Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Shopify Q4 2016 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'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Ms. Katie Keita, Director of Investor Relations, you may begin your conference.
Thank you, operator, and good morning, everyone. We are glad you can join us for Shopify's fourth quarter, 2016 conference call. Tobi Lütke, Shopify's CEO, will open today's call. After which, Harley Finkelstein, our Chief Operating Officer, will discuss what is new and what we are focused on with regard to partners in Shopify Plus. CFO Russ Jones will review our fourth quarter results and our expectations for 2017. As usual, we will open it up for your questions. Note that 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 in our statements. We undertake no obligation to update these statements except as required by law.
Information about these risks and uncertainties is laid out in our press release this morning, as well as in our filings with securities regulators in both Canada and the U.S. 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 our GAAP financial measures. Reconciliations between the two can be found in our earnings press release, which is available on our website. Finally, note that we report in U.S. dollars, so all amounts discussed are in U.S. dollars unless otherwise indicated. With that, I will turn the call over to Tobi.
Thanks, Katie, and hello, everyone. Looking over our accomplishments in 2016, the list is pretty gratifying. We had our first partner conference, which far exceeded our expectations, not just in terms of people attending, but also in terms of, you know, just connecting with people and educating. We added Facebook Messenger as a channel which lets merchants and their customers connect in more conversational way, like, which is something that e-commerce just didn't really have before. We added Apple Pay as an option for merchants to offer to your customers, which roughly doubles conversion rates on phones where it's enabled. We launched a complete refresh of our mobile app, which we saw tens of thousands of merchants start using. Running your entire business from your pocket is now something that a lot of merchants are doing.
We also launched Shopify Capital, added Canada Post as a shipping partner, expanded Shopify Payments into new countries, and added several new channels, most notably amongst those, the Amazon channel. Our to-do list for 2017 is even longer than that. Luckily, we have twice as many people working on the platform as we had last year. We expect great new releases by us all across the year, which will help make merchants more successful, which is really what this company is all about. Let me turn it over to Harley and Russ, who can fill you in on the details.
Thanks, Tobi, and hi, everyone. Thanks for tuning in this morning as I take a few minutes to highlight a few things we've been working on and how these initiatives are creating value for our merchants, for our partners, and for Shopify. We are often asked what's next, what aren't we doing today that we could or should be doing. It's important to understand that as we continue to strengthen our platform, we're focused on what's best for most merchants most of the time. In other words, every time we launch something that lowers friction, makes our merchants work easier or their outcome better, we have created value. It is this hyper-focus on the merchant's entire retail operation that makes Shopify truly unique. From idea origination and deciding on which sales channel to sell their products, as well as the ever-growing to-do list after their business is launched, m erchants have to source, store, and manage inventory.
They have to figure out the most effective way to spend marketing and advertising dollars. They have to learn the best way to engage and retain customers and offer a superior experience, whether it's in person or online. They also need to know about things like taxes and shipping and chargebacks and so much more. It's not easy. Early-stage entrepreneurs soon discover that there's so much more to commerce than simply adding a buy button to a blog. It's far more complex, which to us presents an incredible opportunity. In other words, we don't do these things because they're easy. We do them because they're hard. Our role is to reduce the slope of the learning curve and remove complexity for entrepreneurs. This is how we add value.
This is how we make retail better for our merchants because what's good for our merchants is good for us. The sell on Amazon channel is a great example of this. We launched this channel publicly in December to more than 225,000 merchants on Shopify who are selling in U.S. dollars. Already thousands of our merchants have added products to Amazon. As you know, there's currently no direct- to- Shopify revenue today from this additional channel. We don't charge for it, and the Amazon GMV does not get counted toward Shopify GMV. Rather, the primary benefit of this integration is to merchants. They can now more easily connect to Amazon's vast audience, which is buying intent.
Of course, with every new channel, merchants get a broader view of their success across all channels and an integrated point for managing them, more firmly establishing Shopify as the center of their entire business. One other and perhaps less visible benefit, this is our first large-scale marketplace integration. This means that the work that went into the Amazon channel has paved the way for future development of other marketplace integrations. None of our current channels have ever required us to help our merchants look at their Shopify SKUs through a taxonomy as stringent as Amazon's. We acquired a lot of knowledge from this integration that can be leveraged in the future. Shipping also demonstrates our merchant-centric philosophy. Earlier this month, we made carrier-calculated shipping available to all merchants, whether they're using Shopify Shipping or not.
In Q4, we saw merchant adoption of Shopify Shipping continue to expand in both the U.S. and Canada. We expect this trend to continue as we add new features and new shipping partners. Beyond shipping, Shopify Capital has now provided more than $35 million in merchant cash advances, helping thousands of our merchants secure working capital quickly and easily, which they're able to use to purchase more inventory, launch new marketing campaigns, and accelerate their growth. A huge part of the value created for merchants comes from our partners. Q4 was our best ever for our partners. We had a record number of new partners join our partner program, a record number of partners refer as new merchants, and a record number of new merchants referred by those partners.
Over 11,000 partners referred as new merchants in 2016, that program continues to grow. In addition, our merchants are buying more apps through our App Store, which is good for their business, good for our third-party ecosystem, and good for Shopify. Shopify Plus had another incredibly productive quarter, again, setting a record in the number of new merchants signed on to Shopify Plus in Q4. More importantly, more than doubling the MRR coming to Shopify from Plus subscriptions over last year. Much of the rapid growth was driven by the new Shopify Plus partner program we established in Q2, which has welcomed some of the largest agency partners globally. Not only are we bringing on many new merchants onto Shopify Plus, but our existing Plus merchants continue to grow their businesses on our platform.
If we look at the largest 20 Plus shops who've been with Shopify for at least two years, on average, these shops collectively sold 130% more this year than last year. With this incredible growth, the popularity of Shopify Plus should come as no surprise. We also had some really cool launches on Shopify Plus in Q4. One in particular is the Canadian Football League, who launched a shop in November for Canada's Grey Cup, which is kind of like the Super Bowl, only more polite. The league set up real-time updates to their merchandising, so whenever a football player scored a touchdown, that player's jersey was immediately showcased on their online store. In case you missed it, the Ottawa Redblacks won the game.
Other Plus clients that launched in the past few months include Bulova Watches, Doctors Without Borders, Moët Hennessy, Zippo, the Fine Arts Museums of San Francisco, and The Wall Street Journal. We also had some incredible events last quarter that showcased our in-store point-of-sale capabilities. Kylie Jenner and hip-hop artist The Weeknd both hosted wildly successful pop-up shops over the holidays, all powered by Shopify's point-of-sale. Shopify helped bring their vision to life for their millions of fans, and offline retail proved to be an incredibly powerful sales channel for them. We're hosting another Kylie pop-up right now on Mercer Street in Manhattan for New York Fashion Week. Those of you who are in the neighborhood should swing by and check it out. Overall, it's clear the investments we made in Shopify Plus in 2016 delivered amazing results.
Shopify Plus signed over 1,500 new merchants, bringing us to 2,500 merchants at the end of 2016. Of course, we've been adding since then. We've added Shopify Scripts, built a new partner program, moved into new offices, hired over 100 new people, and added the development team from Boltmade. An important change for Shopify Plus in 2017 will be the transition from fixed to variable pricing, which is a pretty natural evolution as Shopify Plus grows and accommodates a more diverse portfolio of merchants. What this means for our Shopify Plus merchants is better alignment between what they pay, their usage of the platform, and the value they realize from Plus. It was important to do this now ahead of the continued strong growth we are anticipating for Plus in 2017 and beyond.
All in, a phenomenal year for Shopify all around. With more of the pieces in place and the investments we're making, we're looking forward to even greater achievements in 2017. With that, I will turn the call over to Russ. Russ?
Thanks, Harley. Thanks, everyone. I'm happy to report we had a strong Q4, helped, of course, by holiday spending and retail's continued shift to online. Before I take you through the numbers, just to let you know, I'm going to tweak the way we normally do this call and save you from listening to me read through every financial detail. I'll just focus on the highlights so we can leave more time for your questions. Starting with revenue in Q4, revenue grew 86% year-on-year to $130.4 million, thanks to strength across the board. The monthly recurring revenue at quarter end grew 63% to $18.5 million. Gross merchandise volume grew 94% to $5.5 billion.
Of this amount, 39% or $2.2 billion was processed on Shopify Payments, which compares with $1 billion or 37% of Q4 2015. Our merchant solutions take rate grew to 1.34% of GMV this past quarter from 1.25% in Q4 last year. This was due to increased penetration of Shopify Payments, as well as increased adoption of Shopify Shipping and the introduction of Shopify Capital. Take rate, as you know, measures the degree to which we share in our merchant success. Finally, a record number of merchants joined Shopify in Q4, and we surpassed 375,000 merchants, of which approximately 2,500 are Plus merchants. The drivers of new merchant adds in Q4 was consistent with prior quarters, with organic digital marketing and partners all contributing to the growth.
While we continually experiment with new ways to attract merchants, we're also big beneficiaries of a larger trend towards multi-channel commerce, well-equipped for retail shift to mobile and social, and designed specifically for the millions of potential entrepreneurs looking to join today's gig economy. Gross margin dollars expanded by 87% in the quarter faster than revenue. A few factors helped here. In subscription solutions, we benefit from the impact of a higher Q4 volume on our infrastructure cost and a smaller amount of low-margin theme revenues. In merchant solutions, Shopify Payments cost declined slightly as a percentage of revenue due to both operational improvements and the impact of additional geographies. We also benefited here from the introduction and growth of higher margin revenue streams such as Shipping and Capital.
As a small housekeeping item, provisions for chargebacks are now included in G&A instead of cost of revenue, which w e believe more accurately reflects the nature of the cost and more closely aligns with industry standards. Our adjusted operating loss came in at less than 1% of revenue for the quarter at $800,000, compared with a $1.3 million loss for Q4 of 2015 or 2% of revenue. The seasonally high revenue in the fourth quarter allowed for greater leverage on our adjusted operating expense, which came in at 53% of revenue, a decline of 100 basis points from Q4 of 2015. Our adjusted net loss for the fourth quarter of 2016 was $0.4 million or $0.00 per share, compared with $1.1 million or $0.01 per share for the fourth quarter of 2015.
We invested heavily in 2016, and we saw some amazing results. We are entering 2017 with twice as many employees, thousands of additional partners, tens of thousands of new merchants, a stronger leadership position, and a market opportunity that is even greater than it was a year ago. As a result, we expect to be even busier in 2017 and plan to continue to invest in product growth and Shopify Plus. First, product. Our investments this year are largely to future-proof Shopify, the product, through investments in our platform, our data, and our infrastructure. Much of the work in 2017 is to make Shopify the platform even easier to build on for both ourselves and our partners, giving our developers internally and externally better tools and APIs to help keep Shopify's bleeding-edge position.
For data, our focus is on further leveraging our vast stores of transaction data for not only our own improvements, but also for merchant success. Just think, a new, brand-new merchant on Shopify gets the benefits of data coming from the billions and billions of transactions that we've processed over the past 10+ years, and it's growing all the time. Finally, to keep our infrastructure resilient and scalable as the number of merchants on the platform grows, we plan to further take advantage of the ever-improving cloud cost and capabilities. While this will result in some redundant costs in 2017, we expect to realize future benefits, particularly as we scale globally. Our second major area of investment in 2017 is focused on growth. We would be crazy not to capitalize on the evolutionary moment in the development of retail.
This means a new scaled edition, Build a Business Competition, a partner conference that is expected to be nearly twice the size of last year, targeted branding campaigns, and doubling down on content creation. Finally, we will continue to invest in Shopify Plus in both product and growth by building additional features and functionalities that optimize Shopify for high-volume merchants and bringing on new sales and sales-related hires. With this in mind, we are expecting continued strong revenue growth in 2017 in the range of $580 million-$600 million and an adjusted operating loss in the range of $18 million-$22 million. For the first quarter, we expect revenue in the range of $120 million-$122 million and an adjusted operating loss in the range of $9 million-$11 million.
Given our planned 2017 hiring, especially in R&D, we expect stock-based compensation to amount to $55 million for the full year, with about $11 million of this occurring in the first quarter. We believe our continued rapid growth indicates that the fundamental transition in retail is still in its early stages and that our growth trajectory extends well into the future. As such, we believe our long-term focus, combined with our business model that aligns our own interests with those of our merchants, will serve us well for many years to come. With that, I'll turn it back to Katie to start the Q&A.
Thank you, Russ. All right. Before we open up the lines for questions, I want to remind everybody that we would like you to limit yourselves to just one question, so everyone gets an opportunity to ask a question. All right. Sharon, can we open the lines up now, 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. We will pause for just a moment to compile the Q&A roster. Your first question comes from Darren Aftahi from ROTH. Your line is open.
Good morning. Thanks for taking my question. Congratulations. Just if I may on the adjusted operating guidance, can you sort of talk about what's driving the higher operating loss at kind of the high end and just as a derivative? Can you touch on the impact of what shipping was on gross margin and kind of the impact going forward of adoption? Thank you.
Thanks, Darren. In terms of the larger operating loss at sort of the high end, again, if you look at it for the full year, we're talking about roughly a 3% of revenue operating loss. As I think we've talked about and firmly believe, we're in a very strong position as a company right now, and the market's in a very good spot.
We just think investing for the long term is the right thing to do. In terms of shipping, clearly Q4 was the strongest contribution of shipping to our overall performance. Since we record shipping on a net basis, the impact's larger on the margin than on the revenue side. Definitely saw an improvement in the merchant solutions margin for the quarter, due directly to shipping, as well as capital also had a very strong contribution.
Your next question comes from Ken Wong from Citigroup. Your line is open.
Hi, Harley. I was wondering if you could maybe provide a little more color on this shift to variable pricing with Plus. Any sense on timing and just maybe some of the mechanics around how that variable component will work?
Yeah, it's Harley here. I'll take that question. As you, as many of you will recall, Plus really started as a bit of an experiment here. We didn't really have so much data when we launched Shopify Plus a couple years back. As we begin to get more data, we're now modifying the pricing. The change is really moving to $2,000 a month, which comparatively to any other mid-market solution is incredibly, you know, great value. For those selling more than $10 million a year, there is an additional fee which better reflects their use of the platform and of course our costs, and that will be 25 basis points of GMV. In terms of the rollout for that, February 1st was the date for all new merchants.
For existing merchants that are on Shopify Plus already, they'll be rolled out over the next six months or whenever their contract is up. Again, the change is really to reflect some of the larger merchants that are now beginning to come to Shopify Plus and their use of the platform relative to our costs. We'll see that change pretty soon.
Your next question comes from Michael Nemeroff from Credit Suisse. Your line is open.
Hey, guys, thanks for taking my questions and congratulations on a good year and a quarter. I'm really interested in, you know, the geographic breakdown of the business and where the strong subscriber growth is coming from, and how much of the business do you expect to be outside of the U.S. over the next couple of years versus what you've done in 2016. Thanks.
We have merchants now in over 175 countries on the platform. Our core geographies, which is really North America, U.K. and Australia, account for a good portion of that merchant growth. In terms of merchants themselves, just under 60% are coming from the U.S. We continue to see both in terms of the number of merchants and their impact outside of these core groups continue to grow, and we expect that to continue.
Your next question comes from Richard Davis from Canaccord. Your line is open.
Thanks very much. I don't think I heard that your mix of kind of GMV is from online retailers versus brands going direct-to-consumer. What was that mix? The corollary to that would be to what extent as you push forward towards the retailers and omni-channel and those kind of things, why would it not make sense or would it make sense for you to push deeper into kind of either fulfillment, EDI, returns, systems and things like that? Obviously, you're not gonna run trucks, but just kinda how you think about expanding that functionality matrix. Thanks.
Okay, that's two questions, but we'll take each of those-
It's one and a half.
... in turn. Starting with, I think the brands and direct-to-consumer, I'll give that one to Harley, and then Tobi can address your fulfillment question.
Hey there. Thanks for the question there. In terms of brands, t his whole concept of direct- to consumer is something that's pretty new. What we're seeing now with Shopify Plus is brands that typically never went direct-to-consumer in the past are now beginning to do so. Some of them start as promotions where they do, you know, particular marketing campaign and then realize, hey, there really is a business here to sell our products right to the end user. We think Shopify Plus is really well-positioned to take advantage of that particular trend. Again, that's something pretty new for us. Most people on Plus initially were retailers. Now we're starting to seeing these larger brands come on.
Your next question-
Yeah. Hey, let me just address quickly, but, I mean, I haven't got anything really great for you on the fulfillment side. It's like we've spent a lot of time looking at it. It's, you know, it's one of those kind of parts of the business for every one of our merchants that's very complicated, that they have to book on this until they start usually shipping out of their living room and then want to sort of become more professional. We're working with a lot of partners together, this is really the way we're thinking about this for now. We are building great APIs to allow warehouses and fulfillment systems to plug directly into the platform. That's working exceptionally well.
We're also seeing like, the large logistic companies like FedEx and so on, thinking about some of the capabilities that the larger online retailers have been building for themselves. We are hoping that to plug into these. That's roughly sort of the lay of the land for fulfillment at this time.
Thank you.
Your next question comes from Nikhil Thadani from Mackie Research. Your line is open.
Guys, congrats on the quarter. I just wanted to go back to Plus for a second here. As you're sort of investing into that product and you have some data here, what does the sales cycle for this product look like? How has that changed over the past year? Is the sales cycle getting compressed or is it getting elongated? Just any color on what you're seeing out there. Thanks.
Hey there. It's Harley, I'll take that question. So in terms of sales cycles, first of all, I mean, our sales team is, you know, is getting more mature. As we get more mature, we're learning how to better sell. It's a variety of different sales cycles simply because we have so many different types of merchants on Shopify Plus. Keep in mind that many of our Shopify Plus merchants today were upgrades, so obviously, in those cases it's a fairly quick sales cycle to move them onto Plus. In other cases, when we're working with bigger companies, whether it's Nestlé or the Procter & Gambles of the world, you know, that's new for them. Most of them have not sold direct-to-consumer previously.
Those seem to take a little bit longer, but we're getting really good at figuring out what every type of Plus merchant requires and further reducing that sales cycle.
Your next question comes from Sam Kemp from Piper Jaffray. Your line is open.
The question is, you guys called out that social channels were outpacing online stores. I wanted to ask, is that something that's relatively new or is that getting stronger? Maybe a sub-question to that, if I may. How do you guys think about Instagram and potentially having a direct integration into that channel? Thanks.
Yeah, social selling in general.
Yeah. Sorry. I just wanna clarify that the question was about Instagram. You know, social channels, having trouble to figure out exactly how to address this. Like it's, you know, like a lot of it was forward- leaning from us. Let's say, hey, you know, like this is something we are seeing. In fact, we've watched Instagram for years, and there's countries in the world where a lot of commerce activity happens through people taking pictures of their products next to a price tag and then, you know, contacting each other through Instagram. This is the wonderful thing about commerce is really just how global it is, and that almost every experiment, anything that we can dream up, someone's like, is actually going on somewhere on the planet if you just look more enough.
Increasingly, with our platform, we actually have the data to then figure out where people are actually or reacting like this and find it and look at it and sometimes travel and learn from it. So, you know, like all of the social efforts are extractions from something people are already doing, which in my eyes is always how to make the best products. Like, don't try to, you know, bend the world, but rather like bend this world. So that these niches are now expanding, like, you know, it might've been just one country, it might've been just one industry which has done a certain thing, and now these information are traveling and more and more people are tapping into these ideas and figuring out best practices.
We are seeing that the growth is accelerating partly due to, you know, just general information becoming available. Like this is a problem with being very innovative, right? Like sometimes it's not just that when we, you know, build something completely new, we launch it and then everyone knows exactly how to use it. It's actually everyone has to kind of learn how to put these new tools to best use. Frankly, we have to like observe people using them to then make them even better. This process takes a little while. The nice thing is, we are now getting to a phase where we have been in the market for years with, you know, with some of our earlier channels.
This is now getting to, you know, into the phase of acceleration and, this is why the numbers are growing.
Your next question comes from Jesse Hulsing from Goldman Sachs. Your line is open.
Yeah. Thank you, and good morning. I wanted to follow up on gross margins. This is probably for Russ. Do you expect that the improvements and I guess the trend line in Q4 for merchant solutions gross margins continues into 2017 as Shipping and Capital become bigger contributors? I guess as a sub follow-up for that, can you remind us where you think merchant solutions gross margins can go longer term? Thank you.
Yeah. We see as part of our sort of forecasting and projections that we do that, we'll see continued steady improvement in gross margin percentage for merchant solutions. I mean, it's never gonna be where we achieve on sort of the SaaS component or the subscription side of the business. There's a number of things in play here. As you mentioned, both Shipping and Capital continue to improve our overall merchant. On the Payments side, we're already starting to see operational efficiencies that are improving in North America, our percentage of that we're achieving on Payments. Outside of North America, we currently already get a higher percentage margin on our Payments business.
As that portion expands as part of the overall merchant solutions piece of the pie, we can see some slow but steady improvements, is kind of what we're looking for.
Your next question comes from Tom Forte from Maxim Group. Your line is open.
Great. Thanks for taking my question. How should we think about customer additions for Shopify Plus, those growing on the platform versus those added by your sales force? Thank you.
I mean, our history has been that half of them have been upgrades and half of them have been new additions to the platform. As these even brand new merchants that are starting on the platform today continue to grow, it's a very strong migration path for them that they can get access to additional functionality as well as direct contact with account managers and other support people in the organization. We see both of them continuing to be strong parts of that business.
Thank you.
Your next question comes from Monika Garg from Pacific Crest Securities. Your line is open.
Hi. Thanks for taking my question. A question on Shipping. You know, you have relationships with, I think, USPS and Canada Post you talked about. Could you talk about how you're thinking to add new shippers to your platform, especially in other geographies, and how you're thinking about increasing penetration rate of Shipping over the next couple of years? Thanks.
Yeah. In terms of what we have to date, as you mentioned, USPS and Canada Post were two of the initial partners on that. Also remind people that we also do stuff with UberRUSH and Postmates. That provides sort of same day delivery, which is something important for our merchants. In terms of the focus going forward, it's really adding additional carriers, so either a UPS or a FedEx or maybe even both of those to expand the capabilities of what we're doing in the area of shipping. We will also add geographies, but in a lot of cases, that's gonna be sort of paced by the traditional providers in those places 'cause we need APIs, we need contracts to make all of that happen.
You'll continue to see strong movement on the Shipping side. To date, the product's really focused on people shipping around 150 or less packages in a given month. The product itself will be expanded to provide a solution for those doing a higher volume. Once you get to the higher level, most likely you're using a third- party fulfillment house. As Tobi mentioned, really our job there is to work effectively with those so that the merchant gets a seamless solution as they grow their business.
Your next question comes from Ross MacMillan from RBC Capital Markets. Your line is open.
Thanks very much, and my congratulations as well. Harley, just on Plus, I'm curious, have you already tested the variable pricing with some merchants? Have you got some, you know, intel on the readiness of the base to adopt that? Then second, related to that, can you help us understand how big the GMV from the Plus merchants are relative to the total? Thanks.
Yeah. I'll to start with, in terms of the pricing change, as I mentioned, the pricing change went into effect February 1, and obviously we've been signing Plus merchants since that point. Those that are coming on are well aware of that pricing change. Just keep in mind, relative to the other players in that space, we think we're providing a ton of value, you know, relative to what we're providing them with. The pricing change comes from now having a couple of years of data to look after and understanding what some of the more, the largest merchants are using on our platform. We needed a way to properly reflect their use as well as our costs, and we think this pricing change makes a lot of sense.
Keep in mind that for most people, they're not necessarily selling $10 million on day one, on an annual basis. $2,000 a month is still an incredible value.
On GMV, do you have a rough estimate of Plus GMV versus total?
Yeah. I mean, obviously, as we add more Plus merchants, it's gonna grow relative to Shopify.
Your next question comes from Gus Papageorgiou from Macquarie. Your line is open.
Thanks for taking my question and congrats on the quarter. Russ, can we just touch on capital for a minute? Last quarter, you ended up with $50.5 million outstanding. You closed this quarter at $30 million, and it sounds like you're at $35 million now. Can you just tell us a little bit about the accounting on that? I'm assuming you take provisions up front and your target was about nine-month payback with low teens kind of interest rates. Can you just talk a little bit about how you're accounting for that? If you look into 2017, how big is that $35 million gonna grow to? Second question real quick, can you confirm that you're still committed to reaching operating profitability in 2017? Thanks.
Yeah. I'll answer the second part first. Yes, Q4 2017 is still when we're targeted to hit adjusted operating profit for the company. No change on that. In terms of cash advances, at the end of fiscal 2016, we had advanced about $30 million. Just a reminder, the real importance of doing the cash advances is to really provide working capital to these merchants as they grow their business. As a result of that, a lot of the advances happen pre sort of that holiday period, but the remittances for us are pretty strong during that period.
We ended up, if you look at our balance sheet at the end of the year, at about $12 million of receivables outstanding related to our cash advance program. In terms of the revenue impact, as you mentioned, we recorded really on a net basis, the amount that we earn is spread out over us getting fully remitted on that advance, but we do take the provisions up front. That's reflected in our G&A costs. In terms of the timing, Q4 is a bit of a little bit difficult to predict because the volume's so high that you get paid back a lot in a very short period. We have merchants that are paying back these advances within weeks, months on that side.
In terms of the future amount, we don't have a set goal in terms of how much advances that we were trying to do. Right now it's available to our U.S. merchants, so one possibility is to expand that beyond the U.S.
Your next question comes from Kevin Krishnaratne from Paradigm Capital. Your line is open.
Hi, good morning, guys. Just one question. Any opportunities for you to leverage sort of your retail knowledge to make shopping easier for the consumer? I mean, I know that you're merchant-focused, but just wondering if you've ever thought about potentially even launching your own marketplace. Just thinking about your flash sales app, I think it was called Frenzy, that you launched on Black Friday, which I do think was pretty innovative. Just your thoughts around that.
Yeah, thank you very much. I think Frenzy is a really good example of sort of what we are doing there in this space. Like, obviously a small experiment. They targeted the streetwear industry. The, like, general marketplaces are, as you well know, there's, you know, large and small public companies which essentially only run the marketplace. It's not the kind of thing I think you can add as a hobby attached to the hip of an existing company that looks at something sort of tangential. We're really interested.
I think what we've come down, this is obviously a debate that this company's had since it was founded. If you go, or if you have some fun with a Wayback Machine in shopify.com, you might see us being a marketplace for about 15 minutes somewhere in 2006. We've experimented around with this, but I think we settled on something much more powerful, which is, we represent the 375,000 merchants and all of their product, all their products as sort of a unit.
Through our channel strategy and specifically through the developer tools that are attached to us through the channel SDK, it's very simple for the people who run marketplaces to come and then plug into this merchant base and bring, like, represent all of the products that are going on on Shopify or just the vertical specific ones. We actually think that's a much more powerful position for us because the one issue we have with the being a marketplace is that, you know, the things that we look after are things that people needed actually, like, long before computers, hundreds of years ago. They needed to do their bookkeeping of products and manage their inventory and all these kind of things.
They will still need to do that in 100 years from now. Marketplaces are very much sort of a very, like, a much shorter timeframe kind of thing. The example is, like, if we would be, like, 5, 10 years ago right now, we would very much want to be able to sell our products through Myspace, which of course now is completely without value. Marketplaces come and go, the back office and the kind of boring parts of commerce that we are so good at have a different timeframe. I think the way we work with marketplace through inspired developer tools and then that is one and the other side.
Great. Thanks for the color, Tobi. Appreciate it. Congrats again on the quarter as well.
Your next question comes from Terry Tillman from Raymond James. Your line is open.
Hey, good morning. Practically all my questions have been asked, but I do actually still have one. Harley, oh, by the way, nice job on the quarter. Maybe this is for Harley. In terms of earlier when you were talking about the Plus traction, part of it I think you attributed to the success you've had with signing up agency partners. I guess as you've started to work with them, are you finding that maybe your own sales resources or sales capacity you need to sell Plus is less because they're a lot more productive than you would've thought they would've been, the agency channel that is? Thank you.
Thanks for the question. What we're noticing, just to be clear, the partner program we launched for Shopify Plus is a different program than our traditional partner program really because these are larger agencies that are building online stores and retail operations for much larger brands and larger companies. Previously to Shopify Plus, they really didn't have anything to offer. We've seen a lot of success from them. They're excited about the product. They like the price points that we're at. In terms of them working with the sales team, in some cases, they bring a merchant on to Plus that is fully ready to go and there's no need for sales touch.
In other cases, they work collaboratively with our sales team. Obviously , you know, we adjust our revenue share to them based on that. We find that it's a great partnership between our sales group and those partners. Again, it's still, you know, less than a year old since we launched that Shopify Plus partner program. So far it's going really well.
Thanks.
Your next question comes from James Cakmak from Monness, Crespi, Hardt. Your line is open.
Hi, thanks. This is obviously a big investment year for you guys, especially given the revenue on deck for the year. You mentioned a couple of buckets of investment, infrastructure, growth and Plus. Can you just kinda help us understand the magnitude of investment in each, and then I guess more specifically to that, how much is related to around customer acquisition? Thanks.
Yeah. No real more specifics than what we talked about. I mean, if you think of all three, I mean, it could be a third, a third, a third between those. I think the real important side on the investment is that we can invest in all three to really help build the long-term business here. It's very similar to what we did in 2016. Like, if you look at our adjusted operating loss as a percentage of revenue, we're targeting roughly the same this year. Again, we're doing these very thoughtful. I mean, I think the one that I'll call out a little bit is on the data side. I mean, I think relative to a lot of our competitors and other people in the industry, we just have this wealth of information.
Not only can we use ourselves to be more effective, but putting that now in the hands of the merchants so they can do things that, like figuring out what are the right sales channels, reducing their risk of accepting chargebacks, even on ourselves, making sure that our underwriting is much more sophisticated, I think really add to the value of the platform. I think given again our leadership position and the state of the market, it just really makes a lot of sense to go all in and invest. We're not again talking about incurring big losses and stuff like that. It's gonna be the same thoughtful process that we've applied in the past.
Okay. Your next question comes from Brian Essex from Morgan Stanley. Your line is open.
Hi, good morning. Thank Thank you for taking the question and congrats from me as well. Hey, maybe this one's for Russ. Russ, you know, as we look at , obviously, you know, classic results for the quarter, and, you know, we've called out a couple of things in the past, like your data center spend and a little bit of pressure that that might have on the margins.
As you think about your estimates going or your guidance going forward, what are the primary things that investors should focus on where we just need to keep an eye out and make sure that we don't get ahead of our skis, so to speak, a little bit too aggressive given the strength that you had in the quarter, but pace of the growth that you have, 2017?
I think 2017 will follow a similar pattern to 2016 and even prior years. Q4 is always our strongest quarter. I mean, the fact that the adjusted operating loss was only $800,000 for the quarter, I think should give people a lot of comfort in terms of our projection of being profitable in Q4 of 2017. I think we'll see a little bit more seasonality just because now in addition to the Payments side of merchant solutions for the fourth quarter, we also now have Shipping and the fact that cash advances service such a high level of remittances that obviously ties into the revenue that we generate from that. I mean, the way we look at the business is really MRR and GMV.
I would just keep looking at those two metrics as you really try to sort of get a feel and size of Shopify.
Any way to think about take rate, any all these levels of take rate given the growth of Shopify Plus?
Yeah. The take rate was strong in the quarter, up from the previous quarter. Again, we see slow, steady improvement on the take rate as Shipping and Capital become a bigger piece of the pie, as we add Payments to more geographies, even as merchants themselves get more successful, all of that contributes to that take rate. Again, our internal view is really a slow and steady increase there.
Very helpful. Thank you.
Your next question comes from Todd Coupland from CIBC. Your line is open.
Morning, everyone. I wanted to ask about competitive landscape. Could you give us some color on how much of the merchant count improvement came from share gains and where you're seeing that? I think you've talked about in the past, Magento, you'd picked up some share, and if you could just provide color on that, appreciate it, and whether or not you expect that to continue in 2017. Thanks.
Hey, it's Harley. I'll answer on that Magento question. We've mentioned in the past that particularly for Shopify Plus, we feel that the Magento merchant base is an interesting prospect for us. With the Magento 2 upgrade required, it's just a perfect opportunity for us to start looking at getting those merchants onto Shopify Plus. Certainly that's been a good channel for us for merchant acquisition on Plus. You know, one of the things I mentioned earlier in the call is that a lot of the merchants that we're seeing on Plus as well are new to e-commerce.
Either they were never selling direct-to-consumer before, or it's a celebrity brand like The Weeknd or a Kanye or a Drake who simply never sold merchandise direct to their fan base. Now they're coming to Shopify Plus to do that. Obviously, we're doing these pop-ups in person with them as well. In general, I think on the Shopify Plus side, at least, we are seeing merchants come from all different types of either migrations from other platforms or that are new to the e-commerce game.
Your next question comes from Brad Sills from Bank of America. Your line is open.
Oh, thanks guys for taking my question. Just one on the App Store. Are there any categories that you're seeing, you know, more traction than maybe you would have expected in the quarter or even for the year, you know, across inventory management, accounting, et cetera, just the different categories that you offer? Thank you.
Hey, sorry. I'll take that question too. I think generally across the entire App Store, you're seeing all categories are getting a lot more interest from our merchants. The nice part about Shopify is that, you know, Shopify's core offering does what most people need most of the time. For everything else to really personalize your retail experience, you go to the App Store. No two merchants are the same. You know, if you're selling shoes, you may require some functionality that a T-shirt retailer may not need. All categories are really growing nicely in the App Store, and we're seeing, you know, more apps and more app downloads from our merchants than before. That's really healthy for us and really great for our ecosystem.
Your next question comes from Abhinav Kapoor from BTIG. Your line is open.
Thanks for the question. Just a question on the new Plus pricing, the $2,000 flat fee. Is that going to be applied to all Plus merchants? Because I think earlier, the ones that were graduating up from lower price plans were initially on a lower monthly fee. Thanks.
Yeah. It's Harley. I'll take that question again. Everyone who's on Shopify Plus, existing merchants will be moving to that new price plan eventually. Some of them obviously are in contracts, we'll wait until that contract expires. We are giving a certain six-month period before anyone has to upgrade to ensure that we properly explain the pricing change. For those that are on, that really came on in the early days of Shopify Plus, we're gonna ensure that there's a graduation to that $2,000- a- month price plan. Ultimately, eventually, everyone will be on that new pricing.
Got it. Thanks.
Once again, If you'd like to ask a question, press star then the number one on your telephone keypad. Your next question comes from Eyal Ofir from Eight Capital.
Thanks. Just a quick question for you guys, and congrats on the quarter. As we look into 2017, the cost base, obviously, it seems like you're gonna be investing into the OpEx line heavily as well. Just trying to gauge how we should think about the investment sales and marketing versus the research and development line. Then just another question, obviously, you guys talked about on the revenue front, both mobile being strong and social channels. I was trying to understand if there's a significant correlation between the two, as I would expect there to be one. Thanks.
Yeah. In terms of the expense side, our largest driver expenses is people. We added roughly 1,000 new employees in 2016, and we'll do roughly the same in 2017. In terms of the R&D side, that is really driven by people. I mean, if you look at our ambition and our roadmap, if we can hire faster there, definitely we will do that 'cause every day there's new things that pop up that we could be working on to improve both our position and the platform itself. On the marketing front, Unite, for example, as Harley mentioned, it'll be bigger than the past year, so more dollars go in there.
The Build a Business now has gone from one competition to more of a franchise type approach. Build a BIGGER Business is something that we just recently introduced with Tony Robbins. Other than that, a lot of it's gonna be continued smart spending on advertising associated with that. One area that we've built into the plan is in terms of our infrastructure. Currently, we do use some cloud computing as part of that, in addition to our own data centers. We'll be doing some more work associated with the cloud capabilities in 2017, so there will be a little bit of a duplication there as we'll also maintain our own data centers for this year.
Okay. You don't expect any increase in CapEx then as well then?
Yeah. I mean, as a percentage of revenue, it'll decline. In terms of CapEx, relatively the same on sort of the data center side, certainly as we continue to expand the employee base, we're constantly picking up additional facilities in the many cities that we operate in. Leasehold improvements continues to be a big part of our spend.
Okay, great. If you can comment on the social correlation to the mobile side of the revenue channel, that'd be great too. Thanks. I'll pass the line.
I'm trying to reverse engineer the angle you're coming at this question to give you a proper answer on it. It's interestingly phrased. A nything happening on social and anything happening on mobile, they are highly correlated in the way that they are modern, right? They are new. They are very like, there's a certain group of merchants that is very much looking for the latest and greatest to say, you know, I would like to connect with my customers in a way differently from the way big retailers traditionally have been doing this on the internet. They love everything that's mobile. They have apps in the app stores. They 're on all social channels.
They love things like Facebook Messenger and so on. You know, the nice thing is, and this is really good news for Shopify, is this all the R&D for this happened, you know, like I said earlier, partly due to us discovering some trends, but also partly due to conviction, right? Partly we said, we looked at this and said, hey, this just makes a lot of sense, and we should support this. What you always hope when you do these kind of things is that you find out that not only do they work, they actually work better than what people used to be doing. I think this is what, in this particular case, we found, these approaches all work really well. They are reflected in the sales.
They are high- leverage opportunities for the merchants. What happens then after that becomes clear is that, you know, all the somewhat more conservative folks and larger retailers look at this and saying, hey, you know, this, we believe in this too. We would like some of this. How can we get ourselves some of, you know, these mobile and social capabilities? At which point they go to their existing vendors . This usually ends up in a lot of frustration for them and then that's when they show up on Harley's doorstep and then sign up for Shopify Plus.
This is why, you know, this is how, conviction plus R&D ends up in bottom- line impact after a long circle of, you know, sort of indirection.
Okay. Thank you.
We have no further questions at this time. I will turn the call over to Tobi Lütke for closing remarks.
Cool. Great. Yeah, really, really, I mean, great year. I think I'm very, very pleased. You know, public companies tend to grow in sort of this 90% annual rates usually. It's really fun to manage to pull this off. This is clearly we're thinking internally of this company still as a growth company, much like, you know, just like right after we took our first VC financing and this is how we act. You know, like our little community here is significantly larger now. We, you know, we can work on multiple things at the same time, which is really like I mean, again, for someone who has seen all sizes of this company— The wonderful thing is, you know, a lot of companies when they grow up, they tend to run into problems and they lose focus.
We've always been really good at keeping our focus. This is again, like sort of the marketplace question plays into this. We've really stayed on point of making this physical shippable products, e-commerce better for entrepreneurship and then eventually stretch our market for Plus. That was our focus. The nice thing is now, we can actually be focused on multiple things due to our size. It's not actually that we get distracted by just looking to, you know, what a pop-up store should be, like, and these kind of things. That's really what's going on here within our four walls . I think it's a really, really powerful phase for this business. We continue making our merchants, you know, work easier and more effective.
We're bending down the learning curve that people have to go to approve and building their own online stores. That by itself expands the market, brings more people into, you know, the funnel. They succeed with their businesses and eventually become Plus customers. Yeah, looking forward to the next year. I think the company is in really, really, really good shape right now. Thank you very much for joining us.
This concludes today's conference call. You may now disconnect.