Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Shopify Q1 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 Keita, Director of Investor Relations, you may begin your conference.
Good morning. Thank you all for joining us for Shopify's Q1 2016 conference call. Opening today's call is Toby Lutke, Shopify's Founder and CEO. After Toby's remarks, Harley Finkelstein, our Chief Operating Officer, Chief Financial Officer, will review our Q1 results and discuss our expectations for the rest of 2016. After that, we will open it up for your questions.
First, a brief reminder that 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, which should be considered as a supplement to and not a substitute for our GAAP financial measures.
Reconciliations between GAAP and non GAAP financial measures for our reported results can be found in our earnings press release, which is available on our website. 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.
So thanks for joining us today and thanks again for your interest in Shopify. We've got another really, really great quarter and sort of high level what happened is really gratifying to see so many new merchant adds. I mean, obviously, that's really, really important to us, especially for entrepreneurs adopting our platform to start and run their businesses and their future businesses. We ran our partner conference, very successful. It's jokingly been referred to as the most overdue conference in our technology, and it certainly felt overdue when we were actually running it.
It was fantastic connecting with our ecosystem, with all the people who make their livelihood by building and selling and enhancing Shopify, so super successful for us. And then it finally happened, mobile overtook desktop in terms of order volume on our platform. Absolutely not surprising. We've predicted this forever, but it's good to see it finally happen. So there's so much going our way right now.
It's easy to see how we could get somewhat comfortable, which is silly. So I want to dive into the kinds of things that drive us. We love the role Shopify plays in our customers' businesses. As I said before, I'll say it again, there's a lot of leverage for us to make 100 and 1000 of SMB more successful by making just great choices within the business. At the top end of our market business, we are responsible for powering some pretty heavy flash sales and solving all the technical challenges that relate to that.
Your e commerce platform is no good when you go down once you're in the limelight. Lots of our success on the plus side of our business has come from taking us taking this very seriously. At the earlier stages of our market, it means helping our merchants get better and selling every day. Like this is partly why we acquired Kit. Kit simplifies a lot of the time incentive aspects of marketing.
This is also why we launched merchant cash advances. Both these moves are designed to have merchants accelerate their growth. Let me take a second here to talk about merchant cash advances and why we entered something that some people comment on is a fairly crowded field. Basically, what we found is that funding for SMBs, specifically retail driven SMBs is currently just utterly broken. They could no longer rely on any of our traditional sources.
The VCs can't fund or won't fund retail businesses because at this point of view it's so prevalent that you need completely outlandish returns 100x sometimes. But there's just no appetite for funding any company that has great growth prospects, but not outlandish growth prospects. This eliminates a lot of e commerce businesses. Banks on the other side, which were traditionally funders of SMBs, have unfortunately completely failed to build sort of data driven, data informed underwriting processes, which would allow them to extend lines of credit to young retail businesses. It's a responsibility we have had that they didn't take seriously enough.
So when talking with our customers and hearing about these challenges, we realized we had a great advantage here. We have all the data that anyone might want. Like we see from everything from the sign up of a business to every single click path of anyone who purchases something from them. And so this is just not a problem for us. And of course, we don't actually require the outlandish returns that to acquire because we are just invested in the success of the customers.
So that's enough for us. So this puts us in the best position. And I think it's a really, really good illustration about why we are so excited about this sort of core role we are playing in terms of our customers' businesses. The second thing that excites us is that we have a front seat driving our entire industry forward. This is why we have focused a lot on mobile for such a long time and why we are already thinking beyond mobile for our merchants.
We talked about this a lot previously already, but we passed this milestone in quarter 1 with most of our orders on our platform now coming from mobile devices, just over 51%. Mobile traffic continues to grow and now accounts for 62% of all the traffic to Shopify merchant sites. Internally, we are really interested in messaging and conversational commerce. That's a lot of domain expertise that we now added to the team. So that's a lot of domain expertise that we now added to the team.
Amongst other announcements that Harley is going to get into at Unite, we also shared that we integrated with Facebook Messenger. We have the 1st e commerce platform to do so. This is a combination of almost a year's worth of work with Facebook and is a great first step in the direction of conversational commerce, which clearly is currently at its infancy. The takeaway here is that we will not rest. Innovation is why we exist.
It's core to what we do and it's important differentiator for us. Think it's a big reason for why we've gotten to where we are today and why we keep getting better and going forward. And it's also plain fun. So with that, I'll hand it over to Harley.
Thanks, Tobey, and thanks everyone who's listening in this morning for your interest in Shopify. I'm glad to have a couple of minutes here to update you all on some of the great things we accomplished this past quarter. As you know, I took on the role of Chief Operating in January to allow Toby to further focus on product and technology, while I work more closely with our merchants and partners. This meant assuming merchant support as part of my new responsibilities, which has been a great group to take on because we have an amazing team there with strong leadership in place. This past quarter in a nutshell, as Toby mentioned, we hosted a fantastic conference in San Francisco in March with our top partners from around the world.
We made good progress developing the Shopify Plus program and adding new merchants there. And on the ground, we continue to see really solid execution from teams all around Shopify on the opportunity that surrounds us. Let me start with Unite, our partner conference. With more than 6.50 partners attending, we had a sold out event, which is a great achievement for an inaugural conference. Even so, this is still just a small sample of our much larger global community of partners who are building their own successful businesses on top of Shopify.
They're building apps for us, they're building themes for us and they're referring merchants to us. We announced a number of new SDKs and our storefront editor at the conference. And one of the more exciting SDKs is the Sales Channel SDK. The Sales Channel SDK makes Shopify's APIs available to partners and merchants wanting to integrate a new sales channel with the Shopify platform. These are the very same APIs we use ourselves to build the channels that we announced late last year with Facebook, Twitter and Pinterest.
So far, Houzz, Onello and Ebates have already taken advantage of the sales channel SDK, so that Shopify merchants can now easily list and sell their products in any one of these channels and they can get in front of a larger audience and new potential customers. We expect several more to follow on before year end. Each new channel that connects merchants to places where potential customers spend their time gives our merchants another opportunity to connect with shoppers and another chance to make that sale. Beyond these announcements, it was really valuable to spend a couple of days connecting with and listening to our top partners at the United Conference. One of our primary goals for partners is to make Shopify as easy for them to build new functionality on and customize new stores for their clients as it is for our merchants to use.
And we're doing well here. Partners are growing right alongside us as our revenue from apps, themes and domains in Q1 grew at roughly the same rapid pace year on year as MRR did. Our partners' contributions to new merchant adds also remains fairly steady. One area where partners are especially influential is in Shopify Plus. It was primarily through these partners that we welcomed a number of large brands to Shopify Plus this past quarter.
Nescafe, Jones Soda, Jennifer Furniture, The Golf Channel and Ellen DeGeneres are now using Shopify to sell their goods and run promotions. Through Universal Music Group, Kanye West is now using Shopify ify to not only sell his apparel line, but to sell his new album as well. While names like these are exciting, we take care that they don't overshadow the primary reason for creating Shopify Plus, which was to ensure merchants would never have a reason to leave Shopify Plus, which was to ensure merchants would never have a reason to leave or migrate off of the Shopify platform, no matter how large they become. And it is these homegrown businesses we take the most pride in because we had a hand in helping them launch and grow in many cases since their inception. Almost half of the Shopify Plus accounts created in the Q1 were these homegrown merchants upgrading from lower tier Shopify plans.
At the same time, with the build out of additional internal sales capacity, we'll continue to attract larger brands and existing merchants from other platforms and likely at a faster pace than upgrades. In Q1, we continued to build out the team to support Shopify Plus, including adding a senior level role to lead our growing sales team and we are on track to move that team into their new facility in Waterloo this summer. To sum up, we're pleased with the start to the year and the growth curve we're on. We really do think the key here, especially at this early stage of our growth is that we don't see our growth as a zero sum game. We know that what's good for our merchants is good for us and what's good for our partners is good for us.
We have developed an ecosystem of reciprocity, one that has built incredible loyalty with thousands of partners around the world. For many of our partners, Shopify is all they do every day. As a result of that, they are fierce advocates for us and a big reason we're expecting continued success. And with that, I'll hand it over to Russ to take us through the financial results.
Thanks, Harley. As you saw in our results this morning, we had another great quarter and delivered a solid start to 2016. We continue to benefit from the ongoing strong demand that exists for our ever expanding platform among entrepreneurs of all sizes, including some of the largest and best known brands in the world. On top of this, we continue to benefit from our merchant success through capabilities like Shopify Payments and now Shopify Shipping. Revenue in the Q1 of 2016 grew by 95% over the same period in 2015 to $72,700,000 38,700,000 or 53 percent of this was subscription solutions revenue was 73%.
The main driver here was the continued strong addition of new merchants to the Shopify platform, which surpassed 275,000 merchants during the Q1. One thing we discovered as we have integrated additional selling channels is they are also a source of new merchants. And as a result, we targeted some additional marketing spend in the quarter to capitalize on this. As most of you know, it is because of this wide variety of merchants that we focus on a monthly recurring revenue rather than merchant growth as one of our key metrics. MRR expanded to $12,800,000 at the end of Q1.
This compares with $11,300,000 at the end of the 4th quarter of 2015 $7,400,000 at the end of the Q1 of 2015. Our Q1 Merchant Solutions revenue grew 127% year on year to 34,000,000 dollars The rapid growth here was due to a couple of things. 1st, the expanding base of merchants coupled with the sales success of existing merchants drove GMV on the Shopify platform in Q1 to approximately $2,700,000,000 not far off the $2,800,000,000 of GMV achieved in the seasonably strong Q4. 2nd was the continued adoption of Shopify Payments, which has expanded to nearly 2 thirds of our global merchant base. Although we are nearing steady state merchant penetration in North America, we see continued incremental adoption in the UK and to a greater degree in Australia where Shopify Payments was launched late last year.
Gross profits of $39,300,000 in Q1 of 20 16 were 82% higher than gross profits for the comparable quarter a year ago. Adjusted operating expenses came in largely as expected, growing roughly in line with revenue in the Q1. Unite contributed to the incremental cost as did some digital marketing experiments that we ran. Our adjusted operating loss in the quarter was $5,900,000 compared with $1,500,000 for the Q1 of 2015. On a per share basis, our adjusted net loss in the quarter was $0.06 a share, which is same as our adjusted net loss per share for Q1 of 15.
Weighted average shares outstanding for the Q1 of 2016 was 80,500,000 versus an average of 39,300,000 shares outstanding for the Q1 a year ago. We ended the quarter with approximately $189,000,000 of cash, cash equivalents and marketable securities down just slightly from the $190,000,000 at the end of 2015. At the start of the year, I outlined 3 areas of incremental investment to support the rapid growth we've seen over the past several quarters and more importantly to lay a foundation for the continued growth we're expecting over the next several years in terms of merchants, order volume and platform capabilities. I'd like to briefly update you on these initiatives. On the infrastructure front, we continue to evaluate our data center options in Europe and have increased our available office space in Toronto and expect to do the same in Ottawa this quarter.
With regards to our second initiative, developing our merchant and partner engagement, you heard Harley talk about Unite. Unite attracted hundreds of partners investing 2 full days learning and building relationships with both Shopify and the other partners who attended. The software development kits we launched at the conference gave partners more opportunities over the coming quarters as they continue to build out their businesses. Finally, on our 3rd major investment, I'll update you on the progress we're making with Plus. Plus, which was created as a strategic offering for our most successful merchants to grow into, also offers a great solution for larger brands, some of which require the unique capabilities that the platform offers to support large scale flash sales.
And better still, Plus in no way requires us to reduce our focus on the extremely important SMB market, which organically produces and is expected to continue to produce a significant number of Plus merchants. Looking ahead to 2016, we are increasing our outlook for the full year revenue to reflect the higher than expected revenue in the Q1 as well as the anticipated stronger performance of both components of our business model throughout the remainder of 2016. We now expect to achieve full year revenue in the range of $337,000,000 to $347,000,000 Our projection for adjusted operating loss for 2016 remains in the range of $16,000,000 to $22,000,000 excluding share based compensation expense and related payroll taxes of $25,000,000 as we expect incremental margin to be offset by the stronger Canadian dollar and costs associated with the acquisition of Kit CRM. For the Q2 of 2016, we expect revenue in the range of $79,000,000 to $81,000,000 and adjusted operating loss in the range of $6,000,000 to $7,000,000 which excludes share based compensation expense and related payroll taxes of 6,000,000 dollars With that, I'll turn it back to Katie to start the Q and A.
Thank you, Russ. Sylvie, we are ready to open up the line for questions.
Very good. Your first question comes from the line of Michael Nemeroff of Credit Suisse. Please go ahead.
Hi, thanks for taking. Hi, this is Kyle Chen sitting in for Michael. Thanks for taking the question and congratulations on a really strong quarter. I guess just for Toby or Harley, as you look at the initiatives that you've announced over the last 6 to 12 months, social buy buttons, shipping, the developer SDKs. The conversational commerce and Shopify Capital, guess in your view, what represents the largest opportunity and how would you rank the financial contributions from these initiatives in the near term and in the long term?
Yes. So, excellent question, which I don't have a direct answer for. Like even internally, like we are sort of a company that talks a lot about flywheels and we launched a lot of initiatives as I think you guys are observing the 1st year as a public company. Like if you take a step back and sort of look at all this and like I think what you see is that all the things that we launched cohesively move our software into a certain direction that we think is where all software has to go in our market and which is really to empower and enable small businesses and then be there for the larger ones as well than the smaller ones make it to the size. It's very, very hard to stack rank, Graham.
They are all pushes to a flywheel. And we actually don't get too hung up on the individual contribution of all of those initiatives, but rather because we see the value not in any of the individual ones, but in a way how they all compound onto each other like. So you can easily see this in just 2 things we are currently talking about, like merchant cash advances and like the Kit acquisition clearly go there's leverage between those 2 because making the capital available to a business that allows them to invest into the growth of their business and then giving them a good way of using some of that capital outside of just financing their future merchandise to sell. But to put it smartly into marketing is a really, really good way how 2 things interact already and the intersection of those things is not available in any of individuals.
Great. That's helpful. Thanks for the color. And I guess, Russ, clearly really strong quarter in terms of net merchant additions. In your view, was there anything standout that drove the strong merchant adds, perhaps retention, the digital marketing experiments, partner outperformance?
And then also based on what you've seen thus far this year, do you see any risk that you could add fewer net merchants this year than you did in 2015?
No. So to answer the second part of that, no. I think we'll see continued good merchant growth throughout the year. In terms of Q1, it's really some of the merchants that are coming to the platform for some of our social media capabilities. We started to experiment with a little bit more paid marketing on those platforms and it quickly turned into a lot of new merchants.
And so we think that was a good thing for the quarter because typically Q1 is one of our slower quarters for merchant growth. So the fact that it was a record for us, I think puts us in a very good position for the year.
That's really helpful. Congratulations on the results.
Your next question comes
so much and congratulations from me as well on a strong quarter. Maybe I can just start with Russ, one for you on Merchant Solutions gross margins. They were up sequentially for the Q2 in a row and by a bigger amount. Is that the function of lower interchange as you start to move into international on payments? Or are we starting to see the early impact from shipping?
Yes. I think there's a couple of things that we saw in the quarter. Definitely, international becoming a bigger piece, where we see better margins is part of it. Interchange itself, we did see some improvements there. With our volume, we move into better price ranges with some of the contracts we've negotiated.
So some of that happened. Shipping did have an impact on the overall merchant solutions margin. And then the last one is that during every quarter, we take a provision for potential losses on the charge backs that hit payments. For Q4 with the higher volume, the amount of that provision, as you would expect, gets a bit larger. But then we didn't see that from an experience point of view in Q1, and so that benefited the Q1 margins.
That's great. Great color. Thank you. And maybe one for Toby, just curious, obviously, we've seen this very strong breakout in merchant net adds and there's a lot of incremental channels that you've opened up, especially around social and increasingly now with the investments in Plus. I'm just curious, is social really the maybe the key driver as Russ alluded to?
Is that the one where you're seeing the most traction quickest from a new channel perspective? Thanks.
I think the driver maybe the driver you're looking for is actually people using multiple channels. I think I mean, again, this was previously not possible, but clearly was the actual demand of our market except with no software kind of fulfilling this need, right? So we are like we do have a substantial number of people coming into the Shopify platform now, just selling directly into a social channel. To them, that's where they're from. That's where maybe they talked a lot about the product they were creating.
That's where they had the initial audience. That's the first one they wanted to aggregate. But then the time to 2nd channel, like which often is the website they're turning on or like they go on to sort of a similar channel like from Facebook to something like Pinterest, which like has some similarities in the way you would promote is a common thing. But really, it's not like I think this is probably pretty obvious as well. Where we are going to is like we are talking a lot about channels because we're launching channels right now, right?
But we shouldn't actually think about any individual channel as this big thing. But I think the importance is that the channels are kind of going to matter less in the future, right? Because what you really want to do is you want to think about your product, you want to think about your business, you want to think about promoting your business. And then the channel is an implementation detail of how the order happens. And the important thing for the business is that you and our channels, right?
And I think like we've very clearly stated that, that is our ambition and we would like to enable this. And even if a particular channel that you might be interested in happens to not be part of the Shopify offering right now, I think there's a significant amount of trust now out there that this will come. And the channel SDK, which we just launched, will ensure that you will be able to see Shopify products in across all the channels on the Internet. And I think this is really the place you're going to.
Thanks. And maybe just one quick one for us. I want to ask this just on the Unite conference. Could you quantify maybe the impact on sales and marketing in the quarter? Is that a material impact on that line?
Thank you.
Yes. So in Q1, the cost was just under $2,000,000 for Unite. Originally, we had in our original projections, we thought it would be a little bit less than that. But the demand and the number of partners that attended went up from our original estimates. And so relative to what we were thinking, it was a little bit higher than that, but it's just under that 2,000,000
dollars That's great. Congratulations again. Thanks a lot.
Your next question comes from the line of Joe Luria of Wedbush Securities. Please go ahead.
Yes. Thank you. Good morning. So it appears that the relationship and integration with marketplaces in various channels is becoming an important differentiator. What's the nature of the agreements that you have with the Amazon, Facebook and Pinterest?
Are those exclusive to any extent? Are the relationships that say BigCommerce has with eBay, is that exclusive? Or could eBay get added as a channel later on? Is this something that you can keep your competitors out of or will eventually everybody be integrated into all the channels?
Hey, there. This is Harley. I'll take that question. Thanks for that. In terms of the channels, as Toby mentioned, we want to allow our merchants to sell wherever they potentially have customers hanging out.
And so, there were some channels that we built ourselves like Facebook and Pinterest and Twitter, those integrations. In other cases, by opening up the sales channel SDK, we now allow any channel and any marketplace anywhere in the world, in any specific product vertical to easily and easily allow our merchants to cross those products on those platforms. In terms of the exclusivity, we certainly do not have exclusivity with these marketplaces or platforms. That being said, we tend to be early on an early partner for them simply because we think of product very carefully here and we're able to provide them with integrations at a much faster pace and in many cases at a higher quality than others might be able to. But certainly, we expect that other competitors of ours may also integrate with these channels eventually, but we think we're certainly ahead of the curve there.
And then on Merchant Cash Advance, the value proposition is very clear from your perspective, from a small business perspective. But one of the things we've seen is there's recently IPO payments company out there that has so gotten enamored with this business that it now represents substantial amount of their growth, almost half of their growth in revenue. And that now puts them at a significant amount of risk if there's a change in the credit cycle, if their 3rd party financers decide to pull out. Would you ever foresee it becoming that big that it's so much of your business that you put the rest of the business at risk?
It's still at a very early stage, but I mean with the strength of our platform and the number of merchants and what they're doing on the platform, unlikely to get us in the situation that you're referring to. The other thing that I think is important is although it is a revenue source and it's a high margin revenue source, it's not the prime driver here. Really the prime driver is how do we make merchants more successful because as part of that they become stickier on the platform. And because of our other merchant solutions, we also participate in their success. So that's kind of the really the drivers for us.
In addition, the advances that we're talking about are pretty short term in their nature. And so any sort of macro trends there is something we could react to. But also relative to the market itself, the position that we're in with the amount of data and information on a particular merchant also puts us in a good position to make sure that we're doing it in a very thoughtful way in terms of the risk associated with it.
Got it. Thank you very much.
Your next question comes from the line of Colin Sebastian of Robert Baird. Please go ahead.
Great. Thanks and congrats guys on another fine quarter. I have a couple of questions. First off, following up on the merchant subscriber growth, which was above our expectations. I wonder if you could address any changes you're seeing in the competitive environment.
I know a couple of other platforms announced expanded services this or recently. And then secondly, Russ, on the last call, I think you highlighted R and D and infrastructure as the key incremental investments for 2016. But given the bigger step ups from Q4 were actually in sales and marketing and G and A, which you described a bit. I was hoping you could frame the trajectory of those expense line items as we look through the balance of the year? Thanks.
Yes. So if you look at the areas of investment, actually sales and marketing through our investment in Plus and some of the conferences and other marketing activities is an area that we were expecting to see increases year on year. And so that clearly was the case. On the R and D front, I mean, we're in a great position competitively and from a roadmap point of view. And so we'll continue to add R and D and other related resources as they become available.
And we've had quite a good success there. Q1 was actually another good hiring period for us. In terms of the merchants, again, all sources of places that we get merchants. So whether it's organic through the partners or through paid mechanisms generated good increases in merchant growth. So nothing specific to an area there.
Okay. And then lastly, I was hoping you could just clarify on the payment side the difference between the integration you've had with Stripe and now with PayPal. I know PayPal cited an expanded relationship with Shopify on their earnings call. Thanks very much.
Yes. So when we onboard merchants on Shopify relationship there was just an expansion of our partnership outside of really North America. So to align with the pace, the places that we're being successful on the payment side.
Thank you.
Your next question comes from the line of Richard Davis of Canaccord. Please go ahead.
Hey, thanks guys. It's D. J. On the line for Richard. So you spent a bunch of time talking do
you feel like there are more tools that you can sell to enable success on this front? Or do you feel like there are more tools that
you can sell to enable success on this front? Or does the channel not really matter to Shopify and that's just the direction that commerce is moving?
Yes. I think it's too early to tell. Like right now, you're right. It looks the same to us because frankly, because a lot of our business model has been developed in a pre mobile mode, right? And I think the concept of a SaaS company predates like the iPhone by a good deal.
So in terms of the way that our business model is going to evolve and how it's going to be reacting, how it depends on the channels and the way the merchants have built their business and so on. All these kind of things haven't really crystallized yet, I would say. It's a good question. I have I would give a more in-depth answer if I had one. I like mobile is really it's really just sort of not as far along as I think a lot of people think.
And frankly, it's not a sort of global brainstorm about how to really build mobile applications, constellations and businesses, frankly, is not as far along as sort of a calendar suggests, just because it's such a like I think we all thought when the smartphone came out that this was sort of like a touch enabled smaller PC. And we just I think we all didn't like appreciate the magnitude until it like sort of almost hit us over the heads. And so I think now like no one is confused about this anymore. And now you see a lot of things. And of course, there's phenomenal success stories of very good companies that are mobile only and mobile first is the thing that everyone thought of.
And so for us, like I think what we did well is maybe we like came on to these conclusions a little bit early. We always have a massive advantage of all the data that's just sort of is where at our fingertips. And we are fully focused right now on how can something so big as an e commerce software can run again like something that you built into your lunch break or that can run like $100,000,000 a year business. How you shrink something like this completely to the phone? And then how like can we be the e commerce and commerce software of choice in a world where people don't like to get their laptops out of their closets anymore or out of their drawers or wherever they store them.
Yes. Yes. No, that makes sense. And then maybe this is maybe geared towards Russ. On the Shopify Plus side, can you just talk about direct sales hiring plans for this year?
How many reps do you guys have now? Is there a target for year end? You wrap any numbers around it? That would be helpful.
Hey, D. J, it's Harley. I'll take this question. So in terms of how many sales do we have, we had mentioned that we ended last year sort of in the mid teens. We're going to continue to add to the Plus sales team as we need.
And we expect that that will be amongst one of the fastest growing teams for the year. But more than that, we're not getting any specifics on.
Okay, got it. All right. Thanks, guys. Good quarter.
Your next question comes from the line of Monika Garg of Pacific Crest Securities. Please go ahead.
Hi. Thanks a lot for taking my question. First on the Shopify capsule, could you maybe provide more details like for example, what is the you are expecting as an attach rate as percent of GMV less than 1% as advances to merchants? And then which sources do you plan to raise capital from? And if you can provide details around remittance rates, sector rates, anything else?
Thanks.
Yes. In terms of sort of the larger projections there, too early at this stage to go in much. I mean, we've done it in the initial phase to hundreds of merchants just to make sure that we had a lot of the operational stuff farmed out. For the initial rollout, we'll do it with our own balance sheet and our credit facilities that we already have in place. But we are exploring a number of other options as it as we see the take up improve.
In terms of factor rates, we're looking in the low teens in terms of that. The reason being is really what we're trying to do is really just help businesses get to the next level. So that's really where we're going to see the monetization from it. And in terms of repayment rates, it really ties into the amount that we're giving as well as the sales that that merchant has. And so we adjust that accordingly.
Okay, thanks. And then your business definitely is growing very fast and it's an understandable you have to invest, but you raised 2016 revenue guidance, did not raise EBITDA guidance. So when are you expecting to be EBITDA positive, cash flow positive?
So we've always talked about hitting adjusted operating income in the Q4 of 2017 and that remains our plan.
Got it. Thank you so much.
Your next question comes from the line of Darren Aftahi of ROTH Capital Partners. Please go ahead.
Thanks guys. Thanks for taking my questions and my congratulations as well. Just a couple. First, so on your integration with Facebook Messenger, how does that help you at all in terms of driving new merchants who are using Facebook pages for local brand awareness? And then now you said you've kind of increased paid marketing and social channels, but I'm curious if that's actually a lead generation for you as a channel.
So the Facebook Messenger integration so far hasn't I don't think has impact directly on sign ups other than that it's something that some merchants might want to take advantage of and they might be considering a replatform and it might tell us that, like a decision towards Shopify. So I mean, this is also because like the Facebook Messenger channel, like the entire system there is like really in infancy. The pickup rate by our customer base is extremely enthusiastic. It's been growing very, very quickly. Our merchants, the feedback we are getting is like incredibly positive, like being like because one thing it does to the sales process is that instead of the buyer getting a standard email confirmation that everyone has probably hundreds of in their inbox.
We can deliver this like the buying confirmation directly through Facebook Messenger, which drops you into a chat with the merchant. And the merchants love to get the little thank you back and love the opportunity to just actually engage their customer base in almost a more sort of pre Internet kind of way like the little chit chat that happens after in the checkout line, which we have lost in this move towards electronic payments. So again, these are all pushes on a flywheel. So this is the way we think about it. We don't really
have like
a 5 forces model of Facebook Messenger going on that tells us exactly what might be coming out of it. We just know that it makes the flywheel go faster and that's the Facebook together. We are going to fully explore the potential of commerce through these chat channels and we're all very excited about sort of medium and far out plans that we're hedging.
Great. And just second, Russ, I think you said you ticked up paid social marketing in the quarter and that kind of helped with merchant growth. Is that something you plan to increase going forward? Maybe just some color around kind of your marketing spend to that specific channel would be helpful.
Thanks. Yes. So for all of these things, we do experiments. And once we find an experiment works, we'll put some more dollars towards it. And then when it stops working, then we'll move the investment somewhere else.
And so not a crazy increase there, but just something, again, very thoughtful like everything else we invest in. Great. Thank you.
Your next question comes from the line of Ryan Essex from Morgan Stanley. Please go ahead.
Good morning. Thank you for taking the question and congratulations for me as well on the quarter. I was wondering maybe there's a question for Harley that given that he's fielding the Shopify Plus questions. But I was wondering aside from getting greater detail, what is the philosophy with which you're growing that business? When I say that, I mean, we've seen some other vendors kind of stumble in that regard given in their particular businesses is much higher customer acquisition costs.
So I guess in terms of growth philosophy there as you look to grow that business, how do you look to measure the profitability or the efficacy of that sales force and that effort versus the growth of the rest of the business?
Thanks for the question, Brian. So unlike most enterprise software businesses, we don't have an enterprise traditional enterprise sales team behind it with massive commission structures and long lead time and closing times. In many cases, what we're noticing is that a lot of these larger brands, whether it's Nescafe or it's Jones Soda, they're actually looking for quick time to market. They're looking for a product that is really easy to use and easy to customize. And they're looking to be able to sell many 1,000,000 of dollars on it without even thinking about the infrastructure.
And so in many ways, a lot of these larger brands are starting to operate with a similar needs to what the entrepreneurs need. And in that case, having built Shopify initially for entrepreneurs and continue to focus on entrepreneurs, a lot of these large brands are coming to us in that regard. In terms of some of the different ways that we're working to better monetize some of these brands, again, a lot of these brands do come to us with existing payment gateways. Other are coming and actually using our payment gateway, which is great to see. But we're running I mean, even though these brands are traditionally large enterprise brands, we are the way that we're selling to them and marketing to them is really as we do with the rest of our merchants.
Obviously, they need a little bit more handholding, but other than that, we're able to do that at scale and in a very effective way.
Got it. That's super helpful. So thank you. And is there a way to think about the payback on that business in terms of these representatives are these direct reps at this point paying for themselves? Or do you have a certain amount of visibility that you land a large deal with a large enterprise customer and you have certain amount of visibility that that can be a self sustaining effort?
I mean, in some cases, obviously, they're coming to us and it's inbound. In those cases, those deals are closed pretty quickly. In other cases, it takes a little bit longer to ensure that we can provide them everything they're looking for. Specifically for those that are migrating off larger platforms, we'd want to make sure that they have the comfort and the confidence that we can provide them everything they were getting from one of the larger enterprise platforms. But we think we're doing a good job there.
Great. Thank you.
Your next question comes from the line of Kevin Krishnaratne of Paradigm Capital. Please go ahead.
Hi, good morning guys. Question for you. As so channel seems to be the theme of the year for sure and great to see the number of channels increasing. I'm wondering as you add more channels and as merchants enable more channels, is that potentially a way for merchants to potentially move up from one of the lower level tier packages into a higher channel? I'm just thinking as the number of channels and the complexity in their business grows that makes things like the report builder and advanced analytics a bit more attractive to them.
So I'm wondering if the adding of channels can help stimulate growth in price plans?
Yes, probably through 2 ways. So clearly, more channels will result in more sales. And so there are some capabilities like reporting that become more relevant the more sales you have. The other way is that the way we price the merchant solutions is that you get, for example, lower payment processing rates as you move to higher plans. So the 2 very much go hand in hand.
Okay, great. And then I guess just related question on channels. I know it's very early days on the social channels, but you had great read throughs on some of the players like Twitter and Facebook this quarter in terms of SMB growth. I'm wondering nothing quantitative, but are there any kind of neat examples or anything that have surprised you with respect to use cases from merchants that have been coming into the system on either of those platforms?
Yes. I wish I would have like a really good example. Like it's but unfortunately nothing directly comes to mind. It's the I mean, one of my favorite things about Shopify is we do get a like get a little bit of inside view at sometimes at just what's going on in the market. And even we can even sort of see the nature of entrepreneurship changing.
And it's extremely gratifying to just watch like lean back and watch people because like 10 years ago, I was building a snowboard store, and it was just absolutely like the Caskaresque like experience of trying to find my first customer was actually like had a profound impact on me. And now I see entrepreneurs with exactly the same kind of background to the one I had and like the lack of formative lack of experience in the retail industry. And they just derive this massive audiences, which accidentally created by just being interesting and then like sadly creating the products that sell into this kind of thing and becoming this massive business overnight. I'm just like stunned. And then this is like it's something I kind of expected to see that, But at this point, we're kind of seeing it daily.
And it's just really cool. And you see this kind of thing definitely on the social channels a lot more just because like a lot of people just didn't know that they had monetizable audiences. They built them for completely other reasons, not for business reasons. They just knew something much better than some other people and they're commenting on it, and that's how they did them. And so explaining we almost our position is almost creating a product, which just sort of suggests to them that by the way, like you didn't know this, but you actually built a business and that's cool to see that.
That's great to hear. Congrats again on a great quarter.
Your next question comes from the line of Terry Tillman from Raymond Jones. Please go ahead.
Hi. Thanks for taking my questions. Most of them have been answered, but I still had a couple. I guess, if you look on your website, it talks about selling on Amazon coming soon. I'd like to get maybe an update on when you suspect that capability will be launched and would there be additional economics for that capability?
Hey, there. It's Harlan. I'll take that question. So as you recall, we announced our partnership with Amazon back in September and beyond the just the migration of some of their web store merchants to Shopify. As part of that partnership, we also integrated with Filament by Amazon and Sell on Amazon, which are excuse me, Filament Amazon and Amazon Payments, which is already being used by our merchants.
The Sell on Amazon channel is currently being worked on and we should have that by the end of the year. And in terms of Harley, in terms of economics, is there a thought process on that?
Or would that be part and parcel with whatever your subscription solution want to subscribe
to? Yes. So again, once we sort of see the uptake on that channel, we can talk more about the economics behind
it. Okay. And Russ, just one last one. In terms of obviously, you're seeing some payoff from the investments in a Plus sales force. But going forward, in terms of additional investments in that and maybe more ad spending on social or other channels, would that get in the way of potential sales and marketing leverage as a percentage of revenue over the next couple of years?
Or do you still seeing that unfold? Or should we think about leverage coming in other areas, not so much in sales and marketing? Thanks and nice job.
Yes. Our view is that we'll get leverage in all areas. Even our investments that we're doing in paid marketing have a fairly quick return on them, like those merchants start on a 14 day trial and then become paid merchants. And so we'll continue to see the leverage. Because this year is an investment year, you won't see the drop that you saw in 2015 versus some of the prior years, but we'd still expect to see leverage.
Your last question comes from the line of Gene Munster from Piper Jaffray. Please go ahead.
Good afternoon. Good morning. I'll add my congratulations. And just a high level question about the addressable market. Your merchant adds have been impressive for 2 consecutive quarters.
Investors tend to have this anxiety about what the addressable market is and I think that the results speak for themselves. But as you think about the addressable market maybe in terms of numbers of potential merchants over the next few years, how would you frame that for investors? Thank you.
Yes. I mean, even at 275,000 merchants relative to the SMB space, we're a very small piece of that. So lots of room to grow there. In addition to that, we're seeing new waves of people starting commerce businesses, whether it's celebrities or people with some other followings or people that want to start out selling on Pinterest or Facebook. And so, I think what's really happening is our addressable space continues to grow.
And we've always said that the $10,000,000 in our core market and $46,000,000 retail SMBs is just sort of a subset of the market that we address. And so what we're seeing now is at that both the plus level and that entrepreneurial level, we're getting more and more opportunity to help satisfy these needs.
And the addition of new channels, as you've been talking about
on the call today potentially could expand that base? Absolutely. Absolutely. So I mean, one of the things with Pinterest is people go there with buying intention and now they can actually buy. And so Facebook very similar.
And so as new opportunities and new channels arise, really our platform focus will allow us to take advantage of those. And I think that puts us in a very good position. I mean, other people, as one of the earlier callers said, can also do that, but having 1st mover advantage is always the best position to be in.
Great. Congratulations.
There are no further questions at this time. I will turn the call back over to Toby Lutke.
Okay. Thanks a lot, everyone. I think this has been fun. Good quarter, I think. Lots and lots of little releases, lots and lots of pushes on this ever increasingly fast flywheel we are building.
Investors even from the 1st days that tried to raise any money have always kind of struggled wrapping their head around Shopify because it's not exactly a simple business. Like there's just a lot to it. So I'm glad that everyone's got to witness sort of our 1st year as a public company roughly and just sort of gotten a feel for the way we think, the way we experiment, the way we launch. Because I think this is the correct way to act in our industry and because the industry is actually a lot earlier than sort of people expected, there's a lot more brainstorming, a lot more exploration that has to happen. And sort of our approach really with the lens itself for us like slowly establishing what the software actually should do for its merchants, right?
Okay. And I'm on earth, and wish everyone, May the 4th be with you. Thank you.
This concludes today's conference call. You may now disconnect.