Please stand by. We're about to begin. Good day, ladies and gentlemen, and welcome to the Square first quarter 2017 earnings conference call. I would now like to turn the call over to your host, Jason Lee, Head of Investor Relations. Please go ahead, sir.
Hi, everyone. Thanks for joining our first quarter 2017 earnings call. We have Jack and Sarah with us today. First, we want to remind everyone of the format of our earnings call. We have published a shareholder letter on our investor relations website, which was available shortly after the market close. We'll begin this call with some short prepared remarks before opening the call directly to your questions. During Q&A, we will take questions asked from our sellers in addition to questions from conference call participants. We would also like to remind everyone that we will be making forward-looking statements on this call. Actual results could differ materially from those contemplated by our forward-looking statements. Reported results should not be considered as an indication of future performance. Please take a look at our filings with the SEC for a discussion of the factors that could cause our results to differ.
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. 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. This call in its entirety is being audio webcast on our investor relations website. An audio replay of this call will be available on our website shortly. With that, I'd like to turn it over to Jack.
Thanks, Jason, and thank you all for joining us. We're off to a great start this year, and we're proud of our work this quarter. We entered our fourth international market with our launch in the U.K., built a new way for sellers in chip and PIN countries to accept payments, and added more industry-specific features for our sellers. A lot of this progress stems from our work on integration, which I've mentioned is an area of focus for us this year. We place a lot of emphasis on integration because tools that work seamlessly together create a better experience for our customers. We hear from our sellers that the cohesiveness of our services is why so many sellers choose Square to start their businesses and stay with us as they grow.
For example, this focus enabled us to launch Square in the U.K. with what was by far our biggest product launch in a new country to date. We launched with payments and point of sale, but also with invoices, employee and location management, analytics, customer directory, integrations with third-party apps, and our Build with Square APIs. Our integration of hardware and software also allows us to address market needs in innovative ways. For countries such as the U.K. and Australia, we needed to enable acceptance of payments that use PINs to authenticate chip card transactions. We invented a new, secure way to enter PINs into the Square app on a mobile device, eliminating the need for expensive hardware PIN pads. We'll continue to work alongside industry partners to make card acceptance more accessible for businesses of all sizes.
We're also working to integrate Caviar with Square and expand Caviar from a food delivery service to a food ordering platform. For example, we now use technology from Square Cash to complete delivery payouts to all new Caviar couriers. Square's expertise in payments, point of sale, and order management sets Caviar apart from other food delivery services. Caviar helps Square reach more restaurants, which is a key vertical for us. As we grow and add more services, it becomes more important to maintain a cohesive ecosystem for our sellers. One of these sellers is Sam, who runs a flower stand in Norbury station in South London. Sam was one of the first merchants using Square in the U.K. She attended our launch event, where she spoke about how she used analytics to track her sales and figure out the best hours for her to be in the station.
We talked a lot about the importance of focus, and she told us her goal was to ultimately open a physical location. A week later, Sam sent us a note that she was finally taking the leap. She wrote, "I've been half-heartedly saying I want a shop for ages, while not really doing much about it. It's time to focus." Sam's focus is our focus. The dream Square represents is the ability to grow a hobby to a small pop-up, to a physical store and a growing business. Sam is just one of the millions of entrepreneurs around the world pursuing this dream, and we will be there to support her as she does. Now I'll turn it over to Sarah for some more detailed remarks on our financials.
Great. Thank you, Jack. We started 2017 demonstrating our continued ability to grow at a meaningful rate, even at significant scale. Our continued growth, combined with operating efficiencies and ongoing risk loss rate improvement, enabled adjusted EBITDA margin expansion of 19 points year-over-year. Gross payment volume for the first quarter was $13.6 billion, up 33% year-over-year. We saw strong momentum across our product base, with both transaction-based and subscription and services-based monetization resulting in a 22% year-over-year growth rate in total net revenue and a 39% year-over-year growth rate in adjusted revenue. Transaction-based profit as a percentage of GPV was 1.07% in the quarter, up from 1.03% in the prior year period. Excluding processing credits for pre-orders for our contactless and chip reader in Q1 of 2016, transaction-based profit as a % of GPV has been quite stable.
Our continued ability to grow GPV at scale, including the ongoing growth in larger sellers, while maintaining transaction-based profit margins, demonstrates that our sellers value the full extent of our managed payment solution and our cohesive, integrated ecosystem. GAAP net loss was $15 million in the first quarter. This equates to a net loss per share of $0.04, compared to a net loss per share of $0.29 in the first quarter of 2016. Adjusted EBITDA was $27 million this quarter. We saw a strong quarter in improving our risk management, driven by our ongoing investments in machine learning, as transaction loss rates continue to decline and are trending below our 0.1% historical average. With that, let me turn to full-year guidance. Please see our shareholder letter for details on the second quarter guide.
For 2017, we increased our full-year guidance to reflect our strong Q1 results and the ongoing momentum in the business. We now expect full-year 2017 total net revenue to be within a range of $2.12 billion-$2.16 billion, and adjusted revenue to be in a range of $890 million-$910 million. Adjusted EBITDA is expected to be in a range of $110 million-$120 million. At the midpoint, this suggests a 13% adjusted EBITDA margin, which translates into a mid-single-digit percentage margin increase year-over-year. We expect net loss per share to be within a range of $0.24-$0.20. This includes a negative $0.04 impact from our recently raised $440 million convertible debt instrument, which was not previously anticipated in our guidance. We expect adjusted EPS to be in a range of $0.16-$0.20.
Finally, as a reminder, we will host an investor day on May 16th. We encourage you to watch live via webcast or on our investor relations website. With that, let me turn it back to the operator to start the Q&A portion of the call.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We do ask that you limit yourself to one question. You may reenter the queue if you have additional questions as time permits. Again, that is star one if you have a question or a comment. We'll take your first question from Tien-Tsin Huang from JPMorgan.
Great. Thanks. Good results here. Just wanted to ask actually on the U.K. opportunity. I'm just curious how you might approach this market entry differently than other markets like, say, Australia or Japan and some of the others. Is it going to move the needle in revenue expenses in 2017? Really curious to hear how you might lean in with any investments in marketing in the U.K. Thanks.
Yeah, thank you for the question. One of the things that we were really proud of is our ability to launch multiple products in the market. Traditionally, we have only focused on payments and Point of Sale, and this really speaks to how good we're getting at internal platform and moving much faster to launch a fuller suite of products within market. The U.K. is also really interesting for us, corresponding to our hardware. Our contactless and chip card reader was built to be a global platform. The U.K. is interesting because over 70% of transactions are tap transactions, NFC based. We had a really perfect product market fit. Everything that we've learned from launching Canada, Japan, Australia, and now the U.K. is going into this launch, and we're going to work really hard to make it successful.
One of the biggest things that we were able to do this time was really launch with an ecosystem instead of launch with a part.
Great. Tien-Tsin, on your question on investments and the impact overall to financials, clearly, we've fully anticipated the U.K. in the guidance that we gave, and we're very comfortable with that. A launch is a tip of the iceberg. A lot of the product development is already in place, as Jack has talked to. From a sales and marketing perspective, a launch usually involves a lot of experimentation to figure out which channels are going to be most efficient. Every market is slightly different. However, we bring a lot of the learning, clearly, from markets like the U.S. and Australia as we go to the U.K. For now, though, guidance fully reflects our expectations of what that market will mean for Square.
Got it. Thank you. See you in a couple of weeks.
Great. Yeah. Thank you.
Thank you.
We'll hear next from Darrin Peller from Barclays.
Great. Thanks, guys. Nice job again. Want to start off first, the take rate again, it looked pretty strong, better than our expectations despite obviously very strong trends, again, larger merchants. I know you've done well with that before. There's been an upward trend. Can you just remind us again the sustainability of that, the drivers of that strength? I guess just a quick follow-up on the potential for cash deployment given the debt. I'm not sure if I remember hearing the use of proceeds for that. Thanks, guys.
Sure. Great. Thanks so much, Darrin. First on that take rate. As you saw in the quarter, at 2.96%. It's why we called out a little bit the year-over-year. From a year-over-year perspective, it's actually quite stable when you account for the free processing credits that happened in Q1 that actually lowered the take rate in Q1 of last year. Overall, about flat when you look at a Q1 to a Q1. Q1 tends to have some seasonality in it that naturally lifts the take rate. For example, card present tends to be a little lower, as you'd expect, seasonally slower quarter, less going on in stores, and we see a little bit more of card-not-present. That clearly impacts it.
From a more broader perspective, as we've talked many times here, we want to continue to be able to have the flexibility around custom pricing as we move upmarket. Often that will mean that we offer a more competitive take rate, but we're always mindful of the overall margin that we can make from that larger customer. At the same time, there are products like Square Invoices where we charge 2.9% and $0.30, or even the Build with Square API platform, where clearly that's priced as a card-not-present transaction, that will continue to bolster the take rate. International is yet another fluctuation that we add into the mix. I think that's why, ultimately, what we drive to is adjusted revenue, because it will take out all of that fluctuation over time.
In terms of use of proceeds from the convertible debt instrument, nothing to talk about on this call right now. Really, the rationale for that was, first, a company at our scale, it behooves us to have a balance sheet that matches that, so we have always the maximum amount of flexibility. Second, we wanted to be opportunistic. We had been watching the convertible debt market for a while, very low issuance at the beginning of the year. We knew we would be seen as a very high-quality issuer, we felt that that would bring us together to give us a very good outcome in terms of the terms, I think that's what we saw. We're delighted with our 0.375% interest rate on that debt, for example.
it's really the combo of always being mindful to financially plan our balance sheet well to give us flexibility, combined with an ability to be very opportunistic at that point in time.
Okay. That makes sense, guys. Thanks. Nice job.
Great.
Dan Perlin from RBC Capital Markets, please go ahead.
Yes, this is actually Matt Roswell stepping in from Dan. Congratulations on the good numbers. Wanted to talk about the subscriptions and services growth, came in better than we were expecting. Could you sort of disaggregate what the main drivers were and whether there was any sort of one-time capital sales?
The growth rate in the subscription and services revenue line was 106% year-over-year. It was a very nice quarter for products that we monetize in that way. I think in terms of highlights in that area, Square Capital, certainly one. Square Capital grew 64% year-over-year, and we facilitated the origination of $241 million worth of loans. Still feel great about that product. Clearly, we are answering a big market need, and very few, if any others, can really follow us into that market. Caviar continued to scale. Q1 2017 orders more than doubled year-over-year. Then I think the other one we'd call out is Instant Transfer. Clearly benefiting from awareness across our ecosystem for both sellers and for Square Cash users as well. Those three are probably the biggest components.
No, there was no one-time Square Capital sale in the quarter.
Okay. Should the similar type of growth rate continue for the rest of the year? Or is there a seasonality in this?
When I look at the drivers of each of those businesses, clearly, at our scale and given that a lot of it we face U.S. commerce, there's always seasonality. However, Q1 tends to be somewhat a seasonally slower quarter. Q2 is our seasonally strong quarter. We'll see some of that shift quarter to quarter. The underpinning growth components, whether it's for Square Capital, Caviar, Instant Transfer, really remain intact, and we feel very good about the continued momentum there. I would draw you back to the overall guidance for 2017 that we gave on adjusted revenue, which has a 31% overall growth rate across all the adjusted revenue line items for the year.
Excellent. Thank you.
We'll move next to Steve Guppinder from Square Seller.
Hey, Jack. Hey, Sarah. Thanks for taking this. The numbers of the NFC adoption in the U.K. sound great, my question is, what has the Apple Pay adoption been like? I feel like some users might be slow to adopt it because they're more comfortable with the swipe and they incorrectly associate Apple Pay with EMV, which usually has slower wait times.
Yeah, great question. Thanks, Steve, for using Square. We think it's our responsibility to make sure that people are moving towards authenticated form of payments. EMV is a standard that both chip cards and NFC are based off of. We built our contactless reader to serve this purpose, and this is, again, a global platform, so same hardware every market. In terms of adoption of NFC and Apple Pay in particular, outside the United States, predominantly NFC is used, and it's growing much, much faster than its peers, especially around EMV cards, chip cards. Inside the United States, we still have a lot of work to do in educating both sellers and consumers. We're working with our partners, like Apple, to make sure that we are giving our best effort to help consumers understand the value of Apple Pay and of NFC.
The main value is speed. Security is underlying everything, but being able to move through a line much faster, being able to transact much faster means that whatever you're buying, you get to enjoy much faster as well. We're focused on our part, which is helping to educate sellers, but also working with all of our partners to help educate consumers around the value of moving to more digital payments and more authenticated payments.
Thanks so much. Congrats on the great quarter.
Thank you, Steve.
Thank you.
Bryan Keane from Deutsche Bank, your line is open.
Hi, guys. Congrats on the quarter. Sarah, I just want to ask again on EBITDA. Once again, you guys have bested your estimates. Can you just talk a little bit about the leverage points you're seeing? Sequentially in 2Q, it looks flat from 1Q. I would've thought there'd be a little more leverage in the model in 2Q, the guidance kind of looks like it's more flattish, just interested in your thoughts there. Thanks so much.
Sure. Great. Thanks, Bryan. We were very pleased with the overall outcome of Q1. If you look at what is the driver of the EBITDA beat, it really does start at the top line, we saw good growth across all of our products. I think always reminding that the core trends continue. When we bring on a new cohort of sellers, we see a four to five-quarter payback period, from there, a positive retention. Just underpinning the growth of the base is this very kind of profitable growth from sellers who are already on board the Square ecosystem. In addition, clearly, new services like invoices, virtual terminal, API, and so on, are growing well. We're taking more and more of the book of business of the current base of sellers, it's drawing new sellers in the front door.
That also tends to drive better top-line performance, which then falls through to the bottom line. In addition, I would call out, I said it in my prepared remarks, transaction and advance losses. Again, another quarter of outperformance there. We've been doing a lot of work, as you know, from the get-go of Square to invest in machine learning to make sure that we can deal with risk in a highly automated, machine-intense way rather than people. I think that is giving us the advantage of helping improve our EBITDA margins, but also be able to launch products like Instant Transfer that you couldn't do if you didn't have real-time risk review. Those are the drivers that we saw in Q1.
As we go into Q2, and really, I would look at the full year, we've been very consistent in saying that we would see a mid-single-digit year-over-year EBITDA margin improvement. That's what we've continued to guide to, and I think that gives us the right balance of being able to continue to invest for growth. As you can hear already on this call, we believe there's a lot in front of us right now, whether it's new countries or new products, to be able to continue to invest on that top line.
Good. Super. Thanks so much.
Thank you.
Josh Beck from Pacific Crest, your line is open.
Thank you. I had a question on Caviar. I think part of it might be for you, Jack, in terms of the pickup launch, if that's really oriented towards new customers or really a cross-sell to existing. Also along those lines, for Sarah, if I look at the subscription and services gross margin, I think it was up over 500 basis points year-over-year. What would you point to there? Is it better profitability within Caviar, higher mix of deposit? Any call-outs along those lines? Thanks.
Yeah. To start on the high level with Caviar, we acquired Caviar in order to drive more sales to a type of seller we weren't able to reach, which was a full-service restaurant. Along the way, we learned that not only was delivery important, but offering more types of fulfillment of food was critical as well, and it would continue to open us up to new types of restaurants as well, including QSRs. We have learned a bunch from delivery, but the biggest learning is that we think we have an opportunity to go beyond just delivery and to really be a food platform anytime you're hungry. Sometimes you want that food to come to you, sometimes you want to go to it.
The pickup launch represents an extension of the fulfillment type, which has been asked by us from our sellers, because they do have people coming by and picking up food, and gives us a more complete and cohesive view for the restaurant, so they can use us for more and more things. This is a big focus for us this year, is to make sure that we continue to highlight everything that Square has to offer from all of our services, inclusive of Caviar. Pickup allows us to reach new customers, but also to cross-sell to existing customers. Everything that we're focused on is really continuing to go after newer customers and bigger customers that have different needs. Caviar is really focused on the food vertical. With pickup, we get to serve a whole lot more in new ways as well.
Great. Josh, on your question on the gross margin for subscription and services, that year-over-year improvement, you're right, it's about 600 basis points. It's really to do with the mix of what's in that line. Clearly products like Capital and Caviar remain key contributors. I think what is more, not net new, but starting from a smaller base and now becoming more material is Instant Transfer. As you recall, that's a product we originally launched for sellers, really speaking to sellers that needed money more real time. If you are a hair salon and your biggest day is Saturday, waiting until Monday to get paid can really put a dent in your working capital. We've found great product market resonance with that to date, and we think there's a lot more opportunity, by the way.
On the Square Cash side, that's also become a really big value proposition for Square Cash, is the ability to get your money instantly as you partake in P2P. It's that mix, that lift of Instant Transfer that is having probably the biggest impact on the gross margin of software and services. Of subscription and services. I'll get it right this time.
Yeah. Thanks.
We'll hear next from James Schneider from Goldman Sachs.
Good afternoon. Thanks for taking my question. I was wondering if we could start maybe in terms of the merchant additions that you saw in the quarter. In terms of the profile, I'm assuming that the largest seller group grew the fastest, followed by the mid-range merchants. If you can give us any kind of color in terms of where you're seeing the greatest traction in terms of growth of those sellers. Specifically, can you give us a sense about whether you've kept pace with the prior quarters and whether you're now over 3 million in total?
Great. Thanks, Jim. In terms of the profile and the growth rate of each of the kind of striations of sellers that we give, you're right that larger sellers continue to grow faster. Part of it is just that we're still younger and being able to go out after that seller base. Today, large sellers now comprise 43% of total GPV, and that compares to 39% a year ago. What's driving that is the continued evolution of our product. I think releases like retail point-of-sale are really going to help a lot here because we know as sellers get larger in areas like retail, they want a more sophisticated point-of-sale around elements like inventory management, for example. I don't want to underestimate, though, the growth in micro, because I do think that this continues to be a real home ground for Square.
We think there's still a lot of untapped market opportunity and just more and more for us to do. Keep building our awareness, keep building on things like word of mouth referrals, for example. Still a lot of opportunity even in some of the smallest merchants. In terms of new sellers added, I think is your question. Yeah, we still have millions active on our platform. In terms of quarterly adds, no change to what we have talked about previously.
That's helpful. Maybe just kind of shifting over to capital for a second. Looks like the loan losses were pretty muted in the quarter, maybe even less, if you could clarify that number. More broadly speaking, I think credit quality is obviously becoming an issue for the broader market, given what we've heard from Synchrony and even some of the big banks. Can you maybe just give us a sense about what you're seeing in terms of credit quality trends across the seller base and whether you, in fact, are at the point of actually tightening some of those levels as is happening across the broader industry? Or do you think your levels are sufficient as they are?
Great. Thanks for the question. Loan losses, you're right, were maintained at 4%, or even slightly lower. We think we have a very unique asset here in terms of being able to see point-of-sale data. With that, we're able to manage the risk as we help originate those loans. That is number one, is just the uniqueness of the data that we have. In terms of broader credit quality and how we would adjust, because our risk loss is model-driven, in effect, the models are always readjusting because they're readjusting to seasonality, they're readjusting to payment velocity. As we get more data points, things like as we see your inventory, as we see are you adding new employees, all of this creates an even richer complexion of the seller from which to help facilitate that loan.
Net-net, we haven't made any adjustments right now, but our models are constantly adjusting, and I think for us, it's ultimately about the output. What is the loss rate in a given quarter? We're very happy to see it maintained in this 4% or even lower type range.
Great. Thank you.
We'll hear next from Dan Dolev from Instinet Bank.
Hi, thanks for taking my question. Two questions. First one, is there any way you can quantify the investment you made internationally and maybe how much of that is actually baked into the second quarter EBITDA guidance?
We are not calling it out specifically. I think generally, as I talked about, when we go into a new market, a lot of the product development work is always ongoing, but a lot of it is clearly done before we can hit that launch button. The real investment tends to come more around the go-to-market. We are in full test mode in the U.K. at the moment. As I said, we're bringing learnings that we've seen in countries like Australia and even the U.S. that have a lot of similarities to U.K. market. At the end of the day, every market is very different.
We will go test Google AdWords, we test Facebook, we test direct mail, many different channels in order to see where we can see most efficiency in a channel, always being mindful of that payback period that we look to here in the U.S. as well. Don't want to call out a specific number, we also want to make sure we can be successful in the U.K. It's very front and center for us right now.
Excellent. Thank you. My last question is on, again, on that transaction-based profit, which accelerated sequentially. It goes a little bit against sort of the fact that your largest sellers are actually accelerating in terms of % of GPV. Two questions. Is it just because of the things you laid out, like the card present, etcetera? Or is there something else, is this kind of the new normal? Should we think about those rates going forward like that? Thank you.
Yeah. One of the reasons why we wanted to call out the seasonality of it, when you look at Q1 of a year ago and you take out the deferral that we put on the balance sheet, effectively the free processing credits when we launched the new reader, that number would have been more like 2.95-ish from Q1 of a year ago. Net-net, I think of it as more flattish, that is normal seasonality, that in Q1, you'll always see this slight uptick in that take rate, that transaction revenue as a % of GPV because of the seasonality of card present versus card not present. As you think about Q2, Q3, Q4, I would model it much more year-over-year rather than thinking of it sequentially.
I think the meta point that you made about larger sellers and so forth, it comes back to that we believe our value proposition is much greater. We do manage payments, we help you get on board a system. We help you make sure that you can take the payment and then get paid the next day. We handle all of the risk and all of the chargebacks behind it. It is a much greater service than someone simply doing payment processing. I think that's why for the vast majority of our merchants, our take rate continues to stay very stable.
Understood. Thank you so much.
We'll now take a question from one of our sellers, Brian from K. Hall Studio. For Square for Retail, will you provide updates so that I can better manage my inventory, like a more detailed items page that includes unit cost or the ability to create SKU codes and print price tags?
Thank you, Brian, and thanks for being a Square customer. Yes, we have a very fulsome roadmap for Square for Retail. The team is working really hard to get it out as quickly as possible. We also benefit from feedback from our customers through our sales channel, through our support channel, and through watching what people are saying about our launches. We're learning quickly, and we're focused obviously a lot on, with retail, on inventory. You should continue to see our inventory system get more sophisticated, and help you better scale as you grow your business.
We'll move to the next question from Ramsey El-Assal from Jefferies.
Hi, guys. Can you elaborate on the process by which you cross-sell new services to existing clients? I'm assuming there's some detailed targeting and offers that go out. Is the process fully automated? Is there manual intervention? Are there levers you can pull to accelerate the kind of cross-selling process? Just looking for a little more color there.
Yeah, I'll start. Sarah can add some comments as well. One of the benefits of starting with the most critical thing being payments and sales is we have a customer base that's constantly checking how they're doing. They're constantly checking how they're doing on our dashboard, for instance. The dashboard being on the mobile app or on the web. This is a great opportunity for us, to show everything else that we have to offer and how easy these tools are to use. Again, there's no integration or hooking things up for a seller. They just go to that section of the website or that section of the mobile site.
We have something very unique, in that we have a base of customers who are checking daily, if not hourly, on how they're doing, and it gives us plenty of opportunity to show everything else we have to offer. This is one of the areas we're focusing a lot of our machine learning efforts on, is to get a whole lot better at making sure that we're showing people things that are valuable in the moment when they need them, so that we get better conversions every time and we're actually providing more value to that particular seller. That's probably the biggest opportunity is where we can automate more of that and really be in front of where the seller is naturally looking.
Yeah, I think from a numbers perspective, Jack's kind of spoken to the investments that we make. That is a place where ML, for example, is very efficient. In terms of the output, we are always looking at every channel, so we look at cross-sell in the same way as we look at a new channel to compare and make sure that we're putting our dollars in the right place. The only final place in the numbers I think it really shows through is in the positive retention rate. Historically, we've talked a lot about the retention rates on payments alone, to really underscore how profitable payments can be. As we go forward, we're starting to see more and more impact of the ability to cross-sell and upsell into the seller base. It has a twofold impact, clearly, on the ROI.
A, customers tend to be more sticky, the more products that they're using. Two, they have a greater LTV, to the extent that they're using more products. I think this is a place you'll see us dive into more in our investor day as well. It's a good teaser for investor day, right?
Okay. One last one from me. You just entered the U.K. If you can't go that far, can you just help us think through what you look for in a geographical market that makes it a good fit for your offering?
Yeah, I'll start there. One, we're looking for, obviously, mobile adoption, and a high degree of entrepreneurship and small businesses within the market. One of the things to point to is we're really proud of the markets that we're in, but there's a lot more to complete in those markets as well that opens up more of the market to us, and to consumers as well. Right now, we are focused on making sure that our markets are as strong as they could be, with a particular focus on Canada and Japan, and our launch of the new market in the U.K. We're using the U.K. as a way to really understand deeper the European market and are looking for the next.
Right now, our focus is making sure that it's not just about launch, but we're really successful in each one of the markets that we're in. We're completing and have a cohesive offering in each one.
Great. Thanks for taking my questions.
Thank you.
Thank you.
Paul Condra with Credit Suisse, your line is open.
Oh, great. Thanks, and afternoon, everyone. Just kind of a follow-up on that question. You focus a lot on the large cities where you have a lot of small business activity. I'm curious kind of in the U.S. what you're seeing in more rural parts of the country, how you penetrated those regions and how important is the strategy to expand in those parts of the country?
Sure. Thanks for the question. I think for me, one of the most interesting and uplifting things about Square is that we are everywhere that commerce happens. We're not just about large cities. Instead, if you just looked at a map of the U.S. at any given point in time, you can see transactions happening all over the country. In terms of how we have done that, I think part of it has been building a brand that really resonates and that people recognize. Even to this day, a large portion of our activations come from effectively word of mouth. We call them organic. They haven't been touched by any form of paid marketing.
Instead, it's a seller telling a seller, or a seller sees it in a cab, but when they return to their cupcake shop, they want that same ease of use, that same kind of delightful experience. That has really helped a lot in terms of proliferation across all parts of the U.S. By the way, this also is the same trend we see in Canada, which has massive land mass, and where we see transactions happen everywhere in Canada as well. I wouldn't say that there's one particular thing that we've done. Rather, it's been about building a brand that continues that referral, that word of mouth, and then utilizing really large scalable go-to-market channels like SEO, SEM, direct mail campaigns, and so on, that can be done in a very low touch, no touch way, but at broad scale.
Ensuring that we're always very diligent about the payback period. Whatever channel we push in a given quarter, that we're always maintaining that four to five quarter payback period.
Okay. Thanks for that. Just as a follow-up on the, I was surprised the stock compensation was flat, and I wondered if you could just talk about how that will look for the year. Thanks.
Sure. From a stock comp perspective, we gave you our GAAP EPS guidance. I think that should give you a lot of color on both what SBC should be for the year, even as we think about the fully diluted share count. We can clearly follow up if you need more depth on that. At a high level, just to remind in terms of SBC, we do have a philosophy of ownership at the company, and we think that aligns the interests of Square's with all of the investors in our company. Secondly, we are starting to trend more towards cash compensation though, because we do want to be mindful of dilution. We've moved from options to largely RSUs for most of the company at this point in time, and we are erring more into cash.
That's just part of the maturity of the company. If you look at any of the larger tech companies that have been around for decades, they've made the same move. In terms of for the year, we would continue to expect SBC as a % of adjusted revenue to continue to trend down in the same way that we see with all of our other operating expense lines.
We'll hear next from James Faucette from Morgan Stanley. Please go ahead.
Great. Thank you very much. Just a couple of quick follow-up questions from me. First, you mentioned transaction losses staying low and below kind of the way that you formulated them in your guidance the last couple of quarters. How have you rolled that forward into your forecast? Are you now looking at a permanently lower level or do you still have built-in expectation that those losses could increase? My second question is, I understand that the move into the U.K., you've kind of built that into your guidance, but should we anticipate any impact on some of the other key performance indicators that people track, perhaps as given the difference in interchange rates, et cetera, in that market? Thank you very much.
Great. Thanks, James. First on transaction losses. We've typically talked about transaction losses being around 0.1% of GPV. When we think about forward guidance, we tend to go back to that number. We've put a lot of investment in order to maintain that level of transaction loss. It's also a way for us to be able to open up the top of the funnel and allow as many sellers as possible who come to Square to be accepted onto the platform. That's very, very different from anyone else in the industry, and we think it's a core competitive advantage to do that. We don't want to overly constrain the top of the funnel by getting too myopic on a transaction loss rate.
In terms of the U.K. guidance, and impact on other KPIs, I think where you're alluding to is if you look at pricing in the U.K., our fee is 1.75% for card present, and then 2.5% for card not present. We can go to that fee rate because interchange in the U.K., it's a very regulated market. For context, for those that maybe haven't looked at it, interchange on card present is capped at 20 basis points on debit and 30 basis points on credit, and that compares to about 160 basis points to 180 basis points in the U.S. It's a very, very different market from a cost perspective. I think it will take a while for the U.K. to really impact things like take rate or things like transaction margin profit, just given the scale of the rest of the business.
We'll definitely update you at a point where that makes sense.
Thanks.
We'll hear next from Brett Huff with Stephens.
Good evening, and thanks for taking my questions. Can you talk a little bit about competition both in the U.S. and the U.K.? There's lots of folks who have popped up to try and imitate what you've done. Some focused on card present, some are more card not present. How do you sort of think about as you develop your products and also try and capture more share of wallet? How do you defend that franchise that you guys have going?
Yeah. As you said, we have seen a lot of imitation. We're very proud that we continue to invent and others follow, we can't just rest on those laurels. We need to make sure that we're really clarifying what sets Square apart, we think it comes down to four things. Number one is our simplicity. That's due to a lot of, because of number two, which we spoke to in the opening remarks of cohesiveness. Our tools work together, we focused on the most critical tools first, then the next most, the next most, the next most. I feel really good about how cohesive our ecosystem is and how well it works together. The other big defining aspect for us has always been how self-serve our tools are.
This is another focus for us this year in terms of using machine learning to make sure that we continue to be more self-serve, that our sellers can do what they need, they can do it very quickly. The more self-serve we get for every seller type, the more customers we get to serve. Then finally is speed. This is not just how fast our apps are or how fast we've made our hardware, which we put a lot of emphasis around. For instance, our chip card reader, we brought down from an industry average of 11 seconds to five seconds to now three seconds. It's also how we give access to sellers' funds. Sarah spoke to Instant Transfer, for instance. It's really important that sellers have instant access to their funds and have that option available.
If they have faster access to their funds, they can grow faster. Our whole goal is to help drive more sales to our sellers, and that comes in a multitude of ways. We have continued to innovate, continued to be the first to market for everything that we've offered. Building into those four aspects, cohesiveness, simplicity, self-serve, and speed, really helps us make sure that we stay ahead of the curve as we continue to invent new things as well.
That's helpful. Just the second question is, as you think about your ecosystem and maximizing sort of what you provide for folks, how are you delineating what you want to do and build yourself in terms of functionality, and how do you determine what you're going to partner with in order to both provide the most value to your merchants, but also maximize the stickiness and value of your ecosystem over time?
It's all a matter of prioritization in terms of what a seller actually needs and what is most critical. We started with the most critical need, which is being able to accept the sale in the first place, and that's payments. The next most critical was understanding my business. That's where Point of Sale came in to help organize someone's business and understand what's going on in the business. That allows me to make better decisions as a business owner. The next most critical thing was access to capital. The next most critical thing is access to new customers, be it in the form of existing customers and building more loyalty, or new customers and driving new sales. You see this in what we did with Caviar, allowing us to reach a restaurant seller, drive new sales to a restaurant.
As we add a dimension like pickup, we get even more types of restaurants and more individual consumers as well. That has been great, and I feel really good about our ability to focus and prioritize. We do have an escape hatch, which is our Build with Square platform and APIs. That allows partners to join and to build on top of us, and with us, that we can serve every type of seller with solutions that we don't have or are not prioritizing. Gives us an ability to learn as well, and allows us to help promote our partners, but also, especially around larger sellers, make sure that Square is always in the solution set, no matter the size.
I feel really good, again, about our focus, but also our ability to understand what our sellers need at any size because of our API and because of the focus on our platform.
At this time, we have time for one last question. That will come from Bob Napoli from William Blair.
Thank you. Good afternoon. Can you talk about the attach rates, the trend in the attach rates, and what you feel like you can get to for some of these products for Invoices, Instant Deposit, Square Capital? Obviously, those products are growing at a much faster pace than payment volume overall. The attach rate is going up. Could you give some color on where you think that those attach rates could possibly get to over time?
Sure. Thank you, Bob. If you look at a product like Invoices, Q1, very nice quarter for that product, 225,000 active sellers driving $700 million of GPV in the quarter, almost getting close to $3 billion on an annualized rate. I think that's a great example of a product that can hit a seller of any scale or size, any type of business. It has a lot of ability to go in and penetrate the install base. Capital, similarly, I think we've always been very proud of the fact that with Capital, we can go right down into micro merchants that really have no other avenue to get capital to help them grow their business.
A seller like Sam, that Jack mentioned in his opening remarks, how she goes from a pop-up in a station to a store, we can get her capital to do that, even at her scale. I think that's a product that also has a wide applicability to our seller base. There's others, like retail Point of Sale, where clearly we're going to double down more into retail as a vertical, which retail as a percent of total GPV on our base is more in the kind of 20%-ish type range. It's not broadly applicable.
It's kind of a tension of where do we want to go deep because we believe that vertical specificity will allow us to go into a merchant base that we don't have access to today, maybe a larger full-service restaurant, for example, with Caviar or a partner with a Point of Sale. Or where do we want to go really wide and make sure that the product, like the speed of access to capital with Instant Transfer, is available to all. Invoices is the best example since it's the furthest along right now, but I think we still have a ton of running room, even in a product like Invoices.
Any numbers on attach rates, where you are today and where you think you can go as a.
Yeah. I don't want to get into %s because then I think some products, it'll look like a really small number. We'll be talking basis points to begin with. Invoices, you know that we have millions in our install base, but you also know we now have 250,000 actives on Invoices. You're starting to see a product that's getting to a more meaningful attach rate. That's why I pointed to it as a good example of where other products can get to. Invoices itself, I still think can really go quite far from here.
Great. Just a clarification on a number. The Capital business where you. I guess the question was there any one time. That business.
Yeah
the way the business model works is you originate and you sell each quarter, so those are normal.
Yes.
It's not that you didn't have any gains, it's just nothing abnormal, just in the normal course of business.
Yeah. Thanks for the clarification if that wasn't clear. That's exactly right. The core part of our strategy with Capital is to sell those loans on to third-party investors. That helps us to continue to fuel our growth and also help manage our risk at the same time. As you can see, sitting on our balance sheet right now, we have loans held for sale at around $52 million. When you compare that to the $251 million that we facilitated the origination of in the quarter, clearly that third-party investor is a core part of how we grow.
Are the margins stable on that product? What are the gain on sale margins? Are they mid to high single digits is what I think you've said in the past?
They haven't changed. They've remained very stable. I think as we continue to build that business, we see more and more investor interest. As you get more investor interest, clearly that starts to give you more and more ability to negotiate from a rate perspective.
Great. Thank you very much. I appreciate it. I'll see you in a few weeks.
Great. Yeah. See you soon. Thanks.
That does conclude our question and answer portion of today's conference. 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'll be hosting our second quarter 2017 earnings call on August 2nd and our investor day on May 16th. 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.