Q2 2023 Shopify Inc Earnings Call
Good afternoon, and thank you for joining <unk> second quarter 2023 conference call Harley Finkelstein shop, Vice President and Jeff Hoffmeister, our CFO are with us today.
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 could 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 afternoon as well as our filings with the U S and Canadian regulators.
We'll also speak to adjusted financial measures, which are non-GAAP and not a substitute for GAAP financial measures.
Reconciliations between the two are in 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, Carrie and good afternoon, everyone.
Back in June Shopify entered its eighth year as a public company and 17th year in existence.
Credible Testament to the resilience of our merchants, who propel the economy and our team that shows up every day to help power their success.
While a lot has changed since 2006 across the consumer landscape commerce and shopify, our commitment to solving the biggest challenges in commerce remains front and center as we shipped more products and solutions to make commerce better for everyone.
As of Saturday led company Shopify contains a distinctive mix of passion vision and entrepreneurial spirit that drives innovation and a deep understanding of our customer base.
And our 17 year history, we've demonstrated our commitment to investing in innovative solutions that simplify commerce and that value for merchants everywhere.
Our Q2 results are clear proof points revenue growth accelerated to 31%.
Our product attach rate continues to expand and we delivered our third consecutive quarter of positive free cash flow, which we expect to continue to trend even higher throughout the rest of the year.
We are quickly positioning herself to build on the momentum we are seeing across our business, making purposeful changes that support our core focus on commerce and unlock what we believe is a new era of data driven entrepreneurship and growth.
An era, where AI becomes the most powerful sidekick for business creation.
Commerce is available everywhere anywhere and always.
And sharply cutting edge solutions will enable more businesses large and small local and global to achieve even greater success.
Last quarter I talked about the evolving shape of the larger commerce ecosystem and changes we have made of shopify to meet that moment.
We are already well underway and operating within the new shape of Shopify.
That can execute with greater speed and agility on a much larger scale to ship products faster to bring more merchants onto the platform and further supercharge, our virtuous growth for years to come.
To do this we remain committed to the areas, where we can add the most value for our merchants, including expanding from first sale to full scale building consumer relationships and going global.
So let's dive into each area and the key accomplishments, we are driving to execute on the massive opportunity ahead.
Starting with helping our merchants expand from for sale to full scale we.
We recognize the immense potential of AI to transform the consumer landscape and commerce more broadly and we are committed to harnessing its power to help our merchants succeed.
We believe AI is making the impossible possible, giving everyone superpowers to be more productive more creative and more successful than ever before.
So of course, we are building that directly into shopify.
You know our additions last week, we unveiled shopify magic our suite of free AI enabled features that are integrated cross shop of ice products and workflows everything from inbox to online store builder and App store to merchandising to unlock creativity and increased productivity.
One of the most exciting products, we will be launching soon in early access is our new AI enabled commerce assistant sidekick.
Howard by Shopify Magic sidekick, as a new chat interface packed with advanced AI capabilities purposely built for commerce.
<unk> will now have a commerce expert in their corner, who is deeply competent incredibly intelligent and always available with psychic no matter your expertise or skill set it allows entrepreneurs to use everyday language to have conversations that jumpstart the creative process tackle time consuming tasks and make smarter business decisions.
By harnessing a deeper understanding of systems and available data.
<unk> integrates seamlessly with the shopify admin enhancing and streamlining <unk> operations, while we're at the very early stages. The power of psychic is already incredible and it's developing fast.
Integrating AI directly into Shopify, we are providing businesses with the most modern tools that will enable them to make data driven decisions optimize their operations and ultimately achieve greater success from first sale to full scale in today's competitive market.
And that's just the beginning as commerce has continued to evolve pushing transactions far beyond the traditional retail or online stores. We were building the right tools for commerce to be available everywhere anywhere and always and that is one of our superpowers and why merchants of all sizes are coming to and building their future on shopify.
We've enabled our merchants to reach a larger base of audiences through deep partnerships with social platforms apps and creators.
Q2 G M b through these channels nearly doubled year over year as merchants are adopting these new ways of reaching customers.
It's really about leveraging our scale and the breadth of growing brands across the platform to unleash new opportunities. It's simply do not exist. If you are not on shopify.
We are fueling the shopify flywheel with things like our recently launched Shopify collective, which creates new pathways for them or just to not only sell their products, but also each other's products collective.
Collective allows retailers to discover and sell from other top shopify brands, who was shipped directly to their customers, allowing them to expand their product offering without the cost and risk of buying inventory.
This seamlessly aligns with the advancements we are making in establishing our wholesale presence, which we refer to as our BTB on shopify offering with.
With B to B G M B up 61% in the first half of 2023 and over 45 customizable features tailored to the unique needs of wholesale businesses launched in the past year alone we were getting traction.
Some of the most well known consumer brands around the world, including Kraft Heinz Company, Brooklyn, and Momofuku have all adopted this product.
We are working hard to create advanced features for <unk> that we think will change how the industry works and help merchants grow in this area.
Features like volume pricing company account request and personalized storefronts are all seamlessly integrated into our core platform.
This makes the wholesale buying process better and makes it easier to find and win over potential wholesale customers.
Even though b to B currently makes up a small portion of our revenue. It represents a huge untapped potential for shopify and as a channel that we know is especially important for enterprise level merchants.
It not only allows us to deepen our engagement with our existing merchants and help them grow this channel, but it also opens up opportunities to serve a new group of merchants, who solely conduct BTB transactions.
Within retail our momentum continues in Q2 offline <unk> increased 23% year over year as we want larger multilocation merchants across the 14 countries, where shopify point of sale operates today.
To even a year ago, our deep investment in our point of sale platform, coupled with transformation in our go to market process are enabling us to sell our retail offering more effectively especially with larger merchants.
Among shopify point of sale retailers with more than 20 locations. There Q2 G. M. B grew over 120% year on year with more than 70% of their JV coming through shopify payments, demonstrating our ability to monetize as we move up market.
The work we've been doing to transform our go to market engine resulted in our Q2 retail point of sale business delivering the highest quarterly G. M D wins ever and we believe our momentum is only growing.
In addition to bringing on more new brands to point of sale in the quarter. We're also seeing existing merchants expand their retail presence with brands like reef, adding more locations in the quarter.
We're also enabling online for shopify merchants like baby list to venture into physical retail by opening their first flagship store powered by Shopify point of sale.
Bringing all of the capabilities that we offer for online two point of sale remains a big opportunity for us, especially as our retail offering represents additional pathways to bring even more merchants and customers into the shop by flywheel.
One example of that integration is shop pay installments for point of sale.
This feature allows retailers using shopify point of sale to offer their in store shoppers. The same flexible buy now pay later option that they offer their online shoppers.
Early results show, a five X increase to retail average order value from installment transactions compared to standard in store transactions.
Beyond driving larger purchases sharpie installment is a major step towards increasing buyer attribution for offline sales as all in store shop pay installment orders are associated with a customer more known buyers means more opportunity to build relationships and drive repurchase activity, which fuels our merchants growth.
Two years ago, we launched hydrogen and oxygen to give merchants that wanted to go head list easier development path that would help them get to market faster.
Hydrogen a react based toolkit is a front end web development framework used for building custom storefronts. This.
This product just passed an incredible milestone hitting the $1 billion in cumulative Jim V. Mark with 2023, Jimmy So far this year already to access as much as we did in all of 2022 validating shopify as their trusted commerce partner in their shift towards headless commerce.
Beyond shipping great products and building more products for every level of complexity for first sale to full scale. We have also been transforming our go to market engine.
Led by Bobby Morrison, our Chief revenue officer over the past year or so our team has been working on implementing new tactics kpis and capabilities to accelerate sales reduce costs and ensure merchants success.
And it's working in the past two quarters alone we have seen sales volumes across key products like capital retail and payments gain momentum leading to some of the highest cross sell volumes we have ever achieved.
But that's not all we're implementing an end to end sales process and methodology, that's designed for increase effectiveness and efficiency.
Tailored to various merchant segments and industries and consistently enabled for scalable execution throughout the revenue cycles Shopify as go to market strategy is operating at an unprecedented level.
Whether it's attracting new customers to the shopify platform delivering ongoing value to existing customers or encouraging current customers to utilize more of shopify as offerings. Our team is working tirelessly and executing effectively.
With this powerful go to market engine beginning to fire on all cylinders, we are seeing more brands come to shopify across the spectrum from entrepreneur to enterprise.
In particular, we continue to bring more of consumers' favorite brands to shopify, including recently signed deals with womens fashion apparel company soft surroundings, beauty and skincare brand Jafar cosmetics boots, and accessories company Hunter and meta who will sell quest through integration shop White house with multiple channels.
We also saw brands launched in the quarter, including subscription Bellwether dollar Shave club workwear retailer for women, New York <unk> company baked goods manufacturer Mrs fields, as well as international launches, including Paris Fashion House, Nina Ricci owned by weak International sites for American head, where company New era, along with more brands from CPG Giants Nestle.
And Unilever.
Our platform remains the go to for top celebrities and creators to build their brands in.
In July Taylor, Swift launch or Erez to emerge shop with us experiencing unprecedented volume of sales and site visitors on launch day, and we were ready for it proving once again that our infrastructure is scalable flexible and most importantly reliable.
That same week musician Drake released his new store Drake related using our new product shop like collective that I mentioned earlier.
And finally, Mr. Beef one of the world's most popular youtubers revamped historic using one of Shopify is out of the box free themes. This showcases the immense value accessibility and scalability, we've integrated into every facet of our business.
These brands along with many others are recognizing that the speed at which we deliver products and innovate is unmatched we help them prepare for the future in a world where technology customer needs and markets are changing quickly.
Next is building consumer relationships, starting with Shopify checkout, which has proven to be the best converting checkout on the internet.
We've invested in a vault our platform because we know that not all checkouts are created equal.
Ours converts better well, we have known for years that our checkup is the best a recent external study from a leading global management consulting firm has confirmed it in fact shopify is overall conversion rate outpaced the competition by up to 36% and an average 15% more than others.
The April study also revealed a power of shop paid the highest converting accelerated checkout on the internet the.
The data shows that the mere presence of sharpie, even when it is not used by a buyer can boost lower funnel conversion by 5% and when it is used can lift conversion by as much as 50% versus guest checkout.
With our accelerated checkout outperforming all other major players by nearly 10%. It is now a competitive disadvantage not to be on shopify.
Even as powerful as our accelerate check it has become we know every second matters when it comes to making a sale and that is why we introduced signing with shop. This enables customers to use their shop account to log into merchants online stores.
By signing of a shop shoppers can access their customer count speed through checkup with Prefilled payment and address details and unlock discount codes that will automatically be applied at checkout.
By lowering friction, giving faster access to payment details signing with shop is making the internet's best converting checkout, even better shop.
Shopping behavior continues to shift to mobile with over 70% of online checkouts happening on phones and other small screen devices in Q2.
With this shift we've seen major brands like thrive cosmetics, Vesey and Todd Snyder launch custom shop storefronts to optimize this shift and we can expect even more brands to follow.
Not only because the shop App offers an immediate out of the box mobile storefront, but also because they can tap into the rapidly growing audience of buyers to reach and retain new customers.
For the quarter shop pay facilitated $11 billion and G. M. B, that's up 37% year over year and cumulatively $98 billion since its launch in 2017 as of today, we have now surpassed $100 billion in cumulative dollars through shop pay which is an incredible milestone for the company.
Moving onto going global.
Our international solutions make it easier for our merchants to take their business to any customer around the world and we continue to invest in helping merchants of all sizes start and scale of our global business all from within their shopify admin during the quarter approximately 15% of total GMB, where cross border sales supported by the continued adoption of our markets and markets.
Offering in the EMEA region the rate of new merchant growth continues to surpass that of North America contributing to the strong growth we witnessed in Europe in the quarter. This was led by Germany, France, Spain, Italy, all of which experienced GMB growth exceeding 40%.
With our markets pro offering which is still in early access and slated for a rollout later this year, we make it easy to expand our merchant business to over 150 markets all within a single view and the Shopify admin.
We are simplifying the onboarding experience.
Spanning shipping support and enabling shop paid all international purchases to continue to enhance the product even further as.
As a result, more and more merchants across all sizes from SMB to plus are adopting it and we're excited to bring it to all our U S. Merchants later this year on.
On top of that we continue to upgrade capabilities that give merchants more control when selling internationally.
Merchants can now effortlessly tailored different experiences and product assortments for various markets. So in apparel merchant like vre can promote a summer collection in the U S and a winter collection now Australia at the same time all from their online store.
Our work here includes features like smart order routing multi currency payout and market support for shopify functions. These enhancements significantly benefit our merchants, making their global expansion goals more attainable simpler to navigate and more customized for each customer in every market that they penetrate.
In closing Shopify is rapidly strengthening its position as a leading enabler of global Commerce and entrepreneurship, we have successfully established and expanded our unified commerce platform that is continuously gained the trust of our merchants attracted new merchants sped up our momentum and broaden our market presence.
The new shape of Shopify is enabling us to make faster decisions flex with the rapid pace of technology and deliver innovative solutions that increase our merchants odds of success.
And what's most exciting is that even after 17 years and all the changes. We've made recently, we know that the opportunities for shopify are only growing whether that's online or in person SMB or enterprise direct to consumer or wholesale domestic or global.
We're positioning ourselves to capture it all by innovating pushing boundaries and leaning even deeper into our mission to make commerce simpler easier more democratized more participatory and more common.
And with that let me turn the call over to Jeff.
Excellent. Thanks, Charlie we had another quarter of strong financial results, we are shipping products faster growing our merchant base expanding around the world and improving our profitability all of these factors contribute to our flywheel and ensure that we continue to build the best product in the world to make commerce better for everyone.
Let's dive into our Q2 results starting with G. M D G.
<unk> in Q2 was 55 billion up 17% year over year as merchants delivered another strong quarter of growth. We achieved this G. M V strength, primarily through growth in our merchant base globally with such being the largest driver of G. M. B outperformance. This quarter continued resilience of our merchants consumers with strength in Europe .
And particularly notable not only in terms of the durable same store sales strength of our existing European merchant base, but even more so on the new merchant acquisition front end same store sales growth for our existing merchants.
Revenue for the second quarter was $1 7 billion up 31% year over year key contributors to our revenue growth included the G. M. B strength, just discuss the growth in our merchant solutions business, which was itself driven by a combination of increased penetration of payments and continued growth across a broad number of solutions, including capital.
All in installments growth.
Growth in subscription solutions from adding more merchants.
Two months of contribution of deliver revenue, which contributed approximately three points of the 31 points of growth in the quarter and subscription pricing changes.
Revenue in the second quarter outperformed our expectations, primarily driven by two things stronger adoption of higher attach rates across our merchant solutions product suite, including payments penetration and capital and more robust merchant retention after our recent pricing change.
Our product attach rate, which is defined as revenue divided by G. M D. As a key performance indicator of our business and our ability to generate greater value for our merchants merchants continue to buy more and more solutions from us which speaks to both the traction of new products and the trust that merchants put in us in Q2, our attach rate was 3.08% or three.
2.01% excluding deliver.
Continued gains in G. P V were the largest contributor to year over year growth in our attach rate along with growth and shopify capital and gains in newer products, including markets installments and our tax planning.
Moving to our revenue streams, starting with merchant solutions.
Q2 merchant solutions revenue was 1.3 billion, increasing 35% year over year with nearly half the increase due to the growth in G. M D.
Additionally growth was driven by continued penetration of shopify payments the partial quarter of contribution from deliver and strengthen some of our other solutions, particularly shopify capital markets and installments.
One 7 billion of G. M. D was processed on shopify payments in the second quarter, 27% higher than in the second quarter of 2022, the penetration rate of shopify payments as a percentage of G. M. D was 58% compared to 56% in Q1 of 2023 several factors drove the quarter's higher gross payments volume compared to the.
Our year, including the strong performance by those merchants utilizing shopify payments and increasing percentage of which our shopify plus.
New merchant adoption across the globe greater penetration of shop pay.
And continued growth of our integrated point of sale solution in physical retail stores.
Subscription solutions revenue was $444 million up 21% over Q2 of 2022, primarily due to the growth in the number of merchants on both our standard and plus plans to.
The increase was also driven by the price increases for the existing merchants on our standard pricing plans that went into effect in late April and growth in our variable platform fees.
Q2, <unk> was 139 million up 30% year over year, the pricing change was the largest contributor of growth in absolute dollars in the quarter.
We saw year over year and quarter over quarter growth in MRI across each of standard plus and point of sale. All three segments are performing well, our plus merchants as a percentage of total MLR decreased to 29% from 31% in Q2 of last year, but that decrease was simply a function of the growth in our standard MRI from the pricing change.
Let's talk a little bit more about the pricing changes that went into effect for our existing merchants at the end of April .
Merchant spoke loud and clear regarding their trust and the unmatched value that shopify provides through our unified Commerce platform. We are seeing our merchants continue to remain on the platform rather than using the price change to move off platform and largely remain on monthly plans versus moving to N for.
For Shopify and provides us with more gross profit dollars to invest back into the business balanced with improved profitability for the rest of the year. We expect these pricing changes to continue to benefit our subscription solutions business and MRO.
Moving to gross profit gross profit was $835 million for the quarter up 27% year over year.
Gross margin for subscription solutions was 89% compared to 76, 7% in Q2 of 2022 our subscription.
<unk> solutions gross margin increase was driven primarily from hosting and support efficiencies with pricing changes also having a positive impact.
Gross margin for merchant solutions was 38, 1% compared to 43% in Q2 of 2022 or.
Our merchant solutions gross margin was primarily affected by the dilutive impact of deliver excuse.
Excluding deliver our merchant solutions gross margin was essentially flat year over year is the same factors, we experienced in the first quarter, including growth of our lower margin Shopify payments business were offset by growth in other higher margin merchant solutions, including capital installments and FX revenue.
This brings our overall Q2 gross margin of 49, 3% compared to 57% in the prior year, excluding the dilutive impact of deliver gross margin in Q2 increased year over year, driven by our higher margin subscription solution business.
Operating expenses on a GAAP basis were $2 5 billion for the quarter, which includes 1.7 billion and one time charges comprised of 1.3 billion on the impairment on the sale of our logistics businesses.
Third and $65 million and accelerated stock based compensation also pertaining to the sale of our logistics businesses and $148 million related to severance when you exclude these items. Our Q2 operating expenses were $818 million down from $846 million in Q2 2022.
The decline year over year was driven largely by lower marketing expenses. This past quarter as we maintain strict discipline around returns on marketing spend. Moreover, the $818 million of sequential quarterly decline of 10% compared to Q1 2023 operating expenses of $910 million.
All while revenues were up 12% sequentially Q1 to Q2, we have reset the bar for the scale that we can deliver off of a more consistent operating expense base. The sequentially lower expenses are primarily a result of Q2, having only one month of the higher head count and two months of the expenses from the logistics businesses.
Operating loss was $1 6 billion, which includes a $1 7 billion for impairment SBC acceleration and severance that I just mentioned excluding these charges operating income was positive for the quarter compared to a loss of $190 million in Q2 of 2022.
Stock based compensation for Q2 was $280 million or $115 million, excluding the $165 million for the SBC acceleration related to the sale of our logistics businesses. This compares to 139 million for the same period, a year ago, primarily driven by lower head count.
Adjusted operating income for the quarter was $146 million.
Capital expenditures were 21 million for the quarter.
We have now delivered three consecutive quarters of free cash flow delivering Q2 free cash flow of $97 million or 6% of revenue.
Turning to the balance sheet, our cash and marketable securities balance was $4 8 billion as of June 30th and we had a net cash position of $3 9 billion after consideration of the outstanding convertible notes.
Before moving to our Q3 outlook some comments regarding the completed sale of our logistics businesses and what it means for US as we look ahead to the back half of 2023.
We are now approximately two months post the closing of the transaction. We continue to work closely with Flex board any integration in order to make it easier for our merchants to access fast and reliable logistics solutions.
While we are still working through the terms of the commercial agreement. We are pleased with how the transition has gone thus far and are excited to be a part of flex ports condition moving forward.
Let's take a moment to discuss how the sale of the logistics businesses will impact our financials in terms of comparability for the third quarter, we expect a headwind of approximately three to 400 basis points of revenue growth in Q3 related to the lapping of our logistics businesses. This results in approximately three to 400 basis points of tailwind to our gross.
<unk> rate compared to Q3 of last year.
With that in mind, our expectations for the third quarter are as follows first on revenue, we expect our third quarter revenue to grow at a low twenties percentage rate year over year, which translates into a year over year growth rate in the mid twenties. When you adjust for the 300 to 400 basis points headwind from the sale of our logistics businesses, we anticipate pricing changes along with <unk>.
Option of our merchant solutions products led by payments will continue to drive our strong topline growth.
Q3 gross margin percentage is expected to be approximately two to three percentage points higher than our Q2 2023 gross margin of 49, 3% driven by a full quarter of benefit from the sale of our logistics businesses and a full quarter of benefit from the pricing changes.
We believe that our Q3 operating expenses will be flat to up slightly compared to our Q2 operating expense dollars of 818 million when excluding one time items from Q2, lower head count and the removal of the logistics operating expenses are expected to be counterbalanced by targeted increased investments in marketing and the impact of our staff.
Employee compensation review cycle.
Starting with marketing.
I mentioned earlier in my remarks regarding the Q2 results that lower marketing spend was the leading cause for the year over year Q2, Opex decrease over the past few quarters. We have done a lot of work analyzing our return on marketing dollars, including tightening payback periods assessing where our marketing dollars are having the most impact automating where possible and reducing our spin.
This work is also highlighted some areas, where we think we should invest more based on the strong paybacks, we were seeing and the opportunity to support the success and momentum in our business.
In Q3, we expect to increase marketing spending in two areas in particular, where we historically spent limited amounts and where we are seeing strong returns point of sale and offline marketing.
For point of sale Harley talked through the strength in that business and we plan to lean in further.
Regarding offline marketing, we have utilized offline marketing in North America, and now see an opportunity to replicate that playbook in Europe , which as I mentioned this year has been a source of G M b strength for us.
Next talent and compensation.
We just went through a compensation review cycle as it had been almost a year since we last did that process specifically not since the flex comp rollout last September and we will see some compensation increases for existing employees in Q3 as a result of that comp review that said, we will continue to be extremely disciplined regarding our approach to talent and compensation.
Q2, excluding one time items achieved significant operating expense savings largely driven by the quarter, including only one month of the higher head count. Therefore, Q2's results already reflect approximately two thirds of the impact to our Opex base.
As a reminder, the $818 million in Q2 Opex. Excluding one time items is a sequential quarterly decline of 10% compared to Q1, all while revenues were up 12% sequentially Q1 to Q2, while we expect Q3 operating expense dollars to be flat to slightly higher than Q2 or Q3 operating expenses on it.
Absolute dollars basis are expected to be lower than Q1 of this year in each of Q2 Q3, and Q4 of last year, excluding any one time items in those quarters, demonstrating our commitment to driving increased productivity and efficiency across our teams with a disciplined approach to our spending Moreover, the flat to slight increase in Q3.
Operating expenses relative to Q2 should be kept in context with the continued growth in revenue scale.
Moving to stock based compensation S. P. C is expected to be approximately $110 million in Q3.
We now expect capital expenditures to be approximately $45 million for all of 2023, which includes $33 million that we incurred related to logistics in the first two quarters of the year. This reduction in capital expenditures expectation versus our previous outlook is driven by changes in our expectations related to leasehold improvements for some of our office spaces.
Some due to timing and some due to a reduction in total planned spend just as with Opex. We continue to be diligent in our spend as we look to drive strong free cash flow.
Finally, we expect free cash flow for Q3 to be higher than the entire first half of the year Inc.
In closing Shopify is moving quickly to capitalize on the momentum we are seeing across our business our pace of new product introduction remains excellent. We highlighted some of the additions from additions, including sidekick Shopify magic collective and the extended functionality of checkout among others, we talked about how we continue to see success in our point of sale business.
And how we continue to enhance that solution in order to allow merchants to offer in store shoppers. The same flexibility that we offer online with the integration of shop pay installments as the latest manifestation of that.
We are constantly evolving to meet the changing needs of our customers expanding our solutions across channels like b to b and point of sale, while making it easier and faster for our merchants to make a sale with our accelerated checkout and login with shop features.
The top line growth of our business remains very strong our focus on operating expenses remains unwavering and our free cash flow generation continues to strengthen now with three consecutive quarters of positive free cash flow as we lean into the new shape of Shopify, we believe that we will be able to execute with even greater speed and agility on a much larger scale and deliver a business.
Model that achieves a compelling combination of growth operating leverage and free cash flow generation with that I'll now turn the call back over to Kerry for your questions.
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 fixed on mute yourself.
Ask that you limit yourself to one question. So we can try to get to as many questions as possible.
Our first question comes from Richard Tse National Bank.
Yes, Thank you and in light of the recent pricing changes that have been quite successful how do you think about extracting increasing value from your customers as you add meaningful features like Shopify magic going forward.
Hey, it's Harley I'll take that question look in terms of the pricing increase.
That was that increase we did a couple of months ago. There was a first inquiry has been a very long time and we saw that you know merchants, we're absolutely willing to pay for it which I think evidence is that the value to cost ratio of shopify.
Product is very much on the side of value. So certainly there is opportunities for us to consider.
Tenuously review, our pricing and figure out where the right pricing is and we will continue to do that but in terms of.
Features like Magic and Insightec, which we're really excited about remember what our merchants do better Shopify does better that's the if that that is the business model and so the more that they can sell the faster they can grow.
The more we can share in that upside, but the other part that we talked about on the in the prepared remarks, just worthwhile mentioning again is that product attach rate.
Fact that were still there were growing that there were still above 3%, which is which is really high it means that as we introduce new products, new merchant solutions, whether it's payment solutions shipping things like audience is.
Anything anything like Collabs collective more of our merchants are taking more of our solutions and that is very important because it means that shopify is becoming the most important piece of software that that the millions of merchants on the platform use and where we were happy to see that merchants felt that the additional increase in price was still really good value for the product.
Thank you for your question. Our next question comes from Gabriela Borges Goldman Sachs.
Yeah.
Good afternoon, Thank you, Jeff and Harley I wanted to follow up on how you're thinking about the long term margin profile of this business given your comments on the train positive quarters of free cash flow and the extra logistics. So would love to hear your thoughts what sort of free cash flow EBITDA margin profile do you think shopify can support.
Thank you.
Yeah Gabriel Thanks for the question. We obviously gave some guidance on Q3 in terms of how we think about gross margin and you saw it in terms of the movement. We saw in our margins on the subscription solution side very positive up 400 basis points over the quarter and we talked obviously about some of the margins on the merchant solutions side, which with the removal.
Logistics, obviously those will be some strong tailwind for us.
We haven't obviously given guidance as it relates to Q4, our long term in terms what the operating model. It looks like you can sense clearly, though from what we said about margins on both of those pieces, both subscription solutions as well as merchant solutions that we've gotten to a gross margin profile, which is more similar to where we were for example, Q1 Q2 of last year before we got into logistics in.
Our goal is to as I alluded to when we were talking about operating expenses continue to make sure that we stand with this I guess step function I would say that we've done in terms of when I talked about the 10% sequential decline in operating expenses in the 12% sequential increase in revenue talking about a new ratio between those two in terms of how we can sustain that going forward.
Word and continue to make sure we're doing as much as we can with every opex dollar. So I'd love to give you more clarity on what the long term margin looks like but I think as you look at Q3, that's some pretty good snapshot for what the future looks like based on the.
The removal of logistics.
Thank you for your question. Our next question comes from Keith Weiss with Morgan Stanley .
Thank you for taking the question and really nice quarter.
Maybe following on on Gabriel's question I'll be talking more about the top line.
You guys have a broad solution portfolio already but b.
B fulfillment business was a big initiative for you guys and definitely a big part I think of investors models on lighthouse take rate expands over time is that a replacement we should be thinking about is there like one initiative or new initiatives that we should think about taking the place of what we had in our model for fulfillment or is it just.
Fundamentally a new type of growth profile on a go forward basis.
Thank you for the kind words.
Good to hear from you.
Look part of the the model of Shopify is that to get as many merchants using our product as possible whether they are small merchants or their large merchants like Mattel Mars black and Decker staples glossy a some of the ones I mentioned like dollar Shave club and now met are using the product. The key though is that if we want to qualify in a re qualify to be the central.
Nervous system of their business, we have to ensure that whatever issue. They have when it comes to commerce and retail we can serve them. So for example, you know we talked a little bit about collabs, and and and and what we're doing there. This idea that we can actually match incredible audience Conte creators that are massive audiences with incredible brands, that's not going to be for every merchant or every call.
Greater but the ones that is four we'll use it with great efficacy things like audiences. For example, we talked about audiences to point out which in some cases are showing a 50% lift in ROE as again not every merchant is always going to use every single merchant solution, but as we build more and more what it means is that we can we can help them with a larger piece of their business and that is really.
We're focused on and then when you think about some of the new things in the new areas. We're going into for example, beta B, which historically, we really focus on the direct to consumer point, we know that there is pent up demand to use sharply for <unk> and so you're seeing us introduce new thing as a collective for example, there's about 45 new features that have come out around just BW by itself in the last 12 months, So again theres not going to be one particular Merck.
<unk> solution that you know that every merchant is going to use I mean, obviously shopify payments is one of those because everyone needs to accept payments, but the idea really is to ensure that we fixed merchant pain and give them. This incredibly scalable product no matter, what they want to achieve on the platform.
Thanks Keith.
Our next question comes from Mark as you go to with the benchmark company.
Thank you Gary.
Follow up on the Flex board.
I know you had said you haven't yet signed a commercial agreement but.
Maybe just two related questions one.
You talk about the integration of deliver with flexible right now and how much of your holiday G. M B E.
<unk> will be supported by export.
Export capacity.
And then at a very high level, what is it safe to say the considerations in terms of flex.
Export economics are predominantly profit versus any type of revenue.
Sure. Thanks.
Yeah. Thanks for your question I think firstly as it relates to just the timing of the commercial agreement to your point. These are obviously agreements, which involve a lot of data flows co marketing a bunch of other thing just in terms of integration of the products. We want to make sure that we of course get that right and get our merchants up and running I don't have guidance for you in terms of what <unk>.
<unk> of our holiday traffic will be going through deliver so I wish I could give you that perspective, we obviously just don't have that yet at this point.
But we're still very excited about the partnership we think the world of that team over there we've known Ryan the founder for a long long time day was a great addition that management team is really strong. So we think that's going to really assist our merchants and accelerating what they're trying to do so we're excited about it I just don't have a snapshot for you in terms of holiday traffic and how much.
We'll be going through them.
Thank you for your question. Our next question comes from Andrew Boone at JMP Securities.
Alright, Thanks for taking my questions I wanted to go back to Shopify Magic insight check just ask about the near term vision products. What do you think is the easiest thing that gets solved and then what do you guys see as your guys' involve your own data as well as relationships and knowledge.
Where does this go over time, thanks, so much.
Good question look we're taking a very very practical approach or when it comes to AI and we think that shopify is uniquely positioned to harness the power of AI.
In order to unlock incredible capabilities that we think will help our merchants grow their business.
Starting with Shopify Magic I mean, unlike other generative AI products Charley Magic is specifically designed for commerce and it's not just embedded in one place it's embedded throughout the entire product. So for example, the ability to generate blog posts instantaneously or write incredibly well you know high converting product descriptions or create highly contextualized content for your business.
That is where we feel like AI really can play a big role here and making merchants lives better built on top of that of course is psychic, which Toby announced over video, but two weeks ago right before editions and that really is the first of its kind AI enabled assistant again built for commerce and with sidekick you can do this incredible things that you can analyze sales and you can ideate.
On store design or you can even give instructions on how to run promotions, but when you think about these things altogether ultimately what youre, giving merchants is a better faster more creative way to build businesses and I think that it's something that only shopify can offer and by embedding it across the entire product rather than simply one area of the product merchants are going to see is this.
This efficacy in a speed of of building and scaling.
Only on Shopify, and again back to that business model comment.
Comment I made a couple of minutes ago, when our merchants succeed we succeed and so we think that leveraging the power of AI to give every entrepreneur incredible superpowers is going to be really incredible and it's something we're very exciting about excited by enzyme.
And you'll see more of that rollout in the next couple of weeks.
Thank you Andrew our next question comes from Kevin Kisner at Nee at Scotiabank.
Good evening, just a sharp ramp.
$11 billion 5 billion in <unk>. It just keeps tracking higher how do we think about the opportunity there and maybe thoughts on penetration of class versus SMB and how much of the <unk> right now and also just seems like pay is helping to stimulate DNV. So also wondering how it's helping to influence I'm looking at same store sales growth.
Thanks for the question Andrew Yeah for the quarter, even shop, a facilitator about $11 billion of Jimmy that's up 37% year on year.
And now as of today, we've now surpassed $100 billion and $200, which is an incredible milestone for the company, but the most important part of it is that it has the highest converting accelerated check it on the Internet. It's also the most popular accelerated checkup on shopify and and so actually.
Study that we recently did with our big three consulting firm shows that the mere presence of showing shop pay as a 5% boost in terms of funnel conversion and when it is used for conversion can be as much as 50% versus guest checkout. So it is it is something that a lot of merchants want and that is not necessarily just small merchants. It was also a very large merchants large brands want that one of the reasons.
That's our we think Shopify E. Commerce components are so important is because it allows us if a large brand that's not that's not ready to migrate entirely over to shopify, but wants to begin a business relationship with us things like checkout as a commerce component is a great way for us to do so but again, it's incredible this incredible way to checkout for consumers are.
Around the world is only available on shopify, which means that if you want to be able to offer that to your consumer you have to view on our platform.
Thank you for your question.
Our next question will come from Michael Martin at Moffett Nathanson.
Hi, Thank you for the question.
Shopify is starting to approach the one year point from when you began entering the partnerships with the large system integrators. We were wondering if you could provide an update on how these relationships are materializing and if they're contributing to the final for enterprise commerce players and following through with that like you've discussed 20.
23, being an investment year for the enterprise.
It would be great to hear how you view the enterprise sales team and if theres an opportunity for additional investment.
Around that channel. Thank you so much.
Yeah. Thanks for the question on that.
Unequivocally more large retailers are coming to Shopify I mentioned, some household names like dollar shave club and reaching Anastasia Beverly Hills, but also hunter boots in metastatic for the quarter.
So in that way, we are certainly seeing more more large brands more large merchants come to the platform that obviously helps us signed even further.
As of now we have signed partnership agreements with Deloitte E Y KPMG Accenture.
Last earnings call, we mentioned IBM consulting cognizant. So they continue to build practices around shopify Shopify plus in Congress component inside of there inside of their own sales teams and what we've been spending time on is training them up to how to best sell Shopify most effectively.
In some cases, it's actually leading to a really wonderful new brands.
On the international side, Unlike new era for example, our purina in Israel from Nestle. So we are working hand in hand with a lot of these systems integrators are a lot of these sales cycles are a little bit longer than traditionally we are used to but they do bring on very very large brands and merchants to shopify. So we're really excited about that in terms of the go to market I think it's really important we have been transforming this go.
Market engine at Shopify for.
For for a number of years, but this is really led by Bobby our chief revenue officer and over the past year or so that team has been working to implement new tactics kpis, but really focusing on not just bringing on large merchants to shopify, but also ensuring that we also cross sell and this end to end sales process and methodology.
It's really designed for us to increase the the.
Pes and frankly the.
The velocity of bringing on these larger merchants, but the end result is in the last two quarters alone. We've seen sales volumes across key products like capital retail and payments gain momentum, which has actually led to some of the highest cross sell volumes. We have ever achieved so the team is working tirelessly, they're executing really effectively but this go to market engine.
It is now starting to crank and the results are there. The results are as we mentioned today are more merchants coming to shopify much more larger merchant coming to shopify.
Thank you for your question.
Next question will come from Mark Mahaney at Evercore ISI.
Hi, This is jocelyn asking a question for Mark could you hear me.
Yes, Okay can I ask a quick question, maybe on Amazon I'm, just I know like before this general flex for Amazon partnership looks like on the tables I wonder like.
Is that still possible not maybe not just in terms of I always plan that also payments just kind of how I think about what are some considerations you have there.
Yeah, I mean, our conversations with Amazon remain productive, but no news to share right now.
Oh, Okay got it thank you and then maybe.
Thank you for your question. Our next question will come from Samad Samana Jefferies.
Oh, it looks like he dropped out of the queue.
Our next question will come from Paul Treiber at RBC capital.
Are you there, yes, sorry, I was muted.
Thanks, very much yeah, just on large enterprise you called out a number of wins.
Should we assume that most of the growth that youre seeing in large enterprise as shopify plus or are you seeing a lot of the growth and momentum pick up in commerce components and is there any metrics you can share just on.
The growth in e-commerce components in general yes.
I mean look in in terms of Shopify, plus very strong year on year plus growth in Q2, we actually outpaced <unk> growth from standard merchants.
And we'll continue to see that that plus business grow.
The plus merchant base straw really strong year on year growth as a result of both upgrades and also new brands joining that that's important to us because we want to make sure that the most successful brands that you know the homegrown success stories graduates on shop, I never leave us and we're seeing that but we're also seeing a lot of new brands joined the platform as well the reason that that Ccs or commerce component is important to us.
Is again it starts the business relationship that with businesses that aren't necessarily ready to fully migrate over so by giving them a really.
Selection of 30 modular components from storefront to checkout to Omnichannel capabilities. It means that we're able to begin that relationship and over time get more and more of their business a lot of the names that you're hearing about today, obviously, there's a little bit of a longer sales cycle with some of the large enterprise brands a lot of them those conversations started before we announced.
Commerce components, but the fact that we have this incredible.
Enterprise solution in a box with plus and we also have this alternative which is this modern composers commerce stack for enterprise retailers means that we can have conversations with with frankly pretty much every major brand pretty much every retailer on the planet and that wasn't possible years before.
Thank you for your question. Our next question will come from Todd Coupland CIBC.
Good evening everyone.
I wanted to ask about your <unk> strength and what you think it says about the possibility of a recession. Thanks a lot.
Yes.
Alright, Jeff that Harley.
I'll, just kick off and I'll hand, it over to Jeff I mean, obviously <unk> being up 70% year on year and Q2, we it out we outpaced the broader U S retail market in terms of trends I mean, shopify has so many millions of merchants and stuff and so the one thing that connects most of the merchants and on all the merchants on the platform is it fundamentally the merchants on Shopify, Arkansas.
<unk> favorite brands and so we continuously see and we've seen this for a long time know that merchants that consumers are voting with their wallets to buy from their favorite brands and we are fortunate and we work hard at this but those favorite brands are on on Shopify, So whether it's something like the the Barbie effect that is happening right now, obviously, where the commerce partner for Mattel.
Cross the board, we're seeing dot dull sales up 56% and play vehicles up 70%. So ultimately I think it's important this direct to consumer trend as it is is it happening it continues to grow but the key for US is to make sure that the best most important and the brands that consumers love her on Shopify.
Jeff do you want to yeah.
The only point I think we all see the same economic data that youre watching and we talked before both Harley and I did talked about the strength, we're seeing in Europe , I think we're doing better in Europe than others are so I think that is one spot of particular strength for us and what we're seeing in North America continues as it was last quarter to be a good mix in terms of same store sales growth for our existing merchants.
As well as a strong merchant acquisition models. So I don't I don't think I have anything that I can extrapolate into broader comments around the probability of recession I can just speak to the strength of our business and we're really firing on all cylinders.
And our final question will come from Trevor Young at Barclays.
Great. Thanks, just on audiences any update on whether monetization of that has moved up in terms of priority and then the possible mechanisms for monetizing that whether it'll be like a per user subscription type fee. So just timing and method for monetizing audiences.
Audiences, we had a we talked a bit about this at.
At additions, which happened last week, where we rolled it out to the algorithm keeps getting better we keep seeing increased adoption right now the monetization is happening indirectly obviously through G. M V. No no necessarily a news on that but we feel like the better audience has become the more it becomes something that that every merchant wants to use an effect.
It becomes there must have when they're running ads across the major ad platforms.
That that provides us incredible leverage and again, that's something that's only available for on Shopify. So right now we're focused on indirectly monetization for audiences, but that obviously that leavers available to us in the future.
This concludes our second quarter of 2023 conference call. Thank you for joining us.