Q3 2024 Shopify Inc Earnings Call

Good morning, and thank you for joining Shopify's third 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.

We will make forward-looking statements on our call today that are based on assumptions and therefore subject to risks and uncertainties that could cause actual results to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements.

We undertake no obligation to update or revise these statements, except as required by law. You can read about these assumptions, risks, and uncertainties in our press release this morning, as well as in our filings with the U.S. and Canadian regulators.

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 thank you all for joining us today. As we say each quarter, Shopify is building for the long term.

Harley Finkelstein: Our consistent results, quarter after quarter, confirm that our strategy is working incredibly well.

Harley Finkelstein: These are not just numbers, they reinforce that Shopify is an industry leader, delivering on both growth and margins.

Harley Finkelstein: all while simultaneously creating and leaning into opportunities that bolster our growth. So, before we dive in, let me start by saying this. If you walk away from this call with anything, it should be these three things.

Harley Finkelstein: 1. Entrepreneurship and commerce are growing and Shopify is capturing an increasing share of this vast and expanding market.

Harley Finkelstein: Two, Shopify is increasingly the go-to platform of choice not just for entrepreneurship, but for all of commerce. We are well positioned for extensive growth across different merchant segments, size, geographies, channels, and products.

Harley Finkelstein: And three, as our merchants do better, Shopify does better. Our business model prioritizes merchant first, fueled by a high-velocity product innovation engine that makes the hard things easy and everything else possible.

Harley Finkelstein: Now, let's quickly dive into some of the key accomplishments in the quarter.

Harley Finkelstein: Starting off with product, we build outstanding tools that work seamlessly together, creating a platform that is packed with value and, quite frankly, just works really, really well. This is why we invest so heavily in building the most integrated platform on the planet. And it's also why merchants come to Shopify and why they don't leave Shopify.

Harley Finkelstein: We are shipping products and enhancements on a literal daily basis. So rather than give you a laundry list, I'd like to spend a few minutes now walking through some of the highlights from the quarter. First, let's talk about enhancing merchant automation.

Harley Finkelstein: Our new features are making it easier for merchants to run their businesses more efficiently. Because let's be honest, nobody starts a business with the goal of focusing their time on sales tax compliance or inventory management.

Harley Finkelstein: These foundational tools make the nitty-gritty stuff automatic, so merchants can focus on the reason they started a business in the first place, for the products they are selling.

Harley Finkelstein: Let's start with Shopify Flow, a low-code workflow automation app that empowers merchants to build custom automations that help them run their businesses more efficiently.

Harley Finkelstein: This includes a new automation trigger based on the merchant's custom data and newly completed admin API connector that provides an additional 304 new actions to use in their automations.

Harley Finkelstein: And as a result, Flow has become a much more powerful tool, enabling merchants to update products, process customer form submissions, edit orders, and so much more.

Harley Finkelstein: And within Shopify Inbox, this product now uses AI to suggest replies based on each merchant's unique store information, making it super easy for merchants to respond quickly and accurately to customer inquiries.

Harley Finkelstein: In fact, on average, merchants are using the suggested replies for about half of their responses, edited or not, showing just how effective this feature has become. Replying can quickly boost conversion rates, which means more sales for our merchants, and in turn, for Shopify.

Harley Finkelstein: And finally, within Shopify Tax, we started rolling out automated filing to eligible merchants. Merchants can now automate their preparation, filing, and remittance of their sales tax returns from within the Shopify admin. This saves time and simplifies one of the most complex parts of sales tax compliance.

Harley Finkelstein: And, as we know, taxes do not get simpler just because you cross borders.

Harley Finkelstein: That's exactly why in our focus to make Shopify the best way to sell globally across all channels We saw a clear opportunity to tackle the complexities of cross-border commerce head-on

Harley Finkelstein: And in Q3, we successfully extended our shop-like tax product to merchants in the UK and the entire EU.

Harley Finkelstein: We've automated value-added tax calculations to make them more accurate. We introduced automated VAT invoices for easy compliance in cross-border commerce. And we've developed tax liability insights that track regional and national compliance. All of this ensures our merchants can focus on growing their business.

Harley Finkelstein: Another product that can be used to gain traction by helping our merchants sell globally is Managed Markets, which allows merchants to easily enter new countries and grow everywhere.

Harley Finkelstein: For our merchants, it's proven to drive some pretty incredible results.

Harley Finkelstein: Meanwhile, if you look at the top 100 merchants, they saw an increase of greater than 200%, which is truly incredible. Managed Markets is another example of a product that is yielding incredible results for our merchants globally.

Harley Finkelstein: By utilizing the NFC chips and devices, cap-to-pay processes payments from contactless cards in digital wallets like Apple Pay via Shopify Payments. So why does this actually matter? Because it enables our merchants to create a truly delightful in-person experience for consumers, all powered by Shopify.

Harley Finkelstein: For merchants using the Point of Sale app, we made significant functionality and usability improvements.

Harley Finkelstein: Notably, we introduced offline payment support, which ensures uninterrupted sales even during network disruptions.

Harley Finkelstein: We also focused on personalizing the customer experience by enabling access to customer metafields and supporting Shopify bundles Which has seen encouraging adoption rate, especially among mid-market merchants We also improved operational efficiency and optimized the point-of-sale app for tablet view introducing a split-screen search view

Harley Finkelstein: In retail, every second in detail counts to drive sales, build customer affinity, and foster brand loyalty. And these updates, along with others like accepting unverified returns and expanding UI extension capabilities, reinforce our commitment to making in-person commerce easy and fast.

Harley Finkelstein: and more flexible payment options in credit to better manage cash flow. Now, within Shopify Payments.

Harley Finkelstein: penetration grew to 62% and shop pay facilitated 17 billion dollars in GMV which is up 42%

Harley Finkelstein: highlighting the power and the strength of our payment product, which also unlocks a key gateway for merchants to leverage our other features and products only available when on Shopify payments like the shop app.

and speaking of the shop app.

Harley Finkelstein: This quarter, the Shop app launched a new merchant-focused home feed, showcasing the diversity and the richness of brands on Shop. The experience uses new machine learning models to help buyers keep up with the brands they love and discover new brands based on their preferences.

Harley Finkelstein: These changes have already led to early success, with an 18% increase in sessions where a buyer engaged with a recommendation.

Harley Finkelstein: These enhancements combined with our deep and seamless integration helps drive higher GMV and GPV and strengthens our overall ecosystem. On the topic of machine learning, I want to give a shout out to Mikhail Parakin, our new incredible CTO, who recently joined the Shopify team.

Harley Finkelstein: Mikhail spent over a decade at Microsoft where he spearheaded AI advancements and products like Copilot. He also served as CTO at Yandex where he developed multiple search engines and cloud services.

Harley Finkelstein: Mikkel brings a wealth of experience in AI and search technologies and in just over two months since he joined us, he's already made a significant impact enhancing our products and pushing us forward. I'm convinced that with Mikkel on board Shopify is only going to get stronger.

Harley Finkelstein: Building on that note of strengthening our bench, let's talk about our ecosystem.

Harley Finkelstein: We are committed to creating an ecosystem where everybody thrives. Our partners, our merchants, and of course Shopify itself.

Harley Finkelstein: This collaborative success is by design, and as a result, we have earned the reputation as the preferred partner in the commerce world.

Harley Finkelstein: This quarter, we became the first commerce integration partner for Roblox, which has on average over 88 million daily active users. We integrated with YouTube's Shopping Affiliate program, and we diversified our payments product offering through an expanded partnership with PayPal.

and it's working.

Harley Finkelstein: Our go-to-market efforts, combined with our product development, are enabling us to make incredible headway across multiple long-term growth drivers of our business, B2B, offline, and international.

Harley Finkelstein: all of which are increasingly the on-ramp to Shopify and unlocking more opportunities for us to grow our addressable market and we've got the results to prove it. Q3 offline GMV was up 27 percent year-over-year and has more than doubled in just the past three years.

Harley Finkelstein: Q3 B2B GMV grew over 145% year-over-year and has now had five consecutive quarters of triple-digit growth.

Harley Finkelstein: And, international GMV continues to outpace the growth in North America, accelerating to greater than 30% growth in Q3, and cross-border was approximately 14% of GMV.

Harley Finkelstein: So, let's dive deeper into what's really driving our success in the offline segment.

Harley Finkelstein: Our go-to-market efforts are really paying off, especially with large, complex, multi-location merchants.

Harley Finkelstein: This segment saw a 50% increase in locations year-over-year in Q3, highlighting our really strong momentum.

Harley Finkelstein: This quarter, established omni-channel retailers like British clothing company Orla Bar-Brown, footwear store Fit2Run, and fashion retailers Akira and Billy Reid adopted our point-of-sale solution.

Harley Finkelstein: In Canada, the legendary women's fashion retailer, L'Oreal, migrated their point-of-sale systems to Shopify, bringing over 130 stores in one of our largest point-of-sale migrations yet.

Harley Finkelstein: As we continue to power an increasing number of established, multi-location brands, we also firmly believe that consumer-favorite brands of tomorrow are being built right now on Shopify.

Harley Finkelstein: This stickiness and trust in our platform are what truly sets us apart, ensuring that as our merchants expand, online, offline, and everywhere in between, they do it with Shopify.

Harley Finkelstein: In B2B, we continue to set new records for monthly GMB highs, with September marking our largest single month ever.

Harley Finkelstein: We are positioning ourselves to keep breaking these records, especially with new enhancements like the ones I mentioned earlier, including Shopify flow automation templates that streamline B2B workflows and improvements to tax collection and conversion tracking.

Harley Finkelstein: While much of our growth to date stems from our existing merchant base, in Q3, we also broke in new territories in industrial, hardware, and automotive vehicles and parts sectors that hasn't historically considered Shopify. Now they're not just considering us, they're committing to us.

Harley Finkelstein: We are also continuing to focus on international growth, which continues to outpace North America, especially in Europe, like key countries Germany and France, where we're increasing our market share.

Harley Finkelstein: We've made enhancements to localization, shipping, and compliance, and are pairing that with intensified marketing efforts.

Harley Finkelstein: And it's working. In Q3, international merchants increased by 36% year-over-year, with top brands like watch retailer Watches of Switzerland and cosmetics company The Body Shop signing with Shopify in the quarter.

Harley Finkelstein: Okay, so now that we've talked about product and channels, let's focus on how we're making waves upmarket.

Harley Finkelstein: Q3 was an exceptional quarter in terms of new enterprise-level brands coming to Shopify. For example, this quarter we signed luxury handbag company Fashionphile, jewelry designer Brilliant Earth.

Harley Finkelstein: footwear brand Reebok, fashion apparel brand Off-White, cosmetics company Beauty Counter, and Lionsgate Entertainment to name a few. We are also now powering some iconic apparel brands including Hanes, MeUndies, Vera Bradley, and Bear Necessities.

Harley Finkelstein: Our platform's composability gives large brands the flexibility to choose modular components, like On Running, who recently adopted our checkout commerce component.

Harley Finkelstein: One of the best things about modular components is that integration can happen fast.

Harley Finkelstein: In fact, we recently had an outdoor gear company go from handshake to full implementation in less than three weeks.

Harley Finkelstein: Seriously, in under a month we had the shop pay button up and running in our check-in, showcasing not only the robustness of our API, but also our team's incredible ability to make things happen faster.

and the momentum does not stop there.

Harley Finkelstein: Victoria's Secret, Joanne Storrs, and Shoot Carnival are also coming soon to the ShopPay Commerce component, further proof that this pathway to growth is really working. Enterprise brands from all verticals are making the move to Shopify.

Harley Finkelstein: And it is clear that our platform's flexibility, speed, and value are really what sets us apart. We're constantly working to make it easier for larger, more complex companies to make the switch.

Harley Finkelstein: Take our new data migration tool. New merchants can now import essential data like products in as little as four clicks. Picture this, one merchant recently brought over 44,000 SKUs to Shopify in less than three minutes. A task that used to take hours, if not days.

Harley Finkelstein: This significant reduction in data migration hassle is a big deal as it removes major friction points for merchants looking to move to Shopify.

Harley Finkelstein: With 16 enterprise launches in Q3 alone, we are truly just getting started with our push into the enterprise commerce market.

Harley Finkelstein: As we wrap up, let me circle back to how I started.

Harley Finkelstein: Q3 was another standout quarter with 26% top line growth and a 19% free cash flow margin.

Harley Finkelstein: We continue to deliver some of the strongest results in the industry quarter after quarter.

Harley Finkelstein: I truly believe this is the best version of Shopify yet.

Harley Finkelstein: because it gives us the ability to grow the business and invest in the future.

Harley Finkelstein: This is increasingly making Shopify the go-to commerce platform for merchants of all sizes. As our merchants gear up for the busiest shopping season of the year, they can be confident that Shopify has their back, equipped with the speed, reliability and tools needed to capture every sale.

Speaker Change: We are not just running a platform. We are building a future where anyone can transform an idea into a thriving business. This is the vision and the reality of Shopify. And with that, let me turn the call over to Jeff.

Jeff Hoffmeister: Great, thank you Harley. We had another outstanding quarter. These consistent results delivering both growth and profitability demonstrate the durability of our business, our numerous growth drivers, and our ability to balance investing in the future with discipline, delivering double-digit free cash flow margin.

Let's dive into our Q3 results.

Jeff Hoffmeister: starting with GMV. In Q3, GMV was up 24% year-over-year as we delivered our fifth consecutive quarter of GMV growth over 20%.

Jeff Hoffmeister: The same four consistent GMV growth drivers that we have seen delivered again this quarter.

Jeff Hoffmeister: Same source sales grow from our existing merchants, Web Buyer Plus merchants.

growth in the number of merchants on our platform.

Jeff Hoffmeister: Continued strong growth internationally with GMV outside North America growing 33% in Q3.

Jeff Hoffmeister: European GMB grew greater than 35 percent as our largest markets of the UK, Germany, France, and the Netherlands continue to gain traction.

Jeff Hoffmeister: The Netherlands was a notable source of strength, delivering year-over-year incremental GMV that outpaced France and was behind only the UK and Germany, and demonstrating the broad base of strength that we have in Europe.

Jeff Hoffmeister: And fourth, offline, our point of sale, where we had 27% GMB growth year-over-year.

Jeff Hoffmeister: In terms of industry verticals, Q3 saw notable growth from health and beauty, food and beverage, and apparel and accessories.

Jeff Hoffmeister: Q3 revenue was $2.2 billion, up 26% year-over-year. Q3 is the sixth consecutive quarter of revenue growth greater than 25% excluding logistics.

The key drivers of revenue growth for the quarter were

Jeff Hoffmeister: The GMB strength just discussed, growth in subscription solutions revenue stemming from the growth in the number of merchants on our platform and, to a lesser degree, the impact of the shortened paid trials and the plus pricing changes, and, third, increased payments penetration, which hit 62 percent for Q3.

Jeff Hoffmeister: Stronger growth across the business, led by international GMV, drove our outperformance on revenue relative to our outlook. Q3 merchant solutions revenue increased 26% year-over-year, driven by the continued strength in GMV and the penetration of Shopify payments.

Jeff Hoffmeister: These primary drivers were partially offset by lower non-cash revenue from strategic partnerships.

which continues to be a headwind throughout the year.

Jeff Hoffmeister: 43 billion of GMV was processed on Shopify payments in Q3.

Jeff Hoffmeister: 31% higher than last year and as a percentage of GMV was 62% compared to 58% in Q3 of 2023. Several factors drove the quarter's higher gross payments volume including

Jeff Hoffmeister: The strong performance of those merchants utilizing Shopify payments, an increasing percentage of which are Shopify Plus

Jeff Hoffmeister: more merchants across the globe adopting payments, and greater penetration of shop pay, which was 40% of GPV in the quarter. These items were partially offset by the continued strength of our business in Europe, which has a lower GPV penetration than North America.

Jeff Hoffmeister: Subscription solutions revenue was up 26% over Q3 of last year. The growth was primarily driven by an increase in the number of merchants on our platform and, to a lesser degree, higher variable platform fees and the benefit from the plus pricing change.

Jeff Hoffmeister: Q3 MRR was $175 million, up 28% year-over-year, with continued growth in each of Standard, Plus, and Point of Sale, with all three categories seeing an increase in the number of merchants. Plus represented 31% of MRR for the quarter, consistent with Q2.

Jeff Hoffmeister: Q3 gross profit was $1.1 billion for the quarter, up 24% year-over-year. Our Q3 gross margin was 51.7%, compared to 52.6% in the prior year.

Jeff Hoffmeister: Subscription Solutions gross margin was 82.3% similar to Q3 last year.

Jeff Hoffmeister: Gross margin for merchant solutions was 39.7% compared to 41.0% in Q3 of 2023. The decrease was driven primarily by the same factors that have been impacting us all year.

Jeff Hoffmeister: The largest impact was from lower non-cash revenues from certain partnerships that have now fully amortized.

Jeff Hoffmeister: Payments was the other key driver with two roughly equally sized impacts.

Jeff Hoffmeister: First, payments constituted a larger percentage of our overall revenue in the quarter, given the strong growth in payments.

Jeff Hoffmeister: And second, we had lower margins on payments this quarter as we saw pressure from both a higher mix of plus margins and a higher mix of credit card usage rather than debit card.

Jeff Hoffmeister: These headwinds were partially offset by the growth in our other merchant solutions products, which have a higher gross margin rates than payments. Now turning to operating expenses. Q3 operating expenses were $835 million for the quarter or 39% of revenues.

Jeff Hoffmeister: Compared to the prior year, Q3 operating expenses were up $56 million, or 7%, well below our gross profit dollar growth rate of 24%.

Jeff Hoffmeister: The largest drivers of our Q3 operating expenses compared to the prior year were higher compensation stemming from our biannual employee review process.

Jeff Hoffmeister: which resulted in merit-based pay increases where appropriate. Each of the January 1 and July 1 compensation cycles this year were low single-digit percentage increases to overall compensation.

Jeff Hoffmeister: We also hired some key roles within sales and R&D. Within transaction loans and losses, we had higher absolute dollar losses on both our capital loans and payments. But it's important to note that this was a function of volume increases for both of these businesses. The loss ratios remained within the consistent range. We also hired some key roles within the consistent range. We also hired some key roles within the consistent range.

Jeff Hoffmeister: And finally, increases in marketing spend as we continue to invest in our core performance marketing, including higher affiliate partner payouts and continued investment to support our growing enterprise and point of sale businesses.

Jeff Hoffmeister: Partially offsetting these in terms of year-over-year comparability was a $38 million real estate impairment expense in Q3 of last year.

Jeff Hoffmeister: Our Q3 operating expenses came in lower than our outlook, primarily due to lower-than-expected marketing spend.

Jeff Hoffmeister: The lower spend was primarily in non-performance marketing for enterprise and point-of-sale and to a lesser degree, lower spend in brand advertising, where we don't spend much to begin with given the overall strength of our brand. Performance marketing also came in a little bit lower than planned, which was driven primarily by the decision to run some testing regarding point-of-sale.

Jeff Hoffmeister: We remain firmly committed to carefully managing our investments and continue to operate within our guardrails. For the quarter, operating income was $283 million, or 13% of revenue, with operating income dollars more than doubling compared to Q3 of last year.

Jeff Hoffmeister: Stock base compensation was 115 million for the quarter. Q3 free cash flow was 421 million, or 19% of revenue, delivering an expansion of 300 basis points from Q3 of last year.

Jeff Hoffmeister: This high teens free cash flow margin came in better than our expectations, largely due to a stronger GMV driving revenue combined with lower operating expense.

Jeff Hoffmeister: Let's now turn to our Q4 outlook. As a reminder, Q4 is seasonally our highest volume quarter of the year as it includes a key holiday selling period, including Black Friday, Cyber Monday.

Jeff Hoffmeister: We expect Q4 to see similar seasonality trends to what we have seen in prior fourth quarters. First on revenues, we expect Q4 revenues to grow year over year at a mid to high 20s percentage rate driven by the same factors that have supported our strong revenue growth results so far this year.

Jeff Hoffmeister: These include assumptions around the continued strength of our merchant's GMV. Q4, gross profit dollars are expected to grow year over year at a rate similar to Q3.

Jeff Hoffmeister: As a reminder, consistent with prior years, Q4 sees a higher percentage of revenue from payments given the high volume holiday selling season. Turning to operating expenses.

Jeff Hoffmeister: We expect our GAAP Q4 operating expenses to be 32 to 33 percent of revenues.

Jeff Hoffmeister: representing a 300 to 400 basis point improvement compared to Q4 of last year. Compensation and marking are the two largest increases in absolute dollars year-over-year but importantly both of these areas as a percentage of revenues are expected to be down year-over-year.

Jeff Hoffmeister: We also expect higher dollar losses on payments, which is largely driven by sheer volume growth, not loss rates. Regarding compensation, we expect to keep headcount relatively flat year over year but will have the impact of the merit-based pay increases that I discussed earlier in the call and some mixed shifts in terms of headcount per department.

Jeff Hoffmeister: Worth reiterating again, though, that while we have a year-over-year dollar increase in OPEX, we expect a 300 to 400 basis points decrease in OPEX as a percentage of revenues. And we continue to grow gross profit dollars much faster than operating expenses. Moving to stock-based compensation.

Jeff Hoffmeister: Q4 SBC is expected to be approximately $120 million. Finally, on free cash flow, we expect our Q4 free cash flow margin to be similar to our Q4 2023 margin of 21%.

Jeff Hoffmeister: which would result in us increasing both free cash flow margin and free cash flow dollars in each successive quarter throughout the year. Moreover, we have gone from negative 3% free cash flow margin in 2022 to 13% last year.

Jeff Hoffmeister: to being on track to deliver high teens for full year 2024 based on our Q4 outlook.

Jeff Hoffmeister: We are proud of the consistent growth and margin expansion of our free cash flow throughout both 2023 and 2024, all done while delivering exceptional top-line growth at scale. These outcomes are a direct result of the work and disciplined decision-making we have put in place over the past couple years.

Jeff Hoffmeister: The free cash flow margin profile that we have now achieved is one we like. It strikes the right balance between profitability and investing back into the business to continue to deliver top-line growth.

Jeff Hoffmeister: taking into account the typical yearly evolution of cash flow margins across quarters.

Jeff Hoffmeister: that we have seen in our business the past two years.

Jeff Hoffmeister: One additional topic before closing. In the coming days, Shopify board member and Uber CFO Prashanth Mahendra Raja will step into the role of chair of the audit committee as part of a planned transition.

Jeff Hoffmeister: Colleen Johnson, who has served on our board and as audit committee chair for over five years, will step down from the board. I want to thank Colleen for all the excellent service that she has provided Shopify and all the counsel that she has given me and the Shopify leadership team as a whole.

Jeff Hoffmeister: Thank you very much, Colleen. I look forward to working with Prashant more closely in his expanded role. In closing, it was an exceptional quarter.

Jeff Hoffmeister: Shopify continues to power an increasing portion of the internet, serving as a system of record for millions of businesses. As entrepreneurship and commerce grow, Shopify is capturing an increasing share of this expanding market, becoming the go-to platform for all of commerce.

Jeff Hoffmeister: Our success is not just in our scale but also in how well we partner and work with other technology companies in order to give merchants a seamless way to run their businesses. Thank you to all of our merchants for your trust.

Jeff Hoffmeister: And thank you to the Shopify team for all the hard work done long before this quarter began, making these results and what is next to come possible.

Speaker Change: With that, I'll now turn the call back over to Carrie for your questions.

Carrie Gillard: 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 nine to join the queue and star six to unmute yourself.

Carrie Gillard: 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 Brian Peterson at Raymond James.

Speaker Change: Hi, thanks for taking the question and congrats on the really strong results. So I'd love to understand how the GMB came in relative to your expectations and any comments on linearity through the quarter and early thoughts on the fourth quarter. Thanks, guys.

Speaker Change: Yeah, thanks for your question, Brian. I'm happy to talk through that.

Speaker Change: That was the key element to the outperformance. And I made a brief comment about that in my comments in terms of the strength we're seeing. And it's pretty broad-based. I made the comment about.

Speaker Change: the Netherlands. So it's not just a lot of times in the past calls, I've talked about Germany, France, Italy, Spain.

Speaker Change: All of Europe is performing very well for us, and that's one of the key elements of GMB outperformance.

Speaker Change: We're obviously, and Harley and I both touched on this as well, we're seeing a lot of strength and plus.

Speaker Change: We've had all the success in B2B. It's really across a bunch of different fronts in addition to all the areas which have traditionally been core pockets of strength for us.

Speaker Change: It was, in terms of linearity throughout the quarter, it was especially towards the back half that we saw some strength in Europe. But that being said, as we think about the quarter overall and we think about the strength we see in Europe and the U.S.,

Speaker Change: I don't have any specific trends to call out, just other than to say we feel really good about what we're doing right now with the merchants.

Speaker Change: Thank you for your question. Our next question will come from Collin Sebastian at Baird.

Collin Sebastian: Great, thanks. Really appreciate the opportunity here. You guys have positioned Shopify as the rebels going up against the larger online marketplaces, but arguably the consolidation of e-commerce market share is occurring to a smaller number of platforms, including Shopify. I wonder if your views of how the industry is evolving or changing, what that consolidation means for your merchant base, and ultimately how that influences product plans for things like ShopApp. Thank you.

Speaker Change: Historically, when it came to larger brands, our focus was really on

Speaker Change: Shopify plus we it's sort of this one-size-fits-all for larger brands

Speaker Change: But now we have an enterprise product, we have Shopify Plus, we have Commerce Components. And Commerce Components in particular is really compelling because, you know, I mentioned this in my prepared remarks, but, you know, we're now seeing brands that are calling us, and three weeks later, they now have Shop Pay installed on their checkout.

Speaker Change: or brands, for example, like On Running, one of my favorite brands that has, you know, Shopify's checkout as a commerce component that they've now taken. So there are all these new sort of gateways into Shopify or on ramps to Shopify on the enterprise side.

Speaker Change: The next thing I want to talk about is check out this idea that some of these large brands that are very sophisticated

Speaker Change: still don't have an optimized checkout like they would have on Shopify is becoming a competitive liability. And so that's also driving things quite a bit. And the third thing is, the fourth thing is total cost of ownership, TCO.

Speaker Change: The fact that we have this very transparent pricing with very large enterprise brands makes it that they understand exactly what they're getting. And when you sort of combine those things, I think you're seeing a lot of the, you know, consumers' favorite brands.

Speaker Change: Especially the larger ones come to Shopify and they're coming at a faster clip and they're coming in in in larger volumes

Speaker Change: I think that will continue to happen especially now that our go-to-market engine has really ramped up I think when you combine an incredible enterprise product with the right pricing that is unified and a very strong go-to-market energy and effort You you get these results

Speaker Change: Thank you for your question. Our next question will come from D.J. Hines at Canaccord.

Speaker Change: Hey, good morning guys. Congrats on the great quarter. Harley, can you talk about what you focused on from a product perspective to drive further B2B adoption, especially in the enterprise? I mean, you're obviously seeing nice momentum there, but is there any additional unlocks that you're focused on?

Speaker Change: Yeah, there's there's a couple that have recently come out and you're seeing us talk more of a b2b around or additions for example I think particularly The couple in q3 alone. I think we shipped three or four new major features I mean things like product bundles supported in draft orders. There's now improved conversion tracking and tax collection There's now new automation Shopify flow templates which means that you can actually Assign a sales staff to particular b2b customers if you're if you're a merchant and and the result is that you're seeing companies like Dermalogica and therabody and life fitness and daily harvest and craft come to us as well So I think we're closing those gaps fairly rapidly

Speaker Change: I also think that, you know, historically, we really focused on existing direct-to-consumer brands on Shopify that also had a strong B2B or wholesale practice. That felt like sort of low-hanging fruit for us. We are now beginning to see merchants that are specifically and exclusively B2B wholesale merchants come to Shopify now for our B2B product. And eventually, in some cases, we've actually seen them begin to dip their toe in the water on going direct-to-consumer as well. So back to my comment earlier about this unified commerce system, the beauty of Shopify is that you come in for one particular channel, but once you're in the ecosystem, you begin to make that the entirety of your retail operating system. But, you know, specific on your point, those gaps are getting closed pretty quickly. And we just think B2B is a

Speaker Change: I think there's like a 14 billion dollar cam. We're already seeing our B2B, Jamie, doubled since since last year. We think that's a great opportunity and we're able to close these future gaps quite quickly.

Speaker Change: Thanks, DJ. Our next question will come from Todd Copeland at CIBC.

Speaker Change: I can hear me. Okay. Yeah. Thanks. And good morning. Everyone.

Speaker Change: I wanted to talk about the impact of China with the U.S. election out of the way. Can you just talk about how much of your GMV, your estimation, is coming from China and whether Trump tariffs will impact merchants? Is there anything you can do to help them? Thanks a lot.

Speaker Change: Yeah, maybe I'll just sort of start. I mean, we've been operating now for over two decades.

across

multiple administrations.

Speaker Change: We can't anticipate what every presidential administration is going to do. But what we can do is arm our merchants and the people that use Shopify with the tools they need to compete in any environment. In COVID, for example, where everyone had to move online, we were there for them. In tough times, economic cycles, we're able to provide really transparent, competitive pricing. So our job is to support our merchants. Specific on China, it's not a huge area for Shopify. It has not been historically a big area for us. But again, back to you.

Speaker Change: Our job is no matter what comes the way of our merchants, we provide them with tools and service and support for them to navigate it really well. And I think we've proven to do that over the last 20 years.

Speaker Change: Todd, the only other thing I'd add, there's nothing in what we've heard from Trump, nor would there have been anything from Kamala, which we think impacts the overall state of just new business formation and entrepreneurship. So, we still feel really good about all the merchants out there, all the entrepreneurs that want to start new businesses, and that's obviously not going to change with.

and the administration.

Michael, are you there?

Speaker Change: Thank you for the question, Carrie. This is for Harley. I know it's early days, but we're seeing some of the largest changes that have occurred in years to the search experience, right? AI overlays and even new search startups for the first time in decades.

I'd love to know how you're thinking about

the changing e-commerce experience

Speaker Change: the funnel for consumers and then what it could mean for the discovery experience of some of your e-commerce merchants as search changes

Speaker Change: Yeah, thank you for the questions. It's a great question. Look, I think

Speaker Change: build tools and build across Shopify's entire product to make their jobs way easier. They can focus on what matters most. And I mentioned suggest replies and Shopify inbox, which may not seem like a big deal, but it's a huge deal because it means we're going to spend more of their time focused on the things that they need to focus on, like building our products.

Speaker Change: But in terms of where consumers find merchants or find products.

Speaker Change: Yeah, AI and search is going to change, but to be clear, this entire flow and discovery process has been changing for many years. It's the reason that you saw us integrate with places like YouTube or more recently Roblox or TikTok or Instagram. We believe the future of commerce is happening everywhere. In order for us to qualify and then re-qualify to be the most important partner in retail for the millions of stores on Shopify.

Speaker Change: wherever consumers are looking for new products, we have to be there. And so I can't give any specifics on how we're working with some of those companies. But I will say that you can rest assured that when consumers shift their buying preferences, their discovery preferences, their search preferences, and they're looking for great products from great brands, Shopify will ensure that our merchants are able to do so. And that's the reason, even some of the more nuanced or some of the more, you know, as you know, Shopify has an integration to Spotify. Why? Because some merchants that also have very large followings as a musician have massive followings on their artist profile. The fact that you can now show Shopify products on your artist profile means for that particular segment of merchants, they can easily, you know,

Speaker Change: Over time, those channels are going to expand. Not every channel will work for every single merchant, but the idea is when a new channel exists, you're able to easily activate it directly from the Shopify admin. And that's the commitment we have to our merchants.

Speaker Change: Thanks for your question. Our next question will come from Siddhi Panagrahi at Mizzou Health Securities.

Speaker Change: Thanks for taking my question. I just want to dig into the enterprise part of the business, mainly go-to-market. I know that's a displacement market and also you see, you know, some of the big vendors in that space. Help us understand like how you are seeing, what's your strategy for go-to-market for the penetrate there and what kind of trends are you seeing when enterprise customer uptake? Is it like total replacement? Is it or slowly they try to replace the existing solution?

Speaker Change: In some cases, it's total replacement, which obviously is the goal. In other cases, they want to begin to work with us on checkout or on shop pay or one of the commerce components. But I would say that

Speaker Change: go-to-market executions literally across the board. And we have done a really great job of shifting this narrative that Shopify is no longer just for small businesses in North America, we're now for every size business everywhere in the world.

Speaker Change: When you have these incredible brands, these iconic brands, the Reeboks and the On Runnings and the Victoria's Secret of the world coming to us, it begins to create even further momentum.

Speaker Change: 40,000 SKUs being able to migrate those 40,000 SKUs in less than five minutes. That is not something that most companies can do. In fact, that's not something that any company can do and we're really innovating to try to make that a lot better and we're displacing the largest enterprise commerce companies on the planet and the momentum is continuing. And the best part is we're winning these deals and they're not leaving. They're staying with us and they're acting as references for other incredible brands, too. So it's a really important part of a business and now there's sort of something for everyone when it comes to enterprise commerce. on Shopify.

Speaker Change: Thank you for your question. Our next question will come from Andrew Boone at JMP Securities.

Jeff Hoffmeister: Thanks so much for taking my question. Jeff, I wanted to ask about one comment and guidance. You said similar pre-cash flow margins going forward. Can you just speak to the implications of that and what are you guys either investing in or how do we think about that as it seems like headcount has been flat? Thanks so much.

Jeff Hoffmeister: Yeah, I think in terms of my comments about similar cash flow margins going forward, one of the things I want to do just in terms of start from a perspective is look at both last year and this year and see how the free cash flow margins have played out throughout each of the quarters through the year. And you can see, again, to my comment about us getting

Jeff Hoffmeister: in the expectation of where we were last year. I think we've gotten to a very good spot, especially over the last two years.

Jeff Hoffmeister: where we've gotten to solid free cash flow profitability. And as I mentioned on the call, I think we've now struck a very good balance.

Jeff Hoffmeister: in terms of where we say this feels like a good free cash flow margin where we can invest every incremental dollar back into the business and continue to do everything we want to do to sustain the long-term growth of the business.

Jeff Hoffmeister: So that doesn't in any way, shape, or form mean that we're not going to spill it on everything we're trying to do to continue the leverage on how we use AI around automation around, as you alluded to, Andrew, in terms of the discipline headcount.

Jeff Hoffmeister: We talked investor day, you know, I guess it's a little bit less than a year ago now. We talked investor day about our internal proprietary systems, GSD, Shopify, iOS, some of the things that we built to make ourselves more efficient, really point the team in the right direction, be highly effective in everything we're doing. So we're going to continue to do all of that, but we also see the opportunity right now, and both Harley and I alluded to this in our comments, we also see the opportunity to really make sure the incremental dollar goes back into top line growth and supporting that momentum and all the things that we've talked about, the durable elements of growth for us in terms of what we're doing in point of sale, what we're doing in enterprise, what we're doing in international.

Jeff Hoffmeister: So, it's really that element of not trying to aggressively push free cash flow margins higher and instead focus on the continued growth of the business. So, that's really the best context I can give you under.

Speaker Change: Thanks Andrew. Our next question comes from Mark Zdodowicz at Benchmark.

Mark Zdodowicz: Thanks, Carrie. Appreciate it. Jeff, you've alluded to last quarter, too, just in terms of your enterprise pipeline starting to contribute perhaps in the first half of next year. I'm just curious if you could maybe quantify or qualify the size of that contribution in the first half of next year. Thanks.

Speaker Change: Yeah, Mark, I don't have any real numbers to give you or say this is how we think about the incremental to top-line growth.

Speaker Change: I would echo some of the comments which Harley made just a few moments ago in terms of what we're seeing on enterprise and go to market and how that's playing out. Obviously, we've been lending some marketing dollars to support enterprise, and that's helping fuel the momentum in addition to all the other things we covered.

Speaker Change: But on average, if you say it's 6, 9, 12 months in the selling cycle, 6, 9, 12 months in the implementation cycle, you kind of stack those two on top of each other and say, we've really been making a push on enterprise.

Speaker Change: I don't know, roughly two years now, and we're kind of 18 months or like nine months, nine months and stack on top of each other, kind of 18 months.

into really having a lot of these enterprises.

Speaker Change: on platform, taking volume, really working with us. I think we're still very early in the days of this, Mark. So this is going to be more of a 2025 phenomenon than is 2024. I just don't have any exact numbers to give you and say it's going to add X number of basis points, for example, to the next year's growth rate.

Speaker Change: Sorry, looks like Martin dropped out of the queue. All right, we'll take our next question instead from Ken Wong at Oppenheimer.

Speaker Change: Fantastic. Thank you for taking my question. I wanted to ask about your enhancements with PayPal announced back in September. I guess, one, how does this kind of progress the platform? Any potential uplift to monetization or unit economics over time that we should anticipate?

Speaker Change: Let me just sort of start, before we get into economics, sort of, you know, why we did it, because it's important. I mean, for us, it's all about optionality, we want to effectively, you know, I mentioned those browser tabs, we want to make it really easy for our merchants to conduct all their business. So for example, you know, after this integration, now the all your PayPal wallet transactions, you can be seen directly from the Shopify admin. So when we think about these partnerships, what you should sort of think about is, is what we're trying to do is make it so merchants can operate more, more effectively, easier with things are already using. And that's the reason why sort of, this made a lot of sense, optionality really matters to them.

Jeff Hoffmeister: Jeff, I'm not sure if you want to add anything else to that. Yeah, and that's a function of just the level of integration we did with PayPal on these wallet transactions. And so this really specifically goes into make sure we're differentiating between situations where we would process with PayPal on the backend.

Speaker Change: The specific situation that Harley and I are alluding to is that the consumer chooses to effectively use their PayPal wallet, use the PayPal button to pay.

Speaker Change: then given the integration that we've done, which we really did for the sake of being able to give the merchants a more holistic view of all these transactions. So they're Shopify admin from the dashboard that they're using to run their business.

Speaker Change: They have a comprehensive view of all the transactions, the orders, the payouts, the reporting, the chargebacks.

Speaker Change: all of those things. One of the outcomes of that is the revenue recognition change on those specific types of transactions which Harley alluded to. So we're going from what in the past had been a net revenue recognition on those, it's now going to gross.

Speaker Change: the gross revenue recognition. Importantly though, while there's going to be some headwinds to margins on that, some uplift for revenues in terms of growth rate, it's on a gross profit dollars, it's incremental gross profit dollars to us.

Speaker Change: But that will, and we signed that agreement at the, this PayPal wallet transaction activity went into effect at the very end of September. So this will be a little bit more of a 2025 phenomenon.

Our next question will come from Trevor Young at Barclays.

Speaker Change: Great, thanks for taking my question. Jeff, just back to your comments about feeling comfortable at this kind of, you know, high teens, 20% free cash flow margin. Help us foot that with, you know, comments earlier in the year about, you know, further room to run on optimizing your internal facing marketing tools and adjusting spend across channels to maximize ROI and so forth. Should we assume that, you know, you might lean in on marketing heading into next year?

Speaker Change: Well, Trevor, I don't, there's no change in how we think about marketing. And I don't think that there's any change in terms of how we think about free cash flow from a marketing perspective.

Speaker Change: We obviously have spent more time on that topic in the last or the prior two calls, but our strategy remains focused on everything we can do on both performance marketing and the non-performance marketing in terms of, one, supporting the core Shopify growth engines and two, obviously helping expand in things like point of sale, enterprise.

Speaker Change: So we're going to continue to leverage those, we're going to continue to be more and more efficient in terms of our internal operations.

Speaker Change: I don't think that impacts how we think about marketing. And I don't think that in any way impacts saying, well, all right, so now we've both topped out on free cash for margins, which is not clear, which is not the case. We're making a proactive decision in terms of how we think about these margins.

Speaker Change: So we can invest those dollars, whether it be back in marketing, whether it be upgrading in certain spots, maybe the R&D team, maybe adding to the R&D team, product development, AI, all those things. It's not a marketing-specific initiative to say, oh, this gives us the additional dollars to go pump that back into marketing. So.

Speaker Change: Thank you for your question. Our next question will come from Dominic Ball at Redburn Atlantic.

Dominic Ball: Hey, Jeff, Harley, and Carrie. Thanks for the question. One question on the changing nature of search discovery and the evolution of short-form content.

Dominic Ball: Can you give us a little bit more color on the Shopify-YouTube-Shorts integration? How this came about, the merchant uptake, and how big do you think this can really get? Thank you.

Speaker Change: I mean, when it comes to YouTube, this isn't a new partnership for us. We've been working with YouTube and Google for.

Speaker Change: very, very long time. The relation with YouTube actually started with live selling. We were their live selling launch partner originally. And then what we realized or what I guess we realized in collaboration with them is that this idea of actually creating an affiliate program whereby if one of their content creators is talking about

Speaker Change: for example, and also wants to use a particular product that eventually becomes for sale.

Speaker Change: pretty much every one of the brands that the audience likes and wants to purchase from is on Shopify. So it felt like a really great thing for them because it allows their creators to further monetize through affiliate fees, but it also means that Shopify merchants can now find a new sales channel through these creators across the YouTube audience, which we think is obviously always positive.

Speaker Change: But at a macro level, these, you know, whether it's YouTube or also, you know, I mentioned Roblox, my pair of remarks or any of these other channels. The idea here is to make sure that every surface area where consumers may want to purchase, they're able to do so through Shopify. And and so you'll continue to you'll continue to see us do more of those things in terms of how how YouTube in particular is going to fare. That remains to be seen. It's still pretty early. What I suspect will happen similar to our other channels is that some merchants will find a lot of success there because they'll find that that their audience, their core audience works really well with this particular affiliate dynamic. In other cases, it may just not be that helpful. But that's that's the point. The point is that we want to effectively make it so.

Speaker Change: Every merchant on Shopify can get in front of a new audience that otherwise they may not. And again, in order to do that, you have to be on Shopify.

Speaker Change: And so you'll continue to see us do more of these commerce integrations and these partnerships and actually, you know one thing I'll just sort of mention this one thing that shop has got really good at is we have a great reputation of being a great Partner and what that means is not just technology not just commercials, but more more sort of holistically It means that when a company of any size or in any industries thinking about commerce Shopify is usually the first call they make and the integration doesn't take months or years It often happens quite rapidly. And so I'm very proud of Shopify showing up as a great partnership company

Speaker Change: Thank you for your question. Our next question will come from Deepak Bhativanam at Cancer Fitzgerald.

Harley Finkelstein: Hey, thanks, Carrie. Thanks for taking the question. Harley, can you give additional color on what you're seeing in terms of the consumer behavior or repeat use after all the recent product enhancements you made on the Shop app? How should we think about what informs your product strategy for this going forward, say in the next two to three years? Thanks so much.

Harley Finkelstein: Yeah, I mean, the product strategy remains the same, which is we want to create new ways for merchants to engage and to drive authentic connection with customers. We also want to make it that shop is an owned channel for merchants that can help them drive, you know, real traffic and real sales.

Harley Finkelstein: And these enhancements are working. I mean, shop is becoming a sort of cultural force. We're seeing incredible brands, you know, Drake, Mr. Beast, Steve Madden, Feastable, Spanx.

Harley Finkelstein: all come to shop to do these incredible, you know, not just promotions, but also they're launching things directly on shop. We also think search and AI together makes the shop search way more relevant, way more personalized. That is also very compelling. And then merchant co-marketing, you know, teaming up with these big brands to do these shop cash giveaways has become really important for some merchants some of the time. It's one of the major drivers for them. So in terms of, you know, where it's going, I mean, you know, in.

Harley Finkelstein: In terms of our goal here, the changes that we've made in some cases have led to an 18% increase in sessions where a buyer engaged in a recommendation with our new home feed, for example. So I think you'll continue to see new improvements to the Shop app, but ultimately, the idea is, can we actually help increase LTV for the merchants who use it? Can we help consumers find brands they have not otherwise encountered, and also re-engage with brands they already love? And to my point earlier,

Harley Finkelstein: The key here is that this is something that if you want to engage with, if you want to be a part of, you have to be on Shopify. And Shopify continues to do really well.

Speaker Change: Thank you for your question, Deepak. And our final question will come from Richard Hsu at National Bank Financial.

Richard Hsu: Yes, thank you. You talked about Shopify being a system of record for commerce. So as we look out ahead, is it fair to say that you have an opportunity beyond commerce, so to replace existing systems of records such as ERP, CRM, or supply chain?

and harley finkelstein out!

Speaker Change: Thanks for your question. I'll now hand it back to Harley for some closing remarks.

Harley Finkelstein: Yeah, thanks, Carrie. Look, you've heard a lot from Jeff and I on the call, but I just want to say this. For those of you that have been following the Shopify story for quite some time, you know that we are a company that is laser-focused on our merchants. You've heard that we have a very long-term vision that we think could help them succeed. I think you will continue to see us seize opportunities and invest, as Jeff describes, with discipline to further establish ourselves as the leader in commerce. And this has enabled us to deliver, you know, as you can see from these results, some of the strongest results in the industry quarter after quarter. I also want to repeat, this is the best version of Shopify yet. We really like our size, our shape. We like how we're operating. We really think it gives us the ability to grow the business and invest in the future. And so I just want to finish with that point and

Harley Finkelstein: now for us back to helping our merchants crush this holiday season and well into the future. So thank you all for joining us on this call.

Speaker Change: This concludes our third quarter 2024 conference call. Thank you for joining us. Goodbye.