Earnings Call: Q2 2019

Aug 1, 2019

Good morning. My name is Heidi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Shopify second quarter 2019 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Katie Keita, Head of Investor Relations, you may begin your conference. Thank you, operator. Good morning, everyone. We are glad you can join us for Shopify's second 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 our 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 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 the 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 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 US dollars, all amounts discussed today are in US dollars unless otherwise indicated. With that, I will turn the call over to Harley. Thanks, Katie, and good morning, everyone. This past quarter, our momentum certainly continued. Our efforts to expand internationally accelerated with new global additions to our partner network and the largest ever mix of international merchants to our base. Our merchants reached new levels of success with year-over-year GMV growth accelerating from Q1. In fact, merchant sales reached a major milestone, selling on average $1 billion per week in Q2. An impressive number considering it was not very long ago that it took our merchants an entire year to sell $1 billion worth of their products. More than 1,500 partners and developers from more than 50 countries joined us for our sold-out Shopify Unite conference, our largest ever, where we announced many of the features we've been working on. I want to highlight a few of these new features before updating you on our progress with Shopify Plus and our partner ecosystem as we continue to level the playing field for entrepreneurs. We announced a new online store design experience, making it easier than ever for merchants to design and update their stores while creating their own unique brand and buyer experience. We're adding new functionality to enable businesses of any scale to showcase their products in 3-D, AR, and through video, creating a more immersive browsing experience. This also makes Shopify the first major platform ever to natively support 3-D. Based on our early tests, buyers interacting with 3-D were more than 2 times as likely to complete a purchase. We announced our long-awaited order editing feature and API, which will enable both merchants and partners to create flexible solutions for managing upsells and changes during the post-purchase process. We announced checkout app extensions, allowing partners to integrate new functionality into Shopify's checkout so that buyers can choose things like recurring payment transactions seamlessly. We made big steps towards connecting merchants and buyers around the world with the announcement of our translations API and multi-currency for all of our merchants. We're incredibly excited about all these announcements, but our biggest news of the day was the Shopify Fulfillment Network. We expect to spend $1 billion over the next 5 years to democratize fulfillment, making it accessible and affordable for merchants of any size to offer what used to be reserved for only the largest companies in the world. No other company is as well-positioned as Shopify is to offer this. By leveraging our scale with machine learning, demand forecasting, smart inventory allocation across warehouses, and intelligent order routing, we expect merchants will be able to get their goods to buyers faster and cheaper than any other option they have today while keeping their own brand front and center. We're also focused on an increasingly important part of our business, offline commerce, which we're enhancing so merchants can provide a far better in-store buyer experience. We announced our new point-of-sale software, which is faster, more intuitive, and more scalable point-of-sale software for retailers to grow their brick-and-mortar businesses. Following the launch of our new retail hardware kit in April, we released the card app extension, which let merchants apply loyalty points and discounts directly into their point of sale. Another way we've helped merchants sell more and improve the buyer experience is Shop Pay by removing friction at checkout. Shop Pay's popularity continued to grow in Q2 with millions more buyers opting in. This led to Shop Pay's order volume doubling compared to the same period last year and reaching nearly $1 billion in GMV for the quarter. In Q2, we released new features for Shop Pay, like giving buyers the ability to add discount codes and edit saved shipping addresses. Shopify Capital and Shopify Shipping both experienced robust growth year-over-year. Growth in these areas are particularly important to us because these are products that our merchants increasingly use as they become more successful. Shopify Capital exceeded $630 million in total merchant cash advances in the second quarter, and more than half of that was distributed in the past 12 months alone. Simply put, merchants have a better shot at success when they have timely access to affordable capital. That's why this July, we introduced Shopify Capital to non-Shopify Payments merchants in the U.S., expanding our eligible market and helping even more entrepreneurs accelerate the growth of their business. Shopify Shipping adoption continued to grow with more than 42% of eligible merchants using shipping in the second quarter, which was up from just a third of eligible merchants in the same period last year. Merchants now have access to shipping profiles, which gives merchants the flexibility to define shipping rates by product and source location while improving the accuracy of shipping prices. Of course, Shopify Plus, which had another phenomenal quarter. The agility and flexibility of the platform gives these large merchants the ability to move fast, offer exceptional buying experiences, and grow their business. Some of the brands that launched this quarter include fashion labels bebe, A.P.C., and Frances Valentine, which was founded by the late fashion icon Kate Spade. International electronic brands including Dolby, Sony, Uniden, and Palm. More brands from some of the largest influencers on the planet, like Kylie Jenner's new skincare line, Kylie Skin, and Katy Perry's new footwear line, The Katy Perry Collection. One of Canada's largest sellers of office supplies, retailer Staples Canada, footwear brand Clarks, beer company Heineken, and we continue to see more launches from the world's largest consumer packaged good companies. Shopify Plus is set to become an even more compelling solution for complex and large-scale businesses when we release our new Shopify Plus product later this year. The all-new Shopify Plus will give merchants an overview of the performance of every single one of their stores with the ability to manage all stores, staff accounts, user permissions, and automation tools like Shopify Flow in a single place. Finally, let's turn to our partners. As I mentioned, Shopify held its fourth annual Unite Partner Conference this June, where we shared glimpses of our product roadmap with our partner community. This event gets bigger and better every year as we surface all the opportunities available to our ecosystem to help build the world's best multi-channel retail operating system. The Shopify Fulfillment Network, our international expansion, and the continued growth of our sales channels like Point of Sale are just some of the exciting areas where our incredible partner ecosystem plays a vital role. Our partner ecosystem has been busy. 22,000 partners referred merchants to our platform in the last 12 months, up from 19,000 in Q1. This was primarily driven by international growth. Our partners play an important role in helping us localize the platform internationally. In fact, I've been on the ground meeting with partners from around the world. I always come home energized by their enthusiasm to enable our merchants from every corner of the globe. Our App Store also continues to grow with more international partners building new functionality for Shopify. We added another 200 apps, bringing the total number to 2,900 at the end of Q2, and translated the Shopify App Store into 18 languages so that our non-English-speaking merchants can add the specific functionality they need regardless of where they're located. It's incredible what we're getting done at Shopify. We're shipping important features at a strong pace. As we invest and build great products enabling more capabilities, I'm confident that we will continue to unlock unprecedented opportunities for merchants around the world, making commerce better for everyone, everywhere. Thanks, Harley, and good morning, everyone. We delivered a strong second quarter, one that highlighted both the power of our business model as well as the strength of our execution. We grew revenue 48% year-over-year to $362 million. Subscription Solutions revenue increased 38% to $153 million, driven by monthly recurring revenue growth of 34% to $47.1 million. Shopify Plus increased its contribution to MRR, accounting for $12.4 million or 26%, compared with 23% of MRR in Q2 2018. Subscription Solutions revenue grew faster than MRR in the quarter, mainly due to strong growth in app and Plus platform fee revenue, which is not included in MRR. Merchant Solutions revenue grew 56% over the same period in 2018 to $208.9 million. This growth was driven by GMV expansion, which accelerated to 51% year-over-year to $13.8 billion. Our merchants are selling more than ever as our investments across international, Plus, and POS are paying off. $5.8 billion of GMV was processed on Shopify Payments in Q2, an increase of 51% versus the comparable quarter last year. Shopify Payments penetration of GMV grew to 42% in the second quarter versus 40% in Q2 2018, primarily due to increased Shopify Plus penetration as well as the addition of new Shopify Payments geographies. Gross profit dollars grew 50% from Q2 of 2018 to $204.8 million, outpacing revenue growth in the quarter principally due to new payment partner pricing terms, which included a one-time benefit. Adjusted operating income in Q2 was $4.8 million or 1% of revenue, compared with a loss of $4.3 million or 2% of revenue in the second quarter of 2018. We achieved better than expected adjusted operating results in Q2 due in part to the one-time payment partner pricing benefit I just mentioned and timing of brand spend with Q2 underspend shifted to the second half of 2019. Early indications are that the brand campaign has nearly doubled unaided awareness in our test markets, while there was minimal increase in similar control markets. This has resulted in an increase in traffic to the platform. How and when that takes effect down the funnel and impacts conversion remains to be seen. This is certainly a positive early readout. Adjusted net income for the quarter grew significantly to $15.8 million or $0.14 per share over income of two and a half million dollars or $0.02 per share for the same period last year. Our cash equivalents and marketable securities balance was approximately $2 billion, generally consistent with the balance at the end of 2018. The appeal of entrepreneurship is universal, attracting entrepreneurs around the globe to Shopify. Why Shopify? Our merchant-centric business model is inclusive, ensuring that multiple voices contribute to the future of commerce regardless of scale or location. Investing in their aspirations and growth keeps our flywheel in motion, leading to a diversity of merchants joining the platform, more channels and capabilities to help our merchants succeed, and greater opportunities for merchants to grow their sales and reinvest in their businesses. Harley discussed our achievements and continued investments in Platform and Plus. I will provide updates for international and Shopify Fulfillment Network, starting with international. We made great headway improving our product market fit across a number of regions in the second quarter, adding 11 more languages to the Platform, enabling more merchants to start using Shopify in the language they're most comfortable. We also translated the partner dashboard into 11 additional languages as we leverage a growing international ecosystem to support our localization efforts. We introduced more product solutions to fuel merchant growth. In Q2, we launched Shopify Payments in Denmark and the Netherlands, which features an integrated local payment method that allows for bank transfers in addition to credit card payments. Multicurrency is now available to eligible core merchants using Shopify Payments, with a full rollout planned for later this year. Early signs of growth are promising since launching this feature to Plus merchants in Q1. Optimizing product market fit on a localized basis is clearly the right approach. While still early days, we are pleased with our progress. Our mix of international merchants continue to grow relative to total new merchant adds. International also contributed to the re-acceleration of GMV, with its contribution relative to overall GMV continuing to expand in the second quarter. Moving to Shopify Fulfillment Network, a major new product expansion area for our merchants. As I discussed at our Investor Day, our merchants' need for fast, reliable, affordable fulfillment is clear and growing and can be the difference in whether a merchant makes a sale or not. In other words, the success of our merchants depends on it, which is why it is among our top investment priorities. Since announcing Shopify Fulfillment Network at our Unite conference, we have received an incredible amount of interest that has exceeded our expectations. Thousands of merchants have expressed their desire to be a part of our early access program, and dozens of partners are eager to join us in being a part of this solution. We have spent the past six weeks onboarding merchants we've approved so far, are in discussions with thousands of other merchants, and are assessing interested partners. Given that the uptake and interest for Shopify Fulfillment Network has been much stronger than anticipated, our plan is to accelerate investing so we can move fast and execute on this opportunity for our merchants. All in, we are pleased with our second quarter results. We see top-line momentum continuing in the back half of the year and are committed to investing for the long term. As a result, we are raising our revenue expectations for the full year to be in the range of $1.51 billion-$1.53 billion, with an adjusted operating income ranging between $20 million-$30 million. For the third quarter, we expect revenue of $377 million-$382 million and an adjusted operating income between $0 and $3 million. Stock-based compensation in 2019 is expected to be approximately $175 million for the full year, with about $47 million of this in the third quarter. This is higher than originally expected, primarily due to an anticipated increase in payroll taxes related to option exercises resulting from Shopify's strong share price performance this year. In closing, we're excited about the future of commerce and Shopify's role to level the playing field for entrepreneurs everywhere. Given the success of our merchants, we are confident that we are making the right investments that will continue to energize the flywheel and deliver strong and sustained growth well into the future. With that, I'll hand the call back to Katie. Thank you, Amy. Before turning it over to the operator to open it up to everyone's questions, let me remind you to please try to limit yourselves to just one question, and that way everyone can get a chance to ask a question on the call today. With that, operator, do we have anyone in queue? Certainly. If anyone would like to queue up, if they didn't get the instructions at the beginning, just press star then 1 on your telephone keypad. Your first question comes from the line of Brad Zelnick with Credit Suisse. Please go ahead. Excellent. Thanks so much, and congrats on another fantastic quarter. My question is for Tobi or perhaps Harley. As we look out on the horizon, what can you do with all of the rich and insightful data that you have to drive merchant success, perhaps in ways you're not already doing? Hey, I'll take this. Tobi here. It's such an interesting type of data, right? Like, I want to be careful because there's a really, really strong principles at this company, like which are around that, the data is the merchants, and we use it to their exact benefit, right? You see like I think a great implementation of this with our plans for the Shopify Fulfillment Network because they're We talked about this on stage. We can based on historics of, you know, their sales, demand course and so on, we can predict. Right now, we are about 85% accuracy from which region the next order's going to come and where demand is gonna be needed and so on. It's these kind of things. It's taking data to either make something that was, would previously have been impossible for the merchants possible for them or take something that would otherwise be incredibly difficult or full of manual labor and just simplify it. Those are the kind of use cases we are looking at. It's going to I haven't got anything terribly concrete to point at because I think we also just gave a good example of the kind of thing that we can do. It's important to say that what Shopify won't do is take the sort of aggregate total of and act on the learnings to our benefit. It's a sort of we've seen this in the history of retail a lot, where large vendors go, and create retail brands based on, or in-house brands based on, the insights that they are only marginally entitled to, and this is just not the right move for a platform such as us. Thanks so much. Great. Thank you, Brad. Next question, please. It's from the line of Colin Sebastian with Baird. Please go ahead. Well, great. Thanks. Good morning. Good morning. I guess in terms of the interest that you're seeing for fulfillment services, I wonder how much of this is coming from merchants that are not currently on the platform, meaning, could we anticipate this to be an incremental driver of new customer ads and any other observations you have from the channel as well? Thank you. Hey, thanks for the question. Harley here. Certainly, with the way we're looking at SFN, we have, you know, more than 800,000 merchants that many of which are shipping, particularly in the U.S. where SFN will be rolled out first, that we think we can certainly help with and add value to their shipping and fulfillment practices. In terms of new merchants that may not be exploring entrepreneurship because of all the different challenges, it's just one more place where we can reduce the barrier to entry into entrepreneurship, so that in the same way they don't have to think about designing or coding up their own website. They don't have to think about integrating some sort of complex payment system. They don't have to think about, you know, any new functionality. They can just go grab it from our App Store. The Fulfillment Network is just one more piece of the puzzle that people may be risk-averse about in terms of jumping into entrepreneurship. The more we can level that playing field, the more people will participate in entrepreneurship and more and more that is happening all on Shopify. Thank you. Thanks, Colin. Next question, please. Hi, good morning. This is Ato Gaillard on for Ken. I just had a question about some of your merchant ads in the first half of this year. Given the focus you guys have placed on filling the top of the funnel, do you think that merchant ads are kind of consistent with the first half, what you've seen or what you saw in the first half of last year? Are they coming in better? Thanks. Yeah. Let me just kinda talk about the first half and kind of what we're seeing. You know, we obviously had a record Q1 in terms of net merchant ads. When we think about Q2 relative to Q1, we attribute the movement largely to seasonality. You're seeing some of that. We saw a consistent pattern from Q1 to Q2 this year in terms of funnel gross ads and net ads that we saw last year, Q1 to Q2, 2018. In fact, we think we saw it a little bit magnified. As we get larger, our scale gets greater and our international presence is greater. We're seeing a very consistent pattern year over year. Our Q2 ads were in line with our forecast and expectations, and we continue to be very optimistic about long-term growth of our merchants globally, with our investments internationally as well as brand. The early indications, as I said earlier from the brand spend, are great. We just concluded this first brand campaign a couple of weeks ago, so it's still early, and we're still analyzing, and we did see an increase in traffic to website at the top of the funnel. But as I said, it's too early to tell how that's gonna translate into merchant ads going forward, but we're very encouraged. Great. Thank you. Great. Thanks, Ariel. Your next question comes from the line of Samad Samana with Jefferies. Please go ahead. Hi, good morning. Thanks for taking my question. Amy, maybe this is for you, but I guess expanding Shopify Capital to non-payments customers, how should we think about that maybe in terms of expanding the dollar opportunity or the rate of change in terms of capital and the dollars that you guys have been putting out? Does it also change the risk dynamics since non-payments customers are a little bit tend to have a little bit higher churn? Thanks for taking my question. Yeah. With capital, I'll just kinda give you a little bit of context here. We've actually managed our loss ratio in a very, very tight range. In fact, it's lower than the top of the range where we think we could go with this, which says, you know, the power of our algorithms are working. It's one of the reasons why we felt comfortable offering the capital product to non-Shopify Payments merchants. We feel like we're in a good position. With respect to non-Shopify Payments merchants, we still have significant visibility into their operations. We see their orders, we see the engagement with the platform. We are very comfortable moving in that direction. It does expand our addressable market, about 10%, and we see other opportunities to increase our addressable market over time as well. If you recall, we're only in like 14 states right now, we've got some initiatives underway to take that nationally. Timing to be determined, but we certainly see opportunities to continue to grow that business aggressively over time and in a smart way. We'll do it prudently, pull those growth levers and watch the loss ratio, but we're very comfortable where we're at right now. Great. Thanks for that. Thanks, Samad. Your next question comes from the line of Ygal Arounian with Wedbush Securities. Please go ahead. Hey, good morning. Thanks for taking the question. I just wanna talk, get into the retail POS a little bit more and maybe get your take on how much of a selling point the POS software has been since you launched it. Particular how the kind of cross-integration between the e-commerce platform and the POS software helps drive merchant growth, especially on the Plus side when merchants are debating between your platform and maybe a different one. As you think about, you know, going further into retail and, you know, you've obviously put a lot of effort into the POS and the software there. How do you think about kind of pain points in the areas where you can solve for that might be lacking in the marketplace today? Thanks. Hey, it's Harley. I'll take that question. As I mentioned in my prepared remarks, we are certainly focused in a new rejuvenated way in terms of point of sale. We already have more than 100,000 physical retailers using our point of sale product. We feel like new hardware and new software, our point of sale offering can be best in class. Part of what we're doing now is obviously making sure that anyone who's currently using Shopify for e-commerce begins to use Shopify as well for point of sale. There's some low-hanging fruit there for us as well. Also, if you think about, you know, what we talked about with channels, point of sale is just another entryway into Shopify. Some merchants come to us to sell online, some are coming to us to sell offline as well. As their business grows, they're able to take more channels and expand with us. We are excited about our point of sale offering, our new point of sale offering. We think with the hardware kit, which is proprietary, which is something that we're really proud of, coupled with a brand-new software, which we think is the best out there right now. We can really win in this in this particular market. The other thing that we're working on with point of sale is a sort of a new go-to-market strategy. Obviously the way that merchants and small businesses purchase point of sale is different than the way they purchase e-commerce. By having the right marketing, the right salespeople, and the right go-to-market strategy, we think we can do a really great job of increasing that 100,000 merchant mark to much more than that. Thanks, Ygal. Thank you. Next question, please. It's from the line of Thomas Forte with D.A. Davidson. Please go ahead. Great. Thanks for taking my question. I had a question for Tobi. Tobi, with the four horsemen of big technology, Amazon, Apple, Facebook, and Google, facing increasing government scrutiny on a global basis, as evidenced recently by their testifying in front of a House Judiciary Committee. To what extent is this potentially a problem for Shopify to the extent you partner with some of those companies? More importantly, to what extent does this create an opportunity for Shopify? Thanks. Thanks, Tom. Well, I guess first of all, I think it's a very, very healthy debate for every country, society to just, you know, at least meditate on how the largest companies fit into society and what roles they should play and so on. I think this is all good. More about Shopify. The nice thing is, like, Shopify. Again, the thing that's so great about this company from, I mean, from my perspective, frankly, it makes my job easier, is that Shopify is really, we are on the same side of the table with, you know, all the stakeholders, all the way down, like, not just partners, merchants and buyers and so on. It's like even the externalities of Shopify are, you know, that there is more entrepreneurship, which leads to more successful small businesses. You know, when I talk with politicians, if when I do, the thing that we get to pretty quickly is that the future needs billions and millions of small businesses creating good jobs for, you know, 10 to 50 people or maybe beyond in certain cases. It's, I'm super comfortable with how Shopify fits into this picture. To the extent of like us working with other companies, I do think again, they're so large in scope and some of them are very beneficial for the same thing for the SMB space. We'll collaborate with them and, you know, try to create a situation where the Internet is a place which is beneficial to entrepreneurship, which then leads to all the, you know, good side effects to society that we like to see. Great. Thank you, Tobi. Thanks, Toby. Next question, please. Your next question comes from the line of Darren Aftahi with Roth Capital Partners. Please go ahead. Hey, good morning. Thanks for taking my question. Just when you look at your international merchant base today, and kind of look at it compared to your domestic base when it was similar size, way back when, I'm curious how much faster is that international base reaching kind of those same GMV benchmark levels as they're achieved? Thanks. Hey, Darrin, it really depends. In the same way that there's no way for us to get product market fit in every country at once. We actually have to go and understand the nuances of each geography, understand what they need from a product perspective, what they need from a ecosystem like a partner perspective. The same sort of thing happens in terms of merchant type. We will see a very different type of merchant in a place like Japan than we would in a place like France as well. That being said, there are opportunities for us to not only get more merchants in each of those countries, but also for those merchants to grow really successfully. The way that we think we can do, we can help them with that is by making sure they have all the tools they need. When you know, as I mentioned, my prepared remarks, translating the App Store into way more languages than we initially had, making sure we have third parties in each country building new apps for country-specific merchant needs. Those are all ways that we think we can not only get more merchants on the platform, but make those merchants internationally way more successful at a faster clip. Great. Thanks, Darren. Next. Your next question comes from the line of David Hynes with Canaccord. Please go ahead. Hey, good morning. Maybe for Harley. Harley, how do you think about the relationship between the fulfillment network and Shopify Capital? I mean, obviously the goal is to help merchants be as efficient as possible, you know, in enabling faster delivery. I also assume for most, it's gonna require a degree of inventory build. Is it right to think that, you know, a scaling fulfillment network is gonna be a tailwind to your capital business? Thanks for that question. Hey, look, obviously what you're seeing with SFN, which is Shopify Fulfillment Network, and Capital and Shipping and Payments and all these sort of different merchant solutions, is we wanna complete the picture of what merchants require to not only start a business, but to grow really, really big. Obviously, the more services and solutions that our merchants take from us, the easier it is for us to provide them with assistance. If we know how much inventory they have in the SFN, we obviously can make faster, smarter, more intelligent Capital decisions. All these things fit together. What you're beginning to see here is you're beginning to see what we've been talking about is this first global retail operating system where a merchant can come to Shopify, whether it's housing their inventory, shipping out their products, providing them capital, providing them shipping labels or payment opportunities. We wanna do more for these merchants once they come onto the platform. You're seeing more of that now. Got it. Thanks. Thanks, David. Your next question comes from the line of Deepak Mathivanan with Barclays. Please go ahead. Hey, guys. Thanks for taking the question. Amy, can you elaborate on the one-time benefit to Merchant Solutions gross margin? You noted one-time partner payment. Is that incremental revenues? How should we think about the magnitude of that and also going forward? Thank you so much. Sure. In the normal course of business as we've scaled, we've obviously we're able to negotiate volume discounts with our various partners. In the second quarter, we concluded a contract renegotiation with a payment partner where we were successful in negotiating future volume discounts. Along with that came a one-time benefit that was recognized in the second quarter. If we had not had that one-time benefit in Q2, Merchant Solutions margins would've been roughly flat quarter-over-quarter and year-over-year. That should give you a sense of the magnitude. On a go-forward basis, this obviously is a benefit to our payment margin, and, you know, recognizing the greater volumes that we'll be bringing on over time. Great. Thanks, Deepak. Next question, please. Koji Ikeda with Oppenheimer. Hi, good morning. Thanks for taking my questions. I had a quick question on the fulfillment network. Obviously, big news coming out from the Unite conference, and I know it's really, really early here. Any sort of commentary on the initial demand from the customers out there or maybe how has sign up requests been for the early access program? Were they about as expected, maybe higher, maybe a little bit lower? Any sort of color there would be helpful. Thank you for taking my question. Yeah. In terms of progress we've made since the announcement, we've received a ton of interest from merchants and partners. I can just say this bluntly. We exceeded our expectations on that. We've spent the last 6 weeks onboarding merchants we've approved so far, and we're currently in discussions with thousands of other merchants and assessing interested partners. Generally, we're really pleased with where things are at right now. As we've mentioned, we've signed on 7 nodes for 2019. Each of those nodes are in various stages of implementation. There certainly may be more coming on as well. The idea really is we think we can provide this fulfillment network to provide lower cost, to allow merchants to keep their brand and allow them to have a much smoother business. We're really happy where things are at right now. These merchants that we're bringing on now, it's still early access and again, this announcement was made, you know, less than two months ago. Great. Thanks, Koji. Next question, please. Chris Merwin with Goldman Sachs, please go ahead. Your line is open. Okay, thanks very much. Maybe just keeping on the theme of fulfillment. You know, you mentioned a very strong uptake so far and, you know, with the seven fulfillment partners you have, yeah, to date, do you think that's enough to kinda handle the near-term demand? Or, you know, could you potentially be, you know, starting to build your own in the near future? Just at a higher level to the extent that GMV and revenue continues to exceed your expectations for fulfillment, should we think about you mostly reinvesting all of that, you know, into growth given the magnitude of the opportunity? Thanks. Yeah, I'll sort of tackle the last part of, you know, the question about. We obviously saw greater demand than we expected coming out of Unite for our early access program. Yes, we want to, we wanna be able to accelerate some spend, as I said earlier in my remarks. You know, largely the way I would look at the $1 billion that we said that we would spend over 5 years, the timing of that's gonna be driven by a variety of factors. It's gonna be merchant demand, merchant onboarding, our ability to bring on our partners, the capacity. Those things are gonna, to some extent, determine how we spend. We'll continue to give you progress updates as we go. It's too early, I think, to make generalizations other than the early indication is that there's significant demand, and we wanna make sure that we meet the demand of our merchants, especially through BFCM. There'll be a lot more coming in the coming quarters on SFN and how that's gonna roll out. In terms of the, you said 7 partners. Actually, what we announced at Unite was 7 nodes, not 7 partners, that we expect to have online in 2019, and they're all in kind of various states of implementation. We expect that will be sufficient for this year. Again, we'll be assessing it, as we move through this early access program. Great. Thanks so much, Chris. Okay, great. Thank you. Next question, please. Nikhil Sidani with Mackie Research Capital, please go ahead. Your line is open. Oh, thank you. Maybe for Amy, could you just remind us of your FX hedging program and how that changes with all this ongoing sort of interest rate and Fed drama? Thanks. Yeah. I mean, I don't think it really changes our FX program. As you know, probably recall, we currently bill most of our revenue in U.S. dollars, there's almost no impact on that. Where we hedge is on the expense side. A significant amount of our operating expense is denominated in Canadian dollars. To mitigate fluctuations in our results, short-term and longer term, we do have a pretty mature hedging program that we've utilized. The FX impact, in fact, you know, for the first six months of this year was minimal because of that hedging program. We expect that'll continue, and I don't see those other factors playing much of a role here. Great. Thanks, Nikhil. Next question, please. Mark Zgutowicz with Rosenblatt Securities, please go ahead. Your line is open. Good morning, and thank you. Just a follow-up question on SFN. I was hoping you could maybe quantify what you meant by accelerated investment there and what it potentially means for new timing in terms of an official launch. Then how you see SFN sort of pulling CPG volumes off Amazon. You know, you've talked about CPG, DTC initiatives, so in that regard, if you could comment on sort of that dynamic. Thank you. I'll take the accelerated spend piece of that. You know, we just, for our forecast, we, you know, we took revenue up for the year, reflecting how optimistic we are about our continued growth opportunity. None of that is dropping to adjusted operating income. We kept our guidance flat from last quarter. Obviously, when I said accelerated spend, that's what I was referring to, is that a good chunk of that spend will go to accelerate SFN and do a larger early access program than we anticipated. Yeah, I can add to on the CPG side of that. You know, as I mentioned earlier on, Q2 was quite strong for Shopify Plus. We continue to see more brands come on from the likes of Johnson & Johnson and Procter & Gamble, Unilever. Whether or not they leverage the SFN or not, we will see in time. We certainly are seeing more of those CPGs creating brand-specific stores on Shopify Plus. We're also seeing much larger, more established companies like Staples Canada build their entire retail, online retail operations on Shopify Plus as well. We are beginning to see a lot more of these established and more complex retailers, which is one of the reasons that we're excited about the new Plus product. Great. Thank you. Thank you, Mark. Next question, please. Todd Coupland with CIBC. Good morning, everyone. Just wondering if you could just comment some granularity on international success so far this year. Which countries are you seeing the strongest take-up, and where are there bottlenecks that you'd like to work out? Thanks. Hey there, it's Harley. I'll take that question. In terms of what we had mentioned as being some of our priority countries, they remain our priority countries, and all of them are growing at different clips. That being said, I think the most important thing that we've discovered in the last year or so is that, as I mentioned earlier as well, that these merchants in different countries require different functionality from Shopify. They require different payment methods in some cases. They require different types of partners to help them get onboarded and build their custom integrations as the case may be. One of the things we are, we've been focused on, and you've sort of seen this just from the partner referral numbers growing to 22,000 partners referring merchants in the last 12 months, is we are leaning heavily on more of that ecosystem internationally, which we had not historically done. By translating both the partner dashboard into 11 languages and translating the App Store into 18 languages, we think that we can help better help these merchants internationally find product market fit, which inevitably will make them more successful. I wouldn't say that there's any one country that is doing way better than any other country. They're all growing at different paces. Again, the size of the merchants in each country does differ depending on where they're at. It's been a really exciting new initiative for us. Again, it's been about just over a year since we began to focus on international merchants translating the admin. So far, so good. Thanks, Harley. Great. Thanks, Todd. Next question, please. Terry Tillman with SunTrust. Yeah, thanks for taking my question. Harley, kind of building on a question earlier about Shopify Plus, as you're increasingly enterprise hardening the Shopify Plus platform and seeing bigger brands and well-established merchants actually coming looking at it, does it change the go-to-market? Also, when you're seeing these bigger brands, are you replacing something that's usually a homegrown system, or is it a prior generation commercial system? Thank you. Thanks for that question. In terms of the go-to-market strategy, it remains generally the same. We're still not going out for golf games with anyone to convince them to come to Shopify Plus. That's just not our strategy. We obviously understand now a lot better than we did in the past how to speak to these larger, these larger merchants, these CPGs. You know, Clarks Shoes was founded in 1825 and convincing them to leave a homegrown system to come to Shopify Plus obviously takes some takes a different type of model than going after Allbirds, which started on Shopify in 2015. I think we're building sophistication inside our go-to-market strategy for Shopify Plus, and we're able now to approach these different variety of merchants in new ways. To the first part of your question in terms of enterprise hardening, Shopify Plus, look, these merchants require things that small merchants just don't, whether it's multi-store, multi-currency, multi-geographies, whether it's things that Shopify Flow provides in terms of putting more of their business operations on rails. We are really focused on making sure that we can provide them with product market fit. The announcement of the new Shopify Plus product that we made at Unite, we think provides way more opportunity for us. Even as I mentioned some of the examples of stores that have come on, you're seeing a lot more established retailers that either have had a homegrown system in the past or on an enterprise platform that have migrated over or have never sold direct to consumer before, as is the case with some of the CPGs. Generally, we're firing on all cylinders when it comes to Shopify Plus, and we think the new Plus product will give us far more ability to help those type of merchants. Thank you. Great. Thanks, Terry. Next question, please. Ronald Buchbinder with ISF Securities, please go ahead. Your line is open. Good morning, and yes, congratulations on another great quarter. The new POS system. Could the new POS system be used by businesses outside of retail, such as restaurants? Have you been talking to new merchants outside of traditional retail? How does the new POS system and the distribution initiatives expand your TAM, which you used to estimate at being around 50 million? Yeah, I'll take this. It depends on how far you go with this. I think it's important to understand about Shopify in aggregate that we are more interested in going deeper rather than wider. We are not looking to go after restaurants, because that's really like that's like data model up. That's a completely different kind of business to model. There are some use cases around point of around point of sale in the B2B space that are, you know, interesting, we sort of weren't aware of it. We make sure that those work really well. There's always a little like our customers are eternally stretching Shopify into all directions, for us, sometimes, very successfully because it's very flexible, hopefully, well-crafted software. In many of those cases, there's an opportunity for us to learn about some, the, place where Shopify is of value, which we previously didn't realize. At which point, we either encourage this or we make product adjustments to make that particular idea really even better. We wanna take this area of physical ship of a product and then make it so that entrepreneurship around that idea is going to be very, very simple and there. We are really interested on full life cycles scalability so that Shopify can stay with you from that first sale all the way to running, tens, maybe hundreds of millions of dollars, maybe billions of dollars, businesses. Grow our role within those businesses. Other things such as, capital and all these other things we talk about, SFN being probably the best example of that. Great. Thank you, Ron, for your question. Thank you. Next question. Suthan Sukumar with Eight Capital, please go ahead. Good morning, guys, and congrats on the quarter. Just wanted to touch on Fraud Protect. It's been more than a few quarters now that you've rolled this out. Kinda curious to know what type of results and feedback you're getting with the offering, and how has that been helping drive payments adoption. Hey, it's Harley here. It's been less than a year since we launched Fraud Protect. It's shown promising growth across key metrics like merchant adoption, eligible GPV and protected GPV. Now Fraud Protect is still only available to Shopify Payments merchants and only in the U.S., obviously there's a lot of room for us to grow there. Generally, it's one more thing that we can do to help our merchants. Over time, the more merchants that adopt Fraud Protect, the smarter our algorithms become, the greater our ability to make good decisions for them or show them good decisions becomes. We're generally happy with where Fraud Protect is right now. Again, it's still in a limited geography for a limited set of merchants, and that'll continue to grow. It's been less than a year and so far we're quite pleased with where it's at. Great. Thank you. Great. Thanks, Suthan. Next question, please. Brian Peterson with Raymond James. Please go ahead. Your line is open. Hi. Thanks for taking the question. Maybe one for Harley. Just on the Plus business, I know one of the legacy solutions in the space will no longer be supporting their product at the end of next year. I'm curious how much of that has been a factor in acquiring new merchants on the Plus side, and anything that you can share on how the new merchants coming to the platform on the Plus business are trending. Thanks, guys. Yeah, thanks. In terms of migrations from legacy e-commerce systems, some that are being supported, some that are being deprecated, we've always gone fairly aggressively to migrations and have had fairly aggressive migration campaigns. You don't often see Shopify calling out competition, but when we know that there's an opportunity for us to bring on a whole bunch of wonderful merchants to our platform, because either their existing platform just doesn't work properly or because it's being deprecated, we go after those opportunities with gusto. We'll continue to do that as well. In terms of them coming on, again, as I mentioned, the reason I go through different categories of merchants in my prepared remarks is I think it's important to understand the types of merchants that are coming onto our platform, whether it's, you know, new businesses from Kylie Jenner or it's companies like Sony or Heineken. Generally, we're just becoming more sophisticated the way we onboard these merchants and the way we're able to attract them. You're seeing Shopify Plus show up at places that we may have not showed up in the past, like enterprise, e-commerce trade shows, which traditionally wasn't our thing. We now feel that there are some places we wanna be because there's an opportunity for us to migrate a lot of these larger, more legacy brands onto Plus and frankly, make their lives 10 times better. I'll just jump in here, like because, I think one thing which is kind of important to understand about the Plus story is that, like we are talking about, you know, enterprise, trade shows and about large consumer packaged good companies and so on. It's not really I mean, we certainly are stretching up, but it's really that the approaches that work in retail are just different from the approaches that people thought should work in the, like, last decade. That realization means that actually those companies are often giving up on the enterprise approach of software, right? They need something just significantly more agile. I talked about this in previous calls, but really, it's important when looking at the Shopify Plus success story that what we offer is something that works really, really well. It's super agile, exists and functions at the speed that even the most ambitious marketing department wants to move at. It's that I think a lot of companies are not, it's not that we come around to the world of enterprise, it's a lot of companies coming around to our worldview. That's what's driving a lot of the adoption. Great color. Thank you. Thank you, Brian. Next question, please. Richard Tse with National Bank, please go ahead. Your line is open. Yes, thank you. With a fairly tight labor market in tech, I'm kind of wondering if it's creating any challenges for you from a hiring perspective, given your this heavy investment mode. If so, how do you navigate that? It's tight. When I talk to my board members, they, you know I certainly can be found sometimes complaining about how hard it is to hire engineers. They tell me that, you know, Shopify is the one company they're on the board of which complains about how hard it is. Everyone else tells them it's impossible. I think we might even be in better shape than most. Like, I mean, there's a confluence of things that have to happen right now, luckily we are really well prepared. Like we started outside a major labor pool market as a company, so we are extremely adapted to hiring people for potential and then getting them trained up like towards their potential much faster. Like, you will find when looking at our bios even the executives for Shopify, a lot of us, this is the first job, so there's a lot of precedent here, of people just sort of growing into the roles that Shopify needs of them. So that's a, that's a big component. Just again, we are sort of drawing people from a very far reaches. I mean, people are moving from all parts of the world, for jobs at Shopify, but also our home markets are exceptional. Like it is, we sort of see Canadian EST as like our absolute core, and there's a lot of talent here. It's tight, but it's possible, as long as you're not trying to not just look at hiring in San Francisco and hiring only fully formed engineers that happen to have exactly the skills you need. If you're willing to compromise on those things, which I think everyone should, because I actually think that looks better, building more sophisticated systems of hiring than it works. It's good. That's great. Thank you. Great. No, thank you, Richard Tse. I think we're out of time today. I'd just like to say thanks to everybody for dialing in and we will talk to you throughout the rest of the quarter. This concludes today's conference call. You may now disconnect.