Good morning. My name is Dan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Shopify Q2 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 would 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, you may press the pound key. Thank you. Katie Keita, you may begin your conference.
Good morning. Thank you all for joining us for Shopify's Q2 2016 conference call. Opening today's call is Tobi Lütke, Shopify's founder and CEO. After Tobi's remarks, we will hear from Harley Finkelstein, our Chief Operating Officer, and then Russ Jones, our Chief Financial Officer, will review our Q2 results and our expectations for the rest of 2016. We will open it up for questions. 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 in these statements. 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. Our commentary today will include adjusted financial measures, which are non-GAAP measures and should be considered as a supplement to, 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 are in U.S. dollars unless otherwise indicated. With that, I will turn the call over to Tobi.
Thanks, Katie. Good morning, everyone. All in all, it was another great quarter number-wise. Russ will dive into that later. Product and development-wise, there are a few things I'd like to talk about today, because although you can't see them directly in our quarterly numbers, well, they make a big difference. Unless you're reminded of those things from time to time, it's easy to forget what goes into merchant acquisition, merchant retention, and merchant success. In other words, I'm going to talk about the things that cost money, but don't have an obvious impact on the immediate returns. However, return of those efforts comes over time. I've made it clear in the past that we are all about long-term. This is what I'd like to talk about. The first thing, this is really kind of my wheelhouse, is user experience.
It's just a great place to start because it was user experience that helped Shopify spread like wildfire in the early days. Frankly, it will be user experience that will continue to set us apart. When we poll our merchants and talk with them, they absolutely always reference user experience as the primary differentiator that made them fond of Shopify in the first place. User experience is a really big field, and there's a lot of sort of sub-parts to dive into. The thing we concentrate most about on are two, which is simplicity and performance. Simplicity is the thing you also hear the most referenced. It's just if you get simplicity right, the software simply works. It reduces the learning curve and all these kind of things.
The trick is keeping ease of use intact as commerce becomes more complex. Every new channel added, every new device, every new feature we add, inherently affects the merchant and their interaction with Shopify or the buyer's experience purchasing things from a merchant. Getting this right is just really important to us. Over 10% of the Shopify headcount is in our UX team, which is led by our co-founder, Daniel. We spend hundreds of hours in stores talking to merchants, watching merchants, sifting through data, just to really understand how to solve these core problems. These efforts pay off. Ease of use actually translate to speed for them. Our design decisions, which on the surface might seem small, but which are based on many hours of behavioral research, make setup faster, administration faster, and make purchasing faster.
All these bits of time saved for merchants add up and let them focus more on building the business rather than learning their tools. A great enabler for a lot of this good user experience is the underlying technology infrastructure. This is, again, a clear differentiator. I've talked about flash sales in the past. Merchants come to us and partners send merchants to us because they know despite surges of demand, Shopify performs. One of the most extreme examples recently sustained well over 1 million requests per minute, which we handled while supporting hundreds of thousands of other merchants at the same time. Beyond the flash sales, let's just look at the day-to-day. While app server requests have more than doubled over the past year, we continue to deliver response times faster than 100 milliseconds on average. This matters because speed directly results in more sales.
This is why the addition of Apple Pay and Android Pay to our merchant storefronts is so important. The difference between pinching a mobile screen, zooming in, filling in tiny numbers into a tiny checkout form, or simply doing a single tap and have it all said and done, this is just a profound difference. Additionally, trust and security continue to present a challenge for buyers interacting with brands they are not familiar with yet. Presenting a familiar brand during checkout, like Apple or Android, has mitigated this. The benefit to Shopify is that unlike many other wallets such as PayPal, Apple and Android Pay leverage their existing shops' credit card processing capabilities. This allows Shopify Payments to offer wallet-like experience on these mobile phones, which is going to be very helpful to our GMV footprint.
Most important, we expect the addition of Apple Pay and Android Pay to improve mobile conversion rates. Because time spent on mobile phones keeps increasing, this will increase sales for merchants across the platform. A more powerful driver of sales for merchants, however, is marketing, which brings me to Kit. Kit is doing exceptionally well since joining Shopify in April and has nearly doubled the number of installs on the Shopify platform. Ironically, with zero dollars spent on advertising and really due the power of the platform, in this case, a simple blog post. The recent addition of a Kit home card in the admin brings Kit even more front and center for merchants. We expect the ongoing success that we have seen to continue. Merchants simply love Kit.
I encourage you to read the reviews of Kit in the Shopify App Store because it will give you a taste of just how wonderful and powerful conversational commerce can be. While there are a lot of people super excited about bots who maybe shouldn't be quite yet, Kit is a legitimately great use case. Small businesses today already run on text messages between staff members. Kit, even though it's a computer program, joins this process perfectly. Nothing new to learn. You already know how to talk to it. It's amazing the new ways we can solve problems that have been hanging around for centuries for small businesses. Not only is it fun, it's also very gratifying. With that, I'll hand the mic to Harley.
Thanks, Tobi. Good morning, everyone, and thanks for taking the time to talk about our Q2. This morning, I'll limit my comments to highlights around our partner community and Shopify Plus. In both these areas, Q2 was all about execution, really great execution on the initiatives we announced earlier this year. Let me start with partners. Since our partner conference in late March, called Shopify Unite, we've continued to see our partner ecosystem thrive. As Shopify has many different kinds of partners. They build apps, they design themes, and refer new merchants to us. Some are operational, like UberRUSH, Postmates, and USPS. Some, like Facebook, Pinterest, and Amazon, expand the selling channels our merchants use directly from their Shopify admin to sell more products in more places.
Let me start with these channel partners, since there's a lot going on in this area right now. GMV over our social channels, including Facebook and Pinterest, as well as our buy buttons, while still small, continues to grow even faster quarter-on-quarter than GMV from our online stores, which itself is a fast-growing channel. As we added Messenger capabilities to our Facebook channel in April, and already there have been more than 1 million unique conversations between our merchants and their customers via Messenger. Our first integrated marketplace channel, Amazon, is on track for general availability later this year. Already, and in its limited deployment, merchants have completed thousands of orders over the Amazon channel. Merchants are also now generating sales over the integrated channels built by our new sales channel SDK partners, Wanelo, Ebates, and Houzz.
While all of these are early stage and still small relative to our total GMV, what's important to understand here is that with each new channel made available, merchants are selling more, finding new customers to buy their products in new places. Partners, of course, also continue to be an important source of new merchants for Shopify. Our agency and freelance partners referred thousands of merchants to Shopify in Q2, and a growing number of those partners referred merchants to our Shopify Plus offering. In Q2, we expanded our partner program to include a new segment specifically for Shopify Plus, adding world-class agencies like R/GA, One Rockwell, and Interstellar, who work with some of the largest and best-known brands on Earth.
These partners work with merchants that are looking to evolve their existing commerce strategies, and as we know, Shopify offers a radically different model, which delivers incredible value, so the result is often a perfect fit. Although this program is quite new, these partners have already brought on dozens of new larger merchants to Shopify Plus, and as these ramp up, they will be a powerful complement to our Plus sales team. Speaking of Shopify Plus, Q2 was another stellar quarter for that group, where we added a number of large brands. These include Boeing, Bose, Hallmark, and musicians like Adele, Justin Bieber, and Radiohead, who launched their new album on Shopify. We also added Ubuntu as a merchant, which is selling support contracts for users of its open-source software. I love this example because it shows the versatility of the Shopify platform.
With the progress we made in Q2, it is easy to see why Shopify Plus' contribution to MRR and GMV grew in the quarter, as it has every single quarter since inception. Average MRR per Plus merchant has expanded, as we have now been able to capture more value for more deals more consistently as our sales organization has evolved. Once again this quarter, about half of the new Shopify Plus merchants in Q2 were homegrown. That is, they upgraded from lower price plans. The move we mentioned last quarter into our new Plus office in Waterloo, which gives us ample room to grow, is now complete. Finally, no discussion of the Q2 would be complete without mentioning the winners of our sixth Build a Business competition, which has become one of the largest and most impactful entrepreneurial competitions on the planet.
This year, the competition once again drew thousands of newly- minted entrepreneurs. Over the course of the competition's 6-year history, these contestants have achieved over $600 million worth of sales, which is remarkable considering they were all brand new businesses when they signed up for the competition. In fact, that is what makes the Build a Business competition so great. These winners are entrepreneurs whose businesses didn't even exist at the start of last year. Now, while they may not be the well-recognized big brands I mentioned earlier, one day they could be. This is the market Shopify was built for and who we target because all of them can grow to be future Shopify Plus merchants and never have a reason to leave Shopify. The future of retail looks nothing like it did 10 years ago.
It is far more data-driven, far more efficient, and easier than ever for merchants to connect with their customers. Transactions are more seamless than ever. Investors often ask me what makes Shopify different. This is really it, that we're pushing retail into the 21st century, and we're doing it for everyone, from the startup entrepreneur to some of the largest global enterprises. It's about so much more than just online versus brick-and-mortar. It's about helping people sell, period, wherever, whenever, and however. That's why merchants come to Shopify, and that's why they stay. With that, I'll turn the call over to Russ to finish up.
Thanks, Harley. I will second what Harley said. Q2 was a quarter of solid execution, our numbers attest to this. Q2 was the fourth quarter in a row where we grew revenue year-over-year by over 90%, which speaks to both the size of our market and our leadership position within it. We grew revenue in the Q2 93% over Q2 2015 to $86.6 million, split almost equally between Subscription Solutions and Merchant Solutions. Subscription Solutions revenue grew 72% to $43.7 million, Merchant Solutions grew 121% to $43 million. First, the drivers for Subscription Solutions revenue. MRR at June thirtieth was $14.4 million, up 70% year-over-year.
We continue to see strong growth in the number of merchants joining the platform. The number of Shopify merchants now exceeds 300,000. We also benefited from higher subscription revenue per merchant as we had more merchants either upgrade to or onboard on higher priced plans. Driving merchant solutions revenue, GMV growth accelerated to 106% over last year's Q2, reaching $3.4 billion. Not only did we process more GMV, the percentage of GMV processed through Shopify Payments grew again as well, and we surpassed the billion-dollar mark in Q2 for payments volume processed. Gross profit dollars grew 93% to $46.2 million. Here, both Shopify Shipping and to a lesser degree, Shopify Capital helped contribute to this. Q2 results also reflect improved operating leverage both year-over-year and sequentially.
Overall, adjusted operating expenses as a percentage of revenue declined to 57% versus 61% in Q2 of 2015 and 62% in Q1 of 2016. Most of this improvement came from higher sales and marketing leverage. As a result of our improved performance and leverage, our adjusted operating loss for the Q2 of 2016 was $3.2 million or 3.7% of revenue, compared with an adjusted operating loss of $1.9 million or 4.2% of revenue for Q2 of 2015. The adjusted net loss for Q2 was $3 million, compared with $1.7 million for Q2 a year ago. We ended the quarter with $179.6 million in cash equivalents, and marketable securities.
Looking at our three focus areas of investment for 2016, as Harley said, Shopify Plus has expanded into its new headquarters. Our new partner program is off to a good start, and the new sales hackers hired in the first half are currently ramping. With regard to the build-out of data center capacity, we continue to explore the various European alternatives and are planning to add capacity to our existing infrastructure this quarter and early next ahead of the holiday retail season. Instead of a single large merchant conference, we've decided to focus on a larger number of industry conference and city-specific events, which we are finding to be very effective.
Taking all of this into consideration as we look ahead to the second half, given the strong results in Q2 and our improved outlook for the balance of the year, we now expect to report full year 2016 revenue in the range of $361 million-$367 million. Given the improved operating leverage in Q2 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-$16 million, smaller than we had previously forecasted.
This excludes stock-based compensation expense and related payroll taxes of $25 million, our forecast for which has not changed. For the Q3 , we expect to achieve revenue in the range of $93 million-$95 million and adjusted operating loss in the $2 million-$4 million range, which excludes $7 million in expected stock-based compensation expense and related payroll tax. With that, I'll turn it back to Katie to start the Q&A.
Thank you, Russ. Dan, we would like to open the line up for questions now, please.
At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile a Q&A roster. Your first question comes from the line of Kenneth Wong from Citigroup. Please go ahead.
Oh, sorry. Can you guys hear me now? I had it on mute.
Yep.
Okay, great. You guys added over 25,000 merchants. You guys are up to 300,000 now. Any notable changes to that composition of kind of these net new 25,000 that are coming in that you could perhaps share with us?
This is Russ here. No real change. We continue to get strong growth in sort of all tiers of our target merchant base. Entrepreneurs who are just starting out, as well as Harley talked about, at the higher end, picking up a number of new Plus merchants. No real change overall and just good, strong growth at all levels.
Got it. In terms of the commentary around, you got half your customer, your homegrown customers moving up to Plus, can you maybe help us understand kind of what is driving that dynamic? Is it purely they're growing beyond the core capabilities of the lower offering? Is it just they wanted the higher touch, maybe specific capabilities? Any thoughts on what you're seeing there?
Hey there, it's Harley here. I'll answer that question. In terms of the upgrades, people that are moving up from lower level plans to Shopify Plus, we're seeing a variety of reasons. In some cases, they need more dedicated account management or dedicated support. Some of them need specific features that are only offered to Shopify Plus, things that they may be specific to their business. For example, perhaps they need tax compliance, and so for them, Avalara is really important, which is something we offer to our plus merchants. It's a variety of reasons. Some upgrade because they wanna do a massive flash sale, and they want to have that peace of mind, and others need particular features. Generally, there isn't one reason.
Got it. Any sense for what % of your base this offering might eventually make sense for? It seems like it's probably compelling for more than just a pure, larger enterprise type of a customer, with so many of your homegrown guys already moving up there.
In terms of a percentage of total merchants Plus, the number of Plus merchants is still relatively small, although obviously their impact on the business is much larger. They pay more money. They sell more products, and certainly, we're able to capture that through things like merchant services. In terms of what that eventually split is going to be, that remains to be seen.
Your next question comes from the line of Tom Forte from Maxim Group. Please go ahead.
Great. Thanks for taking my question. Two questions. One, I wanted to know, what in particular are you doing to drive the attachment rates for the shipping and the payments offering, and to what extent is that working? I can't resist to ask Tobi this question, so I apologize in advance. Given the success of Pokémon Go, how does he see augmented reality and virtual reality playing out within the e-commerce space? Thank you.
Hey, Tom. Okay. In terms of attach rates, like, Shopify Payments we set up automatically, right? Like, this is our in our sort of worldview, we find that the payment gateway you use is sort of a odd implementation detail that traditionally has been, like, has been put on the merchants to make a choice over. We want Shopify just simply to be a commerce system you sign up for, which can receive money and puts it on your bank account. It's very important for us to, like, ship out of a box with a very good payment setup. With shipping, it's a, it's a similar story.
I would say there we are still experimenting exactly how to introduce it because the thing is, your shipping processes are simply more heavily ingrained in the existing business than like just the way money takes before it hits your bank account. That's just a lot more flexibility. This is something we've been spending a lot of time on since launching Shopify Shipping, and we are making really great progress there. About Pokémon Go. What a phenomenon. Like, it's cool. Like, the world, it happened so fast, and what was really exciting for me personally was just watching what happened on Shopify.
Like, I've often, sort of said that Shopify is actually a, like, just from a data perspective, a wonderful view into sort of global SMB economic activity, right? Like, the day, like, the day after Pokémon Go sort of like first, like, hit the news and chip, one of our trending stores ended up being a store which I've referenced in various meetings before, which makes, custom Pokémon jewelry and so on. Like, so you see this kind of. This happens then in Australia, then there are stores in North America which did other things related to this. Then, of course, what was wonderful is that there was this ability to through this system called Lure. A lot of our customers told us that they were attracting a lot of new buyers into their stores by placing those Lures and having lots of people.
With their noses in their phones sort of walking into the store and then sometimes also buying things. This was a piece of information which we immediately pushed out to everyone through our blog and through the home cards. That drove a lot of activity. I think, like, just zooming out a moment, like, here's a great example of the things that we just can't kind of predict, right? This is why I'm extremely excited about virtual reality and virtual reality is the thing that sets the stage for augmented reality. The thing that sets the stage for both of those things is location-based programs, we are only just scratching the surface. Clearly that's applicable for commerce.
There, I'm sure there's going to be channels that are gonna take advantage of these kind of ideas. It'll have some impact on the future of advertising, and maybe it'll be a major driver behind what might make smaller sort of artisanal merchants more competitive again with the big box stores of sort of the last century, right? It's really cool. And we are well prepared for very quickly to not just like allow, like help create software to take advantage of these new trends, but also just push information into the network so that people can help themselves when something like this new happens. Yeah.
Your next question comes from the line of Darren Aftahi from Roth Capital Partners. Please go ahead.
Hey, guys. Thanks for taking my questions, and congratulations. Two if I may. First, can you give us a sense for merchant upgrades driving ARPU growth. What % of your existing base upgraded to a higher price plan in the quarter? Number two, it looked like gross margins on merchant solutions improved a little bit. Two things. One, what's the trend going forward for that? Number two, what's really driving that improvement? Is it interchange? A higher % of shipping tools? Just more color around that would be great. Thanks.
Hi, this is Russ. In terms of the absolute number of upgrades, I don't have the specifics on that. Our whole pricing approach is making the decision on which plan to pick the merchant's decision. On higher plans, you get, for example, better credit card processing rates, or if you're not using Shopify Payments, you get a lower transaction fee. Also the way we've designed shipping, you get higher discounts the higher the plan. It's really an economic decision. With the exception of Plus, as Harley mentioned, there are some capabilities only available on the Plus side. On the margin, there's really a couple things. We do, or we are seeing some improvements in terms of the overall interchange rates that we are getting charged.
As we expand that beyond North America, we do get better results there. Both the U.K. and Australia contributed on the margin side. This quarter, we did start to see some positive impact from both shipping and to a lesser extent, Shopify merchant cash advances.
Thanks.
Your next question comes from the line of Terry Tillman from Raymond James. Please go ahead.
Hi, this is Brian Peterson in for Terry Tillman. A question for Harley Finkelstein. Just wanted to hit on the Shopify Plus customers that are new to the platform. Are those typically greenfield or are you replacing another technology vendor? I'm curious, of those deals, how many are coming direct versus from partners?
Yeah, I'll take that question. In terms of the, as I mentioned, 50/50 for Q2 in terms of upgrades versus brand new to Shopify, of the 50% that are new to Shopify, it's a mix. Some of them have never actually sold direct to consumer before. In the case of Bose, it's a new product, which is a speaker system that you can build your own speaker system. That is a new product to the market, and so they obviously did not migrate. In other cases, we are seeing companies that are migrating over from some of the more traditional enterprise platforms. There's a healthy mix there.
In terms of the partner program that I mentioned earlier, we've had a very large and a very successful partner ecosystem for a long time. The big change in the last in the last quarter is that we're now going after partners that traditionally only worked with the largest of enterprise platforms that are now starting to work with us. It's still early days, but we suspect that the partner ecosystem will be a very strong driver of new merchants on Plus in a similar way that it has been to the rest of Shopify.
Awesome. Thanks. Quick one for Russ. The guidance for the third quarter implies that profitability should get better, and for the fourth quarter, you should be pretty close to break even. How should we be thinking about the balance of growth versus profitability, as we look forward to 2017 and beyond? Thanks.
In terms of our view of profitability, it still remains Q4 of 2017. As we talked about, I think, investing back into the business is the key thing we can do right now. We're in a excellent position competitively, and the market continues to grow with new opportunities. We'll continue to invest there. Some of the improvement on the top line, though, will fall to the bottom line, as we've forecasted.
Your next question comes from the line of Gil Luria from Wedbush Securities. Please go ahead.
Thank you. I want to use my question for a high level one. You talked a little bit at your prepared remarks about why you're winning and how you're improving user experience. If you took a big step back, e-commerce in general, is, it seems to be at an inflection point. There's been several e-commerce companies that have reported great results. Yours are probably the best and the most impressive. There seems to be something going on. E-commerce seems to be doing better than it has in maybe since the beginning. What is it that you think that you attribute this inflection point to? How is Shopify capitalizing on that right now?
That's a great, high-level question. I don't think it's a single thing that's contributing to this. It's a mix of a lot of things that although I would say, at least for people who have been tracking the industry, were quite predictable. One, like Harley mentioned, the Bose store. Like, one thing you're seeing a lot more for the largest brands and as well, is that there's just a lot of disintermediation, like a lot of people are going direct.
This, when Shopify started like a decade ago, the hoping this would one day be the case, and we kind of got it confirmed by the fashion industry because the fashion designers really had a very limited way of getting in front of their customers. They usually had to go through some runway in Milan and then, of course, got all their products copied by H&M and so on. There was a much more, greater need for disintermediation and going direct to consumer, and that happened early. This is something we are now, which has absolutely spread into every nook and cranny of the industry of people who create products for consumer goods.
The other thing is just, like, it almost sounds weird to reference this, but entrepreneurial savviness is a major factor here. Like, we can actually see this if you compare the cohorts over the years of the people starting completely new businesses. We have ways of detecting this in our data. It just doesn't take people time anymore to build big businesses. People have figured out how to do advertising, how to reach customers, how to do, like, new platforms for customer acquisitions like Facebook, but also, Google. They've kind of been figured out . We see just like the ramp being much shorter.
Like there's a lot of sort of you just sort of macroeconomic trends. Like as much as much as the hipster movement is sort of like, about like against everything that exists, they do consume a lot of products. A lot of new brands have been established for them and these are being serviced through something, through things like Shopify stores. You have all these kind of trends on the demand side. Now, on the supply side, or at least, like I should really bring this to the user interface.
Like finding an online store, even that had products like 5, 10 years ago, often meant like you added a product to your cart and then you couldn't figure out where to click next. You had to create a customer account and create a new password before you could even see a form that you could enter a credit card. It just, these sort of experiences like really ground people out and like just people were not willing to do this kind of thing anymore.
You saw a lot of this activity simply move to like Amazon, where everyone had one account with a credit card, preloaded and which they sort of understood. Now that the user experience of the rest of the internet is really catching up with this kind of thing, you just see this economic activity just spread over a greater number of like independent businesses again. That's like sort of what you're seeing in the market.
That's very insightful. Thank you.
Your next question comes from the line of Monika Garg from Pacific Crest. Please go ahead.
Hi, thanks for taking my question. Very strong GMV growth. Can you talk about is it due to adding larger new customers or growing your existing customers? Now also how big Shopify Plus is. Maybe if you can talk about how many customers in Shopify Plus you have now.
Yeah. In terms of the GMV, the answer is really both. We are adding a number of large merchants who are doing a sizable amount of business through the platform. We're also adding lots of new businesses, and so collectively, those are having a pretty strong impact. In terms of the merchant number for Plus itself, we're less focused on the number. We're more focused on the impact that they're having on the platform. As we said at the end of last year, we had over 1,000 merchants on Shopify Plus. That's a number we'll probably update at the end of the fourth quarter as well.
Got it. The next one. You recently filed prospectus to raise about $500 million from the markets. You have close to $180 million cash on the balance sheet. Maybe you can talk about the need to raise capital.
Just as a bit of a background. In Q2, we became eligible under the MJDS as a dual-listed company to file a shelf registration. As a result, we did so effective July 29th and issued a press release. The shelf really provides flexibility over the next 25 months. In terms of specific financing plans, we do not plan to comment until there is something to disclose, at which time we'll issue another press release on that. If we do nothing over that 25 months, most likely we would renew it for another 25 months.
Got it. Thanks a lot.
Your next question comes from the line of Ross MacMillan from RBC Capital Markets. Please go ahead.
Thanks so much. Congratulations on another strong quarter, especially nice to see the operating leverage and on a personal note to get Radiohead on Plus. Congrats. Tobi or Harley, just on the Amazon Marketplace integration and controlled release. I guess on one level, the way about it is it's going to be profoundly helpful for merchants in terms of reach and therefore GMV growth. Are there any other ways that you would think about how it could impact your business beyond merchant acquisition and GMV growth? Are there any other potential ways to monetize that? Thanks.
It's Harley here. We talked about channels for on the last couple of calls and how important it is specifically because it allows our merchants to sell in more places. Certainly allowing merchants to sell more on a place like Amazon, we think is a great idea. As I mentioned in my opening comments, it's still in limited release, but we're already seeing these merchants that are participating in that beta selling thousands of products. We're hopeful that the Amazon channel will help our merchants sell more. In terms of ways to further monetize, whether it's Amazon or other channels, that will come, that will come in the future. Again, our main priority right now is opening up these channels so merchants can sell more.
The economics will follow, we believe. Keep in mind, the reason that we're doing these channels is really because we want our merchants to sell more in more places. Ultimately, we think that a merchant that starts a store in the next couple of years won't just start with one channel but may start with multiple channels. As new things come out, you've heard us talk a little bit about VR, that may be a great channel for those merchants to continue selling. It's really important that whatever merchant is selling, wherever their customers are hiding on the Internet, that we're providing them with a direct channel to sell there. That's really why this stuff is important.
Great. Just one for Russ. Russ, we noticed that the Advanced tier had a price increase this last quarter. Maybe you could just help us understand the rationale there and more generally on pricing. How do you think about making modifications to pricing? What's the strategy that you're following as you think about tweaks to pricing? Thanks.
Yeah. As I mentioned, we increased the price of the Advanced. We also renamed it to Advanced from Unlimited, which was probably the bigger change or the more important part of that change. In terms of pricing, it's something we look at on a regular basis. At the low end, the pricing will stay relatively stable. Really our goal there is to make pricing a non-issue in terms of people coming to the platform. At the higher end, particularly on Plus, we have increased the price versus last year, and we still believe there's upper room there.
Even at the Advanced that, I believe it's $299, there's still lots of value that we're providing, so we do have some flexibility there as well. A little bit of this was just to sort of as we increase the high-end increase that one as well, just to make the migration a little bit easier in the merchant's mind to justify that.
One thing, like the way we post our pricing is that we say that all prices are guaranteed for, like about in two months intervals so that partners can count on prices staying the same. We do, like, pretty much constantly look at the prices. Especially, in years prior, we've made a lot of tweaks just because getting pricing right is really, really difficult. It's actually probably impossible. We found the only way to approximate correct pricing that works exactly the way we want is by trying a lot of things. You'll see a little bit more of that again.
Your next question comes from the line of Michael Nemeroff from Credit Suisse. Please go ahead.
Hi. Thanks for taking my questions. Nice quarter. One for Tobi. I'm curious if you're tempted, given the recent acquisition of Demandware by Salesforce to expand into providing large retailers more of a customized solution set like Demandware offered, given that they're gonna be part of a closed platform, how you would think about that going forward. I know that the Plus product is doing well, but there's an opportunity at some of the larger customers in Plus to grab all of their GMV if you do that. I'm curious if that's something you've thought about.
Demandware really targeted a group of people we are not targeting here. Like, Plus, We really sort of like we sometimes veer into the territory of calling it enterprise, but that's still. This is actually a mistake we are making because it just, it looks really. Enterprise looks really, really high up from sort of our baseline. Really from a perspective of the industry, this is sort of mid-market what we are targeting, the, this Plus. However, that being said, like, we as a company don't want to build out the kind of things that Demandware has, like this massive group of services, right?
Like the six or the 12-month integration cycles that are done by engineers on Shopify's payroll that go out of offices of their customers and so on. It's just that's a kind of different form of a company that has their own pros and cons. We would be, I would imagine, a poor version of one of those because that's just not our home base. However, the neat thing about Shopify is we figured out a way to still get that, and that's the partner ecosystem. This is worthwhile.
Just, like for me to point out, like here, partners solves a lot of these kind of issues for us because they are often local. They often have existing relationships with these businesses. They really understand them. Or commonly from a branding perspective, they might have designed the websites and then built out engineering capabilities. Now these same groups that have trust relationships with these larger merchants and larger businesses now can come in and on top of our platform, on top of our APIs, do the kind of custom integration into the financial accounting systems and the ERP systems and all these kind of things which are traditionally done first party. That's how we are thinking about it.
That's helpful. A follow-up for Russ, if I may. I'm just trying to understand what the economics would be for integrating Apple Pay and Android Pay, just so people don't get the wrong impression. How would you generate money and what would the impact be on the gross margin and payments related to that?
Where they really play is allowing the merchant's customers to transact more easily with that merchant. For the merchant, if they're using Shopify Payments, then that'll flow through like any credit card transaction. That'll just be a normal thing from our side. If they're not using Shopify Payments, chances are they're using one of the gateways that we have a rev share, and so we'll benefit from that as well.
Your next question comes from the line of Colin Sebastian from Robert Baird. Please go ahead.
Thanks, guys, and congratulations on another very good quarter. On Shopify Plus, as another follow-up, presumably you're seeing a lower churn rate as merchants are able to upgrade to the higher end platform. I wonder if that lower rate is having a material impact on the net merchant growth numbers. Secondly, with the new Plus sales team coming on board, what should our expectations be for them in terms of moving the needle, either on number of new Plus merchants or merchant volume overall? Thanks.
Hey there, it's Harley. Yes, you're correct. The churn rate for merchants on Plus is certainly low. It's in line with the norms for enterprise SaaS companies that you guys will see. Keep in mind that as a percentage of total net new merchants, it's still small. Again, their MRR and GMV is obviously proportionally higher than a typical Shopify merchant. In terms of the number of merchants, that number is still pretty small. In terms of salespeople on Shopify Plus, again, as you'll recall, we really only hired our first salesperson, our sales hacker, Q1 of last year.
We're still ramping up a sales team. We're seeing a lot of early success there. Again, as I mentioned earlier, with the introduction of the new Shopify Plus partner program, coupled with a sales team which is ramping up to full capacity, we think things are going really well there.
Okay. Quickly on Shopify Capital, I Sorry if I missed this in the opening remarks. Did you talk about what level of adoption you're seeing to date for this and how much additional capacity you have to fund these advances, and then also the margin profile of that program? Thanks.
Yeah. In terms of the margin profile, our revenue is the amount of the factor rate that we have there, so a really high margin profile. In terms of the adoption, it just got really publicly announced earlier in the quarter. We are seeing a significant increase in the amount of advances. It's still relatively small, just north of $5 million of advances, well within our capabilities on our balance sheet to continue to fund that ourselves. We'll continue to explore other ways to finance that as well as to reduce the risk of that program. Interesting thing there is, just so people are aware, the dollar amounts that we're advancing range from $2,500 up to $50,000 is the largest one we've done.
In terms of the people that have paid off their advance, the majority of them have gone for a 2nd advance. In fact, we have one merchant now on his 4th advance. The real driver behind this program is to give the merchants some working capital to grow their business, and that's fundamentally why we're doing that. Just as an interesting side note, we had one merchant that, shortly after the advance had a flash sale and ended up paying the whole thing back within 10 days. Kind of unique.
Your next question comes from the line of Brian Essex from Morgan Stanley. Please go ahead.
Hi, good morning. Thank you for taking the question. I was wondering if you could talk a little bit about the take rate and how much contribution that might be from increased penetration of GMV versus mix, just so we get a better sense of how the contributions of that growth we saw in the quarter.
Yeah. The take rate went up slightly relative to Q1. It's a number of things. Shipping starting to have an impact. To a much lesser degree, capital is having an impact. We're trying to get more of the Plus merchants on payments, so that'll have a positive impact going forward. As well as now that we've expanded payments into Australia, covering our sort of key core markets, that's adding an impact there as well.
The % of GMV processed through payments, did that go up in the quarter as well, or did your GMV outpace that?
Both. The % of GMV going through payments went up as well as the overall GMV went up, which is kind of the really sweet spot with our business model in that adding more merchants drives revenue, but having those merchants sell more also drives revenue. We're in a very good position that way.
Maybe if I can sneak one in on the margins. Nice progression in the margins, but I understand you've got that data center build coming up or at least center investments. How should we given the expansion that we've seen to date, how should we think about margins going forward and the impact that investments on the infrastructure side might impact those margins?
Historically, on the subscription side, Q3 and Q4, as we sort of ramp the investment, drops the margin a little bit there. On the merchant solutions, you're gonna see a number of factors. Obviously more shipping, more advances improves the margin profile as well as expansion outside of payments outside of North America. On the flip side, as we do try to get more Plus merchants, that will have sort of a bit of a headwind in terms of that margin percentage. The way we think of this, again, as we talked about before, is really the gross profit dollars, which is really what we're
Your next question comes from the line of Richard Davis from Canaccord. Please go ahead.
Thanks. Most of my questions have been answered since I'm pretty far back in the queue. Merchants kinda need a site shipping and get paid. You guys are already doing this. They also need kind of advertising and provide customer support, which we're seeing from several vendors. They call it customer experience, whether it's Medallia, Sprinklr, Clarabridge. Why or why not are those functions on your product roadmap? Thank you.
In terms of the advertising one, that's really where Kit comes into play. It will tell a merchant that you're seeing traffic from Facebook, for example, do you wanna advertise? You respond with an SMS message, yes, you do, it sort of takes care of the rest. We're already making some inroads there. On the support side, where we'll really see some strength of the platform is using some of the Messenger capabilities. As we talked about over 1 million unique messages already. That's a good way for the merchant to provide that sort of more customized experience. That's probably the way that we'll tackle that for certainly the foreseeable future.
Okay.
Your next question comes from the line of Gus Papageorgiou from Macquarie. Please go ahead.
Hi. Thanks for taking my question. Russ, could you just talk a little bit about Shopify Shipping and adoption rates in the U.S. where it's been launched? Can you give us a sense of what proportion of the merchant base in the U.S. has adopted that solution? Could you contrast it to Shopify Payments in the early days? Is it being adopted as fast, faster or slower? Then a follow-up question, if I can. Your average revenue per merchant seems to be doing quite well, up quite significantly year-over-year. Is there a revenue level that kind of triggers these merchants to go into the higher tier plan, or there are other factors that would motivate them to upgrade the plan? Thanks.
In terms of your second question, going from the advance to the Plus is really features as well as some support, hands-on support there. That's the driver. Other than that, it is really just economics on that front. Sorry, what was the first question? Adoption of Shopify Shipping.
Yeah. Relative to payments, it is lower than payments. As Tobi talked about, like, payments is somewhat ubiquitous. You just need to be able to accept credit cards, where there's a lot more involved in terms of internal company processes relative to shipping. For merchants that are doing, let's use 150 orders or packages a month, the penetration's quite high there. Above that, you start to see merchants starting to use more fulfillment services who also then do the shipping piece of it. We'll continue to grow that, both within the U.S. and with USPS, but also, as we talked about, in the past, like we're fairly early in our journey on shipping, and so adding other geographies and other vendors, is kind of the next phase of that.
Your next question comes from the line of James Cakmak from Monness, Crespi, Hardt. Please go ahead.
All right. Thanks. Harley, you talked about successes in winning Plus customers away from an established enterprise players. Can you talk about kind of the reasons that these customers feel comfortable coming to you? If not, kinda what are the hurdles and/or potential things you can do to kinda win customers at the next level? Secondly, just Russ, on the, on the guidance, what does that contemplate in terms of GMS when you think about, the developments with Brexit in Europe? Thanks a lot.
Hey, sorry. I'll take the first question. In terms of Plus and, and the migrations over, keep in mind, our roots and what we, what we're still focused on is really that SMB. Educating the market that we can actually handle some of the largest brands in the world, some of the largest flash sales in the world is really important. Plus is still fairly new in terms of the Shopify story. Educating and making sure that large brands know they can come to us and they can do massive flash sales is super important. A lot of the reasons why those migrations happen tend to be for either cost, ease of use, or time to market.
What seems to be happening is a lot of these, a lot of people that work within these large companies that are looking to go direct to consumer on brands, with their brands are, they're acting like entrepreneurs. What by that is they need something that works really well, easy to customize, and they can get up and running really fast. Tobi alluded to the fact that some large enterprise, e-commerce companies, you can take 12 months to get set up. In 2016 that is just not right and, unfortunately that doesn't work for them.
We're seeing a lot of these defectors coming over from these other more traditional enterprise platforms looking for just a better solution that they can get fast and easy and without many headaches. Beyond that, one of the things that we're still working on is ensuring that we don't just bring on these big brands, we talk about these big brands. We wanna talk about how Justin Bieber and Adele and Radiohead have decided to go direct to consumer using Shopify Plus. We're spending time doing that. It's still early days for Plus, but certainly it's a growth area within a growth company, so there's a lot of potential there.
In terms of the GMS, which is Etsy's term, GMV is what the order volume that we talk about. You saw in absolute dollars a big increase from Q2 up from Q1. Generally what we see is again, a smaller increase going from Q2 to Q3, then Q4 historically has been that strong holiday shopping season. We'd expect it there. We don't provide guidance on specific GMV, though.
Your next question comes from the line of Sam Kemp from Piper Jaffray. Please go ahead.
Great. Thanks. Two questions, if I may. First, on the Amazon integration, where do you expect most of that inventory to appear on their site? Would that be mostly within the handmade section, or do you think that a lot of the merchant inventory will show up in other search? Second, on payments, obviously a large portion of that non-Shopify Payments, GMV is going through other gateways and payment options that your larger merchants are using. Can you just talk about what are the key steps to getting them to convert from using their existing payment format to Shopify Payments? Thanks.
Hey, it's Harley. I'll take the first part of that question around Amazon. What you're gonna see is you're depending on the products being sold, you'll see it in different sections. For example, if a merchant wants to cross-sell some sort of home furnishing on Amazon, you may see that on the main marketplace, but they also may cross-sell on Houzz, which is specifically for home furnishing and home goods and stuff of that nature. Certainly, we do have merchants that do sell crafts, you'll see those in other sections of Amazon. The nice part about a partnership with a company like Amazon and allowing merchants to cross-sell is they can select what is the best venue given the type of product they're selling.
And then. Sorry, in terms of the payment side, for the merchants that are upgrading to Shopify Plus, the majority of them are already on Shopify Payments. No issue on keeping them there. In terms of ones that are coming to, like sometimes it's a corporate decision on what payment gateway the whole corporation uses, unlikely to change that. As we add some other capabilities, including the ability to process things like Apple Pay, Android Pay through the Shopify Payments side of it, we'll see some there. We do have to be more aggressive in terms of the pricing because those are kind of the ones that other gateways target as well.
We have no further questions at this time. I turn the call back over to Mr. Tobi Lütke.
Thanks very much for joining us. We had a couple of great questions there. Like one thing which I love about Shopify Plus again is these homegrown success stories that we've talked about a bit. We talked about what kind of size Shopify Plus like represents within Shopify and on unit flow. The really amazing thing about the business really is that we, through our work on the product through user experience, through increasing the simplicity, through making it faster and more approachable, we can actually have a meaningful impact on the businesses of our customers and actually help produce more future Plus customers.
This just so neatly wraps up how aligned everything is in our little world here. We on the same side of the table as our customers and as our partners, and if any of them do well, everyone else does well. That's really kind of part of the secret of this company. With that, thank you very much, and I'll talk to you soon.
This concludes today's conference call. You may now disconnect.