Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Shopify's First Quarter 2018 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
Thank you. Katie Keita, you may begin your conference.
Thank you, operator, and good morning, everyone.
We are
glad you can join us for Shopify's Q1 2018 conference call. We are joined this morning by Toby Lutke, Shopify's CEO Harley Finkelstein, our Chief Operating Officer and our new CFO, Amy Shapiro, who joined us 4 weeks ago. After prepared remarks, we will open it up for your questions. We will make forward looking statements on our call today, statements that are based on current assumptions and 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.
Information about these risks and uncertainties is included in our press release this morning as well as in our filings with regulators in Canada and the United States. Also, 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. And 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, and good morning, everyone. The Q1 of 2018 was another strong one as the results released this morning show. Entrepreneurs and large brands alike continue to choose Shopify to begin their journey to multichannel commerce. Their GMV continues to expand at a healthy pace and we are steadily gaining wallet share as merchants continue to adopt new solutions like Shopify Shipping and Shopify Capital. These are all good things, but it's also worth highlighting the progress we're making in our longer term investments for the future, in particular in our platform, internationally and in Shopify Plus.
This is where I will focus my comments this morning starting with our platform. There's a lot of complexity introduced when commerce goes multi channel. Suddenly, merchants are dealing with complications that come from doing business everywhere, adding to the list of things they need to think about. Things like shipping, fulfillment and logistics, which can be complex even for in person transactions, go from being backroom functions to being part of the customer experience. It's easy to see how merchants can quickly feel overwhelmed.
This is why one of our primary design principles is to keep things simple for merchants. Prioritizing simplicity helps small and midsize merchants better compete and continue to fuel the commerce landscape as we believe SMBs and newly established micro brands play an important role in the future of retail. And it also helps higher volume brands incorporate only those capabilities that suit their needs best. Why is this important? Well, two reasons.
1, we think simplicity is one of the main reasons small merchants and large come to Shopify. And 2, it underscores the wealth of opportunities we have in front of us. At Shopify, by leaning on technology to help solve problems instead of letting technology create them, we level the playing field for merchants. A good example of this is Google Pay, which we added in Q1. With so many options for checkout, including Apple Pay and Shopify Pay and such a variety of end user devices and preferences, keeping it simple for the merchant and their buyer is key.
As with all checkout accelerators, Google Pay can discern whether the consumer's device is enabled for it and presents the consumer with checkout options accordingly. This focus on simplicity has for the past 12 years been centered on merchants North America first, as this has historically been our largest market. It's where most of our merchants are today and where most orders on Shopify are shipped to and from. But our adjustable market is much larger than that, which is why we are embarking on our multi year journey towards making Shopify as simple and effective globally as it is in our core geographies. One of the first steps in this journey has been transitioning to a global cloud service provider for production.
With the rapid addition of merchants around the world, coupled with the increasing regulations around data sovereignty, we began leveraging the capabilities of a cloud provider last year. Today, the vast majority of our production data and operations are no longer running on our own hardware. While this means increased costs in the short term for subscription solutions, we expect the benefits of global scale, flexible capacity and increased engineering velocity will grow over time. Another step in developing our platform internationally is language. This means that adoption of Shopify will no longer be limited to just those merchants who understand English.
And so many opportunities remain to better localize the platform for things like payment methods, currency and merchant solutions like shipping and capital. We expect these efforts will further boost the percentage of Shopify merchants outside our more established geographies in North America, the UK and Australia, which continue to grow in Q1. Turning to Shopify Plus. While the Q1 of the calendar year is seasonally a slow one for buyers in the enterprise, we still added far more new merchants in the quarter versus the same period last year. Some of the more recognizable names launched on Shopify Plus in the quarter include Varnay, The UGG Company out of Australia, LeSportsac, Monster Electronics, HarperCollins UK, Vega, Colgate Palmolive and some great new shops from the likes of Nestle and PepsiCo, including the Smile with Lay's shop where consumers can customize a bag of Lay's potato chips and put their own face on it.
Finally, no discussion of the quarter would be complete without an update on Our partner ecosystem is healthy and thriving with 2,400 apps available to merchants on the platform today and nearly 16,000 partners having referred merchants to Shopify over the past 12 months. We are looking forward to welcoming our partners to Toronto next week for our annual Unite Partner Conference. The ecosystem that Shopify has created between merchants and developers, designers and agencies is very powerful. We believe this ecosystem can and will inspire what the future of technology and the future of commerce looks like. Before I turn it over to Amy to comment on the moving parts behind the numbers, I would like to welcome her on the call to our management team, to Shopify and to Ottawa.
Amy wasted no time at all adding value to the executive team in her 1st 4 weeks. It's great to have Amy on board, especially now as we're so early in our journey towards making commerce better for everyone.
Thank you, Harley, for the warm welcome. I'm very glad to be here. When I was going through the interview process, I was struck by a few things, but probably the most important one, as Harley said, was the vast opportunity still in front of Shopify. Here was a company still in the early innings of the space where it plays with a team that had demonstrated its ability to capture that opportunity. What Shopify had accomplished since its IPO was really impressive, not to mention the many character forming years before that.
These factors made this a unique opportunity and the mission driven team here just felt like a team that I wanted to be a part of. So while I was not here for the quarter, I am reporting on today, the drivers were fairly straightforward. Starting with revenue, Revenue was up 68% from last year's Q1 to $214,300,000 The larger and fastest growing component was merchant solutions revenue, which grew 75% year over year to $114,100,000 While Shopify Payments is still the largest piece of this, Merchant Solutions revenue is rapidly diversifying as revenue from capital and shipping both more than doubled over the last year. Shopify Payments continued to climb on strong growth in GMV, which reached $8,000,000,000 an increase of 64% from the comparable quarter last year. The percentage of GMV processed on Shopify Payments was on par with last year's Q1 at 38% and was a slight downtick from Q4's 39% consistent with seasonal trends.
Subscription Solutions revenue grew 61 percent to $100,000,000 As Harley mentioned, we had another quarter of strong merchant adds. By continuing to flatten the learning curve for entrepreneurship, Shopify is putting the possibility of starting your own business within reach for more people than ever. Monthly recurring revenue grew 7% and ended the quarter at $32,500,000 Shopify Plus' share of this ticked up in the quarter to 22% of MRR compared to 17% in Q1 of last year. Gross profit dollars again grew faster than revenue, up 71% from Q1 of 2017 to $123,800,000 We saw strong growth in revenue from partner referral fees as well as in higher margin streams like capital and shipping. These more than offset the headwind to subscription solutions margins from our transition to the cloud, specifically accelerated depreciation on our own servers and the temporary duplication of costs as we transition from our own data centers, both of which we expect to be behind us by year end.
Our adjusted operating loss in Q1 was approximately $200,000 close to breakeven compared with a loss of 4 point $3,000,000 or 3.4 percent of revenue in the Q1 of 2017. Adjusted net income for the quarter was $4,200,000 or $0.04 per share. This compares with a $3,500,000 net loss or $0.04 per share for last year's Q1. Finally, our cash and cash equivalents and marketable securities balance was $1,600,000,000 This is about $650,000,000 higher than our December 31 balance of $938,000,000 as we raised additional funds from our offering of 4,800,000 shares in February. Now I'm thinking that one of the first questions I may get once we open up the call for questions is about plans for these funds.
As I said at the start of the call, one thing we are not lacking at Shopify is opportunity. And like the rest of this management team, I'm a big believer in the strategic benefit of optionality. So we will ask you now to stay tuned on that front as the year progresses. Our expectations for what we can achieve financially in 2018 have been revised upward from February based on the better results in Q1, which carry benefits throughout the rest of the year. We now expect to see revenue for the full year of 1.0 dollars to $1,010,000,000 and adjusted operating income of $0,000,000 to $5,000,000 For the Q2, we expect revenue of $230,000,000 to $235,000,000 and an adjusted operating loss of $5,000,000 to $7,000,000 Stock based compensation in 2018 is now expected to be approximately $110,000,000 for the full year with about $27,000,000 of this in the Q2.
Before I turn it over to Katie to start the Q and A, I want to underscore the importance the rest of the exec team and I place around investing for growth today to lay a strong foundation for what we expect to be a much bigger company in the future. We believe the 50% revenue growth implied by our expectations for 2018 is achievable due to all of the vectors of growth we have near term. Adding new merchants, Shopify Plus, new product offerings and our push internationally, all aided by tailwinds of growth in mobile, e commerce and entrepreneurialism. Add to this favorable mix the vitality of the Shopify organization and it is easy to see how and why we're in a place to make incredible things happen. So with that, I will hand the call back to Katie.
Thank you, Lisa. I'll ask everyone to please try to limit yourselves to
Our first question comes from the line of Michael Nomura from Credit Suisse. Your line is open.
Thanks for taking my questions. I've actually got 2, sorry, Katie. The first one is around merchant count. A lot of us build our models based on an approximation or a close approximation of merchant count. And Amy, Harley, thanks for the comments about Plus customers being record year over year.
But I'm just curious whether you're going to update us on the merchant count. And then the second one is you mentioned language and network changes to become more global, but what about alternate forms of payments in less developed regions of the world or those where credit card payments aren't the standard? Thanks.
Sure. Hi, Michael. Nice to meet you.
Hi, Amy.
Yes. With respect to merchant count, that's a year end disclosure for us. We don't disclose quarterly numbers. But as Harley said, we had strong merchant adds in Q1 consistent with the last several quarters. It's largely attributable to our strategy of widening the funnel, reducing the learning curve for new merchants, adding larger merchants via Plus and strong international merchant growth.
Yes. Hey, Michael, this is Toby. Obviously, going international means we're going to provide local payments kind of options, right? This is an interesting thing about any kind of international strategy with Shopify, like it's not just translating the product. Commerce sort of exists at the intersection of a lot of different vectors like culture, general population trust and institutions, there's logistics infrastructure that has to be in place and of course there needs to be some form of digital payments available.
Now the really interesting thing is why credit cards we all know and love, there's actually many countries around the world now which are transitioning to things that feel a little bit more Internet native than credit cards. And so this is actually there are some very surprising countries in the world that are actually quite ahead on digital commerce to serve the Western world. It feels a little bit like back when we installed a lot of cell phone towers and suddenly places very remote that didn't have landline suddenly had better wireless infrastructure than the United States and so on. So I think you're seeing a little bit of that in meth reading protein.
That's very helpful. Thanks, Sylvia and Amy. Congrats on the new job.
Thanks. Our next question comes from the line of Monika Garg from KeyBanc. Your line is open.
Hi, thanks for taking my question. Take rates on merchant solution has been steadily increasing. How do you see take rates progressing from here and the big drivers of increasing take rate? Thank you.
Hi, Monica. So the take rate did increase in the Q1. It was largely driven by renegotiation of rev share agreements with payment partners as well as the growth in capital and shipping that we've noted. We do expect take rates for 2018 to be largely similar to the Q1 with some bias towards upside towards the end of this year as we see tailwinds for increased share of wallet.
Thanks, Amy. Lisa?
Our next question comes from the line of Jonathan Kees from Summit Insights Group. Your line is open.
Great. Thanks for taking my question. I'll just have one question here and welcome aboard Amy by the way. Wanted to ask about stock expenses. That was pretty high as a percentage of revenues.
It's the highest level that you've had. I guess my question is more like in the war for talent, how is that going? Are you seeing that being more difficult to get the talent that you wanted and it's still more in the technology area? Thanks.
So I'll take the part about the stock based comp expense and then I'll turn it over to Harley and Toby on the talent. So with respect to stock based comp expense, it did increase year over year and is expected to be higher this year, largely due to a couple of factors. We're adding employees headcount, so that's obviously increasing it. We continue to build out our ranks at more senior levels and add R and D talent to continue to grow in areas that we've stated. We've also recalibrated our stock based compensation strategy with annual grants for execs and we've changed our vesting schedules from to 3 years from 4 years.
That's all outlined in our circular that we recently filed. We think that share based grants are an effective way to attract, retain and motivate employees. It is competitive out there. We look closely at the comparable tech companies to us and we expect to keep our overall costs within range of our comps.
Yes. I think Amy covered this very well. Obviously, I mean, as I said from the beginning, the only way to build a world class company is to pick a sort of geography and then try to become the best company to go for in that larger geography. I think we've done this where we are located now. And because of that, we are getting incredible people to join Shopify, like people have an amazing wealth of experience in all these kind of areas that we are getting into.
And yes, they cost quite a bit to say the least. But the good news is I talk with a lot of CEOs and who about especially R and D hiring and so on and everyone says it's impossible and for us it seems to be just really, really hard. So I think we are in better shape than most.
All right. Thanks, Jonathan. Next question, please.
Our next question comes from the line of Deepak Mathivanan from Barclays. Your line is open.
Hey guys, thanks for taking the questions. 2 quick ones for me. First, wanted to understand the drop shipping use case on Shopify. Can you talk about how many merchants Oberlo has and what's the primary revenue model there? And then secondly, with ePacket program coming under scrutiny now, can you discuss what percentage of your merchants use ePacket shipping arrangements?
And what broadly, what are some of the things we can do to mitigate exposure if the program becomes kind of economically viable later this year?
Okay. Let me unpack that a little bit in sentiment, right, like because we are getting back into like this sort of general skepticism towards drop shipping, which I think is important to kind of address. I likened this before on this call to cloud computing, right? Where everyone built their own data centers and that cost a lot of money. And then we said, hey, why don't we centralize this?
Why don't we rent service by the hour instead of by a free year depreciation? And that's this was a process improvement that then came to the benefit of everyone who needed service. That's exactly drop shipping really. It's just a process efficiency improvement. What also happened in cloud computing is after this was also done, a lot of tiny startups said, hey, like suddenly I don't actually need to spend an ungodly amount of money for servers.
And I can get my product to market at the end of just using my laptop in a coffee shop. And so the creation of startups became cheaper and therefore there were more startups. So that is also what happens because of drop shipping. Just to illustrate this point a bit, I once ran so we have a Shopify store, which is a Shopify point of sale hardware store. We sell iPad stands and all these things that our point of sale customers need.
Amongst those products is a label printer, so receipt printer sort of thermal paper kind of thing. Anyways, great product. Everyone uses this one printer, like it's just by far the best one that exists. So I once checked and there was actually 2 60 different Shopify stores that all sold the same label printer. And that's the situation that retail is in, right?
Everyone gets these from their supplier and then everyone stores them somewhere and then they mails them out once someone places an order. So the drop shipping world just says, okay, let's keep both central and whenever someone creates a sale, we mail them out from there and so on. It all kind of makes perfect sense. Oberlo is sort of takes this part of the sort of process improvement and just tries to make it to benefit of the people who are just starting out. And so this is why we are seeing like a lot of people experiment with it, but also just a lot of excitement.
People who are accomplishing something that they kind of themselves a little bit surprised about accomplishing tend to be very vocal about it and this is why there's just a lot of exposure. Now, Oberta is a fantastic product and they're really, really proud to own it and it's driving a lot of new people into entrepreneurship, which is of course a mission. But I think like people are a little bit I wish it would be as big as what some people seem to think. So similarly, exposure to ePacket, this is not like Shopify is an incredibly diversified platform. It's like almost its own economy, kind of, if you will, like everyone's doing everything.
And just because there's a specific route of which packages can take that is really, really cheap doesn't mean that this is the thing that makes all of Shopify tick and that we would be very affected by that changing. The stores tend to arrange themselves around the opportunities. So yes, right now we are in the situation where shipping things from Hong Kong is often to the United States, often cheaper than shipping something from Massachusetts. But I think it's important to realize that a lot of what Shopify is and in fact most of what Shopify is in the United States is like shipping United States to United States. So this some of these sort of artificially low shipping routes becoming a little bit more realistic, that might actually be really good for most people on the platform because of the levels of playing ground and so on and so on.
In general, commerce happens, GMV happens because of demand, not really because of supply. So like the way like people like our customers are very crafty and will rearrange themselves around any kind of new realities in shipping costs and I wouldn't worry too much about it.
Great. Thank you, Deepak. Next question please.
Our next question comes from the line of Colin Sebastian from Robert Baird. Your line is open.
Thanks and good morning everyone. A question on Shopify Plus. I wonder if you could talk about how the sales and marketing strategy is evolving there as that becomes a bigger focus clearly and as well on the product side where you see the most opportunity to increase the value of Shopify for for larger mid market and enterprise clients? Thank you.
Hey there, it's Harley. I'll take that question. So starting with the second piece around the product of Shopify Plus, as I said, it's the last earnings call that is certainly a focus right now for us is to not only get more Shopify Plus merchants onto the platform, but also ensure that the product we deliver to them is uniquely valuable to them. So we've talked about things like Shopify Flow, we've talked about things wholesale, but there's a bunch of things that are the work on right now. And certainly relative to last year and the year before, the focus in Shopify Plus is related to ensure we have the best product for merchants that are at a larger scale.
In terms of the sales model for it, in a similar vein to Shopify Core, we don't get merchants from any one place on Shopify Plus. We have a very extensive partner program that's been growing quite a bit. We have our sales team, which is growing also quite a bit since last year. Marketing plays a role in that. But there are also opportunities with Shopify Plus that just may not be relevant to Shopify Core.
Things like trade shows, for example, which enterprise trade shows, which we never would have done for a core product, but Shopify Plus actually fits nicely in from an opportunity perspective there. So in general, Shopify Plus is firing at all cylinders here, but there isn't one thing that is driving it. It's a whole bunch of things and we will continue to do that this year.
Thank you.
Thanks, Collyn. Our next question comes from the line of Sam Kemp from Piper Jaffray. Your line is open.
Great. Thanks for taking the questions. Amy, I guess I'd love to take advantage of your fresh eyes on the organization at this point. As you take a look at Shopify, and we've seen huge growth over the past several years. When you think organizationally and structurally, where are the areas that you think that there's really a need for investment or to build out a better organizational structure or anything that really needs to catch up with the broader growth that the company has been facing?
And then second and totally separately, on the Shopify Plus volume fees for the non payments customers, can you just comment on how much that's contributing to Merchant Solutions growth?
Yes. Let me take the first one. Sam, nice to meet you. So I think coming in, I was impressed with Shopify. I'm even more so impressed now that I'm hearing on the inside.
As I said in my opening remarks that is a tremendous amount of opportunity still in front of the company. Its mission and vision are invest in the core platform is critical to provide additional services for our merchants and to deepen our moat. The focus on international is a huge opportunity and think that that's really just in the early innings. And then the same with Plus, this widening of the funnel, taking the learning curve down for new merchants, as well as adding larger merchants through Plus has been a really significant focus. The company has managed to keep very strong unit economics as it scaled the business and we see a ton of opportunity to continue to scale efficiently, maintaining strong unit economics and monthly billing retention rate and LTV to CAC has consistently been strong since the IPO.
It's an amazing business model with a ton of opportunity still in front. And I think I need you to repeat your second question. Yes.
I think it was about a year and a half ago that you rolled out the 15 basis point or 10 basis point fee for Shopify Plus customers that weren't using Shopify Payments. I'm just wondering now that that's begun to really layer and I think in full at this point, how much is that contributing to revenue growth?
Hey there, it's Harley. I'll take that question. So it's been about, I think, 14 months or so since we introduced the new pricing plan. And along with that came 15 bps, if you don't use Shopify Payments. To it's certainly still pretty small.
It is a positive contributor for Shopify Plus growth, but it is still quite small. Really the intention there was to get as many people using Shopify Payments as possible. And when they're not able to or they don't want to that we still share the upside. So I would still say that it's still quite small. And again, the pricing change in general, not just with the 15 bps is really to future proof our business model for Plus so that as we get larger merchants on or merchants get really much larger on the platform, because the merchants get larger on the platform that we do share in the upside.
Great. Thanks, Sam.
Our next question comes from the line of Jesse Helfink from Goldman Sachs. Your line is open.
Yes. Thank you. Good morning. Harley, maybe this one is for you. I guess longer term as you build out this Plus business, what do you think the I guess the incremental drivers of take rate could be?
I guess payments would be one of those, but are there any other services that you think you could build out over time to drive the take rate higher and how are you thinking about that? And then a quick follow-up for Amy. Can you remind us what your exposure is to movements in foreign exchange? And was that a tailwind to revenue growth in the quarter? Thank you.
Hey, there. Yes. So it's Harley. So I'll start with that. Look, I mean, when we initially started Shopify Plus in the first place a couple of years back, it was really for a place for larger merchants that got big to graduate to and that worked really well.
What's interesting is that over time, it's developed now more than half of the merchants that joined us in the last quarter were brand new to the platform. So as they come on, there are new additional merchant solutions that they're taking, obviously payments and shipping, capital to a lesser extent because those merchants may not require capital in the same way that smaller merchants would. But the conversation that I have with my team at Shopify Plus is to constantly reevaluate what are the things that these merchants, larger merchants require that we can provide to them where they have a better experience, they pay less money, we make more money and we'll always continue to evaluate those. But shipping and payments are obviously the 2 major ones right now and we're not going to share anything beyond that right now.
With respect to FX, we do enter into cash flow hedges to minimize quarterly fluctuations, but we did see favorable in the quarter. It's outlined in our footnotes as well as our MD and A. Thanks, Jesse.
Our next question comes from the line of Darren Aftahi from ROTH Capital Partners. Your line is open.
Good morning. Congratulations, Amy. Just some questions around shipping. You called out I think penetration in U. S.
And Canada as being about a third of the base in March. Can you just talk about maybe 2 things? 1, where can that penetration within those two geographies go? And then outside of those geographies, can you just talk about kind of the rollout and strategy for shipping going forward? Thanks.
Hey, there. It's Harley. I'll take that question. So I mean, in terms of Shopify Shipping, that can be just to grow. It's grown every quarter since we've launched it.
We think there's a lot of opportunity there, but I think we're still in the early innings for Shopify shipping, whether that's on the product side providing more features or it's geographies, we're really in the early innings there. So I would say that it's too early to see the full potential of that at this point.
And it's this shipping, we are kind of it's not quite like payments in that people just make a decision, then they get the money through a different channel and get some additional features if they happen to be adopting Shopify Payments. In the shipping world, everyone has very intricate processes in build inside of the businesses like they train staff about how exactly the labels are and all those kind of things. So it's just a much more disruptive switchover within businesses. So this is why it's always going to be lower than payments and it's always going to it will not expand that quickly. And that's something to keep in mind if you're trying to model it.
Okay. Thanks, Darren. And I'll just take this opportunity to remind everyone that we really would like you to limit your questions to 1. We have a lot more questions to get through before 9:30. So next question please.
Our next question comes from the line of Gus Papageorgiou from Macquarie. Your line is open.
Hi, thanks for taking my question. I just want to focus on the gross margins for a bit. So the way I'm thinking about it is that for subscriber solutions, you're aiming, I think what you're suggesting is the gross margin should trend back to kind of the 80% level as we go through the year and you make the transition. On the Merchant Solutions, I mean, you hit a 41% gross margins, which is a big number and the highest we've seen since 2013. Can you tell us like what kind of progress should we expect on the gross margin line for merchant solution through the year?
And I'm assuming that capital and shipping were big influences in growing that number and how should we think about that as we advance through the year?
Yes. Let me start with subscription solution margins. The Q1 was impacted by the migration to the cloud, accelerated depreciation of our own servers, duplication of costs as we migrate. And we've always said that the cost would be slightly higher to outsource than if we had continued to own our own data centers. The migration to the cloud is expected to continue over the next two quarters.
And so we expect subscription margins to be at around the same level of the Q1 over the next two quarters. As the migration is completed, we expect subscription margins to improve in the Q4 over the current levels. With respect to merchant solutions margins, yes, we did have a favorable Q1. As I said earlier, many of the revenue items that were strong in the quarter are high margin revenue streams. In addition, in the first quarter, we did have some one time items related to some billing adjustments from payment partners, some cleanup from the Q4 that will not repeat.
So for the remainder of 2018 for Merchant Solutions Margins, we expect each quarter to be higher than their comparable quarter in 2017, but not to the same extent that we saw in the Q1 of this
year. Can you
just kind of can
you just kind of qualify the one time items, just how much of an impact was that in the quarter?
Small. Thank
you for answering the question.
Your next question comes from the line of Koji Ikeda from Oppenheimer. Your line is open.
Great. Thanks for taking my question and welcome to the team, Amy. I wanted to ask a question on the B2B opportunity. Majority of your subscribers, I would think they're primarily focused on the B2C model. But I was wondering if you
could talk a bit about
the B2B opportunity. I noticed on the Plus website in addition to wholesale, B2B Commerce became a solution option sometime last month. Is this a new SKU? And was this a customer driven initiative? And I guess are there any technological differences between the B2B product and the wholesale product?
And any commentary on the pricing would be helpful. Thank you.
Hey, there. It's Harley. So just in terms of B2B and sort of the wholesale opportunity, initially, we launched it for a small subset of existing merchants who are doing both B2B and B2C and they were asking for additional functionality to run a wholesale business as well as a retail business on top of Shopify. That's why it started and we were sort of pulled into that area. We now do have a very early B2B product and we now have merchants that are joining to use that product, but it's still very early days.
What we like about B2B is that it provides us with wider product market fit. So now there's a there are groups of merchants who only do B2B that now Shopify can be a great solution for and previously it may have not been. But there's a lot of additional functionality that comes into it beyond just password protection. B2B merchants require different things that B2C merchants simply don't need. So working on that right now, but again, super early days of that.
Thanks, Koji.
Our next question comes from the line of Nikhil Tandani from Mackie Research. Your line is open.
Thanks guys. How should we think about the competition going forward with Square buying Weebly here? It seems like a bunch of other guys are sort of trying to move to your model of putting online and offline together that you guys were probably the first at. So how should we think about the competitive landscape going forward? Thanks.
Yes. Good question. Like I mean, one thing I think it really confirms that we had it right. So Square buying Weebly, I think you will see just about every point of sale company buying or launching something like Weebly, I mean buying in the case that they are really late or hopefully they've been working on it for a while already, let's say, spotted this trend earlier. We are just going for like this market was very weirdly dominated by different, usually incompatible point solutions for all the different things that retailers had to do.
And when we came by some of you on the during the IPO roadshow, I think that's what we leaned in and said, hey, we think that's wrong. And I think we think that retailers need a centralized software that can easily move all the inventory into different channels that might actually sometimes be fairly short lived. They are pop up stores. They sometimes are campaigns on social media. They obviously involve an online store and point of sale, if that's what you need.
And all of this should be you should think about the software needed in the space a lot more like an operating system on top of which other software is built that specializes depending on the business that's the business needs. And that was our vision all along. That got largely ignored initially and then like I think people have been paying attention and everyone realizes that clearly this is right and clearly this is the driver of all the growth that Shopify said and so now more people are coming around to this. We started working on this about 5 years ago. We launched it 3 years ago.
We now have a lot of momentum because of it. So it's like I mean, I think if you see a growth story like Shopify, you usually see a company that defined a new space. And so that's I think it just goes to show that our crystal ball is reasonably clear and we are working on all the things that's next and I'm actually looking forward to having some other people look at the same space and seeing what they are seeing because I think that's more fun frankly from a company building perspective than trying to do it all alone. So that's cool.
Great. Thanks, Nikhil.
Our next question comes from the line of David Hynes from Canaccord. Your line is open.
Hey, thanks guys. Just one on Shopify Capital. I imagine there are some seasonal patterns to demand for merchant cash advances, but obviously that's something you guys can control. So just help us think about kind of the seasonal patterns as it relates to our efforts to model cash flow. And then remind us, how long are these loans typically outstanding?
Hey there, it's Harley. I'll take that one. So in terms of seasonality around Shopify Capital, it's important to note that the use of proceeds for Shopify Capital for most of our merchants tend to be in the realm of inventory or marketing spend, which we quite like because that leads to more sales, which makes it easier for them to return the capital to us. Obviously, there's the seasonality of capital reflects the seasonality of retail in general, which is certainly more of a Q4 issue than it is Q1 issue.
Just keep in mind these are
not loans, these are cash advances. So I want to be very clear about that. And then in terms of the payback period, it is less than a year typically.
Okay, got it. Thanks.
Thank you.
Our next question comes from the line of Tom Forte from D. A. Davidson. Your line is open.
Great. Thanks for taking my question. On the last earnings call, Toby mentioned the importance of helping small merchants leverage technology. She is the example of augmented reality to compete against larger companies. Can you update your efforts specifically to artificial intelligence and what you're doing to enable small merchants to leverage AI to compete against larger companies?
Thanks.
Yes. Take a look, it's an interesting topic these days, isn't it? I think one of the most important things from our perspective is all data is our merchants' data. And what we want to do is give it back to them in to their own benefit in different ways, right, like make it to their own benefit. So the most obvious example of this is one thing Shopify has shipped with is absolutely excellent fraud detection.
It's we're getting I mean, it's fraud is obviously a problem in the retail world, but we are trying to drive it as close to possible as to being a non problem. This is directly powered by AI and by machine learning models that have that are trained on what's happening on the platform. So this is the good news there is that Shopify sees global trends. Shopify can see bad actors that are moving across the network. And so this is one of those areas where there's a direct benefit.
So we're very comfortable with this kind of book.
Thanks, Tobey.
Our next question comes from the line of Ross MacMillan from RBC. Your line is open.
Thanks so much and my welcome to Amy as well. My question is actually for probably Toby or Harley. And I was just curious given the potential changes in the data privacy environment, whether it's the Facebook controversy or GDPR, what do you think, if any, are the implications on your merchants businesses as a result of this?
Yes. So I'll take that. So we actually grilled with GDPR. So what's happening is like I said in the previous answer, we have very sort of strict principles around data, around privacy, which we had internally. And the way we see GDPR is that the rest of the world is sort of coming around to our vision of how data should be handled and puts that into law and put some fines in place.
And I think that's honestly really, really, really good for the Internet. So we are very happy that this is happening. We are going to be like Shopify is going to be ready for GDPR and so I think going to be a very important thing I think we are delivering next month. And yes, I could go more in-depth on this topic, but I'm we are of course monitoring the conversation as everyone is in the tech industry. We made some very important choices at the early stages of this company.
We looked at opportunities of doing things with data that just didn't fit in like that would have made a lot of sense for the growth or maybe revenue of the business or so, but didn't conform to our opinions of what ought to be done and what we would like the standards we hold ourselves to. And so we walked away from those things and I'm very proud of that.
Great. Thank you, Ross.
Our next question comes from the line of Brian Essex from Morgan Stanley. Your line is open.
Hi, good morning and thank you for taking the question. Amy, welcome to the call. A question for you on if I could revisit merchant solutions and payments and the contribution, any way we can get some kind of quantification of incremental take rate from payments? How much was contributed by capital and shipping versus what the rate of payments? I think a few quarters ago, we got some kind of insight, which kind of implied that the take rate for payments specifically was relatively flat and the incremental take rate expansion was primarily from shipping and capital.
What does the environment there look like this quarter? And then what do you anticipate, particularly on the payment side with international expansion, the impact you might expect for each on take rate going forward?
Well, I can say that for the Q1, the primary increase in the take rate was driven by the renegotiation of rev share agreements with payment partners and shipping and capital. Payments was largely consistent year over year. But having said that, we see opportunity in payments going forward, strong opportunity as we grow internationally. We see the opportunity for those take rates to move up in new geographies and we expect payments to largely follow our international expansion with Asia Pac next in countries with high credit card penetration, and then Western European countries, where we see strong merchant growth. So, opportunity across the board.
Great. Thanks, Brian. Next question, please.
Our next question comes from the line of Todd Coupland from CIBC. Your line is open.
Yes, good morning everyone. I wanted to ask about international. So you've seen strong merchant count in Western Europe for at least a year. You've been calling it out as an area of strength. Can you just talk about the countries where the merchants are maturing the best and give us some examples of which countries are working well and are they likely to see the focus of your efforts in international, whether it's in shipping or in foreign currency tools?
Thanks.
Yes, we don't want to go into breaking that out. So think of Shopify as a portfolio of lots of countries.
Thanks, Todd. Next question, please.
Our next question comes from the line of Suthan
On the Plus segment with respect to customer growth, we're obviously seeing good traction here. And also, Nicole, you guys noted a large part of that was being of merchant ads were being new to the platform. Can you speak to what the mix of growth is being driven by the direct sales channel versus the partner channel And are these competitive displacements?
Hey, there. It's Harley. I'll take that question. As I said earlier, the growth model and the growth strategy for Plus is a mix of a variety of different sources. We are seeing new we're seeing existing partners that have migrated to become Plus partners in the platform.
We're also seeing brand new partners to the platform that traditionally only worked with some of the more larger enterprise platforms that are now choosing to be Shopify plus partners. In some cases, they're going all in on it. In terms of our sales capacity, that's grown considerably since this time last year and we'll continue to grow that as needed basis. But I wouldn't necessarily say that one channel is disproportionately winning over another channel. It's still pluses relative to Shopify is still pretty new and we're still experimenting with a bunch of different ways to get new merchants on the platform.
But in terms of that mix that you mentioned, it's likely you will continue to see more new Plus merchants of the platform relative to upgrades in the future.
Great. Thank you.
Our next question comes from the line of Ronald Bookbinder from IFS Securities. Your line is open.
Good morning and congratulations, Amy. When looking at the health of your core merchants, what was the growth of the average GMV per merchant that have been on your platform for at least 1 year similar to a retailer's comparable store sales, thus excluding market area shifts and new merchant adds? And secondly, how does your merchants on that metric compared to other established online retailers? Thank you.
I can take the first part of that. In terms of GMV growth, we're not going to break that apart, but I can say that we did have a strong quarter of GMV growth and contributing to that was obviously new merchants added to the platform, but also a strong contributor were merchants who have been on the platform for at least a year.
It's hard to benchmark this against everyone else, like the nature of like there's so many different stores on Shopify and like again it's growing so quickly. So even if you slice by saying everyone who's been on the platform for more than a year, you still such a large percentage of the people are now like they are for 13 months because the growth is accelerating. So your like averages are end up like just confusing in general. So we never look at average revenue per user, average GMV. I know sometimes you guys do that.
I encourage you not to and think of cohorts. That's a better way of doing it. And I think it's the platform is also diverse and large enough to that it's roughly reflects general economic trends. So I think health of retail in general might be the same as Shopify. I would say it probably skews a little bit better just because it's younger stores and especially in the retail world as we all know, mediocre retail is over.
So this is sort of a problem a lot of big box stores run into. And the kind of people on Shopify tend to be the ones who are looking for opportunities to create like more experiential retail and tend to ride the waves rather than being swallowed by them of what's going on in retail. But I'm completely guessing, so not really basing this on data.
All right. Thanks, Ron.
Our next question comes from the line of Richard Tse from National Bank Financial. Your line is open.
Yes. Thank you. So if we look beyond 2018 and into 2019, what do you think the most notable challenges are to executing on your growth aspirations? Is it people? Is it technology?
Changes in operations? Maybe give us a bit of insight on that, please? Thanks.
Yes, that's a really good question. I think people that's probably like I mean the biggest it's not that it's not really in the way, it just makes like if you can't find the people we need, I think we are going to get to the results slower, right? Because we are also like Shopify internally, it's a learners organization like we our sort of core competency as a company is we are hiring mostly based on future potential rather than current core skill set and then train people to become as good as they never thought they would be as fast as possible. And so I tend to think we can do anything, but time is variable. And so with us, there's now more some more experienced people joining us who can become mentors to all these other people who I talked about earlier, that accelerates things a lot.
And so that's again our opportunity. And so I have great confidence in our ability to world class software. I think you've demonstrated that. I think it's a very well built company that absorbs market changes with ease, absorbs shifts in strategy, macroeconomical tidal waves, all these kind of things. I think they are very anti fragile in that particular regard.
And again, I think last time was competitive landscape, yes, it's just sort of not seeing much there. So I think they're good.
Okay, great. Thanks. Next question please.
Our final question today comes from the line of Justin Furby from William Blair and Company. Your line is open.
Great. Thanks for sneaking me in. I guess for Harley, just going back to an earlier question, if you I guess if you look at the Plus business and you set aside the merchant solutions attached and just think about that sort of core 25 basis points fee for the vendors that scale out beyond $10,000,000 Do you look at that price point as meaningfully below what you're competing against, I guess? And do you think you have ability to increase that over the next 12 to 24 months?
Thanks. Yes. In terms of the ratio from value to cost, I think Shopify Plus remains very it looks really good in the eyes of the larger type of merchants. In terms of reevaluating pricing, it's something that we've made a pricing change last year. It's something that I'm looking at.
I think our pricing plan where it is right now is quite good. It allows a larger or a potentially larger merchant to easily start in the platform with Shopify Plus. And then as they grow, we get the share of their upside through the 25 basis points that we have in place there. So for now, I'm feeling really good about where we are in terms of the pricing plan, but it's something we will continue to reevaluate on an ongoing basis.
Got it. Thank you.
Sure thing, Justin. Thank you. And we'll turn it over to Toby for closing remarks.
Yes. So thank you very much for joining us. Again, welcome Amy. Welcome on board. I think this sort of the emerging theme of this call is Shopify is a pretty big platform.
There's real diversity, like sorry, there's real strength in the diversity of what makes up Shopify, like there's a lot of people doing a lot of different things, which is kind of rare, especially in software as a service, right, like software service tends to be fairly like produce software that's laser focused to a certain vertical and making something really, really flexible where people can build a business that have never done this before at the same time as some people having $100,000,000 annual run rate businesses, making something that flexible is difficult and we've accomplished this by taking a couple of lessons out of the book of the operating system guys, making a platform and then allowing software quite easily be built on top of that adjusts sort of people's ambitions into and adjust to people's ambitions and unique requirements. So I think that's well understood. I think this is sort of why you see more movements by other companies to try to get on the same train tracks you're on. The thing I see a bit right now is we've done we've now done really well for I think what the 12th quarters have been public or something like this.
And I see it like an interest by a lot of people trying to find shoppers that are Hillis Hill like because they feel like there must be this one thing that they're not talking about that's really driving this, it's like drop shipping now or that's ePacket the next day. I would meet these kind of reports of suspicion. Shopify is really just putting something online that humans have been doing for tens of 1000 of years, which is commerce, right, like which is has its roots in bartering. And there was an incredible pent up demand for taking this kind of thing and doing it easily on the Internet for obvious reasons. And that's what we're doing.
It's actually quite simple and it's kind of remarkable that this is not a more crowded field I think. So, but I think that might help this like fleshing out sort of understanding of everyone of this what this company really is doing. For a lot more in-depth, I encourage you to have a look at the Unite live stream. This is starting next week and we're going to announce some really, really cool stuff that I'm really excited about. So hope to see you there.
All right. Thank you. Have a good week, everybody.
This concludes today's conference call. You may now disconnect.