Shopify SHOP Q4 2020 Earnings Call Transcript

Operator: (00:00)
Thank you for standing by, this is the conference operator. Welcome to the Shopify fourth 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 will 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: (00:38)
Thank you operator and good morning, everyone. We are glad you can join us for Shopify’s fourth quarter and year end 2020 conference call. We are joined this morning by Toby Lutke, Shopify’s CEO. Harley Finkelstein, Shopify’s president, and Amy Shapiro, our CFO. After some brief prepared remarks by Harley and Amy, we will open it up for your questions.

Katie Keita: (01:01)
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 US and Canadian regulators. Note that the adjusted financial measures we speak to today are non-gap measures, which are not a substitute for gap financial measures. Reconciliations between the two can be found in our earnings press release. And finally we report in US dollars. So all amounts discussed today are in us dollars unless otherwise indicated. And with that, I turn it over to Harley.

Harley Finkelstein: (01:44)
Thanks, Katie. And good morning, everyone. 2020 was the year of the entrepreneur. Entrepreneurs worldwide demonstrated grit, meeting the challenges presented by a global pandemic that forced businesses to think completely differently, and which also pushed more buyers online. Our merchants inspired Shopify to level up and pursue our mission of making commerce better for everyone with even greater energy. I’m proud to say that entrepreneurship is in a better state and more businesses are surviving the pandemic because of the work that we do here at Shopify.

We broke new ground across the company in 2020, a number of merchants from early stage entrepreneurs to enterprise level brands chose Shopify to launch and to scale their business. At the end of 2020, we had more than 1.7 million merchants around the world reaching further economic independence with Shopify. With merchants from outside our core English speaking geographies, continuing to increase as part of our mix. Approximately 3000 merchants joined Shopify Plus, our subscription plan for larger and more complex merchants. Bringing the total number of Plus merchants to more than 10,000 at year end. Shopify reimagine new ways of working as we permanently shifted to a remote work model, which gives employees the freedom to work from almost anywhere and empowers us to recruit top talent from around the world. And our merchants generated approximately $120 billion in GMV, which nearly doubled year over year for three consecutive quarters in 2020.

Shopify is getting more entrepreneurs to that magic moment of their first sale. In 2020, a new business on Shopify made their first sale every 28 seconds on average versus nearly every minute in 2019. On an aggregated basis, our merchants would rank as the second largest eCommerce retailer in the US, a lead that further expanded this past year. As the center of gravity of retail shifts firmly from offline to online, Shopify continues to innovate for the future of commerce for merchants of all sizes.

Today, I want to talk about four key trends that we believe will define this new era. First, consumers are voting with their wallets, so we’re making it easier for them to go directly to the merchants and the brands they want to buy from. In April last year, we launched Shop, are all in one mobile shopping assistant, which helps form authentic and lasting relationships between buyers and their favorite brands. Shop features curated merchant lists, including local shops and black owned businesses. And from day one of Shops launch 100% of the delivery emissions produced by every single order using its accelerated checkout, Shop Pay have been automatically offset at no charge to Shop users or the brand.

Second, retailers are prioritizing buyer retention. We see large companies are pushing acquisition costs up in their bid to attract customers. So we’re innovating so merchants can build strong and lasting relationships with buyers and keep them for years. The Shop experience is built for buyer retention with features like our accelerated checkout, Shop Pay. Our buy now, pay later product Shop Pay installments and real time delivery tracking. By the end of 2020 Shop had more than 100 million registered users, including both buyers that have opted into Shop Pay, as well as users of the app of which more than 19 million were monthly active users at the start of this year. By the end of 2020 Shop Pay had facilitated close to $20 billion in cumulative GMV since its launch in 2017.

Third on the list, is the growing popularity of modern financial solutions. Products like Shopify Capital, are increasingly sought out by entrepreneurs and small businesses that face unnecessary barriers to access from traditional banks. Merchant empathy runs deep at Shopify, when traditional institutions were turning away small businesses because of perceived high risk. We financed a record number of merchants when they needed it most. And we also introduced Shopify Capital to Canada and to the UK in 2020 to expand where we could help merchants. Shop Pay installments, which will begin rolling out to US merchants in our third quarter, lets merchants offer flexible payment options to their buyers. Buy now, pay later products, especially resonate with young consumers, who since the start of the pandemic have contributed to the significant shift in online spending. We also made Shopify Balance available for early access in Q4, enabling merchants in the US to easily open no fee business accounts, separating business finances from their personal finances and giving them greater clarity on the health of their business.

Finally, the power of omni-channel, as eCommerce captures a greater share of retail, omni-channel commerce becomes even more critical for businesses. We continue to strengthen our multi-channel value proposition in 2020, adding more ways to help merchants get discovered by new buyers, including Facebook Shops, Walmart, Pinterest, and TikTok. We are also making it faster and easier to check out in other channels. Earlier this month, Shop Pay was made available for the first time off the Shopify platform to Shopify merchants on Instagram. And will roll out to Facebook in the coming weeks. Once fully implemented with Shopify payments as the processor of all transactions with Shopify merchants on both these social services, not only will merchants have a conversion advantage of accelerated checkout through Shop Pay, but it will enable merchants to manage all of their Facebook and Instagram selling directly within Shopify.

Brick and mortar merchants that came to Shopify, as their storefronts closed during the pandemic discovered the importance of omni-channel commerce as they open online stores, attracting broader buyer audiences, and with the release of the Shopify all new point of sale software combined with our captainship hardware. These retailers are enjoying the benefits of a unified back office that allows for an integrated view of business operations and various omni-channel functions. These include buy online, pickup curbside, buy in store, ship to customer and local delivery. All of which have increased in popularity with buyers during the pandemic as a convenient way to get their products.

Shopify shipping, offers merchants another simple and affordable way to get products to buyers. In Q4 adoption of Shopify shipping by eligible merchants increased to 52% up from 45% this time last year. And we continue our work to democratize fulfillment for entrepreneurs through the Shopify Fulfillment Network, offering fast and affordable services to buyers. The progress we made through the year on our platform, set our merchants up for success during the global Black Friday, Cyber Monday shopping weekend, when Shopify merchants exceeded $5.1 billion in GMV. Selling to more than 44 million consumers worldwide.

In addition to this record setting weekend, we saw holiday shopping start earlier and with more consumers supporting local independent businesses. Merchants on our Shopify Plus plan benefited from the power of the entire platform. Strong sales by merchants on Shopify Plus throughout the holiday shopping season was an out-sized contributor to our phenomenal fourth quarter GMV and revenue growth which has been typical for our fourth quarter. Shopify Plus offers greater value and simplicity to the most complex brands compared to non Shopify alternatives. We are enabling more traditional retailers to directly reach their customers with speed and agility as their in-store sales channels vanished during the pandemic. And giving digital native brands the tools to distinguish themselves in this modern era of commerce.

With a record number of merchants subscribing to Shopify Plus in 2020, we saw a diverse slate of notable brands launch in Q4. Including international skincare brand Dermalogica, fashion designer, Elie Tahari. Japanese motorcycle brand, Yamaha. California’s surf wear brand, O’Neill. International furniture company, Herman Miller. A famous greeting card company, Hallmark one of the world’s largest makers of wines and spirits, Diageo. Aldi Mobile, from discount, grocery chain, Aldi and popular dog food brands from Nestle’s Purina.

Our summary of 2020 would be incomplete without acknowledging the enormous contribution of our partners to our merchant success. Over the course of the year, more than 42,000 partners referred a merchant to Shopify. Up 72% compared to the 12 months ending December 2019. Underscoring, the strong demand for our partner skillsets in the shifting commerce landscape. Our partners played an incredibly important role in helping our merchants to adapt to the rush to online shopping, getting stores up and running fast and preparing our merchants to maximize new opportunities. To shape their stores with the features that are important to them, merchants made heavy use of our incredibly rich portfolio of more than 6,000 apps with our app partners alone, earning more than $230 million from Shopify in 2020.

We are excited to continue expanding our partner ecosystem in 2021, outside our English speaking geographies in particular. And Shopify would not have been able to accomplish the amazing things we did in this unprecedented year without our employees. I want to say thank you to all of our employees for your heart and your unfailing dedication to our mission and to our merchants. To wrap up, if 2020 taught us anything, it is that the world needs more entrepreneurs. Their ability to remain resilient and embrace change is why we believe the future of commerce is brighter than ever. Entrepreneurs are the backbone of our economies, and we need them to help our nations recover from this pandemic. Shopify is here to give them the tools they need to adapt and evolve through the future that emerges, making commerce better for everyone. And with that, I will turn it over to Amy.

Amy Shapiro: (11:39)
Thanks, Harley. Our merchants truly exemplified the spirit of entrepreneurship in 2020. And along with years of strategic investment and strong execution by Shopify, they helped propel us to exceptional Q4 and 2020 results. Revenue nearly doubled once again, in our fourth quarter to $977.7 million, up 94% over the same period last year. Subscription solutions revenue of $279.4 million accelerated to 53% growth year over year, largely due to exceptional growth in monthly recurring revenue. MRR growth also accelerated to 53% year over year to $82.6 million in Q4 as a high number of new merchants joined the platform in the quarter following record merchant ads, in the third quarter.

Q4 MRR also benefited from incremental new revenue from our retail POS pro subscription offering as subscription pricing came into effect in November 2020. Shopify Plus contributed $21 million to MRR or 25%, compared with 27% of MRR in Q4 of 2019. While Shopify Plus MRR grew significantly non Plus MRR grew faster benefiting from a significantly higher number of merchants on standard plans joining the platform in 2020, as well as from our retail POS pro subscription beginning November 1st. Merchant solutions revenue grew 117% to $698.3 million in Q4 compared to the same period in 2019. This outstanding growth was driven primarily by merchant strong sales with GMV nearly doubling year over year to $41.1 billion in the fourth quarter alone. Strong Q4 GMV, was the result of a greater share of retail spend going to online purchases and extended Black Friday, Cyber Monday, shopping season and higher GMV per merchant. This strong growth in merchant sales combined with merchants increased adoption of Shopify payments capital and shipping, drove revenue from these products higher.

Nineteen point one billion dollars of GMV was processed on Shopify payments in Q4, in increase of 116% versus the comparable quarter last year. Payments penetration Of GMV was 46%, versus 43% in Q4, 2019. And more than one percentage point over Q3 this year. The majority of new merchants coming onto Shopify opted to use Shopify payments and Shopify Plus, international merchants expanded their share of GPV year over year. Demand for Shopify Capital remains strong in Q4 with merchants receiving $226.9 million in funding across the US, the UK and Canada, up 96% versus the same period last year. And the highest year over year increase in funding in 10 quarters. Our data algorithms and prudent risk management help keep loss ratios in line with historical periods. We are proud to stand with our merchants and provide them with convenient access to funding to help get them through the most difficult of times, because we know that ultimately when our merchants succeed, Shopify succeeds.

Adjusted gross profit dollar growth accelerated to 89% over last year’s fourth quarter to $510.6 million, reflecting strong revenue growth, despite the significantly greater mix of lower margin merchant solutions revenue versus last year. And the ramp up of investment in Shopify Fulfillment Network. Adjusted operating income was $200 million in the fourth quarter compared to adjusted operating income of $28.5 million in the fourth quarter of 2019, as our strong revenue performance in the quarter greatly outweighed spending. Adjusted net income for the quarter was $198.8 million or $1.58 cents per diluted share, compared with adjusted net income of $50 million or 43 cents per diluted share in last year’s fourth quarter. Finally, our cash, cash equivalents and marketable securities balance was $6.39 billion on December 31st.

… was $6.39 billion on December 31st. With a strong balance sheet, we are well-positioned to fund our growth initiatives and help merchants capitalize on the trends that Harley spoke to earlier. Shopify enters 20 21 stronger and more mission focused. This year, we will continue our important work of building a global commerce operating system to arm independent merchants everywhere with the tools they need to build their own businesses and take advantage of the strong secular shift to online commerce. This translates to executing on a portfolio of growth initiatives that puts Shopify into the hands of more entrepreneurs, unlocks the value of the platform for our merchants, and increasingly delivers scale benefits.

Three key areas of incremental investment in 2021 are Shopify’s fulfillment network, the Shop App, and international expansion. Starting with Shopify Fulfillment Network, we capped off a year of significant progress with a successful fourth quarter, advancing the development of our fulfillment service.

In Q4, we continued to harden our systems, executed multiple flash sales, and smoothly processed record volume through the peak holiday season. We also shipped our first self-service onboarding system, making it easier for merchants to access our network. We announced Shopify Fulfillment Network 18 months ago to reduce the complexity of fulfillment for our merchants. And our network is taking shape.

In 2020, we opened an R&D warehouse in Ottawa to test fulfillment technology, built out a network of warehouse and transportation partners, enhanced our merchant facing apps to provide updates on inventory and orders, and assembled a team of fulfillment success managers to simplify the merchant experience. We also learned a few things along the way that are informing the development of our product.

Most important of all, how to optimize to provide fast, accurate, and affordable fulfillment with great customer service. This will be reflected in much of our decision-making, including the partners we work with and the design of our network.

As we planned, when we started this journey a year and a half ago, we will use 2021 to continue improving product market fit, to focus first on quality and merchant delight, before we scale our fulfillment capabilities. This means iterating on the software that tightly integrates fulfillment into our tech stack, optimizing our node network, which may involve adjusting our network of warehouses to best serve our merchants needs, and accelerating our merchants’ onboarding journey. We also plan to continue to invest in the automated fulfillment technologies of Six River Systems, which recorded strong revenues in our fourth quarter and exceeded 2020 bookings expectations.

Six River Systems technology has helped improve the productivity of Shopify Fulfillment Network, and we believe will play an important role in supporting our scaling efforts. Our Shop App is another area we plan to invest aggressively in 2021. We launched the Shop App just 10 months ago to help merchants strengthen their relationships with buyers, with the ultimate goal of increasing customer lifetime value for our merchants.

Since then, we have placed the app into the pockets of millions of buyers, making it easier for them to rediscover and purchase from the merchants they love and introduced features to discover local shops and black owned businesses. In 2021, we will continue to develop the Shop App into a must have shopping companion that fosters buyer loyalty and retention. We plan to invest in building features that will further reduce friction for buyers at more points along the shopping journey, from discovery to delivery, creating value for both our merchants and their buyers.

And third, international expansion, 2020 demonstrated just how big our addressable market is. Year over year GMV growth by our international merchants outpaced overall GMV growth and our international merchant base grew within the overall mix. We continued to localize the platform in several regions in 2020, making it easier to sell cross border and from a mobile device. And launching Shopify Payments with a local payment method in Belgium, as well as in Austria.

In Q4, we introduced local pickup points in France, a popular delivery method in Europe. In 2021, we are focusing heavily beyond our core geographies to bring our omni-channel capabilities to more merchants.

We expect to continue to localize our solutions and countries where we have established a foothold and increase investments in sales and marketing to bring Shopify to more merchants around the globe. Another area we will incrementally invest, albeit at a lower level, is retail POS. Retail merchants demonstrated resilience in a tough year, adapting to socially distance selling. Our retail POS product especially resonated with businesses wanting to seamlessly bridge their online and offline operations and buyer facing experience. Momentum continued in Q4 is more merchants adopted RPOs offering and GMV increased to record levels, delivering a real turnaround from the first half of the year. In 2021, we will continue to grow merchant adoption of our retail POS and POS Pro offering by investing in foundational technologies to make things like onboarding easier. And our sales team expanding our POS products to more countries. And in executing our go to market strategy. We believe our investments in international and retail POS will help expand Shopify’s presence and enable us to capture more of our TAM while encouraging more entrepreneurs around the world to start businesses on and offline.

We’ve intentionally invested in both these areas over the past couple of years and expect them to deliver returns over the next couple of years. As always, we intend to invest in our future across the business, including our platform, which encompasses our core and Shopify Plus offerings, and our established merchant solutions, Shopify Payments, shipping and capital. These products, which are profitable today, give merchants the fundamental tools to start and grow their businesses and have been critical in setting Shopify’s flywheel in motion.

While these tools are designed to make selling easy, our platform also allows for extensibility and a focus in 2021 is on continuing to enhance developer tools for merchants who want to customize their experiences beyond what’s available out of the box. In 2020, years of investment in our platform paid off as the future of retail was pulled forward, enabling Shopify to act fast, to help our merchants adapt during the pandemic and encourage more entrepreneurs to begin their journey.

In 2021, we plan to execute on our product roadmaps, bringing our solutions to more merchants around the world and strengthening our value proposition as a leading global commerce platform. 2020 was an exceptional year of growth in revenue and adjusted operating income for Shopify, driven by the unprecedented acceleration of e-commerce by COVID, which drove an acceleration in the growth of GMV and new merchants on the platform and the increased adoption of merchant solutions. We believe that changed behaviors adopted by merchants and consumers in 2020 have expanded the prospects for entrepreneurship and digital commerce significantly. Our outlook coming into 2021 assumes that as countries rollout vaccines in 2021, and populations are able to move about more freely, the overall economic environment will likely improve. Some consumer spending will likely rotate back to offline retail and services, and the ongoing shift to e-commerce which accelerated in 2020 will likely resume a more normalized pace of growth.

For the full year 2021, we expect subscription solutions for 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 are likely to be more similar 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 and new merchants joining the platform, and expanded adoption of Shopify’s growing menu of merchant solutions, including established offerings, 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 Six River Systems contribute nascent, but incremental revenue in their early stages.

As a result, we expect that we will continue to grow revenue in 2021, albeit at a lower rate than in 2020. With regard to seasonality, while we expect that Q1 will still likely contribute the smallest share of full year revenue and Q4 the largest, the revenue spread may be more evenly distributed across the four quarters than it has been historically to the degree the rollout of a vaccine shifts more spending to services and prompts more offline shopping towards the back half of the year.

2020 catapulted commerce into a period of incredibly rapid change, presenting Shopify with unprecedented opportunities in 2021 to accelerate innovation. We expect rapid growth in gross profit dollars in 2021 and plan to deploy substantially all of these dollars effectively investing back into our business as aggressively as we can. In research and development, we’re launching an ambitious hiring campaign for engineers that we expect will gain strength over the course of 2021. In sales and marketing, we expect to increase online marketing spend into increased global demand, add to our global sales teams to capture more Shopify Plus and POS merchants, both in North America and internationally, and expand product marketing to help merchants take advantage of the full range of capabilities on the platform.

For 2021, we anticipate stock-based compensation expenses and related payroll taxes of $465 million and amortization of acquired intangibles of $21 million. As many of you who have followed us for years now, we have always prioritized longterm value over short-term financial opportunities, because we don’t manage our business to achieve short-term discreet financial results. We are replacing quarterly and annual numeric ranges with information on directional indicators, the primary levers driving our financials, and the assumptions that guide our planning.

Spending more time discussing the inputs instead of trying to predict a specific financial output should build a greater understanding of the many moving parts at Shopify, the areas that are profitable today, those where we are incrementally investing, and trends that shape our revenue and cost structure over time. We ultimately hold ourselves accountable for returns on our investments by whether or not they move the needle for our merchants, because it is their success that ultimately drives our own.

In closing, Shopify has a massive opportunity to shape the future of commerce. And we are excited about 2021. We believe we are investing in the right initiatives to urgently build out the commerce infrastructure that will give our merchants and Shopify the edge to win, positioning us and our merchants for success this year and into the future. I’ll now hand the call back to Katie.

Katie: (27:45)
Thanks Amy. Before handing it over to Ariel for Q&A, let me remind you to limit yourself to just one question. That includes related questions. It’s still another question. So just keep yourself to one. That way we should have enough time to get to everyone who has a question on today’s call. Ariel, can you now open up the line?

Operator: (28:08)
Certainly, 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.

Operator: (28:27)
Our first question comes from Brad Zelnick of Credit [inaudible 00:28:31]. Please go ahead.

Brad Zelnick: (28:33)
Great. Thanks. And congratulations on the strong Q4. My question is in respect to your focus on helping solve merchant pain points and how you’re thinking about the investments required to help merchants with discovery heading into ’21 and related to that, how should we think about the impact of the iOS app tracking transparency changes on a merchant’s ability to directly reach targeted customers?

Toby: (29:03)
Hey, it’s Toby. No [inaudible 00:29:08] to announce right now. Obviously, it means Shop’s data most relevant [inaudible 00:29:18] for discovery, some minor potential of discovery right now, because it pointed you to local businesses and then [inaudible 00:29:29] businesses. So you like expect that to continue. But again, like the purpose of a app is to increase [inaudible 00:29:43] of all customers, not necessarily optimized for your transactions in which way it… Again, and a lot of differences that you will see in Shop’s [inaudible 00:29:53] this particular optimization targets. That’s not the norm in retail.

Toby: (29:58)
And then, a related question, it’s too early to tell on the tracking changes. It’ll remix a lot of things in the advertising space, but that’s totally normal. Like the space is rapidly boarding, usually in the form of new tools coming online, or new discoveries being made, or people [inaudible 00:30:25] having new channels. Everyone in this space, as they [inaudible 00:30:29] to rolling out new strategies, then the boundaries change. So it’s usually the entrepreneurs who are the most adaptable. I think they’ve proven this during COVID and people make the most of the new situation.

Katie: (30:49)
Okay, [inaudible 00:30:50] repeat. Sure thing, Brad, I’ll just repeat the instructions to limit yourself to just one question. Ariel, next question please.

Operator: (30:59)
Our next question comes from Thomas Forte of DA Davidson. Please go ahead.

Thomas Forte: (31:05)
Great. Thanks for taking my question. So one of the many things I appreciate about Shopify is your culture. The notion that you’re empowering the rebels to overthrow the empire. As you scale the business, for example, adding 2021 engineers from across the globe in 2021, what gives you confidence you can continue to add talent while maintaining your culture?

Toby: (31:27)
Yeah, I mean… It’s Toby again. As you can imagine then, like we do a weekly town halls and ask me anythings, which I’ve been hosting for more than a decade. And I’ve gotten a question about, hey, next unit of time, we are going to hire more people than previous units of time. Therefore, how can we possibly keep a culture going? And it’s a super valid question, but it’s just one that growth companies are very familiar with. Honestly, I don’t know if you want to pick-

Toby: (32:03)
Honestly, I don’t know if you want to take it down to this resolution level. The key from existing as an entrepreneur in general rather than CEO of Shopify right now, the trick is don’t try to hold onto previous culture. Just evolve your culture to be better than it was before. Bring forward your strengths, double down on your strengths, try to leave some of the weaknesses behind. And just make sure that the next version of your company is a better version than the previous company. I think the way cultures end up bad is when people hold on to things that were appropriate in previous times and make most things that are un-negotiatable, and I see this as a path that doesn’t lead to anything. Personally, I’m the one person working at Shopify who has seen every single version of Shopify. This one is the best one. So far, so good, and intending to keep it this way.

Operator: (33:04)
Thanks, Tom. Our next question comes from Craig Mauer of Autonomous Research. Please go ahead.

Craig Mauer: (33:13)
Yes. Hi. Thanks for taking my question. I wanted to ask about Shopify Balance. Very intriguing product. We’ve seen products like this work very well in some international markets. So I was curious how you’re thinking about this business in terms of what types of products, financial services products, you can bring to these merchants through the balance platform, to what degree interchange income through purchasing as expected, and how you can leverage Shopify Balance into a B2B payments platform. Thanks.

Harley: (33:54)
Hey there, Craig. It’s Harley. I’ll take that question. So, Shopify Balance entered early access in Q4 of 2020. It’s going to roll out to all US merchants this year who are eligible, meaning they’re using Shopify Payments. And so we want to obviously evolve that. We expect Balance wide value over time, not only as a retention tool, but also as an efficiency tool. One, it’s going to make revenue available to merchants faster, reduce delays that are sort of inherent in fund transfer processes between accounts. It also will help streamline merchant cashflow operations, which is something that a lot of merchants find challenging. But what I think you’re seeing is that more and more Shopify, we want to be at the heart of merchants’ businesses and the things that they use every single day.

Harley: (34:39)
And so over time, we expect that merchants will use Shopify Balance as a way to… And as a way to get in front of merchants, introduce new, more centralized financial services to simplify their financial lives. And anytime that we can offer a better solution that makes it easier for them where they can do their business better, faster, more effectively, that is something that we think is very important. So it further brings us closer to the merchants’ heart of the business. And Balance, of course, as you sort of alluded to, provides opportunities for us to go beyond just things like cash management. So it’s the start of something that I think will continue over the years to evolve and help merchants have greater capacity.

Operator: (35:18)
Our next question comes from Ken Wong of Guggenheim Securities. Please go ahead.

Ken Wong: (35:24)
Thanks for taking my question. In the past, you guys pivoted the POS from best for merchants on Shopify to just best POS period. Recently, you guys announced Shop Pay to go beyond your walled garden with Facebook and Instagram. Should we think about pushing beyond the Shopify wall to something that’s going to be more commonplace going forward? What’s the impact that these news side doors have on merchant growth and monetization to the extent that you guys have kind of thought through some of these ramifications?

Harley: (35:57)
Yeah. I mean, wherever possible, we look to future proof of product as much as possible for merchants. What that means is that if we know that extending Shop Pay to services like Facebook and Instagram is going to help them not only find new customers on those incredibly huge services but also transact better, where there’s fewer card abandonments, where the transaction happens faster, more effectively, we’re going to do that. So I don’t think there’s any hard and fast rule around we keep these things internally or we extend them. We simply want to make sure that Shopify is not only the best product that merchants use right now, but over the course of the next couple of decades, they never have to think about leaving Shopify. And the only way to do that is to actually future proof the product. So there is again no schematic of when to pull something out. It really does depend on, can we add more value for merchants? And if we can, we’re absolutely going to do that.

Operator: (36:50)
Our next question comes from David Heinz of Canaccord. Please go ahead.

David Heinz: (36:55)
Hey, thanks guys. Congrats on the results. I want to ask a go-to-market question. Now that you’ve had some time to digest, can you speak to the pros and cons of the 14-day versus the 90-day free trial that you ran early in the pandemic? I think you said that the 90-day trials led to higher-quality conversion. So I’m curious what consideration you gave to that, or maybe something in between in terms of being the go-forward model.

Amy: (37:24)
Yeah, I’ll take that one. So, we were really pleased with the results of the 90-day free trial. The cohorts coming off of that 90-day free trial, even in the face of dramatic increase in merchants coming to the platform, those cohorts have performed on par or better than pre-COVID cohorts. So we’re really pleased with the results of the 90-day free trial. But as we found towards the end of the offer period of the 90-day free trial, the merchants coming to the platform looked more similar to pre-COVID in terms of composition. And we generally think 14 days is enough time for a merchant to trial on the platform. So we’re generally back in the 14-day free trial mode right now, and selectively deploying 90-day free trials, working with some governments, Canada as an example, to get more merchants online. So we will selectively deploy it going forward, but we think generally the 14-day free trial is working well. And maybe just one more comment on that, the 14-day retrial is what drove the significant merchant growth in Q4. So we’re still seeing really, really strong merchant growth on the 14-day free trial.

Operator: (38:59)
Thanks David. Our next question comes from Mark Zgutowicz of Rosenblatt Securities. Please go ahead.

Mark Zgutowicz: (39:07)
Thank you. I was just hoping you could maybe provide some tangibles on the Shop app investments that you spoke about that could bring in more pull on the buyer side. And you also mentioned buyer loyalty. Just curious what maybe some specifics there. Just seems like a really big untapped opportunity for you right now. Thanks.

Toby: (39:37)
I mean, I agree it’s an untapped opportunity. But I haven’t got any kind of product announcements to make right now. This is probably going to be in other realms. I think what they’re trying to do is just confirm that this is how we are thinking about it. This is the direction we are going to develop it. I keep saying there’s an absolute obvious playbook with Shops that I think everyone can see. The reason why we’re not following it is because the [ETB 00:40:22] angle, and that Shopify is extremely focused on merchants. And we believe that by focusing on merchants, the consumers end up getting better products. And as students of retail history, we do believe that certain, like if you go pre-internet times, that there are sort of general criticisms of consumerism, and these things are all products of a channel in which retailing had to exist, very mediocre products, the ones which tended to make it through the gatekeepers and the retailing process. We believe that the direct-to-consumer strategy is just better.

Toby: (41:15)
It leads to truer products. It actually is potentially a cure for this material consumerism. Because of course, this is sort of probably a tangent, but consumerism is not a thing that exists because people love buying things. It exists because people hate the things that they get to buy. The quality is just not there. And this is partly because of a disintermediation in the past of the people who had a chance of selling the product compared to the people who had the care to try to make the best products. And then so in a lot of ways, the internet allows people to go direct. That has a lot of good follow-on results. But we are the last ones who want to create some distorting middle channel there because we feel like this is one of the accomplishments of the company is to make this direct relationship. So as we are creating our discovery surfaces, they really have to be in keeping with these ideas that they strengthen the existing relationships that people have, that make us have customers. And therefore, you have to invent things that otherwise we could just sort of take off the playbooks, and that just takes longer. And we’ll take great care to get it right.

Operator: (42:46)
Our next question comes from Colin Sebastian of Baird. Please go ahead.

Colin Sebastian: (42:53)
Thanks. Good morning, everyone. Maybe a bigger picture question for me. You guys have talked about bending the curve in entrepreneurship, and I wonder based on what you’re seeing on the platform, if you think this inflection point in new business creation is a sustainable trend beyond the pandemic, as the barriers have been lowered. Or do you think it’s more of a function of the pandemic and people needing to find new or additional sources of income? If you have any perspective on that. Thank you.

Harley: (43:20)
I think the data supports the fact that there are more business creations happening now, certainly in North America, but around the world. You saw Q3 in the United States, you had more business registrations than any other time since 2004. And certainly we’re seeing that on Shopify. More people are starting businesses. I think part of this is that the pandemic did create this catalyst that people, one, needed to supplement their income, or they lost their job and needed to find something else. But I do not think this trend is going away. We envision a future where anyone that wants to or needs to start a business or share their product, the thing that they make that they love with the world, can easily do so.

Harley: (43:56)
And again, not all of them will succeed and we know that, but, but that’s exactly the point. We want everyone that has that ambition to try that. And more and more, Shopify is becoming the place that they go and try it. And then the ones that do succeed, and again the success of those are monumental right now. You’re seeing this massive scale of some of these D2C brands that five years ago didn’t exist, and today they’re literally the incumbents in their industries. They’re leaders in their verticals. That is happening entirely on Shopify. And so making it really easy to get started where the cost of failure is as low as possible, where the ease of use continues to increase. And the fact that once they scale, they never have any reason to go anywhere other than Shopify. That is the strategy of the company. And I think that’s working really well.

Operator: (44:41)
Thanks, Colin. Our next question comes from [Citi Penagraffi 00:44:46] of Macy Securities. Please go ahead.

Citi Penagraffi: (44:51)
Thanks for taking my question. So in 2020, we saw this accelerated adoption of e-commerce, and you also talked about GMV growth partly benefited from non-discretionary items like food, beverages and some terms like curbside pick-ups, and order online and pick up at store, like that. So could you give us some color in what percentage of that growth was driven by such kind of trends? Just to understand. And what are you seeing these days in Q4, and as of today?

Amy: (45:29)
Yeah, the mainstays for us have been apparel, accessories, cosmetics coming into 2020. What we saw during 2020 as a result of COVID was more food, beverage, essentials, home office, home workout gear, and things like that increase in terms of mix of our GMV. We’re continuing to see those sorts of trends. We continue to see those trends in Q4, and believe that more merchants who sell those types of goods have found us over the course of 2020. And so many of those trends will continue into 2021.

Operator: (46:21)
Our next question comes from Matt Sow of William Blair. Please go ahead.

Matt Sow: (46:28)
Thanks guys for taking my questions. Just wanted to understand how you’re thinking about Shopify Plus for 2021. As we get closer to the new normal, do you anticipate seeing more or less established brands either replacing their legacy e-commerce platform or moving online?

Harley: (46:52)
Yeah. As I mentioned in my opening remarks, we now have 10,000 merchants on Plus. In fact, I think 10,000 is probably one of the largest enterprise e-commerce customer groups of any company on the planet. And certainly, Plus GMV grew faster than non-Plus international, partially due to more Plus merchants and an increase of GMV from those merchants. The Plus merchant count growth came from a lot more upgrades and fewer downgrades. But we also saw an acceleration this quarter in migrations from legacy platforms and specifically from brands like Demandware and Magento. So I think that’ll continue.

Harley: (47:27)
Certainly, as you heard in my opening remarks around some of the big brands that are using Shopify, a lot of those brands had direct-to-consumer already. They were just using legacy systems, and they were looking at some of the more modern retail brands, the D2C brands, and wondering why they had better technology than they did considering they were these massive companies with large budgets. So I think what you will continue to see with Plus is not only we will see more upgrades from those merchants that get really successful on the platform, the homegrown success stories, you will also continue to see migrations over time. And I think that mix is incredibly healthy.

Harley: (48:02)
And I think that mix is incredibly healthy.

Operator: (48:04)
Our next question comes from Paul Treiber of RBC Capital Markets. Please go ahead.

Paul Treiber: (48:10)
Thank you so much and good morning. Just wanted to speak about international, just looking at your full core geography, it’s at a much faster revenue acceleration this year versus the acceleration of international. What do you see as the biggest points of friction for e-commerce outside your key markets and how are you looking to help eliminate that friction?

Harley: (48:33)
Yeah. So as you heard and Amy had mentioned this earlier, but Q4 GMV was really strong across all regions internationally. Our plan is really to focus on geographies where we have a foothold this year with a view to expand our presence into additional countries in the future, so really doubling down on where we think we have product markets that are close product market fit.

Harley: (48:52)
We’re going to invest in growth marketing and product marketing, and also in in-country sales teams in those geographies, because we think we actually have a lot of potential there. Also remember now, we’ve brought total languages up on Shopify to 20, so Shopify’s admin is now in 20 languages. And Shopify Payments is now available in 17 countries.

Harley: (49:10)
So a lot of what we’re trying to do is not only go into these countries haphazardly, but rather go in and make sure that we have the best product in the market. And in the countries where we are investing heavily, we think we have the potential to have that in the near term. Some other countries that we have on our radar, we don’t think it’s the right time to go really deep; that will happen in the future. But this meticulous and very strategic approach to international expansion leads us to actually being the leader in these countries, as opposed to being one of many options. And I think that has served us really well from a strategy perspective.

Katie: (49:44)
Thanks, Paul.

Operator: (49:45)
Our next question comes from Trevor Young of Barclays. Please go ahead.

Trevor Young: (49:51)
Thanks for taking the question. Just looking at first quarter, how should we think about trends so far quarter-to-date? Has it been a continuation of the strength that you saw last quarter on top of the pretty difficult compares in January and February versus an easier compare in March? And are you seeing any of that spend shift back to offline versus online? Thanks.

Amy: (50:13)
Yeah, we continue in Q1 to see strong e-commerce tailwinds and strong interest in the Shopify platform.

Operator: (50:21)
Our next question comes from Drew Foster of Citigroup. Please go ahead.

Drew Foster: (50:31)
Hey, guys. Thanks for taking the question. Wanted to also just follow up on international, specifically in Asia. So excluding Australia, what countries specifically in Asia are you getting the most traction? As I’m parsing the numbers there, I’m noticing that the half of Asia that’s not Australia is growing much faster. So curious, what’s driving success there? Thanks.

Harley: (50:59)
Yeah. I think, again, we don’t necessarily want to single out any particular country, but there are places where you’ve seen us do quite well. We’ve been in Singapore and Japan for quite some time. We obviously have mentioned on previous calls what we’re thinking about, cross-border strategy in a place like China. But generally, our international strategy, whether it’s in Asia or in Europe or anywhere else is the same. We want to be the best product in market in those geographies. And so, we’re not just going to simply go into those markets just for the sake of it.

Harley: (51:28)
Australia is quite different. If you recall, Australia has been one of our core markets for a long time. The way that it operates, the way that our product works there is very similar to what we see in places like the UK, Canada and United States. So Australia, I would say, would be different, but we are keeping our eye closely on how things are evolving.

Harley: (51:45)
In terms of trends though, I mean, one of the things that we think is really fascinating that we study is what are people doing in China? How are consumers interacting with brands there? What do new retail models look like there and what can we learn from those places? So Toby mentioned earlier, we are a student of e-commerce and retail history. We’re also students of modern and contemporary e-commerce trends, and trying to figure out how we can bring some of those back to our core markets is something we’ll continue to always do.

Katie: (52:11)
Thanks, Drew.

Operator: (52:12)
Our next question comes from Ygal Arounian of Wedbush Securities. Please go ahead. Ygal Arounian of Wedbush Securities, your line is live.

Ygal Arounian: (52:32)
Oh, hey. Sorry, I was on mute. Thanks for the question. So we got some comments on SFN, Amy, just around some of the trends you’re seeing, and I want to dig in a little bit more. I guess you guys have highlighted the second half is when we come out of the product market fit phase into a full launch. Are things still on track there? Are they being pulled forward, pushed back? Anything as we get closer to that, as we think about how that can translate? And this word omnichannel I think, is the biggest word that’s come out of the pandemic as we go back to normal life, is omnichannel commerce. How can [inaudible 00:53:17] with POS accelerate your opportunity there and bring all those things together? Thanks.

Katie: (53:23)
Ygal, Which one do you want her to answer? The SFN one, the Shopify Fulfillment Network, or the omnichannel trends one?

Ygal Arounian: (53:38)
Let’s just talk about the SFN ones, I guess.

Amy: (53:43)
Okay. On SFN, yeah, we achieved some really significant milestones in Q4 as I talked about earlier, record volume. In 2021, we remain in the product market fit phase, as we said, when we launched 18 months ago. We are very focused this year continuing to build the software and the infrastructure for the network, focusing on optimizing things like inventory and order management and the network optimization. We’re continuing to iterate, learn and build, so there’s really no changes to what we’ve previously stated at this time. As we continue to learn, if our plans change materially, we’ll be sure to communicate that.

Operator: (54:39)
Our next question comes from Josh Beck of KeyBanc Capital Markets. Please go ahead.

Josh Beck: (54:47)
Thanks for taking the question. I guess maybe I’ll ask about the point of sale angle. Just maybe describe where it is in the journey? Is it the product market fit is effectively nailed at this point and it’s really about scaling? Just curious, when you think about that initiative, just where we are in the journey?

Harley: (55:14)
Yeah. So I think, as Amy pointed out earlier, we achieved record point-of-sale GMV in Q4, which is great. But really, what we’re doing is we continue to grow the number of merchants using it, despite lockdowns and seasonal focus on selling over point-of-sale transition.

Harley: (55:28)
We also added new features. You saw smart inventory management get integrated, buy online, pickup in store, staff permissions, retail level reporting. We also introduced the point-of-sale pro subscription. So I think while Shopify’s integrated POS solution, the payment side, by the way, also is still limited to US, UK, Canada, Ireland. We think that we can expand not only payments, but we also can continue to evolve the actual offering that it provides.

Harley: (55:54)
The all-new point-of-sale though, to be clear, it is faster, it is more intuitive, it is more scalable, and it’s designed to meet the needs of our most complex brick-and-mortar retailers. And when we introduced the POS Pro, which is the new subscription, we really looked at what was missing from it. So I wouldn’t necessarily say that we’re not a product market fit yet. Certainly, the merchants that do use it, find it to be incredibly compelling. But obviously, we are incredibly ambitious with Shopify. We want to make sure it’s the best product on the market. And so, that will continue to happen. But again, just if you look at where it was a year ago to where it is now, if you look at record POS GMV that went through in Q4, if you look at the number of merchants that have been using it, point-of-sale has a very bright future at Shopify.

Operator: (56:37)
Our next question comes from Brent Bracelin of Piper Sandler. Please go ahead.

Brent Bracelin: (56:44)
Thanks for taking the question here. I wanted to drill down probably for you, Harley, on Shopify Pay as a followup. Obviously, as a consumer, love Shopify Pay, it’s been a fantastic and frictionless payment experience for me personally. But you now have Instagram and Facebook that are starting to embrace Shopify Pay. My question is how much interest is there from other partners and brands to embrace Shopify Pay, given there are so many other payment options out there? And can you remind us of the monetization strategy? Do you get a small take rate for all transactions processed or just the Shopify only merchants? Thanks.

Harley: (57:21)
Yeah, so just as a reminder, I mean, in terms of Shop Pay, it has now facilitated nearly $20 billion in GMV by the end of 2020, relative to when we launched in 2017. It also is four times faster than normal checkout, and it converts close to two times higher than a regular checkout. So we’re really excited by it.

Harley: (57:41)
In terms of other partners, we can’t speak to who we’re talking to or what our strategy is with partners around that. But certainly, we think that Shop Pay brings a fast, secure, and efficient checkout to this all-in-one commerce experience offered at Facebook shops and Instagram, and we think it’s going to be great for merchants.

Harley: (57:59)
In terms of the economics of it, that’s not something that we’re discussing right now, but certainly we think that by bringing it outside of the Shopify ecosystem and providing it with partners where a merchant can access billions of new consumers, it is a really great way for our merchants to continue to grow. And it also substantiates Shopify’s role in the future of retail and commerce.

Operator: (58:22)
Our next question comes from Brian Peterson of Raymond James. Please go ahead.

Brian Peterson: (58:28)
Hi, thanks for taking the question. So Amy, I appreciate all the color on the investments. I was a little surprised to hear the Plus not on the list. And so, I don’t know if that’s some investments benefit Plus as well? I know that that colors in the Venn diagram potentially change there in terms of investments, but could you characterize the investments in 2021 and beyond, specifically related to Plus? And I guess I’m curious when they go-to-market side in why, so just any color there? Thank you.

Amy: (58:55)
Yeah. And it is in there. It was probably a lot to intake, but we do absolutely intend to invest in Shopify Plus and in 2021. Today, most of our Plus merchants are concentrated in North America intentionally, that’s where we’ve been focused. So one of the investment areas in 2021 is to put more in-country sales teams to take Shopify plus to other geographies more aggressively, focusing on those markets where we have a foothold today.

Amy: (59:34)
And then, we also will continue to develop and enhance APIs and developer tools for those larger, more complex, tech savvy merchants who require that to customize their experience somewhat, to make it a great experience for them. So that’ll be a focus as well, but continued strong opportunities in Plus globally.

Operator: (01:00:09)
This concludes the question and answer session, as well as today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.

Shopify SHOP Q4 2020 Earnings Call Transcript

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