Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Shopify Q1 2017 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, Director of Investor Relations, you may begin your conference.
Thank you. Good morning, everyone. We are glad you can join us for Shopify's first earnings call of 2017. We are joined this morning by Tobi Lütke, Shopify's CEO, Harley Finkelstein, our Chief Operating Officer, and Russ Jones, our esteemed CFO. After prepared remarks from Harley and Russ, we will open it up for your questions. We will make forward-looking statements on the call today. These are based on current assumptions and are 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 Canadian and U.S. securities regulators. Our commentary today will include adjusted financial measures which are non-GAAP measures.
These should be considered as a supplement to, 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 turn the call over to Harley.
Thanks, Katie. Good morning, everyone. Over the first few months of 2017, we continued our steady progress towards our goal of making Shopify the platform of choice for sellers. While much of our work in the quarter was under the radar, quietly improving Shopify for developers both inside and outside the company, we also achieved a record number of new merchant ads, brought some great new brands onto Shopify Plus, and held a hugely successful partner conference a couple weeks ago in San Francisco. Our sold-out Unite conference for Shopify partners brought together more than 1,000 app developers and web designers to talk shop and to introduce all our new APIs and platform functionality they can now leverage to build new commerce experiences for our merchants.
It was incredible to see the level of support and engagement from our partners and witness their commitment to helping us build a platform that flattens the learning curve for entrepreneurs. Together with our partners, we are combining our passion for entrepreneurship with our passion for technology to make starting and growing a retail operation as easy as possible. Notable announcements at Unite this year included our new point-of-sale card reader, Shopify Pay, and our new wholesale channel for Shopify Plus. Let me touch on each of those in turn. Our new EMV card reader will be available in June to U.S.-based merchants. This is our first hardware product designed by Shopify and branded with our logo. We designed it as a freestanding reader, so it can easily be used anywhere and will be free to all merchants new to Shopify point of sale.
This card reader further demonstrates our commitment to the POS channel. Shopify Pay accelerates the checkout flow and provides another opportunity to help merchants reduce friction and increase conversion. Merchants can offer consumers the option of saving their payment and shipping information at checkout time. Doing so speeds up the checkout process on not only that merchant store but on any Shopify store that has Shopify Pay enabled. It is worth noting that this will be the first time that the Shopify brand is actively presented to consumers, which we expect will improve name recognition and recall in our drive to inspire entrepreneurship. Finally, the Shopify Wholesale channel addresses a long-standing need for merchants to seamlessly tap into their wholesale market. With Shopify Wholesale, we will help make wholesale B2B commerce just as simple, approachable, and extensible as Shopify makes B2C commerce today.
Merchants can use the channel to present password-protected storefronts that grant their commercial buyers access to an array of bundled wholesale pricing options. Other announcements at Unite, all of which are either live now or coming soon, include new channels such as those created by BuzzFeed and Wish, new APIs that further expand our platform for developers for orders, reporting, storefronts, and marketing app extensibility, and software development kits, including the Shopify Buy SDKs for custom storefronts using iOS, Android, JavaScript, and now Unity, which delivers in-game transaction functionality for video games using the Unity game engine. Our commitment to supporting our developers technologically is part of the reason our partner community continues to expand. With these announcements, there has never been more opportunity for our partners to build on top of Shopify's platform.
More than 12,000 partners from over 110 countries have referred merchants to us in the past 12 months. The Shopify Plus partner community was also very well represented at Unite, including several partners who traditionally had worked exclusively on other platforms. They are looking to expand their knowledge and capabilities on Shopify for their high-growth and high-volume clients. Shopify Plus clients that have launched in the past few months include fashion brands like Fossil Group's Skagen Watches, eyewear retailer Ollie Quinn, event producer Live Nation, Sears' new Canadian discount chain, health and beauty brands like Borghese, Tyra Banks' cosmetic line called TYRA, and Miranda Kerr's KORA Organics. We also launched a variety of other sellers, such as Seismic Audio Speakers, Undies.com, and Splenda.
The percentage of our merchants using Shopify Shipping continues to grow as well, with nearly one in four merchants with orders originating in the U.S. now on board. Canada's penetration rates are smaller, but also growing steadily. The adoption of cash advances by merchants eligible for Shopify Capital also needs to grow. Cash advances to merchants grew to $49 million by the end of the first quarter, compared with $30 million in cumulative advances just three months ago. It's also interesting to note that today, just one month later, that number stands at more than $60 million. We hit a major milestone in mid-March when our machine learning algorithms fully automated our offers to merchants for these advances. This means offers are now personalized based on individual merchant performance rather than the more general criteria that lump merchants into groups.
This helps us better understand and mitigate risk as we expand our merchant pool. It also means that because offers are personalized with terms that are more individually appropriate, acceptance rates are likely to go higher. All of these things that I just talked about, the new channels, APIs, SDKs, partners, merchant solutions, all of them exist to flatten the learning curve for merchants, our guiding principle, as we extend our leadership position as a platform of choice for developers, partners, and of course, for merchants. With that, I'll turn it over to Russ.
Thanks, Harley. Thanks, everyone. 2017 is off to an excellent start, thanks to our focus, execution, and the continued shift in retail towards multi-channels. In Q1, we grew revenue 75% year-on-year to $127.4 million as we saw continued strong growth in both subscription solutions and merchant solutions revenue. Subscription solutions revenue grew 60% to $62.1 million, driven by growth of the monthly recurring revenue of 62% to $20.7 million. Shopify Plus accounted for $3.5 million or 17% of this MRR, compared with 11% of MRR for Q1 of 2016. Merchant solutions revenue grew 92% to $65.3 million, mainly driven by continued strong growth in gross merchandise volume and the expanded adoption of Shopify Payments, Shipping, and Capital.
This contributed to an increase in our merchant solutions take rate to 1.35% of GMV from 1.27% of GMV in Q1 of last year. GMV grew 81% to $4.8 billion as we continue to attract merchants to the Shopify platform and make it easier than ever for merchants to capitalize on the shift to multichannel commerce to grow their sales. $1.8 billion of the GMV in the quarter, or 38%, was processed on Shopify Payments. This compares with $1 billion or 37% in Q1 of 2016. Gross margin dollars once again grew faster than revenue in the quarter with operational scale improvements in both subscription solutions and merchant solutions, more than offsetting the higher weighting of merchant solutions as compared to Q1 of last year.
Merchant solutions also benefited from the impact of the higher margin revenue streams from Shopify Shipping and Shopify Capital. Our adjusted operating loss in Q1 was $4.3 million or 3% of revenue, compared with $5.9 million or 8% of revenue in the first quarter of 2016. Our adjusted net loss for the quarter was $3.5 million or $0.04 per share, compared with $5.1 million or $0.06 per share for the first quarter of 2016. Finally, our cash equivalents and marketable securities balance grew slightly from year-end to $395.7 million. Harley talked about how we're reaping the benefits from our data in the growth and performance of Shopify Capital. That is only the beginning.
In Q1, we added another 12 billion interactions with the Shopify platform, which together with the tens of billions we have amassed over the past 10-plus years can help us guide merchants on key decisions like pricing and channels, discounting, order fraud, and shipping optimization. These massive datasets also allow for behind-the-scenes improvements that translate to greater efficiencies and better conversion from lead to customers for us and from browser to buyers for our merchants. As we look to the rest of the year, we now expect 2017 revenue in the range of $615 million-$630 million and an adjusted operating loss in the range of $14 million-$18 million.
For the second quarter, we expect revenue in the range of $142 million-$144 million and adjusted operating loss in the range of $6 million-$8 million. Please note that Unite was held in Q1 last year, but in Q2 of this year, and it was nearly twice as large. We continue to expect stock-based compensation to amount to $55 million for the full year, with about $12 million of this in the second quarter. Q1 marked our eighth successful quarter as a public company, and in these past two years, retail has continued to shift in a very favorable way towards our business model and our strategic vision at the time of the IPO. One of the most rewarding aspects of our relentless focus on inspiring entrepreneurship and small business growth has been the ballooning number of Shopify users in the general population.
Merchant staff accounts on the Shopify platform are rapidly approaching the one million mark. Having a growing role in the shift within retail, a role that disruptively creates economic value and employment simultaneously gives us confidence in our aspiration to become the commerce platform for sellers. With that, I'll turn it back over to Katie to start the Q&A.
Thank you, Russ. Chris, can we turn the call over to our participants for their questions, please?
At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. Your first question comes from Jesse Hulsing of Goldman Sachs. Your line is open.
Yeah. Thank you. First question probably for Harley. It looks like Shopify Plus is up about 150% year-over-year on an MRR basis. First, can you give us a sense of, I guess, what you're seeing in that business to start the year, particularly when you look at migrations from Magento? Second, how much of a contributor was price increases to that MRR growth?
Thanks for the question. It's Harley here. In terms of Q1 growth in Plus, specific to your Magento question, we did do a campaign in Q4 which targeted Magento merchants, as you know, and as well as Magento partners. We certainly are reaping some of those benefits in Q1, even though we didn't do another campaign in that quarter. There is obviously some more seasonality in terms of the cycles of sales that these larger companies look after. Unlike some of the small businesses that can make a decision fairly quickly, these larger brands and merchants do take some more time. Generally, we're happy with where things are going with Plus.
In terms of the price change, that sort of rolled out the way we expected, so, in that respect, it was good.
Quick follow-up for Russ. It looks like gross payment volume as a percentage of GMV was down slightly quarter-over-quarter. Can you walk us through why that would be?
Yeah. It's two reasons for that. I mean, we always get a little bit of fluctuation, depending on sort of, primarily Plus merchants, some of which do have Shopify Payments and some that don't. In addition to that, I think the larger factor is, our GMV outside of our core Payments market continues to grow. As that continues, you'll see that penetration rate fluctuate slightly.
Thanks, guys. Appreciate it.
Your next question comes from Deepak Mathivanan of Barclays. Your line is open.
Thanks, guys. Two questions from me. First one, can you talk a little bit about the merchant growth this quarter, perhaps more color on the Plus merchants versus the SMB merchants? I guess the delta between GMV growth and the MRR growth was kind of declining. Wanted to understand the dynamics there. Two, on the B2B solution, is there any difference in the go-to-market strategy for that, or should we think about it very similar to how you do it for Shopify Plus? Thanks, guys. Congrats on a good quarter.
Thanks, Deepak. I'll take the first part of that. In terms of MRR, Q4 versus Q1, relatively flat. Versus Q1 of last year, it was up again in the quarter. On the GMV, as you would expect because of the fourth quarter holiday period, the GMV per merchant typically is lower in Q1 and then kind of builds throughout the year.
Hey, Deepak. I'll take the wholesale question. It's Harley here. On the wholesale one, we've had merchants on our platform that do sell B2C that have asked to have functionality to sell B2B, there's obviously some pent-up demand there. We feel with the, as the product of wholesale continues to roll out, we can go after merchants that are exclusively doing B2B, which is something previously we weren't really seeing too much of. Additionally, there are some partners that have approached us that exclusively work with B2B type merchants, with a new product like this, we feel like we can start going after those partners as well.
Great. Thanks.
Your next question comes from Colin Sebastian of Robert Baird. Your line is open.
Great. Thanks, guys. A couple of questions from me. First off, on gross margins as a follow-up, it was a nice step up there, in particular on the merchant solutions segment. Russ, you cited the mix of shipping and capital as benefits, but I was curious if there were any changes in margin or pricing on the payment solution side of that that might have also contributed to growth. I have a follow-up.
Yeah. We did see also improvements on the payment side. As we've seen in the past, our Payments business outside of North America has higher margins, so as that continues to grow, there's a positive element there. In addition to that, we're just seeing some good operational improvements on sort of the core Payments business as we hit higher milestones in terms of our billing, as well as we've been able to take advantage of some operational improvements there.
Okay. Then secondly, as a follow-up on the question around payment volume, beyond the factors you mentioned, where do you see this mix moving long term as part of the overall GMV? Thanks.
In terms of payment volume, it continues to grow. I mean, there's a number of things happening there. As part of the new Plus pricing, there's an incentive for merchants new to the platform to also adopt Shopify Payments. In terms of capital, we're now seeing merchants who want access to Shopify Capital, which requires Shopify Payments, moving over to Payments as well. I think all of those trends bode nicely for the future.
Do you guys see any benefit from reduced churn from merchants that are using and adopting the Shopify point-of-sale system and perhaps some of the other services that, related services you announced at Unite?
Yeah. Typically, merchants that also use the Shopify Payments and our point-of-sale are generally more established merchants. Anyone who has more sales channels typically does better, so, that definitely helps.
Thank you.
Your next question comes from the line of Richard Tse of National Bank Financial. Your line is open.
Yes, thank you. Russ, wondering if you can maybe comment on what do you think the reasonable upside limit it would be on the take rate here going forward here in the next few years?
We think take rate will continue to move up modestly. I mean, it's gonna come with the success of the adoption of Payments as we move Payments to other geographies, which is part of the longer term plan. That will help. As shipping and capital continue to roll out, all of that will help on that take rate. It's not gonna be a drastic increase. It'll be sort of slow and steady improvements.
Your next question comes from Terry Tillman of Raymond James. Your line is open.
Yes, thanks for taking my questions. Russ, the first question just relates to if we look at the updated guidance, $15 million to $50 million. Well, actually, if we look at the old range and the new range, it's actually a range of $15 million to $50 million in terms of the low end to the upper end in terms of what's changed here. I guess with the significant increase in the guidance, you know, is it more on the merchant solutions and take rate and attach rate of those solutions or soon to be released merchant solutions, or is it more on the software side? Just some more help on this big increase to the guide.
Yeah. Q1, as we pointed out in the press release, was a record quarter of new merchant additions. Just based on that momentum and the traction we see both from a market point of view and a competitive point of view, we expect to see growth. Obviously, the more merchants we have, the more volume they do, and that's where the sort of the strength of our business model really comes into play that we benefit on that side as well. We see good growth as we increase that guidance on both fronts.
Your next question comes from Michael Nemeroff of Credit Suisse. Your line is open.
Russ, on a very nice quarter, and thanks for taking my question. You know, it was actually around Plus. Your business kind of reminds me of Salesforce when it was around your size as it started initially as an SMB-focused product, then they really quickly turned their business towards the large enterprise like you're doing with Plus. My questions are on Plus. How many existing sellers moved up to Plus in the quarter? Now that it seems that Plus is close to or above 10% of total revenue, could you tell us what the average GMV is for a Plus merchant? Also maybe give us some insight into how you plan to further monetize that Plus customer base over time, aside from the higher subscription fees. Thanks.
Hey there, Michael. It's Harley. We've mentioned this before, but, you know, looking at the average GMV for Plus actually isn't really helpful. What may be more helpful is the fact that more than 50% of the GMV on the platform come from both the advanced plan as well as the Plus plan. That should give you sort of a sense of GMV there. In terms of, you know, as we sort of said when we first introduced Plus a couple of years ago, we really wanted to provide a place that merchants can grow up on Shopify and never have to leave the platform. Obviously, we continue to see upgrades there.
That being said, in Q1, it was weighted towards net new merchants on the platform, which we're quite excited about because it introduces established brands to Shopify. We will continue to see upgrades going forward. There will certainly be a focus on net new. The other thing to note is that we no longer provide preferential pricing on upgrades at the same as is coming net new. I think you will see that mix to weight on the side of net new merchants going forward.
Great. Thanks for taking my question.
Your next question comes from Darren Aftahi of ROTH. Your line is open.
Yeah, can I just follow up on the last question? I wanna add my congratulations as well. On Plus, what was kind of the mix, roughly speaking, percentages of net new ads, between sort of organic homegrown versus newly acquired? Then can you give the composition or percentage basis of what the merchant growth was in shipping? I think you had said a quarter domestically, but what was the comparable number year-on-year? Thanks.
Hey, it's Harley. I'll take that first question. As I mentioned in the last question, it was weighted on the side of net new for the first quarter rather than upgrades. Again, that's partially because there is no preferential pricing on upgrades, but also because Plus has been around now for a couple of years. The obvious merchants on our platform that should upgrade to Plus, many have already done that before. I'll pass it over to Russ on the shipping question.
Thanks, Darren. Yeah, on the shipping side, as Harley mentioned, about a quarter of the U.S. merchants, shipping product, used Shopify Shipping in the quarter. That was a couple of percentage points up from the previous quarter.
Your next question comes from Monika Garg of Pacific Crest Securities. Your line is open.
Hi. Thanks for taking my question. You know, your merchant solution revenue is more than 50% of total revenue, you know, but at least 85%-90% currently is coming from Payments, and you are paying close to 70%-75% of that revenue to Stripe. Question is, given that there are other back-end gateway providers also, could you, first of all, either negotiate a better rate, especially since this business is ramping very fast, or maybe at some time would you like to do back-end yourself?
I'll take the first part and then, since Tobi's here, I'll give him for the product side of it. In terms of that first part, I mean, because we're the merchant acquirer, we have complete flexibility on who we use for the processing side. In our current agreement, it's based on cumulative volume, we already get a huge benefit as that volume increases. That again, we see falling to that both gross margin dollars and gross margin percentage side of it. Again, we have that flexibility, but to do something like that wouldn't result in a significant improvement in the cost structure. I mean, the largest piece on the payment side is the interchange.
If we could find a way to reduce the sort of charges from Visa and Amex, that would have the bigger impact for us. I'll turn it over to Tobi.
Hey, yeah. Shopify supports more than 80 different payment gateways, which we all can use. Shopify Payments is one of them. On a purely transactional basis, like it's very easy for us to go and use a different provider. More importantly, like the partnership between Stripe and Shopify is very deep. Like we are culturally very similar companies. We are equally ambitious and we sort of work with an assumption that Shopify is going to be the company which is going to figure out this space of how, you know, getting more entrepreneurs on the internet, how to, you know, like make software that scales throughout the market, at all sizes.
Stripe is taking the entire complexity of moving money around and solving this in a very future safe way. Right now with credit cards, maybe this is going to evolve over in the future. This is a really good demarcation point for us because while we could go and build a payment gateway, there would be a massive opportunity cost in this and I don't think, I mean, I think the best we can do is build something as good as what Stripe is doing. I think this is one of those partnerships which is just fairly rare in technology, but it's it's deep. We compare roadmaps with each other and so on. I think that's one of those things that's worth celebrating.
Gary, thanks. Just as a follow-up on Shopify Capital, as that keeps ramping, would you be looking to sign partnership with other financial institutions to extend credit? Thank you so much.
Yeah. At the current level that we're at, it's still well within our capacity of funding it from our balance sheet. We continue to look at other options there because it is growing at a pretty strong pace. We've already done more advances this year than all of last year, definitely something we're thinking about.
Thank you.
Your next question is from Gus Papageorgiou of Macquarie. Your line is open.
Hi. Thank you for taking my question and congrats on a good quarter. just on capital, so just based on what you said, in the month of April then you extended $11 million worth of loans. Is that correct?
That's correct.
Okay. What kind of payment period are you seeing? Like how quickly are these loans being paid back?
Typically, I mean, because it's an advance, you don't think about it as terms of periods of time. Typically what we see is the full remittance happens in sort of a seven to nine-month period. The other thing that I should mention on the, on the capital side of it is we now have more and more merchants on sort of second, third and fourth advances, it's really becoming an important piece of them growing their business.
Okay. Just if, I mean, if you look at your subscriber or your Merchant Solutions gross margins, they're at kind of multi-quarter highs. If you could characterize the improvement between Payments, Capital, Shipping, which of the three had the biggest influence?
All of the three had it. I would say that Shipping and Capital were relatively equal in terms of their contribution, but even Payments, we saw a good improvement there as well.
Okay. Final question just on customer additions. You didn't give a number, but you said you had a record quarter. Is it fair to assume that Q1 of this year you added more customers than Q4 of last year?
That is correct.
Okay, great. Thanks for taking my questions.
Your next question is from Ken Wong of Citigroup. Your line is open. Your next question comes from Tom Forte of Maxim Group. Your line is open.
Thank you. Good morning. Thanks for taking my question. I wanted to talk about your sales force for Shopify Plus. What's the current size of the sales force? How's the turnover been to date, and what are your future growth plans as far as rate of growth for that sales force?
Hey there, it's Harley. I'll take that question. In terms of the sales reps, what we call sales hackers, that team continues to grow. Our count of sales hackers is slightly higher than where we were in 2000, excuse me, in the Q4 of last year. Keep in mind that our sales force is not just our sales hackers. We also have a massive network of partners that continues to grow, and we're bringing partners on from different platforms that traditionally didn't work with us who are now starting to work with us on the Plus side of things. Generally things are growing well and as expected and quite happy with where that's at.
Thank you.
Your next question is from Nikhil Thadani of Mackie Research Capital. Your line is open.
Thanks, guys. two quick questions for me. Russ, I just wanted to go back to the gross margin for Merchant Solutions for a bit here. Is it fair to sort of think about that gross margin in the low to mid 30% range going forward, or did Q1 have any sort of special, seasonal one-times?
No seasonal one-time. We expect Merchant Solutions to continue to improve throughout the year. In terms of the overall merchants, as we've seen in the past and as we expect again this year, the weighting will move towards Merchant Solutions as you progress through the year. The overall percentage will come down, but Merchant Solutions, we continue to see improvements there and expect that on a go-forward basis. We also saw a good bump in subscription solutions. Typically, what we see on that side is the infrastructure that we put in place for kind of that Black Friday, Cyber Monday, Q4 holiday period, results in that merchant coming down in the second half of the year.
We saw some operational improvements that helped in Q1, plus the infrastructure that we needed for Q4 was sufficient for the Q1 volume. Just so you have that color as well.
Super great. Just one last one before I pass the line here. What was the biggest sort of takeaway from Shopify Unite that you kind of walked away from in terms of the product roadmap? I know you can't get too much into the details of your future roadmap, but just in terms of big themes, was there something overarching that you kinda left San Francisco with? Thanks, guys.
Yeah. I'm not. It's probably not the time to talk about what we walked out from this one. Maybe it's worth just talking about, you know, like this is only has been the second Unite. We've, the, you know, the one we did last year was our first actual, you know, sort of event with our community of partners, outside of just, you know, forums and phone calls and these kind of things. Initially, this was planned to be just sort of a series of product announcements by us, where we just sort of share what we've been working on. It actually had a really profound effect on the company, on Shopify. Like, we walked away from the conference.
We flew back to, you know, Canada and really did change our roadmap significantly. The things that we came back with this year were significantly influenced by all the stories we heard and all the feedback we've gotten. It was very, very honest, you know. It was, like the partners really did tell us, you know, a lot about their own stories, but also some things we needed to hear about the particular quality of, you know, something that maybe only they see because they work with a certain group of customers and so on.
Unite is actually like It's interesting because these events, you go in for a particular reason, but usually, you learn so much more about the business because everyone is currently engaged in figuring out how to, you know, how to build the correct software for this market. Again, like I said on previous calls, I still think Shopify is now getting, for the first time, close to something, like a product market fit in our markets and the previous sort of solutions in this market were sort of all had sort of missed the mark before. We were very encouraged with reactions to, you know, just us, going a little bit more into hardware, where we've seen some of those problems.
Like, this was sort of a theme we heard the year before. Like, yes, we had card readers, but if you actually watched a merchant sell a product with a card reader that's connected to a headphone jack and trying to align the card and, you know, spend, like, a couple minutes trying to just get everything right, you realize that someone actually needs to build hardware that makes these things easy. Shopify Pay and so on, like all these things are based on the feedback we've gotten, and I think this is the cycle we are now on.
Your next question is from Ross MacMillan of RBC Capital Markets. Your line is open.
Thanks so much. Two questions if I could. Thank you for the disclosure on the Plus merchant MRR. Russ, as you go forward, when we think about the new pricing model for Plus, how are you gonna present that in the P&L? Where will the GMV-based pricing fall, and where will the transaction, the 15 basis point transaction fee fall?
In terms of the fee for merchants that are not using Shopify Payments, that'll roll up to Merchant Solutions. In terms of the price to use the platform itself, the 25 basis points with the minimum of $2,000 and the maximum of $40,000, we haven't completely decided on that yet. As a minimum, the $2,000 will hit Subscription Solutions. The variable piece on top of that, up to $40,000, may also be in Subscription Solutions or may hit Merchant Solutions. We haven't completely determined that yet.
Okay, that's helpful. One follow-up. We looked at your filing, and we see that your SEM, your internet spend, your SEM SEO has been tracking at about 60% of the annual increase in sales and marketing spend. This quarter, it seemed that the increase was skewed to non-SEM SEO. Just curious as how we should think about that internet spend as a percentage of sales and marketing growth going forward. Would you expect it to decline within the mix or stay at around that consistent level? Thanks.
It's something that we look at on a quarterly basis.
In Q1, in terms of our spend on sort of Google AdWords versus Facebook, we saw some really stellar results on the Google AdWords, allocated more of the paid spend, and in fact, increased the amount overall, just to capture that. It's something that we really look at on a sort of a weekly, daily basis before making that decision. Overall, we don't see any sort of fundamental changes there.
Thanks so much. Congrats.
Your next question is from James Cakmak of Monness, Crespi, Hardt. Your line is open.
Hi. Thanks. Harley, you talked about, you know, building the brand in the eyes of the consumers. You know, historically, you've been the back engine for all these businesses on the payment side. Can you just talk about, you know, how you see the brand evolving, you know, for consumers, and the benefits of that, you know, kind of as we look down the road? Thanks a lot.
Hey, this is Tobi. I'm gonna take this. Like, you know, strong opinions weekly had. This is really important thing for, like, anyone who's trying to make it through the, you know, startup period. One of the most strong opinions that Shopify had is that we are not in this to make ourselves look good. We are in this to make other people look good, like specifically the merchants and the partners. We try to give them a fantastic product which they can use to so that their buyers and their customers can be delighted by the experience of, you know, like the interaction they have. We are just going to be providers and the people who are sort of helping along with this.
You know, this is one of the reasons why, for example, we didn't even have a conference. Like we really just, we are very, we were very happy with, you know, being up here in Canada, a little bit hidden and, you know, have our software hidden, our brand hidden, all those kind of things. What Like, we do revisit these decisions. This one is one we only reluctantly changed, but it's one of those kind of pieces of feedback coming from our partners at Unite who said, That's good that you guys are trying to, you know, do all this, and not plaster 'Powered by Shopify' across everything. You know what.
Like, you guys are a brand, and you need to realize that there's value of that. This sort of encouraged us to do Shopify Pay because we are, you know, again, we are trying to play the long game here. Like the thing that we are really trying to accomplish, I'm just gonna spend a second talking about Shopify Pay. The thing that we are really trying to do here is the whole concept of someone like finding a new store, finding product they'll love, adding it to a shopping cart, and then spending five minutes, you know, with their thumbs entering an address is ridiculous, right? We are trying to make this go away. No one should fill out a checkout ever again, ideally.
First step was let's go to the platform owners, Apple Pay, Android Pay, these kind of things, get something into Chrome. Let's get to all the people who actually own the software through which people consume the internet and get transactions built into this. We are part of the W3C. We get this done. It's too slow. We've now accomplished this goal, and we realize it's still gonna take a couple of years and where people have to thumb in their addresses. We realized there's over 1,000 stores now. That's a significant percentage of the online stores that people shop on. We can actually say, Hey, Shopify Pay is also a thing.
We can get you through the checkout really fast. That's gonna be a really good solution until we get this properly done by moving all the credit cards into secure elements on the devices and, like really upgrade the way the internet moves money around. This is sort of our thinking, and the first time we come sort of, say, Hey, this is us powering this. Therefore, you know, sort of our first little foray into being a brand even to the people who buy on Shopify stores.
Thank you.
Your next question is from Jonathan Kees of Summit Redstone. Your line is open.
Great. Thanks for taking my question. Congrats. I add my congrats to the quarter too. I just wanted to see if we can get a little color here on a couple of your marquee names. For example, Amazon, they at one point had their own solution, then they chose you as a partner. Another, you're one of their premier partners in terms of what they do. You added Amazon Marketplace back in December. Just curious if how that's been trending, how much of, you know, if you could even talk in terms of contribution there, and also with Facebook in terms of the channel there. Thanks.
Hey there, it's Harley. I'll take the question. Whether it's Amazon or it's Facebook or it's any of the other channels, the concept is that we want our merchants to sell wherever their customers are hanging out. Some of those customers are hanging out on marketplaces like Amazon, and others are hanging out on social media platforms like Facebook. Enabling our merchants to have a wide variety of options to find new customers online is something really important to us. To your question on Amazon, you know, there was a couple different pieces to the Amazon partnership. One was the fact that they were shutting down their web store product and we became their migration partner for that.
There also were some other benefits to it, like enabling Checkout by Amazon, Fulfillment by Amazon, and which allow our merchants to use those products. And obviously the most recent one is allowing our merchants and enabling them to cross-sell on Amazon's Marketplace, where there are hundreds of millions of people looking for products. In general, whether it's any channel in particular, the whole concept is to make our merchants more successful and allow them to sell more, and that's why you're seeing more and more of these announcements around new channels.
Okay. Great. Thanks.
Your next question is from Richard Davis of Canaccord. Your line is open. Mr. Davis, you may be on mute.
Thank you very much. Do you see yourself over time as Michael Nemeroff kinda touched on moving upmarket and into higher end firms, you know, like the old Demandware, which is Salesforce now. If that's the playbook going forward, you know, kinda when you think about this more broadly, you know, what changes in your go-to-market strategy and/or technology platform would you need to accomplish that? I mean, some of it's self-evident, but how do you think about that if that's the direction you're going? Thanks.
Yeah. I wanna kind of specifically say this is not our playbook. This is actually fairly easy to prove because that's the easy playbook. Like it's, it's actually trivial to lot like, I mean, there's Clayton Christensen can't stop writing books about this topic. Like, you go into the bottom of a market, and then you slowly go upmarket, and that's how you disrupt things, right? This is a, this is a play that's available to us, and it would be very successful to do this specifically short term. We're trying something much, much harder, which is, we are going into a market from the bottom as, as we have, and then we stick to the bottom, and then we create a single product that stretches all the way through the market.
This is actually like, I'm struggling finding an instance of where this has been done successfully. If there's a, you know, someone who aspires to be the future Clayton Christensen listening, then maybe write a book about this particular thing as, I mean, hopefully it's gonna work. We want to, we do not want to be confused with Salesforce because we don't want people to have the expectation that, you know, it's only gonna be Fortune 50 companies soon on Shopify. This is specifically like, and there's good business reasons for this obviously, otherwise, you know, maybe I could even be talked out of this. Business reasons are this market isn't as big as it needs to be or should be.
Like, I, even back in the day, like 10 years ago when I first ran to Sand Hill Road to try to raise money, people were telling me, Well, there's only like 60,000 online stores. You know, like, maybe this market isn't so big, which, you know, is crazy because, you know, what's the vertical market or demand for websites that make more money than they cost, right? Clearly, we can all agree that there's a lot of people who want one of those. What's the reason why there are so few and why there's so few? Really bad software, especially for new entrepreneurs. The best long-term play that we can play is be massively focused on the first couple of hours of these new businesses.
What happens after they sign up? How do we help them? Can we help them be successful? This is because this is how the entire market grows. You know, as you can see, like, up until very recently, half of our even Plus accounts have come from these sort of homegrown success stories. You know, this is the kind of, I think the strategy playing out. Now, our customers growing up, like there's now a bunch of people who are get to very high revenue revenue streams. Certainly there's a bunch of customers who are as big as the, you know, the top of a Demandware customer base now.
Their requirements are now requirements that we have to address because this is the sort of contract we have with our customer base. Like if they need something and if it's something that most business in that particular situation would need most of the time, then it's something that's gonna be part added to our platform. If it's something that some people need some of the time, then it's something we are going to our partner ecosystem out with, and apps are going to be built. We find that as a, as a better long-term solution for our market in terms of software.
I think the fact that we are so committed to entrepreneurs, should be fairly self-evident from watching the Unite talks, but also is really, really, really important ingredient in sort of understanding what we are going for here with this company.
That's very helpful. I guess the only version 1 analogy might be like Paychex, but yeah. Good luck and sounds like you're doing a good job. Thank you.
Thank you.
Your next question is from Todd Coupland of CIBC. Your line is open.
Yes. Good morning, everyone. I just wanted to clarify the answer on the merchant count. I had a question. You said you added more than you had in the last quarter in Q1, so that would actually put the number well above 400,000. Is that the Am I interpreting that statement correctly?
Yeah. I mean, what we've done, and we will provide an annual update of that merchant count, so it's not that we abandoned it completely. What we really believe and how we sort of manage the company is when you have pricing plans that start at $29 and now go up all the way to $40,000, that the MRR is a much better metric to really monitor the business. What we've really done is stop talking about quarterly milestones, which in some respects were causing confusion versus adding value to the people trying to understand Shopify.
Okay. My question on the data monetization, how are you thinking about monetizing all the interactions on the website or on the platform in 2017? Is that something that merchants will just benefit within Plus, or is there specific ideas around monetizing that? Any color would be helpful. Thanks.
I mean, the nice thing about all of this data that we have, particularly even more relevant to small merchants, we can help them progress faster and be more successful in their journey. It's gonna be available to everyone. There are some additional capabilities that we have that are more relevant to merchants doing higher volume. At that stage, there is an opportunity to monetize a portion of that, just because a lot of these merchants are spending money, in fact more money on sort of third-party tools, to get the same sort of end state. We just think we're in a good position there.
Your next question comes from Eyal Ofir of Eight Capital. Your line is open.
Thanks. It's a great quarter, guys. Just two questions from me. First off, you talked about how the partner network is continually contributing more to your merchant ads. Do you guys have any metrics around how much is coming through the channel partnerships, either this quarter and then comparing it out to last quarter and last year?
Yeah. The way we get merchants, it really hasn't changed over the life of Shopify. Organic is still our largest source of new merchants. After that, if you sort of rank order these, it would be the paid advertising that we do. That partner ecosystem is kind of third on the list, but still contributes a large sum. I think as Harley said, Sorry, over 12,000 partners referred one or more merchants to us in the last 12 months. Again, a very important piece of what we do.
Okay. you don't have any, like, percentage in terms of ads within.
Well.
From the channel versus the direct?
Yeah, I mean attribution is always a bit of a challenge. Most people that come to the Shopify platform have touched us in more than one different way before they get onto the platform. Exact numbers are somewhat difficult to specify. I will say though, generally, that people who've gone to a partner are more established or certainly more serious about getting their business up and running. I would say if you look at a quality index, partners are a little bit stronger on that front.
Okay, thanks. Just another question from me. Just on the geographic front, have you seen a greater push this quarter than any, than in what specific country or region? Kind of what's the plan for the rest of the year? Thanks. I'll pass the line.
Yeah. We're doing a number of things to increase our presence outside of our core markets. We've seen that both in terms of merchant count as well as the GMV coming from sort of the non-North America, U.K., Australia markets. We expect that to continue grow as we continue to do things like translating our blog and more focused efforts in some of these areas.
Okay. Okay, thank you. I'll pass the line.
Your next question comes from Kevin Krishnaratne of Paradigm Capital. Your line is open.
Hi, good morning. Just one question from me on point of sale. I wonder if you can talk about your thoughts around the push there. At Unite, you mentioned, I think it was 65,000 merchants sold on POS last year, and you're expecting that to rise in 2017 to maybe half of your merchants selling in person. I'm wondering if you can comment on that and maybe just thoughts around related merchant ad trends, ARPU, and then on the cost side, if there's anything to think about on how hardware subsidies might impact either margin or CapEx.
Yeah. I mean, point of sale for a number of years has been an important piece, and a lot of merchants currently not online do have brick and mortar. Having that combination, I think puts us in a very good spot to capitalize on. In terms of providing some of these free card readers to further push that market, that will be very much a sales and marketing expense and so reflected in that line going forward.
With this push, are you thinking differently about your TAM? Does it change your thoughts? Are you moving down more smaller market micro merchants? What would that potentially mean to ARPUs or average GMVs? Just any kind of additional color on how you're thinking about the market opportunity for that.
We just point of sale, we kind of view as just another selling channel and an important one. Typically people that do have brick and mortar would be larger merchants and so more GMV. Again, on the payment side, whether it's a card present or a card not present transaction, we can process both. It's just part of the way we think of the world, that this is something that is required. Because we've been able to do it, something that gives us an advantage.
Okay. Well, thank you.
That was our final question today. I now return the call to Katie Keita.
Thanks, Chris. I will pass the mic to Tobi for some closing remarks.
Thanks. I think we've done this for eight quarters now. I think everyone's starting to get a feel for the company. Like we are very much, you know, mission driven. We are really trying to look at this entire market, look at the entire situation. You know, kind of have an opinion about just how things should be rather than, you know, how things have been and how incrementally things that already exist could be done slightly better. Rather like just working toward Like working backwards from how would we invent the retail world right now if it would be an original idea and no one has ever sold a product to anyone, like, what would we do in that case?
Then see if we can build products that support these kind of behaviors and then invite everyone over. This, like, Unite was a really important ingredient in this. I think, sort of if you read between the lines of our announcements, you kind of get this sense from the company. Like, we really want people to be able to check out instantly, and not thumb in their addresses. We really want people to use hardware, which I can, you know, have in their bag somewhere, do a sale everywhere. We really want people to, you know, have a point of sale product that kind of fits into the times, like retail is changing very rapidly. The big box retailers are all struggling, as everyone knows.
What's going to be left of retail is essentially a form of entertainment because, you know, all the necessities will eventually be purchased online or through automatic refills and these kind of things. All these things need different software to support them. From this vantage point we've been seeing this for a while. Like, if you go back through, you know, like the various quarters, you'll see that retail and online retail, it's playing out exactly the way we predicted all along, right? I think this is a strength. We announced a lot of things at Unite. This is clearly the kind of company which is firing on all cylinders. The financial results are really good.
I'm very proud of what we've done here, but they are reflective of the things we announced last year in Unite. I think it's important. We've hit our stride as a public company. We hit our stride as a company in this space. We're starting to be more comfortable with leading this market and taking it to places where we want to, instead of just sort of being a participant and a data point in it. With that, thank you very much and talk to you soon.
Thank you for your participation. This concludes today's conference call. Goodbye.