Q3 2019 Earnings Call

Good day, ladies and gentlemen, and welcome to the square third quarter 2019 earnings Conference call I would now like to turn the call over to your host Jason Lee head of Investor Relations. Please go ahead.

Hi, everyone. Thanks for joining our third quarter 2019 earnings call, we have Jack in the reader with US today first we want to remind everyone of the format of our earnings call. We have public to showed a letter on our Investor Relations website, which was available shortly after the market close will begin this coal with some short remarks before opening the call directly to your questions during Q.

And maybe we'll take questions from our sellers. In addition to quick questions from conference call participants.

On November 1st we filed the press release, an 8-K announcing that we completed the sale of caviar, our food ordering platform to door Dosh on October 31st today. In addition to our show letter. We have filed an 8-K that include Cavalier financial statements for the third quarter 219, and the preceding six quarters, which I encourage you all to read.

We would also like to remind everyone that we've been making forward looking statements on this call actual results could differ materially from those contemplate buyer forward looking statements.

Report results should not be considered at the indication of future per store performance.

He's taking a look our filings with the as you see for a discussion of the factors could cause results to differ.

So 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 will discuss certain non-GAAP financial measures.

Reconciliations to the most directly comparable GAAP financial measures are providing show letter on our Investor Relations website. These non-GAAP measures are not intended to be a substitute for GAAP results.

Additionally, as discussed in the shareholder letter, we will be just can tune the use of adjusted revenue beginning next quarter. Following receipt of a comment letter from and discussions with the FCC as background. We introduced adjusted revenue in November 2015, 2015, or the supplemental non-GAAP metric for investors to measure our business performance and growth and provide greater comparability to other.

When solution providers. Additionally, management uses adjusted revenue internally to measure the performance of our business.

Going forward, our steaming up operations will continue to disclose total net revenue transaction based costs and pick one cost determined in accordance with gap, which are the key components of adjusted revenue. We're also introducing new guidance measured this quarter on GAAP gross profit as well so some of transaction based costs and big cone costs.

We have posted it SBQ document on our Investor Relations website with further details on this reporting change as well as a spreadsheet with our historical financials. There are no changes to any other GAAP or non-GAAP metrics.

Finally, this call in its entirety is being audio webcast on our Investor Relations website.

An audio replay of this call will be available on our website shortly with that I'd like to turn over to Jack.

Good afternoon, everyone and thanks for joining us.

A few comments before I pass the time rhythm and we answer your questions.

Well make square unique is our focus on building a robust ecosystem.

Ecosystem to US is a set of tools were self critical problems for folks in remarkable ways.

More importantly, reinforced one another.

For instance, so it might come to square because we are the fastest unless elegant way to manage their payments in store.

And through that one move they find a broader set of tools such as capital to get a quick loan.

Well website builder to sell online the most advance register to put on their countertop and payroll to pay their employees instantly be a catch up.

Likewise in individual comes into catch up because they receive some money from a friend or new employer.

Not only do they find the fastest way to send and receive money, but also previously card they can use everywhere for purchases.

And then soon rewards program called boost or where do invest their money in the stock market, where even pick one and a way to quickly pay yoga teacher or dog Walker.

Having one of these ecosystems that scale is incredible having to the can interact with and strengthen each other is profound.

With the sale of caviar to door dust complete we're taking the opportunity look deeply at how.

And how to best Guy these forward [noise].

With the solar ecosystem, we built in shown a long term profitable business. When it has an expected adjusted EBITDA margin of nearly 30% for full year 2019.

Compare this to a margin of negative 9% in 2015 at the time of our IPO.

Given the official payback periods and ROI for the tools in the sequel system, we've decided to significantly grow our sales and marketing efforts this year and into 2020.

Our first investments will be focused on bringing more awareness to all the software tools, we make available to sellers to run their entire business. In addition to managing their payments.

And we'll continue to prioritize investments to grow our seller network beyond our expectations.

Cash has been another incredible story.

Excluding bitcoin catch up revenue was 159 million in Q3 up 115% year over year.

Like seller catch up also has a broad portfolio of tools that reinforce each other and this quarter, we successfully redesign yep to make all that much easier to find a news.

Adding to send store and spend we introduced a new capability this quarter investing and did so in a way we believe is transformational.

Today on the catch up you can purchase stock since away for free when the market is open we're scheduled when it's closed.

Well, we wanted to solve a much bigger problem. We saw most people can't even afforded by one share of a company they want to own.

So we took everything we learn from pick one and fresh wise the stock market.

Now someone who believes in Berkshire Hathaway, Hey, currently trading above 300000.

By $42 or even one dollar worth of the company and hold or sell it at any point.

Oh this will offer this ability eventually, but none will match, our east where the fact that this one app service most of the needs Your bank did in the past.

For many other folks we serve catch up is the first introduction of financial services and for many more in the mainstream it's the best replacement for a number of apps. They had a two otherwise cobbled together to make work.

Finally, we've shown what a thoughtful and deliberate approach has paid off.

We started this company over 10 years ago, we hope to solving only one critical needs dealers had.

We sell the opportunity to build a rich ecosystem around that to serve multiple needs and ended up building to those ecosystems.

I'm really proud of how far we've come and given everything we've proven to ourselves and all the positive signals in our business I'm really excited to accelerate our investments to grow these ecosystems together.

Each of these businesses have massive potential when taken alone, but the magic really lies in how they will work together.

As a fundamentally new idea and our entire focus now is on being the greatest and most inclusive financial ecosystem to serve all needs.

With that I'll turn it over time rhythm.

Thanks, Jack therefore key highlights that I want to share today.

First we continue to drive strong revenue growth in the third quarter and recently completed the sale of caviar.

Second given sellers strong profitability profile and attractive return, we're increasing our investments in go to market and also aligning our team's efforts to prioritize the highest return product opportunities in 2020.

Third as a catch up service has scaled over the past three years. It has built a strong business model with compelling cohort economics that have improved the ecosystem margins each of the last three years.

Fourth we're raising our guidance for our business ex caviar in 2019, and providing a preliminary outlook on growth and profitability and 2025.

First our strong revenue growth in the third quarter total net revenue grew 44% year over year to $1.27 billion. Adjusted revenue grew 40% year over year to $602 million and gross profit grew 42% to $500 million.

We saw continued strength from the seller in cash businesses offsetting underperformance from caviar in the corner.

We also had a sizeable sizeable EBITDA beat in the quarter driven by our core business performance as well as the timing of certain expenses.

We completed the transaction to sell caviar to door Dash on October 31st.

Have you already included in our reported financials for the entire third quarter and will be included in part of the fourth quarter.

Excluding caviar from the first three quarters of 29 team, we would have seen our your year over year growth for total net revenue and adjusted revenue increased by one point and two points respectively.

Second given sellers strong profitability, we're capturing the opportunity to invest a compelling returns and orienting the team to address the highest return product opportunities in 2020.

In the third quarter of 2019, our seller ecosystem generated $918 million of total net revenue and $364 million of gross profit, which increased 27% and 26% year over year, respectively.

[noise] as we're investing more and go to market. We're seeing good early results and I wanted to call out a couple of examples first our marketing campaigns. This year have driven an uplift across key indicators, including awareness web traffic and revenue contribution from new stellar cohorts.

Second reducing the pricing on our newer hardware devices Square Register in square terminal has resulted in an uplift in unit sales, which is bringing new sellers into our ecosystem.

From a product perspective, as we think it had to the work we have to do and 2020, we are aligning our seller teams to our key priorities of omni channel global and financial services.

We have recently decided to pull back resources on the marketplace product that supports event bright core online processing volumes in 2020.

We are exploring other opportunities to partner with event right. Although although we don't expect these to be meaningful to GPV in the near term.

While the originally contemplated event bright deal would have contributed to GPV the impact to revenue would have been diminimus.

Given this we have decided to double down on the higher potential return opportunities in our core it for focus areas to strengthen our platform and our ability to address multiple customers who contribute to meaningful revenue growth.

Third Kashyap has a strong business model with compelling cohort economics as well the seller business. It starts with the fishing customer acquisition for cash out. This comes through peer to peer network effects next like seller cash separate teams. The majority of our active customers through our strong product appeal.

We then cross sell our new products and features across our base to drive more money movement and higher average revenue per customer, which our new tabs redesign will help us do more effectively.

All of this leads to cash having achieved positive revenue retention for each of its monthly customer cohorts. Since 2015 said differently if catch up did not acquire another new customer revenues would still grow from the existing base.

Low customer acquisition costs combined with positive revenue retention drive compelling cohorts and payback economics dynamics that are very similar to what we have seen in the seller business.

This is provided a strong foundation for rapid and efficient growth, while expanding margins as cash at the scale.

We expect dynamics to continue to improve as we scale, our customer base and launch new products like investing.

Fourth we are raising the guidance for our business ex caviar in 2019, and providing our initial outlook for revenue and profitability in 2020 as a reminder, as Jason noted starting next quarter, we will no longer be reporting or guiding to adjusted revenue.

We provide certain adjusted revenue measures this quarter only as a transitional bridge you can find additional information on this change in our shareholder letter and on our Investor Relations website.

There are two factors impacting our updated full year 2019 guidance of $2.24 billion to $2.25 billion in adjusted revenue first underlying trends in our seller and tasha ecosystem.

Increased the top end of our guidance by $15 million.

Second the timing of the caviar sale and it's on underperformance reduced our guidance by $45 million.

These offsetting factors result in a net decrease of $30 million to the top end of our full year 2019 guidance, though again, what we are managing going forward is a core business was strong momentum heading into the fourth quarter.

We are maintaining our guidance for 60% adjusted EBITDA growth in 2019, we plan to reinvest Q3 outperformance given the returns we see and the opportunity to drive future growth.

Turning to 2020 based on our preliminary outlook, we expect to achieve year over year gross profit and adjusted revenue growth in the low 30% range on a pro forma basis, excluding caviar.

2020, we expect adjusted EBITDA margins to <unk> to be roughly flat compared to the 18% adjusted EBITDA margin implied by our updated 2019 guidance.

We expect to reinvest the entirety of the two points of EBITDA margin unlocked by the sale of caviar.

A key investment area and 2020 include sales and marketing spend ended a seller ecosystem, we expect to invest over $75 million, an incremental seller sales and marketing over 2019 levels targeting payback periods to remain within four quarters.

Additionally, 2020 guidance includes a larger than normal office expansion related to our Oakland office as well as additional regional expansion, which will add an incremental one time step up of $50 million of operating expenses.

Finally, we plan to host an Investor day in mid March since our last Investor day in 2017, we have more than doubled our revenues and gross profit scale tripled, our EBITDA and scaled to unique ecosystem for sellers and individuals.

In our 2020 Investor day, we will provide a deeper update into our long term vision, our market opportunity strategy and business model for the seller in cash ecosystem and our long term financial model will provide more information on investor day in the coming month.

I'll now turn it back to the operator to start the Q any portion of the call.

As a reminder to ask a question you will need to press star one in your telephone to withdraw your question press. The pound key we ask that you. Please limit yourself to one question only.

And your first question comes from the line of chance in Hong from JP Morgan. Your line is open.

Again. Your first question comes from a line of chance in long your line is open.

Hi, I Hope you can hear me sorry about that speaks well to all the disclosure Lucky Digest.

On 2020, unless they're just can you give us an idea on the growth between the.

Two ecosystem seller, and Oh, gosh, and I'm curious if you can give us some idea here. Thanks for the EBITDA margins just goes wrong seller.

How quickly you can scale the catch up margins thinking that ultimately approach.

It's interesting on so that is cash out versus so thank you.

Thanks and of course intention.

So I'll start off on the growth for 2020 between seller in cash.

As noted in the prepared remarks, we're expecting low 30% gross profit growth, which is similar to what we would have expected for adjusted revenue two things to keep in mind. There first our exit rate from 2019 in the fourth quarter adjusted revenue and gross profit guide implies a 37% growth rate in 36% growth rate respectively.

Excluding caviar and secondly, we are making meaningful investments into the business with payback periods of about four quarters, particularly for the seller sales and marketing investments.

So to break it apart between seller in cash with seller, we're expecting steady revenue and gross profit growth in 2020 from the current Q3 baseline that you heard of about 27% in 26% growth respectively, but again keep in mind. These investments that we're making tend to have a four quarter payback.

So we'd expect to start seeing the impact on top line numbers towards the end of 2020, as we add new cohorts into the seller ecosystem.

For cash out we've reached a pretty significant scale, representing a quarter of our revenue in the third quarter very rapidly the growth in 2019 has been greater than 100% on the topline and now we just over 600 million dollar annualized revenue run rate naturally growth rates at this level you'd expect to come down over.

Time, the biggest drivers for cash shop, as you know instant deposit and cash card will be growing in 2020 off of a larger base as those two business lines have ramped rapidly during 2019 and ultimately we're focused on growing revenue scale on a dollar basis here that said we're continue.

And to invest aggressively into both our cash shop ecosystem as well as our cielo seller ecosystem and we think we're in the early days there in terms of of customer acquisition and in terms of the product road map. So we'd expect to continue to see strong and going growing contributions from kashyap going forward with respect to mark.

And just quickly and we see attributes in the cash business that are very similar to what we see in the seller business in terms of fishing customer acquisition in terms of retaining customers over the long term and in terms of positive revenue retention and because of that we've been able to increase.

Cash margins each of the last three years and we'd expect to do the same in 2020, so over the long term, we see a very positive trajectory there as well.

[noise] alright, very clear thank you.

Thank you.

Your next question comes from a line of Darrin Peller from Wolfe Research. Your line is open.

Hey, Thanks, guys, you know just given that 30% margin disclosure on solar and obviously the backdrop of the lifted from caviar selling margins, maybe just help us understand the priorities around the investments in terms of U.S. seller versus omni channel versus international how can we think about the magnitude of the payback or expecting and what that.

I mean in terms of just revenue in flux.

Appreciate the guidance on 2020.

Well. Thank you so so I'll start off and and really coupled with some mismatches as well but.

I think the most important thing is we have recognized a pretty compelling opportunity I'm, specifically within solar and we of found a lot of a efficiencies in our model and we found a lot of various a weekend a really focus on in sales and mark.

But we think.

We'll move the needle for us and meaningful ways. So a lot of a lot of what weve identified its certainly continuing to build upon the product and being the best product out there, but we think we could do a much better job in supporting it around awareness, but extra annoyed, but more importantly aware.

And as a internally to our customers today. So you know as we are set apart by the ecosystem nature of our business. The most important thing is that are sellers find all the tools or would help them run their into our business and that's where we where we could do a whole we could do a lot better job both in terms of.

The product experience itself and showing people the right tools to to put the right needs a with a marketing via email or direct response and also with our with our sales team and account management.

Our goal here, mainly is to focus our sellers and make them aware of everything that we hope to offer because if we have.

Sellers, who find value in multiple services and products for most we build a much more durable relationship.

With the solar so so that's the immediate goal, but but the net is we see a pretty significant opportunity to to accelerate our investment and really grow they grow the overall Bose.

Just to add to that Darren with respect to the sizing the $75 million of incremental sell or non-GAAP sales and marketing in 20, and 2020 just to size that relative to that number in 2019, it's at two x. increase over 29 teens income.

Rental spend on both a dollar and a percentage basis.

You know, we have a large large and fragmented addressable market for both seller in cash and we see tremendous attractive opportunities to invest into that specifically on seller.

We see three primary areas of investment as we think about our strong brand awareness of 80%, but are relatively low product awareness of 9%, we can see ways to move the needle across marketing across sales and across hardware pricing.

Specifically on marketing, we're investing in campaigns that improve our awareness of the broader product set beyond just payments we already initiated some campaigns. This here in April and then again in September and October on and we've seen some encouraging early results in April we reached 7 million businesses and we've driven enough.

Lift across indicators like awareness web traffic and revenue contribution on so we would expect even with this elevated spend in 2020 to still see around a four quarter payback overall as a blended pay back across all of our investments frankly today. We believe we are two efficient.

And in the U.S. at a three quarter pay back and in across some products, even less than a three quarter pay back. So we see opportunities here to expand the funnel even further from a sales perspective, we street see strong ROI comparable to marketing. So we want to lean in there in 2020, and then from a hardware per se.

Active as mentioned in the prepared remarks, we see that when we flex pricing on compelling products like terminal and register weren't able to attract more sellers and so those are the three primary ways that we look to deploy incremental funds and 2020.

Okay. Thanks, guys.

Thank you.

Your next question comes from a line of Beatrice Cauldron from square your line is open.

Hi, good afternoon, so I'm a square southern and I My or my business is called doesn't work, so shops and as a retail business. It would be helpful to see sales and inventory in one report has square consider creating a report that would provide up the sales in the end.

Venturi in it and also salto percentages.

Yeah. Thanks features and thanks for use in US. This is a a request we get from sellers a lot and we know that the managing inventory is it's pretty difficult and exceedingly complex and we believe the you know ultimately it's our job to remove a bunch that complexity to make it easier.

So well I can answer the full details yet heading into next year, we're looking to spend some time, adding new reports like this.

And more broadly looking a opportunities to remove more and more of complexity from deal from the task of inventory and reports because ultimately.

If we simplify things were given time back I'm. So that you can focus more on your customers in your business.

Great. Thank you. Thank you.

Your next question comes from a line of Josh Beck from Keybanc. Your line is open.

Thank you for taking my question I wanted to ask about cash App. A you gave the revenue growth rate, which is very hopeful of 115%. Maybe you could just help us think through the composition of drivers and maybe how that's changing over time as either new products.

Our introduced like stock trading or.

The app redesign or direct deposit and just how that can ultimately influence the.

Gross composition of the drivers there.

He Josh I'm I'll take that so yes, we had strong revenue growth for cash happened the third quarter up 115% with gross profit actually up even higher at 125% year over year, we're seeing as as discussed strong unit economics in cohort economics here. The primary drivers in terms of my.

Monetization leverage across Kashyap <unk>, we have a half a dozen of them, but the two primary ones are instant deposit in cash card. However, when we manage our product feature set across the ecosystem, we think about both engagement drivers and monetization levers and things like investing.

Enable us to introduce new engagement drivers into the ecosystem that have the potential to raise awareness and raise the daily utility for cash cap, which then it impacts the other levers that we haven't kashyap around monetization. An example of that we've seen more recently.

With our big Queen product, which we launched about a year ago is that big coin active have a two x. attach rate to cash card.

Which means that when you're using the app on a more regular basis and when you're finding daily utility any app you're finding other important uses that we can provide you with Indiana and so the tabs redesign was another piece of that to provide increased discoverability and navigation to many of those new products that we've launched overtime.

Okay very helpful. Thank you.

Your next question comes from the line or Bryan Keane from Deutsche Bank. Your line is open.

Yeah, Hi, guys I saw the GPV stabilize this quarter at over 25%.

Even a slight acceleration on our math.

Just curious what drove the straight.

Because it had been slightly moderated in the past few quarters and it sounds like do you expect similar GBB growth in 2020, so with the investment now in shell or will we see an acceleration eventually in the revenues and TPV from that line in fourth quarter or 2020, it maybe into 2021. Thanks.

Hey, Brian Thanks for the question and yes, we drove strong TPV growth had scale in the third quarter up 25% year over year to $20 billion and if you look at the last four quarters combined we've driven over $100 billion and GPV to breakdown what happened in Q3, there the a few.

Important drivers to discuss across both existing and new sellers existing sellers were a source of strength for us and they as they have been historically with positive revenue retention across all cohorts.

And then on new sellers, we had three drivers and as we saw new sellers, adding to the square platform first larger seller GPV growth was in line with Q2 up 34% year over year and now comprises 55% of total G.P.D. as a mix.

Second we're focused on expanding our total addressable market in our shareholder letter you saw us calling out on new omni channel use cases like stadiums as an example.

Third and we had strong growth in the quarter from international markets, where we actually had an acceleration in the third quarter versus the second quarter, though these markets are still relatively a small part of our business growth in international continues to outpace the U.S. As you look ahead to 2020 of course, we don't guide to GPV.

But couple of things for you to keep in mind on the trajectory of GPV in Q4 and into the future first is remember we implemented the pricing change on a seller business for card present transactions on November 1st and we'd expect that to have an impact on GPV growth in the fourth quarter and into 20.

He 20, although from a revenue and transaction margin perspective, we expect neutral to positive intact.

And then again thinking longer term the investments that we're making in our seller business in terms of sales and marketing to marketing today, we're seeing encouraging early signs around them, but we do expect a payback period in the four quarter range, which means that these incremental investments would add incremental absolute dollars of GPV.

He in late 2020 and into 2021.

Okay helpful. Thanks, so much thank you.

Your next question comes from a line of Lisa Ellis from Moffettnathanson. Your line is open.

Hey, good afternoon, guys. Some a a follow up on cash out. This is more of a strategic question I think about how cash up is differentiated from the sort of like avalanche of other Neil banks that are popping up like a time or discovered direct banking.

And then maybe more broadly.

Just announced the ability to purchase fractional stocks like what is the pipeline of additional services that you're planning to launch the cash how much would be expecting installment lending, perhaps or maybe a credit card offering some of a credit related offering. Thank you.

Yeah. Thanks for the question Lisa.

There is a there's a lot out there as you point out and one of the things that could I'm really excited about.

Is that just like square, we've taken on a bunch of the complexity of conducting together the most critical needs a in one place.

And what that means a is that people can come to it for very different reasons.

As I read a pointed our earlier like some people come to.

To the catch up because it's the easiest way the fastest way to buy pick one.

And that allows for us to show them. The other attributes it offers as well, including sending and receiving.

Money.

Storing money.

Getting a cash card that they can use anywhere bces accepted or go to an ATM to good to get paper cash out.

And what is important about this is a you know we're not just an up for one specific thing, but a lot of the critical needs you might have the you would.

We look to from a traditional bank.

Are built right in the up so you can go to the up store and you can download this does happen.

You come in and you have so much incredible capabilities right away in an entirely new capabilities.

I'm like investing and fractional shares.

So in terms of a in terms of the the competition and how we think about building in other words. It really goes back to the the square a story of putting all these things together in one experience.

We believe is very strong and they actually play off each other and reinforce one another and very interesting ways too. So we think that's a real strength.

In terms of fractional shares and what features are coming we're really excited about this this feature with.

As I said, we think it's.

Pretty transformational and we do believe the this gives access to a part of the financial system, but most of them left out of.

And there's a number of things that we could do if you just look at the other services within cash up to really bring this to to even more light and even more strength and that's just.

Not what our competitors can do because we're focused on just one aspect.

These financial services instead of considering how they're already exist together and how they how they work together and in terms of future features forward for casual generally we're we're we're just constantly looking for critical needs and wherever we can make things.

In order of magnitude better in terms of the experience we're accessibility.

Or how we might be able to reinvent the approach to help people thought about buying stocks for instance, so.

That's that's where we're looking at <unk>, we have a bunch of experiments, we're excited about but nothing that's the most announced today.

Terrific very clear. Thank you thanks a lot.

Thank you.

Your next question comes from the line of her sheer Robert from Bernstein. Your line is open.

Hi, Good afternoon. My question is on the competitive environment in the seller business a there's a lot that has happened over the last few years in dose of growth of integrated players. It does not a lot of cloud based view escalators.

I would that and of course, there's been some consolidation. So can you talk about what <unk>, but you're seeing from the competition point, if you know with a few years ago.

I don't think it's really any different from when we started as a company. We saw a lot of folks who were building solutions for parts of the ecosystem, but very few who were building and ecosystem.

And that is would continues to set us apart both on the solar side and also.

More recently on the cost side, we don't have a company. This was focused on one one tool or one use case its really focus on how do we.

Ensure a solar a number one can.

Run a business and ideally how do we help them make more sales.

And a lot of a lot of our tools are really focused on I'm looking for opportunities to help sellers make more sales, which is great for us because if they make more sales we grow the business and as we grow the business. We can help more sellers and we just don't see much also that out there.

But we're really sets us apart is even if there are companies out there who are attempting.

To bite at the edges of an ecosystem.

There are only doing it with one ecosystem like solar they don't have the equal pairing of individual ecosystem mccosh. So well we can we can focus on the boot the strength of the solar ecosystem.

If you zoom out a bit what's really powerful is that we have an upscale seller ecosystem.

And we have enough skill buyer ecosystem and catch up and there in the same company. So this is very rare and I don't know of many others, but how this capacity and that I think really speaks to or are true differentiation and are true power and are true.

The control how you know as I said in my opening remarks, we.

We do believe we have a lot of invention to bring to financial services and we're guiding that invention by bringing more access to more people and that's both sellers.

And now individuals through the cash up so.

I think is quite strong and I just don't see its I don't see whose complement in the market.

She that just to add to that you know, it's always been a competitive landscape, but we continue to gain share our volumes growing at 25%.

These days relative to the rest of merchant acquirers on average going 5% to 8% and the networks growing low double digits.

So we are growing we're going fast and we're continuing to take share in a large and frankly still very fragmented market and that just speaks to payment volumes. Our ecosystem does much more than that as Jack was saying we have many more monetization monetization lovers beyond payments when you look at subscription and services for seller.

And when you look at the broader buyer ecosystem with catch up.

Thank you very much.

Your next question comes from the line of Dan Perlin from RBC capital markets. Your line is open.

Great. Good evening I wanted to just parse out a little bit I know you've talked about already but you know the investments necessary to kind of capture you know the incremental seller I'm trying to think through larger merchants rail or larger sellers relative to different verticals or really just deepening the product penetration.

I mean, it sounds like a lot of it isn't awareness to drive deeper product penetration, but I'm just trying to parse those three and then the other just quick question is on the international side on the sellers can you just give us some idea about what those cohorts look like relative to the United States in terms of size, maybe level of sophistication and maybe even number products purchased thanks.

Yes, thanks, Dan So in terms of any investments I mean fundamentally we we believe that we have a suite of tools for sellers of skill.

Well that's skills from the very small to the very large.

And where we don't we have a platform and <unk> on the larger sellers can fill in whatever they need to whether it be a legacy.

Hardware or inventory systems. So that does strategy has continued to play out and as we.

Think about our investments has as we as we talked a little bit about a little earlier, we have we have a bunch of levers to pull certainly awareness of more of the products is important.

Sales or sales team and come management is another important area for us and hardware is an area that we can also see a lot of potential and this is independent of whether euros or a large solar you're a restaurant youre a retail organization, we can really customize.

Well solution around around each one so we're not we're not necessarily I'm guiding I'm about to a particular size of sellers. It's more focus on the use cases, and how utilizing more of our tools will make your business a lot more efficient and.

And run better ultimately hopefully leading to more sales for <unk> for you and your for you in your company and I'll, just add to that Dan I'm on a plane about larger sellers. We continue to have strong traction there a with larger sellers growing 34% year over year in the third quarter the products that address larger sellers as you know he.

I will point of sale around retail and restaurants are developer platform, where you can create more customized product offerings for larger sellers and some of our newer hardware products terminal and register.

In terms of the go to market ways that we can address larger sellers are marketing campaign, we believe address small and large sellers alike, and we do see that larger sellers have a tendency to take on more product instead of focusing the campaign being the broad suite of products that we offer beyond just payments we feel can resume.

Eight with large sellers.

Finally, the sales team gross which we expect in 2020 should also address larger seller needs and more complex seller needs.

I did want to address your international punched question, we see that are cohorts of customer is internationally similar to the U.S. have positive revenue retention, which is an important thing for us obviously to continue to measure we most recently launched our terminal product.

And on Australia, Canada, and the UK in this past quarter and those launches were successful launches for us we're seeing that were unlocking new use cases, as we bring our full suite of products to our international markets. So we're excited to continue doing that in 2020.

That's great. Thank you.

Your next question comes from a line of Andrew Jeffrey from Suntrust. Your line is open.

Hi, I appreciate you taking the question.

I wonder if I could dig just a little bit deeper into any cash out.

After about a number of ways.

Looking to monetize at Americas, any pushback, we get is that.

Really an instant deposit product first and foremost flashed out.

It means by which to advance.

But I wonder if you could elaborate a little bit on.

The merchant flywheel. It strikes me that that this is a pretty powerful tool for merchants, who have receipts from cash shop or.

Square capital loan or the case, maybe and that you couldn't really act as a.

Ball business banking.

Substitute for traditional can you just to elaborate on that and how you think that sort of plays out to the long term ability to monetize.

That ecosystem.

Yeah, Andrew <unk> I'm not sure I I'm. Following your question are you talking about the car shoppers square card.

Well I mean, I think about square cargo as being sort of.

Integral to the that.

Yeah.

So.

So with the soon so we we have two main offerings here, but I think speak to the the flywheel that you're you're talking about one is the scorecard, which was sellers to store money was square and we can also issue them.

Mastercard that allows them to spend a instantly and get access to their funds or run their business instantly and we think that one.

Has been Oh, a pretty amazing product experience, but entirely new functionality.

Serves as a as another reason to to join square and to add to enter into our ecosystem in terms of Ah. The cash up there is a lot of opportunity between our receipts as a way to drive a more a catch up downloads.

And usage and there was a you know potential intersection between what we're doing around loyalty on the solar side and Bruce on the on the couch upside. So these are things that are definitely questions for us and would love to experiment with but it all goes back to the broader a point that we believe there.

While these two ecosystems are extremely strong at scale and quite powerful in that each one of them whos tools that reinforce one another.

Just one ecosystems themselves reinforce one another though that makes the company truly a truly incredible. So we will continue to look for smart ways to bring these two ecosystems together.

Driven by customer needs and that's customer needs on the solar side, but also on the on the cash upside.

Thank you.

Your next question comes from the Latino Peter Christianson from Citi. Your line is open.

Good evening, Thanks for the question.

I want ask.

More of a philosophical question.

Think about these two ecosystems, both have different competitive dynamics.

Phases of maturity.

How do you think scatter square think about balancing investment between seller in cash happened and perhaps what are some of the key variables that you consider.

And when you're in a decisioning process as you invest across the company broadly.

Yeah. Thanks, Great question. So you know this this is going to be something that we're constantly learning from the most important thing is we recognize this opportunity on the solar side of you know.

The.

How we're thinking about investing within seller and all the payback periods were saying Oh, I, we're seeing and the in the tools. It just it just beg for more investment in the there just felt like we're leaving opportunity on the table.

By not focusing on growing Miss a in a in a much more substantial way.

Cash on the other hand has how that mindset for some time and has really been focused on network first and what gives me a lot of confidence is we have a pretty deep understanding of how both businesses work and what levers to pull where we can be pretty agile although.

When to drive growth and what not true and we've we've we've come a long way with a with a catch up and how we think about building not no work, but but ultimately overtime. We want to continue to build a features that the people love that people can't find anywhere else and.

And as I said in my previous answer I think there's a lot of potential between the two ecosystem. So we you know we will be constantly looking for these opportunities to to grow a both ecosystems book, but more importantly ways to connect the two together.

And he just to tie that to our 2020 outlook.

And we see strong opportunities to deliberately invest in both of the ecosystem and 2020.

For seller today as you know as as we disclosed we see strong profitability with adjusted EBITDA margins of nearly 30%.

In a in 2019 expected for the full year, that's up from negative 9% in 2015 in a very short period of time, we've been able to scale. This ecosystem, while driving strong profitability and seeing very compelling returns as Jack was saying so we want to intentionally invest for future growth in our go to market efforts.

That we outlined earlier in the call and so for 2020, we expect margins and the seller business. As a result is slightly come down and we do expect to start seeing returns on these investments that we're making towards the end of 2020 and into 2021.

Cash given the strong cohort economics that we seen given the margin expansion that we've seen over time over the past few years and getting that continued scaling of the ecosystem. We expect to see some margin improvement in 2020 on even as we continue to invest in scaling the ecosystem.

So some of those are some of the dynamics for how this investment model plays out for 2020.

Okay. That's very helpful. Thank you.

Thank you Sir your next question comes from the line of George Mihalos from Cowen Your line is open.

Hi, This is thousand on for George Thank you very much for taking my question I wanted to follow up on the GTV commentary from earlier it looks like the year over year grows and the sub 125000, GPV seller category accelerated this quarter versus Twoq you I'm wondering if there's any color you can provide there. Thank you.

Thanks for the question Alison.

TPV growth from larger sellers was 34% and the second quarter and sorry in the third quarter and actually also in the second quarter from a mix perspective larger sellers were up slightly quarter over quarter. So 55% in terms of nicks and 53% in terms of makes in the second quarter.

So we continue to see real traction with with larger sellers and Ah continue to build out products as mentioned earlier in terms of vertical points of sale in terms of hardware and in terms of the developer platform to address this basis of customers.

Thank you.

And your next question comes from a line of Jason Kupferberg from Bank of America Merrill Lynch. Your line is open.

Hey, guys just a quick clarification on a question just on the clarification. So I want to make sure I've got the numbers apples to apples right here. So your growth in 20, Nineteenx caviar as forecasted now at 46% and on that same basis, we're talking about low thirtys in 2020, so since I just want to get a clarification on that and then.

Can you just give us a sense on the 75 million of incremental sales and marketing how much of that will be U.S. person international.

Sure I'll take that Jason and you've got that math right in terms of full year 2019, the guided the midpoint X caviar for the full year 2.1 billion, which is a 46% growth rate year over year, which is actually the same growth rate that 20 team would have been on an ex cat.

We are basis.

But as you think ahead to 2020 keep in mind the exit rate that we've got I'm coming into 2019, which is a 37% rate in the first quarter fourth quarter X caviar on adjusted revenue and 36% a growth rate.

On gross profit at the midpoint.

In terms of the $75 million of marketing investment U.S. versus international you know the international markets today are about 5% of our revenues they will be a higher percentage of our marketing investments, but the vast majority of our marketing investments and still go towards a are you asked me.

Good.

Thank you.

Your next question comes from line of James Friedman from Susquehanna. Your line is over.

Hi, a thinks it's Jamie it's just glad I just wanted to ask him read a with in your prepared remarks.

You had mentioned that some of the EBITDA upside into Q3, which was a surprise us.

You said that you sold the came from core in some of the came from timing of expenses I was just hoping you could elaborate a little bit about that and I just have to ask about either upgrade.

Those comments, Ralph will too, but if I was interpreting what you're saying relative to the GPV versus what sounded like a less important revenue factor was that about price where am I just over simplifying thank you.

Sure on on the first part of your question James on the EBITDA beat that's right. It was driven by both Overperformance in our seller and cash ecosystems offset by underperformance in caviar, along with Overperformance related to expense timing.

As well as some efficiencies we do expect most of those expenses to materialize in future quarters and as we have in the past we plan to reinvest any outperformance that we'd had back into these ecosystem through both product and sales and marketing efforts to grow for the long term.

With respect to event rate I didn't quite catch your question, but I think you were asking why there's less of a revenue impact.

Relative to GPV.

And yes, the take rate on a deal like event bright as much lower so that's why from a GPV perspective, there would have been an impact but from a revenue perspective. The contribution from an event right would have been de minimis.

Got it thank you.

Your next question comes on line of Ramsey El Assal from Barclays. Your line is open.

Hi, Thanks for taking my question given all the puts and takes an evolving business Nixon Noxafil Thunder from from Analyst day, but how would you frame up the you're kind of normalized margin profile. At this point I know that you have a completely different business than you did you know when you.

First analyst day meetings I was just wondering if you could comment on that and I. Just a quick bolt on is what's the revenue model for the stock treating feature how do you how do you make money on that.

Sure I can take that you know on on our last Investor day at our last Investor day, Kashyap with sort of Twinkle in our I and obviously it has grown rapidly. Since then it's now a quarter of our revenues.

And so clearly I think at this next Investor day, we'll be sharing much more with you about kashyap in terms of a product road map and business model and so you know I think it's premature for us today to give you a long term view in terms of margin profile, but what I can't say is as we've shared with you. This.

Corridor, you know compared to our last Investor day, the dynamics in our seller ecosystem, which was the majority of our business in 2017 and have have largely been stayed the same or gotten better at last investor day, we talked about a 20% to 25% long term topline growth and 35% long term margins and Jim.

The year and a half later now in 2019, we stand here, having achieved a nearly 30% margin by year end and having exceeded the top line growth targets, all with a three to four quarter payback and positive revenue retention.

And then with catch up we have scaled it rapidly since the last Investor day, and as mentioned on had continued to see margin expansion. Some cash shop for each of the last three years with very similar dynamics and in terms of cohort economics and compelling returns on our investments very similar.

Dynamics in cash up to what we see in the seller ecosystem.

So we're excited to share with you more on when we meet at Investor Day.

With respect to monetization of investing and [noise].

As we noted there was no concern that condition piece related to our investing product today within kashyap. The majority of the costs associated with investing well be brokerage cost and I'll be included in our sales and marketing line related to catch up we really view. This this product set to be an engagement drive.

Her for US as we mentioned earlier to help build out the network and to help bring discoverability and daily utility to the App that enables growth for for other revenue streams within the App.

Thanks, so much.

And that has all the time, we have for questions. At this time I'd like to turn the call back over to the company for some closing remarks.

Thank you everyone for joining our call I would like to remind everyone that we will be made we will be hosting our fourth quarter 2019 earnings call on February 26, Thanks again for participating today.

This concludes today's conference call call, ladies and gentlemen, thank you for participating in today's program you may all disconnect.

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