Shopify Inc.

Good morning, everyone. We are glad you can join us for Shopify's first quarter of 2022 conference call. We are joined this morning by Toby Lutka, Shopify's CEO, Harley Finkelstein, Shopify's president, and Amy Shapiro, 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. We undertake no obligation to update these statements except as required by law. You can read about these assumptions, risks, and uncertainties in our press release this morning, as well as in our filings with U.S. and Canadian regulators. Note that the adjusted financial measures we speak to today are non-GAAP measures, which are not a substitute for GAAP financial measures. Reconciliations between the two can be found in our earnings 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 turn the call over to Harley.

Good morning, everyone. For the past two years, we have been on an extraordinary journey with merchants, helping them sell on any and every channel as commerce shifted numerous times during the pandemic. Throughout the last two years, we showed up for our merchants when they needed us most. And now, the trust we built with them throughout the pandemic with our platform is being rewarded with more of their business. This momentum encourages us to continue to invest for the long term. The more hard problems we solve for merchants, the more energy we add to our flywheel, and the better off commerce is for everyone for years to come. As we start to put the pandemic behind us, there is yet another shift happening in commerce. And the good news is Shopify is again on the right side of that change. Beginning in February, many people, myself included, celebrated the easing of Omicron and rolling back of mandates with travel, dining out, entertainment, and in-person shopping. While this new mobility moderated the explosive growth in online activity that we've seen over the last couple of years, it drove home the importance of commerce everywhere, online, in-app, and in real life. Brick-and-mortar merchants learned this lesson two years ago when they were forced to close their doors almost overnight. Tens of thousands of physical retailers pivoted quickly and moved online using Shopify. Shopify played a mission critical role for these businesses over the pandemic when they needed it most. And we directed all of our energy to making sure businesses could stay open when their physical presence had to immediately shut down. Everyone from mom and pops to merchants with large operations and considerable existing sales came fully online with Shopify, which at the time was the only sales channel that mattered. Now that physical retail is reopening and retail in general is rebalancing, this bigger position we've earned and the trust that we've earned with our merchants represents a huge opportunity for us. The hundreds of thousands of businesses that shifted their business to Shopify during the pandemic and stayed with us since can now take advantage of our powerful retail point of sale offering for a unified view of their sales online and offline. Shopify has been developing the world's best point of sale retail software for years, and it's now at the point where all merchants who came to Shopify during the pandemic can leverage it. No need to go back to their old, dilapidated POS systems. As we mentioned last quarter, we are growing our sales team and marketing support to help ensure that any merchant doing in-person selling on Shopify knows how much stronger the Shopify point of sale value proposition is relative to standalone offerings. And this is because we've done a great job building our point of sale channel. For example, luxury label Philip Lin adopted our point of sale for multiple retail locations this past quarter, as did the clothing retailer Fear of God. As Point of Sale Pro added more merchants, locations, and geographies in Q1, we grew offline GMV by nearly 80% year over year as we continue to gain share. Even with the current resurgence in offline retail, we still believe that e-commerce will continue to grow and take share of overall retail over the long term. And we are well positioned here. With our online commerce GMV posting a 51% compound annual growth rate since the start of the pandemic in Q1 2020. Faster than overall e-commerce over the same period. And we took share this past quarter as well. Our overall GMV, including offline, grew even faster at a 57% compound annual growth rate since Q1 2020, demonstrating that the opportunity for Shopify is beyond just online. It's to be the commerce platform of choice in any environment and on any surface. The result of these past two years is that our trust battery with merchants is fully charged. To prove it, merchants are taking more of our offerings to compete in the fast-moving digital commerce landscape. A central value prop of our business model is that the platform gets more robust and more relevant to a merchant over time. Here we showcase three merchants that illustrate a common theme. Newer and smaller merchants get great value from a few features. As they become more established, they add more, and with increased volume, even more. Figs, a publicly traded company built entirely on Shopify, started on our $79 plan. They grew into features which helped them scale and are still only just getting started. Merchants rely on Shopify for these needs, not just because they trust us, but also because it's easier, more reliable, and importantly, saves them money. And in the inflationary environment we're in now, this is especially important. By passing the economies of scale we capture down to our merchants, Shopify saves merchants money compared to what they would pay to secure each of those solutions separately, allowing them to free up capital to grow their businesses. We are training more of our sales and support teams to be able to highlight to merchants ways they can benefit from making fuller use of our platform. As a result, we believe there's an opportunity to deliver more services to merchants while saving them money. our merchant solutions revenue expanded by 29%, driven by increased penetration of Shopify payments and capital, as well as growth in revenue from our partners, helping to extend the value of our platform. Because we are on the same side of the table as our merchants, they can thrive on the platform, and they do. Shopify Plus once again saw a large percentage of its merchant additions this past quarter come from upgrades, such as luxury menswear brand Tom Sweeney, coffee house Dogwood Coffee, and fragrance company Ellis Brooklyn, created by New York Times beauty columnist Bea Shapiro. These last several years have proved that serving both startups and large companies is not mutually exclusive, especially when you have an entire ecosystem of support from both ends of the market, and we continue to invest in both. For example, with our new link and bio tool, LinkPop, our unmatched capabilities for creators got even better. This is only one example of how commerce can happen anywhere. What we've seen over the past two years throughout the pandemic has been a shift of transactions to digital venues beyond the online store, where buyers are discovering goods. For years, we've invested in APIs to more easily connect our merchants with buyers across services and directly transact on partner platforms, starting with Meta and Google. Orders completed on key partner services more than quadrupled year over year. While it's still a small percentage of the $43 billion of GMV we did in the quarter, it indicates growing momentum on this multi-year trend towards commerce everywhere. This should not be surprising. With the shifting landscape of the digital ads industry, merchants are becoming increasingly focused on finding new ways to reach buyers, and they're finding success with commerce completed directly in the app or on the search surface itself. For larger enterprises, Deloitte and Accenture are now officially partnering with Shopify on systems integrations to help some of their largest clients achieve and maintain marketing agility. We've already collaborated with the team at Deloitte Digital for Audi, World Vision, and Inkbox. And as Fortune 500 companies move fast to keep their brands top of mind, we look forward to working with systems integrators to bring more of the world's best-loved brands onto Shopify+. The energy at Shopify Plus right now is terrific, as the team finished Q1 with their best month ever, closing 20% more deals in March than ever before. The variety of merchants and ways they're using Shopify Plus continue to grow, with new launches in the quarter spanning well-known brands in food, footwear, art supplies, cosmetics, athletic gear, tech companies, and video games, including the legendary Miami Beach restaurant Joe's Stone Crab, Havaianas, Mexico, Crayola, Fiera Cosmetics, Bridgestone Cycle, TRX Training, Figma, and Call of Duty. The Internet's favorite influencer, Mr. Beast, launched his own chocolate brand on Shopify Plus this past quarter. And the NBA followed the lead of the Chicago Bulls, who launched a sale of NFTs last summer with their own all-star NFT store on Shopify in the quarter. Our track record and our momentum with merchants tell us we are on the right track, investing for the long term to solve more hard problems for them, and in doing so, energizing our flywheel. I'd like to double-click on what we mean when we talk about our flywheel, as this approach differs from the zero-sum approach of a lot of other companies. Direct monetization from the customer in the short term is good. However, building something that may be less immediate and direct but will generate more value for the customer and for Shopify over the long run is much, much better. We have many examples of how we've applied the Flywheel over the years, from APIs to Liquid to our App Store, and the long-term relationship we have with our community developers, an ecosystem built over a decade. None of these were very material in the short run, but over time, they strengthened every aspect of our platform. Keeping our momentum, our approach to investing for the long term is consistent with our continued investment in the Shopify fulfillment network. Supply chain management and fulfillment are some of the biggest challenges merchants face running their businesses. Millions of small merchants struggle to scale even once they've built a product they know buyers want. To actually get an order to a buyer, they have to fumble through a maze of freight providers, 3PLs, and middle and last mile carriers. We know merchants trust Shopify to offer simple, reliable, cost-effective solutions to their biggest problems. That's why we're creating the world's most merchant-obsessed end-to-end software and logistics platform, fully integrated into the Shopify ecosystem. We are simplifying logistics across every stage of a merchant supply chain, from inventory inbounding to inventory distribution across all merchant channels to fast and affordable D2C order fulfillment and returns. Making this end-to-end supply chain easier to navigate for merchants reduces the barriers to becoming a successful entrepreneur, increases their odds of success, and offers a durable source of energy to the flywheel and differentiates us even more. So today we're announcing the acquisition of Deliver, our largest acquisition yet to strengthen Shopify's fulfillment network and accelerate our path to an end-to-end merchant supply chain solution. Fulfilling more than a million orders per month, Deliver's asset-light, technology-driven service is trusted by thousands of merchants across the U.S. to connect all stages of a merchant supply chain and manages distribution and fulfillment to all merchant channels. For the post-order phase of the merchant supply chain, SFN has made considerable progress towards our core offering, which includes inventory balancing, delivery promises, and simple returns functionality. Our proprietary warehouse management system we've been developing is now running in our key warehouse locations and will handle all SFN order volume by the end of Q2 2022. Combining Shopify Fulfillment Network, which delivers software, talent, data, and scale, provides merchants simplified inventory management and logistics services, demand-driven inventory placement that eases minimum inventory requirements, and offers highly reliable, fast, and affordable delivery. We are thrilled to soon welcome Deliver's experienced team of software engineers, operations experts, and merchant champions to Shopify. While adding Deliver this year will impact profitability in 2022, it's well worth it because it accelerates our ambitions around SFN. Despite Q1 not being the easiest start to the year on the macro front, we showed an adjusted operating profit of $32 million on 22% revenue growth. This is on top of 110% growth last year during lockdowns and boosted by stimulus. This past quarter's growth was partly driven by our merchant solutions revenue reaching a record high as a percentage of GMV. That means that our merchants are getting more value from our platform than ever before. It is in times like these that great companies prove themselves through a combination of strategic decisions executed in time right and maintaining strong operating discipline. Our merchants need to be ready for whatever the future brings because they know Omnichannel is more than just online versus offline. It's commerce on social platforms, in apps, in videos, and it's wherever communities and creators are connecting. The surge in digital commerce pushed transactions far beyond the online store, and they're increasingly happening in app, in social, in search, and even email. This larger mix of channels is what makes Shopify so valuable in any environment and across every buying surface. Building all the right tools for commerce to happen on every surface where we believe the future of commerce lives is one of our superpowers and why merchants, large and small, are building their own futures on Shopify.

Thanks, Harley, and good morning, everyone. The trends Harley just talked about, how much more important Omnichannel is right now, merchants making greater use of Shopify, and the importance of investing now to stay ahead of the curve for merchants were clear in our financial results in Q1. But before we dig into that, I want to first speak to what we're seeing on the macro front and how it relates to what we've seen over the past two years, because that's impacted our results in Q1. While our performance in the quarter was consistent with the guidance we provided you in February, a couple of macro factors played a larger role than expected. Before I review these factors, we reminded you in February that last year's first quarter GMV growth was 114% year-over-year as online consumer spending on goods soared, fueled by government stimulus and lockdowns. This surge was not unique to Shopify. Fast forward 12 months, our GMV growth for this year's first quarter was 16% year-over-year. The timing of Omicron easing was also a factor, with mobility resuming with vigor earlier in Q1 of this year versus Q1 of last year, causing a shift in consumer spend to offline retail and travel starting in early February this year, in strong contrast to a year ago, where that shift occurred in late March and into April. Another factor that impacted year-over-year GMV growth more than expected, although to a lesser extent than mobility, was inflation at a record level, pushing more consumer spend both online and offline toward discount retailers in Q1 of this year as consumers' wallets were stretched from higher prices, including a surge in gas prices due to the war in Ukraine. Even with these macro factors impacting year-on-year growth in the quarter, our online and offline GMV and Q1 each continue to outpace their respective markets in the U.S. In the case of offline, our retail GMV grew approximately six times the market, underscoring our omnichannel advantage relative to online-only providers and enabling merchants to be prepared for anything. And in the context of the past two years, overall GMV growth of 57% compounded annually highlights just how far Omnichannel has enabled independent brands to reach. Our revenue for the first quarter grew to $1.2 billion, which is 22% higher than the same period last year, and represents a two-year compound annual growth rate of 60%. In addition to the macro factors that I noted earlier that affected our year over year comparison, revenue for subscription solutions was also impacted by the app and theme revenue models for partners, as well as by the change in recognition of themes revenue from gross to net. which were not yet in place in Q1 of 2021. This change in terms and treatment for apps and themes accounted for about two points and seven points of headwind to our overall revenue and Subscription Solutions revenue growth in the quarter respectively. Subscription Solutions revenue of $344.8 million grew 8% year-over-year, reflecting the app and theme revenue change I just talked about, as well as lower merchant ads in the quarter compared to Q1 a year ago. While increased mobility, along with a robust labor market, tempered our merchant ads in the quarter, monthly recurring revenue was up 17% year-over-year, benefiting from Shopify Plus and the addition of thousands more POS Pro retail locations. Merchant Solutions revenue grew to $858.9 million in Q1, up 29% compared to the same period in 2021. This was nearly twice the growth of GMV due to the increased adoption of Shopify payments, Shopify capital, and even Shopify markets, which has gotten off to a strong start, as well as growing revenue from partners. $22 billion of GMV was processed on Shopify payments in Q1, an increase of 27% over last year's first quarter. Payments penetration of GMV was 51% versus 46% in Q1 2021. Over the past four quarters, we've seen gross payments volume benefit from strong performance by merchants on Shopify payments, an increasing percentage of which is Shopify Plus GMV, new merchant adoption both in North America and internationally, penetration gains in shop pay, which has facilitated $50 billion in GMV since inception, and expanded availability of our POS Pro hardware with integrated payments now being used by merchants in 11 countries. Adjusted gross profit was $646.1 million, compared with $565.1 million in the first quarter of 2021, reflecting a greater mix of our lower-margin merchant solutions revenue versus the prior year, lower margins in Shopify payments due to mix, increased investments in our cloud infrastructure, and the impact of the change in terms for our app and theme partners versus the prior year. Adjusted operating income was $31.9 million in the first quarter compared to $210.8 million a year ago as we bolstered our R&D data and sales teams and stepped up performance marketing in both North America and internationally. Adjusted net income for the quarter was $25.1 million or 20 cents per diluted share, compared with adjusted net income of $254.1 million or $2.01 per diluted share in the first quarter of 2021. Finally, our cash, cash equivalents and marketable securities balance on March 31st was $7.25 billion. This healthy cash balance is testament to the strength of our approach to capital allocation and operating discipline. Since day one, we have funded our growth wisely. Over the past seven years, we've raised $7.7 billion of funds via equity offerings in our convertible note, deployed $1.7 billion for investments in M&A as of March 31, 2022, and have conserved a strategic amount on our balance sheet for optionality. Outside of our acquisition of 6RS, all of our growth thus far has been organic, funded by redeploying gross profits back into the business to energize the flywheel. As I said in February, Shopify is focused on strategically allocating capital to four key investment themes in 2022, one of which is simplifying fulfillment for merchants. Shopify Fulfillment Network is making considerable progress against its roadmap. We've had great success migrating SFN merchants to the updated version of our new simplified offering. Not only does it make fulfillment easier, SFN is designed to intelligently rebalance merchants' inventory to maximize their fast fulfillment reach with the lowest committed inventory. As Harley outlined, the acquisition of Deliver helps Shopify Fulfillment Network accelerate its roadmap by assembling an end-to-end logistics platform that manages inventory from port to porch and across all sales channels for merchants of all sizes on and off Shopify. Soon, merchants will have access to Shop Promise, a new benefit in early access that displays expected delivery dates on merchants' online stores and other channels, and consumers will see a new badge on products they browse. This delivery promise extends beyond the online store across surfaces like Google, Facebook, Instagram, and the Shop app, helping merchants improve trust and increase sales with billions of potential customers by meeting them where they like to shop. and will leverage SFN's and Deliverer's fast fulfillment capabilities to power two-day and next-day delivery promises. We view simplified, fast, and affordable fulfillment across all sales channels as incremental to the Shopify flywheel, with the aim of helping millions of future merchants start and scale their businesses. So it is with much excitement that we announce the acquisition of Deliverer. Under the terms of the agreement, Shopify will acquire all of Deliver's outstanding securities in a transaction valued at approximately $2.1 billion, consisting of approximately 80% in cash and 20% in Shopify Class A shares. Most of the stock-based portion of the transaction consideration will be received by Deliver's key management, will vest subject to certain conditions, and will be treated as stock-based compensation. We expect the transaction to close following regulatory review. Our financial outlook for the rest of 2022, which includes the impact of deliver, is as follows. Our outlook for the full year is guided by the same assumptions we gave you in February. We're operating in a more measured macro environment relative to 2021, moderated by inflation. E-commerce will continue to penetrate commerce overall. And the prospects for entrepreneurship and digital commerce are greater now than at any point in our history, after two transformational years for the industry and for Shopify. What these trends mean for expectations for our own results is as follows. That year-over-year growth will be lower in the first half of 2022 and highest in Q4, given the absence of stimulus payments and expected higher inflation relative to the first half of 2021. That the number of merchants joining the platform in 2022 will be comparable to 2021. And that merchant solutions revenue growth will be more than double that of subscription solutions. Because of this larger mix of merchant solutions contributing to overall revenue, we expect gross profit dollar growth will trail revenue growth, which we still expect to be rapid and faster for the full year than our revenue growth in the first half. Our intention to reinvest all of our gross profit dollars back into the business this year remains intact, since the pace of change independent brands need to get ahead of is not slowing down. Factoring in the effects of an inflationary environment on consumer spending, we expect our adjusted operating results to reflect the reinvestments in our four key themes outlined in February, as well as the impact of deliver, which we expect to be dilutive to operating margin this year. As we help our merchants build buyer relationships, go global, grow from first sale to full scale, and simplify fulfillment, we're arming them for long-term success. Finally, the estimates of stock-based compensation and related payroll taxes, CapEx, and amortization of acquired intangibles incorporating the impact of deliver are now $800 million, $200 million, and $62 million, respectively. Before turning it over to Katie to start the Q&A, I want to underscore the importance of long-term thinking that underlies our capital allocation decisions is how great companies are built. In the past, we have reinvested knowing we were laying the foundation for what we expected to be a much bigger company in the future. While we're much bigger today because we reinvested, the building that lies ahead of us is considerable, and that is a good place to be. Putting technology to work to help independent brands with everything from discovery to delivery guides us as we continue to build for the future of entrepreneurship.