Q2 2024 Shopify Inc Earnings Call

Good morning and thank you for joining Shopify's second quarter 2024 conference call. I am Carrie Gillard, Director of Investor Relations, and joining us today are Harley Finkelstein, Shopify's President, and Jeff Hoffmeister, our CFO . After their prepared remarks, we will open it up for your questions.

Carrie Gillard: Carrie Gillard, Director of Investor Relations, and joining us today are Harley Finkelstein, Shopify's President, and Jeff Hoffmeister, our CFO. After their prepared remarks, we will open it up for your questions.

Harley Finkelstein: Good morning everyone, and thank you for joining us. We cannot wait to walk you through all the outstanding results from the last quarter. Our relentless focus on our mission has not only empowered our merchants but has also strengthened Shopify significantly. We are at our strongest yet, and we could not be more excited about the future of commerce and the future of Shopify. So first, let's break it down at a high level.

Harley Finkelstein: We are at our strongest yet, and we could not be more excited about the future of commerce and the future of Shopify.

Harley Finkelstein: In Q2, we saw 25% revenue growth when excluding logistics, with gross profit growing faster than revenue. Operating expenses decreased quarter over quarter, and our free cash flow margin more than doubled to 16% from last year. A couple of other highlights from Q2 were the release of our latest editions at the end of June, with over 150 new product updates and features. We also passed a massive milestone as we crossed the $1 trillion mark for cumulative GMV that has been processed through Shopify, and our offline business surpassed $100 billion in cumulative GMV.

Jeff Hoffmeister: So first let's break it down at a high level. In Q2 we saw 25% revenue growth when excluding logistics with gross profit growing faster than revenue. Operating expenses decreased quarter over quarter and our free cash flow margin more than doubled to 16% from last year.

Harley Finkelstein: These results reiterate what we've been saying all along; we are building for the long term, and our business model is working. As you may have seen in our recent edition, unification was a central theme. But what do we mean by that?

Harley Finkelstein: Well, we believe that the mark of great software is that as it scales and grows, each new feature is built as if it were there from the very beginning. Everything works together harmoniously, crafted in consistent style and quality. This is a key value proposition for Shopify and something that, as we have evolved from an online store to a comprehensive unified operating system for commerce anywhere, anytime, is becoming increasingly important. Whether online or offline, direct-to-consumer or B2B, domestic or global, Shopify captures it all.

Jeff Hoffmeister: This is a key value proposition for Shopify and something that as we have evolved from an online store to a Comprehensive unified operating system for commerce anywhere anytime is becoming increasingly more important

Jeff Hoffmeister: Whether online or offline, direct-to-consumer or B2B, domestic or global, Shopify captures it all. What makes Shopify so powerful is how seamlessly all parts of the product work together, reducing complexity at every stage of a merchant's journey.

Harley Finkelstein: What makes Shopify so powerful is how seamlessly all parts of the product work together, reducing complexity at every stage of a merchant's journey. We understand that starting a business is hard, and expanding into new markets adds even more complexity. As our merchants grow, Shopify tackles these challenges so they don't have to. So one of the coolest things that we rolled out at this edition was Markets.

Harley Finkelstein: What used to be called markets and markets pro are now streamlined into cross-border products, international selling, and managed markets, respectively. This means our merchants no longer have to worry about juggling multiple stores or wrestling with new workflows. Whether you're aiming to sell in a new country, break into a B2B market, or launch a physical retail store, the process is straightforward. You set up a new market, you tweak it to your liking, and boom, you are good to go.

Speaker Change: So one of the coolest things that we rolled out at this edition was markets. What used to be Markets and Markets Pro are now streamlined into cross-border products, international selling, and managed markets, respectively.

Speaker Change: You set up a new market, you tweak it to your liking, and boom, you are good to go.

Harley Finkelstein: I remember sitting down with one of our merchants in the UK about 18 months ago and discussing this exact challenge with them, and to see how quickly we moved to address it is really huge. I can't understate how big of a game changer this will be for so many merchants globally. No other platform on the planet offers merchants the opportunity to expand their reach at this scale, this speed, this efficiency, with this level of seamless integration and control, all out of the box.

Speaker Change: I remember sitting down with one of our merchants in the UK about 18 months ago and discussing this exact challenge with them. And to see how quickly we moved to address it is really huge. I can't understate how big of a game changer this will be for so many merchants globally.

Speaker Change: No other platform on the planet offers merchants the opportunity to expand their reach at this scale, this speed, this efficiently, with this level of seamless integration and control. All out of the box.

Harley Finkelstein: Okay, now let's dive into how we're fueling merchant growth across offline, B2B, international, and the Shop app. Let's start with our offline business. Our point-of-sale solution continues to rapidly gain traction, unifying online and offline commerce in ways that no one else can match. In Q2, offline GMV was up 27% year-over-year as we continue to attract larger global merchants with multiple store locations. Two of our most recent examples of this are multinational brands EverEve and Majuri, both of whom are launching online and offline with Shopify, which combined includes over 130 locations across four regions. Offline commerce is still a huge deal for us. It is still happening in physical stores.

Speaker Change: Okay, now let's dive into how we're fueling merchant growth across offline, B2B, international, and the shop app. Let's start with our offline business.

Speaker Change: Offline commerce is still a huge deal for us.

Harley Finkelstein: So we are taking advantage of this by continuing to roll out targeted marketing initiatives that target our point of sale. We're introducing the features they care about most, like improving operating efficiency, such as the new remote smart grid layout editor, omni-channel return rules, and the ability to stack multiple discounts at checkout, which makes it easier for merchants to customize their promotional strategies. And with point of sale and seamless integration with markets, multinational retailers can now manage their entire omnichannel business from a single Shopify admin.

Speaker Change: Still happening in physical stores.

Harley Finkelstein: Just as we've streamlined operations for SMB retailers, we are now removing barriers for global omnichannel businesses on Shopify. Another long-term and largely untapped channel we're unlocking is B2B commerce, and we're making great progress. In Q2, we recorded our highest ever B2B GMV month with a 140% year-over-year increase fueled by the growth of our Plus Merchants.

Speaker Change: And, with point of sales seamless integration with markets, multinational retailers can now manage their entire omni-channel business from a single Shopify admin.

Speaker Change: Just as we've streamlined operations for S&B retailers, we are now removing barriers for global, omni-channel businesses on Shopify.

Speaker Change: Another long-term and largely untapped channel we're unlocking is B2B commerce, and we're making great progress. In Q2, we recorded our highest ever B2B GMV month with a 140% year-over-year increase, fueled by the growth of our Plus merchants.

Harley Finkelstein: Our B2B offering also saw a 6x increase in online orders compared to last year, underscoring the value of self-serve B2B purchases. We're making our B2B offering even more competitive with features like Deposit Set Checkout and Manual Payment Method. This functionality, combined with our modern approach and unified back-end, makes it easier for merchants to manage and track their business seamlessly across channels. Plus, we've seen a 34% increase in the number of merchants getting B2B orders on Shopify compared to last year.

Harley Finkelstein: This is something that many large brands have been searching for and is yet another example of the work we are doing to drive our leadership position in unified commerce. But how do we know that we're hitting the mark?

Harley Finkelstein: Well, brands like home fragrance company Pura and skincare brand Dermalogica have recently adopted B2B and are attracting new brands like Progress Lighting and Therabody, who recently signed up to join Shopify because they're attracted by the ability to manage all their channels from a single admin. Ultimately, B2B is a great example of how we're expanding our total addressable market. Let's talk about cross-border. Cross-border sales made up about 14% of our GMV in Q2, and merchants are really eager to reach new regions, especially when they notice more and more international traffic on their sites.

Speaker Change: So, how do we know that we're hitting the mark?

Speaker Change: Ultimately, B2B is a great example of how we're expanding our total addressable market.

Speaker Change: Let's talk about cross-border. Cross-border sales made up about 14% of our GMB in Q2. And merchants are really eager to reach new regions, especially when they notice more and more international traffic on their sites.

Harley Finkelstein: So just like when they branch out into social channels or B2B, they have to think about everything from pricing and localization to availability and merchandising, all tailored for the end consumer. And that is why we've made it super easy to sell globally right from the start. With our new markets feature, merchants can expand wherever they want and customize what they need really effortlessly. For example, take well-known baby apparel company Caden Lane.

Speaker Change: So just like when they branch out into social channels or B2B, they have to think about everything from pricing and localization to availability and merchandising, all tailored for the end consumer.

Harley Finkelstein: After signing up for Managed Markets, Caden Lane experienced a 692% year-over-year growth in international sales, or wine glassware merchant Glassvin, which experienced 71% international sales growth and a 100% boost in conversion to sales in Canada and Australia. Both of these merchants signed up for managed markets and are very quickly reaping the benefits. And lastly, we know that one of the biggest challenges that merchants face when selling internationally is after they make the sale. Now they've got to actually get the purchase to the buyer.

Speaker Change: Take well-known baby apparel company Caden Lane. After signing up for Managed Markets, Caden Lane experienced a 692% year-over-year growth in international sales.

Speaker Change: or wine glassware merchant Glassvin, which experienced 71% international sales growth and over 100% boost in conversion to sales in Canada and Australia. Both of these merchants signed up for managed markets and are very quickly reaping the benefits.

Harley Finkelstein: So, we've added support for UPS and managed markets in Q2, which makes it even easier for merchants to get great expedited shipping rates for their international buyers. We've also made it simple to understand catalog restrictions that we automatically apply based on customs rules, which prevent packages getting stuck at customs and adds the ability to make prices inclusive of duty and tax to improve international conversion. Let's talk about Shopify payments and our accelerated checkout platform, ShopPay, which are crucial parts of our unified commerce platform, especially as a merchant scales globally.

Speaker Change: We've also made it simple to understand catalog restrictions, that we automatically apply based on customs rules, which prevent packages getting stuck at customs, and adds the ability to make prices inclusive of duty and tax to improve international conversion.

Speaker Change: Let's talk about Shopify payments and our accelerated checkout ShopPay, which are crucial parts of a unified commerce platform, especially as a merchant scale globally.

Harley Finkelstein: In Q2, Shopify's payments penetration was 61%, and Shopify facilitated $16 billion in GMV, up 45% from last year. We see significant growth potential for payments through international expansion, enterprise, and increasing activity in offline and B2B channels. All of which will drive higher GMV and GPV, boost merchant adoption, and ultimately strengthen our ecosystem. Now, whether it's merchants like Grove Collaborative or Tonal signing up, or existing brands like SodaStream and Athletic Greens adopting our payment solutions, it's all fueling our growth. Recognized as the world's best converting accelerator checkout, ShopPay is not just boosting inversion rates across our merchant stores.

Harley Finkelstein: Time and time again, it's a major draw for enterprise brands considering Shopify. I can personally attest to this as I am often on the call with the CEOs of these brands, and, without fail, they cite checkout as one of the biggest historical challenges and one of the top reasons they want to move to Shopify. Our conversion rate, enabled by these products, is absolutely a key differentiator that helps Shopify close the deal time and time again. For merchants, ShopPay is more than just a digital wallet. It offers comprehensive order tracking via the Shop app and allows buyers to earn shop cash redeemable for purchases within the app.

Speaker Change: Our conversion rate enabled by these products is absolutely a key differentiator that helps Shopify close the deal time and time again.

Harley Finkelstein: This builds greater customer engagement and unlocks additional opportunities to reach customers. During shop week in early June, we teamed up with brands like Stanley and Glossier to widen their audience. Thousands of top consumer brands joined in, leveraging shop cash and shop campaigns to draw in new buyers.

Speaker Change: Thousands of top consumer brands joined in, leveraging ShopCash and shop campaigns to draw in new buyers. This led to over 10,000 merchants posting their best GMV week ever on the Shop app, showcasing the solid progress we're making in helping merchants strengthen and expand their customer relationships.

Harley Finkelstein: This led to over 10,000 merchants posting their best GMV week ever on the Shopify app, showcasing the solid progress we're making in helping merchants strengthen and expand their customer relationships. Now, beyond the ways we're helping our merchants grow, which in turn fuels our own growth, let me quickly touch on the great progress we're making across two other growth strategies for Shopify, international and enterprise. Our international GMV growth continues to outpace North America, up 27% from last year, driven by two main goals: expanding our presence and introducing more products in more markets. And in Q2, our marketing and go-to-market efforts led to a 30% increase in international merchant growth year-over-year.

Speaker Change: Now beyond the ways we are helping our merchants grow which in turn fuels our own growth, let me quickly touch on the great progress we are making across two other growth strategies for Shopify, International and Enterprise.

Harley Finkelstein: Notably, in Europe, where GMV grew by 32%, we welcomed major brands like UK football club Newcastle United and French luxury apparel company Amie Paris to shop with us. We also signed a global agreement with Luxottica, the Italian eyewear conglomerate, to launch the first of what we hope will be many brands coming to Shopify in the future. And with their recent announcement of acquiring Supreme, who is already on Shopify, we know that the best brands come and stay on Shopify.

Speaker Change: Every market-specific product feature we launch enhances our competitiveness and helps merchants succeed locally.

Harley Finkelstein: This relentless commitment to helping merchants start and grow in all facets of their business ultimately brings more merchants into Shopify, fueling our flywheel and extending our ability to make commerce better for everyone. Now, within the enterprise opportunity, our flexibility, our speed, and our value are strongly resonating with larger, high-volume brands, and they continue to flock to Shopify. We sign new deals across a diverse set of verticals, industries, and geographies. Additionally, the well-known toy retailer Toys R Us launched on Shopify, along with some incredible celebrity brands like Moss Plus by Lionel Messi and Dios Mio Coffee by Sofia Vergara, which all launched on our platform during the quarter and are now powered by Shopify.

Speaker Change: Combined with our growing partner ecosystem, including a new partnership that we announced with Oracle in the quarter, these wins not only validate our strategy, but also convey our ability to cater to the unique needs of the biggest brands on the planet.

Speaker Change: Now, looking at our marketing strategy for this year, you can see that we are all in. It's about leading confidently, leveraging our strength, and continually adapting to stay ahead of the game.

Harley Finkelstein: This strategy is not new, but how we implement it is continually evolving, thanks in large part to the truly sophisticated marketing platform that we've built. Our aim remains clear: push the envelope, maximize returns, and stay ahead of the curve. This is Shopify doing what Shopify does best, leading from the front, data-informed, and backed by strategies designed to maximize returns and create value. But here's where we truly excel, data-driven decision-making. We relentlessly test and optimize every single channel, keeping well within our average 18-month guardrail.

Speaker Change: This strategy is not new, but how we implement it is continually evolving, thanks in large part to the truly sophisticated marketing platform that we've built.

Speaker Change: Our aim remains clear. Push the envelope, maximize returns, and stay ahead of the curve. This is Shopify doing what Shopify does best. Leading from the front, data informed, and backed by strategies designed to maximize returns and create value.

Speaker Change: But here's where we truly excel, data-driven decision-making.

Speaker Change: We relentlessly test and optimize every single channel, keeping well within our average 18-month guardrail. Our tools and our AI models are crafted not just to operate, but to excel, leveraging emerging technologies to enhance our feedback loops.

Harley Finkelstein: Our tools and our AI models are crafted not just to function, but to excel, leveraging emerging technologies to enhance our feedback loops. These tools provide sharper, more iterative feedback, enable more precise analysis, and deliver quicker signals, letting us identify patterns faster than ever, so we can swiftly adapt and respond. The energy, optimism, and enthusiasm coming out of the event were incredible, which reconfirmed that this is truly the best team and the best version of Shopify yet. We are investing in sustainable growth and driving profitability for the long term.

Speaker Change: This led to a 51% increase in merchant acquisition quarter over quarter on that platform.

Speaker Change: All while staying within our financial guardrails. We also saw a boost in our growth internationally with over 50% of the merchants that join our platform in Q2 coming from outside the core English-speaking markets of the US, Canada, UK, Ireland, Australia, and New Zealand.

Speaker Change: At the same time, we scaled back in other channels, focusing on further testing and experimentation to uncover new high-return opportunities.

Speaker Change: Now, for the back half of 2024, we will continue with this playbook, testing, exploring, and optimizing our core performance marketing within our guardrails.

Speaker Change: By remaining flexible in our approach across our portfolio of investments, we can better target and support our growth efforts, especially in areas such as enterprise, point-of-sale, and international markets.

Speaker Change: By dynamically allocating resources across all of these channels and growth areas, we believe we can continue to drive our performance from the front and redefine industry standards.

Speaker Change: Now before I turn it over to Jeff, I want to briefly share my thoughts on the incredible success of our recent Shopify Summit in Toronto. This annual event brought our entire company together to discuss Shopify's future, to align as a team in our priorities, and to host our Hack Days, which have produced some of our best products over the years.

Speaker Change: The energy, optimism, and enthusiasm coming out of the event were incredible, which reconfirmed that this is truly the best team and the best version of Shopify yet.

Speaker Change: Shopify is rapidly strengthening its position as a leading enabler of global commerce and entrepreneurship.

Speaker Change: We are investing in sustainable growth and driving profitability for the long term.

Speaker Change: This very unique ability that we have to serve the largest brands while also inspiring new entrepreneurs to launch and scale businesses makes Shopify an incredibly durable company. We are so well positioned to power more commerce globally for the years to come.

Speaker Change: And with that, let me turn the call over to Jeff.

Jeff Hoffmeister: Thank you, Harley. Our second quarter was incredibly strong, demonstrating the power of our business model and our ability to execute.

Jeff Hoffmeister: Across every metric we delivered. Let's discuss our Q2 results.

Jeff Hoffmeister: The strong Q2 GMB was driven by same-store sales growth of our existing merchants, led by our plus merchants, continued growth in the number of merchants on our platform globally,

Jeff Hoffmeister: And the last key driver was Point of Sale, which grew 27% year-over-year.

Jeff Hoffmeister: We saw salad growth across verticals with robust performance in health and beauty and food and beverages.

Jeff Hoffmeister: We also saw solid growth in our largest category, apparel and accessories.

Jeff Hoffmeister: This marks the fifth straight quarter where our revenue growth, excluding logistics, has grown 25% or greater. Our consistency and stability of performance reflect the quality and breadth of our software solutions, the success of our merchant acquisition engine, the breadth of the industries, geographies, and merchant sizes that we serve, and, quite simply, our ability to export.

Jeff Hoffmeister: This marks the fifth straight quarter where our revenue growth, excluding logistics, has grown 25% or greater. Our consistency and stability of performance reflect the quality and breadth of our software solutions.

Jeff Hoffmeister: The success of our merchant acquisition engine, the breadth of the industries, geographies, and merchant sizes that we serve, and quite simply, our ability to execute.

Jeff Hoffmeister: Growth in Subscription Solutions revenue stemming from the growth in the number of merchants on our platform, the pricing changes that have been implemented in the past year, both standard and, to a lesser degree, plus, and the impact of the shortened paid trial. As a reminder, this is the final quarter where the year-over-year revenue growth rate is impacted by the sale of our logistics business. $41 billion of GMV was processed on Shopify payments in Q2, 30% higher than last year. More merchants across the globe are adopting payments.

Jeff Hoffmeister: Growth in subscription solutions revenue, stemming from the growth in the number of merchants on our platform, the pricing changes that have been implemented in the past year, both standard and to a lesser degree plus, and the impact of the shortened paid trials.

Jeff Hoffmeister: And as a third key driver, increased payments penetration, which hit 61% for Q2.

Jeff Hoffmeister: Q2 merchant solutions were $1.5 billion, increasing 19% year-over-year, driven by the continued growth in GMV and the penetration of Shopify payments.

Jeff Hoffmeister: Those primary contributors were partially offset by the absence of the logistics business and lower non-cash revenue from strategic partnerships.

Jeff Hoffmeister: And as noted above, the absence of logistics had an approximate 400 basis point headwind of total revenue, and all of the logistics revenue sat within Merchant Solutions.

Jeff Hoffmeister: The penetration rate of Shopify payments as a percentage of GMV was 61% compared to 58% in Q2 of 2023.

Jeff Hoffmeister: Subscription Solutions revenue was $563 million, up 27% over Q2 of last year. Our standard pricing changes went into effect at the end of April of last year, so for purposes of the year-over-year comparison, Q2 of this year had a full quarter of the standard pricing change, whereas Q2 of last year had only two-thirds of a quarter, with a change in plus pricing providing some benefit as, On a sequential quarter basis, our attach rate was down slightly as the gains in GPV penetration were offset by lower non-cash revenues from strategic partnerships and lower shipping.

Jeff Hoffmeister: Subscription Solutions revenue was $563 million, up 27% over Q2 of last year.

Jeff Hoffmeister: driven by three items.

Jeff Hoffmeister: shortening the paid trial offering on our standard plans from three months to one month, strong growth internationally, and the work of our marketing initiatives. This growth in the number of merchants was complemented by the change to our pricing plans for Standard and Plus.

Jeff Hoffmeister: The impact of these two pricing changes, though, was a smaller contributor to this quarter's subscription revenue growth versus overall growth in the number of merchants.

Jeff Hoffmeister: The largest driver for all three segments was the growth in the number of merchants on our platform, with growth internationally being a key component contributing to our growth in our standard plans.

Jeff Hoffmeister: Our Q2 attach rate was up year over year when excluding the logistics business.

Jeff Hoffmeister: The key drivers of this increase were the continued gains in GPV penetration and higher subscription revenue, offset by lower non-cash revenues from strategic partnerships.

Jeff Hoffmeister: Moving to gross profit. Gross profit was $1 billion for the quarter, up 25% year-over-year, growing faster than our revenue growth rate.

Jeff Hoffmeister: Our Q2 gross margin was 51.1% compared to 49.3% in the prior year.

Jeff Hoffmeister: Gross margin for merchant solutions was 39.1% compared to 38.1% in Q2 of 2023. Operating expenses were $804 million for the quarter, which included a benefit of a reversal of a $55 million litigation accrual that we established in Q3 of 2022. Compared to the prior year, and excluding one-time items in both periods, Q2 operating expenses were up $41 million, or 5% year-over-year, driven primarily by four items. Secondly, our summit event, which, as a reminder, was our first in-person summit event since 2018.

Jeff Hoffmeister: Gross margin for merchant solutions was 39.1% compared to 38.1% in Q2 of 2023.

Jeff Hoffmeister: When including the impact of logistics, our merchant solutions gross margin was down year over year, primarily from lower non-cash revenues from certain partnerships and growth in our lower margin payments business.

Jeff Hoffmeister: Without this reversal, operating expenses would have been $859 million or 42% of revenues.

Jeff Hoffmeister: Compared to the prior year and excluding one-time items in both periods, Q2 operating expenses were up $41 million, or 5% year-over-year, driven primarily by four items.

Jeff Hoffmeister: Increases in marketing. We had a year-over-year increase in our affiliate partner payouts, and since these payouts happen only upon a new merchant joining, it is a clear sign of adding more merchants to the platform and incremental marketing to support our growing enterprise and point-of-sale businesses.

Jeff Hoffmeister: Our Q2 operating expenses came in better than expectations driven primarily by three items.

Jeff Hoffmeister: Some marketing related to Enterprise was shifted out of Q2 into the second half of the year, stemming largely from one campaign that we decided to launch towards the end of Q3. We consistently run tests to assess where we can further enhance the returns of our marketing spend, and implementing the learnings from these tests meant scaling back spending in some areas.

Jeff Hoffmeister: First, lower marketing expenses.

Jeff Hoffmeister: We consistently run tests to assess where we can further enhance the returns of our marketing spend. Implementing the learnings from these tests meant scaling back spending in some areas. We recognize that a returns-based approach to marketing can cause fluctuations in spending in any given quarter. However, it prioritizes the quality and efficacy of our spend.

Jeff Hoffmeister: We recognize that a returns-based approach to marketing can cause fluctuations in spending in any given quarter; however, it prioritizes the quality and efficacy of our spend. The second component of the better-than-expected OPEX was lower compensation expense. And thirdly, we executed our extremely successful summit event under budget. Stock base compensation for Q2 was $109 million, and capital expenditures were $7 million for the quarter.

Jeff Hoffmeister: The second component of better-than-expected OPEX was lower compensation expense.

Jeff Hoffmeister: And thirdly, we executed our extremely successful summit event under budget.

Jeff Hoffmeister: Worth noting that this 5% year-over-year growth in OPEX stands in contrast to the impressive revenue growth over that same period.

Jeff Hoffmeister: Stock base compensation for Q2 was $109 million and capital expenditures were $7 million for the quarter.

Jeff Hoffmeister: This came in better than our expectations largely as a result of stronger GMV and the resulting flow-through revenues and lower operating expenses.

Jeff Hoffmeister: Q2 free cash flow was $333 million or 16% of revenue, more than doubling as a percentage of revenue versus our Q2 2023 free cash flow margin of 6%. We believe that we can continue to drive operating leverage through four key things. Strategic Returns-Based Marketing to Support and Sustain our Long-Term Revenue Growth Internal Use of AI and Automation to Drive Productivity and Leveraging and Continuing to Enhance our Internally Built GSD and Shopify OS Systems, All three of these acquisitions were small in terms of dollar amount and immaterial to our financials, but are important additions to enhancing our merchant Moreover, these acquisitions bring us some great founders who were specifically drawn here by the quality of our existing, Let's now turn to our Q3 outlook, which as a reminder is the first quarter where we will no longer have the impact of the sale logistics on our, First on revenue, we expect Q3 year-over-year revenue growth to grow at a low to mid-twenties percentage rate, driven by the same factors that have contributed to our growth throughout the first half of the year.

Jeff Hoffmeister: Discipline growth and headcount which we have kept essentially flat for five quarters and where we expect we can keep headcount growth well below revenue growth.

Jeff Hoffmeister: Strategic returns-based marketing to support and sustain our long-term revenue growth.

Jeff Hoffmeister: Internal use of AI and automation to drive productivity and leveraging and continuing to enhance our internally built GSD and Shopify OS systems which allow us to smartly aim the product development work and size the team for maximum impact and efficiency.

Jeff Hoffmeister: One other item to cover before we move to Outlook. Since our last earnings call, we made three small acquisitions.

Jeff Hoffmeister: The third brings a team that will enhance our abilities to get early stage merchants on platform and ramp the success of their businesses.

Jeff Hoffmeister: Moreover, these acquisitions bring us some great founders who were specifically drawn here by the quality of our existing team.

Jeff Hoffmeister: Let's now turn to our Q3 outlook which as a reminder is the first quarter where we will no longer have the impact of the sale logistics on our business.

Jeff Hoffmeister: First on revenue, we expect Q3 year-over-year revenue growth to grow at a low to mid-twenties percentage rate, driven by the same factors that have contributed to our growth throughout the first half of the year.

Jeff Hoffmeister: Q3 gross margin is expected to be up approximately 50 basis points from Q2 of 2024, stemming from a higher mix of subscription solutions, representing a 300 to 400 basis point improvement over Q3 of last year at 45%. Unfortunately, I can't be here. Thank you for your time. Thanks very much, take care.

Jeff Hoffmeister: Q3 gross margin is expected to be up approximately 50 basis points from Q2 of 2024, stemming from a higher mix of subscription solutions.

Jeff Hoffmeister: Turning to operating expenses, we expect our gap Q3 operating expenses to be 41 to 42% of revenues, representing a 300 to 400 basis point improvement over Q3 of last year at 45%.

Jeff Hoffmeister: As we stated last quarter, we believe considering operating expenses as a percentage of our revenue, especially as we lap the sale of our logistics businesses, better aligns with our goal of striking an optimal balance between growth and operational leverage to deliver improving profitability over time.

Jeff Hoffmeister: The largest drivers of our Q3 operating expense growth compared to the prior year are marketing and compensation expenses.

Jeff Hoffmeister: On marketing, we plan to continue spending on opportunities that fall within an average 18-month payback period and opportunities to support our key growth initiatives, including international markets, enterprise, and point of sale.

Jeff Hoffmeister: This includes the increased marketing spend to support our enterprise efforts that I mentioned earlier.

Jeff Hoffmeister: Higher year-over-year compensation expense is expected to be driven primarily by two items.

Jeff Hoffmeister: First, we implemented pay increases on July 1st as part of our biannual review cycle, similar to what we discussed in Q1. This resulted in a low, single-digit percentage increase across our overall employee base.

Jeff Hoffmeister: Additionally, while our headcount has remained essentially flat for the past five quarters, in Q3, we do plan to hire some key roles within sales and R&D. However, even with these additions, we still expect to end the year with minimal headcount growth compared to the 8,300 employees that we had at the end of 2020. Finally, on free cash flow for Q3, we expect our free cash flow margin to be similar to Q2 of 2024.

Jeff Hoffmeister: Additionally, while our headcount has remained essentially flat for the past five quarters, in Q3, we do plan to hire some key roles within sales and R&D. Even with these additions, we still expect to end the year with minimal headcount growth compared to the 8,300 employees that we had at the end of 2023.

Jeff Hoffmeister: Moving to stock-based compensation, Q3 SBC is expected to be $120 million. On CapEx, note that we will no longer guide to CapEx separately, given that following the sale of logistics, CapEx has averaged, over the past four quarters, only $4 million, and we do not expect that to change materially.

Jeff Hoffmeister: Finally, on free cash flow. For Q3, we expect our free cash flow margin to be similar to Q2 of 2024. We continue to expect to deliver double-digit free cash flow margin for the rest of the year.

Jeff Hoffmeister: We continue to expect to deliver double-digit free cash flow margins for the rest of the year. We have accomplished this growth while keeping our team size steady and have accomplished these margins even as we ramped up investment. This business can deliver growth and margins all while concurrently creating and leading into opportunities that enhance our future. The strength of this business allows us to accomplish all three, growth, margins, and investment. In closing, we are showing quarter after quarter that we are executing against the plans that we have laid out and that our business model is incredibly compelling with plenty of runway ahead. With that, I'll now turn the call back over to Carrie for your...

Jeff Hoffmeister: Over each of the past five quarters we have delivered top-line growth excluding logistics of 25% or more and positive free cash flow, with our free cash flow margins consistently improving over that time and reaching double digits over the past four quarters.

Jeff Hoffmeister: We have accomplished this growth while keeping our team size steady and have accomplished these margins even as we ramped up investments.

Jeff Hoffmeister: This business can deliver growth and margins, all while concurrently creating and leading into opportunities that enhance our future growth.

Speaker Change: We will now open the call for your questions. Please use the raise hand feature in Zoom to ask your question. If you are dialing in by phone, you will need to press star 9 to join the queue and star 6 to unmute yourself.

Speaker Change: We 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 Bhavin Shah at Deutsche Bank.

Bhavin Shah: Great, thanks for taking my question. Jeff, just on the MRR growth, it was really impressive in the quarter and it looks like a lot of the strength came from merchant ads. Can you just maybe elaborate on where you're seeing a lot of that success? What type of merchants are you now bringing to the platform? And how much of it is a function of the marketing spend that you've...

Speaker Change: in kind of barefoot.

Jeff Hoffmeister: Yeah, we're seeing a lot of strength in terms of the types of merchants that we're bringing on board and it's really the full spectrum. And so it's been

Speaker Change: very strong, has been very impressive in terms of what we're seeing. It is a combination, as you point out, some of it it's the marketing and some of it too is also the paid trials.

Carrie Gillard: Thanks, Bhavin. Our next question will come from Ken Wong at Oppenheimer.

Speaker Change: Are you there, Ken? Yep, sorry, Azamay. Can you hear me?

Speaker Change: Yes.

Ken: Okay, great. My question was just on take rate. Jeff, you mentioned some of the moving pieces that might have pressured it this quarter. Just wanted to get a sense for how you're thinking about take rate, attach rate going forward. Is it going to move up from kind of the current levels now that we've accounted for the partner deferred?

Speaker Change: In general, our headwinds attach rate, we do feel strongly that this will continue to move in the right direction, given all the things we're seeing in terms of increased payments penetration, in terms of adoption of new products, in terms of pricing, all those things are helping drive attach rates.

Speaker Change: But while there may be some very variability quarter to quarter.

Speaker Change: This still is a metric for us which continues to go in the right direction.

Speaker Change: I would say though, and I talked about this a little bit on the earnings call, that this is an output for us. It's not an input as we think about on a

Speaker Change: Daily basis how we run our business. We obviously want to have our merchants take more and more of our solutions But this is not a metric where we we track and say how do we drive up attach rate? We're trying to drive as much value to merchants as we can And that will be reflected in the attach rate

Operator: All right, our next question will come from Brad Sills at Bank of America.

Operator: Great. All right. Our next question will come from Brad Sills at Bank of America. Brad. Good. Thank you so much. Can you hear me? Okay.

Speaker Change: Alright, our next question will come from Brad Sills at Bank of America.

Speaker Change: Brian?

Harley Finkelstein: Thanks for the question. Look, we built these marketing systems over a very long time, and now they're really producing the results that we need, which is we want to have a highly analytical, data-driven approach to how we find new customers in new areas. The other thing that's changed over the course of the years of Shopify is there's not just one on ramp to Shopify. It's not just small businesses in the US or in North America, the English speaking world.

Speaker Change: Thanks for the question. Look, we built these marketing systems over a very long time. And now they're really producing the results that we need, which is we want to have highly analytical data driven approach to how we find new customers in new areas.

Harley Finkelstein: Now we have a whole different swath of types of merchants and customers that come to us now, whether it's B2B, point of sale, enterprise, it's across every geography on the planet. So we've built these marketing systems to allow us to get the most out of every single existing channel. Now we do have guardrails in place that are important to us. We want an 18 month payback.

Speaker Change: Small businesses in in the US or in North America, English speaking world. Now we have a whole different, you know, swath of types of merchants and customers that come to us now, whether it's b2b, it's point of sale, it's enterprise, it's across every geography on the planet.

Harley Finkelstein: I mentioned that a couple of times now, but we are also trying to find new channels to both experiment with and, when they do turn out to be successful, double down on. The example that I gave in the call, which I'll spend a second on right now, is important because it illustrates exactly the way we like to run our marketing channels, which is that we leaned into a new emerging social platform in Q1.

Harley Finkelstein: We tested, we saw a good result, and then in Q2, we doubled down. The result of that was a 51% quarter over quarter merchant acquisition increase for Q2. In that same channel, we also saw international growth outside our English countries grow. It was actually over 50% of merchants that joined in Q2.

Harley Finkelstein: So for us, it's about looking at where we can push the envelope, but it's important that we maximize returns ahead of the curve. And so what I think you'll see from Shopify, from a marketing and performance marketing, in particular, is that we're going to optimize our spend to focus on the most compelling opportunities, both near and also long term. And in places where we're seeing a little bit less return, we're going to pull back on that.

Harley Finkelstein: But the idea is to have this very fluid, very dynamic marketing sophistication to allow us to double down on things and stay ahead of the curve across, frankly, everyone else in our industry. Thanks, Brad. Our next question comes from Gabriela Borges at Goldman Sachs. Hi, good morning. Thank you.

Operator: Thanks, Brad. Our next question comes from Gabriela Borges at Goldman Sachs.

Speaker Change: Yeah, data, we will obviously, as I mentioned the previous answer, we want to get the most

Speaker Change: Vince Camuto and Tops and companies like that. These efforts are producing results.

Operator: Thank you, Gabriela. Our next question comes from Craig Maurer at Financial Technology Partners.

Speaker Change: Thank You Gabriela. Our next question comes from Craig Maurer at Financial Technology Partners.

Harley Finkelstein: It's to be clear on the larger enterprise side, we're seeing expansion and enterprise and high volume merchants adopting Shopify payments. We're also seeing our offline business, which, you know, we primarily monetize their payments grow as well. So, you know, it was historically true that some of the larger brands and merchants that were migrating to us didn't necessarily always take Shopify payments, but as they came with their own, that's happening less and less.

Harley Finkelstein: I mean, this quarter alone, you know, Rove, Tonal, SodaStream, Athletic Greens, these were merchants that were already on Shopify but have now adopted Shopify payments more recently. So I think you're seeing more of that. The other thing is, remember that with things like, you know, ShopPay, ShopPay installments, Shopify balance, the audiences product, these are all incredible features and functionality on the platform that require you to be on payments. And so, you know, I think you're going to continue to see healthy penetration across merchant type, region, and channel. Jeff, I don't know if you have anything else to add to that one. Yeah, yeah, the two things I'd

Jeff Hoffmeister: Jeff, our audience is product, these are all incredible features and functionality of the platform that require you to be on payments. And so, you know, I think you're going to continue to see healthy penetration across merchant-type, region, and channel. Jeff, I don't know if you had anything else to add on that one. Yeah. The two things I'd add, Craig is – and Harley just alluded to one of them – obviously a lot of times payments is the first product. And it's environmental consent that drives traffic like this.

Jeff Hoffmeister: Yeah, the two things I'd add, Craig, and Harley just alluded to one of them. Obviously, a lot of times, payments are the first product. But that brings, even though the margins on that are a little bit lower than some of our other merchant solutions, that will bring those other solutions along. So when you think about a blended margin, it's incremental. So it's sometimes, a lot of times, just the first step.

Speaker Change: But that brings, even though the margins on that are a little bit lower than some of our other merchant solutions,

Jeff Hoffmeister: And the same is really true of Europe. In Europe, we've got, in general, some lower attach rates. But what you're seeing is that that's just a function as much as anything else.

Speaker Change: Sometimes, a lot of times, just the first step.

Jeff Hoffmeister: It's just us not having as many products available in Europe as we do in North America. So, over time, we will have a lot of those products that are available in North America that will become available in Europe. And so the opportunity in Europe will continue to expand. When we look at the cohorts, when we look at the profiles of merchants in Europe, and we compare them to what we see in North America, they are very, very similar. So it's not a function that somehow there's less buying power; there's less interest in getting the full functionality of Shopify. That's just a function of us, over time, rolling out more and more solutions to Europe.

Speaker Change: Very, very similar. So it's not a function that somehow there's less buying power or there's less interest in getting the full functionality of Shopify. That's just a function of us over time rolling out more and more solutions to Europe . So it's the tip of the spear for us in many respects.

Operator: So it's the tip of the spear for us in many machines. Thank you for your question. Our next question will come from Keith Weiss and Morgan Stanley. Excellent. Thank you guys for taking the question and congratulations on a really great question.

Operator: Thank you for your question. Our next question will come from Keith Weiss at Morgan Stanley.

Speaker Change: Thank you for your question. Our next question will come from Keith Weiss at Morgan Stanley .

Speaker Change: Yeah, Keith, from our vantage point, the quarter was pretty consistent in terms of what we've seen. I do know that there are a lot of people out there talking about softening consumer spend, and we hear that too. I think for us, the key point is we are working with our merchants to help them be very successful in this environment. We didn't see any significant deterioration or improvement throughout the quarter. On the last call, we talked a little bit about, from a European perspective, what we may see in terms of FX headwinds, and we talked a little bit about what we saw in terms of consumer spend.

Harley Finkelstein: The only thing I'll add to that Keith is, you know, keep in mind we have a very diverse set of verticals and merchants across geos and merchant types. You think about, like, we have scrubs from figs, we have pet products from BarkBox, and razors from Flamingo, we have Nestle and Hynes and Mattel and Staples.

Speaker Change: Simply taking chair, I think is the best way to say it.

Harley Finkelstein: And I think a big part of the reason that we are not seeing the same thing that others might is because we simply have merchants across a ton of verticals and across a ton of geos. Oh, thanks very much. And good morning. You're seeing very good success after the changes that you've made.

Speaker Change: Thank you for your question, Keith. Our next question will come from Paul Treiber at RBC Capital.

Harley Finkelstein: So the wonderful part of our business model is it's not relying on one particular type of merchant in one particular geography. We have merchants coming to us for B2B and merchants doing direct to consumer in one particular geography. We also have, you know, massive multinationals that are using us to sell to get in front of their consumers as well. And so I think that our merchants do seem to be, you know, outperforming and doing better than others.

Paul Treiber: Oh, thanks very much and good morning. You're seeing very good success after the changes that you've made in performance marketing. The question is, is why is the 12 month payback

Speaker Change: point of sale, all those things. So I hear you that in theory we could shorten it even more, but as I alluded to in one of the questions earlier...

Speaker Change: And some of the movements in MRR, some of that has been the shortening of the paid trials, but some of that is already from some of the success we're seeing in terms of adding new merchants on the platform as a function of what we're doing on the marketing side. So, from our vantage point, this feels like the right mix.

Speaker Change: I'd also say that, you know, ultimately, what we care about from a marketing perspective is where can we push the envelope? How do we maximize returns? And how do we stay ahead of competition and ahead of the curve?

Speaker Change: We are really confident in this incredibly powerful low latency marketing platform that we've built here. And we've optimized it around this 18 month guardrail. Now, that being said, there are some longer payback periods for things like enterprise, for example, whereby we begin to talk to a merchant, they may not only they may not launch for, you know, a year or two afterwards. But we think by having this guardrail, and then very, you know, specifically targeting the channels and marketing that we think are going to have an outsized return, and then pivoting our spend based on those based on that data, that allows us to keep testing, keep experimenting, but ultimately keep, you know, stay very disciplined and achieving and unlocking as many opportunities as we can. But that 18 month average payback period is a really good guardrail for us because it holds everyone here accountable for delivering.

Speaker Change: the highest bang for buck.

Speaker Change: Thank you for your question. Our next question will come from Tim Chiodo at UBS.

Tim Chiodo: Kim, are you there?

Tim Chiodo: I know that you mentioned some of the success that many merchants had with ShopApp this past quarter, and I believe that it was in Q4 that you gave a little bit of a sense of the ShopApp penetration of overall GMV. I was hoping you could give a little bit more context on

Tim Chiodo: how large shop app is in terms of your overall GMB mix, and then maybe within that.

Operator: Thank you for your question, Keith. Our next question will come from Paul Treiber at RBC Capital.

Speaker Change: Merchants have been using ShopApp for a while, but the fact that 10,000 merchants on their own posted their best GMV week ever on the ShopApp allowed us to reintroduce the power of this incredible app and this tool to them as a main channel. So we'll continue to do that. We're unleashing new ways for merchants to engage and to drive these incredible connections. Also, we think that from an advertising perspective, I mean, you mentioned shop campaigns.

Speaker Change: These are ways that we can also help merchants.

Speaker Change: not only find new buyers, but also increase their lifetime value, the sales and the checkout rates they have with those buyers. And so, you know, we're seeing brands like Feastables and Steve Madden and Spanx now who consistently come back to us to do this marketing.

Speaker Change: specifically on the Shop app using Shopcash for their audiences and those that use it.

Harley Finkelstein: Thanks a lot. Yeah. So, you know, as you alluded to in Q4, we talked about ShopApp having nearly reached about $100 million in GMV in a single month. We also talked about, you know, over 70% of Shopify's online checkouts in the past year were made via phones or other small devices. So obviously, we know that the consumers that buy from merchants use Shopify, like ShopApp, and this is how they prefer to do it.

Harley Finkelstein: But ShopApp is this incredibly owned first party channel for merchants, and we know it helps them drive traffic. What was so interesting and neat about ShopWeek was that these are ways that we can also help merchants not only find new buyers but also increase their lifetime value, the sales, and the checkout rates they have with those buyers. And so, you know, we're seeing brands like Feastables and Steve Madden and Spanx now who consistently come back to us to do this marketing, specifically on the Shop app, using ShopCast with their audiences. And those that use it, their GMV grows, and they grow their user base. They keep coming back.

Speaker Change: Thank you for your question. Our next question comes from Tyler Radke at Citi Investments.

Tyler Radke: There we go. Can you hear me okay?

Tyler Radke: Awesome. Thanks so much for taking the question. Question on just how to kind of unpack the third quarter revenue guidance. Obviously, you know, you talked about some of the MRR moving pieces in Q2, but I'm just curious how we should be thinking about the growth.

Speaker Change: Maybe in reverse order. I mean, we do as we think about the marketing spend, we do based on the 18 month average payback periods, think about this as something which drives

Speaker Change: Before, on one of the earlier questions about the impact on MRR in Q2,

Speaker Change: was indeed a strong uplifter, in particular in a couple of pieces.

Speaker Change: And some of that was a shortening of the paid trials, and so that will be this quarter. That's not a dynamic you would see next quarter, but some of that is some of the merchants joining the platform, the acquisition engine working.

Speaker Change: And this is reflective in the Q3 guidance, when you look at the revenue growth over the past...

Speaker Change: And as you know, MRR, I guess the other piece to this too, is the pricing changes and some of the things in the marketing. Obviously, from a pricing change perspective,

Speaker Change: mid-quarter, so that's not fully captured in the quarter, but it's a tailwinds that we see in terms of getting to the revenue guidance that we gave. Our business is simply performing well and that's reflected in the numbers you saw.

Harley Finkelstein: No new data to give out just yet on the Shop app. But you can, I mean, if you're watching things like our edition release we did in the summer and you're just, you know, looking at the tea leaves here, you see the shot of continuously gets better over time, both for consumers but also from a merchant perspective, as this incredible channel for them to drive new traffic. And again, that is one more thing that if you want to leverage that, you want to utilize that as a merchant. You have to be on Shopify. Thank you for your question. Our next question comes from Tyler Radke at Citi Investments.

Speaker Change: With respect to point of sale, you seem to be getting some good momentum there. I'm just curious, are you displacing the incumbents in the market or are these sales to vendors without a service provider, meaning they're sort of newer enterprises?

Operator: Thank you for your question. Our next question comes from Tyler Radke at Citi Investment.

Operator: The timing of when you see those paybacks and incremental revenue streams coming into the model. Thank you. Yeah.

Speaker Change: Incumbent legacy systems that, frankly, are not very good, that a lot of retailers have, and it is high time that they look for a better solution that's future-proof, that has far more functionality, that is way more, you know, of a delight to use for both their staff, but also the consumers that use it, and then, of course, you know, there are one of the best parts of Shopify's business model is that we also create and help to sort of incubate, you know, what will be the hottest brands tomorrow, and as they open up more,

Operator: Thank you for your question. And our final question will come from Richard Hsu at National Bank.

Harley Finkelstein: Two sides. One is that there are a lot of incumbent legacy systems that, frankly, are not very good that a lot of retailers have. And it is it is high time that they look for a better solution that's feature-rich that has far more functionality that is way more, you know, of a delight to use for both their staff and also the consumers that use it. And then, of course, one of the best parts of Shopify's business model is that we also create and help to sort of incubate what will be the hottest brands tomorrow.

Harley Finkelstein: And as they open up more, you know, more, more stores, or they enter the physical retail space, they will bring Shopify with them. The reason I mentioned brands like Mejuri, for example, is that Mejuri has had a lot of stores for a very long time.

Speaker Change: We're also finding it to be a very compelling.

Harley Finkelstein: And the fact that they're replacing their existing systems with ours, both online and offline, is indicative of what we're seeing. But we are winning larger merchants; we are winning merchants now with over 100 locations, physical locations, across many regions. We now have launched point of sale terminals in eight additional countries across the EU and APAC. We're also finding it to be a very compelling pitch to say that there's no reason for you to have separate systems running online and offline that are completely disconnected but rather, rather centralizing all your business into one single place, which is this unified commerce system that Shopify provides, is really helpful. And then, obviously, the results speak for themselves.

Speaker Change: pitch to say that there's no reason for you to have separate systems running online and offline that are completely disconnected, but rather centralizing all your business into one single place, which is this unified commerce system that Shopify provides is really helpful. And then, you know, obviously the results speak for themselves. I mean, Q2 GMV growth of 27% from offline.

Harley Finkelstein: I mean, Q2 GMV growth of 27% from offline. And we expect it will be a key driver for us, not just this year, but certainly in the future. And then, you know, we'll continue to get brands like Frank and Oak, for example, and Cherry Republic and Banana Republic Home. And these really amazing brands that have tons of locations that are now using us are also becoming wonderful sort of force multipliers to get other brands and other retailers like them. So it's a really important part of our business, and it's growing really well.

Speaker Change: And we expect it'll be a key driver for us, not just this year, but certainly in the future. And then, you know, we'll continue to, you know, to get brands like, you know, Frank and Oak, for example, and Cherry Republic and Banana Republic Home and these really amazing brands that have tons of locations that are now using us are also becoming wonderful sort of force multipliers to get other brands and other retailers like them. So it's a really important part of our business, and it's growing really well.

Operator: Alright, thank you for that question. I'll now turn it back to Harley for closing comments. Yeah, just a quick one.

Speaker Change: Thank you for that question. I'll now turn it back to Harley for closing comments. Yeah, just a quick word before we close. I wanted to, you know, I wanted to say a couple things here because I think it's really important, particularly right now.

Harley Finkelstein: Those of you that have been following the company for, you know, since since the IPO and hopefully well before that, we've always been a company that builds for the long term. And I think what you are seeing today is that we are seizing these opportunities and making investments

Harley Finkelstein: to further establish ourselves as the leader in commerce.

Harley Finkelstein: We are executing on the plan that we laid out for all of you last year, and you're seeing it in our results. But I think these results in particular demonstrate an important trend, which is that we can achieve a seriously meaningful combination of both growth and profitability, and we continue to invest in areas that we think will be incredibly meaningful in the future.

Speaker Change: You're hopefully seeing this. If you're not, you know, please do a double, double, double click on this. But we are building the most impactful products on the planet for merchants and businesses of every size. And I know I've said this a few times on this call, but I'm going to say it again. This is by far the best version of Shopify. And thank you for joining us on this call.