Q1 2023 Shopify Inc Earnings Call

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Good morning, and thank you for joining shopify, its first quarter 2023 conference call Harley Finkelstein shop, Vice President and Jeff Hoffmeister, our CFO are with US today. After their prepared remarks, we will open it up for your questions. We will make forward looking statements on our call today that are based on assumptions and therefore subject to risks and uncertainties.

That could cause actual results to differ materially from those projected.

We undertake no obligation to update these statements except as required by law you can read about these assumptions risks and uncertainties in our press release this morning, as well as in our filings with the U S and Canadian regulators will also speak to adjusted financial measures, which are non-GAAP and not a substitute for GAAP financial measures reconciliations between the two or the tables.

At the end of our press release and finally, we report in U S. Dollars. So all amounts discussed today are in U S dollars, unless otherwise indicated with that I will turn the call over to Harley.

Thanks, Kerry and good morning, everyone before we jump into our Q1 performance. Let me first touch on the announcements that we shared earlier this morning.

We are changing the shape of shopify significantly today.

The decade, where in shows the speed of change accelerating beyond what anyone has ever experienced.

The pace of change can never outpace our ability to adapt.

So today, we announced that we were reducing our head count and leaning into a partner model ecosystem selling the majority of our logistics business to flex port will become the preferred logistics partner for Shopify.

For our team. This is an incredibly hard week Shopify is a company that deeply values the talented builders that make it possible for shopify to simplify operations that reduce friction and enable merchants success.

We would not be the company we are today without the work and the passion that our team puts in everyday to pursue our mission.

We also realize that in order to adapt and stay at the forefront of commerce Shopify must operate with even greater speed and efficiency.

So, we're making changes and refocusing the priorities that we believe will get shopify to the size and the shape necessary to unlock the next era of growth and innovation.

But that does not make this earnings call and easier I will be doing this call and then quickly turning back to internal matters and Toby will not be joining us on the call today as he insisted on focusing his time and attention on our team.

On logistics building logistics infrastructure is a site effort that all E. Commerce entrepreneurs are eventually pulled into you.

Shopify decided to take this on behalf of every merchant because were significantly larger and we can leverage our scale to build this on their behalf.

<unk> has been a key partner throughout this journey and given our long history of building direct integrations into powerful platforms. We believe that flexpath will be the best partner to carry decision forward.

And for our merchants, making it easier for them to access fast reliable fulfillment from port to Port is a shared vision that flexpath will now take the lead on as our preferred logistics partner.

Led by World Class operators CEO , Dave Clark and found Ryan Peterson now with the leadership of deliver founder Harish Abbott. This planned sale will enable flexible to leverage their DNA and logistics and a lot of shopify to focus on what we do best designing and scaling a breadth of solutions and essential infrastructure that our merchants need to compete in increasingly digital world.

We know we have more work to do to achieve our goal of building a sustainable one of your company our actions today should be evidence of our commitment to our mission our merchants and our team not just keep up but to lead and to shape the future of commerce.

With that said I will now turn to our product and merchant elements for the quarter before Jeff discusses the financial results in more detail.

This year has started off incredibly strong for shopify and our merchants in Q1, we continued to expand our merchant base with strong growth across all geographies and merchant sizes.

We realize the incredible amount of trust our merchants haven't shopify.

Which is why we moved quickly so we can shop for a merchant consistently quarter after quarter given them a unified commerce solutions, they need to run their business and focus on what matters, most their product and their customers.

Our strong Q1 performance is evidence of our ability to continuously adapt and anticipate their future needs. At every turn this is why merchants choose us.

Let me start by discussing the progress and key accomplishments that we have made in our three core focus areas, which are centered around how we help merchants first expand from first sale to full scale next go global and finally build consumer relationships.

Starting with how we think about expanding from first sale to full scale.

On our last call, we talked about the launch of our enterprise retail solution commerce components by Shopify or Ccs C.

So you see this as a moderate opposable stack, where retailers can choose the sharply components they want to integrate them with their existing systems and create incredible customer experiences using the same software and solutions that enables shopify to power over 10% of U S E Commerce.

Up until the release of Ccs Theres been a scarcity of modern commerce solutions for enterprise retailers that give brands the choice flexibility and performance from a single enterprise offering by.

By making the best of Shopify, such as our World class Checkout and storefront available on an individual basis Ccs is kicking down the door to conversations with retailers that previously weren't aware of the power and the versatility of shopify.

There was a perception shift happening in the marketplace as enterprises begin to realize that they are now able to combine shopify is cutting edge commerce solutions with their existing infrastructure, all while optimizing their operating expenses and we are seeing success with large recently signed enterprise brands like food delivery company daily harvest the iconic Canadian coffee has chain Tim.

<unk> U K fashion designer, Ted Baker, Japanese retailer Yogi Boe, our largest outbound deal ever in Japan are multi brand deal with global retail brands in Australia, and American retail giant Xu Lilly, which is owned by QVC that actually came to shopify from a referral from another very large enterprise merchants we have.

All of these incredible global brands are trusting shopify to help them grow scale and keep their business secure.

A key part for our go to market strategy for enterprises will come from our system integrator partnerships.

Early in Q1, we signed an agreement with IBM consulting and integrate with cognizant, which is over 350000 employees generating over $19 billion in annual revenue in 2022.

Note cognizant that all of the shopify related implementation for Premier consumer products customer. So we were thrilled to have them as a partner for future opportunities we.

We believe these partnerships will further our efforts to not only grow our merchant base, but also expand our offerings with existing merchants.

To truly enable first sale to full scale requires us to have infrastructure and capabilities to handle massive traffic volumes at any moment in time for.

Shopify, we set a new record in Q1, we hosted the highest throughput flash sale in our company's history with Supremes February drop which drove orders per minute that were equivalent to a black Friday cyber Monday levels, a true testament to the scale agility and the resilience of our platform.

It also highlights how the investments we've been making over the past couple of years are strengthening our commerce operating platform to power any brand on the planet.

Moving onto going global.

One way, we are driving greater penetration internationally is by making it easy for our merchants to sell globally as they do locally during the quarter approximately 15% of total GMB or cross border as our primary products that were rolled out last year markets and markets Pro continues to gain traction.

Markets makes it simple to localize the buyer experience for each region of merchant sells too by enabling local currencies, which is the key determinant for consumers offering local payment options and collecting duties and taxes, a checkout to create total cost clarity.

All of this can be customized in one place in the shopify admin with Es when.

When we layer on the functionality of the translate and adapt app for our merchants, who use markets our data showed meaningful improvements to conversion rates.

I'll play markets Pro a fully integrated merchant of record solution is built on top of markets markets Pro is a great option for merchants looking to scale into new markets quickly without having to navigate international tax compliance or fraud, while tapping into best in class International shipping options with duties prepaid.

Our team has continued to make improvements to markets and is on track to fully roll out the product in the U S. This summer and then to the UK later this year.

We have seen considerable interest in markets.

And believe there is a lot of opportunity for us with this product to further unlock our merchants' ability to reach more consumers around the world.

Finally, our third core area building consumer relationships.

Shopify strengths is our comprehensive suite of innovative unified commerce solutions that enable brands to find engage and build relationships with consumers across every surface.

Commerce is increasingly showing up everywhere advancing our full suite of commerce solutions to stay at the forefront of our merchants' needs remains paramount for their success point.

Point of sale the shop App and audiences are three areas, where we continue to drive meaningful product enhancements in the quarter.

Our point of sale solution can you just gain traction in Q1 with offline GMB, increasing 31% year over year, we continue to expand both the functionality of our point of sale offering and its ability to handle the needs of retailers with large number of physical locations.

During the first quarter top tier apparel brands like kidney Ace, which was started by the founder of Lulu Lemon launch or point of sale pro solution for all of their stores and.

And another consumer favorite gap brand Banana Republic home is planning an omnichannel launch later this year with our point of sale pro offering across their initial retail locations.

These are just two examples of the growing number of household name brands, who are coming to shopify for not only our online offerings, but also our brick and mortar capabilities.

Even as more and more large brands choose shopify for our unified commerce capabilities, we remain the best commerce offering for Smbs.

After intuit made their decision to sunset their quickbooks desktop point of sale product. They chose shopify to be the preferred partner to migrate new retailers in need of a new point of sale solution.

This partnership recognizes the depth and the quality of Shopify point of sale offering and opened up the funnel for more smbs and mid market retailers to join Shopify and Leverages suite of retail solutions, we're already seeing traction from this partnership with thousands of new merchants, having chosen to adopt shopify point of sale.

Our shop App is another incredible opportunity for our merchants back in February as part of our winter edition release, we announced some of the biggest product updates to shop since launching in 2020 were in the post cookie mobile era of Commerce, where brands are increasingly motivated to build their own mobile experiences to retain ownership of their customer relationships.

But for most businesses, the technical and financial resources required to build and maintain their own mobile app just does not make sense.

Today shop gives merchants and out of the box mobile storefront, making it easy for them to leverage sharp's existing buyer audience to drive new and repeat customers to the brand.

And of course, when you layer on sharpie, which continues to be the best converting checkout on the Internet shop is becoming one of merchants most important channels.

Another example of how shopify staying at the cutting edge of Commerce is the AI shopping assistant that shop launch in March shoppers tell the assistant what Theyre looking for and it serves up relevant product recommendations from Shopify merchants.

It's like having your own shopping concierge powered by chat GBT one of the most advanced technologies that we have seen in decades, we believe that we're in the early innings of unlocking the true powered AI not only for our merchants and their customers, but also for shopify.

Moving to audiences Shopify audiences continues to be a dynamic feature for our plus merchants, helping drive top performance in paid advertising across meta Google and Pinterest.

Machine algorithm that powers audiences is more effective than ever before in the year since the product first launched we've shipped dozens of algorithm improvements as frequently as every two weeks. This constant experimentation has resulted in the average return on AD spend merchant C. On the platform to nearly double what it was originally we don't expect this trend to slow down.

This performance is reflected in the product adoption more merchants are using shopify audiences than ever before in fact, our data suggests that audiences is now a key reason merchants choose to upgrade to plus averaging just over a week from upgrades to install the product.

As the number of merchants, who use the product rose the algorithm gets smarter the flywheel moves a little faster and performance improves further a positive feedback loop.

Powered by our scale and the merchant Trust. We've earned over many years audiences is a unique advantage only shopify can offer it as an opportunity for independent merchants to joined forces and help each other succeed we could not be more excited by the trajectory of this young product.

Beyond our three core themes I want to talk a little more about our merchants earlier I shared some of the large enterprise wins, but that of course is just one portion of the success we are seeing.

In this past quarter Shopify welcome numerous notable brands, representing a broad spectrum of verticals within apparel and accessories fashion forward clothing, and denim manufacturer seven for all mankind footwear brand Keene and backpack and accessory brand Herschel supply all launch with Shopify in Q1.

On the international front, Japanese wash, Brent Saco, winemaker, Pernod, Ricard and watchmaker, Daniel Wellington launch sites on Shopify this quarter.

And earlier this week Lulu Lemon studio, formerly known as mere launched on Shopify.

Celebrity brands continue to default to shopify to launch their businesses as well in Q1, Mary Kate and Ashley Olson's luxury fashion designer brand the row, John Legend loved one and Kendall Jenner Award, winning 8182 Chela brand all launched on Shopify.

In closing shop like continues to be the engine powering millions of merchants around the world.

Our platform continues to expand giving our merchants more of the solutions they need to run their businesses online offline and everywhere in between we've worked hard to earn our merchants trust as sharply continues to solve the industry's biggest problems to make commerce better for everyone and with that let me turn the call over to Jeff.

Thanks, Charlie the investments we have made into building a powerful commerce operating system for merchants of all sizes have delivered strength across all elements of our business.

Let's dive into our Q1 results starting with G M B G.

<unk> in Q1 was $50 billion up 15% year over year or 18% on a constant currency basis as merchants delivered another strong quarter of growth. We achieved this <unk> strength, primarily through more resilient consumer spend with strength in Europe , and particularly notable existing merchant same store sales growth and growth in our marriage.

<unk> base.

Revenue for the first quarter was $1 5 billion up 25% year over year or 27% in constant currency driven by the GMB strength just discussed growth in our merchant solutions business led by payments penetration and growth in subscription solutions.

Our Q1 revenue came in better than our outlook largely driven by the outperformance of GMB strong growth across our merchant solutions product suite and strength in Europe from both consumer spend and more favorable exchange rates than anticipated.

Our total attach rate, which is defined as revenue divided by GMB is a key performance indicator of our business and our ability to generate greater value for our merchants in Q1, our attach rate was 3.0% to 4% up from 279% in Q1 2020 to.

Merchants continue to buy more and more solutions from us, which speaks to both the traction of new products and the trusted merchants put in US. This represents the highest attach rate in our history.

Moving to our revenue streams, starting with merchant solutions Q1 merchant solutions revenue was $1 1 billion, increasing 31% year over year or 33% on a constant currency basis, driven by the increase in GMB continued penetration of shopify payments and the contribution from deliver.

$27 5 billion of <unk> was processed by shopify payments in the first quarter, 25% higher than in the first quarter of 2022 the.

The penetration rate of shopify payments as a percentage of <unk> was 56% for the quarter versus 51% in Q1 in the prior year. Several factors drove the quarter's higher gross payments volume, including the strong performance by those merchants utilizing shopify payments and increasing percentage of which our shopify plus new merchant.

Adoption across the globe.

Later penetration of shop pay and continued growth of our integrated point of sale solution in physical retail stores.

Subscription solutions revenue was $382 million up 11% over Q1 of 2022, primarily due to growth in our plus subscriptions.

Moving to monthly recurring revenue or <unk> Q1, <unk> was $116 million up 10% year over year, we saw strong growth across each of plus standard and point of sale with plus being the largest contributor of growth in absolute dollars or plus merchants as a percentage of total MLR increase of 34%.

From 30% in Q1 of 2022.

Additionally, we are beginning to see the impact from the initial cohorts that were a part of our free and promotional trials that began to roar broadly in October 2022.

We saw these cohorts convert to full price standards subscriptions, starting in Q1, which contributed to the acceleration in MLR growth year over year and quarter over quarter.

The merchants comprising the initial cohorts from these trial experiments are demonstrating very positive results.

The longer trial period has provided merchants a better onboarding experience, giving them additional time to experiment and familiarize themselves with our rich feature set and have more time to find the right product and market niche for their products. As a result of these trials, we are seeing higher weekly active sales and more merchants achieving their first sale on our platform contributing to our <unk>.

<unk> outperformance compared to the broader market.

Separately as previously announced in January we introduced pricing changes to our standard subscription plans the pricing changes had minimal impact on our Q1 financials as a full pricing changes did not take effect until about a week ago, but we anticipate that they will benefit our MLR growth more meaningfully in the second half of the year.

Gross profit was $717 million for the quarter and gross margin was 47, 5% in our first quarter.

Compared to Q1 2022 gross margins of 53% our gross margin. This quarter was primarily affected by the dilutive impact of deliver.

Additionally, Q1 gross margin was also impacted by merchant solutions being a larger percentage of our business driven by growth in shopify payments and within our Shopify payments business. We continued to see gross margin pressure due to the greater mix of plus.

And the higher mix of credit cards versus debit cards compared to Q1 last year.

Operating expenses were $910 million for the quarter. This represents a sequential increase of 1% over Q4 of 2022 operating expenses of approximately 903 million when excluding the onetime charges from Q4 of $84 million.

Compared to Q1 of 2022 the primary drivers of this increase in operating expenses are related to higher compensation expense, including deliver.

As we have demonstrated over the past three quarters, our operating expense dollars, excluding onetime items continue to stabilize and grow at a much lower rate.

This directly reflects our focus throughout the entire organization to drive increased productivity and efficiency across our teams.

Continue to rigorously evaluate all of our cost, including greater scrutiny on our cloud infrastructure spend return on our marketing programs and their associated payback periods and in general and increased internal utilization of automation and technology to replace manually driven processes.

Let me share a specific example, what I mean.

In Q1 within sales and marketing expenses declined both year over year and sequentially as we have been working to diversify our marketing mix over the past year.

Prioritizing areas such as direct mail and audio we've also optimized payback from established channels like digital search and display as a result in recent months, we have seen the payback period for our paid advertising improved by over 50%. There is a cross functional team in place that's assessing the amount of value we can extract from different marketing channels as we.

To improve our paid advertising payback periods.

And realize even more value from each dollar we spend in this area.

Stock based compensation for Q1 was $135 million compared to $118 million for the same period, a year ago, primarily driven by the higher head count from deliver.

Adjusted operating loss for the quarter was $31 million.

The decline compared to Q1 of 2022 was due to lower gross margins year over year and higher operating expenses, primarily driven from increased compensation expenses.

Our Q1 adjusted operating loss came in better than expected due to stronger top line growth and lower than expected operating expenses.

For the quarter free cash flow was $86 million, representing 6% of revenue you'll hear us talk more frequently going forward about free cash flow, which we calculate as cash flow from operations minus capex.

Turning quickly to our balance sheet, our cash and marketable securities balance was $4 $9 billion as of March 31.

<unk> revenues that of course has an impact on gross margins in the opposite direction. So as we think about where we are for gross margins. We gave you guidance for for Q2 to basically be in line with Q1, obviously Q1 is up over Q4 and Q4 you may recall, we were at 46%. So we've got some.

Some forces moving in both directions on gross margins, we're obviously not ready at this point to comment on the full year.

But I think it is going to be a lot of the trends that you've seen historically on the business.

Thank you Deepak our next question will come from Colin Sebastian at Baird.

Alright, great. Thanks, hopefully you can hear me as well.

I guess Harley after reading Toby's letter I mean, it sounds like part of the decision here was was based on what Youre seeing around generative AI and developments there and obviously you've made some iterations to the platform already but curious to learn more about the vision of how AI are generally paying more specifically integrates and I guess, Jeff maybe what the.

Hey, Collyn I'll start with that one.

We are very fortunate to be amongst the companies with the best chances of using AI to help our customers our merchants and Thats, how we think about the usage of AI here, how do we integrate it into the tools that help us build and ship better products to our merchants you're already seeing that in certain areas of Shopify. For example, the task of writing product descriptions has now made.

Meaningfully easier by injecting AI into that into that process and what is it what is it. The end result of that is merchant spend less time reading, probably descriptions and more time, making beautiful products and communicating and engaging with their customers. We also youre also seeing we announced.

Couple of weeks ago shopped on AI, which is what I think is the coolest shopping cost shares on the planet whereby you as a consumer can use shop that AI and you can browse through hundreds of millions of products and you can say things like I want to have a barbecue and here's the theme and it'll suggest great products and you can buy it right right in line.

Through the shopping cost here, so youre already seeing this come up in a couple of different areas at shopify, but most importantly, the way we are thinking about AI is how can we use it to accelerate the experience and the product that we deliver to our merchants and I think thats going to make things a lot easier. It means immersing spend more time on the things that matter most to them.

Yeah, and I would think to your question about how do we think about the size of the organization and the infrastructure spend and we need to give or do I think we've as we obviously make these moves today that is reflective of how we think about our future and again as we go into Q2 results here, which will be a period of.

A couple of them.

Sure.

Changes in terms of what we're going through in terms of the financial impact of this we will have more clarity for you in the next quarter.

Thanks, Colin our next question will come from Tyler Radke at Citigroup.

Yes.

Good morning, I appreciate it.

Question so.

Harley you talked about.

Shopify doing a really good job on partnerships, especially.

Relative to other tech companies out there I'm curious just with the exit of the logistics business here, how does that change.

Changing your view on potentially partnering with someone like Amazon.

With the buy with Prime functionality, just you could kind of comment on your overall philosophy now that you've made this decision. Thank you, yes, I mean, specifically on the buy with prime.

We will make a deal with Amazon if that's in the best interest of our merchants all things around by with Prime are moving in the right direction moving positively so stay tuned for that but more generally I mean shopify is obviously I mentioned some of the large partnerships like stripe and now flex board and affirm and and and globally, but remember I mean, a big part of the product market fit that shopify provides to them.

<unk> of merchants is the entire app ecosystem.

<unk> of apps that allow every single merchant no matter what their use cases to get exactly what they need from shopify and even if it's a specific use case, they're able to get 100% product market fit. So it's not just necessarily the larger partnerships that I think demonstrate that shopify is a great partnership company. We've been at this for over a decade now on the App store on the same store.

And increasingly especially with Ccs for example, where we have much larger brands. The mattel's of the world companies like Black <unk> Decker and some of the ones I mentioned like zoo, Lily, they're going to want us to integrate with their existing infrastructure and so sharply has always been really good on the API side of ensuring that you can get exactly what you want from us whether it's directly from our core product or.

By leveraging some of our partners, but that's something that we're really proud of them and.

That's sort of on the product enhancing side on the merchant referring side I mean, we just massive network tens of thousands of these agencies and third parties and systems integrators, who are costly, referring new business of shopify, as well and I think being known to being regarded as a company that has great partnership that allows for partners to participate in the upside of of the business is very important.

Reason, why we probably have one of the most impressive developer ecosystems on the planet.

Thank you Tyler our next question will come from Trevor Young with Barclays.

Great. Thanks, Jeff just on the <unk> Rev guide of around 25% pricing largely offsetting the logistics, but also assuming that the transaction happens very late in the quarter. So just to be explicit youre not assuming much lift in <unk> from pricing and then Relatedly just any initial feedback.

Following the price increase or more merchants slipping to annual plans to keep pricing steady versus staying month to month and just taking the price increase.

Yes Trevor.

To your point of your first question.

We are assuming that the transaction closes towards the latter half of the year and the price impact just really about a week ago went into effect. So it's too early at this stage to fully engaged out but again from a topline revenue growth. This would essentially be in line, obviously per the guidance with what we did last quarter. So we feel very good about our business across all fronts as it relates to.

Merchant additions as it relates to.

Success in all the different geographies the business is doing really well, but as we think again there will be some loss revenue from logistics, assuming that it closes in the quarter and so as we counterbalance all those.

Those drivers Thats, how we think about the Q2 revenue guide.

So.

That's a key piece there and then as it relates to.

The plan the initial feedback on the plans at this point again it's.

It's too early to tell I would say overall, we've been very pleased with the results but.

Again, when we have a full quarter of results in Q2, I think we'll be able to give you some better sense, but.

Thank you.

Our next question comes from Darren <unk> at Roth capital.

Yes, good morning.

Thanks for taking my question your comments about 50% of cross border <unk> could you just kind of speak to kind of markets are markets pro and kind of how fast that.

<unk> Cross border metric has been growing kind of where you see that going in the next 12 months. Thanks.

Okay.

I call yes.

With market shuffling markets is getting a lot of traction in.

In Q1 alone at 100000 merchants use either markets or markets pro feature to make a cross border sale, we launched markets pro into early access in September we see more and more merchants that are that are adopting it now but.

But if you think about the business models of our of our merchants use merchants on average are selling to 14 countries and so going back to your commentary earlier about shop like being the essential retail operating system for our merchants, if we want to be the center of their business, which we are we need to enable them to sell across every single geography, and obviously there are some geographies that debt that.

They have not sold to yet making that easier is really really important in the case of markets Pro what's really interesting is that it really introduces this idea of a merchant of record solution. So you think you have things like tax and duty compliance, but you also were able to provide.

Obviously compliant with local laws Chargeback protection and then if they want to go one step further of course, they can always go and leverage globally as well.

Yeah.

We saw that.

And last year, we saw a $28 billion and cross border sales.

In Q1 of this year, we saw as you mentioned, 15% of total <unk> and so we think the international the ability to help our merchants sell internationally easier with with greater with greater speed and efficiency is going to be very important but also remember that it also allows us to bring on new merchants from new geographies. Obviously, the majority of our merchants are still in our core geographies, but every time, we make it.

Easier to sell across the entire globe with all those features that I, just mentioned more and more merchants join shopify and that also is a huge benefit to both these products.

Thank you Darrin. Our next question comes from Matthew Pfau with William Blair.

Okay, great. Thanks for taking my question wanted to ask one on the audience. This product it seems like it's already helping you out in terms of driving more sales on the platform as well as driving some upgrades, but any other thoughts on how do you. Additionally, monetize this product longer term. Thanks.

Yes look I mean audiences, we continued to improve audiences more merchant and it's improving the algorithms. It's been a year since the launch we're seeing return on AD spend nearly double and it's becoming a driver for upgrades as I mentioned just over a week after upgrades, we see merchants turning on audiences. We're also adding new marketing platform partners. So we had Facebook and Instagram.

Graham we added Google in Q4, we just added Pinterest in Q1.

And so we really are excited I mean average like.

Ensuring that our merchants are able to get the highest return on AD spend possible and it's something that not only they really obviously want and require but it's only some that shopify can do given our leverage because we have 10% of our E. Commerce is done in the U S has done on Shopify that is something very specific to shopify in terms of the monetization of audiences is currently monetize.

Indirectly via Shopify payments, we will revisit the monetization levers once we make that extreme the machine learning algorithm and credit even more effective once we have even more product market fit, but you will see more and more features and more functionality rollouts around around audiences in the coming in the coming quarters, but again as I said on the in my prepared.

<unk>.

It's an early product that is seeing incredible traction and I think it is beloved by the people that use it. So it's a very exciting area of our business and monetization will come in the future.

Yeah.

Thank you Mathieu next question comes from Bob <unk> with Deutsche Bank.

Great. Thanks for taking my question just on the 23% reduction in workforce can you give us a sense of how much of that is related to logistics and maybe those outside of logistics what areas are most impacted.

Yeah.

Yes, we have not talked about specifically how many of the employees are related to logistics I would say as it relates to the areas, which have been impacted this is.

Something which unfortunately has impacted our colleagues across all geographies and all levels within the organization Toby did make some comments in his letter regarding how we think about crafting ourselves for.

Our future and so I would point you back to that but this is unfortunately, something which hits us.

But all perspectives.

Just add to that I mean, let me say the thing. This is a very difficult day for for any leader any company to go through I mean, these are not the type of things. If you want to do but these are the things often the easy thing and the right thing or not the same thing in this case the right thing and the hard thing are the same thing, but what we are building here is a more fit for purpose purpose shopify that is going to be centered.

On our main mission remain quest, we're going to have less scope creep, we're going to have fewer meetings, we're going to we're going to have more shipping great features to our merchants, we're going to create more balance around managers and crafters and builders, which we think will be a lot healthier.

But this is going to set us up to take advantage of the opportunity we see in the future. The pace of change is unlike anything I think any of us have ever seen and this new shape of Shopify will will help us to achieve and execute on our on what is incredibly ambitious mission now it doesn't make it any easier but.

Because it is a tough day for our company, but that's the reason why we're doing this.

Thanks, Bobby our next question comes from Andrew Boone.

JMP Securities.

Good morning, and thanks for taking my question I wanted to go to enterprise can you talk a little bit about greater components adoption and what you are seeing near term in terms of merchants reacting to it and is it driving more merchant adoption in terms of enterprise or is it more of the past cycle upgrade.

Where our merchants are taking all of your products. Thanks, so much.

Andrew So.

So we announced commerce components in January .

On stage at the National Retail Federation.

Conference, but really the idea of this is that we needed something that was sort of a modern composed of all commerce stack.

We've had incredible success of Shopify, plus I mean, obviously, you've heard me talk about all the great names that joined quarter after quarter. Some of the most important brands and some of this iconic brands on the planet using shopify, plus but there are other types of retailers or businesses, who want something a lot more modular and opposable they want our storefront and their checkout, but they may want to use a different inventory.

Free system or they want to use their own ERP system, but they want to use us for omnichannel and data and compliance as well as checkout. So what we're trying to do is make it really easy effectively we're trying to do is make it so that not using shopify as an enterprise modern thoughtful brand that wants to be around for the next couple of decades is a bad idea and wall shop.

Plus provided this incredible robust enterprise solution some retailers some brands wanted to take different pieces of shopify and combine it with their own.

And how system. This allows them to do so so we're getting to a point now where there is fewer and fewer reasons why someone would not use shopify to run a very large modern enterprise and the results are already proving to be.

Quite amazing we're seeing more of these brands, who historically never really wanted to talk to shopify that are now, saying actually we now want to have those conversations and I think it's also shifting the enterprise perception of shopify. So the pipeline is building.

We're adding more and more of those components. There is now more than 30 modular components. The merchants can use and integrate with from from Shopify and they can integrate all of our third party services, but this allows us to get a larger piece of the enterprise and remember what we're providing them with is the same software. The same functionality infrastructure that we have been building for our own use over the last.

Almost 20 years now that powers, 10% of all U S. E. Commerce. So it's a really good product for us, but it allows us to access a different type of enterprise customer.

Thanks, Andrew and our last question will come from Dan Chan at TD Securities.

Oh, sorry, it looks like you just dropped out of the queue last question instead will come.

From Ken Wong and Oppenheimer.

Great Fantastic. Thank you for taking my question and squeezing me in.

Just wanted to.

Try to fine tune our model here just wondering as we think about the back half any any help in terms of trying to calibrate what the <unk> contribution to growth is to the extent that we need to.

Down after after it closes in Q2.

Yes, Ken I don't have any specific guidance for you on this other than obviously, what we said from our Q2 top line perspective.

We've given a general sense for the size of the business in the past I think obviously once we get part of this is just us figuring out when this closes in the quarter and that will obviously allow us to give you better perspective into the back half of the year I think as it relates though just to deliver obviously that would be one piece of it but keep in mind kind of the flip side.

All of this in terms of all the great success, we're having with all the other products and kind of what we're seeing Harley you talked about markets and markets Pro before.

Tax obviously, we talked in the call in the prepared remarks as it relates to our payments progress in the penetration we have there.

And all of the things, we're doing from a geography perspective, particularly with strength in Europe , which has been really really strong so.

It is absolutely true obviously, the deliver will be coming out of the revenue stream for the company, but theres a lot of other things that we've seen in terms of.

Strong momentum, including we had talked a little bit about the merchant ads that is something which across the board we're.

We're seeing a lot of strength in on plus on on standard and obviously Harley just finished talking about Ccs and enterprise. So we're seeing strength really across all segments, all geographies of our business and so while there will be some revenue loss from deliver we feel really good about everything else going on in our business right now.

Before we end let me just.

Reiterate this again.

Stay here at Shopify, obviously, we're seeing a bit of some team members that we've we've really enjoyed working with and it's not this is nothing that any leaders ever want to have to do but I can say as of about to celebrate my 13th year at Shopify. This is the most optimistic and this is the most <unk>.

Focused company that Ive seen the opportunities in the future for us are our massive and I think this new shape of the company does.

Despite the fact that its a tough day for US is exactly what we have to do to execute on that and so.

I'm incredibly bullish on where we're going and I'm excited about the future for this company. This is if you like what we've done in the passenger level with you in the future.

With that this concludes our first quarter of 2023 conference call. Thank you for joining us.