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 speakers' remarks, there will be a question and answer session.
Thank you. Katie Kaida, 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 Toby Lutke, Shopify's Founder and CEO. After Toby'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. Then 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. Also, 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 And finally, note that we report And 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 Toby.
Thanks, Katie, and good morning, everyone. All in all, it was another great quarter number wise, and 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, 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, don't have an obvious impact on the immediate returns.
However, return of those efforts comes over time and I've made it clear in the past that we are all about long term and so this is what I'd like to talk about. The first thing, and 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. And frankly, I think it will be user experience that will continue to set us apart. Then we poll our merchants and talk with them, they absolutely always reference user experience as a primary differentiator that made them on Shopify in 1st 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 2, 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 buyers experience purchasing things from the merchant. Getting this right is just really, really important to us. Over 10% of the Shopify headcount is in our UX team, which is led by our co founder Daniel. I spent 100 of hours in stores talking to merchants, watching merchants, testing for 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
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 a 1000000 requests per minute, which we handled by supporting hundreds of thousands of other merchants at the same time. But 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 important.
The difference between pinching a mobile screen and zooming in, laying 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 mitigate this. A 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 and Android Pay to improve mobile conversion rates. And because time spent on mobile phones keep 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, there's $0 spent on advertising and we only do the power of the platform. In this case, a simple blog post. The recent addition of our Kit Home Card investment brings Kit even more front and center for merchants. So we expect for 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, it is a legitimately great use case. Small businesses today already run on text messages between staff members. And 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, Tobey. 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 you know, Shopify has many different kinds of partners. They build apps, they design themes and refer new merchants to us. Some are operational like Uber Rush, Postmates and USPS and 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. So 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 you know, we added Messenger capabilities to our Facebook channel in April and already there have been more than 1,000,000 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, STK partners, WANELO, Ebates and Howze.
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 RGA, 1Rockwell 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, 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 6th 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 mentioned entrepreneurs. And over the course of the competition's 6 year history, these contestants have achieved over $600,000,000 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. And this is really it, that we're pushing retail into the 21st century and we're doing it for everyone from the start up 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. And that's why merchants come to Shopify and that's why they stay. And 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 and our numbers attest to this. Q2 was the 4th quarter in a row where we grew revenue year on year by over 90%, which speaks to both the size of our leadership position within it. We grew revenue in the 2nd quarter 93% over Q2 2015 to 86,600,000 dollars split almost equally between subscription solutions and merchant solutions.
Subscription solutions revenue grew 72% to $43,700,000 and Merchant Solutions grew 121 percent to 43,000,000 dollars First, the drivers for subscription solutions revenue. MRR at June 30 was 14 point $4,000,000 up 70% year over year. We continue to see strong growth in the number of merchants joining the platform and 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 price plans. Driving merchant solutions revenue, GMV growth accelerated to 106% over last year's 2nd quarter, reaching $3,400,000,000 Not only did we process more GMV, the percentage of GMV processor Shopify Payments grew again as well and we surpassed the $1,000,000,000 mark in Q2 for payments volume processed.
Gross profit dollars grew 83 percent to $46,200,000 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 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 $3,200,000 or 3.7 percent of revenue, compared with an adjusted operating loss of $1,900,000 or 4.2 percent of revenue for Q2 of 2015.
The adjusted net loss for Q2 was $3,000,000 compared with $1,700,000 for Q2 a year ago. We ended the quarter with $179,600,000 in cash, cash equivalents and marketable securities. Looking at our 3 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.
So taking all of this into consideration as we look ahead to the second half, Given the strong results in Q2 and our proved outlook for the balance of the year, we now expect to report full year 2016 revenue in the range of $361,000,000 to $367,000,000 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 $12,000,000 to $16,000,000 smaller than we had previously forecasted. This excludes stock based compensation expense and related payroll taxes of $25,000,000 our forecast for which has not changed. For the Q3, we expect to achieve revenue in the range of $93,000,000 to $95,000,000 and adjusted operating loss in the $2,000,000 to 4,000,000 range, which excludes $7,000,000 in expected stock based compensation expense and related payroll tax. With that, I'll turn it back to Katie to start the Q and A.
Thank you, Russ. Dan, we would like to open the line up for questions now, please.
And your first question comes from the line of Ken Wong from Citigroup. Please go ahead.
Sorry, can you guys hear me now? Okay, I had it on mute.
Yes.
Okay, great. So 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. Yes, no real change. So we continue to get strong growth in sort of all tiers of our target merchant base. So entrepreneurs, who are just starting out as well as Harley talked about at the higher end picking up a number of new plus merchants. So no real change overall and just good strong growth at all levels.
Got it. And then I guess in terms of the commentary around you got half of your customer, your homegrown customers moving up to plus. Can you maybe help us understand kind of what is driving that dynamic? Is 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 to answer that question. So in terms of the upgrades, people that are moving up from lower level plans to Shopify Plus, we're seeing a variety of reasons. And 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.
So for example, perhaps they need
tax compliance.
And so for them, Avalara is really important, which is something we offer to our Plus merchants. So it's a variety of reasons. Some upgrade because they want to do massive flash sale and they want to have that peace of mind and others need particular features. But generally, there isn't one reason.
Got it. Any sense for what percent of your base this offering might eventually make sense for? I mean, 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.
Yes. So I
mean in terms of a percentage of total merchants, I mean 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. But 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. 1, 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?
And then I can't resist to ask Toby this question, so I apologize in advance. But given the success of Pokemon GO, how does he see augmented reality and virtual reality playing out within the e commerce space? Thank you.
Hi, Tom. Okay. So in terms of attach rates, like Shopify payments we set up automatically, right? Like this is like in our sort of world view, we find that the payment gateway you use is sort of a odd implementation detail that traditionally has has been put on the merchants to make a choice over. We want Shopify just simply to be an e commerce system you sign up for, which can receive money and puts it on your bank account.
So it's very important for us to like ship out of a box. That's a very good payment setup. This shipping, it's a similar story. I would say, Vabia is 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. So this is something we've been spending a lot of time on since launching Shopify Shipping, and I think we are making really, really great progress there.
And then about Pokemon GO, I mean, what a phenomenon like it's cool like the wall 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 like just from a data perspective, a wonderful view into sort of global SMB economic activity, right? Like the day after Pokemon Go sort of like first like hit the news and then shipped, one of our trending stores ended up being a store which I've referenced in various meetings before, which makes custom Pokemon jewelry and so on. So you see this kind of and this happens then in Australia and then there are stores in North America which did other things related to this. And then of course, what was wonderful is that there was visibility to through this system called Lures.
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 phone sort of walking into the store and then sometimes also buying things. So this is about a piece of information which we immediately pushed out to everyone through our blog and through the home cards and that drove a lot of activity. But 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? Like this is why, like I'm extremely excited about virtual reality and I think virtual reality is the thing that sets the stage for augmented reality. And the thing that sets the stage for both of those things is location based programs and we are only just stretching the surface.
Like clearly that's applicable for commerce. I'm sure there's going to be channels that you're going to take advantage of these kind of ideas. I think it will have some impact on the future of advertising and maybe it will be a major driver behind what might make smaller sort of additional merchants more competitive again with the big box stores of sort of the last century, right? And so it's really, really cool. And I think 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.
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. 2, if I may. First, can you give us a sense for I know you talked about merchant upgrades driving ARPU growth. What percentage of your existing base upgraded to a higher price plan in the quarter?
And then number 2, it looked like gross margins on merchant solutions improved a little bit. 2 things. 1, what's the trend going forward for that? And number 2, what's really driving that improvement? Is it interchange, a higher percentage of shipping tools?
Just more color around that would be great. Thanks.
Hi, this is Russ. Yes, in terms of the absolute number of upgrades, I don't have the specifics on that, but our whole pricing approach is making the decision on which plan to pick the merchants decision. And so 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. So 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, I think there's really a couple of things. So we do 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. And so both the UK and Australia contributed on the margin side.
And then 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. A question for Harley. 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? And I'm curious of those deals, how many are coming direct versus from partners?
Hey there. Yes, I'll take that question. So in terms of the as I mentioned fifty-fifty 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. So 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. And so 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 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. That traditionally only worked with the largest of enterprise platforms that are now starting to work with us. And so 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. And quick one
for Russ. The guidance for the Q3 implies that profitability should get better. And I think for the Q4, you should be pretty close to breakeven. How should we be thinking about the balance of growth versus profitability as we look forward to 2017 and beyond? Thanks.
So 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 an excellent position competitively and the market continues to grow with new opportunities. So 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 the beginning at your prepared remarks about why you're winning and how you're improving user experience. But 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 reported great results.
Years are probably the best and the most impressive. But there seems to be something going on. E commerce seems to be doing better than it has maybe since the beginning. What is it that you think that you attribute this inflection point to? And how is Shopify capitalizing on that right now?
Yes, I mean, that's a great high level question. I mean, I don't think it's a single thing that's contributing to this. It's a mix of a lot of things, but although I would say at least for people who have been tracking the industry, we're quite predictable. Like I think one like Harley mentioned both store. Like I think one thing you're seeing a lot more for the largest brands 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, we were 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. So there was a much more greater need for this intermediation and going direct to consumer and that happened early. And this is something we are now which has absolutely spread into every nook and cranny of industry of people who create products for consumer goods. I think the other thing is just 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 it 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 our customer acquisitions like Facebook, but also Google. I just they've kind of been figured out.
And so we see just like the ramp being much shorter. And like there's a lot of sort of you just sort of macroeconomical trends like as much as the hipster movement is sort of like about like against everything that exists, they do consume a lot of products and a lot of new brands have been established for them and Visa being serviced for something for things like Shopify stores. And so you have all these kind of trends on the demand side. Now on the supply side, I should really say 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 or 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.
And just I think these sort of experiences like really ground people out and like people were not willing to do this kind of thing anymore. So you saw a lot of this activity simply moved to like Amazon where everyone had with one account with a credit card preloaded and which they sort of understood. And now that the user experience of the rest of the Internet is really catching up with this kind of thing. Do you just see this economic activity to spread over a greater number of like independent businesses again. And I think 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? And now also how big Shopify Plus is? Maybe if you can talk about how many customers in Shopify Plus you have now?
Yes. So 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. But we're also adding lots of new businesses. And so itself, we're less focused on the itself, we're less focused on the number.
We're more focused on the impact that they're having on the platform. But 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 Q4 as well.
Got it. Then the next one, you recently filed prospectus to raise about $500,000,000 from the markets. You have close to $180,000,000 cash on the balance sheet. Maybe you can kind of talk about the need to raise capital? Yes.
Just so 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 29 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, 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.
Sorry, thanks a lot.
Your next question comes from the line of Ross MacMillan from RBC Capital Markets. Please go ahead.
Thanks so much and congratulations on another strong quarter and actually nice to see the operating leverage and on a personal note to get Radiohead on Plus, so congrats. Toby or Harley, just on the Amazon Marketplace integration and controlled release, I guess on one level, the way I think about it is it's going to be profoundly helpful for merchants in terms of reach and therefore GMV growth. But 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.
Yes. So I think it's Harley here. We talked about channels for on the last couple of calls and how important it is specifically because it allows 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.
And so we're hopeful that the Amazon channel will help the merchant sell more. In terms of ways to further monetize, whether it's Amazon or other channels, that will come in the future. Again, our main priority right now is opening up these channels so merchants can sell more. And whether there's the economics will follow, we believe. But keep in mind the reason that we're doing these channels is really because we want our merchants sell more in more places and ultimately we think that a merchant that starts a store in the next couple of years won't just start with 1 channel, but may start with multiple channels.
And as new things come out, you've heard us talk a little bit about VR, that may be a great channel for those merchants continue selling. So 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. And so that's really why this stuff is important.
Great. And just one for Russ. Russ, we noticed that the advanced tier had 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.
Yes. So as I mentioned, we increased Advance. We also renamed it to Advance from Unlimited, which was probably the bigger change that the more important part of that change. In terms of pricing, it's something we look at on a regular basis. I think at the low end, the pricing will stay relatively stable.
I mean, 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 groom there. Even at the advance that I believe it's $2.99 there's still lots of value that we're providing. So we do have some to make the migration a little bit easier in the merchant's mind to justify that.
I think one thing, like the way we post our pricing is that we say that all prices are guaranteed for like about 2 months intervals so that partners can count on prices staying the same. But we do pretty much constantly look at the prices. And 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. So we found the only way to approximate correct pricing that works exactly the way we want is by trying a lot of things.
And so I think you'll see a little bit more of that again.
And your next question comes from the line of Michael Niemarov from Credit Suisse. Please go ahead.
Hi, thanks for taking my questions. Nice quarter. One for Toby. 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 going to 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. And I'm curious if that's something you thought about?
I mean, so I mean, demand we're really targeted a group of people we are not targeting here. Like plus we really sort of like we sometimes we are into the territory of calling it enterprise, but that's still this is actually a mistake we're making because it just it looks really like enterprise looks really, really high up from sort of our baseline. But really, from a perspective of the industry, this is sort of mid market what we're targeting, this plus. However, so 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 6 what the 12 month integration cycles that are done by engineers on Shopify's payroll that look out of offices of their customers and so on. It's just a kind of different form of a company that has their own pros and cons.
And I think we would be I would imagine we would make a poor version of 1 of those because that's just not our home base. So however, the neat thing about Shopify is I think we figured out a way to still get that and that's the partner ecosystem. And I think this is worthwhile just like for me to point out like here, like partners solves a lot of these kind of like issues for us because they are often local, they often have existing relationships with these business. They really understand them. Or commonly from a branding perspective, they might have designed the websites and then build out engineering capabilities.
And 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 and top of our APIs do the kind of customer 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.
Okay. That's helpful. And then 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?
Yes. So 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. So 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.
And 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, there's another follow-up. Presumably you're seeing a lower churn rate as merchants are able to upgrade to the higher end platform. So I wonder if that lower rate is having a material impact on the net merchant growth numbers. And then 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. So yes, you're correct. I mean, 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. But keep in mind that as a percentage of total net new merchants, it's still small.
Again, their MRR and GMV is obviously we really only hired our 1st salesperson, our sales hacker in Q1 of last year. We really only hired our 1st salesperson, our sales hacker in Q1 of last year. And so we're still ramping up the sales team, but we're seeing a lot of early success there. And again, as I mentioned earlier, with the introduction of the new Shopify Plus partner program coupled with sales team, which is ramping up to full capacity, we think things are going really well there.
Okay. And then quickly on Shopify Capital and I sorry if I missed this in the opening remarks, but 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.
Yes. So in terms of the margin profile, our revenue is the amount of the factor rate that we have there, so 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, so just north of $5,000,000 of advances and so well within our capabilities on our balance sheet to continue to fund that ourselves.
We 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 second advance. In fact, we have one merchant now on his 4th advance. The real driver behind this program is to give the merchant 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 and 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 to get a better sense of how that contributions of that growth we saw in the quarter?
Yes. So the take rate went up slightly relative to Q1. I mean, I think it's a number of things. So shipping starting to have an impact to 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.
And the percentage of GMV process through payments that go up in the quarter as well or did your GMV outpace that?
Both. So the percentage 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 and that adding more merchants drives revenue, but having those merchants sell more also drives revenue. So I think we're in a very good position that way.
And maybe if I can sneak one in on the margins. So 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, the impact that investments on the infrastructure side might impact those margins?
So 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, I think you're going to see a number of factors. So obviously more shipping, more advances improves the margin profile as well as 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. And the way we think of this, again, as we talked about before is really the gross profit dollars, which is really what we're focused.
Focused.
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. So merchants kind of need a site shipping and get paid. You guys are already doing this. But 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, Sprinkler, or Clarabridge. Why or why not are those functions on your product roadmap? Thank you.
In terms of the advertising one, I think that's really where Kit comes into play. So it will tell a merchant that you're seeing traffic from Facebook, for example, do you want to advertise, you respond with an SMS message, yes, you do. And then it sort of takes care of the rest. So I think we're already making some inroads there. I think on the support side, I think where we really see some strength of the platform is using some of the messenger capabilities.
As we talked about over a 1000000 unique messages already. And I think that's a good way for the merchant to provide that sort of more customized experience. And so 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? And could you contrast it to Shopify Payments in the early days? Is it being adopted as fast, faster or slower? And 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.
So in terms of your second question, so going from the advanced to the plus is really features as well as some support, hands on support there. So that's the driver. Other than that, it is really just economics on that front. And sorry, what was the first question?
Adoption of Shopify Shipping.
Yes. So relative to payments, it is lower than payments. As Toby 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 the shipping. For merchants that are doing, let's use 150 orders or packages a month, the penetration is 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. And so, we'll continue to grow that both within the U. S. And with USPS, but also as we talked about I think 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 Kaczmarek from Monness, Crespi, Hardt. Please go ahead.
Hi, 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? And if not, kind of what are the hurdles and or potential things you can do to kind of win customers at the next level? And secondly, just Russ on the guidance, what does that contemplate in terms of GMS when you think about the developments in Brexit in Europe?
Thanks a lot.
Hey, sorry, I'll take
the first question. So in terms of Plus and the migrations over, so keep in mind, I mean, our roots and what we're still focus on is really that SMB and so 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. And so Plus is still fairly new in terms of the Shopify story. So educating and making sure that large brands know that story. So 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. And what I mean by that is they need something that works really well, easy to customize and they can get up and running really fast. Toby 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.
And so 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 want to talk about how Justin Bieber and Adele and Radiohead have decided to go direct to consumer using Shopify Plus. And so we're spending time doing that, but 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.
And in terms of the GMS, which I think is Etsy's terms, so GMV is I think what the order volume 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 and then Q4 historically has been that strong holiday shopping season. So 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 fill up in other search?
And then 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 part
of that question around Amazon. So what you're going to see is, I mean depending on the products being sold, you'll see it in different sections. So 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 house, which is specifically for home furnishing and home goods and stuff of that nature. Certainly, we do have merchants that do sell crafts and so you'll see those in other sections of Amazon. But 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.
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 and so 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 that the whole corporation uses. So unlikely to change that. But as we add some other capabilities, including the ability to process things like the Apple Pay, the Android Pay through the Shopify Payments side of it, I think 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.
And we have no further questions at this time. I turn the call back over to Mr. Toby Zutkin.
So thanks very much for joining us. I mean, 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. You talked about what kind of size Shopify Plus like represents in Shopify and on units low. But the really amazing thing about really is that we through our work on the product, through user experience, we're 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. And I think this just so neatly wraps up how aligned everything is in our little world here. We're on the same set of a table as our customers and as our partners. And if any of them do well, everyone else does well. And I think that's really kind of part of the secret of this company.
So with that, thank you very much, and I'll talk to you soon.
This concludes today's conference call. You may now disconnect.