Shopify Inc. (SHOP)

Earnings Call: Q3 2019

← View all transcripts

Oct 29, 2019

Thank you for standing by. Welcome to the Shopify Inc. 3rd quarter 2019 financial results conference call. I would now like to turn the conference over to Katie Keita, Director of Investor Relations. Please go ahead. Thank you, operator, and good morning, everyone. We are glad you can join us for Shopify's third quarter 2019 conference call. We are joined this morning by Tobi Lütke, Shopify's CEO, Harley Finkelstein, our Chief Operating Officer, and Amy Shapero, our CFO. After prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are based on assumptions and therefore subject to risks and uncertainties that could cause actual results to differ materially from those we projected. We undertake no obligation to update these statements except as required by law. You can read about these risks and uncertainties in our press release this morning, as well as in our filings with U.S. and Canadian regulators. Our commentary today will include adjusted financial measures, which are non-GAAP measures. These should be considered as a supplement to, and not as a substitute for, GAAP financial measures. Reconciliations between the two can be found in our earnings press release, which is available on our website. Finally, note that because we report in U.S. dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I turn the call over to Harley. Thanks, Katie. Good morning, everyone. We continued to make great progress this past quarter, and I'll get into more detail on that shortly. First, I'd like to take a minute to mention two major milestones. Last month, our counter hit the 1 million merchant mark. That means that 1 million businesses, large and small, have put their faith in Shopify. For all of us working to build Shopify each day, it is incredibly validating and meaningful that we continue to help tens of thousands more businesses each quarter launch and thrive on our platform. Earlier this month, we closed the biggest acquisition in our history when we welcomed 6 River Systems to the Shopify family. This is another milestone, not just because it signals our commitment to solving some of the most critical challenges our merchants face, but because it is yet another way in which we are evolving to continue making commerce better for everyone. Thank you to all our merchants and partners who continue to put their trust in us. As I mentioned previously, our momentum continued in Q3, as you can see from our third quarter results. Our international expansion efforts continue to pay off as merchants from outside our core geographies were once again the largest component of new ads. GMV from these international merchants outpaced GMV growth overall. Adoption of merchant solutions products continued to expand across Shopify Payments, Fraud Protect, Multicurrency, Shopify Shipping and Fulfillment, and Shopify Capital as we make these offerings more attractive and accessible. We are also showing progress across the multiple product initiatives that are underway. In October, we began rolling out our native video and 3D modeling features to Shopify Plus merchants, with a broader rollout planned over the coming months, making Shopify the first commerce platform to natively support 3D and AR shopping experiences. These features create the most immersive online buying experience, which not only makes a purchase more likely, but also just makes it a really fun way to shop online. More buyers are opting into Shopify Pay, with quarterly order volume increasing and GMV rising to over $1 billion in Q3. We continue to release more features to make it easier for buyers, such as giving buyers more payment options to complete their purchases using Shopify Pay. We continue to work hard to connect merchants around the world directly to their buyers. In Q3, we enhanced our marketing and support tools. We introduced Shopify Chat, our first native chat function that helps merchants build stronger relationships with their customers through real-time conversations. Shopify Capital put up an excellent quarter, setting a new record in merchant cash advances, with over $140 million issued in Q3. We started Shopify Capital to help solve another pain point for entrepreneurs, access to capital to grow their businesses. This is especially true as merchants gear up for their busiest selling season of the year. As we mentioned last quarter, we introduced Shopify Capital to non-Shopify Payments merchants. While it's still early, we're seeing strong adoption from those merchants. Shopify Shipping adoption continued to grow, with 44% of eligible merchants using shipping in the third quarter, up from more than 1/3 of merchants in the same period last year. Shopify Shipping empowers merchants to speed up their packaging and fulfillment process and save time. After a merchant buys a shipping label directly from the Shopify admin, they can print it, affix it to the package, and then ship it from any post office. This is why we continue to provide competitive shipping rates and add best-in-class features like parcel insurance, which we launched in Q3 for U.S. merchants. Moving to Shopify Plus, which had yet another strong quarter. Shopify Plus continued to solidify its position as the preferred commerce platform for high-volume merchants. Some of the brands that launched this quarter include footwear brands Aerosoles, Harrys of London, The Frye Company, and Nicholas Kirkwood from luxury brand LVMH. The shop for the iconic British broadcaster, the BBC, and the space exploration disruptor, SpaceX. Sports drink behemoth Gatorade, Australian electronics giant JB Hi-Fi, appliance brand Bissell. Additional iconic toy brands such as Gund, more brands from some of the world's largest influencers like Kim Kardashian's new shapewear line called Skims, and Victoria Beckham's makeup line, Victoria Beckham Beauty. Finally, more launches from the world's largest consumer packaged good companies that have been leveraging our platform for some time, including Heineken and Unilever. Shopify Plus is becoming the most relevant platform globally for both iconic as well as the fastest-growing modern retail brands. As a quick anecdote, I recently spoke with an executive at one of the largest food and beverage conglomerates on the planet after they went live on Plus. He said that this was the most successful product launch probably in the history of the company. The best part is that I hear stories like this all the time from Fortune 500s to SMBs. While these brands represent different verticals, they have one thing in common. They are growing in complexity. This is reflected throughout their evolving business from the global reach of their marketing, manufacturing, and distribution to the management of their inventory and the growth of their employee base. Shopify Plus features like Flow, Launchpad, and Scripts are built to help solve those complexities by making it easier for our larger volume merchants to manage the increasing scale of their businesses. Turning to our partner ecosystem, which continues to play a critical role in the success of our merchants. 23,000 partners have referred a merchant to Shopify in the past 12 months, and we've added more than 300 App Store, bringing the total to 3,200 at the end of the quarter. International partners are becoming a larger part of our partner ecosystem as well, and we see an opportunity to further leverage this community to help develop localized features in specific markets. At Shopify, we build products that make it easier for anyone to become an entrepreneur, and then we level the playing field so that they can grow and succeed. As our merchants scale and face new challenges and new levels of complexity, Shopify is designed to grow with them, revealing new capabilities as merchants require them. With this formula, we can not only help mint the next million merchants, but we can arm them with everything they need to thrive. More entrepreneurs reaching for independence means more choice for buyers, which ultimately makes commerce better for everyone. Thanks, Harley. Good morning, everyone. We delivered strong growth this quarter and continued to execute on our strategic initiatives. With more than 1 million merchants building their businesses on Shopify, we are more focused than ever on making entrepreneurship easier and helping our merchants succeed. Revenue in our third quarter was up 45% year-over-year to $390.6 million. Subscription solutions revenue increased 37% to $165.6 million, primarily due to strong merchant adds, as well as level setting subscription pricing for legacy plans, growing monthly recurring revenue to $50.7 million, which is up 34% over the same period last year and the same pace as last quarter. Shopify Plus continued to increase its contribution to MRR, accounting for $13.5 million or 27% compared with 24% of MRR in Q3 2018. Subscription solutions revenue grew faster than MRR in the quarter, primarily due to strong growth in apps revenue as well as from Shopify Plus platform fee revenue. Merchant solutions revenue grew 50% over the same period in 2018 to $225 million. This growth was driven by GMV expansion up 48% year-over-year to $14.8 billion, with international being the fastest-growing contributor. Both international and Plus continued to grow their share of GMV mix, while POS channel GMV growth gained momentum, accelerating for the second quarter in a row. $6.2 billion of GMV was processed on Shopify Payments in Q3, up 51% versus the comparable quarter last year. Shopify Payments penetration of GMV grew to 42% in the third quarter versus 41% in Q3 2018, primarily due to increased Shopify Plus penetration, as well as the addition of new Shopify Payments geographies. Newer products like Multi-currency are gradually being adopted and adding further value to merchants using Shopify Payments, contributing to year-over-year revenue growth as we continue to improve their product market fit. Gross profit dollars grew 45% from Q3 2018 to $216.7 million, consistent with revenue growth in the quarter. Adjusted operating income in Q3 was $10.5 million or 3% of revenue, compared with a loss of $2.4 million or 1% of revenue in the third quarter of 2018. We achieved better-than-expected adjusted operating results in Q3, due in part to strong revenue contributions from higher-margin products and lower marketing spend. Note that we have updated our definition of non-GAAP financial measures to also now exclude the impact of amortization of acquired intangibles and related taxes, in addition to the stock-based compensation and related taxes we have always excluded. This is consistent with our peers and provides a clearer view of operational results in the period. In the third quarter, amortization of acquired intangibles was $1.7 million. Adjusted net loss for the quarter was $33.6 million, or $0.29 per share over adjusted net income of $5.8 million or $0.05 per share for the same period last year. Our third quarter 2019 adjusted net loss includes a tax provision of approximately $48 million, net of certain tax offsets, related to a one-time capital gain triggered by the transfer of certain rights from our Canadian entity to regional headquarters, which allows us to develop and maintain merchant and commercial operations in their respective regions as we expand internationally. Our cash equivalents and marketable securities balance was approximately $2.7 billion, which increased around $700 million, largely due to proceeds from a share offering we completed in September. As Harley said, we're building a global commerce operating system that helps solve problems at critical points along the merchant journey. We have thoughtfully developed and implemented a portfolio of investments that addresses many of these pain points and fueled our growth to date. These include multi-channel integrations, enhancements to marketing functionality for merchants, expansion of Shopify Payments and related services, further development of Shopify Plus capabilities, Shopify shipping functionality, and expanding the availability of Shopify Capital to more merchants, among others. I will focus my comments today on more recent additions to this portfolio, international expansion, building brand awareness of Shopify Fulfillment Network, and the acquisition of 6 River Systems. Shopify is taking a disciplined and localized approach to achieve optimal product market fit in our international markets. Over the past year, we more than tripled the number of languages which the Shopify admin is available, and in Q three introduced Shopify Payments in Italy and continued to roll out multi-currency to merchants using Shopify Payments, which is now available in 14 countries versus 10 the same time last year. Our efforts internationally are bearing fruit as the pace of merchant adds from outside our core geographies accelerated in Q three. As a result, international merchants continue to grow their share of our overall merchant base. Merchants around the world need to know that entrepreneurship is an option, so we have begun to build our brand awareness of Shopify outside our core geographies. We kicked off first-ever brand campaigns in Germany and France in Q three and expect to continue brand testing and learning into Q four. We've spent roughly two-thirds of our approximately $30 million budget allocated toward our brand campaigns and Shopify Studios so far this year and plan to invest the remainder of this budget in Q4. Moving to Shopify Fulfillment Network, our solution to further democratize commerce and help merchants provide fast and affordable shipping for their buyers. We have to get this right for our merchants. That's why we're taking a thoughtful and gated approach to the development of Shopify Fulfillment Network. We continued working with our warehouse partners to bring more nodes online through the third quarter, and we're happy with the performance of our network so far. We are seeing strong demand and continue to add select merchants and partners as we focus on high performance and optimizing for the merchant experience. With the 6 River Systems acquisition now closed, we are better positioned to deliver faster, high-quality fulfillment. Once implemented, we expect to expand throughput and capacity at our partner nodes, boosting productivity by two to three times that of manual processes. We will continue to operate, build, and sell 6 River Systems' solution in addition to making it available to our warehouse partners. As a result of extending this innovative technology beyond Shopify's current market, not only are we helping to change the broader fulfillment industry, we are also expanding our total available market. While the acquisition of 6 River Systems had no impact to our third quarter results, given it closed on October 17th, we expect the acquisition will be additive to Shopify's top line over time. Given our strong third quarter results and acquisition of 6 River Systems in the fourth quarter, we are updating our full year 2019 and fourth quarter outlook. To be clear, this updated outlook includes two new items that were not included in our August guidance and includes our acquisition of 6 River Systems, and it includes a change in the definition of adjusted operating income to now exclude amortization of acquired intangibles. For full year 2019, we are raising our revenue expectations to be in the range of $1.545 billion-$1.555 billion with an adjusted operating income between $27 million-$37 million, which excludes stock-based compensation expenses and related payroll taxes of $180 million and amortization of acquired intangibles of $15 million. For the fourth quarter, we expect revenue of $472 million to $482 million and an adjusted operating income between $10 million and $20 million, which excludes stock-based compensation expenses and related payroll taxes of $57 million and amortization of acquired intangibles of $10 million. Our outlook includes expectations for 6 River Systems' ownership in the fourth quarter as follows. We expect no material impact to Shopify's revenue, given most of 6 River Systems' revenue is recognized over the multiyear lifetime of each contract and also reflects a reduction of acquired deferred revenue under purchase accounting. We expect incremental expenses to Shopify of $25 million, including $10 million of cash operating expenses, $7 million in stock-based compensation, and $8 million of amortization of acquired intangibles. We are excited about our progress in Q3 and going forward. As we continue to democratize commerce by bending the learning curve, adding more tools and capabilities to make entrepreneurship easier, and leveling the playing field, we are unlocking the power of commerce for those who want to reach for independence all over the world. With that, I'll hand the call back to Katie. Thank you, Amy. Before we open the call up for your questions, let me remind everyone that we'd like you to limit yourselves to just one question so everyone can get a question in on the call this morning. Ariel, can we have our first question, please? Thank you. Our first question comes from Colin Sebastian of Robert W. Baird. Good morning. Thanks for taking my question. Congrats on the customer milestone. Shopify Capital, obviously a big step up in the merchant cash advances and loans, as Harley mentioned. How are you thinking longer term about the role of capital in customer acquisition and retention and the ability to manage that risk as you expand outside of the payments group? Thank you. Thanks for the question. No, Harley here. It certainly was a record quarter for Shopify Capital. We gave out more than $140 million of advances to merchants. Again, as you mentioned, part of this is making sure that we help merchants in the entirety of their journey to success. Certainly things like having additional cash for things like inventory and marketing are very important to them, and there's not that many places to get that sort of capital. We think we're really helping merchants by doing this. It also serves, of course, as a way to retain merchants because we're not only now their e-commerce platform or the point-of-sale provider or the payments provider, we're also now in some cases playing the role of their capital provider. This is a meaningful part of our business and it keeps growing and certainly it's something we're very proud of. In terms of the managing of the risk, it's something we keep a close eye on. We do a ton of trend forecasting and ensuring that we look at the data to update our models as we see trends changing. That being said, it's important to remember that most of the capital that we put out there is insured by our partner, EDC. We think that we continue to grow the capital business, but at the same time manage the risk, we're not doing anything that is outside of that loss ratio and risk exposure, comfort zone that we think we have right now. Thank you. Thanks, Colin. Our next question comes from Matthew Pfau of William Blair. Hey, thanks for taking my question. Just wanted to ask on the Fulfillment Network, how has the supply of Fulfillment partners been relative to the demand and fulfillment that you're anticipating and, you know, correlating to that, any updated thoughts on if you're gonna need to operate some of your own Fulfillment Centers to help supplement the supply? Thanks. Hey, it's Harley again. I'll take that question. As of right now, the demand for SFN is coming from both sides of the coin. It's coming from our merchants who wanna use it, but also coming from partners. It's important to understand that there are warehouses all over the U.S. which is our first geography, that have spare capacity that are looking to find a way to increase their business. By being part of this network, it's a great way for them to do that. As of right now, the seven nodes that will be operational by the end of Q1 in 2020, all of those will be third-party fulfillment warehouses. Whether or not we build our own, we hope we don't have to. If we do, it'll likely be just to test and do some development work. As of right now, we feel we can do a lot with third parties and still achieve the type of service and cost that we wanna get for our merchants. Into 2020, it'll be a gated approach to SFN, and we'll be adding more and more partners. There's been significant demand on both sides from merchants and also from partners ever since the announcement at Shopify Unite in June. We're quite pleased with the progress. Great. Thank you, Matt. Next question, please. Our next question comes from Ken Wong of Guggenheim Securities. Great. Thanks for taking my question, guys. Some of your e-commerce peers have called out softer than expected holiday trends. Can you maybe talk a little bit about what you're seeing across your merchant base as we head into the typically strong Q4? Sure. I'm taking this. This is Tobi. I mean, it's all trend forecasting at this point. Like, we're all sort of looking at probably similar data. We don't see any weaknesses. Right now it looks pretty much on track to the previous years. Some dates are falling on different parts of the year, there's some change to that in terms of seasonality. Like, right now we don't see anything that gives us indication that there's a difference in purchasing behavior, at least from our segment of the world we can see. Great. Thank you, Ken. Next question, please. Our next question comes from Mark Zgutowicz of Rosenblatt Securities. Hi, thank you. Maybe just a quick follow-on to that last point, Tobi. I think we have one, essentially one less week, between Black Friday and Christmas this year, roughly speaking. I'm just curious if that's contemplated in your guidance. Maybe separately, Harvey, you talked about capital and just curious if you can provide any color in terms of the impact it's having on GMV growth. Thanks. I'll take the one last week. Yes, it is built into our guidance. We had a strong Q3 in terms of GMV growth. We're pleased with our performance going into our peak selling season, that is one of the reasons why we upped our guidance on the top line. Hey, on the capital piece, we've now given out about $770 million of cumulative cash advances. That continue to grow. It's up 85% since if you look year-over-year from last Q3 in 2018. Our capital business will continue to grow. Is it gonna have a material effect on GMV? Probably not a material effect on it. Obviously, people will use this, these merchants will use this money to do things like advertising and inventory, which will have a correlation to GMV. Just given the amount of GMV happening across our entire platform in 175 countries, I don't think that's going to be a material increase in our GMV by itself. It's also not, like, on the capital side, we don't see I mean, sometimes we give a loan, and then people just accelerate or increase in inventory order, and it has an immediate effect. What happens a lot more is that businesses who could otherwise not access loans get them, and therefore actually continue building the business. The effects of, on GMV of the loans end up being delayed, but we might end up with an additional customer who would never actually have become a customer because of them. It's hard to cause and effect it. It's secondary, tertiary effects which end up affecting the GMV in the long run. Got it. Thank you. Great. Thank you, Mark. Our next question comes from Gus Papageorgiou of PI Financial. Hi. Thanks for taking my question. If I look at your numbers, it looks like the year-over-year growth in GMV per merchant is very strong, kind of double digits, and it looks like it's been double digits all year long. I'm assuming that's from increased number of plus customers, but also, it seems like probably the conversion rates are improving for your merchant customer base. Can you talk about what are the kind of main features that you guys have implemented that have helped your merchants convert? If you look into the future, how do you expect conversion to improve with stuff like augmented reality and whatever other features you think you're gonna influence that? In terms of the conversion, look, the things that we're doing, we're trying to ensure that anyone, that any browser turns into a buyer for our merchants. Things like augmented reality or 3-dimensional product listings, things of that nature. As I mentioned, it not only makes a more fun experience for consumers, but it also increases the conversion rate. Even beyond that, things like Shop Pay, more of our accelerated checkout options. What you're beginning to see more and more is that we are trying to reduce the amount of friction that any browser has, so that they do become a buyer and hopefully buy a lot from these merchants. I mean, we've been doing that for almost 15 years now, trying to make it easy for anyone to check out as easy as possible from a Shopify store. We'll continue to do that, of course. Yeah. I'll just add one point at the end that the GMV per merchant growth, it's pretty much across the board, across all of our merchant segments. Yes, in particular, Plus has been very strong. Great. Thank you. Thank you, Gus. Our next question comes from Deepak Mathivanan of Barclays. Hey, guys. Thanks for taking the question. Wanted to ask about, you know, how you're approaching the fulfillment rollout. Are you using initiatives like early adopter discounts or value promotions for some of the large merchants at this point already as you prepare for the holiday season? Can you talk a little bit more about kind of the go-to-market strategy for fulfillment, you know, near term and maybe in 2020 as well? Thank you. Yeah. With respect to fulfillment, you know, we're still in our early access program, and we're onboarding merchants as we speak. We're happy with our progress and absolutely on track. Each contract is competitively priced. We look at each merchant based on the size, weight, and complexity of their fulfillments, and that's largely how we have approached it and will continue to approach it moving forward. Great. Thank you, Deepak. Next question, please. Our next question comes from Brad Zelnick of Credit Suisse. Excellent. Thanks so much for taking the question. With take rate flat quarter-on-quarter, how much of this was driven by mix shift? If we dig into the different segments, Plus and international, what does take rate growth look like on a segment level basis? Thanks. Yeah. If you look at it at the segment level, each of our merchant segments has continued to increase take rate year-over-year. The entire impact from Q3 to Q4 is a mix. We're still seeing strong growth in international, and that take rate is improving quarter-over-quarter, year-over-year. It's just weighing down the average a little bit. Great. Thank you, Brad. Next question, please. Our next question comes from Richard Tse of National Bank Financial. Yes. With respect to the fulfillment network, you know, as it becomes a growing part of your mix, how should we think about the margin profile here for the business going forward? Yeah. Let me just talk a little bit about Shopify Fulfillment Network and what we sort of expect here. Let's take Q3 to begin with. There was minimal impact to gross margin, given we're still ramping the early access program. As we enter Q4 and our peak selling season and we start to ramp fulfillment volumes, we do expect to have slight dilution on our gross margin from that. This is all factored into our Q4 and full year guidance. We do have a path to profitability that we announced at Unite, and we expect to be in product market fit phase through early 2021. We likely will be dilutive on the gross profit line for Shopify Fulfillment Network until we hit the scale phase, which again, we expect early 2020. We believe the short-term dilution is the right long-term decision for our merchants. We expect fast and affordable fulfillments will energize our flywheel by helping our merchants to sell more. That would be hitting the scale phase in early 2021. Our next question comes from Darren Aftahi of ROTH Capital Partners. Yeah, maybe Amy, could you expand on gross margins? Looks like subscription solutions gross margin dipped a little bit sequentially. I'm just kind of curious what's driving that, and then your thoughts going forward. Thank you. Yes, on the subscription solutions margin line for Q3 quarter-over-quarter, we did see a slight dip. It was due to infrastructure investments to increase the performance for merchants, speed performance, and also some additional infrastructure in anticipation of our peak selling season. I will say for the full year for subscription solutions margins, year-over-year, we are still anticipating an improvement because of post-cloud migration this year versus last year. Great. Thank you, Darren. Next question, please. Our next question comes from Jonathan Kees of Summit Insights Group. Jonathan, your line is live. Hi. Can you hear me now? Hello? Hello, can you hear me now? Yep. Go ahead. Okay, super. All right. Sorry about that. I really just wanna ask about one topic. Amazon, during their call, talked about 1-day shipping, really, materially, had an uplift on their volume, on their GMV. you know, at Unite, you guys talk about 2-day shipping. Does that change your planning, your table stakes offering in terms of what you're planning to roll out for your merchants? If I, if I may, on the same topic here, I know you consider Amazon to be more of a partner. It's a sales channel for your merchants. I guess, at what point do they become, a competitor, especially as, more merchants, defect from their network over to yours? Thanks. Yeah, hi, tech. It's Tobi here. Again, I said this before, it seems to have resonated, like Shopify and, you know, Amazon, we are partners. Again, we offer Amazon Pay to the customers who want it, to the merchants who want it. Often when you buy something on Amazon, there's a Shopify store that this particular order flows into and from which the merchant does their fulfillment and so on. It's a partnership, so we are not competing with Amazon. It's, you know, some of our customers are competing in some segments. We certainly help them with that. In a very indirect way, you can draw the parallel of that we are competing, but, like, I don't think either of us thinks about it this way. Amazon also serves as a best practice. You know, like they've kind of I mean, they're certainly the retailer that figured out how to sell perfectly on the internet. The things that people really need, they order from there because it arrives, often now next day, as they announced. The products on Shopify are often the things that people really want rather than want they need. It's a, it's a boutique-y kind of product. There's a little bit more tolerance for the shipping because of that. We are not aiming at one-day delivery because that's just it is an incredibly expensive kind of thing to do, and isn't, like, the return on investment in, for the category of products that are on Shopify isn't there. Like, it will happen in some instances because frankly, a lot of our partner, warehouses will be close to population centers, and we'll be able to do this. To create any kind of guarantees around this, that's not something we are planning on doing. No, there's no change because of the announcements, yeah. Thank you. Great. Thank you, Jonathan. Our next question comes from Kevin Krishnaratne of Paradigm Capital. Hey there. Good morning. Congrats on the milestone. You had strength in ads from international. I'm wondering if you could provide any color on gross ads in core markets, sort of what are the trends are like there versus, say, a year ago or prior quarters, stronger or weaker. Just trying to understand how this quarter might compare to other peak periods for gross ads. Just trying to unpack the different markets. Thanks. We continue to see solid growth in merchants in our core geographies. You know, merchant count is something that we look at as a metric, but we're also looking at GMV growth. The growth in our core geographies and GMV-wise was quite strong. The combination of the two of them, we're happy, and that's another reason why we upped our guidance for the year. Great. Thanks, Kevin. Next question, please. Our next question comes from Nikhil Sadhwani of Mackie Research Capital. Good morning. I wanted to go back to Harley's comments about your native 3D support and augmented reality. Maybe if you could help us understand how that would scale. Can merchants use their smartphones to scan different SKUs, or do they need specialized hardware or perhaps new partners to help them out in that area? Thanks. Hey there. Thanks for the question. In terms of new hardware, no, I mean, the great part about things like augmented reality is that anyone that has the new iOS has it built into with ARKit. There's nothing new you need. Now, in terms of getting the 3D modeling done, that is something that we're actually helping merchants with. If you go to our services marketplace, where we connect merchants with experts and photographers and agencies and freelancers and developers to help them with their business, the specific needs and requirements of their business, that's an area where you now can find 3D modelers as well. We are matchmaking them with people that can help with that. From a consumer perspective, I think the best part about this is that a consumer doesn't have to do anything. Consumer can now go to that particular merchant's online store, and they can have a much better experience given the work that we're doing with 3D and AR, and we think it's gonna lead to higher conversions ultimately. There is no onus on the consumer, and we're making it really easy for merchants to adopt this. Great. Thank you. Great. Thank you, Mikhail. Thank you. Our next question comes from Chris Merwin of Goldman Sachs. Okay. Thanks very much for taking my question. In terms of profitability, it looks like you flowed through the fiscal 3Q beat on non-GAAP EBIT into the full year guidance. I think you mentioned that the updated full year guidance also includes $10 million of OPEX. This is on the non-GAAP. I guess just given all the runway ahead for, you know, Shopify Fulfillment Network plus international, maybe can you just talk a bit about flowing through kind of that level of profitability, and how you think about the pace of investments going forward? Thanks. Let me talk specifically to our outlook that we just updated because there are multiple factors going on with respect to 6 River Systems as well as the change in definition. If you think, if you start with our outlook in August that did not consider the 6 River Systems acquisition, we were at $20 million-$30 million of adjusted operating income for the full year. If our outlook in August were adjusted to also exclude amortization of existing acquired intangibles of $7 million, the new definition, it would've been $27 million-$37 million. Apples to apples, our updated outlook for adjusted operating income for the full year under the new definition is essentially unchanged. What does that mean? That means that the $10 million in OPEX from 6 River in the fourth quarter is essentially being offset by the organic performance of Shopify. You know, we're gonna continue to invest in these important growth areas. That will, you know, be something that we're working on in 2020 planning, and we'll have more to say in February on that. The performance of the overall company, including 6 River for the fourth quarter, we think is very strong. Great. Thank you. All right. Thank you, Chris. Our next question. Next question please. Our next question comes from Thomas Forte of D.A. Davidson. Great. Thank you for taking my question. Regarding your Shopify Fulfillment Network efforts, what was the rationale for purchasing 6 River Systems, and do you believe you need to engage in additional M&A to advance the initiative? Yeah, Tobi here. No plans right now on more M&A, but it's definitely a possibility. Again, this is a completely new field for the company, and we're trying to do this right. The rationale specifically is, you know, in this particular world of fulfillment warehouses, like efficiency and quality metrics are everything. Lots of things that are massively improved by robotics. The part of a significant reason for a lack of robotics build-out in this particular space has been that people have experienced like a great robotics provider coming on the market about a decade ago with Kiva and that then disappearing and the robotics were no longer available. That feed is a good set of horror stories in the market, which made people just not want to go for this particular option. Us bringing in 6 River Systems brings a lot of fantastic talent in-house. People who have known the space for like and have built hardware, software in this space for many decades. And also we can go out to this world and just say, "Hey, we've" like it's demonstrable that we will want this to be available over the, you know, next decades, and that people can do long-term planning with robotics in mind and just keep it in the space and make it a part of this of the fulfillment network build-out. That increases, again, efficiency and e-commerce picking ability of warehouses which currently aren't doing this. It became pretty obvious that this would be a good move and this is a significant part of the rationale of why we did it. Great. Thanks, Tom. Great. Thanks, Tom. Our next question comes from Koji Ikeda of Oppenheimer. Great. Thanks for taking my questions. I had a question on the conversion of mobile eyeballs to mobile dollars. Shopify does a great job with that mobile conversion rate that I think it's well above the industry metrics we see out there. There's still a gap between mobile eyeballs and mobile dollars, even for Shopify. Could you talk about what is the factor or factors that is causing that gap and what Shopify is doing to help close that gap over time? Thank you. I don't think anyone I mean, this is really, really hard to know. It's from Like I think the default devices just has shifted, you know. It's massively more traffic on mobile. People use mobile a lot more in sort of the cracks of a day. Sitting down on a computer is becoming more and more deliberate, a deliberate act. People might have It might be the same people who have, you know, bounced on an online store will then sit down on a desktop to then do the purchase, these kind of things end up skewing the numbers a little bit. I think the correct way to think about the world of the internet really is, it's it exists for serving mobile devices. There's a couple of fallback systems for desktops. Super clear long time ago, and it's actually some retailers are surprisingly unprepared for it. Mobile devices have tons and tons of advantages, like the fact that you can use biometrics as in form of securing access to credit cards on mobile devices, have payment systems directly built in on the platform level, which is again, at the moment, the lack of the browsers doing this over the last decades many times. The mobile vendors have done such an amazing job building secure elements into the hardware and bringing these ideas into reality. Like, I think the experience of purchasing on mobile, on Shopify stores is now equivalent. Like, I don't think friction is a differentiator for conversion rate anymore. Now it's purely based on intent. I think that took a long time to get there, but now, I think we are there between, you know, Apple Pay, Google Pay, Samsung Pay, and all these kind of things that are supported. Of course, Shop Pay sort of making up the difference in the 4 pay cases. Great. Thank you, Koji. Our next question comes from David Hynes of Canaccord Genuity. Hey, good morning, guys. Can you talk about first year GMV for new Plus accounts maybe versus a year ago? I'm trying to get a sense if the increase in contribution we're seeing there is more a function of, you know, adding Plus merchants at a higher velocity or landing larger accounts. I suspect it's a bit of both, but, you know, anything you could provide to help quantify would be helpful. Hey, it's Harley. I'll take that question. We certainly are seeing more complex merchants come onto the Plus platform. We announced Staples Canada coming on a couple months ago. More recently, companies like JB Hi-Fi have come on, which are some of the largest electronics retailers in the world and based in Australia. We are seeing more of these complex merchants that traditionally we saw mostly homegrown success stories come into Plus and upgrading through the different plans. Obviously, we're seeing merchants that frankly, even five years ago, we didn't anticipate they'd be coming to us. They come with a whole bunch of nuances that we just weren't aware of. I think now we're getting better at understanding what they require. That even extends to some of the government agencies we're working with in places like Canada for things like cannabis, where they come with a whole set of requirements. I think we're getting much better and much smarter and much more effective in onboarding them and getting them up and running. The neat part about those particular merchants is they come with an existing business. GMV obviously for them, you know, accelerates fairly quickly relative to a brand-new direct-to-consumer brand that's just trying to build up their business. That being said, relative to the entire stack of GMV across all of Shopify, which again was $15 billion, almost $15 billion for the quarter, it's not necessarily gonna be overly material. I do believe you will continue to see more large, complex, very well-established brands, come onto the Shopify Plus in the coming years. Got it. Thank you. Thanks, David. Our next question comes from Paul Treiber of RBC Capital Markets. Thanks very much. Good morning. Just in regards to Shop Pay, the adoption does seem quite strong. You know, what's your thoughts on some of these more consumer-facing services like Pay creating a consumer brand around Shopify itself? Or related to that, how do you think about striking a balance between, you know, any Shopify-related branding with consumers and the merchant's own branding? This is the perennial or evergreen conversation within Shopify, right? Like again, we've grown up as sort of a total brand behind brands, like even putting Powered by Shopify on our stores that are hosted on Shopify. That's something that people did manually at some point, and only then did we sort of create it as an option. So the success of the company has sort of traditionally been just making other people look good rather than ourselves. So we are very, very careful with any exposed branding. I mean, we are certainly like agreeing with our customers who are saying that, "Hey, you guys have a pretty good brand. Let's use it. This is why Shop Pay was something we engaged in, and it certainly was, been very successful. Like, it's just gonna be something we are gonna do very, very carefully. That's basically the best thing I could say about it. I think this, like, this direction is so fraught with potential pitfalls, and going overboard. I think it's important that we stick to what we know. Great. Thanks, Paul. Our next question comes from Ygal Arounian of Wedbush Securities. Hey, good morning. I wanted to ask the macro question on holidays just from a different angle. There's obviously been a lot more discussion around the macro environment, potential recessions and slowing growth. It would seem to indicate from all your numbers that you're not seeing any real negative sentiment out of, I guess particularly your SMB cohorts. To any degree, you could kind of talk about the overall business investment and sentiment you're seeing from your merchants. Real quick, you guys didn't touch on POS on this call, and you rolled out a pretty meaningful software upgrade at Unite earlier in the year. wanted to see if there's any early reads from that, customer reactions and, you know, any lessons you're learning? The, yeah, the point of sale update hasn't hit yet. This is still coming out in the future. We are super excited about it and generally this scenario we are building up, point of sale is doing really well. We have visibility in purchasing behavior where we don't see any indication of diminishing confidence. We have visibility in new business formation, which seems strong, and it's not tracking in any meaningful way different from how it has through, you know, the last 10 years of a bull market. We are not seeing anything coming from our side, as everyone who's witnessed recessions have noticed. They usually come from the side where you don't expect them from. Doesn't look like our side. Like if something is happening, it doesn't look like our side is the thing that's causing it, and it's tracking ahead. Okay, thank you. Thanks, Vidal. Sure, thanks. I'll just remind everyone, as we are coming close to the end here, to please limit yourselves to one question as we still have several people waiting to ask a question. Our next question comes from Josh Beck of KeyBanc Capital Markets. Thank you for taking the question. I wanted to ask about B2B. I think it's been approaching 6 months since you purchased Handshake. Any updates you can provide us on what the key strategic objectives are for you within that opportunity? Yeah. As you mentioned, we did acquire Handshake about 6 months ago. It's an incredible team of people that have been thinking more about modern wholesale and modern B2B probably more than anyone else on the planet. Remember that Plus historically had a very small B2B business, we didn't necessarily go there. Our merchants pulled us there. We were noticing that some of our merchants had a very, you know, successful and thriving retail business, but also were looking to use Shopify for their wholesale and B2B business. We felt that although we could probably get there ourselves, we wanted to accelerate that, and we felt with the team over at Handshake, we'd be able to do that a lot faster. Again, we're still working together to figure out exactly what the go-to-market will be for that, what exactly the final product will look like for that. Certainly we have the greatest team, we think, on the planet, thinking about modern retail and modern B2B and that'll continue to grow over time. It's not yet a material part of the Shopify Plus business or the Shopify business. It does allow us eventually to get an entire different segment of the market to think about Shopify who currently we are not talking to. Very helpful. Thanks so much. Great. Thanks, Josh. Our next question comes from Brian Peterson of Raymond James. Hi. Thanks for taking the question. Just wanted to hit on the success you've had internationally, and I'm curious if the merchant ads you've seen, have those been more traditional Shopify merchants, or have you also seen quicker than expected adoption for net new Plus merchants as well? Any color on that? Thank you. I'll take that question. From an international perspective, the interesting part about our expansion there is it differs by different countries. In certain countries, we're seeing a lot larger merchants come on. They look a lot more like the Plus merchant segment. They're coming on with GMV. They have, you know, dozens of employees, if not more, working at their companies. In other segments, we're seeing very small merchants, very similar to what we'd see, you know, signing up for a $29 plan in North America. The neat part about our strategy there is that we actually are tailoring our product and the go-to-market on a per country basis, and that's the reason why we need things like country specific and language specific applications. We need a partner ecosystem in each country that differs from other countries. Obviously language is something we've been working on for a while. We currently have Shop Pay now in 19 languages. Obviously the diversification of the merchant base increases our TAM, so we're excited about that. The other thing that obviously Amy had mentioned in her prepared remarks was that GMV from international is actually growing faster than other segments, and that's really great. We still have not penetrated the international market with merchant solutions in the way we have in some of our core markets, so that remains an opportunity in the future for us. Great. Thanks, Brian. Our next question comes from Samad Samana of Jefferies. Hi, thanks for taking my question this morning. Amy, I think in your prepared remarks, you mentioned level setting subscription pricing for legacy plans. I was wondering if you could maybe help us understand how much legacy pricing there still is, what the impact of that was on the quarter, and maybe the philosophy around prices increases now and what drove that. Thank you. Yeah, the migration to standard pricing is largely done now. It was merchants, legacy merchants, that were not on our standard plans. For simplicity, we just wanted to clean that up. We called it out. The MRR growth would've been significant without it, but it did have about a 1 percentage point of growth year-over-year impact. We wanted to call it out, but it is largely done now. Great. Thanks, Samad. Next question, please. Our next question comes from Todd Coupland of CIBC. Great. Just following up on the international questions. Which countries did the best in the quarter, and how do you expect that to trend in the fourth quarter? Thanks. We've mentioned in the past, there are some countries we're focusing on, places like Germany and France and Japan and other places like that. In terms of doing best, again, some of them are areas in geographies where we're gonna see merchant growth. In other places, we're gonna see higher GMV growth, depending on the type of merchants that we have there. We're constantly taking a very nuanced approach to each country based on what they actually require and then trying to find product market fit based on that. I wouldn't say there's any one country that is eclipsing every other one internationally. Great. Thanks, Todd. Next question, please. Our final question comes from Suthan Sukumar of Eight Capital. Good morning. Just wanted to touch on POS. Historically, this has been more of a cross-sell to your online merchant base, expanding it to offline. Given that you're now making more focused investments in the segments with the launch of the new platform and new hires, how do you anticipate evolving your go-to-market plan going forward here? In terms of, in terms of the point-of-sale, go-to-market efforts, we now have a sales team around it. This is mostly inside sales, so we feel there still remains significant low-hanging fruit inside the platform, people that are already using Shopify but may not be using us for point of sale, and so that's where we're focusing. As Tobi mentioned earlier, as point of sale next rolls out in the future, we think that's gonna be a very compelling reason to come to Shopify strictly for the POS product and then take more of our products. Right now, the majority of our sales efforts around point of sale are inside sales selling to our existing merchant base. Great. Great. Thanks, Suthan. Thank you. Then we'll hand it over to Tobi Lütke for closing remarks. Yeah. As you probably saw, like we also announced that we have now 1 million active merchants on the platform, which is, you know, roughly around this time 15 years ago, I launched store number 1. Certainly, didn't imagine to be able to say that 1 day, this is kind of blowing my mind right now. I think here's an interesting thing. A lot of what's working about Shopify is 2 levels of, I don't have a good term for it, but it's more like, I would say business model to customer needs harmony. I think Software as a Service, as a business model is 1 of those things which is, I think, a little bit underappreciated because here's what's going on. The vast majority of our customers are subscribing month to month. What that does is it keeps us as a company incredibly honest, right? Like, they are talking to us. Like, we are getting a ton of suggestions, ideas. We are seeing a lot about the world of e-commerce. Harley pointed out earlier that we actually have some data on the mobile question. It's now that's 81% of all traffic is mobile phones and 74% of all orders complete on mobile. Think about that compared to 15 years ago. The iPhone wasn't even out there yet, right? What SaaS compels us to do is just really understanding what's happening and rolling out all these updates for everyone to appreciate them for free rather than making big, like additional charges for this. It aligns our interests with our customers, and I think this is a dynamic which forges software of just simply higher quality because, again, there's no long-term commitments that you can rely on. One zoom level down, there's a similar dynamic around the D2C situation, right? There's our customers now selling without intermediation directly to their customers also puts them into direct conversation with their customers, and they create significantly better products. That feed in a loop feeds back to us doing well as a company. For, for those of you who've been on a bunch of these calls with us, I at some point mentioned that I had a investor who ended up not investing because they told me that the worldwide market for online stores was about 40,000 stores. It's just amazing to, you know, zoom out and just see, hey, here what happened, how many people are actually building successful businesses from the, from every downtown area in every city to the most remote islands in the middle of Atlantic, and it's just all of them integrating themselves perfectly into the global network of commerce, and it's just really, really gratifying. Those some thoughts to leave you with, and thank you for joining us. This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

• Earnings release