Shopify (NYSE: SHOP) CEO Harley Finkelstein: “Shopify Serves as a Businesses Central Operating System – We Make the Important Things Easy and Everything Else Possible.”

Shopify (NYSE: SHOP) Q3 2022 Earnings Call

CEO Harley Finkelstein

As you can see from our Q3 performance, merchants continue to succeed on Shopify growing sales and using more of our mission critical tools to run their businesses. Shopify’s central tools serve as a businesses central operating system.

These tools help our merchants stay ahead of the curve as commerce continues to rapidly evolve. This is particularly important today as businesses grapple with the consequences of rising interest rates and inflation. This is a key reason why merchants choose Shopify. We make the important things easy and everything else possible.

Later, Amy will discuss our Q3 financial performance and expectations for the rest of the year. I’m gonna focus on the investments and the progress we’ve made in q3 that further our competitive positioning and enable merchants to build buyer relationships, to go global, to advance from first sale to full scale, and simplify logistics, all of which plays a vital role in making commerce better for everyone.

Starting with building buyer relationships for our merchants. Discovering and connecting with more buyers and deepening relationships with existing customers are critical to merchants ability to create long-term success, whether that connection is online or offline. Shopify has a suite of innovative products like our best in class retail point of sale offering that is rapidly becoming the solution of choice, not only for SMBs, but also for large retailers.

During the quarter, the outsized pace of Alfa growth on Shopify continued as we brought on eight new merchants with over 20 locations each, and one with over 175 locations with our commercial teams increasingly selling to larger retailers. Plus merchants accounted for approximately 35% of all point of sale Pro sales closed in q3, and that’s up from 14% in the same period a year ago.

Well-known brands, including department store, show fields, and designer apparel, TOMA implemented our point of sale Pro solutions for their locations driving Q3 offline GMV growth by 35% year over year, or 41% in constant currency since the beginning of 2021. Over half of the rapid adoption of Point of Sale Pro is being driven by new SMB retailers coming to Shopify to get their start as a new omnichannel business.

Additionally, over a third are from established all find retailers who are entirely new to e-commerce or selling only on point of sale. These stats demonstrate the power of our commerce platform and the breadth of capabilities we have built to make it easier for our merchants to reach customers on every surface.

In late September, we launched our new first in class mobile hardware device. Point of cell Go p o s go was developed to empower merchants to meet consumers wherever they are, however they wanna purchase from curb to counter with p os, go, merchants can close sales anywhere and take payments securely and smoothly.

P o s go is one more pathway to bring even more merchants into our flywheel. In just three weeks since launch p os Go has seen enthusiastic adoption among new and existing merchants with strong performance right out of the gates. Building buyer relationships is paramount as our merchants gear up for Black Friday cyber.

Shopify is ready. Our platform is equipped to handle the influx of orders and volume because we don’t just do this a few times a year. We support merchants through these types of flash sales all the time. For example, last month during New York Fashion Week, we supported a top designer during an online drop.

During the flash sale, this Shopify merchant sold hundreds of thousands of units and achieved tens of millions of dollars in sales. Within only a few hours, Shopify made this possible. Today, brands have to be more sophisticated in how they reach and sell to consumers. As shopping continues to evolve, it’s become critical for merchants to be discoverable across multiple platforms and services showing up directly where their consumers are shopping, while still very nascent.

G M V through native checkout integrations on key partner services such as Facebook, Instagram, and Google. More than tripled from Q3 last year, the more merchants continue to invest in multi-channel sales, the more successful they become in building brand value amongst their consumers. Another way that Shopify is enabling merchants to build buyer relationships is through Shopify audiences, our new tool that helps plus merchants find high intent customers.

Since launching in May of this year, audiences is significantly improving conversion rates, return on ad spend, and other important metrics for those plus merchants who have opted in. Last quarter, I mentioned a couple of merchants who have really benefited from audiences. Today I wanna share a couple of additional examples.

Hya, a children’s wellness brand worked with a snow agency who is a plus certified partner to onboard into audiences. As a result, HYA has seen their return on ad spend increase over 170%. Their conversion rate has increased over 150%, all while driving down cost per acquisition by 35. Fast growing home furnishing brand Nathan James attributed over 500 new customers to their use of Shopify audiences.

They also saw 200% increase in purchases of 5.6 times return in ad spend on the targeted campaign, over a hundred thousand dollars new revenue, all while customer acquisition costs decline by over 50%. Examples like these fuel our excitement about how audiences can drive merchant growth, especially going into the upcoming holiday season.

Additionally, we’re excited to continue to deepen our partnership with Google with upcoming new features for Shopify merchants to improve their impact on Google. Another marketing tool that we launched in early access in mid-August is Shopify collab, which brings brands and creators together. It has generated approximately 50 million organic impressions across social channels in less than two months.

Collabs allows creators to monetize their talents by discovering and partnering with independent brands and sharing their favorite products with their followers. This gives merchants at another new channel to grow their brand, reach and find new customers. We’re also investing in our merchant’s ability to grow by helping them go global.

Shopify markets, which launch in Q1 allows merchants to identify, set up, launch, optimize, and manage their international markets from a single storefront. To date, more than 175,000 merchants across the world have used markets to help launch their international businesses by reducing the barriers to international selling US merchants.

Utilizing markets now sell into an average of 14 additional countries, Shopify Markets Pro, which debuted in mid-September in Early Access. It’s our cross-border solution built on top of markets by combining globalize features with markets Capabilities such as the Translate and Adapt app markets Pro makes it easier for merchants to accelerate their global expansion to over 150 countries overnight without increasing their operational costs, risks, or complexity.

So when merchants add languages to their store, they will now be able to leverage automatic translations and create localized buyer experiences with duty, prepaid express international shipping. And this is just the beginning. Our own studies have shown that a merchant’s G M V increases when customers are shown localized content.

And we are confident that adoption will continue to increase as merchants look for ways to grow their businesses beyond their domestic borders. Like everything we do, we are laser focused on lowering the BARR entry in entrepreneurship globally. In May, we introduce localized subscription plans in over 200 countries.

International retailers outside of North America continue to grow. Our overall merchant mix comprising 45% of all merchants in Q3, and demonstrating the continued success of our invest. As we continue to expand our geographic reach, we launched Shopify payments in Finland, Switzerland, and Portugal. We launched Shopify capital in Australia and Shopify shipping in Italy and France.

Also, during the quarter, we launched Shopify point of sale with integrated payments in Singapore and Finland, which brings the total number of countries where merchants can use our point of sale offering to 14. Shopify is built to help merchants as they grow from first sale to full scale and everywhere in between solutions like Shopify Shipping and Shopify Capital help smaller businesses grow.

While development features like Shopify functions enables customized pricing and discounts to increase consumer engagement and loyalty. Shopify capital has come a long way since its humble beginnings in 2016, even back then, we at Shopify had our merchant’s backs when no one else did, supporting them by providing a few thousand dollars to a handful of retail.

Fast forward till 2020. Capital hit the 1 billion mark, and in 2021 it surpassed 2 billion in funding. At the end of August of this year, capital broke another record. We’ve provided cumulative funding of $4 billion since inception to our merchants. The team continues to fund and advance money to more merchants as they ramp up for Black Friday.

Cyber Monday Capital has made a real difference in merchant success rate, particularly as more and more banks and lenders are shutting off the spigot to smaller businesses. We also continue to improve the back office experience. Earlier this year, we launched Shopify Tax, a new product that takes the stress out of sales tax for our merchants so they can focus on what matters most to them, their products and their customers.

Our strategy of making certain high value features available only in our plus package continues to pay off. In q3, we saw our plus base continue to expand, not only from upgrades, but also from entirely new merchants coming off the Shopify for the first time. New to Shopify Plus merchants came from a wide array of verticals driving growth of Shopify Plus GMV and q3, which continued to outpace overall GMV growth.

Some examples of brands that have joined Shopify Plus during the quarter and into early October include beauty, care creator, Glossier electronics manufacturer, Panasonic Techniques, footwear and lifestyle accessories. Maker Cole Han, jewelry designer, Stella and Dots fitness apparel provider, Zumba wear, children’s toy maker, Melissa and Doug, and pet food manufacturer greenies.

Our plus team continues in traction outside of North America as well. International brands new to our platform Included leading Athletic footwear company, converse, Japan Nutrition and vitamin supplement manufacturer, G N C, India Footwear Line, Superga, Italy and Sports Apparel Designer New Era Hong Kong.

The world’s biggest superstars are also building their brands on Shopify Plus. In q3, the Kardashian brand continued to build their empire on Shopify with their latest brand, Courtney Kardashian’s vitamin and supplement company, Lemi. Additionally, food Network star Jetted de Lois introduced Jets E, a new line of sauces and condiments.

Ciara launched on a mission, her new line of clinical skin wear and homegrown Toronto celebrity. Maddie Matheson launched a new Workwear brand, Rosa Ragusa. Shopify continues to invest in global partnerships to support the adoption of Shopify by some of the world’s largest brands. And during the quarter, we officially signed partnerships agreements with Ernst and Young and K P M G, adding to our relationship with Deloitte.

Our strategic alliance with Ernst and Young or EY serves and scales to the needs of the client’s enterprise. EY will be training an initial cohort of 500 technical professionals across their EY Wave Space network of 50 locations globally on Shopify, and will further support those professionals by enabling up to 10,000 consultants through exposure to the Shopify platform.

This access will enable co-creation of unique immersive experiences that will help reimagine the online customer experience and unlock new markets for certain regulated industries and products. In addition, Shopify is thrilled to announce that we sign a collaboration agreement with K P M G in Canada.

As one of Canada’s largest systems integrators, our collaboration will help bring Shopify solutions to KPMG’s clients to enable seamless commerce on their transaction platform of choice. On the development front, we are currently beta testing hydrogen as a fronted web development framework or headless infrastructure.

Hydrogen gives bigger retailers with in-house creators. The tooling needed to accelerate development and deploy their bespoke storefronts with just one click on our hosting solution. Oxygen with unique features such as audiences, b2b, hydrogen plus oxygen, and the expansion of our partner program. For E R P and systems integrators, we expect Shopify plus’s momentum with larger merchants to continue.

Last, I’ll provide more context on our fourth major investment area, simplifying logistics. The internet has leveled the playing field for so many parts of an independent retailer’s business, but not for logistics. We have set up to change that paradigm with Shopify Fulfillment Network. Last quarter, we outlined the three complex stages of a merchant supply chain across freight, distribution and fulfillment as inventory moves from port to porch.

Today I’ll share updates on our integration of Deliver, how we are accelerating our vision for S F N to become an end-to-end logistics platform for merchants, and most importantly, how we are shifting the logistics conversation with merchants to focus on driving value through fast and reliable fulfillment.

First, since closing the Deliver acquisition on July the eighth, we have developed an ambitious plan to create a new fulfillment app for Shopify merchants, and also combine the Deliver and Shopify fulfillment networks into a single network spanning a merchant’s full supply chain. We have made significant progress in our first quarter together with lots more still to come.

We’ve also started creating a unified network built on top of the deliver software platform. The combined scale of S F N and Deliver allows us to consolidate volume, streamline operations, and expand our carrier relat. This unified network will enable Shopify to operate a small number of regional hubs that will serve several functions, including cross-talking, multi-channel distribution, inventory balancing, and some local fulfillment.

These hubs will absorb as much complexity as possible for the rest of the network. We’ll continue to partner with the highest fit three pls around the US to enable local fulfillment, leveraging our proprietary warehouse management software. F M S, the first combined S F N and Deliver facility is already operationally functional in Atlanta and has seen a tenfold quarter over quarter increase in the number of merchants holding inventory in that facility.

We anticipate that unifying the network will be complete in q1. Second, as we mentioned last quarter, we are building an end-to-end logistics platform that will connect every single part of a merchant supply chain. It enables merchants to dynamically route inventory across all their channels from B2B to D two C.

Ultimately, we will create a fulfillment network that can accept orders and make customer delivery promises from the moment a merchant’s goods leave their supplier. Since last quarter, we have seen a threefold increase in the number of ship containers with our freight partner. Flexport initial runs have shown that as we expected, S F N merchants are experiencing up to 20% faster service from Origin ports with significantly lower cost per pallet than average.

This will allow S F N to guarantee that merchants’ inventory is Black Friday, cyber Monday ready the moment it leaves a supplier’s facility. Let me share with you some of the initial stats on the rest of the supply chain. We have seen a 75% year over year increase in merchant inventory being received into deliver crosstalks a nearly 80% growth quarter over quarter in the number of merchants using more than one of our logistics services across all three stages of the supply chain and a 450% year over year increase in orders fulfilled by F M S across both Shopify and partner run facilities.

Finally, and most importantly, we are shifting the conversation with merchants to focus on logistics being a tremendous value driver for their operations. When done right, fast and reliable fulfillment can significantly increase cart size, conversion rate, order value, and turn buyers into repeat customers.

In q3, we completed the rollout of Shop Promise to all S F N merchants. Shop Promise is a consumer facing badge indicating fast and reliable delivery across Shopify’s online store and other popular direct-to-consumer channels. Shop promises already significantly boosted sales as participating merchants increased buyer conversion by up to 9% during the initial rollout.

In September alone, SFN saw over two thirds of domestic packages delivered within two business days. An exponential increase from less than 2% predicted delivery before SFN software update in early 2022. All new SFN merchants are now automatically qualified to display the Shop Promise badge out of the box.

We are confident that shop promises impact on merchant value will continue to increase as it evolves and matures. And we believe that SF N has the opportunity to become the defacto fulfillment solution for independent merchants in the consumer packaged goods and apparel categor. The highlights I’ve shared so far are just skimming the service on why we continue to increase merchant solutions revenue as the percentage of G M V or the Merchant Solutions attach rate, which reach an all-time high of 2.14% in Q3 compared to 1.98% in Q2 on a sequential basis with eight basis points in Q3 coming from deliver our record setting Merchant solutions.

Attach rate is a primary component of our total revenue attach rate of 2.96% in q3, defined as total revenue as the percentage of G M V compared to 2.76% last quarter. Turning now to recent leadership changes starting with the promotion of Cas Naja in sub September to chief operating. I’ve worked with Kaz for over three years and know him to be the real deal.

He embodies the best of Shopify with his product driven mindset and an uncanny ability to see the alignment between product sales support and grow to market strategies, all of which he oversees in his new role as C O O Reporting to Kaz includes the newly created roles of Chief Revenue Officer and Chief Growth Officer as our new chief revenue officer, Bobby Morrison comes to Shopify with more than 25 years of experience, transforming multi-billion dollar enterprises.

Formally, he was the Chief Sales Officer at Intuit. Luke Leve joined Shopify in January, 2020. He previously oversaw growth at Facebook and Trip Advisor Lucas recently promoted to Chief Growth Officer, where he leads our new merchant editions and new business development efforts. And finally, the announcement of our new Chief Financial Officer, Jeff Hoffmeister.

Jeff has known Shopify for many years as he has led numerous transactions for us, including our I P O during his 20 plus years at Morgan Stanley. Let me turn the call over to Jeff to say a few words before I conclude my remarks. Thanks Harley. I am extremely excited to join the company. Thank you to Amy for all the leadership stewardship and hard work over the past five years.

You’ve built the finance team that has a breadth and depth of expertise that is multiples of what you inherited. I’m proud to be able to take the baton from you and work with the team that you’ve built to the investors. I got to know many of you during my years at Morgan Stanley and look forward to working together with you in my new role.

As many of you know, I had the opportunity to work with Toby Harley and team on the I P O several years ago and on numerous projects since then. That vantage point has allowed me to understand the complexities of the business into this role with a headstart, but also have an appreciation for all the incredible things that Shopify has accomplished since its I P O.

The decision to join Shopify was an easy one given my historical context and the tremendous potential ahead for the company. I look forward to working closely with Toby Harley Kaz, and the rest of the senior leadership team to support the company’s mission and next phase of growth. Back to you, Harley.

Thanks, Jeff. This is my last earnings call with Amy, and before I turn it over to her, I wanna say what an honor it has been to work with her. Over the past five years, Amy has been a true partner under her watch. She has built an incredibly talented finance team that has supported the company’s rapid growth and massive scaling on behalf the entire Shopify leadership team.

I wanna thank Amy for her service and her dedication to shop. To wrap it up, Shopify’s Commerce operating system serves as a central nervous system that powers millions of businesses all over the world. If you talk to our merchants, you’ll hear repeatedly that they love the simplicity of our technology and the experience it offers to their buyers.

As our merchants get ready for their busiest shopping season of the year, we are here to help them capture every opportunity. We remain steadfast in our mission to solve the most difficult problems facing our merchants as we continue to make commerce better for everyone. And with that, let me turn the call over to Amy.

Good morning everyone, and thank you, Harley for your kind words and send off. As Harley indicated, I will first provide an overview of our Q3 results, highlighting how we are continuing to operate with discipline as we position ourselves to be a 100 year company. Then provide a summary of our new compensation system and finish with our expectations for the rest of the year.

Beginning with our Q3 results, a reminder that we closed the deliver acquisition on July 8th, and this is the first quarter of results with deliver included. Our total revenue for the third quarter grew to nearly 1.4 billion, 22% higher than the same period last year, driven primarily by merchant solutions revenue growth on a three year basis.

Our revenue compound annual growth rate was 52%. Given the significant strengthening of the US dollar relative to foreign currencies in q3, total reported revenue growth year over year for Q3 was negatively impacted by approximately two percentage points next to G M V. Last year’s. Third quarter, G M V growth was 35% year over year, driven by online consumer spending on goods during the pandemic.

Fast forward to a year later. Our total G M V in Q3 was 46.2 billion, which grew 11% year over year or 15% on a constant currency basis, higher than retail growth overall in the US of about 9%. The challenging macro conditions we saw in Q2 persisted in Q3 with high inflation leading consumers to continue favoring discount retailers and reduce discretionary.

Merchant solutions revenue of 989.9 million, increased 26% year over year, driven by G M V growth and by merchants utilizing our solutions to run greater parts of their business in this inflationary environment, several factors drove this growth, including the increased G M V penetration of Shopify payments, Shopify capital, and Shopify markets greater revenue contribution from partners as well as contribution from deliver, excluding deliver merchant solutions.

Revenue increased 21% year over year headwinds from significant strengthening in the US dollar relative to foreign currencies was most felt here impacting merchant solutions revenue growth year over year by approximately three percentage points, approximately 25 billion of G M V was processed on Shopify payments in q3, 22% higher than in last year’s third quarter, or up 26% in constant currency.

Payments penetration of G M B or gross payments volume was 54% versus 49% in Q3 of 2021 and up 113 basis points quarter over quarter. Over the past six quarters, we’ve seen G P V benefit from strong performance by merchants on Shopify payments and increasing percentage of which is Shopify plus G M V, new Merchant adoption, both in North America and internationally.

Penetration gains in shop pay, which is facilitated nearly 66 billion in G M V since inception and expanded availability of our POS Pro hardware in brick and mortar stores with integrated payments now being used in 14 c. Subscription solutions revenue grew to 376.3 million, which was 12% higher than a year ago.

Driven by growth in monthly recurring revenue and reflecting lapping of our change in terms to make selling in our app and theme stores free for partners up to their first million dollars annually terms that we put in place in the middle of the third quarter of 2021. Monthly recurring revenue was 107 million, up 8% year over year in Q3 versus a year ago, we saw a greater number of Shopify Plus merchants with plus increasing its share of total m r r to 33% from 28% in Q3 of last.

Additionally, thousands more retail locations began using P O S Pro year over year, and Q3 was our first full quarter of traction for our starter plan aimed at creators and other entrepreneurs who need a lighter offering to get started offsetting these M R R gains and Q3 were free and paid trial experiences for Nonplus.

Plans that extend beyond our typical 14 day free trial. Entrepreneurs participating in the trials are immaterial to our M R R until they convert to one of our NONPLUS subscriptions. While these factors slowed M R R growth in Q3 and will likely continue to defer near term M R R gains, our actions have led to valuable insights as we continue to test ways to increase the top of the funnel and build a better merchant onboarding experie.

Adjusted gross profit was 681.8 million, up nearly 11% compared with 616.4 million in the third quarter of 2021. On a three year basis, our adjusted gross profit compound annual growth rate was 46% compared to the third quarter of 2021. Addressed gross profit growth was impacted by a greater mix of our lower margin merchant solutions revenue, lower margins, and Shopify payments due to merchant and card mix shifts and industry-wide network cost increases.

The impact of deliver and increased investments in our cloud infrastructure. Adjusted operating loss was 45.1 million in the third quarter compared to adjusted operating income of 140.2 million a year ago. The loss was largely driven by increased headcount, including deliver, and our new compensation framework versus a year ago, as well as some marketing program spend.

Adjusted operating loss in Q3 of this year excludes one-time charges as follows, approximately 30 million of severance expenses related to the workforce reduction we announced in July and accruals for two pending litigation cases related to patent infringement and publishing copyright infringement, which together total approximately 97 million consistent with our outlook last quarter, excluding severance in other one-time items.

We did see a sequential deceleration of year over year operating expense growth from Q2 to q3, reflecting the streamlining of our commercial organization and the other actions we took in July and continue to take to align spend for long-term success. Our Q3 adjusted operating loss was relatively flat, quarter over quarter, driven by greater cost efficiencies realized in the quarter and lower marketing program spend, while the team focused on free and paid trial experiences that I noted earlier.

Adjusted net loss for the third quarter was 30 million or loss of 2 cents per diluted share compared with adjusted net income of 102.8 million or 8 cents per diluted share in the third quarter of 2021. Turning to our balance sheet, our cash cash equivalence and marketable securities balance on September 30 was 4.9 billion, which is 2 billion lower than June 30, reflecting 1.7 billion deployed for the deliver acquisition.

Our cash position continues to be strong reflecting our approach to prudent and stringent capital allocation. We continue to place the highest importance on opportunities that we expect will significantly expand our merchants businesses, accelerate our product roadmap, and or have strong paybacks from improved operational efficiency.

Before turning to our outlook, I’d like to outline our new compensation system that we implemented on September 1st, 2022, called Flex com. It’s designed to recruit, reward, and retain the best talent in the world and provide greater transparency and flexibility to our employees in how they are paid. As part of opting into this new compensation system, employees received a single total compensation number and had the choice to allocate their pay between cash and newly granted equity in the form of restricted stock units and or stock options.

In addition, previously granted Unvested equity was canceled and the new quarterly equity grants will vest monthly. Employees will be able to change their allocation between cash and equity each quarter as their personal preferences change. We linked flex Comp tightly to our mission and long-term vision of building a 100 year company.

So for those employees who elected extra equity above the default settings, they were given an additional 5% bonus on that equity amount. In the future, we’ll add other mission-driven elements like charitable donations and shop cash. All financial implications of flex com are reflected in our Q3 results and full year expectations.

Turning to our outlook, as we’ve stated since the onset of this year, we are in a transitional period in which we are investing in our core themes that Harley mentioned earlier to ensure our long-term success. We expect these investments will allow us to emerge from this macro cycle stronger and will position us well for long-term growth and sustainable profitability.

As a reminder, our financial outlook includes the expected impact of deliver our new compensation system and currency headwinds from the stronger US dollar. Ann assumes that higher inflation and rising interest rates will continue to negatively affect the consumer’s purchasing power of discretionary goods and services.

In light of these assumptions, our expectations for our own results as we close out 2022 are as follows. Our G M V growth will continue to outpace the broader retail market and the fourth quarter aided by our omnichannel capabilities. Merchant solutions revenue growth year over year will be more than double that of subscription solutions.

Revenue growth for the full year 2022, both G M V and total revenue in 2022 to be more evenly distributed across the four quarters, similar to 2021. Because of this larger mix of merchant solutions contributing to overall revenue and dilutive impact of deliver gross profit dollar growth will meaningfully trail revenue growth.

And we continue to anticipate that operating expense growth year over year and Q4 will sequentially decelerate from q3. From an adjusted operating loss perspective, we continue to expect a loss for the full year for q4. Based on our updated outlook, we now expect an adjusted operating loss dollar amount that will be fairly comparable to the adjusted operating loss in q3.

Finally, the full year estimates of stock-based compensation and related payroll taxes, CapEx, and amortization of acquired intangibles are now five hundred seventy five million one hundred twenty five million and fifty 5 million respectively. In closing, the flexibility and scalability of our technology has proven time and time again to be a must have for our merchants, enabling them to quickly pivot as commerce continues to evolve, the discipline and rigor that we continue to apply across the organization, beginning with software development to ultimately the commercialization of our solutions will position us well for long-term growth and improving profitability when exiting this macro cycle.

And finally, I’d like to thank Toby Harley and the rest of the management team, the finance team, all Shopify around the world, and the board for their support and partnership. Being the C F O at Shopify will always be one of the crowning highlights of my career, and I’m so proud of my team and what we’ve accomplished over the years.

I look forward to cheering on the company and its next chapter of growth and success as it empowers merchants across the globe. I’ll now turn the call back to the other Amy to open the call for your questions. Thank you Amy. We will now open the call for your questions. Please use the raise hand feature in Zoom to ask your question.

If you are dialing in by phone, you will need to press star nine to join the queue in star six to unmute yourself. Also, please note that Jeff Hoffmeister will not be taking any questions on this call. Thank you in advance for limiting yourself to one question. Our first question today will come from Brian Peterson from Raymond James.

Go ahead Brian. Uh, hi guys. Thanks for taking the question. So, so first one, uh, we did see a noticeable improvement in, in take rates. Uh, even if you exclude deliver, you know, I’m curious if you could give a little bit more color on, on what drove that sequentially. Uh, that that would be helpful. Thanks guys.

Yeah, I’ll take that one. Um, yes, we, uh, we did see a sizable. Uh, year over year in merchant services, uh, solutions, take rate. Uh, it was largely driven by mainstays of payments and capital. Uh, new products, including installments and, uh, markets. And yes, the, uh, addition of deliver also, uh, additional revenue from partners contributed.

Uh, it’s important to also note that on an organic basis, excluding deliver, it still would’ve risen, uh, significantly quarter over quarter.

Our next question will come from Mark Mahaney from ever core i s s. Mark. Go ahead. Okay. Thanks Amy. Um, let me, uh, two questions. There’s just a, a small change in your commentary or outlook commentary about merchants growth in the second half versus the first half. Just, you know, why the change in the commentary there.

And then let’s talk about just the Shopify Fulfillment network and. Uh, the investment horizon for that. Is there any change there? And do you feel like, you know, app post deliver acquisition, do you feel like you have all the assets in place? Are there additional acquisitions or maybe areas you feel like you need to build out?

Do you have the solution set you need now or is it still kind of work in progress? Uh, like most things. Thank you. Yeah, I’ll take the first question. Um, so I think the, the important thing to note here is that our primary objective always is to get more entrepreneurs and merchants to success. And so, uh, let me just dissect our q3, M R r, uh, again, to kind of

We’re gonna go ahead. Go ahead. Sorry. Sorry. We, we did see, um, total M r R growth, uh, year over year. Buoyed by gains and plus and p o s more plus merchants, uh, year over year, quarter over quarter plus increasing its share of MRRs, as I noted earlier, to 33%. Also thousands more retail locations adopted, uh, p o s Pro, those m.

I think we’re, uh, losing Amy. It’s hardly here. Uh, mark, I’ll jump into the second part of the question and then, uh, Amy, uh, she can jump back on when her connection is better. In terms of s f n, you know, we’re, we’re really happy with where we’re at right now. We don’t think we need to increase in terms of the, the overall investment.

We’re trying to build this, uh, you know, rather than it be this cost driver, we think fulfillment can actually create huge value for our merchants. And so we think the fast, reliable fulfillment will increase their customer conversion. As I mentioned on the call, we’re already increasing the number of s fent orders with predicted delivery of two days or less, um, from to over 65%.

And so we’re, we’re on track to hit over 75% by the end of the year. We’re really happy with where S F N is going, and we think this will be a reason that people will not only come to Shopify, but also will give merchants on Shopify. This incredible competitive advantage and Shop Promise in particular is really the thing that, that we’re, we’re really excited about.

By putting all these things together, this end-to-end logistics network, we now can provide this incredible tool to merchants to, to tell their consumers when to anticipate, um, their, uh, their, their packages. And we think that’s going to do incredible things for conversion rate. But in terms of the investment, there is no change to it.

We think we can do this on this asset Light software first model and deliver obviously helps us accelerate the product roadmap there. We will take our next question from Tom Forte from DA Davidson. Tom, go ahead. Great. So first, Jeff, welcome to Shopify. Amy, it was a pleasure working with you, and I wish you all the best in the future.

Uh, on its earnings call yesterday When comparing and contrasting the current economic environment against the last downturn, Google’s c e o discussed the emergence of mobile in the last downturn, and his expectations about the emergence of artificial intelligence and the current market downturn. Toby, can you talk about Shopify’s efforts in AI and how they may advance over the next 10 years?

Yeah. Um, Carrie, um, I think, um, AI is at one floor’s, um, remarkable, uh, spots, um, right now of, of, of inflection. Um, like of a recent monster and Transformers, um, uh, and especially large language models have, uh, really accelerated this space. Um, I have to confess, like I might, um, I see my job as, uh, tracking. Um, all the fastest, uh, uh, uh, and quickest changing, uh, fields in technology.

Um, and, um, have a very, like, good view of where things will go because I mean, I built when, when, when we make product decisions, we are building for, like, we, we make decisions that will take about, you know, often a year, two years to implement. Uh, and so, so we, we have to have a good read of future. And, uh, what, what’s, what would be needed, needed by Van to make these decisions?

Well, um, it, it, it’s, um, AI is this spot where, um, there’s all of hype and, um, there’s, uh, uh, a non-trivial chance that the hype is underestimating , how, how much, uh, it will affect, um, the especially latter part of his decade. So, um, I know that’s very vague, but it’s, it’s because that is, uh, it, it is vague.

It’s kind of hard to know how these kind of millions of little, uh, um, Uh, things will intersect. I mean, obviously Shopify has a lot of efforts in, um, uh, machine learning, or our fraud products are powered by, um, uh, by it, it’s something we employ, um, uh, a lot for underwriting purposes, um, in, uh, you know, Shopify payments.

It’s, um, uh, a lot of, uh, active, uh, day-to-day, uh, engineering robot’s going into it that is, uh, related to machine learning. I, I think this is actually a really good example of why Shopify is, uh, important here. Um, because we are looking after the small, medium business space, of course, um, we, we, we have manage the business on Shopify.

Um, in times where there’s a lot of technological advance and change, um, it’s very hard for individual merchants, um, to, uh, stay on top of, uh, technological developments. Um, however, As Shopify, we can, uh, invest in this, uh, almost collectively, um, and, and, and roll out, uh, improvements very, very quickly, um, to everyone often, uh, giving, um, the SMBs that advances that aren’t even available or that that, that the larger retails have not really developed for themselves yet.

Um, already. I think a perfect example is our recent successes around Shopify audiences. Um, and, um, we, of course, machine learning is a very important, um, um, component. I think, um, the places to monitor are really around creative, um, uh, image generation will have impacts on, um, A democratizing, uh, effect on, uh, marketing, um, asset generation, which is currently, um, well not expensive.

It is, uh, something that is done via emails and, and, and sourcing and, and building a relationship with a designer and so on, uh, which is all very good and valuable and pre presumably should be done anyways, but like getting your first version of your ad copy. Um, and, uh, um, and, and all the assets done by just writing a prompt is going to again, allow more people to do early experimentation.

I think visa effects are once we really be welcome because, um, we find that, uh, every time we, something that was previously difficult and, uh, sometimes presenting, um, uh, every time we can use technology to make that available and, and easier, this actually increases the success rates of, uh, of the, the cohorts of merchants that sign up after.

And, um, This is also kind of this, this is from a product perspective, the most gratifying, um, loop and impact we can, we can have inside of Shopify. So we will, um, uh, u use everything. We got to, uh, get to Visa advances quickly, and um, uh, as soon as something becomes practical and, and, and, and, and, um, we should make it available.

And I think that’s the reason why merchants tend to go to Shopify. Our next question will come from Dak meth on, from Wolf Research. Dak, your line is open. Great. Uh, thanks for taking the question. Um, hardly maybe a question for you. Where do you think fulfillment adoption of S F N can reach under the current model long term?

You know, either as a percent of merchants or maybe as a, uh, percent of G M V. Any color on kind of how you’re approaching it in the early days with the deliver would be super helpful. And then maybe a quick follow up for Amy, uh, on the SM B side, M r R was down 3%, quarter on quarter, if my math is correct, you know, well, can you unpack the impact of sort of the local market pricing, you know, being lower than your paral levels versus merchant growth?

Thanks so much. On the s f n side of things, um, we, we are, we are quite clear of the type of merchants we can handle. We know, for example, we’re not gonna do perishables at least no time soon. We we’re getting a lot more thoughtful about the, the exact target pro product market fit that we can have than who are the target merchants.

And there’s a lot of merchants. I mean, I mentioned CPGs, I mentioned apparel, uh, in my prepared remarks, those are sort of the ideal customers, people that are selling things that are smaller than a microwave, that really works well for us. Part of what we want to do. Like I, I think the thing that that often gets missed on S F N is that we’re trying to make it so merchants don’t have to think about logistics so that they know that when they come to Shopify, it is one less headache for them, but at the same time, they can offer something that most consumers are beginning to expect, which is, uh, an anticipated delivery time.

Whether that’s two days or that’s three days. We wanna be able to provide merchants on Shopify. We’re starting with the us the ability to offer that. We think that’ll do wonders for things like buyer conversion. I mentioned on, on my, in my remarks that Shop Promise has already significantly boosted buyer con uh, buyer conversion simply like just with participating merchants that are just trying it now by 9% in the initial rollout.

That is real business, that is real sales for them. And so we think it’s a very large swath of our merchant base that we can help. But we’re also not trying to be everything to everyone. We want to be specific. We wanna be targeted, but who this is for and the people it, it is for will be delighted by this.

We’ll take, we’ll take our next question from Matthew F from William Blair. Go ahead, Matthew. Hey, great. Thanks for taking my questions. Guys. Wanted to, uh, ask about your strategy to target, uh, larger merchants. So you’ve been making some big changes in the strategy, uh, with hydrogen oxygen functions and partnerships.

You know, maybe you can just discuss these changes, because years ago it seemed like you thought you could target that segment of larger merchants with a more packaged solution, but that seems to be changing. So just curious as to what’s driving that. Thanks. Yeah, I’ll take that question here. Um, look, I mean, I, I mentioned these names on every call because more and more of these large established brands are, are migrating to Shopify, either from existing, you know, uh, existing larger enterprise, like existing, uh, enterprise solutions or their own stack.

They’re running in-house. Shopify Plus is becoming a very, very compelling, uh, solution for them. So I mentioned Glossier, for example, or Panasonic, and then obviously the international push as well with, with Converse and, and, and companies, uh, like New Era. We actually think that originally, uh, plus was a great migration path for our most successful merchants.

More and more it’s becoming the best place to sell when you’re selling at scale. And so, yeah, total cost of ownership and simplicity is important. But now when you add things like hydrogen and you add things like some of ’em more enterprise features, like audiences for example, uh, you’re able to effectively build anything you want on Shopify.

And I think that you’re going to see more of these. Existing large GMV merchants continue to come onto Shopify Plus and our enterprise offering, uh, in, in, in the, in the coming months. And part of the strategy also is, is, you know, there are ways where these enterprises like to purchase. So for example, I mentioned a bunch of sis on the call, whether it’s Deloitte or it’s kpmg, Ernst and Young.

There’s a lot of large brands that prefer to work through an SI when they are digitalizing or they’re modernizing the retail operations. And by partnering closely with these SI and becoming their preferred enterprise e-commerce solution, we think we can see more merchants come on faster. So, you know, EY alone is now training 500 technical professionals Yes.

Uh, around their entire, you know, network to, to how to sell Shopify and what Shopify can do. So I think when you combine flexibility, simplicity, it’s still incredibly well priced relative to, you know, the, the, the value to cost equation is still very much on the side of value in terms of Shopify Plus.

That’s the reason why you’re seeing, you know, plus growth outpacing GMV growth, uh, over the last couple of quarters. And so you’ll see a lot more merchants continue to upgrade to. Plus you’ll all see a lot of, um, brands that are not currently on Shopify migrating to us to use this enterprise functionality.

It, it’ll, it’ll be a part of our future and we’re excited by it. Our next question will come from Terry Tillman at Truist Securities. Go ahead.

Yeah. Thank you. Thank you for taking my question. I wanted to build on that last question, Harley, and I, I loved hearing, I love seeing these new logos each quarter that are really household names. I, I guess just a quick two-part question, and it is a single question is first, you know, when you have these coal Hans in some of these other brands, is it across their, all of their storefronts or is it maybe some of their smaller GMV producing storefronts?

So they wanna kind of test you out on the enterprise side. I’m just trying to understand, are you kind of getting kind of wall to wall across all their storefronts? And then secondly, with some of these really big brands, what, what are the attached rates on some of the other products, uh, around merchant solutions?

Thank you. It’s a great question. So when you look at companies like Glossier, for example, or Kohan, we now host their entire business. In other cases, part of our strategy is come in, let us prove to you that we are the best enterprise eCommerce platform for your business. So in the case of Converse in Japan, we’d like to get the rest of Converse’s business.

Of course, they’re owned by Nike. But we’re gonna start by showing them, proving to them that we are exceptional at what we do on the enterprise side. So in some cases, whether it’s Spanx or it’s, you know, with Mattel, for example, We host the entire American Girls Store, which is one of their largest businesses, by proving to them that we are incredible at this enterprise e-commerce, uh, thing, they will bring more stores on.

And then of course, again, with Glossy and some of the others, we have the entire business. So part of it is we wanna land and expand with some merchants. In other cases, they wanna bring the entire base, uh, their, their entire business onto. On the Merchants Solutions point, just wanna hit this, I wanna mention this one more time.

The reason that we talked about Merchants Solutions attach rate on this call is because it is a proxy for the value that we are adding to these merchants lives. We are not just their e-commerce partner where their, where their capital partner or their shipping partner, where their payments partner. The Merchants Solutions attach rate is a proxy for the value that we create for them.

And the reason that it’s exciting to us that we’re at an all time high in the history of the company is because we’re doing so by virtue of, of, of creating more features that they want. And it’s not just the small businesses. We’re also seeing penetration of things like payments and capital increase with, uh, with Shopify, uh, plus merchants.

The larger, the larger brands in the platform, and then obviously with audiences, which is now a Shopify Plus only feature, of course, that will continue to increase the take rate. But all these things further tie Shopify and our merchants together in this wonderful partnership. And I think you’ll see, again, more brands come onto the platform and more brands take more of our, of our products and features.

We’ll take our next question from Andrew Boone from JMP Securities. Andrew, go ahead. Good morning, and thanks so much for taking my question. It sounds like audiences is really helping merchants to improve return on ad spend. Can you just talk about what you’re doing to facilitate the expansion of audiences within your merchants?

And just bigger picture, what, what’s the role of Shopify within advertising over the next three to five years? Thanks so much.

Yeah. Um, I, I’ll take this. Uh, I mean, I, uh, we, we don’t do product announcements on, on, on, on, on, on this course. So like I, um, I mean the role, it’s. With the stake out so far is, uh, you know, we, we are helping, you know, bring CPA Stone. Um, we are, um, uh, running this on for our plus customers. Um, it is an optin, um, it, uh, you know, takes advantage of, uh, the platform we built.

Uh, you know, it audience is a is, is, is, um, um, the, the way people adopt audiences is by installing an app that is the first party app that, uh, we created. Um, so it’s, it’s, um, it, it really, um, I think ties together the way we are thinking about the platform because currently, um, in this phase of a, like of, of the internet given us cer, certain realities, um, that exist right now, we can play this role and, uh, we are intending to play very well.

Like I said, we are making, uh, investments, uh, in it and our machine learning, um, uh, focus is with audiences. Um, right now. Um, Advertising is, uh, it’s rapidly evolving and it’s hard to, um, uh, predict exactly where, um, where things are going. Like the, the, the types of art units that are available to, um, small, um, and medium businesses.

Um, and enterprise businesses is rapidly evolving. Um, you know, sometimes certain things work really well, um, the next day we don’t. Um, and, um, sometimes certain things are being done for a couple of years and, um, uh, you know, throughout a change somewhere, it’s entirely in, in, in, in deep browser architecture.

Um, uh, you know, suddenly those things like, like, like certain completely unrelated things end up becoming high, converting again, visa, like great, uh, functioning growth teams can take advantage of all these kind of things. Um, but, uh, Many of our customers cannot. And, and because they have to be focused on providing great product and great experiences.

So, um, we like to take, um, wherever we become active, it, it’s an area where we can make significant, um, conceptual simplification, um, uh, improvements to to to, to our customers businesses. I dunno if this is helpful, but, um, I think it’s a good idea to explain how we are getting, um, uh, in, into these businesses because it’s, it’s a different decision matrix than, uh, what, what’s generally assumed.

Okay. Um, it is a focus area though, and it’s, we can probably have more than most other areas given the, um, certain, the current re realities. Um, uh, we, a lot of our customers have products at. Um, the intersections of, of, of, of several interests. Um, um, so targeting as in like, um, finding, um, is, uh, the, the people who need worse products is, has always been very, very difficult.

Um, uh, has recently become, uh, more difficult. We, we hope that we can, um, at, at least backfill some of, uh, of what was lost from perspective of the merchants and both of the products, um, wherever. Um, I mean both of the products where the buyers really, really want the kind of personalization as well, because again, without advertising channels, there’s no way to find out about some of these, um, delightful products.

Um, so it’ll remain be a, a focus area and we’ll, uh, have, uh, more products and expansions of these programs to announce in the coming, uh, year. We’ll take two more questions. Our next question comes from Jeff Cantwell at Wells Fargo.

Jeff, go ahead. Hey, uh, can you hear me? Yes, we. Okay, great. Sorry about that. Uh, and, and thanks letting me ask a question. My first was on your, just to follow up on that, you know, just, uh, on your recent product launches, I still wanna follow up on b2b. Uh, and just curious if there’s any updates or signs of progress there that you can talk about.

And we, we understand it’s still early days, but just wanna get a feel for, you know, what excites you there, what you’re seeing from the, from, from that launch. And then second, you know, unprofitability, it does look better than expected. So can you talk about sustainability there? You know, cuz on the outside world trying to get comfortable with macro, uh, and investors who clearly honed in on profitability and they benefit a slowdown.

So, do you see yourselves becoming progressively more focused on profitability? And I guess the point of the question is to try to get a feel for how we should be thinking about your ability to improve profitability going forward. Thank you.

I’ll take the first question on, uh, on B2B and, and, and wholesale generally. Um, I mentioned, uh, on, on previous calls that, you know, our, our ambition is really to be the central nervous system of our merchants businesses. We want to be their, their retail operating system. And, and retail is, is not just direct to consumer for all merchants.

There are merchants that have, uh, wholesale and, and, and B2B businesses as well. And so the ability to actually tie that all in together and make the Shopify admin. Truly their, their, their central nervous system is really important to us. And I think what we’re doing around B2B is making it more centralized so that they have a single view of their entire business.

So one is we have all these merchants on the platform that also do b2b. Now we can add more value for them and we can actually become more important in their lives. But the second thing is it also now gives us an opportunity to go to market with a strict B2B offering for B2B merchants exclusively. Uh, previously, if you were just selling wholesale, you may not consider Shopify.

We think the B2B offering we are offering. We, we are, we were, uh, we’re talking about here is is gonna be world class. And what that means is that we can actually go after a new segment of the market. Um, I I, maybe, I don’t know, Amy, if you wanna jump in on the profitability thing, the one thing I, I just will say is that, You know, I think Shopify has been historically an operationally disciplined company.

Nearly all our growth, pre-delivery, uh, has been organic and we’ve funded, uh, you know, like all our gross profits have been re have been redeployed back into our business. We have raised cash externally, uh, very strategically and that’s only been used accelerated our pro, our roadmap and we’re decelerated decelerating, year on year operating expense growth.

And so, you know, we are a company that, that likes profitability. If you look over the seven years of I, since I p o five, outta those years we’ve been profitable. We plan on becoming profitable again, we said this year as a investment year. But this is a company that thinks deeply about managing expenses, growing revenue, but ultimately this is a company that, that like that likes to be profitable and we will get back.

Amy, I think you’re muted. Uh, I, Steve speaking.

Sorry, can you hear me? I’ve had stream internet problems. Yes. We’ve shown discipline in our Q3 opex in the face of, of adding a major acquisition with deliver and our new flexible compensation system. We managed to, um, to, uh, only have a slight increase in OPEX expenses quarter over a quarter. Um, and you saw a sequential, um, improvement in our subscription margin, uh, quarter over quarter.

That’s the operating discipline that we’ve always exhibited and will continue to exhibit. Into the future. As Harley said, we had increasing, um, uh, profitability from 2017 to 2021. We intend to get back there. Our last question today will come from Gabriela Borge at Goldman Sachs. Go ahead Gabriela. Hi.

Good morning Harley. I’d love to get an update on how negotiations around integration with Amazon buy with Prime going, what as a successful outcome, and then help us get inside the head of a Shopify merchant a little bit. How do you think merchants will evaluate the pros and cons of Buy with crime, buy with Prime versus.

Hey, Gabrielle. Um, I’ll take that one. I look, I think, uh, we said previously the, any, any time a large company is making their infrastructure available to small businesses. In a way that levels of playing field we think is a great thing. And, uh, and so, you know, buy with Prime is no different than that, but obviously it has been in the right way and, and we have nothing to announce now other than that.

We are, uh, as we said last time, uh, last time we spoke, we are talking to Amazon about how we implement this in the right way. What’s important for merchants is they wanna be able to manage their entire business from one centralized place. They want all the information they need to make really, really good decisions.

But at a, at a high level, at a macro level, when, when great companies, uh, or any company for that matter, makes infrastructure available to small businesses and does so in a way that that levels the playing field further for small businesses, that is a very, very good thing. Um, you broke up on the second part of your question, but I think you asked about getting into the minds of, of, of.

Of merchants, um, uh, right now, I, I think for the holiday season, look, I, I think our merchants are preparing. Shopify is their partner. We wanna make sure they have a very successful season. They’re all ramping up right now. This multi-channel strategy that we’ve been implementing for years is really starting to pay off because merchants wanna sell wherever their consumers are, and they can do all that from Shopify.

When you add merchant solutions and you add the fact that, you know, we, we can simplify things that, that are usually not easy to simplify, Shopify becomes the most important piece of software that merchants use and, and that’s what we’re thinking about going into the holiday. I think that, and that was, I think of our last question and um, just wanted to quickly jump in here because I just wanna personally thank Amy, uh, Amy Shapiro for, um, her leadership, um, and, um, bringing Shopify here, being a teacher, um, uh, to me and to the company.

And, um, uh, you know, like these are journeys we, uh, best done together, uh, with friends. Um, and, um, um, thank you for everything you’ve done and being a friend and a teacher over b c s. Ah, thank you. And with that, thank you to all of you who have joined us this morning and for your questions. This concludes our earnings conference call for the third quarter of 2022.

We look forward to providing our fourth quarter and fiscal year end results next year. Thanks again and goodbye.

Did you enjoy this article? Join our FREE Newsletter!
I agree to have my personal information transfered to MailChimp ( more information )
Join over 100,000 investors and business leaders worldwide. Get the latest actionable business and investing intelligence before the rest of the crowd.
We hate spam. Your email address will not be sold or shared with anyone else.