Q4 2024 Shopify Inc Earnings Call
Speaker Change: I'm your host, Emile Ennis Jr., and I'll see you next time.
Speaker Change: Good morning, and thank you for joining Shopify's fourth quarter 2024 conference call. I'm 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.
Speaker Change: 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.
Speaker Change: 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 U.S. and Canadian regulators.
Speaker Change: We will also speak to adjusted financial measures, which are non-GAAP and not a substitute for GAAP financial measures. Reconciliations between the two are provided in 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'll turn the call over to Harley.
Harley Finkelstein: Thanks, Carrie, and good morning, everyone. As we close another year, I've honestly never been more excited by what we've achieved and how it's positioning us for 2025.
Harley Finkelstein: 2024 was one for the books. We executed with discipline, just as we said we would. We maintained a rapid speed of product innovation marked by three, yes, three additions, and we further solidified our position as a leader in unified commerce.
Harley Finkelstein: We continue to expand our global reach and scale, coming in just shy of $300 billion in GMV and $9 billion in revenue for the year.
Harley Finkelstein: And we ended the year on a really high note, with Q4 absolutely knocking it out of the park, delivering 31% revenue growth and 22% free cash on margins, putting us in the rare air of hitting the rule of 50 at a size and scale that very few are achieving.
Harley Finkelstein: We can deliver the success like we did throughout 2024 and specifically in Q4 because Shopify was founded on the belief that we grow by helping our merchants grow and succeed.
Harley Finkelstein: In other words, their success fuels our own. And that remains the flywheel behind our success today.
Harley Finkelstein: Our commitment to making entrepreneurship more common is why Shopify has become the go-to platform across all corners of commerce. From local startups landing their very first sale to global brands pushing billions in GMV, merchants everywhere are choosing Shopify.
Harley Finkelstein: I'm especially proud to share that in the U.S. alone, Shopify is now over 12% of the e-commerce market share. And we continue to grow rapidly in places like Europe and Japan. Let's quickly touch on how we closed out 2024.
Harley Finkelstein: From a regional perspective, North American revenue was up 23%, with the U.S. crossing $5.7 billion in revenue, which is more than our entire company's revenue in 2022.
Harley Finkelstein: Our international regions continue to outperform North America, achieving a 33% growth rate for the year. With two consecutive years of international growth exceeding 30%, we are driving rapid growth at scale as we continue to expand our global presence.
Harley Finkelstein: And finally, our merchants full year GMV accelerated to 24% compared to last year, which includes our merchants most successful Black Friday, Cyber Monday selling period ever, generating $11.5 billion in GMV.
Harley Finkelstein: What's even more impressive about these growth numbers is that we did it while managing our operating expense growth to deliver an incredible milestone for Shopify.
Harley Finkelstein: Our operating income surpassed $1 billion for the year, which is four times higher than our previous peak of $269 million in 2021. And on top of that, our free cash flow margin expanded to 18% up from 13% in 2023.
Harley Finkelstein: I also want to take a minute to mention some major milestones Shopify hit in 2024 that demonstrate our strength. Over 875 million consumers bought something from a Shopify Merchants Online store. That is essentially one in every six internet users.
Harley Finkelstein: We passed a massive milestone crossing the 1 trillion dollar mark for cumulative GMV that has been processed through Shopify
Harley Finkelstein: and we now have hundreds of millions of shop pay users with shop pay representing 38% of GPV up from 33% of GPV in 2023.
Harley Finkelstein: 2024 was nothing short of spectacular, especially with a powerhouse Q4. And if I may, I want to pause for a second here and just make sure that is really, really clear. Nothing matters more than this.
Harley Finkelstein: Q4 was an incredible quarter, and even more importantly, the entire 2024 was exceptionally strong.
Harley Finkelstein: On this very call one year ago, we laid out very clear goals and then we set out and we absolutely crushed them. We delivered 24% GMB growth, 26% revenue growth, and an 18% free cash flow margin.
Harley Finkelstein: This is not just Shopify doing well. This is Shopify operating as a growth company at peak performance across our team, our products, our business model, and with operational discipline, exactly as we said we would.
Harley Finkelstein: and even though we get to get on here four times a year to walk through the quarterly results.
We are laser focused on the bigger picture.
Harley Finkelstein: Our vision goes way beyond just the next quarter. We are committed to building a durable, 100-year company that doesn't just meet the needs of our merchants, but anticipates what they'll need in the next 5, 10, even 20 years.
Harley Finkelstein: We are really pleased with how things are shaping up. Our market position is strengthening, our operating model is proving very effective, and our profitability levels are exactly where we want them to be. If you walk away from this call with nothing else, I hope it's that.
Harley Finkelstein: Okay, where was I? Okay, so in 2024, we focused a ton on optimizing and fortifying the incredible platform we have built. We fine-tuned the edges, we improved performance, and we made sure everything works seamlessly together.
Harley Finkelstein: Now, while there are too many to list in this call, I want to hit on a couple of the most impressive time-saving features and new products that we launched this past year.
Harley Finkelstein: First, our engineers focus on enhancing Shopify's intuitiveness and ease of use by streamlining operations and reducing friction. We increase varying limits to 2,000 to enable building even more complex catalogs for larger merchants.
Harley Finkelstein: We enhanced customer account extensions so merchants can add features like loyalty programs without touching code. We launched Shopify Balancer Plus, introducing next day payouts and attractive APYs and added flexible payment options in Shopify Credit to improve cash flow management.
Harley Finkelstein: In our offline business, we rolled out tap to pay in multiple countries, introduced Shopify bundles and customer metafields, and launched robust order management features like ship to store and draft orders.
Harley Finkelstein: We also help merchants turn their retail locations into powerful acquisition channels by capturing more emails at checkout powered by the network effect of ShopPay.
Harley Finkelstein: Internationally, we've taken big strides by expanding our POS terminal to 8 additional countries and integrating payments in France.
Harley Finkelstein: We also made it easier for merchants to discover and engage with their customers. The Shop app introduced a new merchant-focused home feed highlighting the diversity and richness of brands.
Harley Finkelstein: We also made shop campaigns available to all Shopify plans enabling more merchants to run Acquisition campaigns on platforms like shop Google and meta targeting new and lapsed customers with incentives in the shop app
Harley Finkelstein: As it relates to helping our merchants go global, we've significantly enhanced the global buyer experience by adding UPS as a carrier option in managed markets, expanding our comprehensive coverage for U.S. outbound labels across economy, standard, and express services.
Harley Finkelstein: We've expanded multi-currency payouts across select parts of Europe, introduced Shopify plans in Japanese Yen, and launched Rise, our first flagship theme tailored for the Japanese e-commerce market.
Harley Finkelstein: Additionally, we've integrated Klarna into Shopify Payments as a local payment method for certain countries, and we increased our local shipping options across Europe and the UK, further broadening our market coverage and streamlining operations for our merchants.
Harley Finkelstein: Beyond our products, one of the greatest strengths is our thriving partner ecosystem. We are widely recognized as one of the best companies in the world at fostering a long-term, mutually beneficial partnership.
Harley Finkelstein: Last year we became Roblox's first commerce integration partner. We integrated with YouTube Shopping in the U.S. Expanded our payments offering through our partnership with PayPal.
Harley Finkelstein: launched our first AI-powered search integration with Perplexity, enabling new ways for buyers to find merchants and launch a new collaboration with Oracle for Enterprise.
Harley Finkelstein: Additionally, over the past year, we have paid out $1 billion to partners for apps benefiting our merchants.
Harley Finkelstein: We also added over 3,000 new apps to our App Store, bringing our total to more than 16,000 apps by the end of 2024, including the over 675 that are part of our Built for Shopify program.
This is what differentiates us.
Harley Finkelstein: We accomplished all of this product innovation in a single year. Again, in a single year. We are building for the long term and 2024 shows just that. It's one of the strongest and most balanced years across all aspects of our business in our 20-year history.
Harley Finkelstein: And with that in mind, let me take you through some of the accomplishments from our Q4 across our growth drivers, and then I'll wrap up by sharing an overview of our aims for 2025.
Harley Finkelstein: So let's dive into Q4. Shopify is expanding its merchant base to include larger, high-volume global brands. Since our last earnings call, brands like Reebok, Champion, West Wing, and BarkBox all launched on Shopify.
Harley Finkelstein: We also continue to deepen our portfolio of brands across our largest verticals, citing names from the Apparel and Accessories vertical like the Canadian Behemoth Reitmans, David's Bridal, Uncommon Goods, and luxury handbag designer Dunian Burke.
Harley Finkelstein: Health and beauty companies like Goop, while adding to newer verticals including the legendary Warner Music Group and the renowned window covering company, Hunter Douglas.
Harley Finkelstein: In Europe, we also signed iconic luxury fashion retailer Karl Lagerfeld, who will launch over 70 global point of sale locations with Shopify.
Harley Finkelstein: We are also thrilled to continue welcoming some of the biggest and the most renowned sports teams to Shopify.
Harley Finkelstein: Most recently, FC Barcelona, the iconic soccer team with a global fan base of over 330 million, has expanded their use of our platform to include our unified commerce and point of sale system, moving beyond just online.
Harley Finkelstein: They join an impressive roster of major sports teams already leveraging Shopify, including European football giants like Real Madrid and Newcastle United, NBA powerhouses such as the L.A. Lakers, Miami Heat, Dallas Mavericks, and Sacramento Kings, as well as the Toronto Maple Leafs and Red Bull Racing.
Harley Finkelstein: Not to mention within global esports teams including Team Liquid and of course our very own Shopify Rebellion. You could say we're knocking out of the park in the commerce game. Clearly we are playing in a league of our own as the MVP, the most valuable platform.
Harley Finkelstein: And that is just the beginning. Think about this. From top sports teams to major music labels and even one of the largest window-covering businesses.
Harley Finkelstein: Shopify powers them all. This diversity isn't just impressive, it proves that Shopify is the most compelling choice for any business looking to grow quickly, reliably, and at scale. No matter your industry, we have got you covered.
Harley Finkelstein: In addition to new brands consistently choosing Shopify for its comprehensive enterprise-level offerings, the ShopPay commerce component has also become a compelling entry point into the Shopify ecosystem for enterprise brands.
Harley Finkelstein: Take Everlane, for example. Everlane was the first merchant to sign up for Shopify Commerce Component about 15 months ago. But since then, our partnership has only grown stronger, and by Q4 of this year, we've expanded our agreement with them, bringing more of their operations over to Shopify.
Harley Finkelstein: And we believe this trend should continue to play out over time for the shop-pay commerce component. We expect that enterprise retailers may often begin with a simple integration of shop-pay and gradually, over time, adopt more and more of Shopify's products and services.
Harley Finkelstein: Or here's another example. In Q4, we signed three very large shoe brands, Aldo, Sperry, and call it Spring, that combined will bring both their online and offline businesses to Shopify, including over 400 physical retail locations through Point of Sale.
Harley Finkelstein: Initially, these brands were only looking at our shop pay commerce component. But after working closely with our team and seeing what our full unified commerce offering can do, they each decided to go all in with us.
Harley Finkelstein: I love this example because it highlights so clearly that our go-to-market strategy of offering a singular component as an option can open up conversations that lead to merchants adopting our entire platform.
Harley Finkelstein: Now let's dive into shop products, the buyer-facing side of Shopify that's all about making shopping simpler, more delightful, and becoming the most trusted brand for commerce everywhere. Our shop products are anchored by four main pillars.
Harley Finkelstein: ShopPay, ShopPay installments, sign in with SHOP and the SHOP app.
Let's start by talking about shop pay.
Harley Finkelstein: The shop pay button has become a highly valuable piece of real estate for both merchants and buyers.
Harley Finkelstein: We believe that buyers are actively seeking it out during checkout.
Harley Finkelstein: so much so that if not available, they are more likely to abandon their checkup.
Harley Finkelstein: Now, this behavior underscores what we and our merchants have long understood.
Harley Finkelstein: ShopPay's ability to drive conversions is very powerful. This quarter, ShopPay processed $27 billion of GMV, up 50% from last year, and double that of the next accelerated checkout on Shopify merchant stores. I want to make sure that everybody caught that, nearly double that of the next closest option.
Harley Finkelstein: So it's no surprise that the shop pay commerce component in particular has been generating very strong interest amongst enterprise level brands.
Harley Finkelstein: In 2024, GMV from this component alone surged by nearly 20x, with major brands like Arctic, Boot Barn, and Bespoke Post adopting it.
Harley Finkelstein: And this quarter, well-known brands such as Crocs and GameStop also signed up for Shop A Commerce component, further expanding our reach. Now the Shop app, which has seen its GMB growth 6x in the past two years alone, continues to scale across active users and in-app native GMB.
Harley Finkelstein: In fact, Q4 shop app native GMV was up 84% versus the prior year as we continue to make it an even more compelling destination for buyers to find their favorite brands on their mobile devices.
Harley Finkelstein: Recent improvements include a more personalized and fresh shopping feed, new curated shopping events and category browsing, and the launch of cart syncing, which allows users to complete abandoned shop pay web checkouts through the shop app. This is really, really cool.
Harley Finkelstein: And finally, let's quickly touch on offline and B2B before we turn our focus to 2025.
Harley Finkelstein: Q4 offline GMV grew 26% thanks largely to our focused effort on expanding our reach with large multi-location merchants
Harley Finkelstein: Notably we launched three new brands in the Asia-Pacific region with over 320 locations and celebrated the opening of Skims first location in NYC and Beams is first pop-up store.
Speaker Change: EY highlighted that because of our best-in-class architecture, Shopify point-of-sale enables enterprise retailers to achieve 22% lower cost of ownership and 20% faster point-of-sale implementation, enhancing both operational and revenue efficiencies.
Speaker Change: This is a really, really big deal in the physical retail industry.
Speaker Change: In B2B, Shopify is really crushing it, with 6 straight quarters of over 100% year-over-year GMV growth. In fact, Q4 alone was a 132% increase. And November smashed records with an all-time high in monthly GMV.
Speaker Change: Throughout the year, our B2B GMB climbed by more than 140% compared to 2023. In 2024, we also secured a top spot in the Forrester Wave rankings, a recognition that not only showcases our robust B2B capabilities, but also enhances our appeal to larger merchants.
Speaker Change: We also welcome new brands from various industries, expanding our market reach and customer base.
Speaker Change: While B2B still accounts for a small portion of our GMV, the strong growth we are experiencing highlights the vast opportunities ahead.
Speaker Change: Our aim is to make Shopify the premier self-serve wholesale purchasing platform, offering a unified solution that powers commerce online, offline, and everywhere in between.
and we are well on our way to achieving that.
Speaker Change: Okay, so yes, 2024 was an incredible year capped off by a particularly strong Q4. But as you all know by now, we are already full steam ahead into 2025, actively building on the scaling foundations we have built.
Speaker Change: Every year Toby sets the core themes for our company reminding us of the impact of her work and guiding our focus for the year ahead.
Speaker Change: This year's aims build directly off of last year's successes, emphasizing a continued commitment to strong operational performance, rapid product innovation, and most importantly, the continued success and the growth of our merchants.
Speaker Change: First, we remain committed to nailing the basics, and as a result, continuing our focus on simplification is front and center.
Speaker Change: Everything we build and do should make Shopify even more user-friendly for our merchants. This means stripping away unnecessary processes and focusing on what truly adds value.
Speaker Change: In other words, help our merchants to grow revenue with a growing complexity for their business.
Speaker Change: Next, we will continue to embrace the transformative potential of AI.
Speaker Change: This technology is not just a part of the future, it is redefining it. We've anticipated this, so we're already transforming Shopify into a platform where users and machines work seamlessly together.
Speaker Change: We plan to deepen our investment in Sidekick and other AI capabilities to help not just brand new merchants to launch, but also to help large merchants scale faster and drive greater productivity. Our efforts to shift towards more goal-oriented software will further help to streamline operations and improve decision-making.
Speaker Change: This focus on embracing new ways of thinking and working positions us not only as the platform of choice today, but also as a leader for commerce in the AI-driven era with a relentless focus on cutting-edge technology.
Speaker Change: Additionally, expansion remains a cornerstone for our ability to build for the long term.
Speaker Change: In 2025, we plan to continue to grow our reach across various merchant sizes, from entrepreneur to enterprise, and gain greater presence and market share across all geographies, particularly internationally in Europe and countries like Japan.
Speaker Change: We will continue to defend and to grow our leadership position as the place to start an online business.
Speaker Change: We are dedicated to reinforcing our position as the go-to platform for starting an online business and driving growth in areas like point of sale, B2B, and shop, supported by further strategic marketing and targeted go-to-market initiatives.
Speaker Change: This expansion is not just about increasing our footprint, it's about strengthening the trust and reliability that our merchants expect from Shopify, all while working to become the gold standard for trusted commerce by buyers across the internet.
Speaker Change: And all of this is backed by our continued commitment to a strong free cash flow margin profile. We plan to continue to operate as efficiently as possible to create the flexibility we want for further investment in the multiple areas of growth that we see before us.
Speaker Change: This disciplined approach allows us to focus on investing in long-term strategies rather than just short-term gains.
Speaker Change: Okay, to close this out, our path is clear and we are executing. We've consistently demonstrated our commitment to financial discipline, enabling solid free cash flow margins that position us well for future growth and profitability.
Speaker Change: In 2025, we will continue to invest in our core platform and in key areas like enterprise, offline, and international markets, as these key growth drivers are helping to fuel our top-line growth and laying the groundwork for ongoing success and innovation.
Speaker Change: As the commerce landscape evolves, we firmly believe Shopify is best positioned to thrive thanks to our proven track record, agile platform, relentless focus on product innovation, and the success of our merchants.
Speaker Change: We are entering an exciting era of commerce driven by transformative shifts in technology like AI.
Speaker Change: We are ready to embrace this change and the competition it brings, confident in our ability to continue leading the way.
Speaker Change: So thank you to the entire Shopify team, to our partner ecosystem, and to all our merchants for another amazing year of making commerce better for everyone. As I hope is evidence at this point, we are ready, we are excited for what is next. And with that, let me turn the call over to Jeff.
Jeff Hoffmeister: Thank you, Harley. Q4 was an exceptional quarter for us. It happened in a year where we delivered 25% or greater top-line growth in each quarter when excluding logistics and expanded our free cash flow margin to 18% for the year.
Jeff Hoffmeister: This marks our 7th straight quarter of delivering pro forma revenue growth of 25% or greater, 6th consecutive quarter of GMV growth rate exceeding 20%, 9th consecutive quarter of positive free cash flow, and 6th consecutive quarter of double-digit free cash flow margins.
Jeff Hoffmeister: We also achieved some significant milestones on the expense side, but more on that later.
Jeff Hoffmeister: We are delivering growth across multiple products, multiple geographies, and multiple merchant sizes and types, all while being disciplined on expenses but thoughtfully investing for Shopify's continued growth.
Now, let's dive into our key four results.
Jeff Hoffmeister: In Q4, GMV increased 26% year over year, marking the highest quarterly GMV rate since the pandemic-driven growth rate of 31% in Q4 2021. The Q4 GMV results were driven primarily by
Jeff Hoffmeister: Same store sales growth from our existing merchants, led by our plus merchants.
growth in the number of merchants on our platform.
Jeff Hoffmeister: continued strength internationally with GMV outside North America growing 33% in Q4.
Jeff Hoffmeister: This continued momentum was led by 37% growth from the combined region of Europe, the Middle East, and Africa.
Jeff Hoffmeister: with growth in that region slightly weighted to same-store sales growth versus new merchant acquisition and fourth, online, our point-of-sale, where we had 26% GMB growth year-over-year. In terms of industry verticals, Q4 saw notable growth from health and beauty,
Food and Beverage, Home and Garden, and Apparel and Accessories.
Jeff Hoffmeister: We also had in Q4 notable strength from a few interesting but smaller verticals for us like toys and games and animals and pet supply.
Jeff Hoffmeister: Q4 revenue was $2.8 billion, up 31% year-over-year, and full-year revenue was up 26% to $8.9 billion.
and increased payments penetration, which hits 64% for Q4.
Jeff Hoffmeister: The revenue outperformance relative to our outlook was driven by North America representing a larger percentage of GMV than expected More of our products are available in North America versus other geographies. So outperformance in the US and Canada brings higher revenue per merchant
Jeff Hoffmeister: Q4 Merchant Solutions revenue increased 33% year-over-year, primarily driven by the continued strength in GMB and increased penetration of Shopify payments.
Jeff Hoffmeister: 61 billion of GMV was processed on Shopify payments in Q4. That's 35% higher than last year and 64% of GMV compared to 60% in Q4 of 2023. Several factors drove the quarter's higher gross payments volume including
Jeff Hoffmeister: The strong performance of merchants who use Shopify Payments, an increasing percentage of which are on Shopify Plus.
More merchants across the globe adopting payments.
Jeff Hoffmeister: and greater penetration of shop pay, which was 41% of GPV in the quarter.
Jeff Hoffmeister: As a reminder, Q4 is a quarter which traditionally sees the highest percentage of revenue from payments. For the year, GPV penetration was 62%, up from 58% in 2023.
Jeff Hoffmeister: Subscription solutions revenue was up 27% over Q4 of last year.
Jeff Hoffmeister: the growth was driven by an increase in 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: We continue to execute at an impressive scale, driving both commerce overall and our share of the commerce market.
Jeff Hoffmeister: Q4 MRR was up 24% year-over-year, with continued growth in each of standard, plus, and offline, with all three categories seeing an increase in the number of merchants.
Jeff Hoffmeister: plus represented 33% of MRR for the quarter, consistent with Q3.
Jeff Hoffmeister: Important to note that during Q4 we started shifting to a three-month paid trial in certain markets versus our previously predominantly one-month paid trials.
Jeff Hoffmeister: This change was a headwind to our Q4 MRR growth, particularly in standard and offline.
Jeff Hoffmeister: Moreover, based on the timing of our rollouts, we expect it to impact Q1 and Q2.
Jeff Hoffmeister: As you know, we are always iterating on our approach to merchant acquisition, focusing on enabling and accelerating merchant success for the long term.
Jeff Hoffmeister: With respect to paid trials, the one-month trials yielded revenue to Shopify faster, but our data also suggested that it came at the cost of durability.
Jeff Hoffmeister: specifically given merchants a little bit more time to experiment with our platform, increased the likelihood that they were setting themselves up for greater GMV success over the long term.
Jeff Hoffmeister: This point became clear through testing that we did regarding how quickly merchants from various trial lengths achieved certain GMV milestones. For nearly every lens of our business, like geography or merchant type, the three-month trial yielded better long-term results for merchants and Shopify.
Therefore, we are moving to three-month trials in most geographies.
Jeff Hoffmeister: As a reminder, paid trials are just one of our Merchant Acquisition Tools.
Jeff Hoffmeister: Q4 gross profit was $1.4 billion for the quarter, up 27% year-over-year, and our full-year gross profit was up 27% to $4.5 billion.
Jeff Hoffmeister: Subscription Solutions gross margin was 79.9% compared to 81.5% in the prior year.
Jeff Hoffmeister: The decrease was mainly due to higher cloud and infrastructure hosting costs, in part to support our higher volume fourth quarter. But we do not expect this to have as much of an impact going forward.
Jeff Hoffmeister: Merchant Solutions gross margin was 38.2% compared to 39.2% in Q4 of 2023.
Jeff Hoffmeister: The decrease was primarily driven by lower non-cash revenues from certain partnerships.
Jeff Hoffmeister: which carry a high gross margin and the impact from the expanded partnership with PayPal.
Jeff Hoffmeister: partially offsetting these headwinds in Q4 with strength in our other merchant solutions products led by international selling previously known as markets.
Now, let's turn to operating expenses.
Jeff Hoffmeister: Reflecting on just the past two years, we've made significant strides.
Jeff Hoffmeister: In Q4 2022, operating expenses, excluding the real estate charge, were 52% of revenues.
Jeff Hoffmeister: that went down to 36% in Q4 of 2023 and further down to 32% this Q4 which was right in line with the outlook we provided.
We have come a long way
Jeff Hoffmeister: For Q4, we achieved operating expense leverage in each of R&D, sales and marketing, and G&A, largely due to our disciplined management of headcount.
Jeff Hoffmeister: As of December 31st, 2024, our headcount was just under 8,100 employees.
down from approximately 8,300 at the end of 2023.
Jeff Hoffmeister: In the fourth and smallest of our four operating expense categories that we have on the income statement, Transactions, Loans and Losses,
Jeff Hoffmeister: which does not involve headcount. We saw a slight increase in the percentage of revenue to 3% from 2% the previous year. This increase is simply a function of higher volumes for both our payments and capital businesses.
Jeff Hoffmeister: Important to note that our loss ratios for each remain within a consistent range.
Jeff Hoffmeister: payments and capital are growing well and this was an outgrowth of that. I want to take a moment to thank all my colleagues for the hard work and discipline they're exercising on headcount and the constant innovation and leveraging of automation all while we continue to invest in key growth opportunities.
Jeff Hoffmeister: In my opening remarks, I referenced some milestones on the Exxon side.
Jeff Hoffmeister: In Q4 and for the year, we reached four milestones for the first time since going public nearly a decade ago.
Jeff Hoffmeister: Operating expenses for the year were down to 38% of revenues.
Operating expenses for Q4 were down to 32% of revenues.
Jeff Hoffmeister: Operating margin for the year hit 12 percent, double that of our previous peak in 2021, and operating margin for the quarter was 17 percent.
Jeff Hoffmeister: All of these metrics represent the strongest profitability levels that we have achieved since going public in 2015.
Jeff Hoffmeister: all while maintaining, and in many instances accelerating, growth at scale.
Stack-based compensation was 118 million for the quarter.
Jeff Hoffmeister: Q4 free cash flow was $611 million or 22% of revenue, coming in better than our outlook primarily due to our revenue outperformance.
Jeff Hoffmeister: We delivered increases in both free cash flow margin and free cash flow dollars each successive quarter last year, delivering 12% in Q1, 16% in Q2, 19% in Q3, and 22% this past quarter.
Jeff Hoffmeister: For the year, free cash flow was $1.6 billion, up 77%.
Jeff Hoffmeister: achieving a free cash flow margin of 18% for the year.
Jeff Hoffmeister: Our free cash flow levels are the manifestation of the hard work throughout 2022 and 2023. I believe the strength of our business allows us to achieve these attractive free cash flow margins, but still, importantly, invest in the future.
Jeff Hoffmeister: To be clear, we are a growth company. We plan to prioritize investing further in key areas like our core platform, international, B2B, enterprise, and offline.
Jeff Hoffmeister: as opposed to driving for higher free cash flow margins in the near term.
Jeff Hoffmeister: It's simply the right thing to do with the immense opportunities we see ahead, but delivers a profitability level that we are proud of and believe we can maintain without impacting future growth.
Jeff Hoffmeister: Before diving into Outlook for Q1, one additional dynamic for the full year 2025 to call out. This year, we expect to return to the normal pattern of merging solutions growing quicker than subscription solutions.
Jeff Hoffmeister: A recurring theme of Merchant Solutions' outperformance over the years has been...
the strength of our payments product.
Jeff Hoffmeister: the growing number of our Merchant Solutions products that we offer and our ability to drive merchant adoption of these offerings.
Jeff Hoffmeister: Two things are expected to impact subscription solutions growth this year. First, the move to three-month trials.
Jeff Hoffmeister: Second, our Subscription Solutions revenue recently benefited from the changes in our pricing plans for Standard and Plus.
Jeff Hoffmeister: While we always examine pricing across products and geographies, we don't expect to have substantive pricing changes this year, and therefore expect this benefit to subscription solutions growth to normalize.
With this backdrop, let's move to our expectations for Q1.
We expect Q1 revenue growth.
Jeff Hoffmeister: to be in the mid-20s year over year, driven by many of the same factors that supported our strong revenue growth in 2024.
noting that Q4 specifically is our seasonally strongest quarter.
Jeff Hoffmeister: Turning to gross profit. We expect our gross profit dollars to grow in the low 20s.
Jeff Hoffmeister: The year-over-year gross margin impact versus Q1 of 2024 is driven by the mixed shift between the growth rates of merchant solutions and subscription solutions that I just mentioned, the continued strength of payments,
Jeff Hoffmeister: including the growth of PLOS and Enterprise and the two dynamics that I mentioned regarding Q4 gross margins.
PayPal accounting and lower non-cash revenues.
Jeff Hoffmeister: We expect that our Q1 operating expenses will be 41-42% of revenues, reflecting a 500-600 basis point improvement from Q1 last year.
Jeff Hoffmeister: The factors that contributed to our expense leverage in Q4, as I detailed earlier, are expected to continue into Q1.
Jeff Hoffmeister: We are committed to finding opportunities for operating leverage, but notably want to make sure that we are investing in R&D talent and will continue to invest in marketing to support our key growth areas including enterprise, offline, and international.
Stock-based compensation is expected to be 120 million in Q1.
Jeff Hoffmeister: Finally, free cash flow margin. Q1 is typically our lowest GMB quarter which naturally affects our revenue scale and thereby our free cash flow margin.
Jeff Hoffmeister: Despite this, we still expect our Q1 free cash flow margin to be in the mid-teens, up from 12% last year.
Jeff Hoffmeister: It is important to note that while we've significantly expanded our free cash flow margins over the last two years,
Jeff Hoffmeister: As we move into 2025, and as I mentioned on our last call, we believe the free cash flow margin profile that we have achieved in 2024 strikes the right balance between profitability and investing in building the best products for our merchants today and into the future.
Jeff Hoffmeister: We aim to maintain this level of cash flow profitability rather than optimizing for further margin expansion in the near term.
There are simply too many compelling growth opportunities ahead.
Carrie Gillard: And with that, I'll turn the call back over to Carrie for your questions.
Carrie Gillard: Thanks Jeff. We will now take your questions before turning the call back to Harley for some final words. 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. 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 Andrew Bausch at Wells Fargo.
Andrew Bausch: Hey guys, thanks for taking the question and nice set of results here. Maybe we can just start with the free cash flow guide for the first quarter. It looks like, you know, you're calling for...
Andrew Bausch: So roughly 200 basis points of free cash flow margin expansion, is this the right way to think about the margin expansion as we kind of move through the remainder of the year? And then if we think about the investments that you're making, you know, last year was a lot of the performance marketing was a key theme. Is it consistent with what you're kind of investing in now for these new opportunities?
Andrew Bausch: Yeah, I'll start with that. As it relates to the quarterly aspect of free cash flow, I'm not looking to get into the differentials in any given quarter. I'd go back to the comments I made, Andrew, in terms of
Andrew Bausch: the overall level of free cash flow margins, how we think about it. And we believe we've gotten to a very good level which allows us to obviously maintain this profitability but also invest back into the future and what we want to accomplish.
Andrew Bausch: So, I've made some comments in the past as it relates to the quarterly evolution of free cash flows. I stand by that. As you know, Q4 traditionally is just our, just in terms of the GMV dollars, is our largest quarter in terms of the GMV, which then translates in the revenue, which obviously then translates down into free cash flow margin.
Andrew Bausch: but in the aggregate in terms of how we think about these margins.
Andrew Bausch: Again, I go back to my perspective on this feels like we're at the right level.
Andrew Bausch: And as it relates to performance marketing, that obviously continues to be the majority of our marketing spend.
Andrew Bausch: We still, on the marketing side, are focused on the paybacks we've talked about on numerous calls. They're performing very well. As you know, we're always testing. We're always analyzing. We're always looking at where that best incremental dollar of marketing spend could be put to work. But nothing's changed in our strategy there.
Speaker Change: Thank you. Our next question will come from Jeff Cantwell at Seaport Research.
Speaker Change: ©2010 Universal Media LLC All Rights Reserved. No part of this recording may be reproduced
Thank you for taking my question. Can you hear me?
Yes.
Speaker Change: Great, great. Maybe just to clarify, it looks like your Emerging Solutions take rate was higher than I expected this quarter, but how should we be thinking about that in Q1? Obviously, there's going to be some seasonality there, but on a year-over-year basis, it sounds like we should maybe be contemplating a higher take rate there in Emerging Solutions.
Speaker Change: given all the momentum you're seeing across the platform. And then the gross margins, it looks like you're down in low 20s. Do you mind just going down on that a little bit? How much of the Delta there?
Speaker Change: versus the Revenue to Growth Guide was due to the success moving up market to enterprise and I think he said PayPal accounting So just trying to get more clearly on that to think about to go forward. Thanks
Speaker Change: Yeah, as it relates to merchant solutions and the attached rate, obviously what is going into merchant solutions is the strength of payments as well as the continued growth of
Speaker Change: the products like capital and tax and all the additional products which we're adding.
Speaker Change: and that's, if you look at it on a year-over-year basis, obviously 24 over 23, you've got to keep in mind the impact of performing out logistics.
Speaker Change: And so that actually would add some additional strength in terms of what you're seeing on the merchant solutions attach rate. So.
Speaker Change: We will obviously continue to drive all the products within Merchant Solutions and that will be reflective.
Speaker Change: of what you see in the attach rate, recognizing again, that as we've talked about in the past, attach rate for us is more of an output. We're obviously trying to build great products for our merchants that drives their GMV.
Speaker Change: and from that will obviously come the success in terms of what we realize in revenue and the monetization there.
Speaker Change: Yes, as your question alludes, we're performing well on the merchant solution side.
Speaker Change: As it relates to gross margins for Q1, obviously I talked to you from a guidance perspective.
Speaker Change: the year-over-year impact and the trends that are at play there. Part of what I alluded to in terms of the relative growth rates of merchant solutions and subscription solutions will have an impact on gross margin, and part of that is just the function as I alluded to in terms of what we're seeing on the paid trials this year.
Speaker Change: which will be something which will have some headwinds for the first half of the year, but obviously that will then normalize. So I don't think there's anything beyond what I covered in the primary call. Those are the key drivers.
Speaker Change: Thank you for your question. Our next question comes from Craig Maurer at Financial Technology Partners.
Yeah, good morning. Thanks for taking the questions.
Craig Maurer: First, I wanted to understand how the de minimis exemption impacts your business and how we should think about that should tariffs include that and come into play. Second, I just want to understand how AI can help you with content or listing moderation considering the controversy around the Super Bowl advertisement that took place. Thanks.
Speaker Change: Hey, I'll start there with that question. Let's sort of start with sort of the question of De Minimis and just tariffs in general. Look, I think small and medium-sized businesses are responsible for something like two-thirds of all jobs created. They account for almost all the new job creation, and our merchants alone move billions across the border. So, you know, obviously, tariffs impact real entrepreneurs that are carving out livelihoods for themselves. And what we try to do at Shopify every day is we try to protect and empower every business we can, but obviously especially we care about the underdogs.
Speaker Change: soon as we see anything, whether it's tariffs or de minimis, we usually get to work from a product perspective and we did that right away. I mean all merchants can now display and collect duties during checkout. Consumers can actually easily shop from their home country using shop apps, new search filters.
Speaker Change: And specifically when it comes to de minimis, I mean, we think protections like de minimis are crucial for small business that engage in trade. By exempting these sort of low value shipments from taxes and duties, they keep costs down and allow entrepreneurs, I think, to compete at a much larger scale. So I think rather than eliminating de minimis, countries should really try to streamline these custom processes and improve digital duty collection to make things a lot easier.
Speaker Change: Okay, and our next question will come from Mark Mahaney at Evercore ISI
Mark Mahaney: Okay, great. Two questions, please. Headcount growth, you pointed out, or headcount sort of declined in the fourth quarter. Just how do you think about headcount going forward? Do you think you've got enough operational efficiencies that we should expect relatively modest headcount growth for Shopify going forward for the next year or two? And then
Mark Mahaney: If you look back on the pricing actions that you've taken over the last year or two, the lessons that you've drawn from that and your level of confidence that the value you're creating for your customers is that will allow you from time to time to take more pricing actions. Thank you very much.
Mark Mahaney: So maybe I'll start there, Jeff, and you can kind of jump in. On the headcount thing, you know, we think we're at a point now where we continue to grow the business, both merchant-based, GMV, revenue, and leave our headcount fairly flat. We like the size of Shopify. We like the shape of Shopify. You know, it's been maybe about 24 months now since we sort of talked about this new shape of Shopify.
Mark Mahaney: focus on main quest only, focus on making sure we help entrepreneurs all the way to enterprise merchants not just sell online with us, but sell across every single service area. Obviously merchant solutions and making sure that they take more of our products is something that's also very important to us. But we think we can do so without growing our headcount meaningfully, which really really matters.
Mark Mahaney: In terms of your question around, I think your question is really around value related to the product of Shopify and particularly when it comes to enterprise.
Mark Mahaney: What we've noticed is that, you know, merchants believe that Shopify is still the best deal in town, including at the enterprise level. I mentioned this previously, but, you know, one of the cool parts of seeing companies like Everlane, for example, come to us initially simply for a component and then eventually coming on entirely to Shopify. Or another example is Aldo, where the conversation started with the commerce component and ended up turning into the entire unified commerce.
Mark Mahaney: but also the value. Shopify is incredibly high value. Relative to all the other enterprise players, it's still the best deal in town. Certainly there is some price elasticity and some room for us to increase pricing, but right now we're winning so many of these large merchants and creating this incredible flywheel that doesn't seem like it's the right time immediately. But that being said, we're to keep driving that. And I also think that
Mark Mahaney: When it comes to pricing, we had mentioned to you a little while back in one of our previous earnings calls, six earnings calls ago, about changing our pricing on our basic plan from $29 to $39. And again, even at the lower end of our pricing plans, we saw very few merchants feel like it's still not great value. We saw very little pushback on that, which tells us that we are still deriving an incredible amount of price-to-value ratio.
Speaker Change: Okay, thank you for your question. Our next question comes from Brad Philz at Bank of America.
Brad Philz: Wonderful, thank you so much. I wanted to ask about international. Sounds like some exciting expansion opportunity there. Could you just give us a sense for, you know, which regions, which countries you're making a bigger push, and also what is the kind of investment that you're making there? Is it, you know, more setup experts, you know, direct marketing presence?
Speaker Change: Any any color on how you're investing in some of these new geographies. Thank you I'm glad you asked the question like international expansion is a key growth driver for Shopify It certainly was in q4 and for all of 2024 in particular You know you saw GMV delivered 33% growth in q4 which outpaced North American GMV
Speaker Change: In particular, obviously, you know, EMEA and Europe, Middle East and Africa, GMB grew 37% Q4 year over year. That was led by countries like UK, Germany, France, Netherlands.
Speaker Change: So from a product perspective, we're making Shopify available to more places and integrating it. Obviously, to your point about some of the agencies and partners, that comes with it as well.
Speaker Change: We've made a ton of headway in terms of growing our international merchant base and as we speak, you know 50% of our merchant base are currently now outside of North America and we continue we'll continue to work on that We think that's an area where we have huge opportunity I mentioned on the call that if you look at US e-commerce, we're just over around 12% now of market share But if you look at global retail, we're less than 1% We have so much room for us to grow on a global scale across not just online, but also offline
Speaker Change: most narrowly Western Europe. All the strength there continues whether it's Great Britain, Germany, Italy, France, the Netherlands, Denmark, all those continue to perform very very well and what we're seeing in terms that I made allusion to this on the call in terms of the balance between same store sales growth and new merchant acquisition when you look at the growth rates we're getting for same store sales growth we continue to grow to multiple versus what's growing in the e-commerce growth rates in each of those countries so we think we're doing a really good job on the product market set.
Speaker Change: Thanks Brad. Our next question comes from Gabriella Borges at Golden Saks.
Gabriella Borges: Hey, good morning. Thank you. Harley, I wanted to follow up on your comments on the momentum in the enterprise at NRF.
Speaker Change: Maybe talk a little bit about any other internal indicators you have or anecdotes on
Speaker Change: Momentum Enterprise being a change in trend rather than just a continuation of a trend and anything that you'd highlight on the product roadmap that you're excited about from a milestone standpoint that can help you lift and shift some of this enterprise share over given how sticky we know the incumbents can sometimes be.
Yeah
Speaker Change: Thanks, Gabrielle. It's a great question. Look, what I mean by it, what I mean by that is companies like David's Bridal, for example, or Hunter Douglas or Warner Music or Crocs. These are brands that I'll sign in the quarter, but these are brands that historically did not come to Shopify. They effectively either had some sort of in-house system that they built themselves with a massive engineering team or they were sort of locked into some legacy commerce software platform, even though they didn't want to stay there. Things were sort of duct taped.
Speaker Change: that especially as new management comes in and all of them are looking for innovation they're looking for total cost of ownership to be at a reasonable rate. Shopify is where they're walking towards.
Speaker Change: and then once they see brands like West Wing or BarkBox or Reebok launch, and this is one of the brands that launched in the past quarter, launch at this record speed where it doesn't take 12 to 18 months to launch, where it takes 3 months to launch, it's becoming incredibly compelling. But I think at the high level the enterprise is migrating to Shopify. I think one of the great things we did was we created a bunch of options for them. If they want headless, we have hydrogen. If they want one size fits all, we have plus. If they want something that's a specific component, we have CCS.
and Jeffrey Freedman. . . . . . . .
Speaker Change: all these ISVs and these large agency partners, the WPPs, the El Catertins, the EYs, the IBMs, the Oracles of the world, who are now building practices around delivering Shopify to their existing large enterprise customers, it's really working. So to pick one thing that I'm really excited about, I think it's a combination of incredible product that is absolutely ready for prime time and a very strong go-to-market team that really understands how to win the enterprise and I'm now on the board of NRF and so I get an insight.
Speaker Change: what people are saying on that board and what people are saying at the show. And the amount, you know, if you had to sort of word cloud Shopify and Shopify enterprise and NRF I think it'd be one of the largest clouds. So I think, you know, it's they're coming to us because of exceptional value. They like our product. They like the fact that they can sell everywhere. And as we add new things like B2B, for example or point of sale that allows, you know up to a thousand physical retail locations it's really all coming together in this incredible way.
Speaker Change: Thank you for your question. Our next question comes from Mark Zgotowicz at Benchmark.
Mark Zgotowicz: Thanks, Carrie. Harley and Jeff, just glancing at your cohort analysis in your 10k and noticing that the 23 cohort
Mark Zgotowicz: accelerated, in terms of his contribution to GMB, accelerated quite a bit into 24 relative to what you saw from the 22 cohort. So two questions related to that, sort of what you attribute that acceleration to and sort of what that might imply in terms of the 24 cohort.
into this year. Thanks.
Mark Zgotowicz: That is something we definitely spend a lot of time thinking about. I don't think there's a whole lot to your question. I don't think there's a whole lot to read into.
Mark Zgotowicz: what that means for 24. I think 23, as you know, was to go back roughly two years. There was a lot of things that we started to introduce.
Mark Zgotowicz: I think that's about the time when you can arguably say we've got good product market, well, even better product market fit in Europe.
Mark Zgotowicz: So I think part of what you've seen over the last couple of years is a ramping of a lot of those things that we have in other merchant solutions.
Mark Zgotowicz: So while I don't want to necessarily predict what that means for the 24 cohort, I do think that what we've done is a great job of really expanding the things which our merchants can use to be more and more successful. Whatever geography they're in, whether they're starting on the online side or the offline side, point of sale.
Mark Zgotowicz: however they want to do it. So it's obviously an encouraging trend from our vantage point. I just don't have any specific metrics to give to you but I applaud you looking at it because that's definitely something that we think about as well.
Speaker Change: Thank you. Our next question comes from Paul Treiber at RBC Capital.
Paul Treiber: Yeah, thanks so much and good morning. Just a question in regards to AI and the use of AI internally. You know, over the last year or so, you've made significant investments, where are you seeing it operationally having the most impact? And then what has been the magnitude of productivity gains that you've seen?
Paul Treiber: Yeah, I got a question about that earlier that I don't think I was able to address, so let me do that right now.
Paul Treiber: I actually think Shopify will very much be one of the...
Paul Treiber: faster, more effectively so things like Sidekiq or media editor or Shopify Inbox, SemanticSearch, Sidekiq, these are things that every merchant should want when they are not just getting started but also scaling their business and those things that are only available from Shopify so we're trying to make some of the more mundane tasks
as well.
Colin Sebastian: And our final question will come from Colin Sebastian at Baird.
Colin Sebastian: Thanks, good morning, and appreciate the opportunity. I guess, Harley, you highlighted, you know, the increasing use of Shopify products, ShopApp, ShopPay, etc.
Colin Sebastian: I mean, what's maybe the ultimate vision here for the buyer-facing platform? You're seeing a lot of traction. It seems like there are lots of opportunities to add functionality like combined shopping carts, things like that.
Colin Sebastian: and maybe investing in a larger base of shoppers using the app. And then Jeff, any comments on sort of capital allocation plans for the year ahead? I mean, you're generating a lot of cash and have a nice cash balance, so you have a lot of flexibility there. Thank you.
Jeff Hoffmeister: Look, as I mentioned, you know, Shop App, Q4, and it was up like 84 percent. So I think we're making it even an even more compelling destination for buyers to find their favorite brands on their mobile devices. The way we think about shop is it's the buyer facing side of Shopify. And the goal is really to make shopping simpler and much more enjoyable. And, you know, clearly it's becoming something that consumers recognize more and more. I hear all the time there are consumers who will only check out if they see, you know, the shop, the shop pay purple button there. We're going to continue to invest in it. The goal, though, is.
Jeff Hoffmeister: You'll see continued deep investment in things like personalization. You'll see really high quality new brands, new high quality brands come to the shop app as well, but also, you know, unleashing these new ways for merchants to engage with authentic connections with their customers. And again, it's something that that you can only get if you're on if you're using Shopify.
Speaker Change: Yeah, and then count on the capital allocation comment. That's definitely something that we discuss internally, actively, and we recognize the importance of being good stewards of capital.
Speaker Change: That said, I also still believe right now that it makes sense to have a healthy cash cushion and we examine our cash balance both on a percentage of various benchmarks as well as the absolute amount overall.
Speaker Change: And, of course, we think about capital allocation both in terms of the daily decisions regarding everything on R&D spend to marketing to, obviously, the topic behind your question, which is, is there a return of capital coming?
Speaker Change: Keep in mind that we have the Convert Outstanding which matures later this year, it's a little bit under a billion dollars.
Speaker Change: We have done, as you've seen in some of our last calls, the last year we've done, depending on how you count them, roughly six tuck-in acquisitions, acquihires.
Speaker Change: Those have all been relatively small, but those are an important source of AI talent and other talent for us.
Speaker Change: But, as we recognize how important that is, but I don't have any things to announce today as it relates to returning capital. So, but let me, Harley, let me turn it back to you.
Harley Finkelstein: Yeah, let me just sort of take a second before we close off here. First of all, thanks to everyone for doing the call. I just wanted to mention a few things. You know, since inception, I think most of you that have been following the story have seen us be incredibly laser focused on making our merchants as successful as possible. And I just want to remind everyone that the beauty of our business model is that when we do that well,
Harley Finkelstein: the financial results follow. Our story is quite simple. It's mission, it's rock-solid execution, and it's durable growth.
Harley Finkelstein: And as Jeff said, Q4, you know, was a remarkable example of that. Sixth consecutive quarter of GMB growth over 20 percent. Sixth consecutive quarter of double-digit free cash on margins. And it was actually our seventh quarter of 25 percent or better revenue growth. So, I think you can...
Harley Finkelstein: see that we are indeed a growth company, but we also operate with this incredible operational discipline. And you're also seeing us take more market share in this amazing industry that
Harley Finkelstein: continues to grow. But the best part of Shopify is that we're not just taking a larger piece of the pie. We get to grow the pie itself. And quarter after quarter, we are delivering, I think, some of the strongest results in all of software. And I think 2024
Harley Finkelstein: was pretty emblematic of that. And we have these great contents we can deliver on that. So I just want to say this is the best version of Shopify that I've seen in 15 years since, well, since Toby hired me. And you can expect us to keep improving each and every year ahead. So thank you all for joining the call. And now we go back to building for our merchants. Thank you.
Harley Finkelstein: With that, this concludes our fourth quarter 2024 conference call. Thanks for joining us.