Shopify Inc.

Good morning, and thank you for joining Shopify's second quarter 2024 conference call. I am Keri Gillard, Director of Investor Relations, and joining us today are Harley Finkelstein, Shopify's President, and Jeff Hoffmeister, our CFO. After their prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are based on assumptions and therefore subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements except as required by law. You can read about these assumptions, risks, and uncertainties in our press release this morning, as well as in our filings with the U.S. and Canadian regulators. We will also speak to adjusted financial measures, which are a 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.

Good morning everyone, and thank you for joining. We cannot wait to walk you through all the outstanding results from the last quarter. Our relentless focus on our mission has not only empowered our merchants, but has also strengthened Shopify significantly. We are at our strongest yet, and we could not be more excited about the future of commerce and the future of Shopify. So first, let's break it down at a high level. In Q2, we saw 25% revenue growth when excluding logistics, with gross profit growing faster than revenue. Operating expenses decreased quarter over quarter, and our free cash flow margin more than doubled to 16% from last year. A couple of other highlights from Q2 were the release of our latest additions at the end of June, with over 150 new product updates and features. passing a massive milestone as we crossed the $1 trillion mark for cumulative GMV that has been processed through Shopify, and our offline business surpassed $100 billion in cumulative GMV. These results reiterate what we've been saying all along. We are building for the long term, and our business model is working. As you may have seen in our recent edition, unification was the central theme. So what do we mean by that? Well, we believe that the mark of great software is that as it scales and grows, each new feature is built as if it were there from the very beginning. Everything works together harmoniously, crafted in consistent style and quality. This is a key value proposition for Shopify and something that as we have evolved from an online store to a comprehensive unified operating system for commerce anywhere, anytime is becoming increasingly more important. Whether online or offline, direct to consumer or B2B, domestic or global, Shopify captures it all. What makes Shopify so powerful is how seamlessly all parts of the product work together, reducing complexity at every stage of a merchant's journey. We understand that starting a business is hard, and expanding into new markets adds even more complexity. As our merchants grow, Shopify tackles these challenges so they don't have to. So one of the coolest things that we rolled out at this edition was markets. What used to be Markets and Markets Pro are now streamlined into cross-border products, international selling, and managed markets respectively. This means our merchants no longer have to worry about juggling multiple stores or wrestling with new workflows. Whether you're aiming to sell in a new country, break into a B2B market, or launch a physical retail store, the process is straightforward. You set up a new market, you tweak it to your liking, and boom, you are good to go. I remember sitting down with one of our merchants in the UK about 18 months ago and discussing this exact challenge with them. And to see how quickly we moved to address it is really huge. I can't understate how big of a game changer this will be for so many merchants globally. No other platform on the planet offers merchants the opportunity to expand their reach at this scale, this speed, this efficiently, with this level of seamless integration and control, all out of the box. Okay, now let's dive into how we're fueling merchant growth across offline, B2B, international, and the shop app. Let's start with our offline business. Our point of sale solution continues to rapidly gain traction, unifying online and offline commerce in ways that no one else can match. In Q2, offline GMV was up 27% year over year as we continue to attract larger global merchants with multiple store locations. Two of our most recent examples of this are multinational brands EverEve and Mejuri, both of whom are launching online and offline with Shopify, which combined includes over 130 locations across four regions. Offline commerce is still a huge deal for us, with about 80% of global transactions still happening in physical stores. So we are taking advantage of this by continuing to roll out targeted marketing initiatives that target our point of sale offering. We're introducing the features they care about most, like improving operating efficiency, such as the new remote smart grid layout editor, omni-channel return rules, and the ability to stack multiple discounts at checkout, which makes it easier for merchants to customize their promotional strategies. And with point of sales seamless integration with markets, multinational retailers can now manage their entire omnichannel business from a single Shopify admin. Just as we've streamlined operations for SMB retailers, we are now removing barriers for global omnichannel businesses on Shopify. Another long-term and largely untapped channel we're unlocking is B2B commerce, and we're making great progress. In Q2, we recorded our highest ever B2B GMV month with 140% year-over-year increase fueled by the growth of our plus merchants. Our B2B offering also saw a 6x increase in online orders compared to last year, underscoring the value of self-serve B2B purchasing. we're making our B2B offering even more competitive with features like deposits at checkout and manual payment methods. This functionality combined with our modern approach and unified backend makes it easier for merchants to manage and track their business seamlessly across channels. Plus, we've seen a 34% increase in the number of merchants getting B2B orders on Shopify compared to last year. This is something that many large brands have been searching for and is yet another example of the work we are doing to drive our leadership position in unified commerce. So how do we know that we're hitting the mark? Well, brands like home fragrance company Pura and skincare brand Dermalogica have recently adopted B2B and it's attracting new brands like Progress Lighting and Therabody who recently signed up to join Shopify because they're attracted by the ability to manage all their channels from a single admin. Ultimately, B2B is a great example of how we're expanding our total addressable market. Let's talk about cross-border. Cross-border sales made up about 14% of our GMV and Q2. And merchants are really eager to reach new regions, especially when they notice more and more international traffic on their sites. So just like when they branch out into social channels or B2B, they have to think about everything from pricing and localization to availability and merchandising, all tailored for the end consumer. And that is why we've made it super easy to sell globally right from the start. With our new markets feature, merchants can expand wherever they want and customize what they need really effortlessly. Take well-known baby apparel company, Caden Lane. After signing up for managed markets, Caden Lane experienced a 692% year-over-year growth in international sales. Or wine glassware merchant, Glasvin, which experienced 71% international sales growth and over 100% boost in conversion to sales in Canada and Australia. Both of these merchants signed up for managed markets and are very quickly reaping the benefits. And lastly, we know that one of the biggest challenges that merchants face when selling internationally is after they make the sale. Now they've got to actually get the purchase to the buyer. So we've added support for UPS and managed markets in Q2, which makes it even easier for merchants to get great expedited shipping rates to their international buyers. We've also made it simple to understand catalog restrictions that we automatically apply based on customs rules, which prevent packages getting stuck at customs and adds the ability to make prices inclusive of duty and tax to improve international conversion. Let's talk about Shopify payments and our accelerated checkout shop pay, which are crucial parts of our unified commerce platform, especially as our merchants scale globally. In Q2, Shopify payments penetration was 61% and Shopify facilitated $16 billion in GMV, up 45% from last year. We see significant growth potential for payments through international expansion, enterprise, and increasing activity in offline and B2B channels, all of which will drive higher GMV and GPV, boost merchant adoption, and ultimately strengthen our ecosystem. Now, whether it's merchants like Grove Collaborative or Tonal signing up, or existing brands like SodaStream and Athletic Greens adopting our payment solutions, it's all fueling our growth. Recognized as the world's best converting accelerated checkout, Shop Pay is not just boosting conversion rates across our merchant stores. Time and time again, it's a major draw for enterprise brands considering Shopify. I can personally attest this as I'm often on the call with the CEOs of these brands and without fail, they cite checkout as one of the biggest historical challenges and one of the top reasons they want to move to Shopify. Our conversion rate enabled by these products is absolutely a key differentiator that helps Shopify close the deal time and time again. For merchants, ShopPay is more than just a digital wallet. It offers comprehensive order tracking via the Shop app and allows buyers to earn shop cash redeemable for purchases within the app. This builds greater customer engagement and unlocks additional opportunities to reach customers. During Shop Week in early June, we teamed up with brands like Stanley and Glossier to widen their audience. Thousands of top consumer brands joined in, leveraging Shop Cash and Shop campaigns to draw in new buyers. This led to over 10,000 merchants posting their best GMV week ever on the Shop app, showcasing the solid progress we're making in helping merchants strengthen and expand their customer relationships. Now, beyond the ways we're helping our merchants grow, which in turn fuels our own growth, let me quickly touch on the great progress we're making across two other growth strategies for Shopify, international and enterprise. Our international GMV growth continues to outpace North America, up 27% from last year, driven by two main goals. expanding our presence and introducing more products in more markets. And in Q2, our marketing and go-to-market efforts led to a 30% increase in international merchant growth year over year. Notably in Europe, where GMV grew by 32%, we welcomed major brands like UK football club Newcastle United and French luxury apparel company Amie Paris to Shopify. We also signed a global agreement with Luxottica, the Italian eyewear conglomerate, to launch their first of what we hope will be many brands coming to Shopify in the future. And with their recent announcement on acquiring Supreme, who is already on Shopify, we know that the best brands come and stay on Shopify. From a product standpoint, we remain obsessively focused on simplifying the signup process and localizing more products to enhance the user and the end user customer experience. In Q2, we rolled out point of sale terminal to eight additional countries, contributing to an impressive 2.4X increase in GMV through our point of sale terminal compared to Q1. And in Japan, we rolled out Shopify plans available in Japanese yen and launched our latest first-party flagship theme called Rise, which is specifically designed with unique aesthetics of Japanese e-commerce UX in mind. Every market-specific product feature we launch enhances our competitiveness and helps merchants succeed locally. This relentless commitment to helping merchants start and grow in all facets of their business ultimately brings more merchants into Shopify, fueling our flywheel and extending our ability to make commerce better for everyone. Now, within the enterprise opportunity, our flexibility, our speed, and our value is strongly resonating with larger, high-volume brands, and they continue to flock to Shopify. We sign new deals across a diverse set of verticals, industries, and geographies. Brands like shopping channel QVC, bookseller Barnes & Noble, luggage brand Away, golf apparel brand Travis Matthews, trading card company Topps, designer footwear line Vince Camuto, and mattress manufacturer Casper. Additionally, the well-known toy retailer Toys R Us launched on Shopify, along with some incredible celebrity brands like Moss Plus by Lionel Messi and Dios Mio Coffee by Sofia Vergara all launched on our platform during the quarter and are now powered by Shopify. Our progress in continuing to bring on these high profile, high volume merchants underscores the growing recognition of Shopify as the premier commerce platform. Combined with our growing partner ecosystem, including a new partnership that we announced with Oracle in the quarter, these wins not only validate our strategy, but also convey our ability to cater to the unique needs of the biggest brands on the planet. Now looking at our marketing strategy for this year, you can see that we are all in. It's about leading confidently, leveraging our strength, and continually adapting to stay ahead of the game. This strategy is not new, but how we implement it is continually evolving, thanks in large part to the truly sophisticated marketing platform that we've built. Our aim remains clear. Push the envelope, maximize returns, and stay ahead of the curve. This is Shopify doing what Shopify does best, leading from the front, data-informed, and backed by strategies designed to maximize returns and create value. But here's where we truly excel, data-driven decision-making. We relentlessly test and optimize every single channel, keeping well within our average 18-month guardrail. Our tools and our AI models are crafted not just to operate, but to excel, leveraging emerging technologies to enhance our feedback loops. These tools provide sharper, more iterative feedback, enable more precise analysis, and deliver quicker signals, letting us identify patterns faster than ever so we can swiftly adapt and respond. Now, to give some examples of this agility and this discipline, consider this. After experimenting in a leading digital channel, a new emerging social platform in Q1, and observing substantial growth, we intensified our efforts in Q2. This led to a 51% increase in merchant acquisition quarter over quarter on that platform, all while staying within our financial guardrails. We also saw it boost our growth internationally, with over 50% of the merchants that join our platform in Q2 coming from outside the core English-speaking markets of the US, Canada, UK, Ireland, Australia, and New Zealand. At the same time, we scaled back in other channels, focusing on further testing and experimentation to uncover new high return opportunities. Now for the back half of 2024, we will continue with this playbook, testing, exploring, and optimizing our core performance marketing within our guardrails. By remaining flexible in our approach across our portfolio of investments, we can better target and support our growth efforts, especially in areas such as enterprise, point of sale, and international markets. By dynamically allocating resources across all of these channels and growth areas, we believe we can continue to drive our performance from the front and redefine industry standards. Now, before I turn over to Jeff, I want to briefly share my thoughts on the incredible success of our recent Shopify Summit in Toronto. This annual event brought our entire company together to discuss Shopify's future, to align as a team in our priorities, and to host our hack days, which have produced some of our best products over the years. The energy, optimism, and enthusiasm coming out of the event were incredible, which reconfirmed that this is truly the best team and the best version of Shopify yet. Before I close, I feel I need to make something really clear. Shopify is rapidly strengthening its position as a leading enabler of global commerce and entrepreneurship. We are investing in sustainable growth and driving profitability for the long term. This very unique ability that we have to serve the largest brands while also inspiring new entrepreneurs to launch and scale businesses make Shopify an incredibly durable company. We are so well positioned to power more commerce globally for the years to come. And with that, let me turn the call over to Jeff.

Thank you, Harley. Our second quarter was incredibly strong, demonstrating the power of our business model and our ability to execute across every metric we delivered. Let's discuss our Q2 results. GMV in Q2 was 67.2 billion, up 22% year over year. The strong Q2 GMV was driven by same-store sales growth of our existing merchants, led by our plus merchants, continued growth in the number of merchants on our platform globally, Strengthened Europe, which grew 32% year-over-year from both strong same-store sales growth from our existing merchant base and new merchant acquisition, with same-store sales growth being the slightly larger contributor this quarter. This quarter represents the fifth straight quarter where we have delivered GMV growth in Europe exceeding 30%. Our strength in Europe was broad-based with growth in both our larger markets of the UK, Germany, France, Spain, and Italy, as well as EMEA more broadly. And the last key driver was point of sale, which grew 27% year over year. We saw solid growth across verticals with robust performance in health and beauty and food and beverages. We also saw solid growth in our largest category, apparel and accessories. Notably, this strength in GMB came against a backdrop of mixed consumer spend. We continue to gain market share in the U.S. e-commerce market and abroad. Q2 revenue was $2 billion, up 21% year-over-year, which equates to 25% year-over-year growth when excluding the logistics businesses. This marks the fifth straight quarter where our revenue growth, excluding logistics, has grown 25% or greater. Our consistency and stability of performance reflects the quality and breadth of our software solutions, the success of our merchant acquisition engine, the breadth of the industries, geographies, and merchant sizes that we serve, and quite simply, our ability to execute. For the quarter, the key drivers of our revenue growth were the GMV strength I just discussed, growth in subscription solutions revenue stemming from the growth in the number of merchants on our platform, the pricing changes that have been implemented in the past year, both standard and to a lesser degree plus, and the impact of the shortened paid trials. And as a third key driver, increased payments penetration, which hit 61% for Q2. Relative to our outlook, revenue came in better than expected, primarily from stronger GMV from plus merchants and outperformance in Europe, notably with the FX headwinds playing out largely as we anticipated. Q2 merchant solutions were 1.5 billion, increasing 19% year over year, driven by the continued growth in GMV and the penetration of Shopify payments. those primary contributors were partially offset by the absence of the logistics business and lower non-cash revenue from strategic partnerships. As a reminder, this is a final quarter where the year-over-year revenue growth rate is impacted by the sale of our logistics business, and as noted above, the absence of logistics had an approximate 400 basis point headwind to total revenue, and all other logistics revenue sat within merchant solutions. 41 billion of GMV was processed on Shopify payments in Q2, 30% higher than last year. The penetration rate of Shopify payments as a percentage of GMV was 61% compared to 58% in Q2 of 2023. Several factors powered the quarter's higher gross payments volume, including the strong performance of those merchants utilizing Shopify payments, an increasing percentage of which are Shopify Plus, more merchants across the globe adopting payments, and greater penetration of shop pay, which was 39% of GPV in the quarter. These items were partially upset by the continued strength of our business in Europe, which was a larger percentage of GMV, but where we have a lower GPV penetration than North America. Subscription solutions revenue was $563 million, up 27% over Q2 of last year. The primary source of the growth was an increase in the number of merchants on our platform, driven by three items, shortening the paid trial offering on our standard plans from three months to one month, strong growth internationally, and the work of our marketing initiatives. This growth in the number of merchants was complemented by the change to our pricing plans for standard and plus. Two reminders regarding our pricing plan changes. Our existing PLUS merchants had until the end of April to commit to existing rates or move to a new pricing plan. So our Q2 subscription revenue included two-thirds of quarterly impact of the PLUS pricing change. As stated on our last call, we are not anticipating as much of a benefit from the pricing change on PLUS as we did from the pricing change on our standard plans. Our standard pricing changes went into effect at the end of April of last year, so for purposes of the year-over-year comparison, Q2 of this year had a full quarter of the standard pricing change, whereas Q2 of last year had only two-thirds of a quarter. The impact of these two pricing changes, though, was a smaller contributor to this quarter's subscription revenue growth versus overall growth in the number of merchants. Q2 MRR was $169 million, up 25% year-over-year. We saw growth both year over year and quarter over quarter in each of standard plus an offline point of sale. The largest driver for all three segments was the growth in the number of merchants on our platform, with growth internationally being a key component contributing to our growth in our standard plans. Standard and offline point of sale benefited from the shortening of paid trials, which went into effect near the end of the first quarter, and the marketing initiatives that we have discussed. For Plus MRR, the largest driver of the year-over-year increase was the acquisition of new merchants, with a change in Plus pricing providing some benefit as well. In Q2, our attach rate was 3.04%. As a reminder, and as we discussed back at our investor day, we consider attach rates an output of platform activity, not an input or metric that drives our growth strategy. Our Q2 attach rate was up year over year when excluding the logistics business. The key drivers of this increase were the continued gains in GPV penetration and higher subscription revenue, offset by lower non-cash revenues from strategic partnerships. On a sequential quarter basis, our attach rate was down slightly as the gains in GPV penetration were offset by lower non-cash revenues from strategic partnerships and lower shipping revenue. Moving to gross profit. Gross profit was $1 billion for the quarter, up 25% year over year, growing faster than our revenue growth rate. Our Q2 gross margin was 51.1% compared to 49.3% in the prior year, breaking it down a bit more. Gross margin for subscription solutions was 82.8% compared to 80.9% in Q2 of 2023. The increase is primarily driven by pricing changes on standard plans, as well as the impact of merchant growth from the shortened paid trials. Gross margin for merchant solutions was 39.1% compared to 38.1% in Q2 of 2023. Our improvement in gross margin for merchant solutions was primarily from the absence of logistics. When excluding the impact of logistics, our merchant solutions gross margin was down year over year, primarily from lower non-cash revenues from certain partnerships and growth in our lower margin payments business. Operating expenses were $804 million for the quarter, which includes a benefit of a reversal of a $55 million litigation accrual that we established in Q3 of 2022. Without this reversal, operating expenses would have been $859 million or 42% of revenues. Compared to the prior year and excluding one-time items in both periods, Q2 operating expenses were up $41 million or 5% year-over-year, driven primarily by four items. Increases in marketing. We had a year over year increase in our affiliate partner payouts. And since these payouts happen only upon a new merchant joining, it is a clear sign of adding more merchants to the platform and incremental marketing to support our growing enterprise and point of sale businesses. Secondly, our summit event, which, as a reminder, was our first in-person summit event since 2018. higher absolute dollar losses on capital loans and payments losses, simply as a result of higher volumes from both of these growth businesses. And offsetting these was the absence of the logistics business. Our Q2 operating expenses came in better than expectations driven primarily by three items. First, lower marketing expenses. Some marketing related to enterprise was shifted out of Q2 into the second half of the year, stemming largely from one campaign that we decided we will launch towards the end of Q3. We also cut back spending in a couple of channels in Q2. We consistently run tests to assess where we can further enhance the returns of our marketing spend. Implementing the learnings from these tests meant scaling back spending in some areas. We recognize that a returns-based approach to marketing can cause fluctuations in spending in any given quarter. However, it prioritizes the quality and efficacy of our spend. The second component of better-than-expected OPEX was lower compensation expense. And thirdly, we executed our extremely successful summit event under budget. Worth noting that this 5% year-over-year growth in OpEx stands in contrast to the impressive revenue growth over that same period. Moving to operating income. For the quarter, operating income was $241 million, or 12% of revenue, marking our fourth consecutive quarter of operating profit since the sale of our logistics businesses and our headcount reduction in Q2 of last year. Stock-based compensation for Q2 was $109 million and capital expenditures were $7 million for the quarter. Q2 free cash flow was $333 million, or 16% of revenue, more than doubling as a percentage of revenue versus our Q2 2023 free cash flow margin of 6%. This came in better than our expectations largely as a result of stronger GMV and the resulting flow through to revenues and lower operating expenses. We believe that we can continue to drive operating leverage through four key things. Discipline growth and headcount, which we have kept essentially flat for five quarters and where we expect we can keep headcount growth well below revenue growth. Strategic returns-based marketing to support and sustain our long-term revenue growth. internal use of AI and automation to drive productivity, and leveraging and continuing to enhance our internally built GSD and Shopify OS systems, which allow us to smartly aim the product development work and size the team for maximum impact and efficiency. One other item to cover before we move to Outlook. Since our last earnings call, we made three small acquisitions. The first acquisition added some enhancements to allow plus merchants to do easier customizations of the checkout process. The second gives mid-market and enterprise merchants greater visibility into their inventory across their multiple stores and channels. The third brings a team that will enhance our abilities to get early stage merchants on platform and ramp the success of their businesses. All three of these acquisitions were small in terms of dollar amount and immaterial to our financials, but are important additions to enhancing our merchant efforts. Moreover, these acquisitions bring us some great founders who were specifically drawn here by the quality of our existing team. Let's now turn to our Q3 outlook, which as a reminder is a first quarter where we will no longer have the impact of the sale logistics on our business. First on revenue, we expect Q3 year-over-year revenue growth to grow at a low to mid-20s percentage rate, driven by the same factors that have contributed to our growth throughout the first half of the year. Q3 gross margin is expected to be up approximately 50 basis points from Q2 of 2024, stemming from a higher mix of subscription solutions. Turning to operating expenses, we expect our GAAP Q3 operating expenses to be 41 to 42% of revenues, representing a 300 to 400 basis point improvement over Q3 of last year at 45%. As we stated last quarter, we believe considering operating expenses as a percentage of our revenue, especially as we lap the sale of our logistics businesses, better aligns with our goal of striking an optimal balance between growth and operational leverage to deliver improving profitability over time. The largest drivers of our Q3 operating expense growth compared to the prior year are marketing and compensation expenses. On marketing, we plan to continue spending on opportunities that fall within an average 18-month payback period and opportunities to support our key growth initiatives, including international markets, enterprise, and point of sale. This includes increased marketing spend to support our enterprise efforts that I mentioned earlier. Higher year-over-year compensation expense is expected to be driven primarily by two items. First, we implemented pay increases on July 1st as part of our biannual review cycle, similar to what we discussed in Q1. This resulted in a low single-digit percentage increase across our overall employee base. Additionally, while our headcount has remained essentially flat for the past five quarters, in Q3, we do plan to hire some key roles within sales and R&D. Even with these additions, we still expect to end the year with minimal headcount growth compared to the 8,300 employees that we had at the end of 2023. Moving to stock-based compensation, Q3 SBC is expected to be $120 million. On CapEx, note that we will no longer guide to CapEx separately, given that following the sale of logistics, CapEx has averaged over the past four quarters only $4 million, and we do not expect that to change materially. Finally, on free cash flow, for Q3, we expect our free cash flow margin to be similar to Q2 of 2024. We continue to expect to deliver double-digit free cash flow margin for the rest of the year. Over each of the past five quarters, we have delivered top-line growth, excluding logistics, of 25% or more and positive free cash flow, with our free cash flow margins consistently improving over that time and reaching double digits over the past four quarters. We have accomplished this growth while keeping our team size steady and have accomplished these margins even as we ramped up investments. This business can deliver growth and margins, all while concurrently creating and leaning into opportunities that enhance our future growth. The strength of this business allows us to accomplish all three, growth, margins, and investments for the future. In closing, we are showing quarter after quarter that we are executing against the plans that we have laid out and that our business model is incredibly compelling with plenty of runway ahead. With that, I'll now turn the call back over to Carrie for your questions.