Shopify Inc.

Good afternoon and thank you for joining Shopify's fourth quarter and fiscal year 2022 conference call. Toby Luque, Shopify CEO, Harley Finkelstein, Shopify's president, and Jeff Hoffmeister, our CFO, are with us today. After their prepared remarks, we will open 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 afternoon as well as in our filings with U.S. and Canadian regulators. We'll also speak to adjusted financial measures which are non-GAAP and are not a substitute for GAAP financial measures. Reconciliations between the two are in the tables at the end of our press release. And finally, we report in U.S. dollars, so all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I will turn the call over to Harley.

Thanks, Amy, and good afternoon, everyone. 2022 marked another strong year for our merchants and Shopify, a year that reflects the resilience of our business model and commerce operating system. Our revenue grew 21% for the year, reaching $5.6 billion as we added nearly $4 billion to our top line since 2019. The growth rate we saw in 2022 is particularly noteworthy when you realize that this growth was on top of the incredible 57% growth we saw in 2021 and 85% growth in 2020. Against this backdrop, we continue to see data supporting the strength of entrepreneurship and new business starts. According to the US Census Bureau, applications for new businesses have been approximately 5 million a year for 2021 and 2022, which is a step function above the 4 million per year average for the previous five years. Shopify's penetration of the US e-commerce market is currently 10%, with this year's GMV surpassing $197 billion. as GMV has grown more than three times since 2019. Since our inception, Shopify has powered over half a trillion dollars in global commerce as we increasingly become the platform of choice for brands of all sizes. This past year, our merchants had their most successful Black Friday Cyber Monday selling period ever, generating $7.5 billion in sales over that period, a growth of 21% year over year on a constant currency basis. For that four-day period, approximately 52 million consumers worldwide purchased from brands powered by Shopify, representing a 12% increase from the same period in 2021. The breadth and velocity of the new products and enhancements to existing products that we shipped in 2022 are truly incredible. I will give you the highlights of the key solutions we released last year before diving into our main investment themes. We launched Shopify Audiences, Shopify Collabs, POS Go, Tap to Pay, integrated Twitter shopping and YouTube channels, and continue to build out the Shop app so merchants can more easily connect with and build relationships with buyers. We launched Shopify Markets and Markets Pro to lower the barriers for our merchants to sell globally, while also making it easier than ever to start a business internationally with localized subscription pricing now available in approximately 200 countries. And third, we made it easier for businesses worldwide to go from first sale to full scale on Shopify. helping merchants succeed at each stage of the growth journey. We also made fully available to merchants Shopify functions, hydrogen and oxygen, and expanded our back office merchant solutions to more countries to allow greater customization. And last month, we introduced our large enterprise solution, Commerce Components by Shopify. Also in January, we announced an update to the subscription prices on our basic Shopify and advanced plans. The prices that we had been charging for access to the best tools in commerce have largely remained unchanged for the last 12 years. This will enable Shopify's exceptional value to continue as we solve more of the most difficult problems in the industry and empower more people to become entrepreneurs. These new prices went into effect immediately for new merchants and will take effect on April 23rd for existing merchants. In short, in 2023, we will not slow down. We are committed to simplifying commerce even further this year, as we innovate and invest to future-proof our merchants' businesses and allow them to extract greater value from Shopify. Let's now talk in greater detail through three investment themes that we think about as we help our merchants grow. Helping them attract more buyers, going global, and first sale to full scale. I will start with how we help our merchants attract more buyers through more channels. Key to a brand's success is showing up everywhere their customers purchase. From a channel perspective, as customers have moved back to shopping in stores, we've continued to see outsized year-over-year growth in offline GMV, which was up 25% in Q4 and up over 40% on a full year basis. As more retailers seek to modernize their point-of-sale software, our world-class offering continues to gain traction with brands of all sizes. During Q4, Plus Merchants accounted for approximately 27% of all point-of-sale pro sales, an increase from 12% from the same period a year ago. Also during the quarter, Fast-growing brands including Todd Snyder, Tecovus, and Viore expanded to new retail locations with our Point of Sale Pro solution. Additionally, we were thrilled to power the global retail expansion of Culture Kings as the Australian streetwear giant opened a new flagship store in Las Vegas. Focusing in on the Point of Sale product, we continued to increase its scalability. Shopify can now power retailers with up to 1,000 physical locations. We rolled out both ShopPay and installments to Point of Sale in limited beta, so in-store buyers at the Point of Sale can now benefit from the same payment options and payment flexibility that we offer online. Driving greater integration of ShopPay and Point of Sale remains a big opportunity for us, and we are excited to scale this more broadly in 2023 and beyond. Point of Sale Go, our first-in-class mobile hardware device, takes the merchant and customer experience to the next level by offering buyers a super smooth and quick checkout. Point of Sale Go, which launched in September, is an all-in-one, fully integrated Point of Sale system, barcode scanner, and card reader that accepts tap, chip, and swipe payments. A key selling point of Point of Sale Go is its proprietary operating system, which allows Shopify to control the end-to-end experience on the device, from app updates to permissioning to Point of Sale onboarding. At $399 per device, Point of Sale Go brings incredible value to larger, more complex retailers who are buying these devices in multiples. The initial response to this cornerstone product has been exceptionally strong, and we are excited to drive even greater adoption in 2023. Integrating commerce into more services is another way we can help merchants strengthen their relationship with buyers and discover new customers. The Shop app is an excellent example of how we're helping merchants increase customer lifetime value by deepening their engagement with existing customers while also finding new buyers. Since we introduced the Shop app in early 2020, it has grown from an accelerated checkout and order tracking utility to become an important driver of many of our merchants' business performances. Shop gives merchants new ways to stay connected with their buyers, like in-app offers and notifications when their favorite products are back in stock. In a nutshell, Shop enables a Shopify merchant on their first day to have a storefront in a native mobile app. That's very powerful. In 2022, we ship dozens of enhancements to Shop, including discounts, an expanded search function, personalized shopping experiences, and embedding Shop Cash, our loyalty program that is currently in early access. With tens of millions using the app every month, we're able to match the right merchants to the right buyers, creating personalized shopping feeds for the buyer segment and a new customer acquisition tool for merchants. Shop is still in its early days, but it's one of the ways we're investing to help merchants win over the long term. A key feature of the Shop app is Shop Pay, our accelerated checkout feature, that continues to make commerce better for merchants and buyers alike. With well over 100 million buyers opted into ShopPay, our accelerated checkout facilitated $11 billion in GMV and Q4, and a cumulative $77 billion at year end since its launch in 2017. ShopPay makes for a seamless shopping experience, and it's one of the main reasons why more merchants of all sizes are adopting Shopify payments. Additionally, ShopPay unlocks our Buy Now, Pay Later product ShopPay installments for consumers. As the highest converting checkout on the internet, we want more businesses to benefit by offering ShopPay to their customers, which is why we've integrated ShopPay on social services, including Facebook, Instagram, and YouTube. As a result, GMV through our native checkout integrations with our key partners more than doubled over Q4 last year. As part of helping our merchants attract more buyers through more channels, we launched Shopify audiences in early access in May as an essential feature for our plus merchants. As we continue to enhance audiences, in Q4, we expanded the scope of audiences to support merchant objectives across the marketing funnel, from expanding reach to driving more conversions. We also launched audiences for Google during the quarter, allowing merchants to reach high intent audiences from their own store across YouTube, Google Search, Google Display Network, and Gmail. Within our February 9th editions, we announced the launch of audiences for Pinterest, which operates similar to the meta integration where plus merchants can use the tool to find high intent buyers across Shopify and upload to Pinterest for better targeting. With these partnerships, we continue to invest in marketing platforms where merchants are actively looking for their buyers. Most importantly, merchants are telling us how much they love audiences. In Q4, luxury fashion designer Jonathan Simkai turned to Shopify digital marketing partner, Maison Market, for help. And using audiences, they achieved a 6.6 times return on ad spend and an over 80% higher conversion rate and over a 50% decline in cost per acquisition. Next is going global. Lowering the barriers to entrepreneurship globally is a massive opportunity for Shopify and for our merchants. At the end of 2022, approximately 45% of our merchants were based outside of North America. making up approximately 27% of our revenue. We expanded our offering in country with Shopify payments now available in 22 countries, Shopify point of sale in 14 countries, Shopify shipping in seven countries, and Shopify capital in four countries. We also rolled out our localized subscription plan pricing to approximately 200 countries and localized billing to make it easier for merchants to start and grow their businesses on Shopify. Looking ahead, we're focused on helping our merchants reach consumers no matter where they're located. We want to make selling internationally on day one as easy as it is to sell locally. In 2022, Shopify enabled approximately $28 billion in cross-border sales, capitalizing on the surge of international interest with nearly 28% of all traffic to Shopify stores coming from buyers outside of the merchant's home country. Our solutions allow merchants to sell globally and provide a localized experience from a single Shopify store that makes multi-market management easy with a single dashboard that lets brands sell, ship, and scale internationally while keeping the merchant's team and their overhead lean. Our products are built to boost conversion with capabilities like local currency, language translations with the Translate and Adapt app, payment methods, and an import duties calculator. Our latest addition to our merchant's global toolkit is Markets Pro, which launched in Q3 in early access and is built on top of the Markets product. The unique difference is that Pro is a fully integrated merchant of record solution and provides a complete end-to-end global commerce solution, whereas markets allows merchants to selectively choose only those features that suit their needs. Even in early access, we've seen the impact MarketsPro can have, as we've seen evidence of cross-border conversion improving by up to 36%, and we can't wait to bring this tool to even more brands shortly. Third, enabling our merchants to go from first sale to full scale. After our merchants get started and find product market fit with their initial sales, they need the right tools to advance. That's why we continue to enhance and build new tools to simplify and support merchants journeys for every stage of growth. Our merchants continue to recognize the adaptability and flexibility of our platform. And in 2022, approximately 25% of all plus additions came from the plus self-serve upgrade experience. Another example of how we evolve with our merchants is Shopify Capital. Capital has acted as a lifeline for merchants, especially through the pandemic and this tough macro environment. allowing them to conveniently access capital when they need it most. Capital is now available in four countries, and our machine learning algorithms to underwrite merchants keeps getting better. In Q4, we advanced nearly $400 million, up 21% from the same period last year, bringing the cumulative amount since we launched Shopify Capital in 2016 to nearly $4.7 billion. More merchants accepted capital in Q4 compared to the same period last year, including a greater number of plus merchants, and we're seeing incredibly strong renewals from previous borrowers. Speaking of plus, in Q4, Shopify continued to prove that we are the commerce platform of choice for merchants of all sizes. Giant Tiger, one of Canada's largest retailers, ripped out their entire tech stack and replaced it with Shopify Plus. They needed a commerce platform that would up-level their customer experience and deliver the flexibility their customers needed between both online and the physical store. Our out-of-the-box platform modernized this massive department store we integrated more than 260 locations across the country with their online store and enabled Giant Tiger to offer buy online, pick up in store to meet the omni-channel expectations of their customers. This is another example of how Shopify is increasingly the go-to platform for department stores and large-scale merchants. The diversity of brands on Shopify Plus continues to expand. Shopify made meaningful headway in the luxury space, welcoming French fashion and perfume house Lanvin to the platform as well as Italian footwear brand, Sergio Rossi, and Swiss fashion designer, Bali. Consumer favorites, including hockey equipment and skate retailer, Bauer Hockey, and home appliance and tool manufacturer, Black & Decker, both launched in Q4, as did ButcherBox, which began its migration to Shopify with the launch of their a la carte business. We also continue to increase our geographic footprint in key international markets, launching Eataly, Reebok, Superdry, Sony Music Entertainment, Skechers, and additional Nestle brands in new markets in Q4. Not to mention the migration and launch of Mattel's full suite of brands and Supreme, both of which I'll talk about shortly. Shopify continues to be the go-to place for celebrities to launch their unique brands with our roster continuing to expand. Record producer and rapper Pharrell launched a second brand, Jupiter, on Shopify, which is a global digital first auction house. Shopify is also the platform of choice for creators, fueling the creator economy with brands like Prime by YouTubers and athletes Logan Paul and KSI launching on Shopify this quarter. We are not only the preferred partner for online, but also offline, with Kim Kardashian hosting her first pop-up in LA for her brand Skin, as well as Eminem's mom's spaghetti pop-up store in New York City, both of which were powered by Shopify point of sale. We close out 2022 with more merchants growing their businesses on Shopify. and the caliber of brands choosing Shopify is not slowing down. In Q1, we've already welcomed the iconic streetwear brand Supreme to Shopify. Supreme is one of the world's biggest flash sale retailers, hosting more than 50 flash sales each year that are live for no more than a few minutes, which makes Shopify the ideal platform for Supreme to continue growing their business. The tailwinds for brands joining Shopify Plus are only growing as huge businesses choose to go direct-to-consumer and migrate to Shopify. Already in Q1, Mars, one of the largest CPG companies on the planet with over a century of history, signed a global agreement with Shopify. With over $35 billion in sales, the company is a global business that produces some of the world's most beloved brands. This global agreement will pave the way for more Mars brands to build and scale their businesses on Shopify and is a positive signal for others in the industry as Mars joins the ranks of other large CPG brands that are already using Shopify, including Heinz and Nestle. Our commitment to making commerce better for businesses of all sizes is only growing. To kick off the year, we made a major announcement that we were launching our enterprise retail solution, Commerce Components by Shopify, or CCS. Commerce Components is a modern, composable stack where retailers can choose the Shopify components they want, integrate with their existing systems, and create incredible customer experiences. One of the first brands deploying CCS is the toy and entertainment industry leader, Mattel. Mattel is a merchant with over 400 brands in their portfolio they will be bringing to Shopify, a testament to the durability and scale of our commerce platform. Mattel needed an enterprise partner that could deliver incredible speed, endless flexibility, and the ability to pick and choose the parts of Shopify infrastructure they needed, as well as execute its flash sale model. While it's still early days, extending our reach into the enterprise will be a key investment focus in 2023. As part of our enterprise strategy in 2022, Shopify signed business partnership agreements with Accenture, Deloitte, Ernst & Young, and KPMG to enable greater opportunities for larger brands to adopt Shopify. And last month, we formed an alliance with IBM Consulting. We considered a great testimony to the power of Shopify that such a premier group of system integrators are so quickly building teams to help enable Shopify for large enterprises. These systems integrators will be a critical element in helping us reach more enterprises and in a way which is an extension of our core customer acquisition efforts. Also in Q4, we launched Shopify Tax, a new product offered to U.S.-based merchants that takes the stress out of sales by simplifying tax compliance. Early data shows that merchant adoption has ramped quickly, speaking to the trust that merchants have in Shopify. As we work to solve their toughest problems, our merchants are eager to utilize more of our products. Turning now to Shop Promise and Shopify Fulfillment Network, merchants repeatedly tell us that providing greater visibility and confidence in delivery dates can help improve their store conversions. This is why we launched Shop Promise in 2022, a consumer-facing badge that provides reliable and accurate delivery dates across the merchant's online store, checkout, and on the Shop app. Shopify looks at merchants' shipping performance to identify which brands consistently ship reliably to determine their eligibility for the program. Merchants in the program have seen up to 25% increase in conversion rates. As part of our additions released last week, we are working to expand Shop Promise to all eligible US merchants over the next few months. With Shopify Fulfillment Network, merchants have access to Shop Promise by default. Over the past six months, we have made significant strides in integrating Deliver into SFN. We're creating one unified network that enables data-driven inventory distribution and access to our logistics services. Compared to Q4 of 2021, we've seen a 40% increase in orders per merchant, while Deliver has achieved over 50% growth in units fulfilled, and more than doubled its services outside of fulfillment, services like freight, B2B, parcels, and returns. In 2023, we will continue to integrate SFN with deliberation and discipline. The team plans to broaden our logistics offering, optimize our network performance, and deliver an enhanced fulfillment experience for merchants. I know I've covered a lot, and that's because we've accomplished a lot due to the hard work of our exceptional team. Millions of merchants around the world recognize and value the rich set of mission-critical solutions that we provide. Shopify's commerce operating system is the backbone powering brands all over the world. Since the very beginning, we have been merchant-obsessed and have had their backs when often no one else did. Our merchants' testimonials speak for themselves. Simplicity, reliability, speed, and security. And the list goes on. We've earned our merchants' trust over the years, and it is that trust that supercharges our mission to continue to make commerce better for everyone. And with that, let me turn the call over to Jeff.

Thanks, Harley. As this is my first official earnings call, let me start by mentioning how excited I am to be part of Shopify. It's an incredible collection of talent, and I look forward to helping this team capture the opportunity in front of us. Let's now talk about how Black Friday, Cyber Monday, and all the great product introductions and developments that Harley mentioned translated into a strong Q4 for our merchants and therefore Shopify. Our merchant GMB in Q4 grew to $61 billion, up 13% year-over-year or 17% on a constant currency basis, outpacing overall U.S. retail growth of 6%. Our strong Black Friday Cyber Monday was a key driver of this Q4 GMB outperformance. We saw strong growth in GMB in both our online and offline businesses. Revenue for the fourth quarter grew to $1.7 billion, 26% year-over-year growth or 28% in constant currency. which represents the highest growth rate of any quarter in 2022. Driving this performance was strong merchant solutions growth on the back of robust GMV growth. Moving now to our merchant solutions business. During the fourth quarter, merchant solutions revenue was $1.3 billion, increasing 30% year over year or 32% on a constant currency basis. Our growth in the quarter was primarily due to the increase in GMV, a higher penetration of Shopify payments, and the contribution from Deliver. $34.2 billion of GMV was processed on Shopify payments in Q4, 23% higher than in the fourth quarter of 2021. The penetration rate of Shopify payments as a percentage of GMV was 56% for the quarter versus 51% in Q4 of the prior year, and up 210 basis points quarter over quarter. Several items drove our gross payments volume for the quarter, particularly strong performance by those merchants on Shopify payments, an increasing percentage of which are Shopify Plus, new merchant adoption across the globe, expanded penetration in shop pay, and the increased footprint of our point-of-sale hardware in brick and mortar stores. Subscription solutions revenue is 400 million, up 14% over Q4 of 2021, driven primarily by an increase in the number of plus subscriptions, higher variable platform fees from plus merchants, and the higher revenue shares from ecosystem app developers. Our total attach rate, which is defined as revenue divided by GMV, represents a key gauge of our ability to drive greater value for our merchants. Our total attach rate has grown to 2.85% in Q4 of 2022, up from 2.55% in Q4 of a year ago. Monthly recurring revenue, or MRR, exceeded $109 million, up 7% year over year. Strong gains in MRR from Shopify Plus and Shopify Point of Sale offset the near-term deferral in MRR from new entrepreneurs participating in our trials. During Q4, we also saw an increase in standard merchant MRR as a significant portion of merchants bypassed the paid trial status and converted directly to full price status. Contribution from our plus merchants to total MRR increased year-over-year to 33% from 29% in Q4 of 2021 as larger volume brands joined the platform and thousands of additional retail locations began using point-of-sale probes. As we mentioned in our Q3 call, merchants participating in our onboarding trials are immaterial to our MRR until they convert to one of our fully paid plans. Early signals from these trial experiments have shown encouraging positive increases to merchant engagement. These trials help us attract more merchants and provide merchants a better onboarding experience that gives them additional time to unleash the power of our platform to drive their business. For 2022, our MRR per merchant remained relatively consistent with 2021, excluding those on our free and paid trials. We expect to see some incremental benefit to MRR in 2023 from the pricing changes we announced last month. Gross profit was up 15% to $799 million, and gross margin was 46% for the quarter. Compared to our Q4 of 2021, gross margin was primarily affected by the dilutive impact of deliver. Gross margin for Q4 2022 was also impacted by greater revenue contribution from lower margin Shopify payments as well as pressure within Shopify payments due to Plus, and a shift to greater credit card usage versus debit cards. Operating expenses were $987 million for the quarter, which includes a real estate impairment charge of $84 million. The increase year over year is primarily due to the incremental headcount from Deliver and the implementation of our new compensation system. Of note, when you compare the operating expenses of Q3 and Q4 and remove the one-time items that impacted both periods, we were able to keep our operating expense dollars relatively flat and still deliver strong revenue growth quarter over quarter. A key driver of our stabilizing OPEX for the quarter was a decline in headcount from Q3 to Q4. We also have several other key initiatives already in process in order to help us manage operating expenses, including greater focus on our cloud infrastructure spend, heightened scrutiny of the performance of our marketing programs and their associated payback periods, and in general, an increased emphasis on better leveraging technology internally to automate previously manual processes, and thereby improve the speed, accuracy, and efficiency of delivering great products and solutions for our merchants. These operational improvements serve as a good indicator of our commitment to make Shopify nimble, lean, and highly adaptable, goals that will persist for us well into the future and are not short-term cost fixes. Stock-based compensation for Q4 was $142 million, compared to $98 million for the same period a year ago, primarily driven by deliver and higher headcount. Adjusted operating income for the quarter, excluding the real estate charge, was $61 million. The decline compared to Q4 of 2021 was primarily a result of lower gross margin year over year and higher operating expenses, driven primarily by increased compensation expenses, including our employees' shift to more cash versus equity for their total compensation. For the quarter, we delivered cash flow from operations of $97 million and cash flow from operations minus CapEx of approximately $90 million, as we held CapEx in Q4 to less than $8 million. Turning to our balance sheet, our cash and marketable securities balance grew sequentially from Q3 up to $5.1 billion as of December 31st, largely as a result of cash flow from operations in Q4. To recap, we delivered strong fourth quarter financial results. We grew revenue 28% on a constant currency basis, and our total attach rate increased to 2.85%. We held our operating expenses essentially flat from Q3 to Q4, excluding one-time charges, and delivered cash flow from operations less capex of $90 million. Turning to 2023, I'd like to spend a moment talking about two key items affecting our profitability expectations this year. Our compensation leveling exercise in 2022 and the expense run rate of Shopify fulfillment network following our acquisition of Deliver. Starting with our new compensation framework. Along with enabling our employees to allocate their total compensation split between cash and equity, we also changed the overall compensation system to be better aligned with the market. We went through an extensive benchmarking exercise to help us make sure that within Shopify, the right people are getting paid the right amount. This process resulted in higher compensation expenses starting in September of 2022, primarily in R&D. Given the timing of when we initiated these changes, the year-over-year comparability will be impacted during the first three quarters of 2023. Moving to the Shopify fulfillment network, we currently expect SFN to be a headwind to gross margin and a significant contributor to operating expenses in 2023. This impact on year-over-year comparability will be most prominent in the first half of 2023, given that the deliverer acquisition closed in July 2022. Before I turn to our outlook, let me first make a few comments regarding the macroeconomic backdrop and its implications on Shopify. Our perspectives on outlook assume that inflation remains elevated, pushing consumers to discounted and non-discretionary purchases. As mentioned previously, we had a strong Black Friday, Cyber Monday, and continue to outperform the broader e-commerce market, but we are mindful of the environment in which we are operating now. Let's turn to our outlook for the first quarter of 2023, first on revenue. We historically have experienced a sequential seasonal decline from Q4 to Q1 due to the strong holiday selling season. We anticipate a similar trend this year and expect Q1 revenue to grow in the high teens on a year-over-year basis. We expect Q1 gross margin to be slightly higher than our gross margin for Q4 of 2022, Overall, the same factors that impacted our gross margin in 2022 are expected to continue in Q1, including the annualized impact of the deliver acquisition and the continued growth of Shopify payments. We believe that our Q1 operating expenses will be up in the low single-digit percentage versus our Q4 2022 operating expenses when excluding the one-time charges that we had in Q4. Stock-based compensation for Q1 is expected to be in line with Q4 of 2022. Finally, we expect that capital expenditures for Q1 will be in line with what we spent for the full year of 2022. In closing, 2022 marked a year where Shopify introduced several significant new products and product enhancements, and we look forward to those solutions adding more and more value for our merchants. We delivered strong financial results for the year. We recognize a challenging macroeconomic backdrop and are focused on carefully balancing our growth investments with strict operational discipline. We remain enthusiastic regarding the strength of our merchant solutions and the value that they will bring our merchants and therefore our investors. I'll now turn it back to Amy and open the call for any questions.