Shopify Inc.

Good morning, and thank you for joining Shopify's third quarter 2023 conference call. Harley Finkelstein, Shopify's president, and Jeff Hoffmeister, our CFO, are with us today. 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 the U.S. and Canadian regulators. We'll also speak to adjusted financial measures, which are non-GAAP 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 will turn the call over to Harley.

Thanks, Kerry, and good morning, everyone. We are here to discuss our latest quarterly results, which reflect Shopify's continued growth and commitment to empowering businesses around the globe. Our Q3 results should be taken as a clear indicator of our ability to reshape Shopify, making us faster, more agile, and ready for sustained profitable growth. GMV was up 22%, revenue was up 25%, growth profit was up 36%, and free cash flow margin was 16%. Simply put, we executed extremely well in Q3, delivering results that reflect the power of our merchant-first business model and the progress we are making to further solidify Shopify's position as the global leader in commerce. Thank you. operating with greater discipline and efficiency to ensure our merchants have the tools they need to navigate any macroeconomic environment. The trust we have built with our merchants, combined with our growing scale, highlights the power of our platform and gives us increasing opportunities to deliver even more value to our merchants. from small local retailers to large global corporations. Shopify is helping them achieve even greater heights of success. So let's dive in to the key accomplishments in the quarter as we continue to execute on the massive opportunity ahead, supercharging merchants of all sizes to sell to anyone, anywhere, and always. Starting with product, no other platform has built for every facet of commerce like Shopify has, whether it's online or in person, SMB or enterprise, direct to consumer or wholesale, domestic or global. We are multidimensional and moving quickly to expand our unified commerce platform to not only remove barriers for merchant success, but also to help them thrive. From AI to checkout to shop pay, we are making the hard things easy and everything else possible. At Shopify, we believe AI is for everyone, and its capabilities should be captured and embedded across the entirety of a business. We've integrated Shopify Magic, our suite of free AI-enabled features, across our products and workflows. And merchants are already finding success with unblocking productivity and creativity. Shopify Magic can take the power of Shopify and a merchant's own data to make it work better for them. Whether it's enabling unique personalized page and content generation, like instantly crafting an about us page in your brand voice and tone, or building a custom page to showcase all the sizes available in your latest product collection, we are equipping businesses with more ways to enhance their workflow and streamline daily operations so they can focus on what matters most, growing their business. Moving on to Shopify checkout, we continue to invest into building the most seamless, secure, and efficient checkout experience for our merchants. Since launching checkout extensibility, our new way to customize Shopify checkout last year, we've seen improvements across our merchant base. It is more adaptable, loads faster, and converts better. Designed to handle high volumes, it is ideal for the world's largest flash sellers like the iconic brand Supreme. Its approach to extensibility is fully compatible with ShopPay, making it the world's first completely customized one-click checkout. And all those customizations are upgrade safe, so merchants never have to miss out on the latest features and optimizations we release. Since launch, we've exponentially expanded our suite of APIs, components, and capabilities, and seen over 400 checkout apps in the Shopify app store that supports checkout extensibility. Throughout the quarter, more brands are using checkout extensibility to leverage its enhanced flexibility, performance, and capabilities. We now have consumers' favorite brands like Ruggable, Thrive Cosmetics, and Mr. Beast, and thousands of others using our checkout extensibility with more transitioning over every day. In September, we launched the new one-page checkout, a significant change to our checkout experience that underscores our commitment to creating an experience that is not only fast and streamlined, but also more enjoyable for the buyer, ultimately leading to higher conversion. In just two months, we're already seeing one-page checkout speed up buyer completion time by an average of four seconds. That is a huge achievement considering its potential to boost customer acquisition, sales, and brand loyalty. As I mentioned earlier, checkout extensibility is fully compatible with ShopPay, making it the world's first completely customizable one-click checkout. With over 100 million buyers already using ShopPay, it's increasingly become the go-to choice for consumers, gaining popularity over guest checkout and credit cards. In the quarter, ShopPay facilitated $12 billion in GMV, an increase of 50% year-over-year and cumulative $110 billion since its launch in 2017. Surpassing the $100 billion mark on ShopPay was a significant achievement for the team, but we have our sights set on further establishing ShopPay as the preferred accelerated checkout method across commerce. It's a tool that retailers, large and small, on platform and off, will continue to seek out, given Shopify's overall conversion rate outpaces the competition by up to 36%, and on average, 15% more than others. From embedding AI into our solutions, to optimizing checkout, to expanding the availability of ShopPay, these are just a snapshot of the wide array of ways Shopify is making it easier for merchants to not only sell locally, but globally. Cross-border GMV was approximately 15% of total GMV in the quarter, and in late September, we successfully launched MarketsPro to general availability in the U.S., attracting thousands of merchants to this new product offering. MarketsPro takes on the most stressful and time-consuming elements of international transactions, so our merchants don't have to. As a fully integrated merchant of record solution, it is built on top of markets. MarketsPro is a great option for merchants looking to scale to new countries quickly without having to navigate international tax compliance or fraud while tapping into the best-in-class international shipping options with prepaid duties. Since the rollout, the product has become one of the fastest growing e-commerce merchant of record providers, and we cannot wait to expand its accessibility to other countries beyond the U.S. in 2024. Our primary focus for international remains centered on extending Shopify's products and capabilities to enhance the merchant experience in every market. This includes things like launching shipping guidance for merchants, navigating them through streamlined privacy guidance, initiating localization experiments across various marketing channels and bringing localization tools and AI-backed language translations to the Shopify app store. and it's working. In Q3, similar to the first half of the year, we delivered considerable GMV and merchant growth in key European markets like Germany, France, and the UK, with GMV in these three markets growing greater than 2x GMV for all other geographies. With our growing international and cross-border tools, we are increasing the ways for merchants to reach customers in new markets with ease. And with our growing network of partners, merchants can offer their products on even more channels and surfaces. It is this increasing optionality and integrated ecosystem that separates us from everybody else. Thank you. And all of this can be done within Shopify, giving brands a single centralized place to reach a larger base of customers anywhere, anytime, and always. Within retail, our go-to-market efforts continue to yield strong results. Offline GMV increased 26% year-over-year in the quarter, driven primarily by larger retailers joining the platform. Nearly a third of point-of-sale GMV in Q3 came from Shopify Plus merchants, and our point-of-sale pro subscriber base was up 34%. All powerful indicators that our world-class point-of-sale product is fueled by an even stronger go-to-market that is delivering results and bringing more merchants onto the platform. The strength of our unified commerce platform and scalability of our retail channel continues to draw in major omni-channel retailers like Banana Republic Home, Princess Polly, and the Sacramento Kings. We have worked consistently to build out the features and functionality that larger multi-location retailers require, including powerful, customizable staff permissions, remote management of the point-of-sale products, and innovative professional payment devices like our new point-of-sale Go, which we brought to the UK and Ireland in the quarter. Many of these larger merchants are using Shopify point-of-sale to streamline their operations, giving them a clearer view of their business and greater ability to build personalized customer relationships. Even as more and more large brands choose Shopify for our unified commerce capabilities, we remain the best commerce offering for small and medium-sized businesses. This is evident on our ongoing partnership with Intuit, as well as our newly established partnership with FAIR, making them a recommended wholesale marketplace. As part of the partnership, FAIR also recommends Shopify as the preferred provider for delivering exceptional point-of-sale experiences to their merchant base, which has hundreds of thousands of retail shops in 20 countries. This partnership further reinforces the robustness of our offering for retailers aiming to stay at the forefront of commerce. As consumers increasingly expect to interact with their favorite local shops, both online and in person, we spent the past year developing a plan for retailers who primarily operate in physical locations but also desire a simple online presence. We call it our Retail Plan. Tailored for retail-first businesses for $89 a month, retailers can leverage the strength of Shopify through our point-of-sale platform to help them run and manage their brick-and-mortar stores. Since its launch in early August, 16% of our retail pro locations growth has come from merchants subscribing to this plan. While it's still early days, the retail plan is just another way in which we are uniquely positioning ourselves to expand the entry points into Shopify, thereby facilitating more commerce through our platform, driving the Shopify flywheel. In addition to our success in the retail channel, the momentum in our B2B business continues to accelerate. During the third quarter, our business nearly doubled year over year. And by August, we already had surpassed our entire B2B GMV for all of 2022. These are strong indicators that our efforts to develop advanced features for B2B are making an impact and we have no intention of slowing down. To establish ourselves as industry leaders, particularly for large enterprise merchants, we're leveraging our rapid innovation and product development muscle to bring additional wholesale features, such as staff permissions for sales reps and extensible discounts to make it easier to drive sales. As more consumer favorite brands on Shopify, like Laura Mercier and Bare Minerals, adopt this product, we continue to tap into our immense potential of our platform to enhance our engagement with our existing merchants and support them in growing this channel. Beyond serving our existing merchant base, B2B is a huge growth opportunity for Shopify to tap into new verticals and cater to an entirely new cohort of merchants who exclusively conduct B2B transactions. It is a massive industry that we believe we can fundamentally transform in our efforts to continue to make commerce better for everyone. Thank you so much for having me. Our partner ecosystem is the largest ecosystem of commerce partners in the world, with four times more global partners than the next largest commerce provider. The ecosystem that we have cultivated and extended over the years includes our community of developers and partners that are dedicated to commerce, more than 10,000 apps in our app store, top system integrators like IBM and Deloitte, as well as our recently announced partnership with multinational advertising and technology company WPP, and strong platform partnerships like Stripe, Globally, as well as newer partnerships like the expanded ones we are building with Flexport and Addion. One of Shopify's greatest strengths is creating world-class partnerships with commerce and product companies that are a win-win for both parties. This is central to the flywheel that every company tries to cultivate that we actually have and are incredibly proud of. Our ecosystem is critically important to the success of our merchants. If our partners succeed, our merchants succeed, and we succeed. This is by design, and it's happening across all dimensions of our business. And in the past few months, we've had some exciting things happening for Shopify and our partners. For advertising product audiences, we recently announced integrations with TikTok, Snap, Criteo, joining our existing roster of channel ad partners, including Meta, Google, and Pinterest. On the app side, our long-term partner Klaviyo, who officially launched their app in the Shopify App Store back in 2018, has successfully IPO'd, which demonstrates the strength of Shopify's ecosystem in helping our partners find success. Congratulations to the entire Klaviyo team on this huge achievement. We announced our partnership with Amazon, which will release an app in Shopify's app ecosystem in the coming weeks, giving merchants the choice to offer Buy With Prime directly within their Shopify checkout. This new app will give U.S.-based merchants who use Amazon's fulfillment network the option to add Buy With Prime into their Shopify checkout. And all of it will be processed by Shopify payments. And finally, we have signed our commercial agreement with Flexport. As our preferred logistics provider, we look forward to partnering with Flexport to bring fast, affordable, and reliable logistics offerings to our merchants. More choice means more opportunities to succeed. And that's what we are building at Shopify. Because Shopify is no longer just e-commerce in North America for small businesses. We are a global unified commerce platform for merchants of all sizes. Whether it's full stack, headless, or composable, we have a suite of capabilities that are built for every type of enterprise, every new entrepreneur, and every SMB that is looking for a fast and scalable solution that offers incredible value. No matter what a merchant might need, Shopify has a solution that is right for them, and we are building more every day to increase the optionality and the ways in which we can help businesses succeed. And the best part is that every single day, consumers' favorite brands and the brands of tomorrow are all coming to Shopify. They trust us to provide them with the cutting-edge tools to not only find success today, but to build brands that thrive in the future of commerce. Some of the brands that launched since our last earnings call include Pucci, the well-known French fashion house and luxury retail brand owned by LVMH, Ted Baker, the UK fashion designer, as well as Anastasia Beverly Hills, the celebrity makeup artist and makeup brand, and JLo Beauty, the beauty skincare line by Jennifer Lopez, all highlighting our continued ability to meet the needs of merchants across verticals and geographies. Our go-to-market strategy, combined with our robust, multidimensional, unified commerce platform, is attracting more brands with established online and offline presences to Shopify. Brands like Page Denim and Oakenfort, who recently signed with Shopify, because we can offer them optionality and scalability to power their businesses online, offline, and everywhere in between. We also saw our go-to-market efforts lead to Shopify signing deals with enterprise-level brands around the world, including luxury marketplace Moda Operandi, footwear company Tom's, liberated brands, the retail and e-commerce operator of BoardRider, which is home to brands like Quicksilver, Roxy, DC Shoes, Billabong, Element, and many more. premium wine company, Treasury Wine Estates, specialty beverage marketplace, BevMo, powered by GoPuff, our largest EMEA brand to date, Danish online and physical yarn brand, Hobie, along with Austrian beauty brand, AMR Hair and Beauty, and Snow Peak, a Japanese design camping gear company, our largest brand signing in Japan. Beyond these brands, many others continue to come to Shopify because we offer the best value for flexible, scalable infrastructure to help them succeed. And our excitement around the enterprise opportunity is only growing stronger as we engage and sign more consumers' favorite brands across geographies and channels. Before I hand it over to Jeff, let me just give you a quick update on how Shopify is working with brands to create incredible, unique experiences that customers are absolutely raving about. Over the summer, the Shop app went on tour with Drake. It's the first time in four years that Drake has gone on tour, so it's a big deal for his fans all over the world. So we took the shop app on tour with him and crafted something special for his fans that they can only get through the shop app. We created a QR code and geofences with custom radiuses to drop his fans thousands of surprise Drake-related gifts. Fans could scan the QR code at the show, head to the Drake-related shop, put in their shipping details, and be sent awesome products like unreleased Nike sneakers and champagne hot steps. And every drop was different, with surprise products at a surprise time. These drops are creating huge hype at every tour stop, with people starting to crowd around for the drop after the show. It's been incredible to see and be a part of, and all of it is being done on Shopify. Our merchant obsession and powerful platform ideally positions us at the epicenter of the future of commerce, unleashing new ways for merchants to engage and drive authentic connections with their customers. To wrap it up, millions of merchants around the world recognize and value the rich set of mission-critical solutions that we provide. Our unified commerce operating system is the backbone powering brands all over the world. We continue to make it possible for every business owner on Shopify to leverage the power of the latest technology like AI so they can build their businesses faster and unlock a new level of creativity and productivity beyond their wildest expectations. So as our merchants get ready for their busiest shopping season of the year, their next flash sale, or even their very first sale, we are ready. Arming them with the speed, reliability, and accessibility they need across channels, partners, and products to help them capture every opportunity every step of the way. And with that, I'll turn the call over to Jeff.

Thanks, Harley. Let's dive into our Q3 results, starting with GMV. GMV in Q3 was $56 billion, up 22% year-over-year, as merchants delivered another strong quarter of growth. The 22% year-over-year growth in GMV represents the highest quarterly growth rate since the pandemic-driven growth rates of 2021. Growth in our merchant base globally was the largest contributor to our GMV growth year-over-year. Three other key factors. Continued gains in Europe. Harley mentioned in his comments that GMV in Germany, France, and the UK, our three largest merchant bases in Europe, combined grew greater than two times the GMV for all other geographies globally. The same is true for all of EMEA. GMV grew two times the rate of the rest of the world. The GMV strength in Europe is stemming from multiple sources, with the growth being driven equally by new merchant acquisition and sales growth in our existing merchant base. Secondly, same-store sales growth in our existing merchants globally. And finally, robust growth in our point-of-sale business, which increased 26% year-over-year for the quarter, driven primarily by larger retails joining the platform. Turning to revenue, revenue for the third quarter was $1.7 billion, up 25% year-over-year, which translates into a year-over-year growth rate of 30% when excluding the logistics business. The key contributors to our revenue growth included the GMV strength we just discussed, the growth in our merchant solutions business, which was driven by a combination of increased penetration of payments and continued growth across a broad number of solutions, including capital, markets, and installments. a full quarter of benefit from the subscription pricing changes on our standard plans, and growth in the number of active merchants across each of standard, plus, and point of sale. In Q3, our product attach rate was 3.05%, up from 2.96% in Q3 of 2022. The key contributors were growth in payments, subscription solutions from the pricing change, capital, markets, installments, and tax. Now to discuss our two revenue streams, merchant solutions revenue and subscription solutions revenue. Q3 merchant solutions revenue was $1.2 billion, increasing 24% year over year, driven by growth in GMV, continued penetration of Shopify payments, and strength in our other merchant solutions, particularly Shopify capital, markets, and installments. These partially offset by not having the logistics business in the quarter. $32.8 billion of GMV was processed on Shopify payments in the third quarter, 31% higher than in the third quarter of 2022. The penetration rate of Shopify payments as a percentage of GMV was 58% compared to 54% in Q3 of 2022. Several factors drove the quarter's higher gross payments volume compared to the prior year, including... the strong performance by those merchants utilizing Shopify payments, an increasing percentage of which are Shopify Plus, new merchant adoption across the globe, greater penetration of ShopPay, and continued growth of our integrated point-of-sale solution and physical retail stores. These partially offset by our GMV mix shifting to EMEA, where we have lower GPV penetration than our core countries. Subscription solutions revenue was $486 million, up 29% over Q3 of 2022, primarily driven by the growth in the number of merchants on both our standard and plus plans, as well as the first full quarter of impact from the pricing increases on our standard plans. Q3 MRR was $141 million, up 32% year-over-year. We saw strong year-over-year growth in MRR across each of standard, plus, and point-of-sale. The year-over-year strength stemmed from increases in the number of merchants across all three of these categories combined with, for standard, the pricing plan that we implemented earlier this year. For point of sale, which was up 34%, our new retail plan combined with improvements in our go-to-market strategy. And for plus, continued growth in new merchants and upgrades, with plus growing to 31% of MRR for Q3 of this year. Moving on to gross profit. Gross profit was $901 million for the quarter, up 36% year-over-year. Gross margin for subscription solutions was 81.9% compared to 78.1% in Q3 of 2022. The increase was driven primarily by a full quarter of the pricing changes, as well as support efficiencies. Gross margin for Merchant Solutions was 41.0%, compared to 37.2% in Q3 of 2022. Our Merchant Solutions gross margin improvement was primarily due to the lack of the dilutive margin impact of our logistics business in the prior year. When excluding the impact of logistics, our merchant solutions gross margin was down a point year over year. It's the same factors we experienced in the second quarter, including growth of our lower margin Shopify payments business, was partially upset by growth in other higher margin merchant solutions, including capital, installments, and markets. This brings our overall Q3 gross margin to 52.6%, compared to 48.5% in the prior year. Excluding the dilutive impact of the logistics business in Q3 of 2022, gross margin in Q3 was essentially flat year over year driven by growth in our higher margin subscription solutions business, primarily due to the pricing changes offset by continued growth in our lower margin payments business within merchant solutions. Operating expenses were $779 million for the quarter, down 23% compared to Q3 of 2022. The decline year-over-year was primarily driven by lower headcount, the sale of the logistics business, and the $127 million in one-time charges primarily pertaining to legal accruals incurred in the prior year. Compared to our second quarter operating expense of $818 million, excluding the charges from the sale of our logistics business, its related SBC, and severance, our Q3 operating expenses were lower quarter-over-quarter, largely from... Lower compensation expense driven by a full quarter of lower headcount, partially offset by a real estate charge for the disposal of the last lease we had related to our logistics business, and a reduced footprint in one of our ongoing offices as a result of lower headcount. Relative to our outlook, three items drove our lower third quarter operating expenses, headcount, marketing, and back office. On headcount, we are selectively hiring in key areas, but we decided to restart that process at a slower pace so compensation expense was lower than planned. Marketing came in lower as we continued to remain disciplined in our spend. And lastly, back office spend came in even better than expected in areas such as travel, events, legal, and recruiting. Bringing this to the bottom line, operating income was $122 million in the quarter. Stock-based compensation for Q3 was $102 million compared to $150 million for the same period a year ago, driven primarily by lower headcount. Capital expenditures were $2 million for the quarter. Q3 free cash flow was $276 million, or 16% of revenue. We have mentioned in our past few calls our focus on operating discipline, and you are seeing it play out in our free cash flow margins. We have delivered four consecutive quarters of free cash flow, generated more free cash flow in Q3 than the prior three quarters combined, and have grown both free cash flow dollars and free cash flow margins sequentially each quarter this year. Again, all of this in line with the work that we've been doing to drive strong free cash flow margins. Turning to our balance sheet, our cash and marketable securities balance was $4.9 billion as of September 30th, and we had a net cash position of $4.0 billion after consideration of the outstanding convertible notes. Before turning to Outlook, I want to highlight the Flexport commercial agreement that has now been signed. We are excited to continue to partner with Ryan and the Flexport team to bring our merchants affordable and reliable logistics offerings. It is still very early days, and we do not expect this agreement to have a material impact on our results for the rest of the year. Let's now turn to Outlook. Our expectations for the rest of the year are as follows. First, on revenue. We expect revenue for the full year to grow at a mid-20s percentage rate on a year-over-year basis, driven by fourth quarter revenue growth in the high teens on a gap basis, which translates into a year-over-year growth rate in the low to mid-20s when excluding the 400 to 500 basis points impact from the sale of our logistics business. Our expectations for growth in Q4 reflect the continued strength of our business, and the year-over-year growth rate reflects the tougher comparison to Q4 of last year, which was our highest quarterly growth rate last year and included a particularly strong Black Friday-Cyber Monday weekend. Q4 gross margin percentage is expected to be up 300 to 400 basis points over Q4 of last year, with a clear driver being the removal of the dilutive margin impact of our logistics business, which was itself approximately 300 to 400 basis points. Excluding that impact on logistics, Q4 gross margin is expected to be flat year over year. Other key factors contributing to our Q4 gross margin expectations are the benefit from the price increase in our standard pricing, which is offset by higher expected payments volume and penetration. As a reminder, Q4 gross margin historically has declined relative to Q3 due to the higher percentage of revenue coming from payments, given the GMV volume from the holiday season. Our guidance implies that our gross margins will increase for calendar year 2023 compared to 2022. We believe that our Q4 operating expense dollars will be down at a low single-digit percentage rate compared to our Q3 operating expense dollars of $779 million. Our cost base is stabilizing as we continue to lean into the new shape of Shopify. We continue to demonstrate our ability to operate more efficiently, leveraging automation and process improvements, while continuing to launch new products and invest in key areas. Moving to stock-based compensation. SBC is expected to be approximately $100 million in Q4. We continue to expect capital expenditures to be approximately $45 million for all of 2023, which includes $33 million that we incurred related to logistics in the first two quarters of the year. Finally, on free cash flow, our free cash flow margin and our free cash flow dollars have both improved sequentially every quarter this year, and this trend is expected to persist into Q4. We anticipate that our Q4 free cash flow margin will be in the high teens. This continued improvement in our free cash flow should be viewed as a clear indicator of the steps that we have taken this year to drive towards greater profitability as we build for the long term. Before I close out the call, and as we previously announced, we will be hosting an investor day for financial analysts and institutional investors on December 5th in New York. We will not be providing a long-term detailed financial model at the investor day. What you can expect from us is to hear from the key leaders across our business, including Toby, Harley, Kaz, our COO, Bobby, our chief revenue officer, and Glenn, our vice president of product for Shopify Core. Throughout the event, we plan to discuss the significant market opportunity ahead of us, our multiple durable growth levers, and our approach to product innovation and go-to-market. More information regarding the event can be found on our corporate website, investors.shopify.com. In closing, the top-line growth in our business remains very strong. Our focus on operating expenses remains unwavering, and our free cash flow generation continues to strengthen. All these factors clearly showcase the resilience of our business model, our robust market position, and our capacity to generate more value for our merchants, which subsequently drives our success. With that, I'll now turn the call back over to Carrie for your questions.