Shopify Inc.

Good morning, and thank you for joining Shopify's second quarter 2022 conference call. Toby Lutka, Shopify's CEO, Harley Fingalstein, Shopify's president, and Amy Shapiro, our CFO, are with us this morning. 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. We will also speak to adjusted financial measures, which are non-GAAP measures 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 turn the call over to Harley.

Thanks, Katie, and good morning, everyone. The extraordinary journey that we have been on with merchants continues. As seen in our Q2 results, we continue to grow our merchant base and GMV and deliver more value to merchants via our mission-critical tools that prepare them well for the future. Anticipating their future needs is a key reason merchants choose us. Our multi-channel platform has prepared them for the pivots of the last few years. But we do not get the future right 100% of the time. So now for some real talk. Shopify has always been a company that makes the big strategic bets our merchants demand of us. This is how we win. During the pandemic, we made a bet that retail spend would disproportionately favor e-commerce at a much higher pace than it has. Our belief was that the channel mix, the share of dollars that travel through e-commerce rather than physical retail, would permanently leap ahead. As we built for that digital leap, we staffed our efforts and we expanded the company accordingly. We couldn't know for sure at the time, but we did know that if the prediction came true, we would have to rapidly scale the company to meet that future. Fast forward to now, as things have turned out differently. While the normalized rate of spend online, which is where most of our merchants' orders occur, has reset certainly higher than where it was in 2019, the rate is lower than we had planned for. In short, we overshot our prediction. Recalibrating our investments and spending, we are making sure we do not sacrifice the components we feel are critical for Shopify remains in an enviable position in a massive growing market as an enabler of multi-channel commerce. Amy will describe later the financial implications of how we are building for long-term success. I will speak to the investments we are making to drive top line and merchant growth by helping merchants build buyer relationships, go global, grow from first sale to full scale, and simplify logistics. Let's start with building buyer relationships. We have been investing to extend ways for merchants to connect with more buyers and deepen those relationships across more channels and services. With people shopping in stores again, e-commerce is trending back to a more normalized growth curve. We've seen incredible growth in offline GMV on Shopify as more merchants come to us to modernize their point of sale software. Our world-class retail point of sale offering, which gives merchants a seamless view of their online and offline operations, is quickly becoming the point of sale of choice. During the second quarter, top-tier brands, including Beyond Yoga, Our Place, and James Purse, implemented our Point of Sale Pro solution for their locations. June was the best month ever for merchants adding pro, and our Q2 offline GMV grew 47% year over year as we continue to take market share. This growth is even more remarkable considering it was achieved off of a 266% year over year growth in online GMV in Q2 of last year as the world began reopening after the COVID lockdowns. With the vast majority of all commerce in North America happening offline, the investments we are making in Shopify Point of Sale this year will increase its scalability to handle a much greater number of stores, deepen integration with more third-party apps, and further improve our hardware. Tap to Pay on iPhone and Google Local Inventory Sync are two more ways we are modernizing the offline retail experience for merchants and their buyers. Another significant opportunity lies with consumers looking to connect with brands and purchase goods across digital services. While still a relatively small percentage of overall GMV, GMV through key partner services, including our native checkout integrations on Facebook, Google, and Instagram, grew five times over Q2 last year. We expect GMV growth through these integrations to continue as more channels integrate with us, making their platform stickier while enabling our merchants to show up where their buyers are. For instance, we announced Twitter shopping in late June, and just last week we announced YouTube. Our new YouTube channel allows merchants to add a store tab to their YouTube channel that has their entire product selection and show a curated list of products below on-demand videos and to tag products during a live stream with picture-in-picture so viewers can check out while still watching the live stream. And best of all, shoppers can round out a great shopping experience on YouTube by quickly checking out with ShopPay. It's far easier for a merchant to find new buyers when they have targeting data leading them to their brand's most likely new fans. By tapping the combined power of Shopify Plus merchants who opt in, Shopify Audiences is a tool that helps merchants find new customers. It's essentially a three-step process. A Shopify Plus merchant selects the product they want to sell more of. Machine learning algorithms build an audience of high intent buyers tailored for that product. And the audience list is directly and securely exported to the merchant's ad network of choice, which we are launching first with Facebook and Instagram. Merchants are finding that audiences makes a real difference. They are seeing a meaningful increase in conversion rates and return on ad spend. For example, early access merchant Blender Bottle has seen its return on ad spend increasing as high as six times. Another fast-growing merchant, Lameroo, saw a 48% uptick in its click-through rates, a 2.5 times return on ad spend on its targeted campaign, and 73% of revenue from paid acquisition attributed to Shopify audiences. All this plus a 26% decline in customer acquisition costs. Audiences is off to a very promising start, and we're excited to see what it will do for merchants, especially ahead of the holiday selling season. A second way we are investing in merchants is by helping them go global. International selling should be as simple as selling domestically. With our new cross-border management tool, Shopify Markets, merchants can identify, set up, launch, optimize, and manage their international markets from a single store. Our own studies indicate that merchants can drive up to 40% higher conversion rates in the international regions by customizing their storefronts for each market to improve the buyer experience for customers. We are seeing strong engagement with Shopify markets since launching it in Q1, with well over 100,000 merchants now offering a localized experience to their buyers. Our team's sales and marketing activities continue to drive expansion of our international subscriptions, and we continue to expand the feature set available to merchants everywhere. In Q2, we launched Shopify payments and Shopify shipping in France. And we launched Shopify point of sale with integrated payments in Italy in Q2, which we also brought to Singapore earlier this month. In May, we introduced localized subscription pricing plans to over 200 countries to better reflect those countries' purchasing power and lower the financial barrier to access Shopify. This builds on last year's rollout of billing in certain local currencies, including British pounds in the UK and euros for Eurozone countries, to reduce friction and encourage more international entrepreneurs to start building their businesses on Shopify. Third, we are investing to help merchants grow from first sale to full scale. Features such as Shopify shipping and Shopify capital make commerce easier for entrepreneurs, while features like Shopify functions empower merchants to extend the platform through customization. With functions, developers can help merchants build unique experiences for consumers, starting with customized discounts. Particularly important for our larger merchants, we have significantly enhanced our B2B solution. Not only does our B2B offering allow us to penetrate our merchant base more deeply, we are also able to enter a completely new market of merchants who conduct only B2B transactions. Both segments represent immense opportunities. Our existing base is significantly underpenetrated. We estimate over half of Shopify Plus merchants could utilize B2B, which now enables merchants to use the same store to sell B2B as they would for direct-to-consumer and includes features like customer-specific pricing and assigned payment terms. For our non-plus merchants who are also selling B2B, this could be a compelling recent upgrade. In Q2, we continue to see evidence of merchants growing by the number of merchants upgrading Shopify Plus, as well as new merchants coming onto Plus. New to Shopify merchants came from across a broad spectrum verticals, driving significant growth of Shopify Plus GMV in Q2, which continues to outpace overall GMV growth. Numerous household names became plus merchants during the quarter, including popular beauty magazine Allure, leading athletic shoemaker Asics, furniture manufacturer Ashley Home Store, and national fitness chain Gold's Gym. A laptop collaboration by Hewlett Packard, HB Dev 1, also joined Plus this quarter, as did leading security company Master Lock, and century-old iconic companies looking to modernize their commerce operations, such as skincare brand Pons and Tetley Tea, one of the world's largest tea brands. Notable wins with celebrities looking to get closer with their fans and consumers continued as well. In Q2, we welcomed Greatness Wins, a new brand of athletic wear founded by former New York Yankees player Derek Jeter and hockey legend Wayne Gretzky. Also joining Shopify Plus during the quarter were Gabrielle Union and Dwayne Wade with their plant-based Proudly line. In addition, Kim Kardashian launched her new Skin by Kim line of spa-like skincare products. And lastly, Hailey Bieber also joined Shopify Plus with her newly launched skincare essentials line called Road Skin. These celebrities, as well as many others, have made Shopify Plus the de facto platform to expand their personal brands and turn them into businesses and products for their millions of fans. With the addition of B2B, expanding our partner program for ERP and systems integrators, and our exceptional value proposition in an inflationary environment, we expect Shopify Plus' momentum to continue. We've also made some recent changes to our commercial organization, which tie our sales efforts more closely to our marketing investments and provide our merchants with a more consistent and intuitive growth journey. By streamlining its structure, our cross-functional groups will be better coordinated to implement a far more effective go-to-market approach. We expect that armed with data, our teams will be better able to help merchants by selling the right solutions at the right time. We are confident these changes will generate improved cost of customer acquisition, expand merchant lifetime values, and more importantly, increase our merchants' odds of success by bringing more of Shopify to more merchants. Last, I'll give more color regarding our fourth major investment theme, which is simplifying logistics. Our vision in building Shop Life Fulfillment Network for the long term starts with simplifying the end-to-end supply chain at three critical stages that are really hard or close to impossible for independent businesses across freight, distribution, and fulfillment as inventory moves from port to porch. When this is done well, we greatly simplify logistics for merchants and enable them guaranteed delivery times, which provides a meaningful uplift to conversion. This also feeds our flywheel of lowering the barrier to entrepreneurship within this domain. Let's start with freight. Inbounding inventory from suppliers is incredibly difficult for independent merchants to handle on their own. Today, merchants who manufacture abroad have to work with upwards of 10 vendors to receive inventory from suppliers, ship across the ocean, and receive it at ports. Even if a merchant centralizes this through a freight forwarder, many of the processes are manual and fractured, designed for big businesses with large volumes and consistent demand. To help with this, SFN has launched a pilot program with Flexport so merchants can more easily and cost-effectively inbound freight. It enables merchants to ship inventory at the pallet level versus container level and have just-in-time access to pre-booked containers that deliver goods directly to an SFN hub. This prevents tying up a merchant's excess capital and inventory and allows them to remain nimble to changing buyer trends. Early pilot runs have shown that SFN merchants can expect service from origin ports up to 50% faster, with cost per pallet much less expensive than average. Once their inventory arrives at domestic ports, merchants have to tackle the second challenge mentioned, distribution. Historically, preparing and routing inventory for distribution across multiple channels has been hard for independent businesses, until now. In July, we closed the acquisition of Deliver and have begun integrating SFN and Deliver software network and operations, which we expect will continue for several quarters. Through Deliver, we are accelerating the simplification of the distribution phase. The first example of this will be at our Atlanta hub warehouse. Using software and machine learning, these SFN hubs leveraging Deliver's capabilities will unpack, scan, and inspect all inventory, then compare against metadata in Shopify's back office to route the goods to merchants' various distribution channels, as well as forward position inventory into SFN-spoke direct-to-consumer fulfillment centers based on expected buyer demand. With this software-based approach, Deliver is helping us expand two-day delivery across SFN. Deliver already fulfills more than a million orders per month, and its asset-light, technology-driven service is trusted by thousands of merchants across the U.S. We are thrilled to welcome Deliver's experienced team of software engineers, operations experts, and merchant champions to Shopify. Finally, the third and most critical step is two-day fulfillment and delivery. Affordable and timely fulfillment has been nearly impossible for independent businesses to do on their own, but it is important. Just giving buyers confidence that an order will arrive when promised, even if it's three or four days, is enough to increase conversion. By leveraging Deliveroo's software in SFN hubs and SFN spoke partner warehouses, all equipped with Six River Systems technology, we can forward position merchants' inventory to support timely fulfillment with a minimal inventory commitment from merchants. We've also continued our early access to Shop Promise, which lets merchants offer two-day delivery promises across online storefronts and channels like Google, Facebook, and Instagram. delivered data suggests that a shop promise reaches scale, many merchants will be able to increase average conversion rates by more than 30%. SFN made other significant strides in Q2 to simplify fulfillment for our merchants. We completed our migration of SFN merchants to the updated version of our new simplified offering. We also completed our warehouse management system rollout with 100% of SFN fulfillments processed using the 6RS fulfillment system software that is highly integrated into Shopify. Orders with predicted delivery of two days or less have now increased from less than 2% prior to software updates to over 70% after the updates. And we are just getting started. We are really excited about the evolution that's underway in fulfillment. When merchants and brands can provide accurate delivery timing that's guaranteed, consumers gain greater confidence in independent businesses, and that is good for commerce overall. I know I covered a lot here from a new product standpoint. Much of this is highlighted in our first ever Shopify Editions, which we published on June 22nd. Featuring more than 100 product releases, Editions is our semi-annual publication, showcasing the speed and the breadth of innovation at Shopify to build for the future of commerce. Our platform serves as the backbone for millions of merchants who depend on Shopify for their long-term growth and success. This is why every time you talk to our merchants consistently, they tell you that they love Shopify. We are committed to solving the toughest problems facing merchants so we can continue to make commerce better for everyone. And with that, let me turn the call over to Amy.

Thanks, Harley, and good morning, everyone. Harley provided you with an overview of everything that we are doing for merchants to succeed in any cycle, including the one we now find ourselves in of high inflation. By helping merchants find more buyers on more surfaces, saving them money by passing along our economies of scale, and empowering them with mission-critical tools. I will first provide an overview of our Q2 results and then talk about how we will build for long-term success with the same operating discipline that we have always demonstrated. Before turning first to our financial performance, note that our Q2 results were not impacted by the deliver acquisition given it closed this month on July 8th. I'll begin with GMV. As a reminder, last year's second quarter GMV growth was 40% year-over-year, fueled by online consumer spending on goods in large part from COVID-related government stimulus checks. Fast forward to 2022, our total GMV in the second quarter was $46.9 billion, which continued to grow year-over-year and was up 11%, significantly higher than retail growth overall in the U.S. of about 7%. While the macro environment exited tough COVID year-over-year comps in mid-Q2, consumer spend on services and in-person shopping remained high, and persistent inflation at 40-year highs dampened online sales globally. In the face of rapidly escalating prices for essential goods and energy, consumers have been favoring discount retailers and reducing their spend on other goods categories. Our online GMV growth year-over-year was 8%, and our offline GMV grew 47% year-over-year, as we continue to take share in both, thanks to multiple channels and thousands more POS locations added in the quarter. Our revenue for the second quarter grew to $1.3 billion, 16% higher than the same period last year. Given the significant strengthening of the U.S. dollar relative to foreign currencies in Q2, total reported revenue growth year over year for Q2 was negatively impacted by approximately 1.5 percentage points. Revenue growth in Q2 was driven by merchant solutions as merchants continue to trust us with more parts of their business in this inflationary environment. Merchant solutions revenue grew to $928.6 million, increasing 18% year over year, driven by increased GMV penetration of Shopify payments, Shopify capital, and Shopify markets on the back of GMV growth, as well as by growing revenue from partners. The significant strengthening in the U.S. dollar relative to foreign currencies was most felt here, with Merchant Solutions' reported revenue growth year-over-year negatively impacted by approximately two percentage points. Approximately $24.9 billion of GMV was processed on Shopify payments in Q2, 23% more than in last year's second quarter. Payments penetration of GMV, or gross payments volume, was 53% versus 48% in Q2 2021, and up 200 basis points quarter-over-quarter. Over the past five quarters, we've seen GPV 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 $58 billion in GMV since inception, and expanded availability of our POS Pro hardware in brick-and-mortar stores with integrated payments now being used by merchants in 13 countries. Subscription Solutions revenue grew to $366.4 million, which was 10% higher than a year ago, driven by more merchants on the platform and the strong growth of Shopify Plus, offset by a 4 percentage point negative impact on year-over-year growth from the change in app and theme revenue share model for partners that we implemented in Q3 of last year. In May, we began making a greater number of localized subscription pricing options available to provide a better experience for our international merchants, as Harley explained earlier. And while early days, we saw promising traction in select countries as we exited Q2. We expect this to pay off in terms of more merchants from outside North America on our platform taking more of our services over time. In Q2, merchants outside of North America continued to increase as a percentage of total merchants year over year. Monthly recurring revenue was $107.2 million, up 13% year-over-year, on higher number of merchants on the platform year-over-year, on Shopify Plus, which increased its share of total MRR to 31% from 26% in Q2 of last year, and on an increased number of retail locations using POS Pro. Adjusted gross profit was $665 million compared to $627 million in the second quarter of 2021. Compared to the second quarter of 2021, adjusted gross profit was affected by a greater mix of our lower margin merchant solutions revenue, lower margins in Shopify payments due to merchant and card mix shifts, and increased investments in our cloud infrastructure. Adjusted operating loss was $41.8 million in the second quarter compared to adjusted operating income of $236.8 million a year ago, largely due to investments in talent as well as marketing program spend. The additional talent has enabled us to expand and strengthen our R&D and sales and marketing teams, significantly step up our marketing efforts internationally, and initiate a new offline performance marketing program. While we saw a sequential quarterly increase in the year-over-year growth of operating expenses from Q1 to Q2, we took measures during Q2 to slow spend that resulted in a sequential monthly deceleration of operating expense growth year-over-year as we exited the quarter. Adjusted net loss for the second quarter was $38.5 million, or loss of 3 cents per diluted share, compared with adjusted net income of $284.6 million, or 22 cents per diluted share, in the second quarter of 2021. Turning to our balance sheet, our cash, cash equivalents, and marketable securities balance on June 30 was $6.95 billion. This amount does not reflect the acquisition of Deliver, which closed in July for approximately $2.1 billion, comprising approximately $1.7 billion in cash and $400 million in Class A shares, some of which relates to post-transaction services that will be accounted for as stock-based compensation. Our strong cash position reflects our approach to prudent capital allocation and rigorous operating discipline. We allocate capital to opportunities that we expect will significantly expand the opportunity set for merchants, accelerate our product roadmap, or have strong paybacks from improved operating efficiency. Consistent with this, we're taking actions to recalibrate our investment spending to build for long-term success. We are keenly aware of what's happening around us. We anticipate that inflation and the continued softness in consumer spending on goods will persist through the remainder of the year. Throughout the organization, our teams are mindful of the macro environment and have been rigorously evaluating and adjusting our spending priorities. And we have taken this time to also make adjustments to ensure we have an efficient, productive, and highly motivated team. We began by conducting more rigorous reviews of our workforce throughout the organization with the aim of more fully maximizing our team's performance. This had the effect of slowing the number of net headcount additions to our team in Q2 versus Q1. Upon completion of a comprehensive and careful analysis of the company, we identified certain areas where we could improve our operations and team that resulted in the elimination of approximately 10% of Shopify's total headcount on July 26th. This was an action we did not take lightly given its impact on people, both those leaving and those staying. We expect the streamlining of our workforce throughout the company and realigning our commercial organization, as Harley described earlier, will more effectively deliver Shopify's value to merchants. For the remainder of 2022, we expect a slow hiring to only the most strategic, and with the addition of deliver, exit this year with only a modest increase in total headcount versus the beginning of 2022. We have recalibrated our team so we can continue to operate with rigorous discipline and invest thoughtfully into the enormous opportunity ahead of us. And we are implementing a market competitive compensation system to recruit, reward, and retain the best talent in the world. We believe this new framework will also better equip us to manage total compensation, both cash and equity, for our global workforce. We expect the increased cost of this new compensation system to be approximately $50 million for the remainder of 2022. While the final compensation split can only be determined after employees have made their elections, with the guardrails and default settings in place, we anticipate a split between cash and stock fairly similar to the current composition. We will provide more details next quarter after the new framework rolls out this quarter. In addition, for the remainder of 2022, we expect to reduce spend in lower priority areas and non-core activities that we do not believe would be effective in this environment, focus our sales and marketing spend on activities with shorter payback periods, and realign our support teams under a more efficient operating model. Turning to our outlook. Since our beginning, we have grown the business with operating discipline, allocating capital to the best opportunities to help merchants grow. And I've grown our adjusted operating income over the past five years through 2021. We expect 2022 will be different, more of a transition year in which e-commerce is largely reset to the pre-COVID trend line and is now pressured by persistent high inflation. We expect our multi-channel superpowers and strong value proposition will continue to help our merchants in this environment. And we are excited about our critical investments like Deliver that will position us well for the future of commerce. We believe we will emerge from 2022 and this macro cycle stronger, and our prospects for long-term growth and profitability remain significant. Given the long-term growth trajectory and expansive opportunity set that commerce presents and our leading position within it, earned over years of providing the best technology that merchants and partners build their futures on, Our financial outlook for the rest of 2022, which includes the impact of deliver and our new compensation system, assumes that higher inflation will persist for the foreseeable future and combined with rising interest rates will pressure consumers' wallets for purchases of goods. In light of these assumptions, our expectations for our own results for 2022 are as follows. Our GMV growth, though impacted by persistent inflation, will continue to outperform the broader retail market in the second half of 2022, aided by our multi-channel capabilities. Merchant solutions revenue will continue to grow as a percentage of GMV, driven by mission-critical tools like Shopify payments, Shopify capital, Shopify markets, Shoppay installments, and Shopify fulfillment, including deliver, and continue to benefit from the growth of partner revenue. The number of new merchants joining the platform in the second half of 2022 will be higher than in the first half of 2022 as our localized subscription pricing and other commercial initiatives gain traction. Merchant solutions revenue growth year over year will be more than double that of subscription solutions revenue growth for the full year 2022. both GMV and total revenue in 2022 to be more evenly distributed across the four quarters, similar to 2021, given the increasing pressure on consumer spending on goods and currency headwinds from the stronger U.S. dollar we are expecting in the back half of this year. Because of this larger mix of merchant solutions contributing to overall revenue and deliver, which we expect to be dilutive, gross profit dollar growth will trail revenue growth and operating expense growth excluding severance to meaningfully decelerate in Q3 and again in Q4. Factoring in these expectations, we expect to generate an adjusted operating loss for the second half of 2022, with Q3 adjusted operating loss excluding severance costs expected to materially increase over Q2, reflecting time needed for the streamlining of our operations to take effect, the implementation of our new compensation framework, the first quarter of deliver operations, including approximately 450 team members and related integration costs, and up to an estimated $50 million for certain other operating items associated with these and other areas. As we significantly decelerate operating expense growth into Q4, and with Q4's higher seasonal GMB and revenue, we expect an adjusted operating loss in Q4 that is significantly smaller than in Q3, but larger than in Q2. Finally, the estimates of stock-based compensation and related payroll taxes, CapEx, and amortization of acquired intangibles are now $750 million, $200 million, and $62 million, respectively. In closing, we're ready to keep building the future of commerce. We will continue to prioritize building the software and solutions for merchants to enable entrepreneurs and independent merchants to compete in a world that relies increasingly on technology to succeed. And we will continue to be nimble and adjust our plans to exit the cycle with improving profitability. Our investments will help independent brands get started and compete, bring more modern selling tools for our larger brands, and equip merchants around the world with a richer set of capabilities, all of which fortify our long-term competitive position and value proposition. Over time, the investments we make now will become an integral part of our commerce operating system as Shopify advances to be a 100-year company with sustainable, profitable growth. I'll now turn the call back to Katie.