Shopify SHOP Q2 2020 Earnings Call Transcript

Operator: (00:01)
Thank you for standing by. This is the conference operator. Welcome to the Shopify second quarter 2020 financial results conference call. As a reminder, all participants are in listen only mode and the conference is being recorded. After the presentation, there’ll be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and zero. I would now like to turn the conference over to Katie Keita, Director Of Investor Relations. Please go ahead.

Katie Keita: (00:41)
Thank you, operator. And good morning everyone. We are joined this morning by Toby Lutke, Shopify’s CEO, Harley Finkelstein, our Chief Operating Officer, and Amy Shapiro, our CFO. Each of us is dialing in from our homes. After some brief prepared remarks by Harley and Amy, we will open it up for your questions.

Katie Keita: (01:03)
We hope you enjoyed the on-hold music created by Shopify’s own internal talent. Now for something slightly more [inaudible 00:01:10] by our legal department titled Risky Business. We will make forward looking statements on our call today that are based on assumptions and therefore subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements except as required by law. You can read about these risks and uncertainties in our press release this morning, as well as in our filings with US and Canadian regulators. Note that the adjusted financial measures we speak to today are non-GAAP financial measures, which are not a substitute for GAAP financial measures. Reconciliations between the two can be found in our earnings press release. And finally, we report in US dollar, so all amounts discussed today are in US dollars unless otherwise indicated. With that, I turn the call over to Harley.

Harley Finkelstein: (02:06)
Good morning, everyone. And thank you for joining us today. We hope that you’re all keeping safe and healthy. Over the past few months, we’ve seen the COVID-19 pandemic fundamentally shift the way businesses and consumers interact. It has catalyzed e-commerce, introducing major changes in buyer behavior and pulling forward what retail would look like in 2030 to 2020. Many merchants were caught off guard, and we knew that Shopify needed to act fast to help them survive. So, from late March through the second quarter, we dialed up our urgency to enable independent businesses to adapt and compete in this new reality. This urgency helped more merchants not just survive but thrive in a period of major upheaval. I cannot recall a time in our history when we’ve shipped so many features in such a short period of time, helping so many merchants recover and many others reach new levels of success.

As a result, Q2 GMV growth accelerated to its highest level since before our 2015 IPO, driving Shopify’s cumulative GMV to over $200 billion. Stores selling on Shopify sold one and a half times what they did in Q4 of last year, the seasonally strongest quarter of the year, and that number of stores is growing all the time. This tells me that we’re on the right track and made the right decisions early in the pandemic. The success our merchants are seeing motivates us to push even harder. In Q2, Shopify hosted its first virtual company event, Shopify Reunite, which attracted more than 50,000 viewers, far more than what we’ve been able to reach with our annual in-person event. Our new product and feature announcements span the online store, multichannel capabilities, retail, shipping, and finance, all geared towards helping merchants navigate and quickly adapt to a rapidly changing commerce landscape.

I want to highlight a few of these features and then I’ll provide an update on how our merchants are responding in the current environment, our progress with Shopify Plus and our partner ecosystem. We shipped Express Theme, a free theme designed to get any business online quickly, such as restaurants and cafes. We also introduced online tipping to support the food and services industries and businesses offering local delivery. We introduced natively integrated channels from Facebook shops, walmart.com and Pinterest, enabling our merchants to sell in more places where their buyers are and driving new traffic to their stores. As code [inaudible 00:04:28], our retail merchants are focused on protecting our customers and employees by leveraging safe distance technologies, such as contactless payments. After introducing the new tap a chip hardware in the US last year, we rolled it out in Canada following the global launch of our all new point of sale software in early May.

Together, our point of sale offering is a powerful product that provides a seamless omnichannel experience for both the merchant and the buyer. The shift to online commerce is redefining the role of the physical store. And many retailers are reimagining their stores to serve as order fulfillment centers to meet digital demand. So we enhanced our curbside pickup and our local delivery capabilities to give merchants more control of their retail operations by driving [inaudible 00:05:12] execution. We also announced two financial services products set to launch in the US later this year, Shopify Balance and Shop Pay Installments. We’re introducing Shopify Balance to further level the playing field, giving our merchants access to their cash faster and providing critical money management tools to effectively manage their business. Through our no-fee business account, merchants will be able to understand cash flows, track expenses, and pay bills. Merchants will also receive a physical or virtual card, which will help them access their own sales revenue faster than before, and get rewards like cash back and discounts that will help more of our merchants reinvest in their future.

Our upcoming buy now pay later product Shop Pay Installments will let merchants give buyers more options by paying in installments with no interest and no fees. Working through our partner, Affirm, we will offer a product that can help merchants to sell more by increasing cart size and sales conversion rates. Shop Pay Installments will be integrated into our accelerated checkout Shop Pay, which offers four times faster checkout and close to two times higher conversion than regular checkout options, providing a frictionless experience for merchants and their buyers. Since its launch, Shop Pay has facilitated cumulative GMV of more than $11 billion. Entrepreneurs have proven time and again that they’re resilient and resourceful, and here’s how merchants are tackling their challenges head on in the midst of the COVID-19 pandemic. First, our merchants are creating new buyer opportunities. 39% of brick and mortar merchants in our English speaking geographies adopted some form of local, in store or curbside pickup delivery solutions in Q2.

That is up from 26% in early May to meet increasing local demand. Merchants also saw more local customers shopping at their stores, with the percentage of local customers per shop again increasing quarter over quarter. Merchants also grew their multichannel presence over the second quarter with a greater proportion of merchants installing two or more channels in an effort to reach broader audiences. Second, more merchants are leveraging merchant solutions as they seek to reduce friction while growing their businesses. More merchants access capital quickly in Q2 as the number of US merchants accepting capital rose, and we offered financing for the first time to merchants in the UK and Canada, where we launched Shopify Capital in March and April respectively. Cumulative funding across all three countries reached $1.2 billion at the end of June. More merchants also use Shopify shipping as new users fulfilled their very first orders on the platform and we expanded our offerings to Australia.

Adoption increased at 49% of eligible merchants in the US and Canada in Q2, up from 42% in the same quarter last year. And third, our merchants accessed new opportunities to strengthen customer relationships and loyalty. Merchants leveraged tools like Shopify Email and the Shop App to deepen merchant relationships with buyers and increase customer lifetime value. Over 150 million emails have now been sent through email campaigns since Shopify Email launch in Q1. Shopify Plus merchants experienced and exceptionally strong second quarter. More brands joined Shopify Plus this quarter than ever before, as merchants from lower level plans grow their sales and upgrade and more large brands seek to scale their businesses in an agile and cost effective manner. This is especially critical right now as digital commerce accelerates and an uncertain macro economic environment persists The optionality that Shopify Plus offers from speed to market to cost, and the ability to experiment and act like an entrepreneur is resonating heavily with enterprise level merchants, encouraging them to rethink their channel strategies and accelerate their timelines towards digital transformation.

In our second quarter, brands from different verticals launched stores on Shopify Plus, including the legendary bike company founded in 1895, Schwinn, beach wear company, Hurley, and Western apparel brand Stetson, Canadian grocery store, Farmboy, UK food and drink CPG, Princes, chocolate bar company, Snickers, and the major many more brands across a range of products and industries. In Q2, we also rolled out the new Shopify Plus Admin, a revamped backend for merchants to manage their organizations, including multiple stores, analytics, staff accounts, user permissions, and automation tools like Shopify Flow, all in one place. Our partner ecosystem continued to work hard for our merchants with over 30,000 partners referring a merchant to Shopify over the last 12 months.

Speed, creativity and [inaudible 00:09:47] as they help merchants move online and optimize their stores in the shifting landscape. Our partners have been going above and beyond, getting work out the door faster than we’ve previously seen, with the number of stores created in three days or less increasing by 123% in Q2 versus Q1. They’re also supporting our merchants in a variety of ways, helping them find quick wins that will make a difference to their business now, like running content marketing and social media on their behalf. The versatility and dedication of our partners truly highlights the strength and quality of the Shopify ecosystem.

Technology has democratized entrepreneurship and everyone’s ability to build a successful business. The acceleration of digital commerce has pushed this opportunity forward, an opportunity that Shopify has been building towards for over 15 years. With the ongoing COVID-19 pandemic, the continued uncertainty in our macro economic environment and the growing momentum in the fight for equality, Shopify’s roll to level the playing field for all entrepreneurs has never been more clear. Our mission has always been to make commerce better for everyone. And Shopify is working harder than ever to pull entrepreneurs forward into the future that is emerging. And with that, I will hand it over to Amy.

Amy Shapiro: (11:05)
Thanks, Harley. We’re focused on improving the commerce experience for everyone. And that mission starts with helping our merchants. We are on the side of entrepreneurs, whether they are just starting out or are large and established. What’s important to us is building the best commerce operating system that will help them succeed in any retail environment, especially the one presented in today’s tough circumstances. And when merchants succeed, Shopify succeeds, as evidenced by our merchant sales and our results in Q2. Revenue almost doubled in our second quarter to $714.3 million, up 97% over the same period last year, largely driven by our acceleration and success based merchant solutions revenue and to a lesser extent by subscription solutions revenue.

Subscription solutions revenue increased 28% year over year to $196.4 million. Monthly recurring revenue grew 21% year over year to $57 million, primarily driven by new merchants joining the platform. While growth in the quarter was impacted by the 90 day free trial on standard plans offered from March 21st through May 31st, MRR ended the quarter higher than in Q1, benefiting from the highest ever number. Additionally, we benefited from standard merchants in the 90 day extended free trial March cohort, as well as those in the regular 14 day free trial June cohort converting in the latter half of June. It is important to note that the 90 day clock is still ticking for those who signed up for the 90 day trial in April and May with any standard merchant conversions from those trial cohorts benefiting Q3.

Shopify Plus are accounting for $16.6 million or 29% compared with 26% of MRR in Q2 of 2019. Strong apps and themes revenue related to the 71% year over year increase in new store creations in Q2 contributed to the approximate seven percentage point difference between the growth of subscription revenue, and MRR revenue grew 148% [inaudible 00:13:20] dollars in Q2 compared to the same period in 2019. This is the third quarter in a row of acceleration and a growth rate we have not seen since before our IPO, driven primarily by Shopify payments, followed by growth of other merchant solutions revenue like capital, shipping and transaction fees. All of these were driven by the spike in GMV, which increased 119% year over year to $30.1 billion as [inaudible 00:13:49] solutions by merchants and growth in partner referral revenue. Stores created on the extended free trial, GMV per merchant increase in [inaudible 00:14:02] and across all geographies benefited from the tailwinds of the shift to online commerce.

$13.4 billion of GMV was processed on Shopify payments in Q2, an increase of 132% versus the comparable quarter last year. Payments penetration of GMV was 45% versus 42% last quarter, as well as in Q2 2019. Penetration levels reached new highs across our merchant segments as new merchants joining the [inaudible 00:14:31] payments. And Shopify Plus international merchants expanded their share of GPV. Demand for Shopify Capital was strong in Q2 with merchants receiving $153 million in funding across the US, the UK and Canada. This represents a 65% increase in funding over the second quarter of 2019 while maintaining loss ratios in line with historical periods. Access to capital is even tougher in times like these, which makes it even more important to continue-

Amy: (15:03)
Even tougher in times like these, which makes it even more important to continue lowering this barrier by making it quick and easy so merchants can focus on growing their business. Adjusted gross profit dollars grew 84% over last year second quarter to $381.4 million, which reflects the significantly greater mix of merchant solutions revenue versus last year. The impact of the 90 day free trial, which reduced subscription revenue without a corresponding decrease in related cost of revenues. The acquisition of 6 River Systems in Q4 of last year and our ramp up of investment in Shopify Fulfillment Network.

Amy: (15:38)
Adjusted operating income was $113.7 million in the second quarter, compared to adjusted operating income of $6.4 million in the second quarter of 2019. Adjusted operating income and Q2 2020 reflects our strong revenue performance in the quarter and excludes a onetime impairment charge of $31.6 million resulting from our decision announced in May, 2020 to work remotely permanently. I will go into this in more detail in a few minutes. Adjusted net income for the quarter was $129.4 million or $1 and 5 cents per share compared with $10.7 million or 10 cents per share in last year, second quarter. Note, this is based on diluted shares outstanding due to the gap profit recorded in Q2.

Amy: (16:27)
Finally, our cash, cash equivalents and marketable securities balance was $4 billion on June 30th, strengthened by the capital we raised in our second quarter. Our healthy balance sheet gives us greater optionality that we believe increases our competitive advantage. To retain this financial flexibility, we began the process to renew our shelf perspective yesterday evening. We consider this to be ordinary course of business given the pending expiry of our current shelf. Our strong track record of capital allocation is reflected in the investments we’ve made in our platform and the resulting successes of our merchants. Before providing an update on key investment areas, I will provide an overview of our decision to work digital by default related financial implications in Q2 and expected impact for the rest of 2020.

Amy: (17:15)
We are making changes to how and where we work to keep our employees safe and unhealthy to create opportunities for existing and future talent and to continue effectively solving critical problems for our merchants. We’ll be keeping our offices closed for the remainder of 2020, redesigning our spaces for a new future and reducing our office footprint. This means that most of our employees will work remotely on a permanent basis and leverage our office spaces when it makes sense. This also represents an opportunity for Shopify to open up and further diversify our talent pool unconstrained by physical location. While our offices were a special part of the Shopify experience, our culture is not defined by it. It’s defined by our employees, the values intrinsic to Shopify and our alignment with our mission to make commerce better for everyone. Our Q2 2020 results include $37.1 million of incremental expenses related to these facilities changes reflected in two areas.

Amy: (18:15)
First, we are exiting some of our secondary offices in major cities for which we took a $31.6 million impairment charge in Q2 related to right of use assets and leasehold improvements. The impairment charge in Q2 is recorded in general and administrative expenses and excluded from adjusted operating income given it’s one time nature. Second, for offices we are keeping and retrofitting, we are accelerating depreciation on $40.5 million of leasehold we sold improvements over a two to three year period. The impact in Q2 was an incremental increase in expense of $5.5 million. Accelerated depreciation is allocated across cost of revenue and operating expenses in Q2 and is included in adjusted operating income given its recurring nature. We don’t currently expect to make any further material office footprint changes for the remainder of 2020.

Amy: (19:09)
Now turning to our key investment areas. As we discussed on our first quarter earnings call, our key investments coming into 2020, like Shopify Fulfillment Network, were validated by merchant needs that were escalated by COVID. And we made adjustments to our plans to quickly deliver on features that would help our merchants adapt and thrive both now during COVID and over the long-term. Over time, we believe that actively managing a portfolio of growth investments with different return time horizons is necessary for continued growth. Our key investments fall into three categories, core, expansion and ambition, which include near, medium and longer term initiatives respectively. The core bucket includes merchants and products that [inaudible 00:19:53] respectively. The core bucket includes merchants and products that Shopify has invested in for a few years and continues to build such as our platform Shopify Plus, and merchant solutions like Shopify payments, including multi-currency and other payment related products, Shopify capital, and Shopify shipping. Investments in core generally have strong returns today that help us reinvest to build for the long term.

Amy: (20:20)
A great example is our newly released Shopify Plus admin, which is resonating with merchants of scale with early merchants, feedback highlighting, increased operating efficiencies, and the ability to rapidly expand into new geographies. Our expansion initiatives, which include international growth and retail POS, we expect will deliver over the medium and into the long term. Continued investments to help international merchants get up and running as easily on mobile as on desktop enhance their cross border selling capabilities and make the platform more intuitive on a regional basis, should all help continue progress like we saw on Q2 where international merchants led the pack and year over year GMV growth.

Amy: (21:02)
For retail merchants, we will continue building out retail inventory and fulfillment capabilities, helping them adapt to a retail landscape that delivers a seamless commerce experience bridging online and offline. We’re on the right track if Q2 saw POSGMB start to recover. Healthy adoption of our all new POS software sustain levels of use of the local features we rolled out over the past few months and increasing hardware sales in the U.S. and Canada. Finally, our success to date would not be possible without investing for the out years, which are represented by ambition initiatives. These represent bold initiatives that will power the flywheel longer term. These investments, which are in their earlier stages, take time to scale, but are expected to become game changers for Shopify and our merchants. They include Shopify Fulfillment Network, 6 River Systems, Shopify Balance Shopify App, Brand, Wholesale B2B, and more. We announced Shopify Fulfillment Network just over a year ago and although we are still early in our planned five-year build, we are pleased with the progress we’ve made so far in developing the technology, our partner network and the merchant experience. Q2, we enrolled more merchants and increased fulfillment volumes by two and a half times over Q1 as existing merchants fulfilled more orders and new merchants brought on new volume.

Amy: (22:25)
Our focus this year remains on building product markets [inaudible 00:00:22:27], automating and improving merchant onboarding experiences and working with our partners to develop a strong network of notes. We want to ensure that the foundation of our fulfillment network is strong and the merchant experience is outstanding before entering the scale phase towards the end of next year, or soon after. We believe 6 River Systems will be helpful here. As throughput rates have increased approaching two times previous levels where we’ve integrated 6 River Systems technology. So we anticipate other nodes will benefit as they adopt it as well. It’s value proposition as a flexible, easy to implement warehouse fulfillment solution is resonating right now and adding momentum as both existing and new customers begin to prepare for the busy holiday selling season.

Amy: (23:13)
Wrapping up, we believe the COVID pandemic has permanently accelerated the growth of online commerce, changing the retail landscape forever. Shopify’s task is to help our merchants adapt and succeed in the world that emerges by investing in and building a global commerce operating system that evolves with their journey as the macro environment technology and consumer behaviors change, we will continue to help entrepreneurs power through these difficult times and position themselves for longer term success. Due to the continued lack of visibility into the coming months given COVID and macro economic uncertainties, we are not providing guidance for our third quarter or the full year.

Amy: (23:53)
We continue to closely monitor the factors impacting our business to act nimbly and quickly serve our merchants needs. Our merchant first mission and business model together with our strong balance sheet, our disciplined approach to capital allocation and rich partner ecosystem position Shopify to capture what we believe is a tremendous opportunity to improve lives around the world by helping more people reach for independence. With that, I’ll turn the call back to Katie.

Katie: (24:24)
Thanks Amy. Before handing it back to the operator, I’ll remind everyone to please limit yourself to just one question, this way we can hopefully get to everybody and everybody will get a chance to ask a question on our call today. So with that, I will hand it back to Ariel who will begin pulling for questions.

Ariel: (24:46)
Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then two. We will [inaudible 00:00:25:07]. our first question comes from Thomas Forte of D.A. Davidson. Please go ahead.

Thomas Forte: (25:15)
Great. Thanks for taking my question. Toby, Harley, Amy and Katie, hope you are all well. I have a question for Toby, the CEOs of Amazon, Apple, Facebook and Google are expected to testify today before a house judiciary committee, examining antitrust concerns. These companies are your strategic partners and also your competitors. For example, Amazon called out Shopify as a competitor in it’s pre-released opening remarks. Toby, I want you to comment, I’m curious on your input on the implications to Shopify. Thank you.

Toby: (25:48)
Thanks Tom. Look, we are really focused here on our mission, which is to make commerce better for everyone. Our core business doesn’t directly compete with anyone of them and we are partnered with all of them. And so I don’t think we have any particular insights beyond just fellow travelers in a world of technology. And so, that would be an interesting day and they’d see how it goes.

Ariel: (26:25)
Great. Thanks Tom. Next question, please.

Katie: (26:30)
Our next question comes from Brad Zelnick of Credit Suisse. Please go ahead. Brad Zelnick your line is live. Our next question from Ken Wong of Guggenheim Securities. Please go ahead.

Ken Wong: (26:58)
Great. Thanks for taking my question. In your [inaudible 00:27:01] remarks, you guys mentioned seeing GMV decelerate in June and July and given the magnitude of how you guys have performed this quarter, can you give us a rough sense of what that step down in June and July looks like so we can flow some of that through our models since there’s no guidance?

Female: (27:24)
Yeah. We’re not going to provide guidance on the degree of deceleration, we’re not giving guidance for the quarter or the full year because of the uncertainties related to COVID in the macro environment. One month in our third quarter may not be representative of the full quarter. So for that reason, we’re not providing guidance.

Ariel: (27:50)
Great. Thank you, Ken. Next question, please.

Katie: (27:54)
Our next question comes from [Matt Fowl 00:00:27:56] of William Blair. Please go ahead.

Matt Fowl: (28:01)
Hey guys, thanks for taking my question. You’ve made several recent announcements that you discussed about increasing your merchants ability to sell over multiple channels and specifically I’m thinking about the Walmart and Facebook’s announcement. Clearly, these are beneficial for your customers, but maybe you could just dig in a little bit more on the benefit here to Shopify. Is it just further differentiating the Shopify platform or are you able to monetize the transactions that are processed over these other channels?

Harley: (28:34)
Thanks for the question on that. It’s Harley here. Look, in terms of our channel strategy, which we’ve been working on now for years, the idea is we think the future of commerce and retail is going to be everywhere and Shopify plays a more central role in the lives of more than a million merchants on our platform. We need to be the retail operating system, which means we need to make it easy for them to sell anywhere where potential customers may be, whether that’s on a place like Pinterest or a social media platform on a marketplace like Walmart, but it all fits back into one centralized place where they can manage the entirety of their business.

Harley: (29:05)
And so as new potential opportunities arise, new channels, we think it’s our responsibility to make sure that we make it easy for merchants to sell there and put it all through that retail operating system. And so you’ll see more of those come up, but we’ve been doing this for a long time. And the neat part I think about the Shopify offering is that before Shopify, you had to have 20 different tabs open to manage a multi-channel, omni-channel business. Now you don’t, you can do everything from Shopify, which makes us further being the heart of their business, which is important to us.

Ariel: (29:37)
Great. Thank you, Matt. Next question, please.

Katie: (29:41)
Our next question comes from [inaudible 00:29:43] of Mizzou. Please go ahead.

Speaker 1: (29:48)
Thanks for taking my question. During this time, you’ll see that basic necessities like food, beverages, and tobacco spike in terms of demand. I’m wondering, this year, what percentage of the GMB that represents?

Sidney: (30:03)
Could you share what percent of the GMV does that represent?

Amy: (30:08)
Yeah, we don’t break out our GMV to that level. We did see food, beverage and tobacco increase as a percentage of our mix in the second quarter, but we also saw mainstays in apparel accessories and cosmetics recover through the quarter. So the GMV growth was really a mix of all categories on consumer verticals.

Speaker 2: (30:38)
Right, thank you, Sidney. Next question, please?

Operator: (30:42)
Our next question comes from Collin Sebastian of Baird. Please go ahead.

Collin Sebastian: (30:49)
Good morning, and thanks for taking my question. Perhaps a bigger picture question for Toby or Harley, you have access to such a tremendous amount of data around e-commerce and transactions, lots of potential there to capture insights from this data. If you could talk about the bigger opportunities from that data, including on the consumer facing side of the business and whether you’re still confident that the underlying technology stack used by Shopify is adequate to manage the increasing complexity. Thank you.

Toby: (31:23)
Yeah, thank you. Yeah, so you’re right in as much as one piece of the puzzle of data that Shopify didn’t have insights into is how entrepreneurship and small bits of information would act or look like during a pandemic, so that picture is filling itself in. Of course, they are still early, so it remains to be seen. We had some minor data from the last financial crisis, but of course, that played out very, very, very differently. I mean, the way we are thinking about data is that what we really want to do is have the merchants surface their own data, like give them the insights from their own sales patterns, hand them their own decision making on business expansion. On a micro- aggregated level, we are learning how businesses are best grown, what might be the next step might be for the merchants that are looking for the next steps to expand their business against the backdrop of different economic environments and states and industries and so on.

Toby: (32:44)
So all of this is beneficial. This is all built on, I’m going to call it leading edge, but we’re very good at getting leverage from the latest technology. So that on day one that I made technology decisions, I took that very seriously and the [inaudible 00:33:03] a very, very modern stack and a modern approach and as a sort of a core value for engineering. So we feel very, very confident, and I know technological foundations and being able to use the latest that the technology industry has created and come up with to make commerce better for everyone. That’s kind of the sort of the overall challenge for updates.

Speaker 2: (33:28)
Thanks, Collin, for your question. Next question, please?

Operator: (33:32)
Our next question comes from Gus [Papagergio 00:33:35] of PI Financial. Please go ahead.

Gus Papagergio: (33:38)
Hi, thanks for taking my question, and congrats on a great quarter. Amy, I’m wondering if you could just give us some color on, if you look at the GMV growth sequentially, or I guess year over year, how much of that was kind of from your base of customers growing their sales organically due to increased sales occurring on e-commerce platforms, and how much of it was from adding new customers? Any kind of sense you could give us would be helpful.

Amy: (34:08)
Yeah, let me just start by saying that the GMV growth overall was really driven by the sudden shift at consumer spend from offline to online driven by COVID. And so what we saw was GMV per merchant increased significantly quarter over quarter and year over year as our merchants benefited from that tailwind. But we also saw more merchants, new stores, joining the platform during Q2. And so we know that a higher percentage than normal were established businesses rushing online. Shopify Plus had a record quarter of that adds. And new stores joining on the 90 day free trial for standard plans, there was a healthy mix of established businesses rushing online.

Amy: (35:04)
So it really was a combination of those two. And again, I’d also like to just emphasize how broad-based the GMV growth was across all merchant segments, and all geographies, and across all consumer verticals.

Gus Papagergio: (35:20)
Great. Thank you.

Operator: (35:21)
Great. Thank you, Gus. Our next question comes from [Egal Erunian 00:35:26] of Wedbush Securities. Please go ahead.

Egal Erunian: (35:31)
Hey, good morning, guys. Thanks for taking the question. I want to ask on the POS, and you noted in the release that getting back to February levels, which I thought was surprising if not interesting, retail in the US if that’s where it was in February. So can you talk a little bit about what that means for Shopify? Is it taking share on your customers with their omnichannel presence more inclined to drive stronger in-store growth and have POS kind of outperform overall retail? What are you seeing there that’s getting your POS out of retail overall? Thanks.

Harley: (36:18)
Thanks for the question. Yeah, I think we mentioned on our last earnings call that we did see a POS, GMV decline between March 13th and April 24th, relative to the comparable six week period. But that we also saw that those physical retail merchants managed to replace it by 94% of those that lost GMV through online stores over that same period. So we were pleased to see the resiliency there. We are now beginning to see more brick and mortar stores reopen up, not just in the US, but around the world. And so we are starting to see more of that retail GMV come back.

Harley: (36:50)
That said, one thing that has happened through this whole process and through the crisis, is that we now are seeing our physical retail merchants look at multichannel a much different way. So for example, 26% of our brick and mortar merchants English-speaking countries are now using some form of local in- store or curbside pickup and delivery options. That’s compared to 2% at the end of February. So we are seeing this new, as physical retail reopens up, the business model for those physical retailers are also contemplating a new type of resilient model, which allows them to sell online and offline. And then we continue to roll out great new features for point of sale. Things like staff permissions, retail level reporting. And so the point of sale product, the physical retail product, just keeps getting better and better. But certainly we are seeing more GMV flow back through physical retail than we did at the beginning of the pandemic.

Operator: (37:47)
Thanks, Egal. Our next question comes from Darren [inaudible 00:37:51] of Ross Capital Partners. Please go ahead.

Darren Afty: (37:56)
Yeah, thanks for taking my question, if you will. Question maybe for Amy. So as you kind of think longer term with the work from home and appreciate the impairment cost savings you kind of detailed, but as you think about things like travel spend, marketing, et cetera, how does a PNL kind of benefit or not? What about that puts and takes longer term, or we just reinvest those dollars you saved into other categories and you go forward? Thanks.

Amy: (38:26)
Yeah. Longer term? Yeah, we would expect to save some amount of money, obviously, on the office footprint itself. Right? Most of those benefits, we’re not going to see until a couple of years out, but that would be one benefit. Travel spend, yes, would decline. We’ve seen that happen as we’ve been working remotely through COVID, so we would expect that would continue. However, we would redeploy some of those savings back into helping our employees work from home effectively in their home setups and helping them make sure that they have great internet connections and things like that. So it’ll be a little bit more like a shifting of expenses over time.

Speaker 2: (39:17)
Great. Thank you, Darren. Next question, please?

Operator: (39:24)
Our next question comes from Deepak [inaudible 00:39:27] of Barclays. Please go ahead.

Deepak: (39:30)
Great. Thanks, guys, for taking the question. Harley, can you give us some color on how much is generating growth during this COVID period? Are there any channels where margins are seeing the biggest success? Clearly, there is a big online demand generation, I mean, shift to the online channels from a consumer standpoint, but I was wondering whether margins are using any specific channel that’s seeing better success now? Thank you.

Harley: (39:58)
Thanks for the question. It’s important to understand that because we have such a broad range of merchants on our platform, and I mentioned some of them this morning, brands like Snickers and AAA and Coors, and Molson Coors, but also over a million small businesses, not every channel is appropriate for every particular merchant. And so the onus is on Shopify to make sure that we have all the right channels for any particular merchants’ businesses. A particular type of product that would sell really well on walmart.com may not sell as well on Pinterest or on Instagram or Facebook. And so that, I think, is one of the advantages of the Shopify platform is that regardless, and despite whatever you are selling, there is likely the right appropriate channel for you. Now, of course, the most important and the most impactful channel is online store followed by the physical retail shop by point of sale. But after that, we see merchants selling across a whole variety of channels, which is why we have to keep adding these channels over time.

Speaker 2: (40:52)
Great. Thanks, Deepak. Next question, please?

Operator: (40:55)
Our next question comes from Brian Peterson of Raymond James. Please go ahead.

Brian Peterson: (41:01)
Hi, everyone. Thanks for taking the question. So I wanted to hit on the strength that you saw in Shopify Plus. I’m curious, has there been any change in terms of the net new logos that you’re adding? And I know one of your competitors has a product that’s going into play. I’m curious if that’s been a catalyst at all? Thank you.

Harley: (41:20)
Thanks for that question. So we are seeing an acceleration of companies re-platforming off legacy platforms. We’ve been seeing that for a while, but that acceleration has continued. We’re also seeing digital transformation generally is pushing larger retailers to look at partners who are nimble, who are flexible, who are certainly cost-effective. And that’s us, that’s Shopify Plus, for the larger brands.

Harley: (41:40)
Legacy platforms were never meant to change quickly, and frankly, retailers need that right now. And so what we’re seeing in terms of the types of customers that are dominating our Plus pipeline, it’s digital natives that continue to choose Plus to scale globally, large CPGs that are rushing to go direct to consumer. And we are the preferred choice because they don’t how fast they can launch an experiment with us. And then more traditional retailers looking to transform their companies are choosing us to do that as well. So that’s the reason why seeing brands like Hurley and Schwinn and Snickers and Molson Coors, and Chipotle Farmer’s Market all use Shopify. There’s not one type of particular merchant. We’re kind of seeing the acceleration happen across a bunch of different categories and from a bunch of different re-platforms.

Speaker 2: (42:30)
Great. Thanks, Brian. Next question, please?

Operator: (42:33)
Our next question comes from Josh Beck of KeyBank. Please go ahead.

Josh Beck: (42:40)
Thank you for taking the question, and glad to hear everyone is doing well. I wanted to ask you a bigger picture question about what’s happening with the acceleration of e-commerce. I think you had commented that 2030 is maybe being pulled ahead a decade. And then you also made the comment that you expect this trend to persist. So I’d love to hear a little bit more because you have such great visibility and such a unique view about why you view this trend as durable because I just think that’s such an important investor question. I’d love to hear a little more color on that topic.

Toby: (43:21)
Yeah, gladly. My comment was, I mean, I came at this question a little bit more from a product perspective than from a financial perspective or from a market mix perspective when I said that 2030 is coming forward into 2020. What I specifically meant is like, and anyone who’s ever used software that was written 10, 15 years ago, realizes that it doesn’t fit into the current times anymore because it’s built on a fairly outdated assumptions given how fast technology moves. I think in retail, they are finding us from one day to another of software that feels like a decade old because all the assumptions have been tossed into the air and reassembled based on COVID.

Toby: (44:08)
An obvious example of this is the massive and quick rise of orders placed within 25 miles to local stores, and local pickup, and customer pickup, and all these kind of things that you had to do it by technology. Which we’ve done, I think, fairly quickly, and we see this as bigger factors on the platform. But zooming out, multiple things happened at the same time, right? There’s a lot of businesses who were just local stores, and that’s the only way they’ve been connected to the global world of commerce. And once you have that in place, orders came along, they realized that the only way for them to access the customer base was no longer functioning. And either through, in some cases, through community efforts, which I think is one of the [inaudible 00:45:03]-

Toby: (45:03)
And then either through, in some cases through community efforts, which I think is one of the cooler things people observed, and sometimes through their own adaptability, they set up the online channels, informed the local environments that they are still open for business, and made do with however they could.

Toby: (45:19)
And that, I think, worked surprisingly well for a lot of entrepreneurs. And so as more and more local businesses came online, local stores came online, I think one thing that was surprising to a lot of people, but actually seemed … I think we’ve had internal bets on this. Is that the demand for being able to buy from a more diverse group of merchants was actually there, but the supply wasn’t. It’s very, very rare that there’s such a discrepancy between supply and demand.

Toby: (45:58)
The reason why the supply didn’t come online was because of the perceived complexity, and just because of inertia. So why go online, why set up? Why change your point-of-sale system for something integrated in your online store? Why try switching to Shopify if your business is sort of working?

Toby: (46:18)
And so COVID has accelerated this thing that was already going on. People noticed that they did well, as Hayley already mentioned. We’re seeing strength in a point-of-sale channel. But of course we also now, from the macro numbers, that small businesses have been going out of business. There has been closures.

Toby: (46:41)
This is not, I can’t say this for sure, but anecdotally, the businesses that were adaptable, switched to Shopify or started online stores, or have been on Shopify point-of-sale and added the online channel successfully, which is our slice of the retail base, they’ve actually done okay. And may have seen some growth because of the businesses that weren’t as adaptable have maybe not made it out the other side after the shelter-in-place was over.

Toby: (47:13)
And so I think a lot of ideas that were floating around, a lot of things that people were saying in the industry have gotten validated in this great experiment and test that we all went through in this industry. And now that there’s a significant more supply of merchants out there, and that more buyers have the familiarity of buying from merchants directly, and also the awareness of what that does for the local economies, and that there’s value in supporting local businesses, especially if you want them to stick around.

Toby: (47:55)
All these things kind of mixed together into one big average number, percentage mix. And that’s, I think, just a good deal higher than the ecommerce numbers were before. So yes, there’s been some acceleration. It’s going to be very hard to see. I don’t think we can discern from our slice of the market exactly what these numbers are. Just because I think we’re dealing now on Shopify with just the very adaptable … It’s a very specific slice of the retail industry. But I think we’ve had a lot, and so that’s clearly good for business, and so I think that’s why you see some of the numbers to be the way they are.

Speaker 3: (48:41)
Great, thank you for your question, Josh. Next question, please.

Operator: (48:45)
Our next question comes from Semat Semana of Jeffries. Please go ahead.

Semat Semana: (48:51)
Hi, good morning. Thanks for taking my question. Amy, maybe this one is for you. GMV was about 50% higher than 4Q. But I’m curious that platform and other revenue didn’t quite spike the way that it normally does from 3Q to 4Q. So I’m curious if there was either a mix shift in where the GMV was generated, whether it was more of the non-plus customers. Or if there was a reason why we didn’t see as much of a platform fee, overages, in 2Q, and how we should think about that maybe going forward.

Amy: (49:32)
We still saw a healthy increase in the platform fee revenue. So I’m not sure I would read anything into that in terms of mix. But I think it’s largely because GMV was just so broad-based.

Amy: (49:49)
And again, the highest grower in the category was international, year over year. And so that does have a lower mix of … It’s more standard merchants. But it was broad-based, and we saw a healthy increase in the platform fee for Plus customers.

Amy: (50:14)
Also, just keep in mind, sometimes the platform fee for Plus is impacted by certain merchants who are having flash sales, which may skew any given quarter.

Semat Semana: (50:27)
Great, thank you.

Speaker 3: (50:28)
Thanks, Semat. Our next question, please.

Operator: (50:32)
Our next question comes from Brad Zelnick of Credit Suisse. Please go ahead.

Brad Zelnick: (50:38)
Great, can you guys hear me now? Hello?

Speaker 3: (50:43)
Yeah. We hear you fine.

Brad Zelnick: (50:47)
Excellent. Thanks for getting me back in, and congrats on all the success. I wanted to ask about GMV trends, specifically for those merchants located in countries that are easing social distancing measures. Are they decelerating faster, or at similar rates to other areas like the US?

Harley: (51:12)
Yeah, I think it’s really early to tell that right now. We are seeing certainly, as Amy just mentioned, GMV growth, in terms of the growth percentage, was highest internationally. But we’re also doing a lot internationally for those merchants in trying to find product-market fit there. But I wouldn’t necessarily say that we are seeing anything that is notable yet at this point, although we monitor it pretty closely.

Toby: (51:35)
Yeah, the markets that have really done this going back to normal are also the markets that weren’t hit as badly. So it’s really, really hard to back out with these numbers.

Speaker 3: (51:54)
Thank you, Brad.

Operator: (51:57)
Our next question comes from Chris Merwin of Goldman Sachs. Please go ahead.

Chris Merwin: (52:04)
Thanks very much for taking my question. Can you talk at all about the early impact that SSN has had on the merchant end customer satisfaction or order volume? I think you also mentioned that SSN would be reaching scale phase at the end of next year, so will that include just partners, or would you need to build out some of your own capacity at that point? Just curious what the current plans are. Thank you.

Amy: (52:30)
I can take the capacity question and the plans. We’re still on the same five-year plan that we announced last year at Unite. Where we’ll build the Shopify fulfillment network over a five-year period. We’ll be in product-market fit phase in 2020 and into 2021, with the expectation of entering the scale phase at the end of 2021 or soon thereafter, which is about the mid-point of the five-year build. And that is absolutely consistent with what we said last year.

Amy: (53:08)
That plan that we announced last year had us mostly working with partners to add nodes to the Shopify fulfillment network. We have the seven up and running that we said we would have up and running, and we plan to add additional partner nodes this year. We’re not going to say how many or where, pre-announce it. But we’re continuing down that path, working with partners, because it’s been working well.

Amy: (53:38)
We said that we would continue down that path as long as they could meet our capacity and quality needs. And so far they are. We did leave open the ability to build a few warehouses ourselves. We do have a test dev facility in Ottawa. But in the plan, in the billion dollars, which was mostly variable spend to sell goods, there was some fixed cost allocated to a couple warehouses so that we could build and test and learn in the event that we do decide to build warehouses.

Amy: (54:11)
But right now, we’re on the same plan that we’ve been on.

Speaker 3: (54:18)
Thank you, Chris. Next question, please.

Operator: (54:21)
Our next question comes from Walter Pritchard of Citi. Please go ahead.

Walter Pritchard: (54:27)
Hi. Actually related question to the one that you just had there. So about four billion in cash on the balance sheet, with recent financing. We obviously know about the fulfill plans that require some capital. And you’ve got products like the Shop Capital product.

Can you help us understand how you’re thinking about that cash you have, as needed to run some of those businesses that are more capital-intensive, versus M&A potential with capital you’ve raised, versus just having raised opportunistically to have some cushion? Thanks.

Amy: (54:59)
Yeah, we’ve been pretty consistent in saying that the four billion in cash is to increase our flexibility and optionality. Whether it be build, partner or buy, in order to accelerate our product roadmap.

Amy: (55:14)
And so we continue to just want the maximum amount of flexibility. And I think this actually might be a good place for me to address the shelf renewal that we did. I did address it in my remarks, but I think publicly seen some headlines that weren’t correct.

Amy: (55:34)
I just want to emphasize that the shelf registration, our shelf registration was due to expire in September. They’re only good for 25 months. We did decide to renew a little early so that we could do it in conjunction with this earnings call, which is consistent with how we’ve done it in the past.

Amy: (55:57)
And we had to put a fixed dollar amount on the shelf under Canadian regulations, which is different from the US, where seasoned issuers do not have to put a dollar amount in. The dollar amount just makes sense for flexibility. We absolutely just consider this normal, ordinary course of business. And wouldn’t read anything more into it than that. Thanks.

Okay, thank you.

Speaker 3: (56:29)
Thank you. I think we have time for one more question.

Operator: (56:36)
Our last question comes from Tim Willy of Wells Fargo. Please go ahead.

Tim Willy: (56:42)
Thank you. And good morning, everybody. I have a question about the restaurant vertical. It’s obviously changed dramatically in the last several months, to really become an ecommerce and omni-channel industry, probably much more so than it’s ever been. So I’m just curious from your perspective how you think about that vertical, as a new opportunity to maybe develop product or sales channels to be much more visible, and a bigger part of that industry than maybe you otherwise would have had been if this crisis had not occurred. Thanks.

Harley: (57:19)
Thanks for that question. Look, we’ve been very clear that our focus is on retail, and particularly physical goods. The restaurant thing historically has not been in our focus. Although we did feel that when COVID first hit there was a way for us to help restaurants by doing things like turning them into retailers, whether they’re selling meal kits or they’re selling some sort of physical product.

Harley: (57:44)
And so we did create a theme that allowed them to very quickly set up a very beautiful online store, and a lot of them to start making some cashflow during a very difficult time. But in terms of our focus on restaurants as a new vertical, that is not something that we’re currently looking at right now. But if they do turn into retailers, as some of them have, or wine stores as others have, we certainly can help them.

Operator: (58:07)
This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant …

Shopify SHOP Q2 2020 Earnings Call Transcript

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