Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Shopify's Q3 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'd like to withdraw your question, press the pound key. I would now like to turn the call over to Shopify's Head of Investor Relations, Katie Keita. Please go ahead.
Good morning. Thank you all for joining us for Shopify's third quarter 2016 conference call. On today's call is Tobi Lütke, Shopify's Founder and CEO. We'll be hearing from Harley Finkelstein, our COO, and then Russ Jones, our CFO, will review our third quarter results and our expectations for the rest of the year. We will open it up for questions. Now for the most riveting part of today's call. During today's discussion, we will make forward-looking statements which 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 contained in our press release this morning, as well as in our filings with securities regulators in both Canada and the U.S. Also, our commentary today will include adjusted financial measures, which are non-GAAP measures and should be considered as a supplement to, and not 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 USD, so all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I will turn the call over to Tobi.
Thanks, Katie. Good morning, everyone, and thanks for joining us today. Before I get started, I'd like to welcome Gail Goodman to our Board of Directors. Gail was always full of fantastic advice over the years when we interacted and talked about Shopify, and she has built one of the SaaS companies that I've always admired most. I'm really looking forward to working with her more closely. Because Russ and Harley are here to talk about the things that make headlines, like revenue growth and new brands joining Shopify Plus, I'd like to use my time on these calls to talk about the things that sort of fly under the radar, but which are actually, you know, very important parts of implementing our strategy. Since our IPO 18 months ago, we've been pretty clear about the strategy.
We focus on entrepreneurs, by making product decisions that facilitate their success, a lot of good things follow. Today, I want to talk about three of those things we shipped in this quarter, and I think those will make a big difference for our merchants. It's no secret that we are all spending a lot of time on mobile and usually in apps. To help merchants take full advantage of these trends, last quarter we shipped Mobile Shopify, Sell on Messenger and Apple Pay. First, we launched our new Mobile Shopify app. This was in September. With it, merchants can now do much more than they ever could on their phones.
They can now start a business directly on mobile Shopify, view financial reports, communicate across their team members, with our timeline feature and get insights on just how to grow their business through our home cards. These new mobile apps are a milestone for us. We built them from ground up to be more than just simple companion apps. They're important and full-featured as our web interfaces. This means that anyone can now start and run an entire new online business from their pocket, which I think is really cool. Second, this past quarter, we took our integration with Facebook Messenger beyond customer service and order notifications and built the ability to sell directly on Messenger. Messenger as a channel is unique.
When we integrated Messenger onto the Shopify platform about six months ago, we gave our merchants the ability to connect directly and personally with their customers. Since then, tens of thousands of merchants have started actively using the Messenger channel. Such conversations are form within which commerce can happen really naturally. In many ways, this conversational commerce recaptures what we miss about in-person buying and selling, having the seller on hand to answer questions and guide us through the purchasing process. Apple Pay on our web went live for Shopify merchants in September. I talked on our last call about the difference this should make for conversion rates, that's exactly what's happening. Our merchants are seeing up to twice as many conversions on mobile than without Apple Pay.
The shift of payments to Apple Pay is powerful for commerce, but it's just one of what will be many alternatives for online transactions. For too long, these transactions have been unnecessarily hurdle to e-commerce adoption. As bizarre as it is, commerce on the Internet has always been an afterthought. What I mean is this: web browsers had exactly zero helpful features for e-commerce. They could play music, render 3D graphics, render musical notations and other bizarre niche features that they couldn't, like that they had, but they couldn't transfer money. You can see the effects of this history everywhere. Look at the publishing industry and all the paywalls that they have to put up as an afterthought.
Every online store had to invent its own checkout and ask for a credit card and address over and over again. We believe commerce is one of the primary uses of the internet. We are working hard convincing social platforms, web browsers, and Messengers, and even operating system vendors to adopt transaction brokering into their systems to make it easier and more secure for everyone. We work with them to make it happen and support it with our collective merchants. Commerce online essentially has been an afterthought, it's been kept kind of small. Now that people are increasingly spending their online minutes on platforms that support it, we see new momentum for e-commerce. The momentum will not be limited to apps.
We believe commerce over web browsers will also benefit due to Apple Pay and others soon to follow, partly thanks to the efforts of a W3C standards body, which we are actively involved with. Our thesis is that commerce per hour is going to be higher when people engage with platforms that support commerce natively. This is what we see happening with Apple Pay, and it's still early days. The good news is that Shopify merchants should always be amongst the first to benefit from any of these moves, given our focus on the future and our strong desire for them to thrive. With that, I'll turn the call over to Harley.
Thanks, Tobi. Good morning, everyone, and thanks for joining us on our call this morning. I'm excited to talk about this past quarter as we added a record number of new referral partners to our program, a record number of new merchants to Shopify Plus, and our Shopify Plus Partner Program is off to a great start. First, I want to talk about our most recent acquisition. We now have some incredible new talent at Shopify Plus with the acquisition of Boltmade, a Waterloo-based software development agency we had the pleasure of getting to know over the past year. This acquisition brings a strong group of designers and developers that we expect will play a large role in building out Shopify Plus and help world-class brands offer exceptional retail experiences to their customers. The Boltmade team is already off and running in our Waterloo offices.
In service of our partner ecosystem, we continue to expand this incredible community globally. This past quarter, these partners not only referred a record number of new merchants to Shopify, but the merchants that they brought on joined at higher value plans than in previous quarters. This is due in part to the new Shopify Plus-focused Partner Program that we launched in June. We initially launched that program with more than 40 partners and experts, and we now have grown to more than twice that number today. We really understand how important our partners are to our ecosystem, and we're always looking for ways to further engage them and further support them. Not only do we have a dedicated team of region-specific partner managers, we also provide a host of programs, meetups, and education each quarter to support their growth.
This past quarter, we went a step further and expanded our Shopify Partner Accelerator program from New York to now include Montreal, London, and Austin. This partnership with WeWork gives our network of developers and designers office space to grow their businesses. It's an incredible opportunity for our partners, and we're excited to be part of their journey. This is but one of many things we do to keep building out a knowledgeable, loyal, and highly effective network of Shopify-centered professionals. It is important not to overlook the value that our third-party app developers bring to Shopify. These partners extend the functionality of what the Shopify platform can deliver beyond the core mission-critical e-commerce capabilities. The average monthly spend per merchant on apps has grown consistently over the past couple of years, which tells us merchants are deriving greater value from our app ecosystem.
This isn't because we're offering more apps, but because we continually strive to lead merchants to the apps that will make them more effective and successful in running their businesses. Since launching Shopify Plus almost two years ago, about half the Shopify Plus merchants have been homegrown businesses that started on Shopify, and this is something that we're very proud of. This quarter, while the number of upgrades to Shopify Plus continued to increase, notably, more than half of the new Shopify Plus merchants were brand new to Shopify. This is the result of a number of new growth initiatives, including our new Shopify Plus Partner Program and our most recent marketing campaign for Plus, which successfully helped merchants migrate to us from legacy e-commerce platforms.
The Shopify Plus program itself is expanding nicely with GMV and revenue from Shopify Plus merchants growing even faster than overall Shopify GMV and revenue. Our expanded team of sales hackers was a strong source of new merchants, with many of the recent additions to the sales team now fully ramped up. Their efforts, along with those of our partners, brought us some recognizable brands in the quarter, including the Game of Thrones store from Penguin Random House, the American Kennel Club, T-Mobile, CrossFit, Seth Godin, Macy's cosmetic brand, Bluemercury, Lady Gaga, and one of my wife's favorite shops, Fred Segal. We also signed a global agreement with Nestlé that makes it easy for any of their 200+ brands to spin up a store on Shopify Plus quickly and easily.
As an update to our Amazon channel integration, we moved into beta in Q3 and will be making it publicly available to our merchants in late Q4. This integration is a great example of how we're helping merchants expand their audience directly through Shopify's platform. Regarding shipping, we established a solid foundation for Shopify Shipping in its first 12 months, with one in five of our U.S.-based merchants using it. More recently, we expanded Shopify Shipping with the addition of Canada Post in September of this year. Even with all our success to date with Shopify Plus and our partner ecosystem, we feel like we're just getting started. We continue to expand the capabilities of our platform through our partners and feel strongly that the vast majority of the opportunities for us and for them lies ahead.
This is what makes Shopify so great for merchants, partners, and employees alike. A quick thank you to all of you who are building alongside us and taking our mission of making commerce better to heart. With that, I will turn the call over to Russ to finish up. Russ?
Thanks, Harley. We're pleased to report another strong quarter all around, where we again delivered rapid growth, continued leverage, and steady progress on our strategic and product initiatives. Starting with revenue, we grew revenue in the third quarter 89% over Q3 of last year to $99.6 million, split approximately equally between Subscription Solutions and Merchant Solutions. Subscription Solutions revenue grew 69% to $49.8 million due to the continued expansion of the monthly recurring revenue, which stood at $16.3 million on September 30th. This represents an increase in MRR of 67% over last year's third quarter as new merchants continued to join the platform. We surpassed 325,000 merchants in the quarter. MRR per merchant also went up as more merchants either joined on or upgraded to higher-priced plans in the quarter.
Merchant solutions revenue grew 114% to $49.7 million in the quarter. 100% growth in GMV to $3.8 billion, of which $1.5 billion was processed on Shopify Payments accounted for the majority of this revenue increase. Revenue from Shopify Shipping and Shopify Capital also contributed to the growth. In the 12 months since launch, Shopify Shipping's penetration has established a solid foundation with approximately 20% of U.S. merchants using it. Shopify Capital also reached an important milestone recently, surpassing $20 million in cash advance since inception. At the quarter end, this number stood at $15.5 million, with a sharp increase since the end of Q3, likely due to merchants preparing for the holiday season.
Approximately 70% of merchants that have fully remitted in advance have opted for a second one, indicating the central role Shopify can play in facilitating our merchants' growth that might otherwise be crippled by traditional working capital financing constraints. Our agreement signed in September with Export Development Canada will help us to expand this program with, while maintaining appropriate levels of risk. Gross margins improved year-on-year for both subscription solutions and merchant solutions, which was aided by Shipping and Capital as these incremental revenue streams are recorded on a net basis. The continued results of these improvements was an acceleration in the growth of gross margin dollars to 82% from 77% in Q3 of last year. Adjusted operating expenses as a percentage of revenue came down both year-on-year and quarter-on-quarter.
Overall adjusted operating expenses as a percentage of revenue declined to 55.55% versus 58% in Q3 of 2015, and 57% in Q2 of 2016. As a result of our improved performance and leverage, our adjusted operating loss for the quarter was $2.2 million or 2% of revenue, compared with an adjusted operating loss of $2 million or 4% of revenue for the third quarter of last year. The adjusted net loss for Q3 was $1.8 million, compared with $2.4 million for Q3 a year ago. On a per-share basis, this was $0.02 for Q3 of this year, an improvement from the $0.03 loss for Q3 of last year.
We ended the quarter with $400 million in cash equivalents and marketable securities, with our successful follow-on offering in August, adding net cash of approximately $224 million to the company. Looking at the three major investment areas we outlined at the start of this year, starting with Plus. Some of the biggest investments in Plus this year are the new Waterloo office, the establishment of the Plus Partner Program, hiring and marketing programs, and the acquisition of Boltmade. R&D spending in Q4 will reflect the impact of this acquisition, which further strengthens the Plus product development team. As we said last quarter, we continue to evaluate our data center infrastructure options with the plan for this year to only increase the capacity of our existing ones to meet the demands for the holiday season.
On the merchant and partner engagement front, we are wrapping up our retail tour in the U.K., which we coordinated with the launch of our EMV reader there in Q3. With this in mind, turning to the 2016 outlook, we now expect to report full-year 2016 revenue in the range of $379 million-$381 million. Given the improved operating leverage in Q3 and the stronger revenue outlook for the full year, we expect to report a full-year adjusted operating loss in the range of $12 million-$14 million. This excludes stock-based compensation expense and related payroll taxes of $26 million, which are $1 million higher than our previous forecast due to the impact of the higher share price on our employee equity grants as well as the acquisition of Boltmade.
This means that for the fourth quarter, we expect to achieve our first $100 million quarter, which we came close to in Q3. We expect revenue in the range of $120 million-$122 million and adjusted operating loss in the $1 million-$3 million, which reflects the Boltmade acquisition and excludes $9 million of expected stock-based compensation expenses and related payroll taxes. We'll talk about our outlook for 2017 with our fourth quarter report in February. I'll share a few closing thoughts on how we see the future shaping up. Certain industry trends have been very favorable for us. We see continued strong demand by merchants looking to leverage our multi-channel commerce platform.
On top of this, there has been, and we expect to continue to see very rapid growth trends in online retail, which has driven GMV per merchant higher quarter after quarter. While these provide reliable tailwinds for continued strong growth, we believe the primary reason we will continue to gain share of this growing pie is, as both Tobi and Harley referenced, our strategic focus on merchant success. This means continually reevaluating the platform capabilities necessary for merchants to thrive at every stage of growth and also investing in the partnerships and projects that we believe will help future-proof their success. Although these will require investments, some with longer payback periods than other, we continue to feel comfortable with our profitability target for the fourth quarter of 2017. With that, I'll turn it back over to Katie to start the Q&A.
Thank you, Russ. Because we have so many listeners wanting to ask a question, in order for everyone to get a question in, we ask that questioners limit themselves to one question. With that, Denise, could we please open the line for questions?
At this time, I'd like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We'll pause for a moment as questions come into queue. Your first question comes from Kevin Krishnaratne with Paradigm Capital. Your line is open.
Good morning. A question for you. It's great numbers. Wondering if you could speak to trends on ARPU and on subscription revenue. It looks like the revenue on subscription revenue per merchant is going up nicely. I'm wondering, based on your comments in the quarter, would there have been notable impact from Plus? Is that from uptake of more apps, or would that be simply from merchants upgrading into a higher -tier plans? Thank you.
Hi, this is Russ. Yeah, it's really all of those factors as Harley mentioned. Q3 was a record quarter for new Plus merchants coming to the platform. In addition to that, we are seeing with the higher pricing of the advanced program, some merchants coming and picking that plan as well. Just in general, lots of new merchants. In the quarter, we also seen the revenue from the sale of apps, themes, and domains a little bit stronger as well.
Thank you.
Your next question comes from Monika Garg with Pacific Crest Securities. Your line is open.
Thanks for taking my question, Russ. You know, on the yearly guidance, revenue guidance, you are raising midpoint $15 million, but operating loss, you know, is going lower by only $1 million. Maybe the reasons why we are not seeing more leverage. Boltmade, how much is operating expense it's adding in Q4? Thank you.
Yeah, I mean, I think consistent with what we said in the past, like we're still in a fairly heavy investment mode. Q4, in particular, we need to make sure that we have all the infrastructure and the people in place to support the merchants through that holiday period. The main change from our previous guidance is the Boltmade acquisition, which will result in about $1 million-$1.5 million of expense hit in Q4.
Thank you.
Your next question comes from Jesse Hulsing with Goldman Sachs. Your line is open.
Yeah. Thank you for taking my question, and good morning. I have two quick questions on Plus. First, you mentioned your team is becoming ramped to productivity. I'm curious what your forward hiring plans are for Plus. Second, when you look at the legacy platforms that have been share donors to Plus over the quarter or the last couple quarters, I'm wondering if there's anyone that stands out. Thank you.
It's Harley. I'll take this question. I'll start with the second question just about the legacy platforms. We did have a marketing campaign going for the majority of Q3 that really targeted Magento migrations. That was really the primary focus of that campaign. We are now expanding our migration campaign to include some other legacy platforms. It is really the initial one was geared towards Magento. On the first question about how many salespeople do we have, certainly that sales team continues to grow. We also now have a better sense of how long it takes to fully onboard a salesperson, so they get to capacity fairly quickly. You will see that team continue to grow. Currently it sits around 30 people on the sales team.
Your next question comes from Kenneth Wong with Citi. Your line is open.
Hi, guys. Thanks for taking my question. I'm just wondering, have you guys taken a look into just your customer metrics heading into holiday season? I just wanted to get a sense of how it might compare to last year since, you know, I think, you know, last year was a little softer, not necessarily from you guys, but just retail in general. I just wanted to see what the macro and retail backdrop is, heading into the busy season.
I mean, we're seeing very good growth in GMV. I mean, again, in Q3, we doubled year-over-year. Interestingly enough, the GMV for Q3 was greater than the total amount that we did in 2014. We continue to see very strong growth of our merchant base. I mean, it's with 325,000 merchants now on the platform, it's difficult to predict the exact number, but definitely nothing that we're seeing would indicate a slowdown there.
Sorry, go ahead.
I was just gonna say thanks, Ken. Next question please, Denise.
Your next question comes from Michael Nemeroff with Credit Suisse. Your line is open.
Hey, guys. Thanks for taking my questions. I'm just curious, Russ, the payments penetration spiked this quarter. I'm wondering what caused that. When I look out in Q4 for merchant adds, last year was a fairly strong quarter of merchant net adds. Do you think that the merchant adds in Q4 of this year could outperform what you did last year? Or was there something special about last Q4? Thanks.
Yeah. I'll take the first question on the payments penetration rate. I mean, we've had now more merchants being added in all the core geographies that we have payments, penetration continues to move up in the North American market. U.K. now we're at around 75% of the merchants are using Shopify Payments. In Australia, which we launched in Q4 of last year, we're already now at roughly 60%. That penetration is really just as these are available in our key markets and we're onboarding lots of new merchants, we'll see that number to continue to grow. In terms of the merchant adds, I think it'll again be strong in Q4.
The thing to be a little bit careful of there is during the year, we just announced when we achieve milestones, and then we provide a more indicative number at the end of the year. Depending on when we pass the particular milestone within a quarter, the Q4 number could look larger or smaller based on that.
Thanks, Michael. Next question, please.
Your next question comes from Gil Luria with Wedbush Securities. Your line is open. Hello, Gil Luria, your line is open. Your next question comes from Terry Tillman with Raymond James. Your line is open.
Morning. I got one question, six parts. No, I'm kidding, Katie. My question relates to the Shopify Plus business. I mean, can you all quantify a little bit more in terms of how material it is now? Related to this, as you are having partners, whether they are referral partners or actually agency partners that sell it, is that actually allowing you to not have to invest as much in direct sales resources for that Shopify Plus business? Thank you.
I mean, on a relative basis, Shopify Plus, in terms of the merchant count, is a small piece of our 325,000 merchants. In terms of the MRR that we derive from them and the GMV that they process through the platform, certainly a higher impact on that. I think on the partner side, in a lot of cases, we still will work with that partner as we wanna get them up to speed, and it does reduce the amount of effort on our part. We're still in the early stage of that Partner Program, definitely still some effort required there. A lot of these partners are the same partners that would've maybe years ago got them up on Magento, and now they've moved to the Shopify platform.
It really is gonna help us ramp that program.
Thanks, Terry. Denise, next question, please.
Your next question comes from Gus Papageorgiou with Macquarie. Your line is open.
Good morning. Thanks for taking the question. Just on my calculations here, it looks like the average revenue per merchant in the quarter was up about 28% year-over-year. I'm wondering, is that a fair representation of what's going on, for your average customer, or is it that, you know, there's a cluster of customers that are doing really well and, a bunch, and then everybody else is suffering? If you have time for a second question, I'm wondering if you could quantify how many, how much of your customer base came from, Amazon's web stores. How significant, was that? Thanks.
Yeah. I'll let Harley take the Amazon question. In terms of your first one, it's really the whole merchant base continues to perform. I mean, one of the key elements of our business model is, one, the subscription piece, and then secondly, once we have those merchants, we can gain a greater share of their wallet. Whether it's payments, where in the quarter we processed one and a half billion dollars worth of payments, whether it's shipping, whether it's Capital or cash advances, all of those add to that. I think that's really the strength of Shopify.
Hey, it's Harley. I'll take the Amazon migration question. As you know, now that migration is over and we've received all the merchants we could from Amazon. As a percentage of total merchants on our platform, it is of course, a very small percentage. What it did do is it did two things. It was an endorsement to the industry that Amazon thought us we were a great product, which was fantastic. We also got merchants onto Shopify that may have not otherwise came onto Shopify as well. As a percentage of the total 325,000 merchants, it was fairly small.
Would it have influenced the Q4 adds last year?
It really took place this year. I mean, once the original announcement, we started to get merchants right away. It should also be noted that we, as part of our partnership with Amazon, they will continue to refer us other merchants as well.
Okay. Thanks for answering the questions.
Your next question comes from Brian Essex with Morgan Stanley. Your line is open.
This is Ivan Holman pitch hitting for Brian. Thanks for taking the question. Could you help us understand what the uptake of Shopify Capital is? Are we seeing a meaningful contribution there as we enter the holiday season? How do you anticipate it will impact your balance sheet, and how do you decide how much risk to take on? Thank you.
Yeah. Good question. In part because of a successful follow-on offering, I think we can do a little bit more on Shopify Capital with our own balance sheet. The addition of the insurance by EDC allows us also to ensure that we're not taking unduly risk on that side of it. I think what you've seen, as we talked about even since the end of Q3, is a lot of additional cash advances were provided to the merchants. The key for us on the Shopify Capital is not so much that we can make a good return on that, although obviously that's an important piece of it. It's more that for a lot of these merchants, it's difficult to get working capital financing. We're meeting a real need there.
Those merchants are then growing their businesses, which make them stickier on the platform. Because they're using Shopify Payments and in a lot of cases now Shopify Shipping, we also partake in that as well.
Thank you.
Your next question comes from James Cakmak with Monness, Crespi, Hardt. Your line is open.
Hi. Thanks. As you guys ramp up your efforts in Plus, how should we think about the metrics? You know, will there be kind of a change in the growth profiles, you know, across your merchant base and your MRR base as we, you know, put what seems like a lot more emphasis on Plus, so potentially a slowdown, you know, in the customer count number, but uptake in MRR? Secondly, just real quick on the follow-on offering, if you could just talk about how you're thinking about it. You mentioned the Shopify Capital, but just, you know, how we should think about using that as well.
Yeah. In terms of our core metrics, I don't see Plus really changing that. Really the ones that we're care most about is the MRR. Obviously, having a Plus merchant at a much higher price point helps to grow that MRR number. Then because of the sort of nature of these large brands, the GMV, which is our other key metrics, we'll see growing as well. So I think what you'll see is good growth there, in part due by adding some of these larger merchants. In terms of the follow on, I mean, it was designed to strengthen our balance sheet, which a good use of that cash is for the merchant cash advances.
It also gives us flexibility to do acquisitions similar to the Boltmade one that we did in the quarter and the Kit one earlier this year. We're constantly looking at the sort of founder-led companies that have a great team that can help advance our roadmap.
Thank you.
Thank you, James.
Your next question comes from Richard Davis with Canaccord. Your line is open.
Hey, good morning, guys. It's DJ on the line. I'm not sure if this is better for Russ or Harley, but, you know, we occasionally get questions around customer churn, just given, you know, your SMB core, and this is generally a higher churn market. I know this is a bit of a misleading metric for you guys as you have some really small customers. I guess my question is there a certain GMV threshold that a merchant gets to where you see a step function improvement in retention? You know, any way you can kind of approximate what percent of your 325,000 customers are over that threshold?
Yeah. I mean, for a lot of merchants, they just like the platform as their sort of web presence as well. I wouldn't say that there's any threshold. The thing we find is if there is going to be people leaving the platform, generally it's because they're closing their business, and that happens within that sort of first three to six -month period. Once you, as a merchant, start getting some sales, time to that first sale is something that we're always looking at how do we improve that for the or help the merchant improve that, the churn potential goes down significantly.
Got it. Thanks.
Your next question comes from Ross MacMillan with RBC Capital Markets. Your line is open.
Thanks for taking my question, and congrats on the quarter. Hey, Russ, I was just curious, the merchant solutions gross margin was actually down sequentially, and I would have thought that as capital and shipping pick up in the mix, that would have driven a higher gross margin. Was there anything to say there as to why it was down sequentially? Then just one quick follow-on. We've noticed in the filing that your marketing dollar spend on AdWords and social actually has been down sequentially for the last couple of quarters. I just wondered if that was seasonal or whether there was any shift in spend as you begin to drive more investment into partner programs or similar. Thanks.
Yeah. I would say in terms of your second part on the advertising, we continue to invest in acquiring more merchants. That's kind of the key for us, particularly since we can then partake in a greater wallet share. I would say in Q1, the Shopify Unite program is one that, excuse me, drove up some of the spend there, so that didn't happen in Q2, Q3. That would be my only sort of rationale there versus deliberately us cutting back on the spending. Sorry, can you repeat your first question?
Just on the gross margins for Merchant Solutions, those were down sequentially. They've been going up since the third quarter of last year sequentially. You know, I would have thought that maybe as the net revenue line items, i.e. shipping and capital, expand in the mix, that we would have seen Merchant Solutions gross margins up sequentially, but they were actually down sequentially. I was just wondering if there's any color as to why.
I mean, there's some real tailwinds that will help that margin. As you mentioned, Shopify Shipping and Shopify Capital are key parts of that. The other one is internationally, we do get a higher margin on the Shopify Payments business. As the U.K. and Australia continue to ramp, and now we've launched in Ireland, that will help there. In terms of the headwind, we are getting a little bit more aggressive to get Shopify Plus merchants on Shopify Payments. For these larger merchants who have larger volume, it is more competitive.
It's something that we think is the right thing in terms of the gross profit dollars. You may see quarter to quarter a little bit of fluctuation as the opportunity to get some Plus merchants on there is something that we target.
Great. Thank you.
Your next question comes from Tom Forte with Maxim Group. Your line is open.
Thank you for my questions. On social, how should investors think about the adoption rates for consumers when it comes to the buy buttons and social networks? How has that progressed to date? Do you see any catalyst for that in the future, such as improving take rates for mobile payments? What other catalyst could there be to drive adoption for the buy buttons in social? Thank you.
Hey, this is Tobi. Thanks. You know, my main reason why Katie asked for like us one question only is because I sort of have one of those one-question brains. I'll try my best to take that from the top. Generally, what you're looking for is like how we are feeling about, you know, social and buy buttons and all these kinds of things. They're all growing. They're all growing. Like every one of these channels we launched has been growing faster than, you know, the online store, which means they're catching up in some cases, like completely admittedly, but some small numbers, especially when you compare them against the full platform. Like, we mostly concern ourselves with trend lines, and both are looking fantastic.
The zooming out a little bit, the amazing thing that's going on the platform, and I think this is kind of the more important point. The amazing thing that's going on is 1.5 years ago, you know, not even on the platform, 1.5 years ago throughout the industry, almost everyone who fits the profile of our customers chose a channel for their business. They chose a go-to-market strategy for the products. We've completely removed that choice, and it's now an I'm going to, you know, go Facebook, I'm gonna do Instagram, I'm going to give Twitter a go, because, you know, why not? I also will have my website.
I think this has been leading a significant percentage of people on the platform to success. Because, you know, every product has kind of a different sort of native idiomatic place for where it will connect best with its customers. You know, again, as I said in the intro, Messenger platform is just really promising. I don't think we've like, have it completely figured out. With we, I mean, not just Shopify, but also Facebook and like the people who make these platforms. It's such a powerful idea because in a lot of ways, the development of the internet actually took away this sort of going into a store, having a conversation with a shopkeeper who understands the product and then making purchasing decisions.
Like all the messaging platform efforts are doing, we are actually reintroducing the thing we took away from people, and there's no need to validate a demand for this. Everyone intuitively understands that this is the way people want to do this. We are just sort of negotiating exactly the form this is going to take. I'm actually feel like I'm really happy. I'm looking at all these platforms. There's a ton of our customer base now selling across multiple channels as a percentage, which is really important. Things are looking I'm really thrilled with what's going on there.
Thank you, Tobi.
Your next question comes from Brad Sills with Bank of America. Your line is open.
Oh, hey, guys. Thanks for taking my question. Just one on the App Store. Could you provide a little color, please, on, you know, which categories you're seeing more traction and if any of those categories would make sense for at some point, Shopify to offer, you know, in the platform itself.
Hey there, it's Harley. I'll take that question. In terms of core functionality that we would do ourselves, Shopify's core offering will always do what most people need most of the time, but that definition is dynamic. For example, you know, years ago, there would've been apps in the App Store that allowed you to mobile optimize your site. Today, mobile is just something that needs to get baked into the core functionality of Shopify because it's such a mainstay feature for our merchants. We're constantly reevaluating, you know, what the product needs. The idea really is that the core offering does what most people need most of the time, and everything else you're able to get via the App Store.
In terms of the first part of the question around app categories, if you look at the App Store today, the categories are vast. It ranges everything from shipping to analytics to things like marketing. It really does depend on the particular needs of the particular merchant. They're, you know, obviously, when you're just getting started, you may be playing around with a bunch of marketing apps, and eventually, once you know, have an email, an email list or a list of customers, you may decide to do some email marketing, which comes sort of after that. You really only need analytics and more reporting once those apps, once you start selling at scale. It really depends on the period of time and where the merchant is in their own life cycle.
That's the reason why we need to offer apps that are really important for particular merchants' needs and not something that is a one-size-fits-all.
Great. Thanks.
Your last question comes from Todd Coupland with CIBC. Your line is open.
Yes. Good morning, everyone. I wanted to ask about Nestlé. I thought it was interesting you've added a large enterprise there. Are you able to expand into other large enterprises? Is this something we should expect in the coming quarters?
Hey there, it's Harley. I'll answer that question. The way things work with Nestlé and what we've been seeing is that one of these large brands, one of these multinationals comes to us because they need to get something up and running fairly fast, but it has to be robust, and it has to be easy to customize. They'll start with some sort of smaller store with Shopify Plus. What tends to happen is they enjoy the experience so much, they tend to bring on more of those stores and more of their other properties as well. In the case of Nestlé, they just had a great experience.
Shopify Plus is unlike anything they've encountered from any other enterprise platform in the past, and so they wanted to make it really easy and extremely fast to get any of their other brands up. Nestlé is a great one, of course, because as I mentioned in my opening remarks, they have more than 200 brands. So this sort of model is something we're experimenting with Nestlé, but certainly something that I suspect may happen with other big brands as well.
Thank you.
We do have one more question from Eyal Ofir. Your line is open. Well, from Dundee Capital, your line is open.
Just a quick question for you on the Apple Pay take-up. It looks like you guys have seen pretty good pick-up, take-up from the merchant base. I'm just wondering from an actual merchant solutions standpoint, how should we think about from a revenue for Shopify?
Yeah, that's the nice thing about Apple Pay is, as Tobi mentioned, the conversion rate's higher, and it also is much quicker to complete the transaction when the customer has Apple Pay. From the Shopify platform, that's just like any other credit card coming through the platform. If that merchant is on Shopify Payments, which the majority of them are, then we see that like any other revenue.
Okay. You don't have to split that piece or, I guess a portion of it, you just now split it with Apple Pay instead of, instead of, I guess, your other third-party suppliers.
That's right. That's right. From our point of view, it's like any other credit card transaction.
Okay. Perfect. Thanks.
There are no further questions at this time. I turn the call back over to Katie Keita here.
Thanks, Denise. Thanks everybody for dialing in today. We have a few closing remarks from Tobi.
Thanks. Thanks for joining us again. I think we demonstrated again that we release a lot of product. We are thinking a lot about what, you know, things will become important in the future in our industry. Increasingly, of course, we are trying to influence this because I think we have a little bit of a clearer vision for where all these things have to go.
This sort of move of getting transactions built into the operating systems we use every day and, how much, like just even pointing out how much of an afterthought commerce has been on the internet is something that, you know, has been very clear to us for a long time, but is actually, fairly surprising to people when I mention it, for them first time. This is sort of a role we want to play.
We are like, step by step, bit by bit, we are gonna make it so that in five, 10 years, everyone's gonna ask, "Why were things this way at beginning of a decade?" "Why did we not develop all these things which are clearly used every day by hundreds or maybe even billions of people? Why were they not there from the beginning?" That's the direction we are working towards. In a more immediate, sort of, short term, we're gonna go into Black Friday, Cyber Monday, time of a year, which is of course a big deal in our North American market, which is still a very large percentage of our customer base. This is always like, it's fun.
Like, we all get together in big rooms and look at massive screens with all these telemetry data. It looks sort of like a company getting together for like a nerdy version of Super Bowl, if you will. We make sure everything is gonna run really well, all, you know, everything is fast, people are gonna have good sales, that's sort of the next thing on the plate for us. We'll speak again, I guess, next quarter. Thank you.