Shopify Inc.

Good morning, and thank you for joining Shopify's third quarter 2022 conference call. Toby Lutke, Shopify CEO, Harley Finkelstein, Shopify's president, Amy Shapiro, our CFO, and Jeff Hoffmeister, our incoming 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'll 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 US dollars, so all amounts discussed today are in US dollars unless otherwise indicated. With that, I will turn the call over to Harley.

Thanks, Amy, and good morning, everyone. As you can see from our Q3 performance, merchants continue to succeed on Shopify, growing sales and using more of our mission-critical tools to run their businesses. Shopify's essential tools serve as a business's central operating system. These tools help our merchants stay ahead of the curve as commerce continues to rapidly evolve. This is particularly important today as businesses grapple with the consequences of rising interest rates and inflation. This is a key reason why merchants choose Shopify. We make the important things easy and everything else possible. Later, Amy will discuss our Q3 financial performance and expectations for the rest of the year. I'm going to focus on the investments and the progress we've made in Q3 that further our competitive positioning and enable merchants to build buyer relationships, to go global, to advance from first sale to full scale, and simplify logistics, all of which plays a vital role in making commerce better for everyone. starting with building buyer relationships. For our merchants, discovering and connecting with more buyers and deepening relationships with existing customers are critical to a merchant's ability to create long-term success. Whether that connection is online or offline, Shopify has a suite of innovative products like our best-in-class retail point of sale offering that is rapidly becoming the solution of choice, not only for SMBs, but also for large retailers. During the quarter, the outsized pace of offline growth on Shopify continued as we brought on eight new merchants with over 20 locations each and one with over 175 locations. With our commercial teams increasingly selling to larger retailers, plus merchants accounted for approximately 35% of all point of sale pro sales closed in Q3. And that's up from 14% in the same period a year ago. Well-known brands, including department store Showfields and designer apparel Totema, implemented our Point of Sale Pro solutions for their locations, driving Q3 offline GMV growth by 35% year-over-year, or 41% in constant currency. Since the beginning of 2021, over half of the rapid adoption of Point of Sale Pro is being driven by new SMB retailers coming to Shopify to get their start as a new omnichannel business. Additionally, over a third are from established offline retailers who are entirely new to e-commerce or selling only on point of sale. These stats demonstrate the power of our commerce platform and the breadth of capabilities we have built to make it easier for our merchants to reach customers on every surface. In late September, we launched our new first-in-class mobile hardware device, Point of Sale Go. POS Go was developed to empower merchants to meet consumers wherever they are, however they want to purchase, from curb to counter. With POS Go, merchants can close sales anywhere and take payments securely and smoothly. POS Go is one more pathway to bring even more merchants into our flywheel. In just three weeks since launch, POS Go has seen enthusiastic adoption among new and existing merchants with strong performance right out of the gates. Building buyer relationships is paramount as our merchants gear up for Black Friday, Cyber Monday. Shopify is ready. Our platform is equipped to handle the influx of orders and volume because we don't just do this a few times a year. We support merchants through these types of flash sales all the time. For example, last month during New York Fashion Week, we supported a top designer during an online drop. During the flash sale, this Shopify merchant sold hundreds of thousands of units and achieved tens of millions of dollars in sales within only a few hours. Shopify made this possible. Today, brands have to be more sophisticated in how they reach and sell to consumers as shopping continues to evolve. It has become critical for merchants to be discoverable across multiple platforms and services, showing up directly where their consumers are shopping. While still very nascent, GMV through native checkout integrations on key partner services such as Facebook, Instagram, and Google more than tripled from Q3 last year. The more merchants continue to invest in multichannel sales, the more successful they become in building brand value amongst their consumers. Another way that Shopify is enabling merchants to build buyer relationships is through Shopify Audiences, our new tool that helps plus merchants find high intent customers. Since launching in May of this year, Audiences is significantly improving conversion rates, return on ad spend, and other important metrics for those plus merchants who have opted in. Last quarter, I mentioned a couple of merchants who have really benefited from Audiences. Today I want to share a couple of additional examples. Hiya, a children's wellness brand, worked with the Snow Agency, who is a Plus certified partner, to onboard into audiences. As a result, Hiya has seen their return on ad spend increase over 170%. Their conversion rate has increased over 150%, all while driving down cost per acquisition by 35%. Fast-growing home furnishing brand Nathan James attributed over 500 new customers to their use of Shopify audiences. They also saw a 200% increase in purchases, a 5.6 times return on ad spend on the targeted campaign, over $100,000 new revenue, all while customer acquisition costs declined by over 50%. Examples like these fuel our excitement about how audiences can drive merchant growth, especially going into the upcoming holiday season. Additionally, we're excited to continue to deepen our partnership with Google with upcoming new features for Shopify merchants to improve their impact on Google. Another marketing tool that we launched in early access in mid-August is Shopify Collabs, which brings brands and creators together. It has generated approximately 50 million organic impressions across social channels in less than two months. Collabs allows creators to monetize their talents by discovering and partnering with independent brands and sharing their favorite products with their followers. This gives merchants yet another new channel to grow their brand reach and find new customers. We're also investing in our merchants' ability to grow by helping them go global. Shopify Markets, which launched in Q1, allows merchants to identify, set up, launch, optimize, and manage their international markets from a single storefront. To date, more than 175,000 merchants across the world have used Markets to help launch their international businesses. By reducing the barriers to international selling, US merchants utilizing markets now sell into an average of 14 additional countries. Shopify Markets Pro, which debuted in mid-September in early access, is our cross-border solution built on top of markets. By combining Globally's features with Market's capabilities, such as the Translate and Adapt app, Market's Pro makes it easier for merchants to accelerate their global expansion to over 150 countries overnight without increasing their operational costs, risks, or complexity. So when merchants add languages to their store, they will now be able to leverage automatic translations and create localized buyer experiences with duty prepaid express international shipping. And this is just the beginning. Our own studies have shown that a merchant's GMV increases when customers are shown localized content. And we are confident that adoption will continue to increase as merchants look for ways to grow their businesses beyond their domestic borders. Like everything we do, we are laser-focused on lowering the barrier to entry in entrepreneurship globally. In May, we introduced localized subscription plans in over 200 countries. International retailers outside of North America continued to grow our overall merchant mix, comprising 45% of all merchants in Q3, and demonstrating the continued success of our investments. As we continue to expand our geographic reach, we launched Shopify payments in Finland, Switzerland, and Portugal. We launched Shopify capital in Australia and Shopify shipping in Italy and France. Also during the quarter, we launched Shopify point of sale with integrated payments in Singapore and Finland, which brings the total number of countries where merchants can use our point of sale offering to 14. Shopify is built to help merchants as they grow from first sale to full scale and everywhere in between. Solutions like Shopify shipping and Shopify capital help smaller businesses grow while development features like Shopify functions enables customized pricing and discounts to increase consumer engagement and loyalty. Shopify Capital has come a long way since its humble beginnings in 2016. Even back then, we at Shopify had our merchants' backs when no one else did, supporting them by providing a few thousand dollars to a handful of retailers. Fast forward till 2020, Capital hit the $1 billion mark, and in 2021, it surpassed $2 billion in funding. At the end of August of this year, Capital broke another record. We've provided cumulative funding of $4 billion since inception to our merchants. The team continues to fund and advance money to more merchants as they ramp up for Black Friday, Cyber Monday. Capital has made a real difference in merchant success rate, particularly as more and more banks and lenders are shutting off the spigot to smaller businesses. We also continue to improve the back office experience. Earlier this year, we launched Shopify Tax, a new product that takes the stress out of sales tax for our merchants so they can focus on what matters most to them, their products and their customers. Our strategy of making certain high value features available only in our Plus package continues to pay off. In Q3, we saw our Plus base continue to expand not only from upgrades, but also from entirely new merchants coming out to Shopify for the first time. New to Shopify Plus merchants came from a wide array of verticals, driving growth of Shopify Plus GMV in Q3, which continued to outpace overall GMV growth. Some examples of brands that have joined Shopify Plus during the quarter and into early October include beauty care creator Glossier, electronics manufacturer Panasonic Technics, Footwear and lifestyle accessories maker, Cole Han. Jewelry designer, Stella and Dot. Fitness apparel provider, Zumba Wear. Children's toy maker, Melissa and Doug. And pet food manufacturer, Greenies. Our plus team continues to gain traction outside of North America as well. International brands new to our platform included leading athletic footwear company, Converse Japan. Nutrition and vitamin supplement manufacturer, GNC India. footwear line superga italy and sports apparel designer new era hong kong the world's biggest superstars are also building their brands on shopify plus in q3 the kardashian brand continued to build their empire on shopify with their latest brand courtney kardashian's vitamin and supplement company lemmy Additionally, Food Network star Jada De Laurentiis introduced Jetsy, a new line of sauces and condiments. Ciara launched On a Mission, her new line of clinical skinwear. And homegrown Toronto celebrity Maddie Matheson launched a new workwear brand, Rosa Ragusa. Shopify continues to invest in global partnerships to support the adoption of Shopify by some of the world's largest brands. And during the quarter, we officially signed partnerships agreements with Ernst & Young and KPMG, adding to our relationship with Deloitte. Our strategic alliance with Ernst & Young, or EY, serves and scales to the needs of the client's enterprise. EY will be training an initial cohort of 500 technical professionals across their EY Wavespace network of 50 locations globally on Shopify, and will further support those professionals by enabling up to 10,000 consultants through exposure to the Shopify platform. This access will enable co-creation of unique immersive experiences that will help reimagine the online customer experience and unlock new markets for certain regulated industries and products. In addition, Shopify is thrilled to announce that we signed a collaboration agreement with KPMG in Canada. As one of Canada's largest systems integrators, our collaboration will help bring Shopify solutions to KPMG's clients to enable seamless commerce on their transaction platform of choice. On the development front, we are currently beta testing Hydrogen as a front-end web development framework or headless infrastructure. Hydrogen gives bigger retailers with in-house creators the tooling needed to accelerate development and deploy their bespoke storefronts with just one click on our hosting solution, Oxygen. With unique features such as audiences, B2B, hydrogen plus oxygen, and the expansion of our partner program for ERP and systems integrators, we expect Shopify Plus' momentum with larger merchants to continue. Last, I'll provide more context on our fourth major investment area, simplifying logistics. The internet has leveled the playing field for so many parts of an independent retailer's business, but not for logistics. We have set out to change that paradigm with Shopify Fulfillment Network. Last quarter, we outlined the three complex stages of a merchant supply chain across freight, distribution, and fulfillment as inventory moves from port to porch. Today, I'll share updates on our integration of Deliver, how we are accelerating our vision for SFN to become an end-to-end logistics platform for merchants, and most importantly, how we are shifting the logistics conversation with merchants to focus on driving value through fast and reliable fulfillment. First, since closing the Deliver acquisition on July the 8th, we have developed an ambitious plan to create a new fulfillment app for Shopify merchants and also combine the Deliver and Shopify fulfillment networks into a single network, spanning a merchant's full supply chain. We have made significant progress in our first quarter together with lots more still to come. We've also started creating a unified network built on top of the Deliver software platform. The combined scale of SFN and Deliver allows us to consolidate volume, streamline operations, and expand our carrier relationships. This unified network will enable Shopify to operate a small number of regional hubs that will serve several functions, including cross-docking, multi-channel distribution, inventory balancing, and some local fulfillment. These hubs will absorb as much complexity as possible for the rest of the network. We will continue to partner with the highest fit 3PLs around the US to enable local fulfillment, leveraging our proprietary warehouse management software, FMS. The first combined SFN and deliver facility is already operationally functional in Atlanta and has seen a tenfold quarter over quarter increase in the number of merchants holding inventory in that facility. We anticipate that unifying the network will be complete in Q1. Second, as we mentioned last quarter, we are building an end-to-end logistics platform that will connect every single part of a merchant supply chain. It enables merchants to dynamically route inventory across all their channels from B2B to D2C. Ultimately, we will create a fulfillment network that can accept orders and make customer delivery promises from the moment a merchant's goods leave their supplier. Since last quarter, we have seen a threefold increase in the number of shipped containers with our freight partner Flexport. Initial runs have shown that, as we expected, SFN merchants are experiencing up to 20% faster service from origin ports with significantly lower cost per pallet than average. This will allow SFN to guarantee that merchants' inventory is Black Friday, Cyber Monday ready the moment it leaves a supplier's facility. Let me share with you some of the initial stats on the rest of the supply chain. We've seen a 75% year over year increase in merchant inventory being received into deliver across stocks. A nearly 80% growth quarter over quarter in the number of merchants using more than one of our logistics services across all three stages of the supply chain. And a 450% year over year increase in orders fulfilled by FMS across both Shopify and partner run facilities. Finally, and most importantly, we are shifting the conversation with merchants to focus on logistics being a tremendous value driver for their operations. When done right, fast and reliable fulfillment can significantly increase cart size, conversion rate, order value, and turn buyers into repeat customers. In Q3, we completed the rollout of Shop Promise to all SFN merchants. Shop Promise is a consumer-facing badge indicating fast and reliable delivery across Shopify's online store and other popular direct-to-consumer channels. Shop Promise has already significantly boosted sales as participating merchants increased buyer conversion by up to 9% during the initial rollout. In September alone, SFN saw over two-thirds of domestic packages delivered within two business days, an exponential increase from less than 2% predicted delivery before SFN's software update in early 2022. All new SFN merchants are now automatically qualified to display the Shop Promise badge out of the box. We are confident that Shop Promise's impact on merchant value will continue to increase as it evolves and matures. And we believe that SFN has the opportunity to become the de facto fulfillment solution for independent merchants in the consumer packaged goods and apparel categories. The highlights I've shared so far are just skimming the surface on why we continue to increase merchant solutions revenue as a percentage of GMV, or the merchant solutions attach rate, which reach an all-time high of 2.14% in Q3, compared to 1.98% in Q2 on a sequential basis, with eight basis points in Q3 coming from deliver. Our record-setting merchant solutions attach rate is a primary component of our total revenue attach rate of 2.96% in Q3, defined as total revenue as a percentage of GMV, compared to 2.76% last quarter. Turning now to recent leadership changes, starting with the promotion of Kaz Najatian in September to Chief Operating Officer. I've worked with Kaz for over three years and know him to be the real deal. He embodies the best of Shopify with his product-driven mindset and an uncanny ability to see the alignment between product, sales, support, and grow-to-market strategies, all of which he oversees in his new role as COO. Reporting to Kaz includes the newly created roles of Chief Revenue Officer and Chief Growth Officer. As our new Chief Revenue Officer, Bobby Morrison comes to Shopify with more than 25 years of experience, transforming multi-billion dollar enterprises. Formerly, he was the Chief Sales Officer at Intuit. Luke Levesque joined Shopify in January, 2020. He previously oversaw growth at Facebook and TripAdvisor. Luke was recently promoted to chief growth officer, where he leads our new merchant additions and new business development efforts. And finally, the announcement of our new chief financial officer, Jeff Hoffmeister. Jeff has known Shopify for many years as he has led numerous transactions for us, including our IPO during his 20 plus years at Morgan Stanley. Let me turn the call over to Jeff to say a few words before I conclude my remarks.

Thanks, Harley. I am extremely excited to join the company. Thank you to Amy for all the leadership, stewardship, and hard work over the past five years. You've built a finance team that has a breadth and depth of expertise that is multiples of what you inherited. I'm proud to be able to take the baton from you and work with the team that you've built. To the investors, I got to know many of you during my years at Morgan Stanley and look forward to working together with you in my new role. As many of you know, I had the opportunity to work with Toby, Harley, and team on the IPO seven years ago and on numerous projects since then. That vantage point has allowed me to understand the complexities of the business into this role with a head start, but also have an appreciation for all the incredible things that Shopify has accomplished since its IPO. The decision to join Shopify was an easy one given my historical context and the tremendous potential I had for the company. I look forward to working closely with Toby, Harley, Kaz, and the rest of the senior leadership team to support the company's mission and next phase of growth. Back to you, Harley. Thanks, Jeff.