Shopify SHOP Q2 2021 Earnings Call Transcript

Operator: (00:00)
[inaudible 00:00:00]. Please go ahead.

Katie: (00:03)
Thank you, operator, and good morning, everyone. We are glad you can join us for Shopify’s second quarter 2021 conference call. We are joined this morning by Toby Lütke, Shopify CEO, Harley Finkelstein, Shopify’s president, and Amy Shapero, our CFO. After their prepared remarks, we will open it up for your questions. 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 assumptions, risks, and uncertainties in our press release this morning, as well as in our filings with U.S. and Canadian regulators. Note that adjusted financial measures we speak to today are non-gap measures, which are not as substitute for gap financial measures. Reconciliations between the two can be found in our earnings press release. And finally, we report in U.S. dollars. So all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I turn the call over to Harley.

Harley Finkelstein: (01:08)
Thanks, Katie, and good morning. Shopify’s momentum continued in our second quarter as strong commerce trends prevailed and more merchants joined and succeeded on our platform. In fact, GMV reached its highest level ever as physical stores and more regions reopened their doors in the early days of the post-pandemic recovery, and as buyers continue to value the convenience that online tools bring to shopping.

Case and point. In places that have begun to reopen, like the UK, GMV grew faster than our overall GMV in the quarter year over year, indicating that online and in-store commerce are no longer mutually exclusive. And while we did start to see a shift in some consumer spend back to services and recreation towards the end of the quarter, which we expected, all regions remain at GMV levels above pre-COVID levels. This may be why Shopify remains the go-to platform for entrepreneurs around the world to launch and to grow their businesses as they sell directly to their customers.

Merchants using Shopify are exceptionally well-prepared to make commerce happen on every surface area that it needs to, whether it’s online, in-store, or through your favorite apps. Our brick and mortar merchants illustrated this as they adapted to the accelerated shift to digital commerce in 2020, and are now navigating the early stages of returning to in-store selling. Retail point of sale GMV is nearly back to pre COVID levels as a percentage of overall GMV, even on these higher GMV levels as physical stores reopened and merchants are better equipped with our upgraded hardware and software. More locations adopted point of sale pro in our second quarter for its modern omni-channel features like buy online, pickup in store, which was adopted by 63% of brick and mortar merchants in English-speaking geographies at the end of June. This is up from just 2% in February last year.

Social commerce is another way that merchants are expanding their presence and succeeding. In fact, in Q2, year over year GMV growth from Facebook and Google channels were several times that of the online store. With consumers spending more time than ever on apps, we continue to expand key partnerships. We deepened our partnership with Google in Q2, making it easier for our merchants to sell on Google through a simplified onboarding process and extending our accelerated checkout Shop Pay to all U.S. merchants selling on Google, whether they use Shopify or not. Buyers love using Shop Pay to checkout. The speed and ease of making a purchase strengthens the relationship between merchants and their buyers, which is why we are bringing Shop Pay to more surfaces. Shop Pay is available now to U.S. merchants on Facebook and will be available to Shopify and non-Shopify merchants selling on Facebook and Google in the U.S. later this year. We’re seeing early traction for Shop Pay on Facebook and Instagram, with more buyers opting in and a larger share of GMV 3D surfaces since we announced the integration in February. We remain on track to add Shopify payments as the processor for all Shopify merchant transactions on Facebook properties by year end.

As global retail eCommerce sales are expected to continue shifting to mobile devices, mobile shopping from Shopify merchants has to keep getting easier and more fun if they’re to compete. Our online shopping assistant, Shop, is built for easy shopping on mobile with buyer friendly features like order tracking and Shop Pay. Starting in Q2, merchants can manage how they show up in Shop by customizing their store profile in the app. They can also track the impact of Shop on their business from a new analytics dashboard while driving repeat purchases from customers through automated marketing tools. Shop now supports in-app purchases, allowing customers to add to cart and checkout with Shop Pay within the app. In Q2, we also introduced new filters for discovery on Shop for local businesses, LGBTQ+ owned businesses, and indigenous owned businesses. At the end of Q2, Shop had more than 118 million registered users, including both buyers that have opted into Shop Pay as well as users of the app, of which approximately 23 million were monthly active users. At the end of June, Shop Pay had facilitated nearly $30 billion in cumulative GMV since its launch in 2017.

The increasing complexity that comes with selling everywhere makes Shopify and our suite of solutions even more valuable. As a result, merchants are making greater use of our merchant solutions. Shopify Capital is a great example. We funded more merchants than ever this past quarter and directed more capital to them than ever; a record $363 million. This is 137% more funding than in last year second quarter, and represents record growth for us in capital, bringing us to over $2.3 billion in cumulative capital funded since we launched it in 2016.

Not only does Shopify Capital help fuel our merchant’s growth; our data tells us that merchants that accept Capital stay with Shopify longer as they succeed on the platform and take more of Shopify’s other solutions, namely Shopify’s shipping, apps, themes, and domains, and maybe most importantly, extending capital when their business needs it reinforces the trusted relationship that we have with our merchants, one that goes beyond what they have with their bank or any other vendor. When we talk about Shopify’s flywheel, this is exactly what we mean.

Shopify shipping and Shopify Fulfillment Network complete the car to door experience for our merchant’s buyers. In Q2, label volume for Shopify shipping increased quarter over quarter. And we focus on transitioning merchants who are a good fit from Shopify shipping to Shopify Fulfillment Network to benefit from our full service fulfillment offering. Merchants and their buyers are also making use of our newer merchant solutions. In June, we made our buy now, pay later product, Shop Pay installments, available to all eligible merchants in the U.S., with the product automatically enabled for new merchants signing up for Shopify payments, and simple self-serve onboarding available to existing merchants. While early, GMV transacting through Shop Pay installments more than tripled in Q2 over the prior quarter, as more buyers are using our product to checkout. We are pretty excited about the potential here over the long-term.

And, more merchants are signing onto Shopify Balance, which is in early access until later this year. Shopify Plus had another great quarter as large brands continue to turn to Shopify Plus to help make the complex simple. In Q2, more merchants on standard plans upgraded Shopify Plus and/or international brands joined Shopify Plus to grow their businesses. The list of brands that launched on Shopify Plus recently is stellar. Global entertainment platform Netflix, luxury fashion designer Diane Von Furstenberg, world-renown winery Robert Mondavi, people footwear from well-known shoe company Aldo, global fashion brand and a huge personal favorite of mine James Perse, indie and vintage clothing retailer ModCloth, famous coffee brands Stumptown Coffee and Peet’s Coffee, children’s clothing brand Justice, and more CPG brands from Nestle and McCormick.

Shopify is leveraging the entire ecosystem to create a global retail operating system for the future of commerce. More than 22, 000 viewers tuned into this year’s virtually held developer focused partner conference, Shopify Unite, where we announced major upgrades to our platform on which we are building the internet commerce infrastructure. These include Online Store 2.0, a flexible and customizable storefront so our merchants can build their stores quickly without touching code, while giving max code access to developers, allowing them to extend and customize both the storefront and the checkout. Powerful new APIs and developer tooling that gives our partners and merchants more creative control without sacrificing speed or scalability. A faster and more powerful checkout designed to give each individual shop the ability to handle as much sales volume as we serve across all of Shopify at the peak of Black Friday, Cyber Monday in 2020, and a scalable payments platform, enabling partners to build third party payment gateways as apps.

We also announced a 0% rev share for app and theme store developers on their first million dollars of revenue annually, starting in Q3 2021, making it even more attractive for tech talent to want to build the future of commerce with Shopify. Our teams at Shopify have been heads down innovating over the past year during the platform updates announced at Shopify Unite to life. Their incredible work has formed an even stronger commerce infrastructure for developers to build on. We look forward to seeing the hard problems they will help us solve for our merchants.

As we double down on our efforts to make Shopify the best place to build, our partner ecosystem continues to grow. In Q2, the number of partners sending business to us continued to expand as over 46,000 partners referred at least one merchant to Shopify over the past 12 months, a 53% year over year. As the post-pandemic future emerges, it is clear that retail has changed forever. Shopify is making sure those changes are for the better. Entrepreneurship remains strong, and opportunities to thrive in a modern retail era with the right tools are boundless.

Amy Shapero: (10:37)
Thanks, Harley. Merchant success, combined with sustained eCommerce tailwinds and strong execution by Shopify, contributed to a fantastic second quarter. Revenue in our second quarter was up 57% year over year to $1.1 billion, marking the first time Shopify exceeded $1 billion in a single quarter. This was driven by strong performance from both our subscription solutions and merchant solution segments. Subscription solutions revenue increased 70% over the same period last year to $334.2 million, largely due to strong growth in monthly recurring revenue. MRR growth accelerated to 67% year over year to $95.1 million as more merchants joined the platform and the number of retail locations using POS Pro increased.

Remember, MRR in the second quarter of last year was impacted by the 90-day free trial on standard plans offered until May 31st, and that we experienced a double cohort effect in our third quarter last year as users from the 90-day free trial and 14-day free trial converted into paying merchants in that quarter. Compared with Q1, MRR added in Q2 was more normalized as economies reopened. Shopify Plus contributed $25.2 million or 26% of MRR compared with 29% in Q2 of 2020, when standard merchant MRR was impacted by the extended free trial I just mentioned. While Shopify Plus MRR grew significantly this past quarter, non-plus MRR grew faster, benefiting from a significantly higher number of merchants on standard plans joining the platform in 2020 and new incremental revenue from our Shopify POS Pro subscription offering over the same period last year. Merchant solutions revenue grew 52% over Q2 2020 to $785.2 million. This growth was driven primarily by GMV expansion, which was up 40% year over year to a record $42.2 billion. The strong growth in merchant sales combined with increased GMV penetration of Shopify payments, merchant adoption of Shopify Capital and shipping, and partner related revenue compared with the same period last year drove revenue from these solutions higher. $20.3 billion of GMV was processed on Shopify payments in Q2, up 51% versus the same quarter last year. Shopify payments penetration of GMV was 48% versus 45% in Q2 2020. This increase was driven by GMV penetration gains through online and retail POS channels, while Shopify Plus and international merchants expanded their share of GPB year over year.

Merchant solutions revenue also benefited from the recognition of revenue in Q2 associated with non-cash consideration or warrants we received from our strategic partnerships with Affirm and Global-e, relating to performance obligations with respect to our Shop Pay installments and cross border commerce offerings respectively. The warrants associated with these partnerships were valued at the start of the respective commercial contracts are deferred and then recognized into revenue ratably over the expected life of the contracts. While there are other revenue components to these products, the non-cash consideration component from those commercial agreements added approximately three percentage points to our year on year merchant solutions revenue growth.

Adjusted gross profit dollars grew 64% over last year’s second quarter to $627 million and outpaced revenue growth primarily due to the larger mix of subscription solutions gross profit relative to last year’s mix, which was suppressed by the extended free trial. The combined strength in revenue, improved margin profile, and lower overall OpEx spend as a percent of revenue contributed to strong adjusted operating earnings in Q2 compared to the same period last year. Adjusted operating income was $236.8 million in the second quarter, compared with adjusted operating income of $113.7 million in the second quarter of 2020 as our revenue growth-

… dollars in the second quarter of 2020 as our revenue growth outpaced growth in spend. Adjusted net income for the quarter was $284.6 million or $2 and 24 cents per diluted share compared with adjusted net income of $129.4 million or $1 and 5 cents per diluted share in last year’s second quarter. Adjusted net income in Q2 2021 excludes a $778 million unrealized net gain on our equity investments, including Global-e, which we wrote up to its fair value upon and subsequent to the company’s IPO. Finally, our cash equivalents and marketable securities balance was $7.76 billion on June 30th compared with $6.39 billion at year end. Our healthy balance sheet gives us optionality that we believe increases our competitive advantage. To retain this financial flexibility, we filed yesterday to increase the registered room on our base shelf perspectives. With so many merchants now building their businesses on Shopify, our job is to make entrepreneurship easier and help our merchants succeed.

This is reflected in our three key areas of investment in 2021; Shopify Fulfillment Network, Shop and international expansion. First, we’re heads down building the foundation of Shopify Fulfillment Network so that our merchants can access simple, fast and affordable fulfillment. In Q2, we introduced features that help merchants manage and organize the products fulfilled by our network via the merchant admin and improve shipping, speed and accuracy. We also added the ability for merchants to manage preferences like staff notifications. Our focus remains on building a product that offers merchants a delightful experience and optimizes our network of nodes and partners. 6 River Systems, which had another strong quarter, continued to deploy fulfillment technology into our partner nodes and customer warehouses increasing the efficiency of their fulfillment operations. Our second key area of investment is Shop. As Harley outlined, we continue to invest in developing new features that add value to our merchants and give buyers a great mobile Shopping experience.

Our third key area of investment is international expansion. We introduced new retail POS hardware that is integrated with Shopify payments in the UK and Ireland in Q1 and in Australia in May. This is helpful to grow payments volume as POS pro locations and POS GMV trend upward, and more importantly, helpful to merchants who are benefiting from our leading POS capabilities. We plan to expand our integrated POS offering to additional regions in the coming months. As we expand our commercial efforts into regions, we are localizing our support efforts alongside them. That merchants are able to reach a human who can help them navigate an issue or lead them to the best next steps is an important differentiator for us. And when our support team is armed with data superpowers and speaking our merchants’ language, merchants everywhere can go farther, faster. And a quick note on our equity holdings and companies like Global-e, Affirm and others, we remained active in Q2 pursuing partnerships that position us to work with innovative teams that can help us solve hard problems for our merchants and to continue building the future of commerce.

Turning to our outlook, our outlook for the remainder of 2021 is consistent with our assumptions in February. We’ve seen an improvement in the overall economic environment through the first half of this year, consumer spending beginning to rotate back to services and offline retail and e-commerce growing at a more normalized pace relative to 2020. In view of these factors and Shopify’s performance year to date, we continue to expect to grow revenue rapidly in 2021, but at a lower rate than in 2020. For the full year 2021, we continue to expect the following; subscription solutions revenue growth to be driven by more merchants around the world joining the platform in a number lower than the record in 2020, but higher than any year prior to 2020. The growth rates of subscription solutions and merchant solutions revenues to be more similar to each other than in the recent past as we do not expect the surge in GMV that drove merchant solutions in 2020 to repeat.

And merchant solutions revenue growth to be driven by continued GMV growth from existing merchants, new merchants joining the platform and expanded adoption of Shopify’s growing menu of merchant solutions including established offering such as Shopify Payments, Shopify Shipping, and Shopify Capital, both geographically and as merchants grow into them while newer solutions such as Shopify Fulfillment Network and 6 River Systems contribute nascent, but incremental revenue in their early stages. We expect that the first quarter will likely still contribute the smallest share full year revenue and the fourth quarter, the largest and that the revenue spread will be more evenly distributed across the four quarters than it has been historically. We continue to expect rapid growth in gross profit dollars in 2021 and plan to continue reinvesting back into our business as aggressively as we can with the year over year growth and operating expenses accelerating in Q3 and again in Q4. Hiring momentum picked up in our second quarter as we nearly doubled the number of new hires joining Shopify quarter over quarter, bringing on more engineers and commercial talent to support our growth initiatives.

In addition to increasing our commercial talent, we expect to ramp up our go to market programs [inaudible 00:21:00] in the second half of 2021 as regions reopen. Finally, we expect stock-based compensation and related payroll taxes to be $425 million and amortization of acquired intangibles to be $21 million for 2021. Due to the sustained momentum of digital commerce trends in the first half of 2021 combined with the US stimulus distributed in March and April this year, Shopify generated higher than anticipated revenue while incurring lower than planned OPEX spend as a percent of revenue in the first half of 2021. As a result, we now expect full year 2021 adjusted operating income to be above the level we achieved in 2020. In closing, Shopify is investing in the future of commerce and we’re taking a multi-pronged approach, leveraging technology and talent by building the commerce infrastructure of the internet, innovating new and improved products and expanding our relationships with a diverse community of partners. We are creating a global retail operating system that will help our merchants succeed in the years ahead and make commerce better for everyone. I’ll now turn the call back to Katie.

Katie: (22:15)
Thanks, Amy. Before we open the call up for questions, I’ll remind you to limit yourself to a single question that way more people will get a chance to ask a question on the call this morning. [inaudible 00:22:28], can you take the first question please?

Speaker 1: (22:32)
Certainly. To join the question queue, please 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. Our first question comes from Craig Maurer of Autonomous Research. Please go ahead.

Craig Maurer: (22:57)
Thanks for taking the questions. So two questions, one around payments. Regarding the Shop Pay announcement you guys had during the quarter around making the Shop Pay button available on non Shopify platform to non Shopify platform merchants, is there an opportunity to take the Shop Pay button to a full stack processing solution and connecting with Stripe on the backend to be a full stack PayPal competitor? And secondly, we heard that Shopify is now powering a large global brand in Brazil as that large global brand pulled you into Brazil. And I was wondering what the growth opportunities are for Shopify going forward in that region. Thanks.

Harley: (23:56)
Hey. It’s Harley. I’ll take that question. On the international side, I mean, as Amy discussed in her remarks as well, international remains an important part of our business and our growth story. In fact, merchants from outside north America grew as a percentage of our total merchant mix in Q2 year, over year. And year over year GMV growth in the rest of the world actually outpaced north America in Q2 2021. So we’re seeing more international merchants that are joining and they’re succeeding on Shopify. And obviously we’re stepping up our growth marketing, our sales and our support efforts in places like Brazil and all over the world.

Harley: (24:29)
So it isn’t necessarily any particular focus on Brazil per se, but merchants around the world are looking for retail operating system and Shopify certainly is a favorite of theirs and we’re able to help them sell in a way that they want. In terms of sort of the Shop Pay question, look, I mean the ability… We think Shop Pay is the best way to check out on the internet. It’s fast, it’s secure. Merchants love it because it helps with conversion rates. Consumers love it because it allows them to check out really, really quickly. So making that available on more surfaces, whether it’s on Facebook or it’s on Google or on Instagram to Shopify merchants, and also to non Shopify merchants, we just think that’s the right thing to advance commerce.

Toby: (25:11)
And this Toby. I think your question is specifically about how we can take us beyond the Shopify platform. I think the reason that Shop Pay has been so successful is it’s highly bespoke to [inaudible 00:25:25] platform. We can build based on assumptions that we can make about the merchants and their capabilities because of the vertical integration. We have no… I think if we go beyond the realm of a platform for its customers, then we would have to lose a lot of a differentiation there. So that would be an adjacency for the product and we have no such plan.

Craig Maurer: (25:51)
Okay. Thank you so much.

Speaker 1: (25:58)
Our next question comes from Thomas Forte of D.A. Davidson. Please go ahead.

Thomas Forte: (26:02)
Great. Thanks for taking my question. So wanted to know what the financial implications are of not collecting a commission on the first million of revenue for developers on Shopify and lowering your take rate after the first million to 15% from 20%.

The change in the app store and the revenue models that was announced at Unite are not material to Shopify’s results in the back half of this year or for the full year. And I want to emphasize that while it’s not material for us, it is material for our developer partners. And we are committed to our developers and believe this is the right long-term benefit for our merchants and our partners to help them be more innovative and creative on behalf of our merchants and to keep more of the dollars in their pockets. And so any short-term loss of revenue in the back half is immaterial to us and well worth the longterm benefits.

Thomas Forte: (27:11)
Great. Thank you, Amy.

Speaker 1: (27:16)
Our next question comes from Ken Wong of Guggenheim Securities. Please go ahead.

Ken Wong: (27:21)
Great. Thank you for taking my question. This one’s for Toby or Harley. Just over the past month, the company has introduced search and Shop app, conversion of ads in the partner app store, and we’ve seen theoretical headlines like an audience network out there. How are you thinking about advertising as a product category and what areas do you think makes sense for Shopify to potentially monetize on those products?

Toby: (27:52)
There’s no one approach. I think what you’re hearing about is a lot of the early experimentation. The nature of advertising is that they have to conduct a test that no one sees because I don’t think that would lead to any useful data. So there’s a bit of learning in public going on there. And we [inaudible 00:28:16] some value. Our merchants obviously want to deepen their relationship with their existing bio base. Shop is specifically really good in which nature the bridging that gap is currently what we are trying to discover. And we’re taking advantage of some opportunities.

Toby: (28:38)
Again, companies are journeys, products are journeys, some that don’t quite know where it leads. Certainly when I started thought that we would be building fulfillment warehouses or do loans to a degree, and that’s [inaudible 00:28:55] degree that we are doing now. So again, I think you’ll see a very early representation of early attempts there. And we really have no line of sight on what that does to revenue. And this is certainly not where we are trying any of those things. We are figuring out what the right mix of products is for a new merchant who is trying to build a business and reach for independence. And if advertising from us powered us in some means is part of that, we will hopefully know this over the next years.

Speaker 1: (29:36)
Great. Thank you, Ken. Our next question comes from [inaudible 00:29:37]. Please go ahead.

Speaker 2: (29:41)
Thanks for taking my question. It’s impressive to see this record GMV. I know you guys don’t disclose much [inaudible 00:29:49], but how do you say that trends in GMV per merchant trend this year and also, especially in July, what you are seeing and what’s your expectation on that trend for the remaining of the year?

Speaker 2: (30:01)
… that train for the remaining of the year.

Amy: (30:06)
Yeah. The productivity of our merchants has remained strong on the platform. As Harley said in our opening remarks, the 42 billion of GMV on the platform was a record, and so GMV per merchant remains strong year over year. And it’s really the combination of what Harley talked about, POS our physical retail GMV has had four consecutive quarters of acceleration, is now back to the percentage mix pre COVID on much higher GMV levels, so we’re seeing strong productivity there. And with respect to online GMV, we do believe that it has reset at a higher level and is now just growing at a more normalized level, and so we use the UK as an example of one of the economies that reopened first and our UK GMV grew faster than our average, suggesting that when we equip merchants with multichannel, they do better in a very fluid commerce environment.

Amy: (31:20)
We also saw social GMV increase substantially. It’s still small as a percentage of our mix but the growth quarter over quarter and year over year was significant. And so these are all things with the multi-channel approach that we expect will help continue to keep GMV for merchants strong.

Speaker 2: (31:42)
Thank you.

Speaker 3: (31:44)
Our next question comes from Trevor Young of Barclays. Please go ahead.

Trevor Young: (31:51)
Great. Thanks for taking the question. Can you talk a little bit about the impact, either qualitatively or quantitatively, that merchants are seeing from their ability to use Facebook and Instagram ad targeting? Just in light of IDFA, we’re hearing a lot of noise around this and it’d just be helpful to hear how it’s impacting your merchants, and by extension, your GMV growth, and then how you’re adapting to enable that targeted advertising. Thank you.

Harley: (32:17)
Thanks Trevor. So I think we mentioned this on previous earnings calls, but just in the near term, we do think it will reduce the efficacy of some ads but I think it further will incentivize merchants to look for new ways and multiple ways to connect with buyers, on top of ads getting increasingly expensive. So longer term, we expect merchants will benefit from further embedding commerce itself into surface areas across the internet and in person, whether that’s retargeting or it’s apps like Shop that give more control to the buyer who is actually opted in. Merchants on Shopify have always been resilient, whether it was through the pandemic or through different technological changes, and we think they’ll continue to be resilient and find ways to connect with buyers.

Trevor Young: (33:04)
That’s really helpful, and just…

Speaker 3: (33:06)
Our next question comes from Matt Fowl of William Blair. Please go ahead.

Matt Fowl: (33:13)
Hey guys. Thanks for taking my question. Just wanted to ask a question on the impressive point of sale uptake that you’re seeing. Do you think that this is more tied to economies reopening and physical stores reopening or is it more driven by some of the product enhancements that you’ve you’ve made around point of sale? Thanks.

Harley: (33:35)
So I think a couple of things. So in terms of retail point of sale GMV, we are seeing that it is nearly back to pre COVID levels as a percentage of overall GMV, which again as Amy mentioned on the last question, is a much higher GMV. So as physical stores reopen and merchants are better equipped with our upgraded hardware and software, they’re going to sell more. We did roll out also an all new Shopify point of sale with new hardware and integrated payments in new geographies like places like Australia, and we’re making great progress in places like UK and Ireland as well. So we’re trying to enable merchants in these regions to seamlessly bridge their online business and their offline commerce and to Amy’s point earlier, they should not be mutually exclusive.

Harley: (34:18)
We also saw that 63% of our brick and mortar merchants in English-speaking geographies are now using some form of local in-store, curbside pickup and delivery solutions. That’s compared to 2% at the end of February, 2020. So part of what we’re going to see as reopenings continue to happen, but also as retail has been reset through COVID, is that it will be retail everywhere and Shopify as a platform that powers retail everywhere, whether it’s online or offline.

Speaker 3: (34:45)
Thanks, Matt.

Toby: (34:46)
I’m going to just add that there’s another effect there too, that the point of sale product is now very, very good. Previously, its most differentiated feature was just that it was attached and writes to the same real time database as the online store. That what’s very valuable in its own right but we really took that products seriously. I think we are on rewrite number four at this point since we started just because there’s just a lot of learning, and our initial vision for point of sales was absolutely oriented what the point of sale industry has been doing previously, like better implementation I think of existing patents. I think one effect you’re seeing in a lot of spaces is that second, third, fourth wave of software ends up being more digitally native, like let’s actually use exactly what the power of software, power of internet, power of touch devices in the use case to enable exactly what they can bring instead of just making a touch version of a old text-based point of sale system. I’m very, very happy with where point of sale is. It’s really, really ready to be adopted on a platform and I think that is an addition, accelerant there too.

Speaker 3: (36:16)
Our next question comes from Colin Sebastian of Baird. Please go ahead.

Colin Sebastian: (36:22)
Thanks, and good morning, everybody. I wonder if you could expand a bit on plans for Shopify Plus, maybe where you’re focused in terms of product roadmap to drive more merchant adoption and how much of that is geared towards the enterprise tier versus the mid-market? Thank you.

Harley: (36:37)
Thanks for the question. So I mentioned in my prior remarks, but Q2 was a great quarter for Plus. More merchants on standard plans upgraded to Shopify Plus. We also saw more international brands joining Plus to grow their business. In terms of upgrades versus net new, we’re seeing both. On the upgrade side, with adding more than 700,000 merchants in 2020, that really does feed the pipeline for upgrades and obviously, CAC in that case is incredibly favorable. On the net new and on the competitive front, it’s important to remember the size of our base relative to others. We add more merchants in a quarter than some of the other enterprise platforms have in total, and so the Shopify brand affiliation, Shopify Plus brand affiliation keeps getting stronger. It’s now easier to make changes quickly, which is something that a lot of merchants want, even the largest of merchants, and also, the total cost of ownership is still lower relative to most others.

Harley: (37:35)
In terms of the features and functionality, we continue to add more functionality. We announced a number of new APIs and new ways that you can actually get into the code base of Shopify and be able to customize it to do exactly what you want. That came out at Shopify Unite. So generally, Shopify Plus is really becoming a favorite for the mid market, but also for some very large merchants. I’ve been working on my favorite t-shirt retailer, James Perse for about six years to migrate over to Shopify Plus, and now, it was finally the right time for them to do it. So we think that Shopify Plus is really well positioned to keep not only having more homegrown stories migrate from our basic plan, but also migrations from other enterprise platforms in the future.

Speaker 3: (38:20)
Thanks Colin. Our next question comes from [Siman Simanna 00:38:24] of Jefferies. Please go ahead.

Siman: (38:28)
Hi, good morning. Thank you for taking my question. So maybe just on the cross border side of the business, we were wondering if you could maybe share anything around cross border volumes going to Shopify merchants and how we should think about the cross border opportunity in the install base, especially with that Global-E partnership. Thank you.

Harley: (38:48)
I think commerce in 2021 is cross border, that’s how it operates. In the early days of Shopify, you started to sell in your own backyard, in your own country, in your own region. That’s not the case and so whether it’s with partnerships with Global-E or it’s more functionality to do currency conversion, things of that nature, we think that in order for us to be the platform of choice for the most important merchants and brands in the world, they by default need to sell internationally. And we’ve been working on international, whether it was things like activating new partnerships with new agencies and new developers in different countries to make sure that our product is well localized, or it’s new languages or it’s pushing Shopify payments into more geographies, we’re a global company and our merchants are also global companies. And so the way for us to maintain our position, the leadership position of being the retail operating system for the best brands is to make sure they can sell wherever they want.

Speaker 3: (39:46)
Thanks, Siman. Our next question comes from Josh Beck of KeyBank. Please go ahead.

Josh Beck: (39:57)
Thank you for taking the question. I wanted to triangulate on a couple of the data points you shared. So the social channels seem to have been very strong. It sounds like there was multiple levels types of growth, and then point of sale also rebounded close to pre COVID level. So I’m just curious, if you play out both of those trends, say three to five years, do you see the social channels starting to approach maybe the contribution to your business within point of sale? Just curious if you’re maybe revisiting that equation on the other side of COVID here.

Amy: (40:46)
Yeah. Listen, I think social channels are becoming an increasingly important part of the way commerce is happening and will happen. The rank order of our GMV mix continues to be the online store, offline POS as second, and then all social channels and marketplaces third. And the social channels and marketplaces today represent a small percentage of the mix, but growing very rapidly, so it will take some time before it becomes a significant part of our GMV mix. But having said that, I think that’s the beauty of Shopify and the multichannel aspect is we can be anywhere commerce moves to in the future to be flexible on behalf of our merchants and in order to provide additional ways to access buyers.

Amy: (41:55)
And so I view it as a positive that we have multi-channels and every merchant is going to use those channels in a slightly different way that benefits their business the best. And so our aim over time will be to offer multiple channels that you see today and new ones that are created over time.

Speaker 3: (42:15)
Thank you, Josh. Our next question comes from Paul Treiber of RBC Capital Markets. Please go ahead.

Paul Treiber: (42:27)
Thanks very much and good morning. Just a follow up question on international, just in regards to your international strategy. What priority are you putting on securing additional partnerships or building out your partnerships with local marketplaces and channels? And in a bigger picture, to what degree can you scale and decentralize your support for more marketplaces and channels?

Harley: (42:53)
Whether it’s a place like Europe, Western Europe for example, places like Germany and France, or it’s other geographies around the world in APAC, part of making sure that we have a global retail operating system is to make sure that we not only have local partnerships in terms of app partners, same partners that are building software on top of Shopify that actually is relevant and valuable for merchants in that geography, but it’s also making sure that the surfaces that consumers in those geographies want to buy on are integrated into Shopify.

Harley: (43:27)
So the partnership strategy around international has always been a part of what we said we were going to do. Just building software and translating is not sufficient. We also need to make sure that it’s properly localized. In some geographies, there are marketplaces that… Rakuten for example, that we’re integrated with in Japan, would not be relevant as a marketplace in another geography and in Latin America, so that localization actually is really important. And the good news is that because we do have demand from merchants in all of these geographies, it’s becoming easier for us to develop these relationships with both app developers, scene developers, but also these marketplace partners.

Speaker 3: (44:06)
Thanks, Paul. Our next question comes from Darren Aftahi of ROTH Capital Partners. Please go ahead.

Darren Aftahi: (44:15)
Good morning. Thanks for taking my question. You brought on a lot of merchants as COVID hit last second quarter in that ramp. I’m just curious as we anniversary that, what the sort of sense of retention is amongst those new merchants that were brought on. Thanks.

Amy: (44:35)
Yeah, the, the retention of the merchants that have been brought on over the past year plus through COVID has actually been very strong, especially the cohorts that came on at the height of COVID, especially into Q3 as the 90 day free trial converted. Those cohorts were more established businesses rushing to get online as the mix was…

Darren: (45:03)
Businesses rushing to get online. Other the mix was as we’ve moved through COVID the mixes is now shifted back more towards pre COVID levels with a mix of established businesses and entrepreneurs coming to us. But, but the retention rates of have been stronger than pre COVID levels over the last several quarters.

Speaker 4: (45:27)
Thank you, Darren.

Automated: (45:29)
Our next question comes from Egal [Aronian 00:45:32] of Web Bush Securities. Please go ahead.

Egal: (45:34)
Thanks. Good morning, everyone. I want to ask about online store 2.0 and the impact of having customizable storefronts. How much of a pin point was that for merchants, you know, that this was a big focus for you guys? You know, is it, do you see it more of contributor to Shopify plus or overall, you know, maybe on the conversion from, from the base tiers to Shopify plus.

Egal: (46:07)
Can you just talk a little bit more about your expectations on how that can drive merchant growth and retention? Thanks.

Toby: (46:14)
Yeah, but, but not the torrent on a social event that gave us a lot of things rolled into the same thing. I, I wouldn’t put it in terms of that it made anything new possible. Like even after it launched, it launched as a template language, which allowed for kinds of people who can design HML and CSS and these kind of thing, to really build any kind of store. They have a great variety comes from and, like the reason why, you know, Shopify… Shopify store, you might use, you basically say how to tell that it’s a Shopify store behind, what they are currently on. So that’s all, that’s there. The thing that shifted on us though, too, is how much of that is possible to do without reaching into code. So it’s, it’s really a step function in how many people can engage in this branding, customization and, and, and dial in via online store.

Toby: (47:18)
Just so to, to, to tell the story that you want to tell your brand wants to tell. There’s no more, like a better mix between what the designers and the theme designers [inaudible 00:47:32] ecosystem can can do and what the app ecosystem can do and how they all deliver the extensions to Shopify, and then people can pick and choose how they would like to show up, put it all together and then most importantly, make this all happen very fast. So one aspect before that, that was a challenge is that this, they open in nature of Shopify. Like there’s this call to give people a lot of rope and some managed to hang themselves with it. There was a big performance issues that came from a certain app. For instance, this is all a little bit more managed now it allows us to monitor, visit, have conversations with the app ecosystem about the performance impact of their particular solutions.

Toby: (48:23)
And the new themes that we launched are just extremely fast in the world of commerce, quickly loading sites really, really leads to better conversion. It’s a little bit, we had to talk about it, but like I liken it, to like if you go in an extra physical store, in a boutique, let’s say, and the floors are squeaky, or like, it’s just, it’s, it’s just like, you know, basically sort of subtle human things about it that just kind of make the experience and that not good. Like slow load times are that on the internet. So it doesn’t matter if you’re trying to better relationship with that. That’s a new business that you’ve discovered. So I’m not so to always, basically like underneath, across 20, 30 different projects, a lot around edge hosting and, and, and then then new VMs and whatnot, the, the interest out of it is just, it’s now really, really easy to just show up in what we think is best possible way for the millions of businesses that are on Shopify. So, but also the question.

Speaker 4: (49:28)
Thanks Egal.

Automated: (49:32)
Our next question comes from Chris Merwin of Goldman Sachs. Please go ahead.

Chris: (49:36)
Hey. Thanks so much for taking my question. I just wanted to ask about the adoption of payments among Shopify plus customers. I think historically, that’s run a little bit below what you’ve seen with core and just curious out of the three P payment gateways might be helping to this end. Thank you.

Toby: (49:59)
The Shopify payments adoption for plus and GPC penetration has continued to increase over time as we’ve added more value on top of Shopify payments, including the accelerated checkout with Shop pay as well as multi-currency and, and other things. So it is, it continues to be a major contributor to the reason why our GPB numbers and penetration have been increasing over time and it’s increasing in Mix year over year. So that should give you some view it’s… It’s growing nicely.

Speaker 4: (50:46)
Thank you, Chris.

Automated: (50:48)
Our next question comes from Brian Peterson of Raymond James, please go ahead.

Brian: (50:55)
Oh, hi. Thanks for taking the question. I don’t know if this is for Toby or Harley, but you announced some big partnership agreements this quarter. I’m curious what has been north star for us to think about in terms of partner or build or buy as you guys have scaled this. Just curious to get an update on that. Thank you.

Harley: (51:16)
Well, in terms of, in terms of how we make decision on what to build, what to partner with, and what to buy. Look, we want to be the most important piece of software that our merchants use. We are that centralized operating system. I think some of the partnerships you’re referring to are companies like Google and Facebook, for example. Again, going back to what we said beginning of the call, commerce is now happening absolutely everywhere. And we want to make sure that the merchants that use Shopify can sell absolutely everywhere and the, the town squares of, of modern day, our social media, and are on the internet and are off… And are offline as well, and they’re everywhere. And so it’s important that wherever consumers could be potentially looking to purchase that Shopify merchants show up there and from a merchant perspective, that it all neatly feeds back into a centralized back office where they can run their business.

Harley: (52:05)
So whether it’s Google search or it’s on Instagram, or it’s on all the other channel integrations we have, that is really important. Now, again, over time, you are going to see more of these surfaces show up where commerce is happening, and it’s our responsibility to make sure that we’re integrated there to make sure that merchants can access those, those customers. And of course, as more of those services, you know, come to light that increased the complexity of, of commerce and running a business, a modern day business. And that also increased the value that I think that Shopify provides to our, to our customers. In terms of the, the methodology, I mean, look, shop… We, we want to, we want to provide what most merchants need most of the time we want to do that at a world-class level. And there are some times where it’s faster and better and more effective for us to partner with another technology company.

Harley: (52:50)
We’ve developed a really good relationship. I think in the market for being a company that builds incredible software and particularly have, have been really good partners. But there are other times where we just need to build it ourselves because it’s just mission critical. And we think that we can actually deliver the best product on the planet.

Speaker 4: (53:07)
Thanks, Brian.

Automated: (53:09)
Our next question comes from Keith Weiss of Morgan Stanley. Please go ahead.

Keith: (53:16)
Excellent. Thank you guys for taking the questions and congratulations on a really strong quarter and really be almost awe inspiring kind of expansion of functionality you guys have been able to push into the platform over time. It’s been really, really impressive to watch.

Keith: (53:31)
I wanted to talk about kind of one of those expansion areas, Shopify fulfillment network. And just kind of get an update on kind of where we are in terms of opening the aperture. How… Are you guys getting more comfortable with kind of that program and where are we in terms of a timeline of getting more merchants in there? Because what we do here in terms of feedback from merchants that are using it as a very positive, it sounds like there’s really good feedback on what you guys to put together so far.

Harley: (53:58)
Sorry I’ll start that off. So, I mean, you know, I think SFN is continued… We’re continue to build the foundations for SFN. We have been introducing features to help merchants manage product fulfilled on our network. We’re also improving shipping speed. We’re improving the accuracy and we’re adding things and managing new preference. You know, things like staff notifications. I think there, there were three things that were added in Q2 in particular to SFN, which I think are, have added a lot of value. One is improved inventory management. Now merchants can, can hide products and variants that are no longer being sold or fulfilled with SSN. And so that enables merchants to keep product and variant skews organized. The second thing was we improved shipping accuracy and speed. We, we introduced new tools that, that validates things like shipping addresses and reduces errors. And the third piece is capabilities to manage merchant preferences.

Harley: (54:49)
I mentioned staff notifications, but these things all in aggregate all create real value. We also are, have a better sense now of who the SFN target customers are. Again, we are still in this product market phase. And so we know that, you know, self shippers that are fulfilling between 10 and 10,000 orders a day, durable goods with pick pack and ship needs and, and where brand experience is, is front and center. And they want their brand to look good when the consumer receives it. That is really where we’re, where we’re, where we’re spending our time right now, the volumes on Q2 or somewhere to Q1. And we continue to add more, more, more merchants to SFN. But again, this is still a really important project for us. I think we’re still in that product market phase, product market fit phase. And over time, you’ll continue to see more of these functionality come out in more merchants adopt it, but it’s important to get this right.

Speaker 4: (55:43)
Thank you Keith.

Automated: (55:45)
Our next question comes from Brent Braslen of Piper Sandler, please go ahead.

Brent: (55:51)
Good morning. The question here for Harley on the online versus offline commerce opportunity, a vast majority of Shopify GMV is driven by powering online commerce, but you talked about kind of POS pro being very robust, four quarters of accelerating offline retail GMV. Then clearly there’s a blurring of the lines between kind of the digital experience that customers want online versus offline. I guess my question here, what is Shopify doing to capture and enable more offline commerce specifically? Is it going to be tied to the POS pro product? Are there new products you can do to capture more offline commerce? Any thoughts there around just the opportunity and how big offline commerce can be given? Historically the focus has been on powering online.

Harley: (56:34)
Yeah. Remember that historically, you know, most businesses were created offline and then moved online. That’s no longer the case anymore. And so by Shopify being the place where more entrepreneurs get started, every 28 seconds a new entrepreneur gets their first sale on Shopify business are being started online. And by making sure that we are the, that, that retail operating system we’ve been talking about, when they do decide to move offline, if the product is great and as Toby mentioned earlier, our point of sale product is great and we’ve spent a lot of time and a lot of money and effort focusing on making sure that that product is, is best in class. And so the fact that they, they start with Shopify, that’s where their inventory is. That’s where they spend their time. When they, you know, when they go to work in the morning, they open up their laptop where they start is the Shopify admin.

Harley: (57:19)
It makes it a lot easier for us to be their point of sale partner when they decide to transition. In terms of the legacy point of sale market, we are also starting to see more legacy, you know, merchants that are started offline, begin to use Shopify point of sale as well. They’re using it because the product is really good, but also because every business today and, and, and frankly for the next, the next a hundred years is going to be, omni-channel talking about omni-channel going forward. We’ll be like talking about a color television. Every business by default will be Omni channel. And Shopify is the platform that enables that. So I think the opportunity for point of sale is, is there. Again, back to Toby’s comment about the, you know, the, the point of sale hardware and software and the pro that we put out in the last little while, it’s the best we’ve we think that’s out there right now. We’ll continue to get better. We’ll continue to add more functionality to it, but we think physical retail is a really great opportunity. And to Amy’s point, it’s our second largest channel and hopefully it’ll grow.

Speaker 4: (58:14)
Thank you, Brian. Thanks everybody for dialing in this morning.

Automated: (58:20)
this concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

Shopify SHOP Q2 2021 Earnings Call Transcript

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