with some very notable apps.

And ahead of a bunch of our peers in the category, it's been the #1 finance app consistently for months now.

So we do believe we transcend what our competitors are focused on, which seems to be more peer-to-peer.

We see Square Cash as a spending device, and we see it -- the first critical need was sending money to another individual.

Then we added sending money to a business, requesting money from a business for an individual as well.

And then we issued a card with a stored value behind it, and we are seeing a huge uptick in this usage, and people are using it as a primary spending device, which really excites us.

And we're going to continue to look for adjacencies that solve critical needs for individuals around Square Cash.

The other thing that gets me excited is we do have something that is purely digital, and that is a nice parallel to our core business and hardware.

So we have bets in both places that work together and can be used across our entire ecosystem as well.

So Square Cash represents a really exciting app for us, and we're seeing that in the numbers both in downloads and in usage, but also represents fundamental technology that all of our services throughout the company can use.

Instant Deposit, for instance, was based off this technology.

So we think there's a lot more room around the service and the application, and we're really excited about our roadmap ahead and what people do with it, but also continuing to build more fundamental technology and more fundamental services and potentially business lines on top of it.

We've proven to ourselves that we can do it and we see a lot more in our future.

We'll move on to Jamie Friedman with Susquehanna.

Jack, in your prepared remarks, you talked a bit about omnichannel, in the shareholder letter you talked about some of the unique requirements of omnichannel, like multiparty settlement.

Now more generally, I was hoping to get your comments about how you feel about your competitive position in omnichannel?

What are the opportunities -- but what are the strengths and challenges that you might face as you travel that journey?

Yes, thank you for the question, Jamie.

We are -- this is a big focus for us right now, it's going to be a big focus for us into 2018.

We believe we're extremely well positioned to win here.

And we've been listening to our sellers for quite some time.

We've had a lot of sellers who have come to us, starting off-line and wanting to sell online, and that's who we address first, and we've also seen sellers who are online who want to experiment with pop-ups or physical locations, and again, one dashboard and one set of tools to represent the entire business.

So this is something that we're deeply focused on.

And I think we're in a really good position because one of our strengths, in addition to what Sarah mentioned earlier in self-serve and our speed and access to funds and also our elegance in all of our solutions, is our cohesiveness.

So the fact that you can come into Square through one channel such as Register or Online or Caviar and you get a whole suite of tools that serve critical needs for your business is really powerful, and we haven't seen that matched in many others.

And when it is matched, it's not matched in a seamless way that we have been offering around.

So we are excited to build on that strength, and we do think it is extremely differentiated, and we haven't seen a lot to challenge that, but we don't want to rest on our laurels, we want to continue to make sure that we're building more of those services that work together.

In terms of our challenges, I think it's -- there's a lot we could do.

We just need to make sure that we're prioritizing the things that really matter, and we stay focused on those.

And that's always, it's always a challenge because there are a lot of seller needs and there are a lot of buyer needs, and we get excited about all of them, but we want to continue to go after our discipline which started the company with which is solving the most critical needs first and then doing next-most critical.

So I feel confident in our ability to sequence and our ability to prioritize and our ability to apply the right technology to the problem, but we have to maintain that focus throughout.

Our next question will come from Andrew Jeffrey with SunTrust.

You've had a lot of success with Capital and broadly, I think with AI as evidenced by your continued low loss rates.

You had a competitor enter the market this week with an ostensibly AI-based capital competitor.

I just wonder if you could compare and contrast and think about how you compete as that market perhaps gets a little more crowded.

So I think we always see competitors going after one part of our equation, and we certainly need to watch that.

But again, I think our real strength is the comprehensiveness and cohesion of our offering in our ecosystem.

We're going to continue to apply the right technologies, such as AI, to everything that we do, not just risk, not just capital, but everything.

But I think our strength is the fact that we do have a more comprehensive solution than most others.

And we're certainly watching what others do, but I'm really confident in our roadmap because we continue to prove that we're solving critical needs of our sellers and of our broader customer base that are resonating.

So we need to maintain that focus and we need to continue to look at trends in technology, both in terms of what artificial intelligence and machine learning data science more broadly can do and apply to every aspect of our business, and we remain focused there.

All this goes back to something we believe is a core advantage for us, which is payments, and the fact that a seller doesn't have to think about does this work with x, it just works right out of the box.

No matter how you in the ecosystem, payments comes right out of the box, and there's nothing simpler, nothing easier, nothing faster in terms of getting access to your funds.

So that remains our focus, and we'll continue to see competitors enter at the edges, but we want to make sure that we're focused on that cohesion, which has been a strength of ours.

We'll move now to you, Pete Christiansen with Citi.

Can we a dig a little bit more into this big commerce partnership that you have, particularly as you look to extend Square Capital into the siloed Caviar user?

Do you have the same data insights, I guess, from a risk analysis point of view?

And then how should we think about -- how that relationship scales over time?

And then my follow up would be piggybacking off Jim's earlier question on the sequential downtick on originations, also looks like $8 million was added on to the balance sheet quarter-over-quarter.

Is that related to the same issue that was earlier discussed?

Or should we think of that as more normal run--of-the-mill business?

Right, thanks, Pete.

Why don't I just start there?

Just normal run-of-the-mill business, right?

The Square Capital portion that sits on our own balance sheet is still small relatively.

So we're sitting at about $58 million on our balance sheet.

Cumulatively, we've now done over $2 billion in Square Capital originations that was facilitated.

So just normal course of business.

Recall, we typically use our balance sheet for areas where we are still early and curing the data.

So products like consumer installments, even products like some of our partnerships.

So segueing into that, the important thing with the partnership platform is getting access to the similar sort of data that we see with Square payments, which then helps educate our model so that they can make the right risk trade-off on where to go offer that capital to.

So clearly, with partners like Upserve, originally, which does a point-of-sale more geared towards the restaurants world, a partner like Caviar, frankly, who also clearly is bringing in restaurant-type customers, big commerce seeing a lot of sellers business online, and these are all great partners because they're bringing that same type of data that can flow through the models that we have built for our competitive advantage are.

It also allows us to serve that loan back in a really seamless way.

I think as Jack talked about in the last question, as competitors come and go, what is beautiful about the product is it's getting served to you in your dashboard, where you see your business, and we're actually matching the repayment against how your business is performing.

And you can really only do that when you're in the payments flow.

And so that's why we look for those partners.

It's why we believe we can be very additive to those partners, and it's why we built it in a very scalable platform like way so that as we work with someone like big commerce, they don't need engineers on their side to make this work.

We've made it now so plug-and-play that new partners can come on in a really seamless, easy, fast way.

Great.

And we've seen the Square commercial ads on TV a lot more often.

Should we think of advertising spend increasing as an overall percentage of OpEx going forward?

Sales and marketing spend, as you can see, I mean, it's our variable spend, and it does move up and down quarter-to-quarter, period to period.

And it really depends on partially time of year and partially what we're talking about.

So we've had a lot of launches through this year, starting in Q1 with our first vertical point-of-sale push around retail point-of-sale, appointments is another vertical point-of-sale, but we've really pushed on the retail side.

From there, we've invested behind a new country in the U.K And now with Square Register launching, we want to make sure we continue to position Square, not just as a start accepting payments, but really more as we are the point-of-sale, we're an e-commerce platform, we can help you start, run and grow your entire business with many different pieces.

And I think Jack and I have talked about this on numerous calls about where we have most work to do is awareness and just making sure that larger sellers, in particular, know that Square is the partner for them.

We're not just about micro businesses.

So you will see sales and marketing kind of rise and fall, but how we are monitoring it internally is always coming back to this discipline of a 3 to 4 quarter payback period, and that has remained really consistent even in quarters like the last where we leaned heavily into overall aggregate dollars of sales and marketing expenditure.

And our final question will come from Brett Huff with Stephens Inc.

Two quick ones.

One, can you talk a bit more about your marketing product?

That's something we're pretty excited about.

It seems like a really high ROE product for the merchant and something you guys are uniquely positioned on.

And then second of all, the way you talk about the industrial bank license wanting to inhouse some of the lending function, you mentioned just the speed of decision making, does that also include keeping more on your balance sheet?

We've gotten several questions on that.

So on Square marketing, our CRM product, we're very excited about it, too.

So thank you for talking about it.

If you look at -- we talked a little bit more about this in Q2 actually.

What we see with Square marketing programs is they generate about $10 in sales for every $1 in spend by the seller, that's an incredible outcome for small businesses.

And I think what's really unique in the way Square does this is they can actually close the loop for them because we can tell them you put this marketing campaign out, you sent it to Jack, Jack walked into your store and used the card that we've already tagged to Jack.

So Jack doesn't have to do anything.

In fact, we can even take the $5 off right at the POS.

It's a beautiful experience for him, and the customer -- and the seller knows that the marketing campaign worked.

In terms of loyalty programs, we see about a 70% increase in buyer visit frequency.

We have about 90 million unique customer profiles, with some 350 million digital receipts.

I mean, it is a platform that has scale to it.

In terms of seeing it in our numbers, it would fall within this subscription services line, but I think more broadly, we view it as we have the most CRM forward point-of-sale system out there, and so that helps us compete against the kind of old-school POSs that are really just dumb terminals, and even the folks that are trying to build next-gen POSs, they just don't have that sort of platform, that link back to the customer.

So expect to hear more, but we're excited by the momentum that's building, and we think that's part of why you saw the acceleration in growth, right?

It's just one of many levers as to why adjusted revenue is accelerating quarter-over-quarter and year-over-year.

In terms of the capital, the question on does our -- does -- do we need more on balance sheet as we move to things like the ILC?

Right now, our expectation is to keep our strategy as is -- hopefully I heard your question correctly -- and continue to work with third-party investors.

We still see tremendous interest in this product overall.

We talked about adding in the Canadian pension plan last quarter.

Great example of the type of investor that's now coming to Square Capital as the data has cured and they can see the quality of the product that we're talking about.

CVD clearly has nice long-duration, over $300 billion of assets under management and looking for kind of more long-term returns.

So I think that also helps with our cost of capital.

So our expectation for now is certainly not to keep building up our balance sheet.

We usually talk about it being somewhere in the 10% to 15% max of overall cash equivalent, marketable securities, and we're still well under that, with over $1.1 billion sitting on our balance sheet right now.

Ladies and gentlemen, that will conclude today's program.

Thank you for your participation.

You may now disconnect.