Good day, ladies and gentlemen, and welcome to the Square 4th Quarter 2015 Earnings Conference Call. I would now like to turn the call over to your host, Jason Lee, Head of Investor Relations. Please go ahead.
Hi, everyone. Thanks for joining our Q4 2015 earnings call. We have with us today CEO, Jack Dorsey and CFO, Sarah Fryer. First, we wanted to outline the form for our earnings presentation. For this earnings call and going forward, we will publish a shareholder letter on our Investor Relations website shortly after the market close.
Then we will begin with just a few prepared remarks before opening the call directly to your questions. Our hope is that this format will result in greater clarity and additional time for Q and A, so that analysts and shareholders can drive the conversation. During the Q and A, we will take questions asked from our seller shareholders, in addition to questions from conference call participants. We'd 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, and 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 the call, we will discuss certain non GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measure will be provided in the shareholder letter on our Investor Relations website.
These non GAAP measures are not intended to be a substitute for our GAAP results. Finally, this call in its entirety is being audio webcast on our Investor Relations website. An audio replay of this call will be available on our website in a few hours. With that, I'll turn it over to Jack. Thank you, Jason.
Thank you all for joining us today as we report our quarterly and annual financial results for the first time as a public company. We're off to a great start with 4th quarter financial results that demonstrate both high growth and strong operating performance. This afternoon, we issued a shareholder letter with longer remarks, which I encourage all of you to read. But on this call, I'd like to share my 3 main takeaways from our quarter. First, our core payments business is at scale and growing fast.
We had record GPB this quarter of $10,200,000,000 a 47% increase from the previous year. That's more than $10,000,000,000 in commerce that sellers are contributing to local economies. 2nd, we are seeing strong demand for our contactless and ship reader. As of the end of Q4, we already had received over 350,000 preorders. We have been shipping the reader since December.
It was also for sale online and in Apple Stores around the country for $49 The shift to both chip cards and contactless payments in the United States is just starting and we believe we are in an ideal position to win this industry wide shift. And 3rd, we are developing new products that our sellers love. You can see the traction of these new services in the numbers. For example, with Square Capital, we've sent over $400,000,000 to more than 70,000 advances in 2015 with nearly $150,000,000 advanced in the 4th quarter. We are seeing similar traction with services such as Square Invoices and Instant Deposit and you can learn more about those products in our shareholder letter.
Our sellers are our partners and when they grow, we grow. That's one of the greatest things about Square. We can build a strong growing and profitable business by putting ourselves first. And now I will turn it over to Sarah for some remarks.
Great. Thank you, Jack. Let me provide a bit more color on our financial achievements for the Q4 and full year as well as provide guidance for Q1 and 2016. Our Q4 financial results demonstrated high growth at scale, increased breadth in our revenue streams and improved operating leverage. In the 4th quarter, we saw $10,200,000,000 in GPV, up 47% year over year and adjusted revenue of $135,000,000 up 64% year over year.
We were especially pleased with the growth in our software and data products. In the Q4, revenue from these products was $22,000,000 growing 52% sequentially from $15,000,000 in the Q3 of 2015 and growing more than 3 times from $6,000,000 just a year ago. This growth underscores the strength of our base of over 2,000,000 active sellers and the cohesive commerce ecosystem we've built and continue to expand to help them grow their businesses. Our 4th quarter adjusted EBITDA loss of $6,000,000 was a steady improvement from our loss of $11,000,000 in the Q4 of 2014. Adjusted EBITDA for 2015 overall was a loss of $41,000,000 compared to a loss of $68,000,000 for 2014, representing 15 points of EBITDA margin improvement year over year and demonstrates that we can drive operating leverage in our business while generating strong top line growth.
Next, I'll turn to guidance. For the Q1, we expect adjusted revenue to be within a range of $1,000,000 to $137,000,000 and adjusted EBITDA to be in a range of negative $11,000,000 to negative 9,000,000 dollars Historically, the Q4 has been our strongest revenue quarter as sellers typically generate additional GPB during the holiday season. In contrast, our Q1 is seasonally our slowest in terms of transaction revenue sequential growth. For the full year 2016, we expect adjusted revenues to be in a range of $600,000,000 to $620,000,000 and adjusted EBITDA to be positive $6,000,000 to $12,000,000 So with that, let me turn it back to the operator to start the Q and A portion of the call.
The first question comes from Jim Schneider with Goldman Sachs.
Good afternoon. Thanks for taking my question. Good job on the quarter. I was wondering if you could maybe give us a little bit of color around Square Capital. Clearly, the growth trend is very strong there in the quarter.
So can you maybe help us understand within the context of your guidance for the full year, what kind of contribution do you expect from Square Capital? Or alternatively what kind of originations do you expect throughout the full year or maybe exiting 2016?
Sure. Thanks, Jim. I appreciate the words on the quarter. So overall in terms of core capital, we continue to feel very good about the traction that we've seen there. We talked about 150,000,000 advanced in Q4, 70,000 advances and that's on a base of over 2,000,000 active.
And as we've talked about with you before, we continue to see a lot of breadth in Square Capital in terms of being able to go in and penetrate that installed base. On top of that, the renewal rate remains strong with 90% of all of our sellers who get offered a second advance or a third advance taking it. So it really speaks to the strength of the product and how it resonates for them. We have not chosen to break up part guidance, so we'd rather just stick with giving you the adjusted revenue number of $600,000,000 to $620,000,000 However, we do continue to expect good growth in our software and data products line, but also our payments business continues to show very high growth too.
Thanks. And then as a follow-up, could you maybe just talk about the overall trajectory of profitability and margins as we head throughout the year? Clearly, the guidance implies a breakeven sometime in the middle of the year. Can you maybe talk a little bit about some of the factors that are going to drive those margins higher or lower? And how are you thinking about modulating the investment levels throughout the course of the year to kind of achieve margins?
And maybe any kind of color you could provide on where you expect to end out the year?
Absolutely. So, 1st and foremost, as we think about our business, the underlying platform that we've built that we pay for with the payments business model, we've talked about the underlying profitability of that and it is continuing to shine through. That's why you see that year over year improvement in adjusted EBITDA margin, that 15 points that I talked about in 2015 over 2014. So the base we talked about the 4 to 5 quarter payback period of the base at that point is effectively paying for itself, that's just on payments. And then that cohort, those cohorts continue to grow at that 110% type cliff that we talked about while we were on the road.
So the core itself is a very good strong healthy business and we expect that to continue. And then clearly as we're now layering on new software and data products that continues to add to our ability to cross sell, up sell and to the operating leverage that we've seen. So together those combined to give you this path to profitability that we're on. And I think you're right in terms of the guidance for the full year, we are definitely implementing a steady improvement quarter by quarter with a breakeven somewhere in that midpoint of the year. With all of that said, I always want to remind that what we see in front of us is huge opportunity, whether it's to go back in to our core market where there's still 20,000,000 small businesses that don't accept credit cards, whether it's to continue to go up market into bigger businesses or whether it's to keep adding on new services into our ecosystem, there's absolutely a lot of room to keep investing, keep growing at these sorts of rates.
Thank you.
Thank you.
Your next question comes from Tien Tsin Huang with JPMorgan.
Hey, thanks. Good quarter here. Just on the upside in the software and data line, can you give us some details on the components of revenue and maybe what's performing better than planned and as we look to 2016 that there could be a reordering and what's going to contribute to the growth software and data?
Sure. Thanks, Hae Jin. So overall, within the software and data line, the capital and Caviar continue to be the majority of that line. So clearly, a lot of the growth that we saw in Q4 were driven by those 2 particular products. I won't go through capital again, but even on the Caviar side, we continue to see good momentum about 4x order growth on a year over year basis in Q4, for example.
But I certainly don't want to downplay a number of the new products that we launched through 2015 in Q3 and Q3. So we call some on demand in our shareholder letter products like instant deposit for example that really make use of some of the innovation we did on the Square Cash side to now allow our sellers to not just get next day settlement of funds, but to get instant settlement of funds. And so those products when we build them show really immediate resonance for the base. And so overall, we'd expect that to continue to build as we get through the year. So net net confidence in what we're seeing currently in software and data.
Again, I don't want to call out specific guidance for that line.
Okay. That's fair enough.
If you don't mind, just a quick follow-up. Just demand for contactless readers maybe after the promotion period, any color you can provide us now that we're in March on the contactless side? I'm assuming that maybe that could accelerate growth in GPV from larger sellers, if I'm assuming that the high takeaway there with the contactless readers? Thanks.
Yes, we're seeing some really positive patterns here. We're really excited that the readers is in Apple Stores and that's offline and online and we're seeing a huge demand for the reader and we're taking full advantage of the shift to chip cards and contactless. And we have a best of class hardware and this is the fastest out there both for accepting chip cards and also accepting the mobile phone. And we think that really wins. We want to be able to associate our logo with the ability to pay with your phone.
So we think there's a huge potential for us to really win the behavior. But there is also a lot of education that comes in the United States with this shift. So we're still teaching both sellers and buyers around chip cards and also paying with their devices. More signage on counter certainly helps, but we don't see it just as a sale and then we're done. We have to educate as well and we're seeing some positive returns from that.
But we're putting a lot of effort into getting this reader out fast. We've shipped all the preorders and we're really excited that we're seeing sales from even our micro merchants all the way up to the small and into the mid market merchants as well. So it's a device that works mobile and also on the countertop, which we're excited to see the demand for.
Your next question comes from Darrin Peller with Barclays.
Start off, if you can give us a sense as to what percentage of or maybe the number of your merchants that are now taking on some of your other services. I know that you mentioned some data points in your release, but maybe if you can give us a little bit of a bigger picture cross selling overview on what's done, what's to be done and inclusive of capital and some deposit or others like Caviar, it seems like there's a long runway?
Yes. Thank you, Darren. We have not given a percent attach rate, but I would bring you back to 2 products that today are showing the most momentum in terms of number of square sellers who are now utilizing them. Invoices, we talked about in the shareholder letter, so 100,000 sellers now utilizing invoices. That's an online way to pay at a distance, great experience for both the buyer and the seller.
And a good example, I think of when we create innovation close to payments that we're able to see quick, quick adoption. So getting to 100,000 in just a year and a half. The second is Square Capital. So we talked about 70,000 advances, probably about 50,000 ish sellers. So if you think of that 50,000 as a percentage of our over 2,000,000 active, we're still in small single digit type attach rates.
So for sure, I think that's one of the big competitive advantages of what we felt is this very cohesive ecosystem, a very engaged seller base, they're in that dashboard every single day. And then and the brand is resonating as the net promoter score of over 70. So clearly they have the need of these products and they want to take them from Square.
All right. That's really helpful. Just one follow on to that on related topic. I mean the incremental margin on adding on those cross sold opportunities just given again I mean it's
some of
it is already on an exist most of it is on an existing relationship already to some extent. And so is that margin accretive to you as you add on and grow those software and data products overall
would you say? It's
getting pretty big as increasingly sizable as a percent of your mix.
Yes. The way I would think about the income margin or maybe if I talk about it more in terms of the cost to bring those products into the world and into sellers' hands, There still is a big R and D element generally across the whole company. So we certainly don't view payments innovation as done, right. We're approving that with products like instant deposit and even invoices that I just spoke to. So there's certainly still a lot of investment going back into payments, but then there clearly are engineers, designers and so forth required to also bring about new products like a Square Capital.
So from an R and D perspective, I would expect us to continue to invest there. I think where you do see incremental margin is clearly on the go to market. So the great thing about having today put in place that 2,000,000 plus active base is that we don't have to go out and do more customer acquisition. So products like Square Capital, we've grown at the scale with almost 0 customer acquisition costs. It doesn't mean at some point we won't do customer acquisitions, maybe use Square Capital as its own on ramp to Square, maybe not payment processing, but starting out with something like capital to bring you on to the platform to then do things like payment.
However, you're right that at the moment from a sales and marketing standpoint, those products require a lot less sales and marketing than what you would see if they were standalone companies or
standalone products.
Thanks. Just last quick one
on the international front, any quick update before I turn it back to the queue?
So we're in the U. S, we went to Canada after that, we went to Japan, we learned a lot from Japan. Japan is not traditionally a market that accepts credit cards, it's cash driven. We made a recent announcement that we are live in Australia and we're excited about that. One of the things I would point you to is our chip card and contactless reader is a global platform.
It's a global standard, global technology. So it allows us to move much, much faster around the world and we definitely have more markets insight coming up.
All right. Nice job guys. Thanks.
Thank you. So we'll take our next question from one of our seller shareholders, Beth of Kirby Vacuum in Pittsburgh, Pennsylvania. The question is, kind of security do you have to keep someone from hacking, stealing and disrupting the system? Thank you, Beth. Security is a really big focus for us, and we have a whole team that wakes up every day figuring out ways to keep us ahead of the game to make sure that we continue to be a trusted brand.
We use the most modern technologies, and we also go above and beyond, not just for Square security, but alerting our sellers when there might be security concern around this particular OS or their devices, so that we can keep them safe and also the customer safe. I believe fundamentally the security is not an endpoint. It's something that you have to constantly improve and get better and better and better at. And it's really a question of you have on your team to push this forward. And I have a lot of confidence in the ability of our security team and the engineers who protect all of our sellers and also square more growth.
The next question comes from Jason Kupenberg with Jefferies.
Thanks guys. So just a question on the adjusted net revenue growth outlook for 2016. It looks like it's about 33% to 37% year over year growth. Obviously, quite a solid number, but it is a bit of a slowdown from 64% in 2015. So I mean, how much of this is just kind of law of larger numbers, maybe some conservatism, other factors that we should be thinking about?
Sure. Thanks, Jason. So overall, I think we remain really pleased with this sustained high growth at the scale that we're at. You saw it in the quarter 47% year over year growth on GPB compared to 48% in the September quarter. So really maintaining high growth at scale.
I think underpinning that, the core itself continues to be quite strong and growing. So we've talked about that retention rate positive 100% and that we continue to see really good momentum with new sellers. So I think in our core market, we still got strong opportunity to go target those 20,000,000 sellers that they don't accept electronic payments. And I think we're also as our as our register becomes even much more fully featured and a true point of sale that you're running your entire business on, it's really opening up the aperture to sellers the whole way up to those doing $20,000,000 of revenue. So plenty of opportunity ahead of us.
I think 2015 was definitely a foundational year for new products. Many of them are young, they're going to be volatile, they're still scaling. And so I think with all of that in mind, we wanted to just take a solid approach to our guidance. We feel comfortable with how we've guided and such as now continue to go drive at those opportunities.
Okay. That's helpful color. Jack, just a question for you about how you've been spending your time. I know your target was to be about fifty-fifty between Square and Twitter. And I know Twitter has been keeping you busy as well.
So have you been able to achieve the kind of balance that you've been hoping for? Yes, yes, yes. I benefit a lot from a consistent schedule and a consistent structure. So Monday, I knew with both leadership teams for about 4 hours each and we set the week ahead and commit to what we're doing and we have checkpoints on Wednesday Friday. And the balance of my time is spent reviewing with the product teams and also recruiting.
So I feel really confident in that ability right now. As a reminder, both companies are across the street from each other. So that allows me to be at both companies every single day and be present. And I'm always connected to both leadership teams, so that if something does come up that meaningfully requires more of my time, I can be flexible as well. So it's been working out really well.
Thank you for asking. The
Next question comes from Ben Perlin with RBC Capital Markets.
Thanks. I just had a question in regards to Square Capital, not so much from the demand side. I suspect that's quite significant. I'm wondering, there's a lot of concerns rightly or wrongly about credit in the U. S.
And some of those trends. So I'm wondering your investment partners, where are they in that process? Can you give us any update about their thinking? And then also, you just mentioned the provision expense. I think in the investor letter, I was wondering if you'd be willing to give us a little more detail around how much you actually took on your end balance sheet this quarter versus outside investors?
Sure. Thanks, Dan. So you're right. There are two sides to capital and we feel very good about the demand coming from our seller base and that we're fulfilling a real need that they have. On the investor side, I think a couple of points.
First of all, we started to work with investors so that we could both accelerate the product, but it also helped us manage the risk on our balance sheet and we want to continue that motion. We are absolutely going keep working with 3rd party as well as utilizing our balance sheet to some degree. What's interesting in the current environment is I think Square is being seen certainly as the good guys. I think the investors that we work with are able to understand 1st and foremost a flight to quality almost for Square Capital. So our low customer acquisition costs, low to no, those are not ballooning, it's just seen with other alternative lenders.
2nd, our ability to manage risk. So we do have the data that you want if you're going to underwrite and underwrite well, and that is the payments data. So we're really able to understand how someone's business is trending and it's almost a daily mark that we get, right. We get films every single day how business across the United States is trending. And so for those reasons, we have a lot of inbound interest and a lot of discussions going on in terms of partners to work with.
With what's going on the macro side, we're still trying to be mindful of that and make sure that we don't get ahead of our SKUs in any way. We are utilizing our balance sheet and you can see that I think in particular post the IPO, we want to think about the usage of our balance sheet as a percentage of overall liquidity rather than as a fixed amount. That will allow us to flex up and flex down as our balance sheet changes over time. And then finally, I think we want to be strategic about when to use that balance sheet in moments where the market may be a little tighter to make sure that we are able to keep growing the product given the demand and the overall trends that we see in it.
That's great. And then just a follow-up real quick. Can you just I just want to flush out the commentary around transaction revenues, some of the GPV being depressed in kind of the first and second quarters. Is that simply the mechanics around the processing credits that you're giving on the hardware sales? And is that somewhere around $8,000,000 $8,000,000 to $9,000,000 that we should be flushing through the 1st 2 quarters?
Thank you.
Yes. So you're exactly right that as we now fulfill all of those presales of 350,000, we did some free readers, but then a lot of processing credits because we don't want to just put readers out there, we want to put readers out there that are getting used. And so you see that as a netting against overall revenue. Mostly in Q1, you'll see a little tail of it going into Q2. And so that does weigh on transaction revenue as a percent of It's not major when we're talking about small basis points of impact, but we would expect it then to rebound as we get into the Q3.
We'll now take our next question from one of our seller shareholders, Thomas of MDR Solutions in Reynoldsburg, Ohio. The question is, when is Square going to open up its so that they will allow payment integration with other apps and platforms? Thank you, Thomas. We actually have an app marketplace today and one of our biggest featured third parties on is Intuit. So if you use QuickBooks to run your accounting, you can flip a switch and it just works with your Square register system and you can do that right in your dashboard.
If you want to sell online, you can use Square and BigCommerce or Weebly. So we're focused on making sure that we continue to build a really great cohesive and integrated experience. We realized we're not going to build everything. So we opened up a bunch of APIs and in that marketplace for third parties to actually build functionality and services that extend our ecosystem. And that's good for our sellers, but also good for those 3rd party developers and those companies.
And again, a big focus for us here is around providing a unified dashboard for a seller. So if you do sell offline with Square and you want to move online, you see it in one place. It all comes into your dashboard on the web or in our dashboard app you can take with you and actually keep track of your business on the go.
Your next question comes from Bryan Keane with Deutsche Bank.
Hi, guys. Congrats on the quarter. Just wanted to ask, is there any thoughts on how to model the GPV growth going forward in fiscal year 2016? And then kind of thinking about GPV, I think you guys quoted 39% of it coming from larger sellers, which is a growing percentage. How is that pipeline looking to go up market to the mid to large retailers?
Thanks.
Sure. Thanks, Brian. So I think overall when you think about GPV growth, we really put it into 2 pieces. The first is just the base itself. So we give you a lot of details as we were on the road about how our cohorts typically manifest themselves on a year over year basis.
So what we see is that ongoing growth cohort over cohort and that's true for our oldest cohorts, if you go the whole way back to Q3 of 2010 up to our youngest cohorts, we still see that same positive retention rates on a year over year basis. And so no real shift in that trend. Then I would think about net new sellers that you're adding to the mix. Again, no real I wouldn't bake in any real change of trend. We still see a lot of opportunity out there.
Ultimately comes down to our marketing spend to drive 50% of that, we're still seeing about 50% to come to Square and not touched by any marketing. So it's really a choice on driving overall growth, but we expect to have seen similar trends to continue. In terms of larger seller traction, you're right that in Q4 what we saw is that now almost 40% to 39% of our GTV is coming from sellers that do more than $175,000 on Square. So they're probably doing about a $250,000 plus in total revenue. And we like that shift that's up from about 33% year over year.
Again, our product continues to become more and more fully featured. We absolutely begin to see some verticalization going on with things like Square Appointments, really speaking to sellers that are in the services space. Clearly from a food perspective, our register is very well formulated for folks like QSRs. So we will continue to drive on that. And I think also as we add new pieces, instant deposit, invoices and so on, that continues to allow us to continue this upmarket move.
So yes, you should expect that to continue to continue.
Okay. And just a quick follow-up, the 2,000,000 active sellers, that number seems pretty similar to last quarter. Did that number move a lot and how important is that number going forward? Thanks so much.
Sure. So I think on a quarterly basis we'd rather not get into reporting out on our active sellers. I think last week we talked about over 2,000,000 active sellers. We're still at over 2,000,000 active sellers. You could go back if you look at some points on the line, you would see the Square adds about 100,000 active sellers a quarter and so we still see a continuation of that sort of trend.
Your next question comes from Josh Beck with Pacific Crest.
Hi, thanks for taking the question. I wanted to ask about Square Capital. Have you seen any
changes in fees from 3rd parties or any development along those lines, any other metrics or
other data you can share that
you're seeing in terms of delinquencies and charge offs just given the focus on macro and credit?
Okay. Josh, you're a little quiet, but what I think I got is any changes in fees in 3rd parties and any changes in charge offs and so on from the macro. So you can follow-up if I didn't capture it completely. So on the first note, no changes in fees from 3rd parties that we work with from a core top level perspective. 2nd, in terms of default rates, we have not seen any change currently in our business.
We still see low single digit default rates. We believe we're able to do that because we have some really unique advantages at Square. 1st and foremost, a merchant base that we already know and we have longevity on the platform. 2nd, our access to unique data, the payment data, it is the key data that you want to be able to look at to understand how someone's business is trending. And then we have an ability to do a daily cash draw effectively every time a merchant collects a card, we're taking a cut off that to do a repayment for Star Capital.
Overall in terms of managing risk, I think 2 things I would really call your attention to. The first is short duration and the size of the events that we do. So typically, our duration of our NPAs is around 8 months to 9 months and our event size is about $6,000 per merchant. So we are able to stay quite nimble as the macro environment shifts around. And then the second piece is clearly working with 3rd party, so that we are both taking some risk on our balance sheet, but the majority of that is a true sale off to the 3rd parties that we work on.
Thanks. And one follow-up question. When you look at merchants with greater than $125,000 of revenue, I think as the previous question highlighted, that's moved up nicely. How much of that is from basically growing with Square, so coming onto the platform, opening up new stores versus maybe a new customer to Square that starts with a higher kind of payment volume? Any color you could give us there?
And what's the type of time horizon when maybe this metric could approach 50% just kind of thinking longer term?
So we've seen a really healthy pattern of sellers growing on Square. We don't have any specific breakouts of that number to share with you. But over the 7 years, we have consistently seen both the small and the micro and the very, very large come to our website organically. The majority of our growth is still organic. And that's a really good signal, but they come to us sometimes with 4 locations, sometimes with 1 location growing to 4.
We do believe our biggest job on the seller side is to make sure that we're building tools that help them grow. So we love when a new location is added. We're building services to help them do that Square Capital is an obvious big one, but just a deeper understanding of what the business is doing allows them to make better decisions about it. So we have consistently seen both the very, very small to the very large come to us and want to use the services. And we have also seen pretty significant growth and actually keeping those sellers as well.
So we want to make sure that we build tools to grow our sellers and as they grow, our business grows as well. And that has stayed true for 7 years. Great. Thanks. We'll now take our next question from one of our seller shareholders, Bristol of Jolla Studio in Providence, Rhode Island.
The question is, I've been targeted by a pretty hard sell from Bank of America's merchant services and Voyager switched to their system. Their rates do seem to be lower if you're selling in larger volumes. I am obviously going to stick with Square as I prefer your system, but I am curious to how Square plan to compete with their lower rates and aggressive marketing? Thank you, Gerson. Thank you for using Square as well.
One of the things that we believe has been fundamental to our success has been the speed of our transactions and how quick it is to start processing payments for Square, the transparency and also the simplicity. That's how we started. And what we built from that is a suite of services and an ecosystem that not only helps sell and make the sales, but also helps grow sales as well. And things like analytics, Square Capital, payroll, these are all things that give a seller a better way to understand how to grow their business, how to serve their customer better, how to manage their business a whole lot more efficiently so they can grow. What we have seen from our competitors is they're all going after parts of the system.
And we believe we're the only ones that actually going after a cohesive whole end to end. So starting with the most critical thing, the non discretionary item, which is making the payment and carrying that transaction. So building off that into services that actually help you grow as a seller, buy a new salon share, open a new location, hire a new employee, whatever it is, so that we can do it in one package. So the net result of that is all you have to do is download Square and you have everything you need to start running for your business. And we have seen consistently that, that is the biggest competitive advantage that we have.
And the rate actually matters less to our sellers than we had first imagined. There was a big learning. It's a suite of services and the cohesion that matter a whole lot more and how well they work.
Your next question comes from Bob Napoli with William Blair.
Good afternoon. Thank you for taking the questions. The question on your net transaction revenue yield at around 100 basis points, 104 basis points this quarter. As we think about your target margins for the long term, 35% to 40% EBITDA margins, it seems like you should be able to get some leverage off of that revenue yield. What are your thoughts around growing the revenue yield or is the margin increase primarily going to come from the other the software and data products revenue?
Sure. Thank you, Bob, for the question. Let me just take a step back because I want to make sure we're articulating our long term margin target off of the same kind of base, which is off of adjusted revenue. So we do that to exclude out things like interchange and assessment. So typically where a payment processor would go would be straight to net revenue and so we wanted to create some comparability.
So when we talk about any margin, we really talk about it as a percentage of adjusted revenue, which is kind of where you were starting from. On that basis, yes, on that basis, our the overall technology platform that we have, the payment piece is already starting out with a greater than 90% gross margin, about a 93% gross margin. The software and data product overall actually start with a lower gross margin because they're a blend, products like our software products have more traditional software gross margin, products like Caviar clearly have a lower gross margin. So it's actually when you think about profitability, it's getting those to catch up to our payments is that is certainly a starting point. Overall, when I think about what will drive profitability for Square and the long term margins that we've spoken to, I think it is ongoing kind of profitability of the core.
It is the growth of the new products that you articulate, particularly the software capital type products. And then I think the third thing is just the leverage that comes with scale. So first and foremost, we are a technology company, we will continue to invest in R and D. However, like every technology company as you grow, the percent of your adjusted revenue that will go to R and D clearly comes down and you've seen that in our numbers already. G and A as a percent of adjusted revenue absolutely needs to become more efficient.
That will be a big part of my focus over the next couple of years. And then sales and marketing is a little bit more I would call a variable expense for us. When we see opportunity and we've articulated a lot of that I think on the call, we will continue to invest in sales and marketing. But that is a decision that we can make almost quarter to quarter. But in that we clearly want to show profitability as we go through 2016 and that's what we provided the adjusted EBITDA guidance that we did.
I hope that helps.
Yes. And is the Square Capital the highest margin product for you?
No, actually, our core payment business at a 93% gross margin is probably our highest margin product. We haven't split any of them apart, but core payments is a very good product.
Thank you very much. Appreciate it.
Thank you.
We have time for one final question. And that question comes from the line of Andrew Jeffrey with SunTrust.
Hi, good afternoon. Thanks for taking the question. Jack, I think you made a really interesting comment at the outset in your prepared remarks about EMV and Square's position in the EMV market. Obviously, there are a lot of much larger companies going after the EMV opportunity. Can you elaborate a little bit on what you think Square's key advantages?
And if that advantage in EMV might really leverage you into bigger merchants or you're thinking more about those merchants which heretofore have accepted cash and really being the sort of the go to provider for the EMV solutions among that base? Thank you for the question, Andrew. Great question. So we believe the opportunity for us is, 1st and foremost, to associate our local with the new behavior. And that's something we've been doing for 7 years.
So anytime a customer saw a Square logo plugged into a phone, they knew they didn't have to go to an ATM, they knew they didn't have to find a check, they didn't have to find cash somewhere that could actually use a credit card. We think there's another opportunity now, not just with chip cards and EMV, but actually with paying with your phone. So I think the biggest shift in around NFC is an education that this works, it's going to work every time and it's super, super fast. One of the complaints that we have heard around chip cards is a little bit slow. We have the best in class hardware.
We have the fastest implementation of the chip card read, but Apple Pay and Android Pay is even faster. So this matters to merchants because if they can increase the number of people they see in the lines, they make more sales. If the transaction is slow, they see less sales and people get frustrated. So we think there's a really significant opportunity there. We have a hardware team in house.
So a lot of our competitors outsource this, they build it elsewhere. We recently acquired a company called Pecili and Toronto that actually makes chipsets for EMV and NFC. And that allows us to move super fast and super focused on providing best of class implementation around this hardware. And we just don't see that with our competitors. So, certainly with the smaller and the micro merchants who will hold this reader in their hands, it's a wireless reader, so it can be mobile and we still get the farmer market or someone selling food on the side of the road, but all the way to someone who's plugging into the countertop.
I think the biggest transformation, the biggest opportunity for us is we get to associate with the logo. If you see a white square, you know you can pay with your phone and you just don't have a predictability with any of the other hardware. You don't know if you can do it and you don't know if it's going to work. And we're betting big on NFC because of the speed of the transaction, it's sub second. And we have a perfect implementation of Apple Pay and that it doesn't require a signature as well.
So any amount, no signature, all you have to do is just tap your phone and you get a receipt sent to you automatically via SMS or email. So it's pretty fantastic customer experience, but sellers love it because they get to see more customers. And so we're pushing fast into it. It's also a global platform, so it allows us to move much faster internationally around the world. But we're super excited about it.
And it opens the door for all of our other services like Square Capital Analytics, Employee Management, Square Payroll, invoices and everything that a seller needs to run the business. Okay. So in light of all that and I appreciate the clarity, would Square ever consider reintroducing the wallet or is Apple Pay sort of the de facto standard in your mind? We really love what Apple and Google and Samsung are doing with the wallet because people have these devices in their hand. Where we think we have a different sort of utility is around Square Cash.
And we have much stronger technology now in Square Cash. And we're focused on the fastest way to pay another individual, to pay a group of individuals or even to pay a business. So we have Square Cash for business, but the main utility of Square Cash is around peer to peer. We were super innovative here and that we were the 1st peer to peer payment platform that allowed an instant settlement. So if I send you $5 you get to use that $5 instantly because it pushes directly your debit card over to your bank account.
And we again, it goes back to our core differentiator of speed and simplicity. And we're playing a very long game here. We think those 2 attributes really win.
I'd like to turn the call back to management for closing remarks. All right.
Thank you, everyone, for joining our call. To recap, our financial results reflect our strong execution. Our core payments business is at scale and growing fast. We're seeing strong demand for our contactless and shipped card reader during an important shift in our industry and we're developing new products that our sellers love. Thank you again for your time today and thanks for your support.
This concludes our call. I would like to remind everyone that we will be hosting our 20 16 Q1 earnings call on May 5. Thanks again for participating.
Ladies and gentlemen, thank you for participating in today's program. That does conclude the program. You may all disconnect.