Block Inc (SQ) 2018 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Square Third Quarter 2018 Earnings Conference Call.

I would now like to turn the call over to your host, Jason Lee, Head of Investor Relations.

Please go ahead.

Hi, everyone.

Thanks for joining our third quarter 2018 earnings call.

We have Jack and Sarah with us today.

First, we want to remind everyone of the format of our earnings call.

We have published a shareholder letter on our Investor Relations website, which was available shortly after the market closed.

We will begin this call with some short prepared remarks before opening the call directly to your questions.

During Q&A, we will take questions 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 in our Investor Relations website.

An audio replay of this call will be available on our website shortly.

With that, I would like to turn over to Jack.

Good afternoon, everyone.

We're going to try something a little bit different here.

Instead of reading you prepared remarks to start the call and the conversation, Sarah and I are going to go through a list of the highlights that we've seen throughout the quarter that we wanted to bring to your attention.

So I wanted to start with why we're here as a company.

Our purpose is to empower people into the economy, enable them to participate in a way that they haven't been able to in the past.

The way we do this is by focusing most of our efforts on helping sellers make a sale and ideally helping them make more sales.

One of the things that we have done extremely well is increase the access to sellers in the first place.

A number of sellers and individuals could not even participate, could not get on the financial networks, and therefore could not participate in the economy.

This leads into one of the biggest highlights for the quarter for us, which was the launch of Square Terminal.

We have seen these black rectangular boxes on countertops everywhere around the world.

This is the common device that people use to accept a credit card and make a sale in the first place.

We answered it originally by enabling people to take their mobile personal device, like an iPhone or an Android device or an iPad, and plug in one of our readers or pair it wirelessly.

We decided that we could do better and serve an entirely new market by building an all-in-one device that doesn't require a third-party tool and enables people to sell in the way that they are used to.

We built this with a touchscreen, we built this with a receipt printer, and we built this with usability and speed in mind.

We launched it first in St.

Louis, in San Francisco and New York City.

And we have pretty high expectations around it.

One of the things that we're most excited about is to see how people use this.

We do believe we've built something with a lot of general utility, and that will enable people to use it in ways that we weren't necessarily expecting.

We have already seen some of these use cases manifest in the form of restaurants using Square Terminal to go directly to their customers right at the table and charge them right there, so bringing what an experience that you typically have within Europe into the United States.

As well, this affords our sellers a lot more convenience and it saves their customers a whole lot more time, which enables our sellers ultimately to focus on making more sales.

Another highlight has been our work on the platform.

We have built our company around a series of small internal APIs and STKs that allows our teams to move very quickly to deliver new products that will benefit all of our customers.

An example of how this has manifested in the past is through the Virtual Terminal, Square Virtual Terminal, which uses internal APIs and our internal platform to move really fast to come up with a product and then execute it immediately so we can get it out to people as quickly as possible.

We added a dimension to our external developer platform this quarter that we call Reader SDK, which allows developers to connect directly to our hardware and build entirely new experiences like point-of-sale experiences that are not currently on our roadmap and things that we probably won't go in the direction of.

One manifestation of this that we saw was Shake Shack, who uses a Reader SDK to power their kiosk, which enables their customers to preorder right at the location and then pick up their hamburger and their fries and go about their way.

This ideally speeds people through the line and ultimately allows Shake Shack to sell more burgers and enables them to see more customers.

So the platform continues to be a push for us and continues to be something that we focus on, allows us also to fully realize what we need to do in omnichannel commerce, which is enabling people to sell in every single channel and meet their customers where they are.

Finally, as you all know, we have kicked off a CFO search.

The CFO search is being led by David Viniar, who's our lead independent director; and Roelof Botha, who's a director on our board, both former CFOs who have a lot of experience and a great network of folks that can find a great CFO for us for the future.

That search has been progressing.

We have been interviewing over the past few weeks.

We're seeing a ton of really amazing candidates, really happy with the quality and also the amount of talent that we're seeing and also the alignment to our purpose.

People want to come here.

They want to help sellers make sales.

They want to help extend access into the financial system and empower people into the economy.

And that is what we're looking for the most.

We have a really high bar.

We will not be sharing a time line, but we are working with urgency, and this is my #1 focus at the company is to make sure we fill this role.

We do have a benefit and advantage in that our company structure allows a lot of freedom and optionality and also autonomy through our various business units.

So we do have a GM structure with leads for Cash, for Caviar, for seller, for the platform, for Capital, and they operate and make all the decisions around their business, enabling me and our CFO to make investment decisions around the portfolio.

The other advantage that we have across these businesses is they work together as an ecosystem, so they're encouraged and incentivized to make sure that they're providing tools and infrastructure but also experiences that other business units can utilize.

So that gives us a pretty good advantage in terms of running the business and managing the business going forward.

I do want to take a moment on behalf of myself, everyone at the company and everyone on this call to say a huge thank you to Sarah.

She has been an amazing partner to me and amazing partner to our sellers and the folks that we serve, and we wish her all the best in her new adventure and her new role.

And with that, I'm going to turn it over to Sarah to share some of her highlights.

Great.

Thank you, Jack.

So 3 things really stood out to me as highlights for this quarter.

The first was the revenue growth we showed at scale, and I know you hear that from me every quarter, but every quarter I find it quite remarkable just how fast this company is growing.

The second was EBITDA growth.

So not only are we growing fast on the top line, but even as we grow, I think we're showing really strong financial discipline.

And then finally, we did lift guidance given the momentum we're seeing coming out of Q3 as we head into Q4.

Let me take a second on each of those.

First, on the revenue growth.

This is the sixth quarter of accelerating revenue growth.

To put it in perspective, our total net revenue grew 48% year-over-year, 46% organically, but our adjusted revenue, which is really what we focus on, grew 68% year-over-year.

Taking out the acquisitions of Zesty and Weebly, which we did in Q2, that growth rate is 56% year-over-year, and that is still accelerating off of Q2.

So I think that's remarkable, just really speaks to the strength of the ecosystem and the interplay that we see across all of our products where each of them makes the other stronger.

From a profitability standpoint, as I noted, adjusted EBITDA was up -- was $71 million.

That's up 107% year-over-year.

So it outpaced revenue growth, coming back to that point about showing financial discipline as we grow.

From a GAAP perspective, it is worth noting that this is technically our first quarter of GAAP profitability, where we had net income of $20 million, but we want to be fully transparent about the impact from Eventbrite.

So if you recall, a year ago, we made an investment in our partner, Eventbrite, and we will work with them to bring Eventbrite's GPV onto our platform as part of our marketplaces effort.

Eventbrite had a very successful public offering in Q3, and we had to mark that investment to market.

So it actually had about a $38 million positive impact in Q3.

Without it, our net loss was actually $17 million.

And then finally just on the guidance front, we are seeing strong momentum coming out of Q3.

And so to that end we have raised the guidance of total net revenue to $3.26 billion to $3.27 billion.

Adjusted revenue is now guided to grow 60% at the midpoint.

That's a 5-point increase over the prior guidance and, again, just speaks to the momentum that I see in Square's business right now.

And then finally, adjusted EBITDA, we are guiding $250 million to $255 million, which is also a lift from the prior guidance.

So let me just close by saying it's been an incredible journey with this small private company that I joined when we had about 200 people into the juggernaut that I think I belong to today, an amazing strong public company that is having impact; impact on our sellers, impact on their buyers, impact on consumers broadly, and that makes me really proud.

And I could only -- we can only do that because of the team that we have in place as well that are going to keep carrying it further and further from here.

So I will be supporter for life.

Thanks, everyone on the call, too, for your support.

I know sell-side analysts don't often get a shout-out, but you make us better by questioning us as you're about to do, and we're appreciative of that.

So with that, let's turn it over to the operator for questions.

(Operator Instructions) Your first question comes from Tien-tsin Huang with JP Morgan.

Let me just say up front, Sarah, I'm going to miss working with you.

I want to say thanks for everything.

From a question standpoint, not to get too emotional, I have the Square Terminal.

I definitely want to ask you guys about Square Terminal.

Just is there a way, Jack or Sarah, to rank this in terms of importance as a product for Square?

I presume it was a really big R&D investment, so any comment on what it might do?

What it might bring in terms of volume?

Or how it changes the TAM?

And then also, the gross margin model, is that -- should we assume it's going to be similar to your current hardware gross margin?

Yes, thanks for the question.

So if you look at the market, we believe that this is huge.

You see these black rectangular boxes, they're dinosaurs like Stegosauruses, everywhere in the world, not just within the United States but everywhere around the world, and people have become accustomed to this form factor.

One of the things that we hear from our sellers directly is they don't want to use their personal device to accept credit cards, and this gives them an option to make sure that they don't have to compromise on that.

They can pick up a Square Terminal and use it for whatever they need.

And one of the most exciting things to us about the launch of Terminal is that we fully expect them to surprise us with how they use it and where they use it.

We saw that with original Square Card reader, and I imagine we'll see the same, by an order of magnitude more with Square Terminal.

So this is a launch that we've been real excited about for quite some time.

We're really excited to get it in people's hands and see what they do with it.

I think from a company perspective and looking at our execution, this represents an immense amount of complexity that we were able to make very, very simple.

This is end-to-end.

This is hardware and software and operating system.

It ties completely back to our cohesive ecosystem of seller tools, so it is an acquisition channel for us into that broader ecosystem, which ultimately will help better retain customers as they continue to hire us for more and more things like Payroll, Square Capital, customer relationship management and whatnot.

So this yet again removes another excuse from the table to join the Square ecosystem.

And we're really, really proud of it and really proud of what it represents.

And then I'll let Sarah answer the effect on the gross margin.

Sure.

Thanks, Tien-tsin.

So just from a TAM perspective, we did put in the shareholder letter that we see about 2 million standalone payment terminals in the U.S. alone.

I think one place that folks often underestimate Square, that was by just looking at current market and imagining the share we could take from that rather than thinking about greenfield opportunity.

And I think that's really been the true unlock when we go into a market, is doing the work to let sellers know why they should be up and on the system, why they should be taking electronic payments.

And I think this is yet another device to get there.

From a gross margin perspective, as you know, with hardware, we've always leaned in on how we price our hardware.

We do view the gross margin loss that we take as effectively a sales and marketing tool to get folks on because then ultimately, we can monetize them through the payments that pass over those devices and by the other products that Jack talked about that then get attached.

Overall, if you look at the business, we're still very much seeing $1 in today has a 3 to 4 quarter payback period, and we're still seeing positive dollar-based retention, i.e.

every cohort that joins effectively every year continues to grow, and that's still true of our youngest cohort.

So no change in how we will view hardware, although of course, the hardware gross profit margin has actually been getting consistently better as time has gone on, particularly as products like Square Register and new Square Terminal, we price them a little closer to cost.

Your next question comes from Dan Perlin with RBC Capital Markets.

Let me add my appreciation.

I hope you'll continue to read ponderings at some point, Sarah.

We'll happily send it to you.

I had a quick question, and this is a little nuanced.

The GPV growth did break the 30 barrier this quarter.

We saw a little bit of drop in the take rate, and then we've seen this discontinuation of this inflection up in net revenue growth in totality because of subscription and services.

And I'm just trying to reconcile if there's anything about the type of seller, the mix or even some of the new solutions and the correlation that you get with GPV as you think about driving this model forward.

Sure.

Thanks, Dan.

So from a GPV growth perspective, I mean, I just view it still as more or less asymptoting.

Like if you look back through the last 5 quarters, it's gone 31, 30, 30, 30, 29, which I just kind of view as more of the same.

And that's how you build a really big business is when you can continue to grow at the same sort of pace even though your scale is building every single quarter, right?

When you're doing $23 billion of GPV for the year, you're starting to get into the greater than $80 billion for the year, right?

These are big numbers.

So no change there.

What will continue to drive it is still micro.

We still believe that there is massive opportunity of bringing small businesses up and onto the system, and everything we launch is about how do we bring more to the system, as Jack talked about in his opening remarks.

Of course, there's the ongoing then move upmarket into larger merchants that you're alluding to.

It really made me happy to see the percentage of GPV coming from larger merchants now at 52% overall because it shows that the fulsome solution is resonating regardless what size you are.

And then of course, omnichannel, so 1 of our 3 big pillars for the year, is a great way to make sure that we're there no matter how the buyer is coming to the seller.

So whether they're offline or online, in a marketplace, you name it, we want to make sure we holistically get that whole book of business.

And so that continues to drive growth.

And then layer finally international on top of all those things, those 3 things are true in every country that we look at.

In terms of take rates, as you know, I don't focus on the take rate.

In the end, what we're optimizing for is how much dollar-based margin can we take home from a given seller or across a cohort of sellers.

And so our goal is to get them up and on the platform.

That does sometimes mean we'll custom price, for example, for the larger sellers, although keep in mind, over 80% still self-onboard, which I find remarkable.

But then, can we now upsell and cross-sell them to things like Payroll or Capital or Invoices or Square Marketing, you name it.

Like that's really what we're going for ultimately is, how do we maximize the dollars of margin?

We will now take a call from Yassin Terou of Yassin Falafel.

I'm a seller of Square.

I've sort of been here like now for 3 years.

And I love Square.

I love the value that Square represents.

But as a seller now and as a business who go from selling $20,000 a year using a credit card to over $1 million a year now, as our business is growing, I find I like love the value of the Square.

We have a lot of company, a lot of competitors reaching out to us and asking us how they can get our business and how they can help.

And they're trying to get the business of the merchant who use other than Square.

They're trying to get the business of Square.

So how I can answer them or answer the small business who's asking me the same question, saying, you are -- Square is good for a small business and not for a business who are doing over $1 million a year.

Well, Yassin, it's really good to hear your voice.

I mean you're not just a business on Square, you're a movement.

Very inspiring, and congrats again on winning Nicest Place in America.

You're the nicest person I know.

So thank you for your business.

We get this question a lot.

Should we focus entirely on building for a small business or building for a larger business?

Ultimately, we want to build a utility that scales with the business, and we want to make sure that when you use Square Register, for instance, or Terminal, that it is independent of the size of your business, and in some cases, even the category of your business.

And we need to make sure that we are scaling everything that we deliver to you from the product to pricing to support in a way that scales with your business.

And scaling with your business means that we continue to handle some of the trickier operations for you, so we're giving you effectively time back so you can focus more on the amazing business that you're building and focus a lot more attention on your customer.

So we love any feedback in terms of where we're seeing this friction to your growth, but ultimately, it's the wrong answer for us if we're getting in the way of any one of our sellers growing.

And we've seen a lot of sellers go from 10 locations in the United States, for instance, to over 40 in multiple countries around the world, and we want the same for all of our sellers who have that similar ambition.

But if folks want to stay small, we serve that, too.

So we build with an intention of scalability and that people can use the exact same tool and it grows with their business and ideally helps them grow as well.

Thank you again.

Your next question comments from Darrin Peller with Wolfe Research.

Sarah, I just want to say congrats to you again.

But on the question side, we saw the Cash Card again moved up on the list of drivers really beyond a very strong subscription, its offer side of the business.

Is there any way you can give us more color on the run rate of spend you're seeing there?

Or maybe update any details around the number of users since you did at the end of last year?

Clearly, it seems like that is probably one of the key areas you're still investing in.

And just maybe touch on the investment levels in that business.

Sure.

Why don't I start just on some of the more metric pieces, and then, Jack, grab the how we're thinking about where the business goes from here?

So we're not giving you more updates on this call.

As we talked about in Q2, on Cash Cards, customers have spent $250 million in Q2, so it's $3 billion annualized.

That was almost 3x from what we gave you back in December.

And what I can say is we've definitely continued to see really strong momentum.

As you can note, Cash App continues to be a top 25 downloaded free app in the App Store, really speaking I think ultimately to the utility that it's bringing.

So why don't I pass the baton to Jack there?

So the Cash Card has been a pretty important driver for us.

We do see people use the Cash App fundamentally as you would expect them to use a bank account.

So they'd store money with this.

They can direct deposit a paycheck using the ABA number that we give them.

We can issue them a plastic card that's accepted anywhere, Visa is accepted, they can use that same card to go to an ATM to withdraw paper cash.

And of course, it is a peer-to-peer app as well, so they can send and receive money from friends and family.

We continue to see a lot of value in adding more features on top of not just the Cash App but the Cash Card itself.

So Boosts are a great example of this.

This is one of the first times that I'm aware of that a rewards program with instant payback exists on a card, where we're actually paying attention to where our customers go in the first place.

So if you use your card at Lyft, for instance, you get an instant 10% back.

If you use it to buy coffee, you get an instant $1 back.

If you use it for food delivery service, you also potentially get an instant 10% back.

So we've been observing what our customers are -- where our customers are spending the card and then making sure that we are aligning the incentives with how we think about features and products going forward.

But all this comes back to us being able to serve a traditionally underserved and even unbanked audience because of our focus on access and because of our simplicity and just the point of view that we take within the app itself.

So we're really excited about the continued momentum.

We continue to see the results of this in things like the App Store downloads, for instance, where we consistently see the Cash App break into the top 20 of the top 250 free apps on the iOS App Store, for instance.

So it's a good lagging indicator of the attention it's getting and also the usage, but we're really, really pleased with the progress and also pretty excited about what we can build on top of it.

Your next question comes from Lisa Ellis with MoffettNathanson.

I'll pile on, Sarah, congratulations, and we're all going to miss you.

I wanted to ask about Weebly.

It's been a couple of quarters now, and I think, Sarah, you called out that omnichannel is one of your big pillars for the year.

It's been a couple of quarters since you've had Weebly.

Can you comment on some of the synergies that you're seeing?

And then also just maybe an update on the broader strategy to participate more broadly in the high-growth e-comm areas.

Yes, thank you for the question.

I'll start, Lisa, with the strategy.

So we have a number of sellers who start offline, with offline businesses in the physical world and want to sell online.

And we also have a number of sellers who are selling online today but want to open things like pop-up shops and physical locations to get more visibility in their communities that they're trying to serve and trying to get into.

We want to make that transition seamless, and that's the whole thesis behind getting Weebly and Square together in the first place, is we don't want people to have to think about whether I'm selling online or offline, but we just want them to think about selling.

And that means meeting your customer where they are, whether they be halfway around the world through an e-commerce channel or through -- coming through your door in the first place.

So I want to make sure that we're building as much flexibility for our sellers as possible.

Weebly was always interesting to us because we've had a long-term partnership with them, so we knew a lot about the company, what they cared about, what their purpose was, and we saw a lot of alignment, and it just made perfect sense to get the 2 companies together.

We've been working together through a partnership as one of our options through our partnership network.

And as we have gotten together, we've started asking the questions of what's most important to integrate and taking this from a customer use case direction.

So like what is most critical to get a seller going and started immediately so they can sell immediately on -- both in an offline world and an online world?

So you're continuing to see updates onto Weebly and Square to that effect.

But all this is going towards that goal of being able to serve sellers across multiple channels, not making them think about which channel they're selling into, so they can focus entirely on making the sale and ideally making more sales.

Terrific.

And then just maybe quickly as my follow-up, I'll just ask a question about macro.

I realize no sign of a recession yet, but given your exposure to the small business segment and then also the working capital side of your business, how do you think about the impact of an eventual macroeconomic slowdown on network?

Sure.

So I mean clearly, we're in Q3 seeing tremendous momentum in our business.

So when adjusted revenue is growing 68% year-over-year, 56% organically, clearly that's very symptomatic of a strong macro.

But also the value proposition that Jack has talked about, that if you're on Square, we're helping you grow your business, never miss that sale, and we're finding other tools that make it more and more seamless, whether it's access to Capital or Square Capital, access to things like Payroll and so on, so doing that the best that we can.

The other things I look at, the NFIB Index is always one to go back to, in my opinion.

I think it was at 108, 107.9 in September.

So it remains near an all-time high.

So clearly, the expectations from small businesses are high, and you can see that in the guidance that we gave you, too, for the full year, so 60% at the midpoint.

As we look forward and think about the impact in any recession, I think it's important to note first that payments are not discretionary.

So unlike, say, a tool that you might use just to grow your business, payments is not something you're going to suddenly decide to not accept when times are tougher.

We also think our value proposition is one that includes a lower total cost of ownership.

And so part of that is because of the cohesion of what we've built, so that you're getting that hardware that is best in class, but it's completely linked into the software.

You're getting all of the pieces of managed payments that are built around that.

And so we know that when people do a side-by-side, that Square always compares quite well from a pricing perspective.

And then beyond that, it's about how do we build diversity into the seller types and into the different products that we have.

We think that diversity of the ecosystem will help ballast in any sort of downturn.

And then finally from a risk perspective, we were born in a world where we had to move money off from the get go.

So we've always used machine learning.

I think the stat we gave you most recently is 99.95% of all payments that pass through Square are automatically pass or fail.

They don't touch a human being, and that's because of the investment that we've done in machine learning and deep learning to do that.

And so our belief is that we'll also make sure that when we do things like Square Capital or the new consumer installments that we're being very mindful of the risks that we're taking and using the best possible technology to do it well.

Your next question comes from Bryan Keane with Deutsche Bank.

Just wanted to ask on Square Installments, how does Square get paid there?

And then secondly as a quick follow up, as we start to think about next year, is the formula still going to be to invest for top line?

Or do we go back to growing EBITDA margin expansion mid-single digits?

Sure.

So from an installment perspective, it's very analogous to what we do with Square Capital with the seller.

So in the case of an installment, right there at the point of sale or maybe online, the consumer says, I would like to pay for this purchase over an extended period of time.

And if they click yes to that, there's a really neat customer experience that happens.

But in effect, we pay out the seller so the seller is now good to go and move on with their business, and we take on the facilitation of that consumer loan.

And then in effect, if they pay us back, we're making money as the payments are returned to us.

And I think our long-term strategy there would be very similar to what we do with Capital today in terms of making use of third-party investors to make sure we true sale that off our balance sheet.

In terms of looking out to next year, we're still in the midst of annual planning.

It's fun to see just new roadmaps starting to emerge and just how many different opportunities the company has in front of us.

We will lean into those 3 pillars that we talked to you about in 2018, omnichannel, banking services and international.

Those were meant to be areas that had longevity to them, that you wouldn't just do them all in a year.

And I think we have real momentum in all 3 as we head into 2019.

So from that perspective, maybe a quicker earlier read.

Our expectation on top line growth for 2019 is greater than 40% adjusted revenue growth.

I go back to what I said in my opening remarks.

I find it really incredible that at the scale Square is at, we can still put up numbers like that.

And then from an EBITDA perspective, you should expect margin expansion similar to what we've achieved right now in 2018.

Overall, my net takeaway is, we still see a huge amount of opportunity in front of us.

We want to keep investing against that, but we want to do it with financial discipline.

Okay, that's helpful.

And Sarah, you'll be missed.

Good luck.

Thanks, Bryan.

Your next question comes from Jim Schneider with Goldman Sachs.

Sarah, good luck, and you will be missed.

I guess my question would be, to put the previous question a little bit differently, more for Jack, Sarah, as you've been CFO, you've sort of established an unwritten contract with investors to sort of deliver a higher revenue growth with maybe a little bit less EBITDA margin expansion and sometimes in investment phases of the business.

And conversely, if the growth of the business were to slow a bit, deliver more EBITDA margin expansion.

So I guess, Jack, are you -- to what level are you committed to that philosophy on a go-forward basis regardless of who's CFO of Square?

Yes, we're committed to formulas that work.

We're not expecting significant changes in plans with the addition of a new CFO.

We have a business that is highly efficient, and we are capable of continuing to make investments around inventing new technologies to serve our customers.

But all of it has to follow from being able to innovate and to serve our customers in new markets and in new ways.

So we're letting that lead us ultimately and making sure that we're delivering something that is remarkable, that stands out from everyone else and continuing to build into and invest in our differentiators that set us apart.

Number one is that cohesiveness of our ecosystem; number two is the speed at which you can start with Square; and number three is our ability to be more self-serve than our competitors; and number four is the elegance of our designs and also our hardware.

And by increasing each of those 4 dimensions, we continue to win the market.

So that is what we'll be continuing and that's what we're focused on.

Discipline has always been really important to this company, and has been so since day 1. And we benefit from the amount of discipline we have and also the amount of understanding and control of the business that we have as well.

That's helpful.

And then maybe as a follow-up, if you look at the software solutions you've launched, whether that's Square for Retail or the Restaurants or others or Payroll, for example, can you maybe give us a sense of how those have been tracking in the market, how they've been adopted, which ones you're most excited about, but also, ultimately in the next 2 to 3 years, how big a piece of the revenue of Square do you expect them to be on a subscription revenue basis?

Well, I'll start with the first part of that question.

So we did see a pretty big opportunity, not only to think about our offerings in a more vertical way, like for Restaurants and Retail and Services, but also to add more services like Payroll that helped increased the operational efficiency of one of our sellers and really meeting one of their core and critical needs.

So we've built these with an ecosystem mindset.

We've built these with a mindset of each one should be an acquisition channel for us, each one should introduce other products within the ecosystem so that people are aware of the fact that they may come in as a restaurant, but wow, I can also add delivery as a superpower to my restaurant through Caviar, and I can also pay all of my employees now in all 50 states through Square Payroll, and I can communicate with my customers through the receipts through our CRM product.

So we want to make sure that we are being hired for multiple jobs, multiple parts of the business.

So our emphasis is on the ecosystem and how they all work together rather than each individual part.

And as we look out years ahead, we want to strengthen that ecosystem.

We want to enrich it.

We want to fill it with services that are most critical to help a seller grow their business.

And then we've added this new dimension of consumer with Square Cash.

And even that is pushing back into the ecosystem.

We talked about not too long ago how we pay our Caviar couriers through Square Cash.

You have an option of getting your payroll through Square Cash, which allows you to get instant access to your funds or use the Cash Card.

So you can imagine a lot of integrations that are extremely beneficial to a seller and also to an individual.

So the strength of ecosystem is really something that we want to continue to build and we're really excited about.

And then so maybe just on the percentage of total revenue, I mean I would pull you back from thinking about it as segmented out that way.

So frankly, what you see in our P&L is the business model with which we've chosen to monetize a particular product, and we typically try to match it to the place where we think most value is being created on the other side for the customer.

So for example, software products like invoices and appointments for sole proprietors, those only get monetized through our payments business model.

So for example, invoices is 2.9% and $0.30.

If you look at appointments, we changed back in Q2, so if you're a sole proprietor, it costs 2.75% for the cost of making the booking or effectively the consumer paying you for the appointment, but there's no cost to the software.

There's other places where we lean the other way and we recognize that perhaps we want to make sure there is a software fee.

Payroll is one of those examples.

And even there, you will see us kind of shift around between maybe a monthly fee and then a fee per actual employee because as we more and more can push employees towards Cash App as a vehicle for them to get quick access to their payroll, then we can actually monetize that through the card that they take that they then go spend anywhere in the United States, so Walmart or if they go online with Amazon or Lyft or whomever.

And so I think that goes back to the strength of the ecosystem that Jack just spoke to from a product perspective, but it also creates this very strong business model, too, because we have multiple levers and decisions around where to monetize.

So we don't just sit and think, okay, what can subscription services be as a percent of revenue as kind of a forward look, if that makes sense.

Your next question comes from Jason Kupferberg with Bank of America Merrill Lynch.

This is Ryan Cary on for Jason.

I wanted to ask a little bit about transaction-based profit margins.

I would assume there would be some pressures.

Large margins continue to become a bigger percentage of GPV and as EventBrite onboards.

But today you've clearly done a nice job offsetting this with the higher revenue products.

So looking forward, should we expect transaction profitability will remain generally stable?

Or at some point, does the impact from larger merchants become too large to offset?

Great.

Thanks, Ryan.

So I think you're kind of nailing the put and the take in a way that in many cases, particularly at the take rate level, there are some products where clearly we're able to price higher than 2.75%, so things like Virtual Terminal, things like our API platform.

And those have clearly had an upward inflationary impact on both take rate and then even in many cases, on transaction profit.

If you look at there are other sides to that, the U.K. is often the one I use, where we start our pricing at 1.75%.

So it effectively would have deflationary impact on take rates, but the margin there actually is quite good because it's a very heavily regulated market.

So there's kinds of puts and takes on all sides.

Ultimately, as we add larger merchants and particularly as we do marketplaces, we absolutely want to make sure we remain competitive because what we are going to solve for is absolute dollars and how do we make sure we keep growing absolute dollars of gross profit and ultimately absolute dollars of EBITDA.

And so we have shown with larger sellers that we're willing -- we've been willing to be flexible where it's made sense.

But I think also as we just bring them more value in the product, they are willing to hit the bid in terms of our pricing.

Joe & The Juice was a good example of a seller in our shareholder letter, where clearly they're quite large, hundreds of locations, I think, across the United States, and yet they're willing to be on the Square platform because we give them that wonderful checkout experience with Square hardware.

So as long as we keep adding value into the ecosystem, we feel very good about the value we're bringing, and hence, the profit dollars that we can make.

Your next question comes from Josh Beck with KeyBanc.

Sarah, congrats on a great run at Square and best of luck in your next role.

I wanted to ask on the Square Reader SDK, and I'm just wondering, as you get into new verticals like health care, if we could see maybe an increase in the number of ISV partners that you're working with above and beyond maybe what you're achieving when you were just offering Build with Square.

And then secondarily, any updates you can share on Eventbrite timing and how to think about the volumes there?

Yes, so on the Square Reader SDK, certainly the potential exists for new verticals, and we've seen some people dabbling within this.

Yes, the most important thing for us within all of our SDKs, not just the Reader SDK, is to make sure that we're attracting developers.

And to do that, we focus on the developer experiments -- experience that we provide, making it simple and straightforward.

But also taking opportunities to bring them all together.

So we recently completed our annual partnership conference, which brought a bunch of our developers together to share what we're focused on, what's new and to get them talking and get them focused on providing more and more remarkable solutions for their customers.

So we do see this as a way to expand into entirely new verticals that we don't currently have on our roadmap and watch and experiment and learn ultimately.

In terms of Eventbrite timing, we have nothing to disclose today but we'll keep you updated as we have more meaningful information.

Your next question comes from Jeff Cantwell with Guggenheim Securities.

Congratulations on the job you've done, Sarah, and best of luck to you.

If I could just ask you a follow-up on your earlier commentary about subs and services revenue.

It seems like you guys are putting a ton of focus on value-added services, so I understood what you're saying about the various components and how they show up in different lines in the income statement.

But if we looked at the contribution of subs and service revenue, I believe it was 40% this quarter versus 25% a year ago.

So I just wanted to ask if you could maybe elaborate a little bit about how you see that contribution to total adjusted revenue changing over time.

Will we ever get to the point where we see, call it 50% or so of Square's revenue coming from subs and service, just as an example?

Sure.

Thanks, Jeff.

So I mean it has been an amazing area for us.

So when a business is growing at 165% year-over-year or 117%, excluding acquisitions, I mean, clearly, it has a lot of momentum to it.

If you look at what's within the subscription and service that really drove that growth, Instant Deposit, Caviar, Capital and Cash Card, all are 4 areas that we called out.

Within Instant Deposit, it's worth noting that, that is symptomatic of both a way that we can continue to monetize the seller base by giving them more speed.

As Jack talked about, one of the elements of our remarkable solution is fast, and by giving them instant access to their taking for the day, we can really change the whole equation of working capital for them.

But also on the cash side, Instant has become a really high utility for consumers that are sending P2P.

And so that growth in Instant Deposit is also symptomatic of just how well Cash App has continued to do.

Beyond that, Caviar, we talked about it in Q2, still growing at 100% year-over-year in Q2, and that momentum continues.

Capital, you can see a very nice quarter, up 34% year-over-year, and I talked a little bit earlier about why Capital is so important to the overall business.

And then finally, Cash Card is net new.

If you recall, we didn't have it a year ago or we were just beginning.

It's now become the fourth largest contributor.

And again I think that comes back to the utility that Cash App generally is bringing.

So I don't want to put a stake in the ground of when 50% is possible, but I can tell you that certainly, the products that are monetized through subscription and services, all of them feel very healthy right now with a lot of momentum as we go into Q4.

I appreciate that.

And then a question for Jack.

I', wondering if you could explain something to us about your thinking with how you've built Cash App.

Clearly, you have all the credibility in the world in the realm of social media.

So my question is what do you see as the pros and the cons of having a social feed in Cash App?

And have you ever considered doing that?

Yes, it's a good question.

So we definitely have considered and learned from what our peers in the industry are doing around making peer-to-peer transactions more social.

I think we do have opportunity to certainly open communication channels within the Cash App, probably not in the same way that our peers have done.

But there is a big differentiator from how we think about the Cash App versus others.

We don't see it as pure peer-to-peer stop.

We see it as a way to provide banking services for folks, and that is the audience that we're serving, and that's where we're seeing the most resonance within the market.

So we see people store their money, we see people spend their money on the Cash Card and withdraw from ATMs and deposit their paychecks through the direct deposit function.

We see people buying and sell Bitcoin, and of course we see people with peer-to-peer transactions.

But our focus is really on the spending aspect of cash and recognizing every channel that people want to spend money within, and then making that a lot easier.

And then giving them more availability and access to features that they typically haven't in the past.

Like again, Boost is a good example of this, where a lot of the folks who reserve just have never had access to a rewards program, period, much less one that rewards for the places they already go to and does so instantly.

So our focus is really observing what our customers are doing, and then taking as much friction out of that as possible while adding some magic at the same time.

Your next question comes from Andrew Jeffrey with SunTrust.

This is Oscar Turner or Andrew.

My question is on Square for restaurants.

Just wondering if you can give any color on the uptake you're seeing with that new product and whether that's expected to materially contribute to revenue next year?

And then also related, what do you see as the biggest barriers to penetrating the large full-service restaurant TAM?

Yes, so great questions.

We do have a significant focus on restaurants right now, and I'm really happy with what we have to offer restaurants.

So in the past, the only way that we could restaurants was through Caviar by adding delivery and that superpower to their offering.

And what's meaningful about that is that they're no longer constrained by the number of tables they have and how quickly they can turn them over.

Delivery allows them to make more and sell more, which ultimately drives more sales.

We recently added pickup, which allows the restaurant to offer pickup, so someone can come and get food and take it elsewhere.

And we recently introduced Square for Restaurants, which allows them to do things like table management, but also it allows them to hook up with their kitchen display system so that they can operationalize and make more efficient their kitchen, so ultimately they can serve more food and serve more customers.

So we're putting a lot of our focus on the integration of these things, so that if you come in through Square for Restaurants, you'll be able to eventually use Caviar for delivery and vice versa.

We think that's really powerful.

But even more powerful is introducing them to the rest of our ecosystem, like Payroll, like our customer relationship management, like Square Capital, for instance.

And the biggest barrier in the past had been the fact that we didn't have a point of sale for restaurants.

We didn't have anything that can help them manage their tables.

Now that we do and we are full stack, meaning that we can handle their payments as well.

They see an opportunity to remove a bunch of clutter from their countertops and a bunch of time from their operations, their day-to-day operations.

It's a lot of work to run a restaurant, and it extremely complex.

And our goal is to help keep restaurants in business and help them grow, and a big part of that is just streamlining their operations so that they're not spending time fixing equipment and learning how to operate these technologies, but actually really focused on making food and serving their customers.

So we think we have observed that barrier and also start to overcome it, and that will help us certainly get into restaurants of all sizes, from very small to multi-chain and very large businesses as well.

But we're going to learn and talk to our sellers about what's working, what's not working, and make sure we're addressing those needs.

And then from a -- I'm sorry, go ahead.

No, go ahead.

I was just going to say from a TAM perspective or impact to revenue, I mean clearly we went into the restaurant vertical because it is a massive TAM.

There are over 300,000 full-service restaurants here in the U.S. alone.

That's $200 billion of annual gross receipts.

So when we talk about how will we continue to sustain this sort of GPV growth, that is a big part of it is how do we keep unlocking more and more new places where Square has not really been in place before.

So as we talked about last quarter, we see larger restaurants come on the platform.

The average GPV in a restaurant seller is about $650,000.

But the funding is also to see that they're self-onboarding.

So unlike when they work with an old competitor, where it's like dang it, I don't want to keep using this, instead, they self-onboard onto something like Square for Restaurants and have that user experience that Jack talked about.

So we do think it has a big potential TAM, and we do think it will continue to contribute meaningfully to revenue as we go into 2019.

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 fourth quarter 2018 earnings call on February 27.

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.