Q3 2022 Shopify Inc Earnings Call
Serve as a business is central operating system.
These tools help our merchants to ahead of the curve as commerce continues to rapidly evolve.
This is particularly important today as businesses grapple with the consequences of rising interest rates and inflation.
This is a key reason why merchants to shopify.
We make the important things easy and everything else possible.
Later annual discuss our Q3 financial performance and expectations for the rest of the year.
I'm going to focus on the investments and the progress we've made in Q3 that further our competitive positioning and enable merchants to build by relationships to go global to advance from first sale to full scale and simplify logistics all of which plays a vital role in making commerce better for everyone.
Okay.
Starting with building buyer relationships for our merchants, discovering and connecting with more buyers and deepening relationships with existing customers are critical to merchants ability to create long term success.
Whether that connection is online or offline shopify has a suite of innovative products like our best in class retail point of sale offering that is rapidly becoming the solution of choice not only for smbs, but also for large retailers.
During the quarter, the outsized pace of alpine growth on Shopify continue as we brought on eight new merchants with over 20 locations each and one with over 175 locations with our commercial teams increasingly selling to larger retailers plus merchants accounted for approximately 35% of all point of sale pro sales close in Q3 and Thats up.
From 14% in the same period a year ago.
Well known brands, including Department store show fields, and designer apparel <unk> implemented our point of sale pro solutions for their locations driving Q3 offline GMB growth by 35% year over year or 41% in constant currency since the beginning of 2021 over half of the rapid adoption of point of sale approach is being driven by new <unk>.
<unk> retailers coming to shopify to get their start as a new omnichannel business.
Additionally over a third are from established offline retailers, who are entirely new e-commerce or selling only on point of sale.
These stats demonstrate the power of our commerce platform and the breadth of capabilities, we have built to make it easier for our merchants to reach customers on every surface.
In late September we launched our new first in class mobile hardware device point of sale go.
POS go was developed to empower merchants to meet consumers wherever they are however, they want to purchase from curb to counter.
With Pos go merchants conclude sales anywhere and take payments securely and smoothly.
POS go is one more pathway to bring even more merchants into our flywheel in just three weeks since launch.
POS go has seen enthusiastic adoption, among new and existing merchants with strong performance right out of the gates built.
Building by our relationships is paramount as our merchants gear up for Black Friday Cyber Monday.
<unk> is already our platform is equipped to handle the influx of orders and volume because we don't just do this a few times a year, we support merchants through these types of flash sales. All the time for example last month during New York Fashion week, we supported a top designer during an online drop during the flash sale. This shopify merchants sold hundreds of thousands of units and achieve.
Tens of millions of dollars in sales within only a few hours shopify made this possible.
Today brands have to be more sophisticated in how they reach and sell to consumers are shopping continues to evolve.
It has become critical for merchants to be discoverable across multiple platforms and services showing up directly where their consumers are shopping.
While still very nascent GMB through native checkout integrations on key partner surfaces, such as Facebook, Instagram and Google more than tripled from Q3 last year.
The more merchants continue to invest in multichannel sales the more successful they become and building brand value amongst their consumers. Another way that shopify is enabling merchants to build by our relationships is through shopify audiences, our new tool that helps plus merchants find high intent customers. So.
Since launching in May of this year audiences is significantly improving conversion rates return on AD spend and other important metrics for those plus merchants, who have opted in last quarter. I mentioned, a couple of merchants, who have really benefited from audiences today I want to share a couple of additional examples high out of children's wellness brand worked with Snow agency, who is a plus certified.
To onboard into audiences.
As a result higher has seen their return on AD spend increased over 170% their conversion rate has increased over 150%.
All while driving down cost per acquisition by 35%.
Fast growing home furnishing brand Nathan James attributed over 500, new customers to their use of shop by audiences. They also saw 200% increase in purchases of five six times return on AD spend on the targeted campaign over $100000 new revenue all what customer acquisition costs declined by over 50%.
Examples like these fuel our excitement about how audiences can drive merchant growth, especially going into the upcoming holiday season.
Additionally, we're excited to continue to deepen our partnership with Google with upcoming New features for shopify merchants to improve their impact on Google.
Another marketing tool that we launched in early access in mid August is shop, like lots, which brings brands and creators together.
It has generated approximately $50 million organic impressions across social channels in less than two months.
<unk> allows creators to monetize their talents by discovering and partnering with independent brands and sharing their favorite products with their followers. This.
This gives merchants yet another new channel to grow their brand reach and find new customers. We're also investing in our merchants' ability to grow by helping them go global.
Shanghai markets, which launched in Q1 allows merchants to identify setup launch optimize and manage their international markets from a single storefront.
To date more than 175000 merchants across the world have used markets to help launch their international businesses.
By reducing the barriers to international selling U S merchants utilizing markets now sell into an average of 14 additional countries sharply markets Pro which debuted in mid September and early access is our cross border solution built on top of markets.
By combining global use features with markets capabilities, such as the translate and adapt app.
<unk> pro makes it easier for merchants to accelerate the global expansion to over 150 countries overnight without increasing their operational costs risks or complexity.
So when merchants at languages to their store they will now be able to leverage automatic translations and create localized buyer experiences with duty prepaid Express international shipping.
And this is just the beginning our own studies have shown that our merchants CMV increases when customers are shown localized content and we are confident that adoption will continue to increase as merchants look for ways to grow their businesses beyond their domestic orders.
Like everything we do we are laser focused on lowering the barrier to entry and entrepreneurship globally.
In May we introduced localized subscription plans over 200 countries.
International retailers outside of North America continued to grow our overall merchant mix comprising 45% of all merchants in Q3 and demonstrating the continued success of our investments.
As we continue to expand our geographic reach we launched shopify payments in Finland, Switzerland, and Portugal, we launched shop like capital in Australia, and Shopify shipping in Italy, and France also during the quarter, we launched Shopify point of sale with integrated payments in Singapore in Finland, which brings the total number of countries where merchants can use our point of sale offering to 14.
Shopify is built to help merchants as they grow from first sale to full scale and everywhere in between.
Solutions like Shopify shipping and Shopify capital helped smaller businesses grow while development features like shopify functions enables customized pricing and discounts to increase consumer engagement and loyalty.
Shopify capital has come a long way since its humble beginning in 2016.
Even back then we had shopify had a merchant's backs when no one else did supporting them by providing a few thousand dollars to a handful of retailers faster.
Fast forward till 2020 capital hit the $1 billion, Mark and in 2021 surpassed $2 billion in funding.
At the end of August of this year capital broke another record we've provided cumulative funding a $4 billion since inception to our merchants.
The team continues to fund an advanced money to more merchants as they ramp up for Black Friday cyber Monday.
Capital has made a real difference in merchant success rate, particularly as more and more banks and lenders are shutting off the spigot to smaller businesses.
We also continue to improve the back office experience earlier. This year, we launched shopify tax a new product that takes the stress out of sales tax for our merchants. So they can focus on what matters most to them their products and their customers.
Our strategy of making certain high value features available only in our plus package continues to pay off in Q3, we saw our POS base continued to expand not only from upgrades, but also from entirely new merchants coming onto shopify for the first time.
New to Shopify, plus merchants came from a wide array of verticals driving growth of Shopify, plus Jim be in Q3, which continued to outpace overall GMB growth.
Some examples of brands that have joined Shopify plus during the quarter and integrally October include beauty care creator glossy a L.
Electronics manufacturer Panasonic techniques.
Footwear and lifestyle accessories maker Cole Haan.
Jewelry designer, Stella and dots fitness apparel provider Zumba wear children's toymaker, Melissa and Doug and pet food manufacturer <unk>.
Our plus and continues to gain traction outside of North America as well.
International brands, New to our platform included leading athletic footwear company Converse, Japan nutrition.
Nutrition, and vitamin supplement manufacturer GNC, India.
<unk> <unk>, Italy.
And sports apparel designer New era, Hong Kong.
The world's biggest superstars are also building their brands on Shopify plus in Q3, the Kardashian brand continued to build their empire on Shopify with our latest brand Courtney Kardashians, vitamin and supplement company let me.
Additionally, food network Star <unk> introduced Jetski, a new line of sauces, and condiments Crs launch on emission her new line of clinical skincare and homegrown Toronto Celebrity Matti Matheson launching new Workwear brand Rosa reducer.
<unk> continues to invest in global partnerships to support the adoption of shopify by some of the world's largest brands and during the quarter. We officially signed partnership agreements with Ernst <unk> young and KPMG, adding to our relationship with Deloitte.
Our strategic alliance with Ernst and young <unk> serves and scale to the needs of the clients Enterprise E Y will be training and initial cohort of 500 technical professionals across the <unk> network of 50 locations globally on Shopify and will further support those professionals by enabling up to 10000 <unk>.
Sultan's through exposure to the Shopify platform.
This access will enable co creation of unique immersive experiences that will help re imagined the online customer experience and unlock new markets for certain regulated industries and products.
In addition, <unk> thrilled to announce that we signed a collaboration agreement with KPMG and Canada.
As one of Canada's largest systems integrators are collaboration will help bring shopify solutions to KPMG as clients to enable seamless commerce on their transaction platform of choice.
On the development front, we're currently beta testing hydrogen as a front end web development framework for headless infrastructure.
Hydrogen gives bigger retailers with inhouse creators the tooling needed to accelerate development and deploy their bespoke storefront with just one click on a hosting solution oxygen.
With unique features such as audiences BTB hydrogen plus oxygen and the expansion of our partner program for ERP and systems integrators, we expect shopify plus's momentum with larger merchants to continue.
Last I'll provide more context on our fourth major investment area simplifying logistics.
The Internet has leveled the playing field for so many parts of an independent retailers business, but not for logistics, we have set out to change that paradigm with shopify fulfillment network.
Last quarter, we outlined the three complex stages of emergent supply chain across freight distribution and fulfillment as inventory moves from port to porch.
Today, I will share updates on our integration of deliver how we're accelerating our vision for <unk> to become an end to end logistics platform for merchants and most importantly, how we're shifting the logistics conversation with merchants to focus on driving value through fast and reliable fulfillment.
First since closing to deliver acquisition on July <unk>, we have developed an ambitious plan to create a new fulfillment app for shopify merchants and also combine the deliver and shopify fulfillment networks into a single network spanning our merchants' full supply chain.
We have made significant progress in our first quarter together with lots more still to come.
We've also started creating a unified network built on top of the deliver software platform.
The combined scale of SFA and deliver allows us to consolidate volume streamline operations and expand our carrier relationships.
Unified network will enable shopify to operate a small number of regional hubs that will serve several functions, including cross stocking multichannel distribution inventory balancing and some local fulfillment. These hubs will absorb as much complexity as possible for the rest of the network.
We will continue to partner with the highest fit three pls around the U S to enable local fulfillment leveraging our proprietary warehouse management software Fms.
The first combined F F N and deliver facility is already operationally functional in Atlanta and has seen a tenfold quarter over quarter increase in the number of merchants holding inventory in that facility, we anticipate that unifying the network will be complete in Q1.
Second as we mentioned last quarter. We are building an end to end logistics platform that will connect every single part of our merchants supply chain.
It enables merchants to dynamically route inventory across all their channels from B to B to D to C.
Ultimately, we will create a fulfillment network that can accept orders and meet customer delivery promises from the moment, a merchant's goods leave their supplier.
Since last quarter, we have seen a threefold increase in the number of ship containers with our freight partner Flexpath.
Initial runs have shown that as we expected.
Merchants are experiencing up to 20% faster service from origin ports with significantly lower cost per pallet that average.
This will allow <unk> to guarantee that merchants as inventory is black Friday, cyber Monday ready the moment it leaves our suppliers facility.
Let me share with you some of the initial stats on the rest of the supply chain.
We've seen a 75% year over year increase in merchant inventory being received into deliver cross docks and nearly 80% growth quarter over quarter in the number of merchants using more than one of our logistics services across all three stages of the supply chain.
And a 450% year over year increase in orders fulfilled by Fms across both shopify and partner owned facilities.
Finally, and most importantly, we're shifting the conversation with merchants to focus on logistics being a tremendous value driver for their operations.
When done right fast and reliable fulfillment can significantly increase card sized conversion rate order value entrant buyers into repeat customers.
In Q3, we completed the rollout of shop promise to all <unk> merchants.
<unk> promise is a consumer facing badged, indicating fast and reliable delivery across shopify online store and other popular direct to consumer channels.
<unk> promised is already significantly boosted sales as participating merchants increased buyer conversion by up to 9% during the initial rollout.
In September alone SFM over two thirds of domestic packages delivered within two business days, an exponential increase from less than 2% predicted delivery before <unk> software update in early 2022.
All new <unk> merchants are now automatically qualified to display the shop promise badge out of the box. We are confident that shop promises impact on merchant value will continue to increase as it evolves and matures and we believe that <unk> has the opportunity to become the de facto fulfillment solution for independent merchants in the consumer packaged goods.
And apparel categories.
The highlights of shared so far are just skimming the surface on why we continue to increase merchant solutions revenue as a percentage of <unk> or the merchant solutions attach rate, which reached an all time high of 214% in Q3 compared to $1 nine 8% in Q2 on a sequential basis with eight basis points in Q3 coming from <unk>.
<unk>.
Our record setting merchant solutions attach rate is a primary component of our total revenue attach rates of two 6% in Q3 defined as total revenue as a percentage of <unk> compared to $2, 76% last quarter.
Turning now to recent leadership changes.
Starting with the promotion of <unk> in September to Chief operating Officer.
I've worked with <unk> for over three years and know him to be the real deal in bodies. The best of Shopify with this product driven mindset and an uncanny ability to see the alignment between product sales support and grow to market strategies, all of which oversees in his new role as COO.
Reporting to Kaz includes the newly created role of Chief revenue Officer, and Chief growth Officer.
As our new Chief revenue Officer, Bobby Morrison comes to Shopify with working 25 years of experience transforming multibillion dollar enterprises, formerly he was the chief sales officer at Intuit.
<unk> joined Shopify in January 2020, he previously oversaw growth Facebook and Tripadvisor Lukas recently promoted to chief growth Officer, where he leads our new merchant additions and new business development efforts and finally, the announcement of our new Chief Financial Officer, Jeff Hoffmeister.
Jeff is known Shopify for many years as he has led numerous transactions for us, including our IPO. During his 20 plus years at Morgan Stanley . Let me turn the call over to Jack to say a few words before I conclude my remarks.
Thanks, Harley I am extremely excited to join the company. Thank you to Amy for all the leadership stewardship and hard work over the past five years, both the finance team that has the breadth and depth of expertise that is multiples of what you inherited I'm proud to be able to take the baton from you and work with the team that you've built.
To the investors I got to know many of you during my years at Morgan Stanley and look forward to working together with you in my new role as many of you know I had the opportunity to work with Tobi Harley and team on the IPO several years ago and on numerous projects. Since then that vantage point has allowed me to understand the complexities of the business into this role with a head start.
But also have an appreciation for all of the incredible things that shopify is accomplished since its IPO. The decision to join Shopify was an easy one given my historical context, and the tremendous potential ahead for the company.
I look forward to working closely with Tobi, Harley Kaz and the rest of the senior leadership team to support the company's mission and next phase of growth back to you Harley.
Thanks, Jeff this.
This is my last earnings call with Amy and before I turn it over to her I want to say what an honor. It has been to work with her over the past five years, Amy has been a true partner under her watch. She has built an incredibly talented finance team and have supported the companys rapid growth and massive scaling.
On behalf of the entire Shopify leadership team I want to thank Amy for her service and our dedication to shopify.
To wrap it up sharply commerce operating system serves as a central nervous system that powers millions of businesses all over the world. If you talk to your merchants Youll hear repeatedly that they love the simplicity of our technology and the experience that offers to their buyers as.
As our merchants get ready for their busiest shopping season of the year. We are here to help them capture every opportunity we remain steadfast in our mission to solve the most difficult problems facing our merchants as we continue to make commerce better for everyone and with that let me turn the call over to Amy.
Good morning, everyone and thank you <unk> for your kind words and signed off as Harley indicated I will first provide an overview of our Q3 results highlighting how we are continuing to operate with discipline as we position ourselves to be a 100 year company and then provide a summary of our new compensation system and finished with our <unk>.
<unk> for the rest of the year.
Beginning with our Q3 results a reminder, that we closed the deliver acquisition on July eight and this is the first quarter of results with delivery included.
Our total revenue for the third quarter grew to nearly $1 4 billion, 22% higher than the same period last year, driven primarily by merchant solutions revenue growth.
On a three year basis, our revenue compound annual growth rate was 52%.
Given the significant strengthening of the U S dollar relative to foreign currencies in Q3 total reported revenue growth year over year for Q3 was negatively impacted by approximately two percentage points.
<unk> lab.
Last year's third quarter, <unk> growth was 35% year over year, driven by online consumer spending and good during the pandemic.
Fast forward to a year later, our total <unk> in Q3 was $46 $2 billion, which grew 11% year over year or 15% on a constant currency basis higher than retail growth overall in the U S of about 9%.
The challenging macro conditions, we saw in Q2 persisted in Q3 with high inflation, leading consumers to continue favoring discount retailers and reduced discretionary spend.
Merchant solutions revenue of $989 $9 million increased 26% year over year, driven by GMB growth and by merchants utilizing our solutions to run greater parts of their business in this inflationary environment.
Several factors drove this growth, including the increased <unk> penetration of Shopify payments Shopify capital and Shopify markets Greater revenue contribution from partners as well as contribution from deliver excluding deliver merchant solutions revenue increased 21% year over year headwinds from Sig.
<unk> strengthening in the U S dollar relative to foreign currencies was most felt here impacting merchant solutions revenue growth year over year by approximately three percentage points.
Approximately $25 billion of <unk> was processed on shopify payments in Q3, 22% higher than in last year's third quarter or up 26% in constant currency.
Payments penetration of <unk>, our gross payments volume was 54% versus 49% in Q3 of 2021, and 113 basis points quarter over quarter over the past six quarters, we've seen GTD benefit from strong performance by merchants on shopify payments and increasing percentage.
Which is shopify plus GMB, new merchant adoption, both in North America, and internationally penetration gains in shop pay which has facilitated nearly $66 billion in GMB since inception, and expanded availability of our pls pro hardware in brick and mortar stores with integrated payments now.
Being used in 14 countries.
Description solutions revenue grew to $376 $3 million, which was 12% higher than a year ago driven by growth in monthly recurring revenue and reflecting lapping of our change in terms to make selling in our app and theme stores free for partners up to their first million dollars annually terms that we put in.
And place in the middle of the third quarter of 2021.
Recurring revenue was $107 million up 8% year over year in Q3 versus a year ago, we saw a greater number of shopify plus merchants with plus increasing its share of total <unk> to 33% from 28% in Q3 of last year.
Additionally, thousands more retail locations began using Pos pro year over year, and Q3 was our first full quarter of traction for our starter plan aimed at creators and other entrepreneurs, who need a lighter offering to get started offsetting these MSR gains in Q3 were free and paid trial experiences for.
Nonplus plans that extend beyond our typical 14 day free trial.
Entrepreneurs participating in the trials are immaterial to our <unk> until they convert to one of our Nonplus subscriptions. While these factors slowed <unk> growth in Q3 and will likely continue to defer near term MSR gains our actions have led to valuable insights as we continue to test ways to.
Increase the top of the funnel and build a better merchant onboarding experience.
Adjusted gross profit was $681 $8 million up nearly 11% compared with $616 $4 million in the third quarter of 2021 on a three year basis, our adjusted gross profit compound annual growth rate was 46%.
Compared to the third quarter of 2021, adjusted gross profit growth was impacted by a greater mix of our lower margin merchant solutions revenue lower margins and shopify payments due to merchant and card mix shifts and industry wide network cost increases the impact of deliver and increase investments in our cloud infrastructure.
<unk>.
Adjusted operating loss was $45 $1 million in the third quarter compared to adjusted operating income of $142 million a year ago.
<unk> was largely driven by increased head count, including deliver and our new compensation framework versus a year ago as well as some marketing programs spend adjusted operating loss in Q3 of this year excludes one time charges as follows approximately $30 million of severance expenses related to the workforce reduction we announced.
First in July .
And accruals for two pending litigation cases related to patent infringement and publishing copyright infringement, which together total approximately $97 million consistent with our outlook last quarter, excluding severance and other one time items, we did see a sequential deceleration of year over year operating expense growth.
From Q2 to Q3, reflecting the streamlining of our commercial organization and other actions. We took in July and continue to take to align spend for long term success. Our Q3 adjusted operating loss was relatively flat quarter over quarter, driven by greater cost efficiencies realized in the quarter and lower Mark.
<unk> program spend while the team focused on free and paid trial experiences that I noted earlier.
Adjusted net loss for the third quarter was $30 million or a loss of <unk> <unk> per diluted share compared with adjusted net income of $102 $8 million or <unk> <unk> per diluted share in the third quarter of 2021.
Turning to our balance sheet, our cash cash equivalents and marketable securities balance on September 30 was $4 $9 billion, which is $2 million lower than June 30, reflecting $1 $7 billion deployed for the deliver acquisition our cash position continues to be strong, reflecting our approach to prune.
And stringent capital allocation, we continue to place the highest importance on opportunities that we expect will significantly expand our merchant businesses accelerate our product roadmap and or have strong paybacks from improved operational efficiency.
Before turning to our outlook I'd like to outline our new compensation system that we implemented on September one 2022 called flex Com <unk>.
It's designed to recruit reward and retain the best talent in the world and provide greater transparency and flexibility to our employees and how they are paid.
As part of opting into this new compensation system employees received a single total compensation number and had the choice to allocate their pay between cash and newly granted equity in the form of restricted stock units and stock options. In addition, previously granted unvested equity was canceled and the.
Quarterly equity grants will vest monthly.
<unk> will be able to change their allocation between cash and equity each quarter as their personal preferences change we linked flex comp tightly to our mission and long term vision of building a 100 year company. So for those employees, who elected extra equity above the default settings. They were given an additional 5% bonus.
That equity amount.
In the future, we'll add other mission driven elements like charitable donations and shop cash all financial implications of flex com are reflected in our Q3 results and full year expectations.
Turning to our outlook as we have stated since the onset of this year. We are in a transitional period in which we are investing in our core themes that Harley mentioned earlier to ensure our long term success. We expect these investments will allow us to emerge from this macro cycle stronger and will position us well for long term growth and.
Sustainable profitability.
As a reminder, our financial outlook includes the expected impact of deliver our new compensation system and currency headwinds from the stronger U S. Dollar.
<unk> assumes that higher inflation and rising interest rates will continue to negatively affect the consumers' purchasing power of discretionary goods and services and.
In light of these assumptions or expectations for our own results as we close out 2022 are as follows.
<unk> growth will continue to outpace the broader retail market in the fourth quarter aided by our Omnichannel capabilities.
Merchant solutions revenue growth year over year will be more than double that of subscription solutions revenue growth for the full year 2022.
Both <unk> and total revenue in 2022 to be more evenly distributed across the four quarters similar to 2021.
Because of this larger mix of merchant solutions contributing to overall revenue and dilutive impact of deliver gross profit dollar growth will meaningfully trail revenue growth and we continue to anticipate that operating expense growth year over year in Q4 will sequentially decelerate from Q3.
From an adjusted operating loss perspective, we continue to expect a loss for the full year for Q4 based on our updated outlook. We now expect an adjusted operating loss dollar amount that will be fairly comparable to the adjusted operating loss in Q3.
Finally, the full year estimates of stock based compensation and related payroll taxes, Capex and amortization of acquired intangibles are now $575 million $125 million and $55 million respectively.
In closing the flexibility and scalability of our technology has proven time and time again to be a must have for our merchants, enabling them to quickly pivot as commerce continues to evolve.
The discipline and rigor that we continue to apply across the organization beginning with software development to ultimately the commercialization of our solutions will position us well for long term growth and improving profitability when exiting this macro cycle.
And finally I'd like to thank Tobi, Harley and the rest of the management team the finance team all shop, a poke around the world and the board for their support and partnership being the CFO at Shopify will always be one of the crowning highlights of my career and I'm. So proud of my team and what we've accomplished over the years I look forward to sharing on the company in its next chapter of growth in <unk>.
SaaS as it empowers merchants across the globe I'll now turn the call back to the other Amy to open the call for your questions.
Thank you Amy we will now open the call for your questions. Please use the raise hand, featuring zoom to ask your question. If you are dialing in by phone you will need to press star nine to join the queue and star seeks to mute yourself also please note that Jeff Hoffmeister will not be taking any questions on this call. Thank you and us.
Dance for limiting yourself to one question. Our first question today will come from Brian Peterson from Raymond James Go ahead, Brian .
Hi, guys. Thanks for taking the questions. So first of all we did see a noticeable improvement in take rates. Even if you exclude deliver I'm curious if you could give a little bit more color on what drove that sequentially.
Thanks, guys.
Yeah, I'll take that one.
Yes, we are.
We did see a sizable increase.
Year over year and merchant services solutions take rate.
It was largely driven by mainstays of payments and capital new products, including installments and markets and the addition of deliver also additional revenue from partners contributed.
Important to also note that on an organic basis, excluding deliver it still would have risen significantly quarter over quarter.
Our next question will come from Mark Mahaney from ever core ISS.
Mark go ahead.
Thanks Amy.
Let me ask two questions because there is just a small change in your commentary your outlook commentary about merchants growth in the second half versus the first half just why the change in the commentary there and then let's talk about just the shopify fulfillment network and.
The investment horizon for that is there any change there and do you feel like your App.
Posted deliver acquisition do you feel like you have all the assets in place are there additional acquisitions or maybe areas you feel like you need to build out do you have the solutions that you need now or is it still kind of work in progress like most things. Thank you.
Yeah I'll take the first question.
So I think the important thing to note here is that our primary objective.
Always is to get more entrepreneurs and merchants to success and so.
Let me just dissect our Q3, <unk> again to kind of.
We're gonna go ahead, Oh go ahead sorry.
Sorry, we did see a total.
Total MLR growth year over year.
Louis by gains in plus and Pos more plus merchants a year over year quarter over quarter, plus increasing its share of MRI as I noted earlier to 33% also thousands more retail locations adopted Pos pro.
I think we're losing any it's hardly hear mark I'll jump in on the second part of the question then.
She can jump back on air connection is better in terms of SSM.
We're really happy with where we're at right now we don't think we need to increase in terms of the the overall investment we're trying to build this rather than it would be this cost driver. We think fulfillment can extra creates huge value for our merchants and so we think that fast reliable fulfillment will increase their customer conversion as I mentioned on the call already increased number of <unk> orders with predictive delivery of two <unk>.
Logistics network, we now can provide this incredible tools for merchants to tell their consumers when to anticipate their their packages. When we think it's going to do incredible things for conversion rate, but in terms of the investment there is no change to it. We think we can do this on its asset light software first model and deliver obviously helps us accelerate the product roadmap there.
We will take our next question from Tom Forte from D. A Davidson Tom go ahead.
Great. So first Jeff welcome to shocked by any of the pleasure working with you and I wish you all the vessels in future.
This earnings call yesterday, when comparing and contrasting the current economic environment and against the last downturn Googles CEO discuss the emergence of mobile in the last downturn and his expectations about the emergence of artificial intelligence and the current market downturn. Toby can you talk about shopify is efforts in AI and how they may advance over the next 10 years.
Okay.
Yeah.
Okay.
I think.
Hey, guys.
Yes.
Remarkable spots right now <unk>.
Inflection like of a recent amongst them transform us.
And especially larger language models have really accelerated the space.
Yeah.
African fast like Mike.
I see my job.
Trucking.
While the fastest.
And quickly changing field.
And technology.
And.
I have a very low.
Could view of roofing, so the goal because I mean I boots.
And the mix of product decisions.
And four we make decisions.
Ill take about two years to.
The man.
And so you have to have a good read of future and what would be needed needed by them to make this decision as well.
It's.
Yes.
Spot.
But all of hype and.
There's a non <unk> concept.
This under estimating how much effect.
Especially the latter part of this decade so.
I don't know if they've bake, but it's because of that.
It is vague its kind of hard to know how we've kind of millions of little.
Things intersect.
I mean, obviously surprised a lot of efforts in machine.
Machine learning.
Fraud products are powered by it.
By its something to employ.
A lot for underwriting purposes and.
Shopify payments.
A lot of.
Active day to day engineering work Thats going into it that is related to machine learning.
I think this is actually a really good example of.
Why shopify.
<unk> here, because if youre looking after the small and medium business space of course.
We have made as a business on Shopify and times, where there's a lot of technology grew advance and change.
It's very hard for individual machines.
<unk>.
Ah stay on top of technological developments.
However, as.
As shopify, who can invest in this almost collectively.
Rollout improvements very very quickly.
One of them.
Good evening.
The F&B, Doug wants us that aren't even available all of it but the larger which others have not really developed program sets yet.
Already I think a perfect example is our recent successes around trucks our audiences.
And.
Of course machine learning is a very important component.
I think.
The places to monitor every day your own creative.
Image generation bolthouse impacts on.
Democratizing effect on marketing epic generations, which is currently.
Why not expensive. It is something that is done by email and sourcing and building a relationship with a designer and so on.
Very good and valuable and presumably should be done anyways, but like getting your first version of your AD copy.
And.
And all of the assets done by just providing a prompt is going to again allow more people to do early experimentation I think.
<unk> seven once we really welcome because refi.
We find that at.
Something that was previously difficult and sometimes presenting.
Every time, we can use technology to make that available and easier.
Actually increases the success rates of our.
Cohorts of merchants that sign up after this.
It is also a kind of business from a product perspective, the most gratifying.
Lupin impact we can have in front of shopify so people.
You use everything we got to get to visa advances quickly and.
As soon as something becomes practical.
And we should make it available and I think that's the reason why merchants tend to go to shopify.
Our next question will come from Deepak that's happening now.
From Wolfe Research Deepak your line is open.
Great. Thanks for taking the question Harlan maybe a question for you where do you think fulfillment adoption of sfas can reach under the current model long term either as a percent of margins or maybe as a percent of <unk> any color on kind of how you are approaching it in the early days, but the Delaware would be.
Super Helpful. And then maybe a quick follow up for Amy on the SMB side, MLR was down 3% quarter on quarter. If my math is correct in a while can you unpack the impact of sort of the local market pricing being lower than your prior levels versus margin growth. Thanks, so much.
On the <unk> side of things.
We are quite clear of the type of merchants. We can handle we know for example, we're not going to do perishables at least no time soon we're getting a lot more thoughtful about the exact target product market fit that we can have it who are the target merchant and theres a lot of merchants I mean, I mentioned CPG as I mentioned apparel in my prepared remarks, those are sort of the ideal customers people that are selling things that are.
Smaller than a microwave that really works well for us part of what we want to do is.
I think the thing that often gets misread SFA is that we're trying to make some merchants don't have to think about logistics. So that they know that when they come to shopify. It has one less headache for them, but at the same time. They can offer something that most consumers are beginning to expect which is anticipated delivery time, whether that's two days or three days, we want to be.
To provide merchants on shopify, we're starting with the U S. The ability to offer that we think that'll do wonders for things like buyer conversion I mentioned in my remarks, the Chubb promises already significantly boosted by our buyer conversion simply like just with participating merchants that are just trying it now by 9% and the initial rollout that isn't real business that has real sales for them.
And so we think it's a very large swath of our merchant base that we can help but were also not trying to be everything to everyone wanted to be specific whether it be targeted but who this is for and the people. It is for will be delighted by this.
We'll take we'll take our next question from Matthew Pfau from William Blair Go ahead Matthew.
Okay, great. Thanks for taking my questions guys wanted to ask about your strategy to target larger merchants, so you've been making some big changes in the strategy with hydrogen oxygen functions and partnerships and then maybe you can just discuss these changes because years ago. It seemed like you thought you could target that segment.
The larger merchants with a more packaged solution, but that seems to be changing so just curious as to what's driving that thanks.
Yes, I'll take that question here.
I mentioned these names on every call because more and more of these large established brands are migrating to shopify either from existing.
Existing larger enterprise like existing enterprise solutions or their own stack that theyre running in house Shopify, plus is becoming a very very compelling solution for them. So I mentioned glossary of for example, our Panasonic and then obviously the international push as well with converse and companies like New era, we actually think that originally.
<unk> plus was a great migration path for our most successful merchants more and more it's becoming the best place to sell when youre selling at scale and so total cost of ownership and simplicity is important but now when you add things like hydrogen and you add things like some of more enterprise features like audiences for example.
We were able to effectively build anything you want on shopify, and I think that youre going to see more of these existing large <unk> merchants continue to come on to Shopify, plus and our enterprise offering.
Any in the coming months and part of the strategy also.
There are ways, where these enterprises like to purchase. So for example, I mentioned a bunch of seismic call, whether it's Deloitte KPMG Ernst and young there's a lot of large brands that prefer to work through an <unk> site. When they are digitalized or they're modernizing our retail operations and by partnering closely with these sites and becoming their preferred enterprise.
E Commerce solution, we think we can see more merchants come on faster. So E Y alone is now trained 500 technical professionals.
Around their entire network to how to sell shopify and what shopify can do so I think when you combine the flexibility simplicity, it's still incredibly well price relative to the value to cost equation is still very much on the side of value in terms of Shopify plus that's the reason why youre seeing plus growth outpacing GDP growth.
Over the last couple of quarters, and so youll see a lot more merchants can here to upgrade to plus you'll see a lot of brands that are not currently on shopify migrating to us to use this enterprise functionality.
It'll be a part of our future and we're excited by it.
Our next question will come from Terry Tillman and truly Securities go ahead Terry.
Yes. Thank you and thank you for taking my question I wanted to build on that last question, Harley and a luxury I love to see these new logos each quarter that are really household names I guess just a quick two part question. It is a single question is first one.
You have these co Hans and some of these other brands is it across all of their storefronts or is it maybe some of their smaller GMP producing store fronts, where they want to kind of test you out on the enterprise side I'm just trying to understand are you kind of getting kind of waterfall across all their storefront and then secondly, with some of these really big brands what are the attach rates on some of the other products around merchant solutions.
Thank you.
It's a great question. So when you look at companies like last year for example, or Cole Haan, we now host their entire business and other cases part of our strategy is come in let us prove to you that we are the best enterprise ecommerce platform for your business. So in the case of converse in Japan, we'd like to get the rest of the Congresses business of course thrown by Nike, but we're going to start by showing them pruning.
To them that we are exceptional in what we do on the enterprise side. So in some cases, whether it's banks or it's with mist. For example, we hosted entire American girl store, which is one of our largest businesses by proving to them that we are incredible at this enterprise E Commerce.
They will bring more stores on it and of course again with last year and some of the others. We have the entire business. So part of it is we want on our land and expand with some merchants in other cases, they want to bring the entire base their entire business onto us on the merchant solutions point just want to hit the one I mentioned is more time. The reason that we talked about merchant solutions attach rate on this call.
It is because it is a proxy for the value that we're adding to these merchants lives. We are not just their ecommerce partner, where there where their capital partner, where theyre shipping partner, where their payments partner the merchant solutions attach rate as a proxy for the value that we create for them and the reason that it's exciting to us that we are at an all time high in the history of the company is because we are doing.
So by virtue of creating more features that they want and if it is not just a small businesses. We're also seeing penetration of things like payments and capital increase with with Shopify plus merchants larger the larger brands in the platform and then obviously with audiences, which is now shopify plus only feature of course that will continue to increase the take rate, but all these things.
Further tie shopify and our merchants together in this wonderful partnership and I think youll see it get more brands come onto the platform and more brands took more of our products and features.
We'll take our next question from Andrew Boone from JMP Securities Andrew Go ahead.
Good morning, and thanks, so much for taking my question. It sounds like audiences is really helping merchants to improve return on AD spend can you just talk about what youre doing to facilitate the expansion of audiences within your merchants and just bigger picture, what's the role of shopify within advertising over the next three to five years. Thanks, so much.
Yes.
I'll take that.
I mean.
We've begun to product announcements.
These costs are like.
I mean <unk>.
Let us take out so far.
We are helping.
Bringing CBA stone.
Running this on for our customers. It is an opt in.
It.
Takes advantage of.
That's up from the belt.
No.
Our audience is.
The way people will adopt audiences by installing an alphabet soup first party up at <unk>.
Created so it's.
It really.
I think ties together the way we are thinking about the platform because currently.
Phase of it.
Giving us a certain realities.
That exist right now you can place for oil and the attending to a player like I said, you're making.
Investments in it and our machine learning.
Focus is with audiences right now.
Advertising.
It's rapidly evolving and hearts too.
<unk>.
Predict exactly where.
Things are growing like the types of arguments that are available to them.
And media businesses.
And enterprise businesses.
Rapidly evolving.
Certain things broke really well the next David Owen.
<unk>.
Several things are being done for couple of years and.
Fraud or change some of its entirely in deep frozen architecture.
70.
70 boats things like southern completely unrelated things end up becoming a high converting again visa.
The grades.
Functioning growth teams can.
Take advantage of all these kind of things.
But.
Many of our customers cannot.
And because they have to be focused on providing great products and great experiences. So.
We'd like to take.
Wherever we become active.
It's an area, where we can make significant.
Conceptual simplification.
Improvement.
Improvements to <unk>.
A couple of businesses I don't know if this is helpful.
I think it's a good idea to explain how we are getting.
Into these businesses because it's a different decision matrix and what what's generally assumed.
Okay.
It is a focus area of <unk> and therefore, we can probably have more than most other areas given the.
So the current realities.
A lot of.
Customers.
We have products at.
Intersections.
Several interests.
So targeting like.
Finding them.
The people who need those process.
<unk> has always been David difficult.
Has recently become more difficult.
We hope that we can.
Leaseback for some of <unk>.
What was lost from perspective of emotions in both of our products.
We have.
I mean, both of our products have a bias really really wanted to know kind of personalization is smaller because again remember about advertising channels. There's no way to find out about some of these type of products.
So it will be.
Focus area in vivo half.
More products and expansion of these programs to announce in the coming year.
We'll take two more questions. Our next question comes from Jeff Cantwell at Wells Fargo.
Jeff go ahead.
Hey can you hear me.
Yes, we can.
Okay, great sorry about that.
So let me ask the question. My first was on your just to follow up on that on a recent product launches are sort of harp on b to B I'm, just curious to hear any updates or signs of progress. There that you can talk about we understand it's still early days, but just wanted to get a feel for what excites you there what you're seeing from.
From that launch and then second on.
Profitability. It does look better than expected. So can you talk about sustainability there because on the outside world trying to get comfortable with macro and investors who are clearly honed in on profitability in the event of a slowdown. So do you see yourselves, becoming progressively more focused on profitability and I guess the point of the question that you're trying to get a feel for how we should be thinking about your ability to improve profitability going forward.
Thank you.
Okay.
I'll take the first question on the on VW and wholesale generally I've mentioned on previous calls.
Our ambition is really to be the central nervous system of our merchants businesses, we want to be their retail operating system in retail is not just direct to consumer for all merchants. There are merchants that have wholesale and <unk> businesses as well and so the ability to actually tie that all together and make the shopify admin truly their central nervous system is really important to us.
What we're doing around <unk> is making it more centralized so that they have a single view of their entire business. So one is we have all these merchants and apply for that also <unk> now we can add more value for them and we can actually become more important in their lives, but the second thing is it also now gives us an opportunity to go to market with a strict <unk> offering for VW merchants exclusively previously if you were to just selling whole.
Sir you may not consider shopify, we think the <unk> offer we are offering.
We're talking about here is going to be world class and what that means is that we can actually go after a new segment of the market.
<unk>.
Maybe I don't know if you wanted to have it on the profitability and the one thing I will say is that I think shopify has been historically and operationally disciplined company nearly all of our growth pre deliver has been organic and we funded.
Like all our gross profits have been ever had been redeployed back into our business, we have raised cash externally.
Very strategically and that's only been used accelerate our roadmap and we're decelerating decelerating year on year operating expense growth and so we are a company that likes profitability. If you look over the seven years of IP since IPO five out of those years, we have been profitable we plan on becoming profitable again, we said this year is <unk>.
<unk> here, but this is a company that think deeply about managing expenses growing revenue, but ultimately this is a company that likes to be profitable and then we will get back there.
Amy I think if you're muted.
<unk> speaking.
Sorry can you hear me dream Internet problems.
We saw discipline in our Q3 opex in the basement of adding a major acquisition with deliver and our music festival compensations that we manage.
To only have a slight increase in opex expenses quarter over quarter.
And we saw a sequential.
And in our subscription margin quarter over quarter, that's the operating discipline that we always exhibited and will continue to exhibit.
Yeah sure as Harley said, we had increasing.
Profitability from 2017 to 2021, we intend to get back there.
Our last question today will come from Gabriela Borges Goldman Sachs go ahead Gabriele.
Hey, good morning, Harley I'd love to get an update.
Yes.
I guess two nations.
Yeah.
Integration with Amazon.
Alright.
Dying.
Hello.
Your.
Hum.
And inside the head of the Shopify merchant a little bit how do you think makes sense, we'll evaluate the pros and cons of pilot violent crime.
Hey, Gabriel I'll take that one look I think we said previously.
Anytime a large companies, making their infrastructure available to small businesses in a way that levels. The playing field. We think is a great thing and and so by with Prime is no different than that but obviously it has been in the right way and we have nothing to announce now other than that we are as we said last time last time, we spoke we are talking to Amazon about how we implement this in the right way what's important for <unk>.
And says they want to be able to manage their entire business from one centralized place. They want all the information they need to make a really really good decisions, but at a high level at a macro level when great companies or any company for that matter makes infrastructure available to small businesses and does so in a way that that levels. The playing field further for small businesses that is a very very good thing you broke up on the second part of your question, but I think you add.
Asked about getting into the minds of of of merchants.
Right now I think for the holiday season look I think our merchants are preparing shopify is they're our partner we want to make sure. They have a very successful season, they're all ramping up right. Now this multichannel strategy that we've been implementing for years is really starting to pay off because merchants want to sell wherever their consumers are and it can do all of that from shopify, when you're out of Merck and solutions and you add the fact that we.
We can simplify things that that are usually not easy to simplify shopify becomes the most important piece of software that merchants using and that's what we're thinking about going into the holiday season.
And I think that in Bedbug Bose I think my last question and just monitor quicker jump in here because I just want to personally thank Amy.
Shapiro for her leadership and <unk>.
Bringing shopify here being a teacher.
To me and to the company and.
As our journey.
Our best done together with friends and <unk>.
You for everything you've done and being a friend in the future over all these years.
Thank you.
And with that thank you to all of you who have joined US This morning and for your questions. This concludes our earnings conference call for the third quarter of 2022, we look forward to providing our fourth quarter and fiscal year end results next year, Thanks, again and goodbye.