Q3 2019 Earnings Call
Welcome to the Shopify Inc. third quarter 2019 financial results conference call I.
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 Q 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'd now like to turn the conference over to Katy Kato Director of Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone. We're glad you can join us for Shopifys third quarter 2019 Conference call. We are joined this morning by Toby Luca Shopify, CEO , Harley Finkelstein, our Chief operating Officer, Amy Shapiro, our CFO after 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 we projected we undertake no obligation to update these statements except as required by law you can read about these risks and uncertainties in our press release this morning.
That was in our filings with U.S. and Canadian regulators.
Also our commentary today will include adjusted financial measures, which are non-GAAP measures. They should be considered in the supplement to and not as a substitute for GAAP financial measures reconciliations between the two can be found in our earnings press release, which is available on our web sites and finally note that because we report U.S. dollars all amounts discussed today on U.S.
Dollars, unless otherwise indicated with that I turn the call over to Harley.
Thanks, Katy and good morning, everyone.
We continue to me great progress this past quarter don't gets into more detail on that shortly.
First I'd like to take a minute to mention two major milestones.
Last month, our counter hit the 1 million merchant Mark that means 1 million business is large and small put their faith in shops.
For all of US working to build shops like each day is incredibly validating and meaningful we continue to help tens of thousands more businesses each quarter launch and thrive on our platform.
And earlier this month, we close the biggest acquisition in our history, when we welcomed six rubber systems to the Shopify family.
This is another milestone not just because it signals our commitment to solving some of the most critical challenges our merchants face, but because it is yet another way in which we're evolving to continue making commerce better for everyone.
Thank you all are Murchinson partners, who continue to put their trusted us.
As I mentioned previously our momentum continued in Q3 as you can see from our third quarter results.
Our international expansion efforts continue to pay off as much as from outside our core geography as well once again, the largest component of new ads.
GMP from these international merchants outpace GMB growth overall.
And adoption of merchant solutions products continue to expand across shopify payments frac protect multicurrency, shopify shipping and fulfillment and shopify capital as we make these offerings more attractive accessible.
We're also showing progress across the multiple product initiatives that are underway.
In October we began rolling out our native video in Threed modeling features to shopify, plus merchants with a broader rollout planned over the coming months, making shopify. The first commerce platform to natively support three D and E R shopping experiences.
These features create the most immersive online buying experience, which not only makes a purchase more likely but also just makes it really fun way to shop online.
More buyers are opting into shopify paid quarterly order volume, increasing and GMB rising to over $1 billion in Q3.
We continue to release more features to make it easier for buyers such as giving buyers more payment options to complete their purchases using shopify there.
And we continue to work hard to connect merchants around the world directly to their buyers in Q3, we enhanced our marketing support tools and we introduced shopify chat our first native chat function that helps merchants build stronger relationships with their customers the real time conversations.
Shopify capital put up an excellent quarter setting a new record in merchant cash advances with over $140 million issue in Q3.
We started shopify capital to help solve another pain point for entrepreneurs access to capital to grow their businesses.
This is especially true as merchants gear up for their busiest selling season of the year.
As we mentioned last quarter, we introduced shopify capital to non shop attainment merchants and while it's still early we're seeing strong adoption from those merchants.
Shopify shipping adoption can you need to grow with 44% eligible merchants using shipping in third quarter up for more than one third of merchants in the same period last year.
Shopify shipping empowers merchants to speed up their packaging and fulfillment process and save time.
After merchant buys a shipping label directly from the shop play admin. They can printed a fix it to the package and then ship it from any post office.
This is why we continue to provide competitive shipping rates and add best in class features like personal insurance when we launch in Q3 for U.S. merchants.
Moving to Shopify, plus which had yet another strong quarter.
I'll play Plex continue to solidifying its position as the preferred commerce platform for high volume merchants.
Some of the brands that launch this quarter include footwear brands aerosols Harry's of London, the fried food company and Nicolas Kirkwood from luxury brand LVMH.
The shop for the iconic British broadcast or the BBC and the space exploration Disruptor Spacex.
Sports drink became at the Gatorade.
Australian Electronics giant JB high fight.
Planes brand missile.
Additional iconic toy brands such as gunned.
More brands for some of the world's largest influencers like Kim Kardashians, new ship or line called scams.
Victoria Beckons make a blind Victorian back in beauty.
And finally more launches from the world's largest consumer package goods companies that have been leveraging our platform for some time, including Heineken and you know lever.
Shopify plus is becoming the most relevant platform globally for both iconic as was the fastest growing modern retail brands.
That's a quick anecdote I recently spokesmen executive and one of the largest food and beverage conglomerates on the planet. After they went live on plus he said that this was the most successful product launch probably in the history of the company and the best part is that I hear stories like that's all the time from Fortune 500 Smbs.
Well these brands represent different verticals, Dave one thing in common they're growing and complexity. This is reflected threat their evolving business from the global reach their marketing manufacturing and distribution to the management of their inventory and the growth their employee base.
Shopify plus features like flow launch pad and scripts are built to help solve those complexities and making it easier for larger volume merchants to manage the increasing scale other businesses.
Turning to our partner ecosystem, which continues to play a critical role in the success of our merchants 23000 partners have referred a merchant to shopify in the past 12 months.
And we've added more than 300, App store App store, bringing the total to 3200 at the end of quarter.
International partners are becoming a larger part of our partner ecosystem as well and we see an opportunity to further leverage as cumulative helped develop localize features in specific markets.
At Shopify wheel products that make it easier for anyone to become an entrepreneur and then we'd level the playing field so that they can grow and succeed.
As our merchant scale and face new challenges and new levels of complexity Shopify is designed to grow with them, revealing new capabilities as merchants require them.
With this formula we can not only help meet the next million merchants, we can arm them with everything they need to thrive more entrepreneurs, reaching for independence means more choice for buyers, which ultimately makes commerce better for everyone.
Thanks, Charlie and good morning, everyone. We delivered strong growth this quarter and continued to execute on our strategic initiatives.
More than 1 million merchant building their businesses on shopify, we're more focused than ever on making entrepreneurship easier and helping our merchant succeed.
Revenue in our third quarter was up 45% year over year to $390.6 million.
Subscription solutions revenue increased 37% to $165.6 million, primarily due to strong merchant ads as well as level settings subscription pricing for legacy plans growing monthly recurring revenue to $50.7 million, which is up 34% over the same period last.
Here and the same pace as last quarter.
Shopify plus continued to increase its contribution to have our our accounting for $13.5 million or 27% compared with 24% of them are are in Q3 2018.
Subscription solutions revenue grew faster than EMR are in the quarter, primarily due to strong growth an ABS revenue as well as from Shopify plus platform fee revenue.
Merchant solutions revenue grew 50% or the same period in 2018 did you under $25 million. This growth was driven by GE and the expansion up 48% year over year to $14.8 billion with international being the fastest growing contributor.
Both international and plus continued to grow their share of GMP mix, well Pos channel GMB growth gained momentum accelerating for the second quarter in a row.
$6.2 billion of GMP was processed on shopify payments in Q3 up 51% versus the comparable quarter last year.
Shopify payments penetration of GMP grew to 42% in the third quarter versus 41% in Q3 2018, primarily due to increase shopify plus penetration as well as the addition of new shopify payments geographies.
Newer products like Multicurrency are gradually being adopted and adding further value to merchants using shopify payments contributing to your over your revenue growth as we continue to improve their product market fit.
Gross profit dollars grew 45% from Q3 of 2000 $18 million to $216.7 million consistent with revenue growth in the quarter.
Adjusted operating income in Q3 was $10.5 million or 3% of revenue compared with a loss of $2.4 million or 1% of revenue in the third quarter of 2018.
We achieved better than expected adjusted operating results in Q3 due in part to strong revenue contributions from higher margin products and lower marketing spend note that we have updated our definition of non-GAAP financial measures to also now exclude the impact of amortization of acquired intangibles and related taxes. In addition to the.
Stock based compensation and related taxes, we have always excluded this is consistent with our peers and provides a clearer view of operational results in the period.
In the third quarter amortization of acquired intangibles was $1.7 million.
Adjusted net loss for the quarter was $33.6 million or 29 cents per share over adjusted net income of $5.8 million or five cents per share for the same period last year, our third quarter 2019, adjusted net loss includes a tax provision of approximately $48 million.
Net of certain tax offsets related to a onetime capital gain triggered by the transfer of certain rights from our Canadian entity to regional headquarters, which allows us to develop and maintain merchant and commercial operations and their respective regions as we expand internationally.
Finally, our cash cash equivalents and marketable securities balance was approximately $2.7 billion, which increased around $700 million largely due to proceeds from a share offering we completed in September .
As Harley said, we're building a global commerce operating system that helps solve problems at critical points along the merchant journey.
We have thoughtfully developed and implemented a portfolio of investments that addresses many of these pain points and fueled our growth today.
These include multichannel integrations enhancements to marketing functionality for merchants expansion of Shopify payments and related services further development of Shopify, plus capabilities Shopify shipping functionality and expanding the availability of shopify capital to more merchants among others.
I will focus my comments today on more recent additions to this portfolio International expansion building brand awareness of Shopify Shopify fulfillment network and the acquisition of six River systems.
[noise] Shopify is taking a disciplined and localized approach to achieve optimal product market fit in our international markets over the past year, we more than tripled the number of languages, which the shopify admin is available and in Q3 introduce shopify payments in Italy, and continue to roll out multicurrency to merchants using.
Shopify payments, which is now available in 14 countries versus 10, the same time last year.
Our efforts internationally are bearing fruit as the pace of merchant adds from outside our core geography is accelerated in Q3 as a result international margins continue to grow their share of our overall merchant base.
Margins around the world need to know that entrepreneurship as an option. So we have begun to build their brand awareness of shopify outside our core geographies, we kicked off first ever brand campaigns in Germany, and France in Q3, and expect to continue brand testing and learning into Q4.
We've spent roughly two thirds of our approximately 30 million dollar budget allocated toward our brand campaigns and Shopify studios. So far this year and plan to invest the remainder of this budget in Q4.
Moving to Shopify fulfillment network, our solution to further democratize commerce and help merchants provide fast and affordable shipping for their buyers.
We have to get this right for our merchants, that's why we're taking a thoughtful and gated approach to the development of Shopify fulfillment network.
We continued working with our warehouse partners to bring more nodes online through the third quarter and we're happy with the performance of our network so far.
We are seeing strong demand and continue to add select merchants and partners as we focus on high performance and optimizing for the merchant experience.
With the six river systems acquisition now closed we're better positioned to deliver faster high quality fulfillment.
Once implemented we expect to expand throughput and capacity at our partner nodes boosting productivity by two to three times that of manual processes.
We will continue to operate build and sell six river systems solution. In addition to making it available to our warehouse partners.
As a result of extending this innovative technology beyond Shopifys current market not only are we helping to change the broader fulfillment industry. We're also expanding our total available market. While the acquisition of six River systems had no impact to our third quarter results given it closed on October 17th we expect the acquisition.
And we'll be additive to shopifys topline overtime.
Given our strong third quarter results and acquisition of six river systems in the fourth quarter, we're updating our full year 2019 in fourth quarter outlook.
To be clear. This updated outlook includes two new items that were not included in our August guidance and includes our acquisition of six River systems and it includes a change in the definition of adjusted operating income to now exclude amortization of acquired intangibles Accordingly for full year 2019.
We're raising our revenue expectations to be in the range of 1.54 or 5 billion to $1.555 billion with an adjusted operating income between 27 million to $37 million, which excludes stock based compensation expenses and related payroll taxes of 180.
Million dollars.
And amortization of acquired intangibles and related taxes of $15 million.
For the fourth quarter, we expect revenue of 472 million to $482 million and an adjusted operating income between 10 million and $20 million, which excludes stock based compensation expenses and related payroll taxes of $57 million and amortization of acquired.
It intangibles and related taxes of $10 million.
Our outlook includes expectations for six river systems ownership in the fourth quarter as follows.
We expect no material impact to Shopifys revenue given most of six river systems revenue is recognized over the multiyear lifetime of each contract and also reflects a reduction of acquired deferred revenue under purchase accounting.
We expect incremental expenses to shopify of $25 million, including $10 million of cash operating expenses $7 million and stock based compensation and $8 million of amortization of acquired intangibles.
We are excited about our progress in Q3 and going forward as we continue to democratize commerce by bending the learning curve, adding more tools and capabilities to make entrepreneurship easier and leveling the playing field. We are unlocking the power of commerce for those who want to reach for independence, all over the world with that I'll hand, the call back.
Katy.
Thank you Amy.
Before we open the call up for your questions. Let me remind everyone that we'd like you to limit yourselves to just one question. So everyone can get a question and on the call. This morning.
Area, how can we have our first question. Please.
Thank you. Our first question comes from Colin Sebastian of Robert Baird.
Hi, Good morning, Thanks for taking my question and congrats on the customer milestone.
Shopify capital, obviously, a big step up in the merchant cash advances in loans as Charlie mentioned so.
How are you thinking longer term about the role of capital in customer acquisition and retention and the ability to manage that risk as you expand outside of the payments group. Thank you.
Thanks for the question no Harley here. So it certainly was a record quarter for capital, we get more than hundred $40 million advances to merchants and again as you as you mentioned part of this is making sure that we help merchants and in the entirety of their their journey to success, certainly things like having additional cash inventory and marketing very important.
And there's nothing they place to get that that's with capital. So we think we're helping merchant I do want US. It also serves of course as a way to attain merchants because we're not only now their ecommerce platform or the point of sale provider or the payments provider well. So now it's like is playing the role of their capital provider.
So this is a meaningful part of our business and it keeps growing and certainly isn't that we're very proud of in terms of the the managing the risk. It's something we could close eye on we do a ton of trend forecasting and ensuring that we look at the data to chew on to update our models as as we see trends changing that being said, it's important to remember that most of the.
Capital that we put out there is insured by our partner.
So we think that we continue to grow the capital business, but the same time matters the risk and so we're not doing anything that is outside of that loss ratio in risk exposure comfort zone. That's everything you have right now.
Thank you.
Thanks Colin.
Our next question comes from Matt Pfau of William Blair.
Hey, Thanks for taking my question just wanted to ask on the fulfillment network. So how is the supply of fulfillment partners.
Ben relative to the demand in fulfillment that you're anticipating and core correlating to that any updated thoughts on if you're going to need to operate some of your own fulfillment centers to help supplement the supply. Thanks.
Hey, it's hardly get I'll take that question. So as of right now the demand for Estefan as it's coming from both sides of the coin it's coming from our merchants who want to use it but also coming from partners. It's important to extend their warehouses Oliver all over the west where we're which is a first geography that have spare capacity, but are looking to find a way to increase their business.
This is just circling by being part of this network the greatly for them to do that as of right now on the seven nodes that will be operational by the end of Q1 in 2020 all of those will be third party.
Warehouses, so whether or not we built around we hope we don't have to and if we do it would likely be just to test to do some development work, but as of right. Now we feel we can do a lot with third parties and and still achieve.
The the type of servicing cost that we want to get for our merchant so.
Into 2020, it'll be a good approached U.S. offended well getting more and more partners.
There's been significant demand both sides from merchants and also from partners ever since the announcement at shops at United In June So we're quite pleased with the progress.
Great. Thank you Matt.
Next question. Please our next question comes from Ken Wong of Guggenheim Security.
Great. Thanks for taking my question guys.
Some of your ecommerce peers have called out softer than expected holiday trends.
Do you maybe talk a little bit about what you're seeing across your merchant base as we head into the that typically strong Q4.
Yes, I'm picking up.
Toby so far.
I mean, it's all trend focusing on with point like.
If you go on sort of looking at probably some of the data you don't see any weaknesses.
Right now it looks pretty much on track to the previous years.
Some dates of falling on different parts of a year. So that's something changed about in terms of seasonality but.
Right and I'll be don't see anything that gives us an indication that has a different than purchasing behavior.
From a segment of of what we can see.
Great. Thank you Ken next question please.
Our next question comes from Mark Douglass of Rosenblatt Securities.
Hi, Thank you maybe just a quick follow on to that last point Tobey I think we have one essentially one less week.
On Friday and Christmas this year roughly speaking I'm just curious if there's.
So that's contemplated in your.
Guidance and then.
Separately.
However, you talked about capital and just curious if you can provide any color in terms of.
The impact, it's having a JV growth. Thanks.
So I'll I'll take the one last week, yes, yes. It is built into our guidance. We had a strong Q3 and in terms of GMB growth. We're pleased with our performance going into our peak selling season and that is one of the reasons why we upped our guidance on the top line.
Okay.
And the capital pitch, we've now given out about $770 million of cumulative cash advances I hope you need to grow its up 85% since Oh, if you look year over year from from last Q3 2018. So our capital just continue to grow is it could have material effect on on GMP, probably not a material effect on it obviously people will use this these merchants will.
Use this money to do things like advertising inventory, which will have a correlation to GMB, but just given the amount of GMP happening across our entire platform and 175 countries I don't think thats going to be a material increase our JV by itself.
That's another good it's not.
On the capital side, we don't see and.
Sometimes you get below and had been people, just accelerate or increase and inventory auto and it has an immediate effect what happens a lot more as that business. It otherwise not access loans get them and therefore extra content you're building a business. So the facts off on GMB off the loans end up being delayed but be might end up with an additional customer would never actually that's.
I'm a customer because with them. So it's it's hot to cause and effect. It. It's a secondary tertiary affects which end up from affecting the GMB into long run.
Got it thank you Greg.
Thank you Mark.
Our next question comes from Gus Papageorgiou of P.I. financial.
Hi, Thanks for taking my question.
If I look at your numbers it looks like the year over year growth and GMP per merchant is very strong double digits and looks like it's been double digits all year long I'm, assuming that's from an increased number of plus customers, but also.
It seems like probably the conversion rates are improving for your merchant customer base can you can you talk about what are the kind of main features that you guys have implemented that have helped your merchants convert and if you look into the future.
How do you expect conversion improved with stuff like augmented reality and whatever other features you think you're here are going to influence that.
Yeah in terms of the conversion I looked at things that we're doing we're trying to ensure that anyone that any browser turns into a buyer for our merchants so things like augmented reality or three dimensional a product listings things of that nature, I guess I mentioned it only makes it more fun experience for consumers, but it also increased the conversion right, but even beyond that things like shopify pay more books.
Over to check what options, what's you're beginning to see more and more is that we're trying to reduce the amount of friction that any browser has asked for that they do become a buyer and hopefully by a lot from from these these merchants. So I mean, that's what we've been doing that for 15 years now trying to make it easy friendly once you checkout as easy as possible from Shopify store I will contain.
You do that of course.
Yeah.
I'll just add one one point at the end that the GMB per merchant growth, it's pretty much across the board as all of our merchant segments, but yes in particular Clos side has been very strong.
Great. Thank you.
Thank you guys.
Our next question comes from Deepak Mathivanan of Barclays.
Hi, guys. Thanks for taking the questions I wanted to ask about how you're approaching the fulfillment roll out are you using initiatives like all your doctor discounts or why you promotions for some of the large merchants at this point already as you prepare for the holiday season can you talk a little bit more about kind of the go to market started equal fulfillment.
Tom and off maybe in 2020 as well thank you.
Yeah, so with respect to the fulfillment yeah, we're still on our early access program and were Onboarding merchants as we speak work, we're happy with our progress and absolutely on track each contract is is competitive.
We priced.
We look at each merchant based on the size weight and complexity of their fulfillment center and that's largely how we have approached it and we'll continue to approach it.
Moving forward.
Great. Thank you Deepak next question please.
Next question comes from Brad Zelnick of Credit Suisse.
Excellent. Thanks, so much for taking the question so with take rate flat quarter on quarter. How much of this was driven by mix shift and if we dig into the different segments plus in international what does take rate growth look like on a segment level basis. Thanks.
Yeah it.
If you look at it the segment level each of our merchant segments has continued to increase take rate year over year. So the entire intact from Q3 to Q4 is is a mix, we're still seeing strong growth in international and that take rate is.
Improving quarter over quarter year over year, it's just a weighing down the average a little bit.
Great. Thank you Brad.
Our next question. Please our next question comes from Richard Tse of National Bank financial.
Yes.
The fulfillment network you know as it becomes a growing part of your mix how should we think about the margin profile here for the business going forward.
Yeah. So so let me just talk a little bit shopify fulfillment network and and what we sort of expect here. So let's take Q3 to begin with.
There was minimal impact to gross margin given we're still ramping the early access program as we enter Q4 in our peak selling season.
I will start to ramp fulfillment volumes, we do expect to have slight dilution on our gross margin from that this is all factored into our Q4 and full year guidance. A we do have a path to profitability that we announced it unite and we expect to be in product market fit phase three.
Early 2021, so we likely will be dilutive on the gross profit.
Line for Shopify fulfillment network until we had the scale phases, which again, we expect early 2020, but we believe the short term solution is the right long term decision for our merchants, we expect fast and affordable Fulfillments, a well energizer flywheel by helping our merchants to sell more.
And that would be hitting the scale phase and early 2021.
[noise].
Our next question comes from Darren I fatty of Roth capital partners.
Yes, maybe could you expand on on gross margins looks like subscription solutions gross margin.
Sequentially I'm, just kind of curious what's driving that.
Yes.
Ah, yes on and that subscription solutions margin a line for Q3 quarter over quarter, we did see a slight that it was due to a infrastructure investments odd to increase the performance for merchants speed performance and also some additional.
Infrastructure in anticipation of our peak selling season.
I will say for that for the full year first subscription solutions margins year over year, we are still anticipating an improvement because of post cloud migration this year versus last year.
Right. Thank you Dan.
Next question. Please our next question comes from Jonathan Kees of Summit insights group.
Jonathan Your line is live.
Hi can you hear me now.
Hello can you hear me now.
Yep.
Okay Super all right sorry about that I really just want to ask for one topic on Amazon during their call and talked about one day shipping really materially had an uplift on their volume on their DMV.
You know you guys talked for a two day shipping does that change your planning your.
Your table Stakes offering in terms of what you're planning to rollout for your merchants and if you buy me on the same topic here I know you consider Amazon three more of a partner it's a sales channel for your merchant I guess at what point do they become it competitors, especially as a.
More merchants the effect from their network over two years.
Thanks.
Yes, Hi Tech as Toby.
I get I've said this before it seems that resonate I'd like to Shopify and.
As an op hotness again they'd be off honest on page about customers, who want that I'm doing much of wanted.
Often when you buy something on Amazon data at the Shopify store that though that particular auto flows into.
Mitch mentioned Delta Fitment, that's all.
It's the partnership's if you'd be not competing with Amazon. That's you know some of our costs not competing in some segments.
Certainly helped them thats up so innovate indirect way you can draw the power level of.
Competing but like I don't think Ivo thinks about it this way.
But how does that also so so if that's a best practice you know like that they've kind of I mean baby that's certainly the retail on.
I figured out how did so perfectly on internet the things that people really but you need the audit from bad because the rice.
Oh, No next day S band on.
The protocol Shopify policy, the things that people really want rather than once they need that so that's a but do you kind of product from and as a little bit more tolerant spoke for the 12, a shipping because of that so if you're not aiming at one day delivery because that's just.
It's been incredibly expensive kind of thing to do and isn't like we were talking investment and before the kind of your products that on shopify isn't isn't there I get little help them in subjects with us because frankly, a lot of all partner.
This will be close to population Santos and the EBIT to do this but to create any kind of guarantees around this is that's not something depending.
Depending on doing so no there's no change because of the announcements though.
Thank you thank you Jonathan.
Our next question comes from Kevin Krishna variety of paradigm capital.
Hey, there are good morning, congrats on the on the milestone you had strengthened adds from international I'm wondering if you could provide any color on gross adds in core markets sort of weather trends I like there versus a year ago or prior quarter stronger or weaker just trying to understand how this quarter might compare to other at peak periods for out for gross adds and just trying on.
Pack the different markets. Thanks.
Oh, we continue to say solid growth and merchants in our core geography is you know merchants merchant count is something that that we look at as a metric, but we're also looking at GMB growth and the growth.
And our card geography as well.
GMB wise was quite strong so the combination of the two of them and we're happy and that's another reason why we upped our guidance for the year.
Great. Thanks, Kevin next question please.
Our next question comes from Nick Hiller, Sudani of Mackie Research capital.
Good morning, I wanted to go back to our these comments about your native Afridi support and augmented reality, maybe if you could help us understand how that would scale can merchants use their smartphones to scan different skews or do they need like especially in hardware or perhaps new partners to help them out in that in that area. Thanks.
Hey, there. Thanks for the question. So in terms of new hardware no I mean, the great part about things like augmented reality is that never anyone that has the new iOS has it built into the out with a arquette. So there's not there's nothing new you need now in terms of getting the three modeling done that is something that we're actually helping merchants with so if you go to or what is our surfaces Mark.
In place, where would connect merchants with experts and photographers and agencies and freelancers and developers to help them with their business specific needs and requirements of their business. That's an area where you now can find three de mob versus wells. So we are playing that.
Match matchmaking them with people that can help with that but from a consumer perspective. That's part about this is about to consumer doesn't do anything consumer can now go to that particular merchants online store and they could have a much better experience given me. The work that we're doing with three D and they are and we think it's going to lead to a higher conversions ultimately, but there is no onus on the on the can see.
Remember, we're making really easy for merchants to adopt this.
Great. Thank you great. Thank you. Thank you.
Our next question comes from Chris Merwin of Goldman Sachs.
Okay. Thanks, very much for taking my question in terms of profitability. It looks like it flowed through the fiscal Threeq you beat on non-GAAP EBIT into the full year guidance. I think you mentioned that the updated full year guidance also includes $10 million of out of Opexas is on the non-GAAP and I I guess, just given all the runway.
I had for Shopify fulfillment network plus international maybe can you just talk a bit about flowing through kind of that level of profitability and how you're thinking about the pace of investments going forward. Thanks.
Yeah, Let me talk specifically to our book, though that we just updated because there are multiple factors going on with respect to six river as well as the change in definition so.
If you see a if you start with our outlook in August the did not consider the six river acquisition. We were at 20 to 30 million of adjusted operating income for the full year.
If our outlook in August for adjusted to also exclude amortization of existing acquired intangible was 7 million. So the new definition.
It would've been $27 million to $37 million, so apples to apples are updated outlook for adjusted operating income for the full year under the new definition is essentially unchanged and so what does that mean.
That means that the 10 million in Opex from six river and the fourth quarter is essentially being offset by the organic performance of shopify.
So you know we're going to continue to invest and these important growth areas and.
That will you know be something that we're working on in 2020 planning and we'll have more to say in February on on that but the performance of the overall company, including six river for the fourth quarter. We think is very strong.
Great. Thank you know.
Thank you Chris.
Our next question. Our next question comes from Thomas Forte of D.A. Davidson.
Great. Thank for taking my question. So regarding your shop fulfillment network efforts what was the rationale for purchasing six river systems and do you believe you need to engage in additional M&A.
See initiative.
[noise] thatll be here.
No times right now on more M&A, but.
Definitely possibility I understood competing newfield <unk> <unk> for the company I'm, just trying to do it took us right.
The rational specifically as it.
This particular.
Good of fulfillment warehouses like efficiency and quality metrics everything and lots of things set up massively improved by robotics and the.
Significant reason for other that go for politics build out and in this particular space has been that.
People have experienced great robotics provider coming on the Mockups.
A decade ago, Abbott's, Cuba and.
That baton disappearing.
Politics, but no longer available. So about feed is a good set of horror stories in the markets, which people just don't want to go full focus but because often.
Oh spring and fixed <unk> six sort of a systems.
Thanks, a lot of fantastic.
Talent in house people, who have no into space for like Uh Huh.
The top itself in the space for many decades.
And dog. So it can go out to the took it slowed and just say hey, if you like.
He wants to bill that you've had wanted us to be available over the next decades that people can do a long term planning with robotics in mind.
I'm, just just keep it in the space and make it a.
Part of it's off the fulfillment network build out and that increases again efficiency and so you can most picking up but let's see off warehouse, which caught out doing better and so it became.
Pretty obvious that this would be a quick move.
This is a significant thrashing what it did.
Great great.
Thanks, Tom.
Our next question comes from Koji Ikeda of Oppenheimer.
Great. Thanks for taking my question.
Question on.
So mobile eyeballs to mobile dollars, so shopify does a great job.
Mobile convert.
I think it's well above the industry metrics, we see out there, but there's still a gap between mobile eyeballs and mobile dollars even for shopify.
Could you talk about what is the Soc your factors, that's causing that.
Shopify is doing to help close that gap over time. Thank you.
I don't think anyone Irene this is really really happened, though its from like I I think but the fourth device. It's just has shifted to it you know like that's it's a massive T mall traffic on on mobile and people people use small by a lot more instead of a crack so if a day and.
Sitting dawn of computers, becoming more and more deliberate.
Deliberate act so.
People might have it might be the same people who have.
Bounced online stove and sit down on the desktop to vendor with purchase and it's kind of things end up skewing the numbers a little bit I think that.
Correct way to think about the vote of the.
The Internet really is it's it's it exists for serving all that devices. That's a couple of fallback Oh systems fall for desktops that was super clear long time ago, and it's actually so it's a surprise some somebody does not surprisingly prepared for it.
Well, let you guys have tons and tons of advantage. It's like the fact that they tend to use biometrics as he form offs securing access to credit cards on mobile devices have payments the sort of threat keep that and on the platform level, which is again at the moment, but lack of to Oh, probably that's doing this last decades they times about.
And the mall, but vendors have done such an amazing job doing secure elements into into the hot band.
Bring you said, yes, absolutely.
Okay.
And it's like I think the experience of purchasing on mobile.
Probably five stores is no equivalent like I don't think friction is a differentiator for conversion rate anymore and so now it's purely based on intend and so I think I'd lost I took <unk> took a long time to get down but now I think there. They have between you know Apple pay a Google pace.
I was hoping all that's going to thinks about supported and of course, shopify pay sort of making up a difference though.
Okay. So.
Great. Thank you Koji.
Our next question comes from David Hynes of Canaccord.
Hey, good morning, guys.
Can you talk about first year G.M.D. for new Clos accounts, maybe versus a year ago I'm I'm trying to get a sense if the increasing contribution we're seeing there is more a function of.
Adding plus merchants at a higher velocity or landing larger accounts I suspect, it's a bit of both but anything you can provide to help quantify would be helpful.
It's hardly I'll take that question, we certainly are seeing more complex merchants comments, the plus platform, we announced staples.
Canada coming on a couple months ago more recently come as a JV hi Fi come under some of the largest electronics retailers in the world and based in Australia. So we are seeing more of these complex merchants have traditionally you saw mostly homegrown success stories coming to plus and upgrading through the different plans now obviously, we're seeing a merchants that frankly, even five years ago, we didn't.
Okay they'd be coming to us on the come with a whole bunch of nuances that that we just weren't aware of and I think now we're getting better at an understanding what they require and that evening since some of the government agencies working wasn't in place a candidate for things like Canada, where they come with a whole set of of requirements I think we're getting much better and much smarter in much more effective and onboarding them and get it right.
That meet the neat part about this particular murky says they come with an existing business and so GMB obviously for them.
It's fairly quickly relative to a brand new direct to consumer brand that just trying to build up their business that being said relative the entire stack and Jim be across all of Shopify, which again was 15, let's $15 billion for the quarter.
It's not necessarily could it be overly material, but I do believe you will continue to see more large complex very well established brands come on <unk>, plus and the couple of years.
Got it. Thank you thanks, David.
Our next question comes from Paul Treiber of RBC capital markets.
Thanks, very much and good morning, just in regards to shopify pay the adoption does seem quite strong what's your thoughts on some of these more consumer facing services like pay creating a consumer brand or on shopify itself.
Then how do you ever related how do you think that striking a balance between.
Any color as shopify related branding with consumers and then merchants on branding.
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Green conversation that's been Trump if I read like I couldn't be if we've grown up that's sort of a total brand behind brands like <unk>, putting powered by shopify on <unk> on the stores, but a host of entre before that's something that people to get medically important oney, then they'd be sort of created as an option.
So the success of the company has traditionally been just making other people look good robin ourselves.
So very careful any expose branding I mean, just suddenly.
Good luck agreeing with our customers, who are saying that hey, you guys have a pretty quick brands, let's use. It. So this is why <unk> paid loss, how big the reengaged and suddenly must be very successful but.
I think it's it's just going to be something if you got to do better that's basically but that's fair I could say about at I. I think this.
Yes, it directionally, so fraud or potential pitfalls and Ah going off going all the thoughts I think it's like we stick to or do you know.
Great. Thanks, Paul.
Our next question comes from Eagle or and then of Wedbush Securities.
Hey, good morning.
<unk> I wanted to ask the the macro question or holidays, just from a different angle and.
Obviously been a lot more discussion around the macro environment, a potential recessions and slowing growth and it would seem to indicate from all your numbers that you're not seeing any real negative sentiment out of this particular your SMB cohorts, but attended the Greek kinda talk about.
The overall business investment and something that you're seeing from merchants and then real quick you guys. Then touch on Pos on this call and you rolled out a pretty meaningful software upgrade at <unk>.
Earlier in the year and I want to see if there's any early reads from that.
Reactions and.
The yet, but if the up it hasn't hit yet.
As a so coming out in <unk> in the future of your Super excited about it generally have a scenario.
<unk> part part of soda stayed pretty well.
Michael.
But they have visibility and purchasing behavior, but if you don't see any indication of a diminishing.
Confidence, we have visibility in new business formation, which.
Seems strong and it's not tracking and in any meaningful way different from how it has true you know the last 10 years of a a boat market. So.
You're not seeing anything coming from all sides as everyone was fitness recessions have knowledge.
They used to come from the side, where you don't expect I'm phone. So doesn't look like outside the <unk> if something is happening it doesn't look like all aside to so let's say, what's causing it and its tracking ahead.
Okay. Thank you thanks.
Sure, Thanks, and I'll, just remind everyone as we're coming close to the end here to please limit yourselves to one question as we still have several several people waiting to ask a question.
Our next question comes from Josh back of Keybanc.
Thank you for taking the question I wanted to ask about B to B I think it's been.
Switching six month since you purchased and shake So maybe update you can provide us what the key strategic objectives are for you within that opportunity.
Yes. So as you mentioned, we did you did acquire a hendrick a about six months ago was an incredible team of people that have been thinking more about modern wholesale modern b to b, probably more than anyone else on the planet remember the plus historically had a very small b to b business that was sort of we didn't necessarily go there are.
Our merchants pulled us there we were noticing that some of our merchants had a very successful in driving retail business, but also we're looking to you shopify for their wholesale and I'm happy to be business.
We felt that although we could probably get them ourselves, we wanted to accelerate that and we felt out with the team over at handshake.
We'd be looking to that a lot faster. So again, we're still working together to figure out exactly what the go to market will be for that what exactly the final product will look like for that but certainly we get the greatest saying, we think of planet thinking about modern retail and modern b to B and and I Hope you need she took little bit time, but it's not yet a material part of the Pos business or the shop business a buddy.
Does allow us essentially to get an entire different segment of the market to think about shopify, who currently we're not talking too.
Okay. Thanks, Josh.
Our next question comes from Brian Peterson of Raymond James.
Hi, Thanks for taking my question. So just one of the hit on the success you've had internationally and I'm curious if the merchant that merchandise you've seen a avid as those are more traditional shopify merchants or have you also seen quicker than expected adoption for that new plus merchants as well any color on that thank you.
Hey, I'll take that question it from an international perspective, the interesting part of that art or expansion, there's a difference by different countries and in certain countries. We're seeing a lot larger merchants come on they look a lot more like the plus merchant segment other coming out with GMB. They have dozens of employees if not more working at their companies and other segment.
So we're seeing very small merchants very similar to what we'd see a signing up for 20 mental applied in North America. So the part about our strategy. There is that we actually are tailoring our product on the go to market on a per country basis, and that's the reason why we need things like country specific and language specific applications, we need a partner ecosystem each country that differs.
Front from other countries.
Obviously languages somebody working on for a while so we currently have dropped by now and actually languages and obviously the diversification of the merchant base increases are Tam. So we're excited about that.
The thing that obviously have you mentioned in her prepared remarks was that.
Jim the from international is actually growing faster than the other segments and that's that's really great and we still have not penetrated the international market with Merck and solutions and where you have in sort of our core markets. So that remains an opportunity in the future for us.
Great. Thanks, Brian .
Our next question comes from some AD semana of Jefferies.
Hi, Thanks for taking my question. This morning, Amy I think in your prepared remarks, you mentioned level setting subscription pricing for legacy plans I was wondering if you could maybe help us understand how much legacy pricing, there's still as what the impact of that was on the quarter and maybe the philosophy around price increases now and what drove that thank you.
Yeah <unk> the the migration to 'em standard pricing is largely done now and it was merchants legacy margins that that were not on our standard plans and first simplicity, we just wanted to clean that up and weak.
Called it out a the EMR growth would have been a significant without it but it did have about a one percentage point a growth year over year impact. So we wanted to call it out but it is largely done now.
Great. Thanks, a lot.
Next question please.
Our next question comes from Todd Coupland, a C.I.B.C.
Right just following up on the international questions, which countries.
Did the best in the quarter and how do you expect that to trend in the fourth quarter. Thanks.
Hey, So we've we've mentioned in the past or some countries, we're focusing on places like Germany, and France, and Japan, and other places like that but in terms of doing best again some of them are our areas and geography is where we're going to see merchant growth in other places, we're going to see higher GMB growth depending on the type of merchants do you have there.
We're constantly we're taking a very nuanced approach each country based on what they actually required and try to find product markets based on that so I wouldn't say, there's anyone country that is eclipsing every every other one international.
Great. Thanks, Todd next question please.
Our final question comes from Sudan, Sukumar of eight capital.
Good morning, just wanted to touch on Pos. So historically this has been more of a cross sell to your online merchant base expanding into offline given that you now make you more focus investments in the segments. The launch of the new platform and new hires how do you anticipate evolving your go to the marketplace.
Any forward here.
So in terms of in terms of the point of sale I'll go to market efforts. We now have our sales team around it. So we didn't have in the past now this is mostly inside sales. So we feel there still remains a significant low hanging fruit inside the platform people that are already using shopify, but may not be using us for point of sale in some that's where we're we're focusing now we are.
We're seeing some new merchants come to depart from just a point of sale and as Tony mentioned earlier as potential next rolls out in the future. We think thats going to be very compelling reason to come shopify strictly for the Pos product and then take more of a products right now the majority of or sales efforts of around point of sale, our inside sales fell into our existing base.
Great. Thanks for your time.
Thank you and then we'll I handed over to Toby for closing remarks.
Yeah, So as you.
Probably saw they'd be every also announced that they.
Adam No a million active merchants on on the platform, which is no roughly around this time 15 years ago I I launched store number one [laughter] separately.
Didn't imagine to be able to say that one day. So that was kind of flowing my mind right now.
I think.
Here's an interesting.
[laughter].
A lot of what's looking about shopify is to level off.
I don't have a good time for it but it's more like.
It's a business model to customer needs how many so.
I think swapped out of service as a.
Small that's one of those things such as I think a little bit under appreciated because he is what's going on.
The vast majority of all Cosmos Oh.
Subscribing month to month.
But that does it.
Keeps us as a company incredibly audit spread like they are talking to us that like video getting a ton of suggestions ideas is seeing a lot about vote of most how do you pointed out earlier than we actually had some data on the mobile question. It's no. That's 81% of all traffic is small that fall into that people tend to follow on his company demo. So.
But that's compared to 15 years ago of iPhone wasn't even out though yes, right. So but the let's ask compels us to do it's just really understanding what's happening and we're rolling out all these updates for everyone to appreciate ventral free you rather than making big like they are they still charges focus and so it aligns our interest at all customers and I've spend.
I think this this dynamic niche for just off the off just simply higher quality because again there is no long term commitments that you can rely on one zone lever down. This is like this with some of the dynamic around the D to C situation, but I'd like that's our Kosmos now selling without intermediation directly to their customers.
Also puts them in is a direct conversation to their customers and they create significantly better products and of course, you know that feed.
And I look feeds back to us doing whether as a company.
For those of you have been on a bunch of these costs with US I attempted mentioning that my head of Investor who ended up not investing because they told me about the third what market for on them. So we're supposed to about 40000 stores. So it's just amazing to.
Zoom out and just see what what happened how many people actually putting successful investment of those from.
From heavy downtown area, and every city too, but most remote islands and the Middle Atlantic. That's just all of them integrating themselves perfectly into the global that local commerce, when it's just really really.
Gratified, so with some thought sleeps you've if thank you for joining us.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
Yeah.
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