Jason Lee - Head of Investor Relations Jack Dorsey - Chief Executive Officer Sarah Friar - Chief Financial Officer.

Ryan Cary - Jefferies Tien Tsin Huang - JPMorgan Jim Schneider - Goldman Sachs Kelly Barker - PREP Cosmetics Darrin Peller - Barclays Capital Bryan Keane - Deutsche Bank Dan Perlin - RBC Capital Markets James Faucette - Morgan Stanley Andrew Jeffrey - SunTrust Robinson Humphrey Paul Kondra - Credit Suisse Robert Napoli - William Blair Tom McCrohan - CLSA.

Good day ladies and gentlemen, and welcome to the Square Fourth Quarter 2016 Earnings Conference call. I would now like to turn the call over to our host Jason Lee, Head of Investor Relations. Please go ahead..

Hi, everyone. Thanks for joining our fourth quarter 2016 earnings call. We have Jack and Sarah with us today. First, we want to remind everyone on the format for our earnings call. We have published a shareholder letter on our Investor Relations website, which was available shortly after the market close.

We will begin this call with some short prepared remarks before opening the call directly to your questions. During Q&A, we will take questions asked from our sellers in addition to questions from conference call participants. We would also like to remind everyone that we’ll be making forward-looking statements on this call.

Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance. Please take a look at our filings with the SEC for a discussion of the factors that could cause our results to differ.

Also note that the forward-looking statements on this call are based on information available to us as of today’s date. We disclaim any obligation to update any forward-looking statements except as required by law. Also, during this call, we will discuss certain non-GAAP financial measures.

Reconciliations to the most directly comparable GAAP financial measures are provided in the shareholder letter on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call and 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. Before this call, we issued our quarterly shareholder letter with detail on our fourth quarter performance and financial results, which I encourage you all to read. We’re really proud of our first year as a public company.

We delivered value to our customers in a way that meaningful grew Square’s business to scale, increasing revenue and improving margins. We see this by staying true to our values and committed to our purpose of economic empowerment. I want to take a moment to talk about our priorities in 2017 and how we tie them to our values.

We started Square eight years ago, making it easy to accept credit cards was our first step in providing opportunities for people to engage in commerce, where they are traditionally excluded.

BY removing credit checks, long-term contracts, and other blockers to card acceptance, and by giving away a free card reader, we start building a service that would empower millions of people to participate in the economy. Today, sellers come to Square for much more than [indiscernible] payments and hardware.

They come for financing, payroll, customer management and even delivery.

We’ve chosen to build these tools as part – as of one cohesive ecosystem as opposed to a series of singular, disconnected services, whether sellers are in food, retail, or services, or have one location or 50, they can pick from a menu of services and get up and running faster at Square.

Everything works together seamlessly to help our sellers make smart decisions for their businesses. There’s a lot more we can do to make payments in financial services more accessible and to help our sellers succeed. We have three areas of focus this year; integration, automation, and platform. First, integration.

We will make our services work together more cohesively. For example, in February, we launched Square for Retail, our first industry specific point of sale.

In addition to integrating with our payments and our hardware Square for Retail integrates with our customer directory to give sellers advanced clientele and capabilities to build customer profiles and provide purchasing history directly from the point of sale. We believe integration is why so many sellers choose Square, and we will double-down here.

Second, automation. We’ll make our services more self-serve. Automation saves time, which is important for internal teams and for our sellers. For example, we’ve invested a lot in machine learning across the company, especially in risk, where we automate risk assessment for 99.95% of Square transactions.

We will look for more ways to apply machine learning to help automate, both our internal tools and customer-facing experiences. And finally, platform. We need to build more APIs and SDKs that our internal teams can use and that external developers and partners can build on to.

For example, we use the technology behind our e-commerce API to build and launch Virtual Terminal in just two months. Virtual Terminal allows sellers to key in payments from a web browser ideal for sellers who typically use a computer instead of a mobile device.

The product has attracted new sellers and captured additional volume from existing sellers and it already generated more than $40 million in GPV in January. Fast product development benefits all aspects of our business and a stronger platform will make us even faster.

By focusing and investing more in my integration, automation and platform, we can put Square, our sellers, and the economy forward. Now I’ll turn it over to Sarah for some more detailed remarks on our financials..

Great. Thank you, Jack. We’re proud of our fourth quarter results achieving significant growth at scale in 2016, while improving our margins. We continue to efficiently add new sellers and help them grow their business after they join our platform.

Before I dive deeper into our results, let me take a moment to explain a nomenclature change in our key revenue lines. We changed transaction revenue to transaction-based revenue and software and data product revenue to subscription and services-based revenue. This is only a change in naming convention.

There’s no change to historical revenues and no change to the products and services included in each line. Gross payment volume for the fourth quarter was $13.7 billion, up 34% year-over-year. Total net revenue was $452 million in the quarter and adjusted revenue was $192 million, representing a 43% increase from the prior year.

For the full-year, adjusted revenue of $687 million grew 52% year-over-year. Transaction-based revenue and transaction-based profit as a percentage of GPV were consistent with the prior year period, even as our GPV mix from larger merchants continues to grow.

We maintained a payback period of four to five quarters for our seller acquisition costs and a positive dollar base retention rate. GAAP net loss was $14 million in the fourth quarter. This equates to a net loss per share of $0.04, compared to a net loss per share of $0.34 in the fourth quarter of 2015.

Adjusted EBITDA was $30 million this quarter, which represents 20 points of margin improvement year-over-year. This improvement reflects strong top line growth and benefit from improved operational efficiency and ongoing improvements in our risk management. With that, let me turn to guidance.

And please see our shareholder letter for details on our first quarter guide and I’ll discuss the full-year now. Our 2017 guidance reflects plans to continue to invest in scaling our business for future growth balanced by our ongoing commitment to margin expansion.

For 2017, we expect total net revenues to be within a range of $2.09 billion to $2.15 billion and adjusted revenue to be in the range of $880 million to $900 million. Adjusted EBITDA is expected to be in the range of $100 million to $110 million and year-over-year margin improvement of 5 points at the midpoint.

We expect net income per share to be within a range of negative $0.24 to negative $0.20 and adjusted EPS to be in the range from positive $0.15 to positive $0.19. So with that, let me turn it back to the operator to start the Q&A portion of the call..

[Operator Instructions] And our first question comes from Jason Kupferberg of Jefferies..

Good afternoon. This is Ryan Cary on for Jason. I was hoping to dig a little bit deeper into the relative profitability of the business segments.

So as we look at the $100 million to $110 million in EBITDA expected in 2017, is there any color you can provide on what percent of that you expect will be driven from the subscription services side of the business versus more of the traditional transaction side?.

Sure. Thanks for the question. So I think overall, as we look into our guides for 2017, we’re coming off of a very strong 2016, good momentum in Q4 in terms of top line growth and ongoing improvement on the margin side. When I think about the overall guide on the margin side for 2017, we do plan to continue to invest in our business.

We see a lot of white space in front of us, particularly in areas like the move from offline – online to offline on international, and of course, the continued moves up market. In terms of margins themselves, I would look at as G&A is the line item that we expect to see greatest leverage from.

Clearly, we’re benefiting from a lot of the investment we did pre-IPO. From a product perspective, we are a product-first company, so expect us to continue to invest in great engineers, data scientists, designers, we want to stay very front footed on that. That said, as we scale, there should be ongoing improvements there too.

And then finally, sales and marketing for us is very much the variable expense. And as long as we continue to see a strong ROI, or that four to five quarter payback period, we will want to continue to press on investing there, particularly around some of the newer products.

So we think about the business more holistically, not necessarily profitability from either payments or the transaction-based revenue or subscription and service based rather holistically how do we bring more sellers to our platform and how do we continue to grow the base of business of sellers who are already on the platform.

Hopefully that gives you some context..

Perfect. Thanks for taking my question..

And our next question comes from Emman Bahala from B. Consulting [ph]..

Hi, good afternoon. This question to Jack.

Jack, I often take payments from my customers over the phone, how do I know that that person and that credit cards are real? If the credit card is stole, am I liable for that? And how does Square handle this?.

Well, first, thank your Emman [ph] for being a customer and thanks for the question. So, fraudulent charges are a key concern for all of sellers and we wanted to make sure that we were building up a product and a service that are, fore and most, respectful of your time, so that you don’t have to worry about it.

So our approach has been to really focus on payment dispute management and charge back protection. It’s one of the services that we want to make sure that we provide our services as part of our offering. So it’s not just about payments, but the whole suite of everything that you need to protect yourself and your business.

Our ability to do this is based on the fact that we serve as the merchant record for you and all of our sellers and this means that one of your customers disputes a charge with a credit card company, we handle the process.

So, after the credit card company contacts us, we reach out to you to obtain more information about the payment and then we respond back to the card company. So, we want to make this as seamless as possible for you, so you don’t have to think about any of us and you can just focus on making the sale..

Excellent. Thank you so much for answering the question..

Thanks and thanks for using Square..

And our next question comes from Tien Tsin Huang from JPMorgan..

Hi, hello, thanks for the results. I just want to ask on the – let me ask about the retention rate, deposit retention rate, is that level sustainable? What trends are you seeing there? Obviously, you’re scaling up pretty quickly here, so I’m curious what’s baked into your guidance on that. Thanks..

Great. Thanks, Tien Tsin. So we do continue to see really positive cohort economics overall. As I already talked about the four to five quarter payback period and recall that is just for payments alone.

So just the transaction based profit that we make on payments is what covers the cost to bring all that cohort on to Square and that’s a fairly full sum cost that we apply there.

In term of from there what we are continuing to see is that our sellers join Square, they continue to grow, and so that’s a huge part of what’s driving the positive dollar based retention rates. We have not to date talked about that including many of our new products.

So if they take a capital loan, if they take payroll, if they decide to use some of our customer loyalty tools, we’ve typically not bake that in to how we talk about a positive dollar based retention rate, but clearly all of those products would only add to that positive dollar based retention.

So we’re quite excited by what the new products are showing in terms of providing value to that seller base and we continue to expect more adoption there and I think that will continue to drive ongoing growth of the base, so ongoing positive dollar based retention. Thank you..

All right, thank you..

And our next question comes from Jim Schneider of Goldman Sachs..

Good evening. Thanks for taking my question.

I was wondering if you can talk philosophically about the margin progression from here, you talked about the 500 basis points of expansion implied in your guidance, can you talk about that? If you start to overrun those over the course of the year, would you automatically kind of roll it back into the business, or would you want some more [indiscernible]?.

Great. Thanks, Jim. So we do still see tremendous growth opportunities in front of us. And it a balance always of making sure that you do keep investing not just for 2017, but it’s really about how do we think about a decade of growth. On a lot of the business that you start today, you really won’t start to see the impact of for maybe multiple years.

It is interesting that business that we have launched in 2014 are now comprising a quarter of adjusted revenue that actually surprises me very positively that they can have such a big impact in just three years. But with that said we do want to make sure we keep doubling down into the places where we see a lot of white space.

So I think as we look through 2017, we want to keep coming back and doubling down into areas that are doing well. So I think as we see margin progression or inclination, would be still turned back to find growth. We’re very pleased with the five points that we’ve guided to for the year.

I think it’s very consistent with managing the business strongly from a top line growth perspective, but also mindfully allowing margins to improve and I think we stand behind that guidance. So, thank you..

Great. And then, maybe just a quick follow-up. I would like to ask about Square For Retail.

Maybe give us any quantity that fits on how that’s gone so far in terms of uptick from existing sellers and of new ones and then maybe talk a little bit about what your – or plans would be two years out, what would you consider success for that?.

Sure. So, it’s still very early days. So this product really just launched a few weeks ago. It really speaks to what we’ve heard from our sellers that they do need something quite specific in the retail vertical and that’s true for verticals food, it’s true for verticals like services.

On the retail side, we really dug in to our product where we wanted to give it a much more retail friendly UI, so they are dealing with tens of thousands – maybe hundreds of thousands of skews, so it has a very kind of fast search-based interface in addition we wanted to have deep inventory management behind it and then I think the third thing we heard from retailers was definitely a need for more CRM built into the point-of-sale itself for clienteling, the ability to track the customer when they’re right in front of you making a purchase.

So we’re excited certainly for what the product brings together and through prior to a full launch, we clearly had a lot of input from the sellers who were on it.

I think in terms of looking out the impact to numbers, I’d really more think about the market, so there are about 450,000 retailers in the United States in the small- to mid-size business category. They represent about $700 billion GPV and so I view that as just a big market expansion that we did here now in Q1.

As you think about 2017 guidance, clearly we’ve put some stick in the ground of what that can look like 2017, we’re not yet ready I think to look at multiple years and give you specific guidance on it..

Thank you..

Thank you..

And our next question comes from Kelly Barker of PREP Cosmetics..

Hi there.

Will there ever be a Square business credit card? It would be such a great option for small businesses to use, for everyday purchases and it would be even better if the credit card came with some sort of a loyalty program perhaps tied to lowering the Square transaction fee or even a simple cash program or even as like redeemable gift cards..

Hi, Kelly. This is Jack..

Hi, Jack..

Thanks for the question. Thanks for using Square. It’s a great question. So we’ve been approaching this more in what financial services can we offer for businesses that fit into their business immediately.

So one of the beautiful things about our model is if we focus our efforts on building tools and services to help sellers grow, our business grows as well.

So we have this very, very nice virtuous loop and that’s why we got started in payments in the first place, but that’s also what led us to things like Square Capital where you know a number of businesses were not able to get a loan amount that you would typically see on a business credit card, for example, from a bank.

So it’s replaced some of that usage. So we’ve focused the majority of our energy on making sure that we’re building a service that really helps the seller grow and looking less about – less around the specific answer, but more around the use case.

Sellers need faster access to their funds, they want to take loans, they want to be able to have access to the money immediately and we focused on Square Capital and also Instant Deposit. That said, we’re always looking for opportunities for us to provide more financial services to sellers and also to individuals.

Square Cash is an area where you see some of this on the individual side where people have downloaded Square Cash and they’re storing money in our stored value account and then using a virtual card, which then they also turn into a – they put on Apple Pay to actually use as a spending device.

And so they’re using that to spend online and also offline. And we also have a number of businesses on Square Cash as well.

So we’re definitely not close to it, but we want to make sure that we’re focused on the most important used cases and the most important used cases for sellers right now are to make sure that we’re giving them fast and easy access to their money and also giving them fast and easy access to learn so that they can grow their business..

Okay. Great. Thank you..

Thanks, Kelly..

And our next question comes from Darrin Peller of Barclays..

Thanks guys. Nice job. You know first starting off on the large merchant growth rate keeps showing strong. And I guess a little color if you can on what’s the most recent drivers of that and the sustainability of that into 2017.

And then I guess as a follow on related, I mean the take rate being sustainably as high as it is despite the merchant being larger.

Can you just give us color on that sustainability throughout the year, and again some of the incremental drivers that can keep that up?.

Well, I’ll take the first part of question Darrin, this is Jack. So I think when we talk to larger sellers, the same attributes that smaller sellers come to Square for are attractive and that’s the speed of our offering, simplicity, the elegance. But more and more, and I think the platform aspect of what we’re doing is important here as well.

So Build with Square is something that large sellers can take to and integrate with their system. So it just opens more of the doors for how they want to run their business, whereas before, they just would not – they did not have access to the data they needed to actually integrate it into the workflow.

And then the other opportunity that we see is we do have a significant percentage focus on retail and larger sellers being retailers as well. So it’s one of the reasons that we launched Square for Retail is we believe we have an opportunity to build another utility that can scale to any size of merchant.

And this is something that we’re really focused on and making sure that we’re building a tool that is independent of size and I can take as one store, but I also can kind of run as hundred stores.

So we’ve learned a bunch from how people have taken to the platform and large sellers in particular, but ultimately we want to bake that into every aspect of the tool so they don’t have to really think about their size and whether it’s compatible with their business and that’s actually working out really well..

Okay and just on the take rate here, I think the....

Yes, I’ll take the take rate question. So I think overall the take rate sustainability I think just underscores the value that sellers place on the overall commerce platform that they come to Square for.

So as we’ve talked about, if you just look at managed payments that is going beyond – it’s helping them take every tender type that crosses their counter top, be able to account for that and look at reporting and analytics for it and that includes cash or check, as well as electronic payments. It allows them to manage risk.

In the question earlier from our seller, this is the real pain point and that’s something that we put a lot of effort behind to keep our sellers safe and secure, it’s next day settlement or maybe instant settlement if you want to have. And so I think just like the smaller sellers larger sellers want all of that too.

And when they look at the total cost of ownership of Square and they look at the take rate on payments plus the hardware costs, plus the software fee that they may pay. It still stacks up as a really compelling offering. And so I think that’s showing through on our numbers and we’re very proud of that..

So you’d expect that to remain stable through 2017 as well more or less?.

Yes, I mean I think I would just look at what the overall trend line has been and just stay on the trend line. We don’t expect it to particularly shift one way or the other.

There are clearly, as we move to larger sellers, if we will do a custom price, but we’re not afraid to do that, sometimes that makes a lot of sense, because then they are going to maybe pay for retail point of sale for example.

On the other side there are products like invoices where we did $624 million in GPV in invoices in Q4 and that’s the product that actually is priced a little bit higher than our 2.75%. So it actually is a little inflationary to the take rate.

So I think there’s puts and takes on both sides, but I think the trend line is the right way to look at it for 2017..

All right. That’s great. Thanks guys..

Thank you..

And our next question comes from Bryan Keane from Deutsche Bank..

Yes, hey, guys. I wanted to ask about the fourth quarter EBITDA, it came in at $30 million that was quite a bit higher than the $16 million to $18 million guidance. So for us that was the biggest surprise in that quarter.

What drove some of that outperformance versus your guidance expectations?.

Great, thanks Bryan. So I think just starting from the top, clearly we had a $7 million beat on the top end of our guided range. So we just see continued strength on transaction based revenue grew 35% year-over-year. And then subscription and services that grew at 81% year-over-year.

And clearly within that areas like capital as an example did very well even sequentially like we saw very strong seasonality in capital when we had expected it perhaps to drop off more towards the end of the year. So I think first and foremost that top line beat.

And then I think on the OpEx side, we are continuing to drive for greater efficiency and we have talked about the use of machine learning not just within the products that we show out to our sellers but also within our own business.

There are lots of areas where beyond risk where we can take them out and continue to create a better and better experience, I think support is a great example of where we could absolutely insert our support answer right there in the moment for the seller, because we have context for what they’re doing on their dashboard and with the use of ML we can probably intuit what their problem might be and so that’s the great way to get more and more efficient internally.

I would call it a risk to them, because this is definitely a highlight in Q4. It was around 9 basis points of GPV. So actually 1 point below what has been our historical trend. For the year, risk loss was $3 million below what it was in FY 2015 and that’s despite abating $15 billion of GPV.

Some of the investments that we’ve put in in automation to risk are clearly paying off and I think in Q4 we saw particular outperformance there as well..

Okay, super. And then just a quick follow-up for the guidance for the adjusted EPS, what is the fully diluted share count we should be using or thinking about? Thanks so much and congrats on the quarter..

So let me come back to you on the adjusted, we’ve not given out guidance on the fully diluted share count, but I’ll follow-up with the team and we will probably send our normal follow-up fourth quarter. But here’s how to think about what’s in the fully diluted share count and then how it may trend as you look out into Q1..

Okay. Thanks..

And our next question comes from Dan Perlin from RBC..

Thanks. So the question I have is on the three areas of focus, Jack, that you laid out, the integration, automation and platform. I think the one question that comes to mind is just how should we be thinking about, I guess, layering those into the model? I guess throughout the year from a cadence perspective.

And then the second part of that is which of those three. And I know they all create scale, but I mean which are the ones that you think are kind of furthest behind on and so to the extent that you drive maybe higher integration that drives more attachment and incremental scale. I’m just trying to think of the relative importance of those three.

Thank you..

Yes, I mean I think – so I think the one that provides us the most leverage and probably where we have the biggest opportunity actually are two of them. One is the integration. So just further integrating our services and taking advantage of the ecosystem that we’ve built is a really big opportunity.

So I think we have a much greater opportunity to cross sell a lot of our products into our base. So one of the things that we hear a lot is sellers just aren’t aware of the services that we’re providing. So we see a ton of momentum now that we can fix.

And then the other one is, we’ve been really fantastic at applying machine learning to risk and it definitely shows. But we need to now apply to every aspect of how we run internally, but also our customer experiences and that’s from the register to Square Cash to Square Capital.

So we’re getting a lot smarter and better about applying that discipline to more places in the company and the more we automate internally the more efficient we run, but the more we automate for our sellers, the more they can grow without having to think about how much of mechanical stuff that we would put them through otherwise.

So those to me really stand out. Platform, we’re really excited about, because it’s one that allows others to build on top of us and then we get more integrated into more services, then we also get a learning opportunity on what people need and know where to go next.

But I think that the two almost focus on our just like how we integrate better in terms of all the services that we have and then how we create more automation within it.

In terms of layering them on to the model, these are three themes that just kind of make everything better, but they are in priority order, so we are focused first and foremost on making sure we better integrate our services and take advantage of the cross-sell opportunities, automation and then getting those two right provides a much stronger and more cohesive platform for both internal teams and external teams.

And ultimately it just allows us to move faster, I think virtual terminal is a good example of this where we went from zero in building a product in two months to some pretty impressive growth in our products. So there is a number of things right that we can do with a stronger internal platform that we can also make external as well..

Excellent, thank you..

Thank you..

And our next question comes from James Faucette of Morgan Stanley..

Thanks a lot. I wanted to ask a follow-up question on transaction losses etcetera and so you indicated that you had obviously made great strides there, how are you thinking about those going forward and can they remain low, as low as they have been or what are your assumptions in planning for 2017? Thanks..

Hi James, so I think overall, as we look into 2017 we kind of expect a relatively steady state from where we’ve been in 2016 as we planned, although we always want to do better. But as we go into new countries, as we launch new products, we’ll bring with them new challenges and so I want to make sure we are staying mindful of those.

So we’ll kind of think about it as more steady FY 2016, going into FY 2017. I wound note that within transaction and advance losses, there is also the capital portion, I didn’t talk about it earlier, but it was also a highlight. We continue to maintain focus on low loan default rates.

Again, that speaks to the quality of the data that we have, it’s very, very unique to Square.

We get an eye into someone’s business via their point of sale, very high quality data that we can then feed into our models that have continued to sustain this sort of default rate and we will of course always want to press and get better there, but making sure that we also are mindful of growth.

So and then I’ll kind of view it as steady as she goes as we go into 2017..

And our next question comes from Andrew Jeffrey of SunTrust..

Hi, thanks for taking the question. With regard to sort of the GPV growth this quarter, which decelerated a little bit or it still remains impressive obviously. Just wondering if some of that is sort of law of large numbers and how much of the modestly slower growth from larger merchants feeds into that take rate.

In other words, are we looking at a period of sort of approaching steady state sustainable revenue growth as margin expands or how you frame up the relationship between those two items?.

Okay, so I think I get the crux of the question. I think from a GPV perspective, continuing to grow at 34% year-over-year when you are doing $14 billion in a quarter, we’re really proud of the scale that we are at and then we feel sustaining that sort of growth.

And I think when I look at where GPV growth continues to come from, we look out through 2017 and I talked a little bit about that white space.

So we still have an ability to move I think more up-market, but continue to take more share in – even in micro, there is still a lot of sellers out there who are cash only and every day we are bringing them on to the platform and showing them the benefit, being able to take electronic payments, because it helps their business grow.

So I think the base still has a lot of opportunity in it. Clearly as we turn on new, in the national markets like Australia, it’s going to highlight in the last year and done quite well, that also provides a good growth vector on the GPV front.

And then the shift from offline to online, as Jack talked about with platform is another new arena for us to plan in terms of GPV growth. So you know I would say we continue to expect to see a healthy clip and we are investing that way.

In terms of steady state revenue growth, as margin expands, I mean, I think we would say we are – we’ve given you the guide on what we expect revenue growth to be. At the midpoint for the year, it’s still a 30% clip and against that 5% or a 5 point margin expansion.

So I wouldn’t say we are steady state land yet, we are clearly still in high-growth land and we feel confident in the guidance that we’ve given you..

Okay that’s helpful.

With regard to sales and marketing, is it still your view that about half of your new business comes by a word of mouth, has that changed at all?.

So overall we’ve built a product that is really loved by our merchants. Right now promoter score has stayed in the 70 range, which is really kind of unheard of in a way for them, for us, an enterprise type product where the sales is much more like a consumer product, even there we’d be right up in the top percentile.

I think because of that sort of net promoter score, the flywheel grows where sellers tell sellers about Square and that’s how they come on to the platform, that remains a really strong flywheel for us.

Coming back to how you can all measure it and look at it externally, we are maintaining that five, supportive five quarter payback period because we both benefit from the word of mouth piece of marketing and then that allows us to continue to press into other scalable channels, be it search, be it events, it could be the retail, it might direct mail or even kind of they are on the spectrum Direct TV.

So when are all blended together, that’s really the ROI that we look at by cohort..

Okay, thank you..

Thank you..

And our next question comes from Neil Doshi of Mizuho..

Hi Neil, you might be on mute. Okay, operator, I think we either move on or can you just check his line..

And our next question comes from Paul Kondra of Credit Suisse..

Hey, thanks and afternoon all and nice job here.

I just wanted – can you give us any color on revenue growth across your segments, any kind of qualitative things just to kind of help us model out what to look for? What transactions might look like? What subscription services might look like in hardware?.

So in terms of total guidance, so at that point [ph] 30% year-over-year growth on adjusted revenue for 2017. Again, I would come back and point to the fact that we think about our business holistically and so how hard it gets monetized, we’re somewhat indifferent here.

So there are new products like invoices that today get monetized through a transaction fee, so you’ll see them in transaction based revenue and there are products like retail point of sale, where we charge a subscription fee.

And so rather than going than going line by line, we holistically think about what is the market opportunity ahead of us and how do we continue to both grow the base of Square sellers with more cross sell and up sell as Jack talked about and then also add net new.

I think we have you some hope in products like capital for example, so we called out that we facilitated loans of $248 million in Q4 with 68% year-over-year, we’ve you that each quarter. So I think you are able to kind of draw from that some sense of what capital looks like as we go through 2017.

Within the subscription and services fee line, Caviar would be next in terms of scale and then after that instant deposits. But I want to come back to just overall when we think about revenue growth and when we build our model internally, we think about it holistically across all the categories, not building each category up line by line..

Okay, thanks for that.

And my follow-up would just be, I had heard some discussion that maybe you are considering ISO distribution or some kind of third-party distribution, I’m wondering if that is a discussion that you are having or maybe you could kind of frame up the debate and how you are thinking about that?.

Yes, I mean it’s always been a question that we’ve had. We’re looking of all global channels to us to make sure that we are reaching sellers where they are.

As Sarah talked about earlier, our – the fact that our hardware shapes as company’s name makes us very, very discoverable and always has been, so every time there is a Square register or a Square in a device it’s a marketing impression.

And we have this very rich network from our sellers who are talking about us, because we are handling more and more of their business. So that continues to be a strong driver for us and creates a lot of word of mouth attention.

So we haven’t found it necessary to go beyond those particular channels that work really well for us, so word of mouth the online – the retail stores. So those continue to serve us extremely well and we haven’t really – we haven’t found a major reason to go to new channels like ISOs.

But we’re always open to it, but the guiding principle here is just meeting sellers where they are and we’re finding [Technical Difficulty] impactful..

Great. Great, thanks. Have a good afternoon..

Thanks, Bob..

And our next question comes from Bob Napoli of William Blair..

Thank you, and nice job on the quarter. I know you’re thinking, Sarah, things holistically. But I still would like to get a little better feel for some of the different line items and instant deposit that you talked about a pretty big number $625 million of volume.

But you’re saying most of that revenue shows up in transactions as you look at the quarter Square Capital, I know you – in the past you’ve talked about, do you have the ability to increase pricing some of the other lenders in the area like on deck of had a lot of pressure on their gains.

The $40 million that you have and I’m trying – building – try to build a lot into this.

Square Capital are the gain still in the high single digits? Is Caviar growing very fast and a key long term product? What percentage of the revenue is Caviar? It would be really helpful if you could give a little more color on the breakout of that item that piece of the net income statement?.

Great. Okay, thanks, Bob..

Thank you, sorry..

First, on the $648 million, that is for invoices as a product..

Right..

And so not into deposit. So invoices show up transaction-based revenue, not at all, I just wanted to ask, confirm. I think within the subscription and service fee lines, let me start with capital, because I did get a lot of questions in there.

So capital is a product, I think, what 2016 really unveiled was how differentiated our capital product is in the market. So we have a base of millions of sellers.

We have a very trusted brand, and we’re able to look at data that’s very unique to their business in order to be able to manage the risk of a decision around being willing to facilitate along. So I think first and foremost, we’re doing something very unique. We’re also meeting them where they are.

So they often get the flag on that capital loan being available in their dashboard, or via an e-mail, all avenues that they’re conversing with us often on a daily basis. I think, therefore, from an investor standpoint, because I think that’s where you’re talking about the high single digits.

We therefore have seen a lot of interest from an investor standpoint, because they understand the uniqueness of the product that’s where it’s bringing.

And so we have a very healthy group of investors in place today that can absolutely meet the capacity for growth [Technical Difficulty] for capital in 2017, and we have a list of investors who would like to get in on the program too.

So we feel very good about the supply and demand and what’s going on from a client demand perspective in capital overall. On Caviar, we have not been specific on revenue and so forth. Super pleased with how that product is growing. I think we last talked about it being almost 11X since we bought it. We haven’t updated that number.

But safe to say that it’s continued to multiply from when we first purchased Caviar as a company. I think on the integration point one of our big focuses as a company that’s a great example where integration really comes into its own, because a Square seller might on board be a Caviar, because they want to use delivery to grow their business.

But quickly we can show them some of the benefits of our point of sale and of our broader platform. And so we definitely do see products like Caviar becoming good on RAM. So I think that’s an area where we can continue to push for even more integration over time. I think the final question on instant deposit still a very young product overall.

We see a way to monetize it both for sellers, but also within Square Cash. I think on the seller side, the key for 2017, it’s just more awareness. To the Jack’s point, many of our products are still quite young and people don’t know about them yet. But we absolutely know that sellers want faster access to funds.

And then when they get faster access to funds, they’re able to use that for growth. And so we view instant deposit as just another vector for that. So hopefully that helps you think at least from a qualitative perspective where we’re excited from a product standpoint and how we would expect those to grow..

Okay.

And the fastest growth piece of that is Square Capital in 2017?.

It probably – no, it won’t be the fastest, because frankly, when we have very new products like Square for Retail that are starting from a base of zero, or very small – smaller numbers that happens there. I think the point of capital is both large and material within that line item, but it still has a very healthy growth even at that scale..

Thank you. I really appreciate it..

And our last question comes from Tom McCrohan from CLSA..

Hi, thanks for squeezing me in. Just want to have a question on the API strategy, it really opening up your platform through APIs, and if you can give us a sense of the overall GPV contribution from your various API offerings, as well as the relative margins for an API-based GPV transaction versus your other business? Thanks..

Yes. So I’ll start with that. So, platform has definitely been a focus for us and it’s going to be a focus for us this entire year. And we had a good strong start with Build with Square and we’ve seen some really good momentum and a host of amazing developers.

And I think the most important thing here is, it’s giving us and our sellers more optionality to provide custom solutions that they can better integrate us into their work flows, and that’s really important for larger sellers, but we’re seeing more and more how important that is for smaller sellers as well.

One of the things that we’re focused on a lot in the Build with Square platform is really making sure that we provide an amazing developer experience as well.

So that we’re saving developers time, so with their clients, whether they be small sellers or larger sellers, online or offline, they can move much faster and in a great Square faster, so they can be up and running much faster. So it’s still early, but we’re learning a lot and we have a really strong team behind it.

And and we’re also walking the walk to make sure that we use it internally as well. And as I mentioned earlier, Virtual [Technical Difficulty] tools are available to external developers as well. So early, but exciting and kick it over to Sarah for GPV..

Yes. And so right now in terms of the contribution to GPV from the API strategy not ready to yet call it out, it’s still small and still in early phases. And some early from a margin perspective, it should not impact the margin.

So as I talked about previously, as you think about 2017, but just look at the historical run rate of what’s gone on for transaction-based profit margin and continue to assume that same trajectory into 2017..

Thank you..

Great. Thank you..

I’d like to turn the call back to Jason for closing remarks..

Thank you, everyone, for joining our call. I would also like to remind everyone that we will be hosting our first quarter 2017 earnings call on May 3. Thanks again for participating today..

This does conclude the program. You may all disconnect..