Shopify Inc.

Good morning, and thank you for joining Shopify's third 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. Undue reliance should not be placed on these forward-looking statements. We undertake no obligation to update or revise 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 thank you all for joining us today. As we say each quarter, Shopify is building for the long term. Our consistent results quarter after quarter confirm that our strategy is working incredibly well. Q3 was another amazing quarter across the board. GMB was up 24%, marking our fifth consecutive quarter where GMB growth was greater than 20%. Revenue was up 26%, operating income more than doubled from last year, and free cash flow margin expanded to 19%. These are not just numbers. They reinforce that Shopify is an industry leader, delivering on both growth and margins, all while simultaneously creating and leaning into opportunities that bolster our growth. So before we dive in, let me start by saying this. If you walk away from this call with anything, it should be these three things. One, entrepreneurship and commerce are growing and Shopify is capturing an increasing share of this vast and expanding market. Two, Shopify is increasingly the go-to platform of choice, not just for entrepreneurship, but for all of commerce. We are well positioned for extensive growth across different merchant segments, size, geographies, channels, and products. And three, as our merchants do better, Shopify does better. Our business model prioritizes merchant first, fueled by a high velocity product innovation engine that makes the hard things easy and everything else possible. Now let's quickly dive into some of the key accomplishments in the quarter. Starting off with product. We build outstanding tools that work seamlessly together, creating a platform that is packed with value and quite frankly, just works really, really well. This is why we invest so heavily in building the most integrated platform on the planet. And it's also why merchants come to Shopify and why they don't leave Shopify. We are shipping products and enhancements on a literal daily basis. So rather than give you a laundry list, I'd like to spend a few minutes now walking through some of the highlights from the quarter. First, let's talk about enhancing merchant automation. Our new features are making it easier for merchants to run their businesses more efficiently. Because let's be honest, nobody starts a business with the goal of focusing their time on sales tax compliance or inventory management. These foundational tools make the nitty gritty stuff automatic so merchants can focus on the reason they started a business in the first place for the products they are selling. Let's start with Shopify Flow, a low-code workflow automation app that empowers merchants to build custom automations that help them run their businesses more efficiently. This includes a new automation trigger based on the merchant's custom data and newly completed admin API connector that provides an additional 304 new actions to use in their automations. And as a result, Flow has become a much more powerful tool, enabling merchants to update products, process customer form submissions, edit orders, and so much more. And within Shopify Inbox, this product now uses AI to suggest replies based on each merchant's unique store information, making it super easy for merchants to respond quickly and accurately to customer inquiries. In fact, on average, merchants are using the suggested replies for about half of their responses, edited or not, showing just how effective this feature has become. Replying can quickly boost conversion rates, which means more sales for our merchants, and in turn, for Shopify. And finally, within Shopify Tax, we started rolling out automated filing to eligible merchants. Merchants can now automate their preparation, filing, and remittance of their sales tax returns from within the Shopify admin. This saves time and simplifies one of the most complex parts of sales tax compliance. And as we know, taxes do not get simpler just because you cross borders. That's exactly why in our focus to make Shopify the best way to sell globally across all channels, we saw a clear opportunity to tackle the complexities of cross-border commerce head on. And in Q3, we successfully extended our Shopify tax product to merchants in the UK and the entire EU. We've automated value-added tax calculations to make them more accurate. We introduced automated VAT invoices for easy compliance in cross-border commerce. And we've developed tax liability insights that track regional and national compliance. All of this ensures our merchants can focus on growing their business. Another product that continues to gain traction by helping our merchants sell globally is managed markets, which allows merchants to easily enter new countries and grow everywhere. For our merchants, it's proven to drive some pretty incredible results. In fact, EY recently analyzed the performance of a sample of our merchants after they adopted managed markets and found that 83% increased the number of countries they sold to. And of those merchants, their international sales growth after adoption was on average higher than 40%. Meanwhile, if you look at the top 100 merchants, they saw an increase of greater than 200%, which is truly incredible. Managed Markets is another example of a product that is yielding incredible results for our merchants globally. Moving to offline retail. In October, we expanded Tap2Pay across Shopify point of sale. Tap2Pay is now available in multiple countries, including Australia, Germany, and the Netherlands and the UK, as well as to merchants using Android devices. By utilizing the NFC chips and devices, Tap2Pay processes payments from contactless cards and digital wallets like Apple Pay via Shopify payments. So why does this actually matter? Because it enables our merchants to create a truly delightful in-person experience for consumers, all powered by Shopify. For merchants using the Point of Sale app, we made significant functionality and usability improvements. Notably, we introduced offline payment support, which ensures uninterrupted sales even during network disruptions. We also focused on personalizing the customer experience by enabling access to customer metafields and supporting Shopify bundles, which has seen encouraging adoption rates, especially among mid-market merchants. We also improved operational efficiency and optimized the Point of Sale app for tablet view, introducing a split-screen search view. In retail, every second and detail counts to drive sales, build customer affinity, and foster brand loyalty. And these updates, along with others like accepting unverified returns and expanding UI extension capabilities, reinforce our commitment to making in-person commerce easy and fast. At Shopify, we do more than just help merchants sell. We also ensure they have the financial tools needed to thrive. Recently, we launched our financial services suite, Shopify Finance, which is a comprehensive package that includes products like capital, balance, and bill pay, all integrated through the admin for quicker access. Each component of this suite is designed to offer unmatched financial control and efficiency, with features like higher APY and next-day payouts in balance for Shopify Plus merchants, and more flexible payment options and credit to better manage cash flow. Now, within Shopify Payments, penetration grew to 62%, and ShopPay facilitated $17 billion in GMV, which was up 42%, highlighting the power and the strength of our payment product, which also unlocks a key gateway for merchants to leverage our other features and products only available when on Shopify payments, like the Shop app. And speaking of the Shop app, this quarter, the Shop app launched a new merchant-focused home feed, showcasing the diversity and the richness of brands on Shop. The experience uses new machine learning models to help buyers keep up with the brands they love and discover new brands based on their preferences. These changes have already led to early success with an 18% increase in sessions where a buyer engaged with a recommendation. These enhancements combined with our deep and seamless integration helps drive higher GMV and GPV and strengthens our overall ecosystem. On the topic of machine learning, I want to give a shout out to Mikhail Parakin, our new incredible CTO, who recently joined the Shopify team. Mikhail spent over a decade at Microsoft, where he spearheaded AI advancements and products like Copilot. He also served as CTO at Yandex, where he developed multiple search engines and cloud services. Mikhail brings a wealth of experience in AI and search technologies. And in just over two months since he joined us, he's already made a significant impact, enhancing our products and pushing us forward. I'm convinced that with Mikhail on board, Shopify is only going to get stronger. Building on that note of strengthening our bench, let's talk about our ecosystem. We are committed to creating an ecosystem where everybody thrives, our partners, our merchants, and of course, Shopify itself. This collaborative success is by design, and as a result, we have earned the reputation as the preferred partner in the commerce world. This quarter, we became the first commerce integration partner for Roblox, which has on average over 88 million daily active users. We integrated with YouTube's shopping affiliate program, and we diversified our payments product offering through an expanded partnership with PayPal. We are increasingly close to a world where commerce flows seamlessly everywhere. And that is what we are building. It isn't just about providing tools. It's about creating an interconnected ecosystem, a system of record where businesses of all sizes can thrive. and it's working our go-to-market efforts combined with our product developments are enabling us to make incredible headway across multiple long-term growth drivers of our business b2b offline and international all of which are increasingly the on-ramps into shopify and unlocking more opportunities for us to grow our addressable market and we've got the results to prove it q3 offline gmv was up 27 year-over-year and has more than doubled in just the past three years Q3 B2B GMV grew over 145% year-over-year and has now had five consecutive quarters of triple-digit growth. And international GMV continues to outpace the growth in North America, accelerating to greater than 30% growth in Q3 and cross-border was approximately 14% of GMV. So, let's dive deeper into what's really driving our success in the offline segment. Our go-to-market efforts are really paying off, especially with large, complex, multi-location merchants. This segment saw a 50% increase in locations year-over-year in Q3, highlighting our really strong momentum. This quarter, established omnichannel retailers like British clothing company Orla Bar Brown, footwear store Fit2Run, and fashion retailers Akira and Billy Reid adopted our point-of-sale solution. In Canada, the legendary women's fashion retailer Laura migrated their point-of-sale systems to Shopify, bringing over 130 stores in one of our largest point-of-sale migrations yet. As we continue to power an increasing number of established, multi-location brands, we also firmly believe that consumer-favorite brands of tomorrow are being built right now on Shopify. Take Thuma, for example, a modern furniture maker that has quickly grown into a very large direct-to-consumer brand on Shopify. Now, as they launched their flagship store in New York City, staying with Shopify for their offline expansion was an obvious choice. This stickiness and trust in our platform are what truly sets us apart, ensuring that as our merchants expand online, offline, and everywhere in between, they do it with Shopify. In B2B, we continue to set new records for monthly GMB highs, with September marking our largest single month ever. We are positioning ourselves to keep breaking these records, especially with new enhancements like the ones I mentioned earlier, including Shopify Flow automation templates that streamline B2B workflows and improvements to tax collection and conversion tracking. While much of our growth to date stems from our existing merchant base, in Q3, we also broken new territories in industrial, hardware, and automotive vehicles and parts sectors that hasn't historically considered Shopify. Now they're not just considering us, they're committing to us. We are also continuing to focus on international growth, which continues to outpace North America, especially in Europe, like key countries, Germany and France, where we're increasing our market share. We've made enhancements to localization, shipping, and compliance, and are pairing that with intensified marketing efforts. And it's working. In Q3, international merchants increased by 36% year-over-year, with top brands like watch retailer Watches of Switzerland and cosmetics company The Body Shop signing with Shopify in the quarter. Okay, so now that we've talked about product and channels, let's focus on how we're making waves upmarket. Q3 was an exceptional quarter in terms of new enterprise-level brands coming to Shopify. For example, this quarter we signed luxury handbag company Fashionphile, jewelry designer Brilliant Earth, footwear brand Reebok, fashion apparel brand Off-White, cosmetics company Beauty Counter, and Lionsgate Entertainment to name a few. We are also now powering some iconic apparel brands, including Hanes, MeUndies, Vera Bradley, and Bare Necessities. Our platform's composability gives large brands the flexibility to choose modular components, like On Running, who recently adopted our checkout commerce component. One of the best things about modular components is that integration can happen fast. In fact, we recently had an outdoor gear company go from handshake to full implementation in less than three weeks. Seriously, in under a month, we had the ShopPay button up and running in their checkout, showcasing not only the robustness of our API, but also our team's incredible ability to make things happen faster. And the momentum does not stop there. Victoria's Secret, Joann Stores, and Shoot Carnival are also coming soon to the ShopPay Commerce component, further proof that this pathway to growth is really working. Enterprise brands from all verticals are making the move to Shopify, and it is clear that our platform's flexibility, speed, and value are really what sets us apart. We're constantly working to make it easier for larger, more complex companies to make the switch. Take our new data migration tool. New merchants can now import essential data like products in as little as four clicks. Picture this, one merchant recently brought over 44,000 SKUs to Shopify in less than three minutes, a task that used to take hours, if not days. This significant reduction in data migration hassle is a big deal as it removes major friction point for merchants looking to move to Shopify. To be clear, enterprise is not a short-term play. It is a massive opportunity to build for the long term, and we are positioning ourselves well to continue to capitalize on it today and in the future. With 16 enterprise launches in Q3 alone, we are truly just getting started with our push into the enterprise commerce market. As we wrap up, let me circle back to how I started. Q3 was another standout quarter with 26% top line growth and a 19% free cash flow margin. We continue to deliver some of the strongest results in the industry quarter after quarter. I truly believe this is the best version of Shopify yet. We are really pleased with our overall size and our shape, how we're operating, and especially our free cash flow profile because it gives us the ability to grow the business and invest in the future. This is increasingly making Shopify the go-to commerce platform for merchants of all sizes. As our merchants gear up for the busiest shopping season of the year, they can be confident that Shopify has their back, equipped with the speed, reliability, and tools needed to capture every sale. We are not just running a platform. We are building a future where anyone can transform an idea into a thriving business. This is the vision and the reality of Shopify. And with that, let me turn the call over to Jeff.

Great. Thank you, Harley. We had another outstanding quarter. These consistent results delivering both growth and profitability demonstrate the durability of our business, our numerous growth drivers, and our ability to balance investing in the future with discipline, delivering double-digit free cashflow margin. Let's dive into our Q3 results. Starting with GMV. In Q3, GMV was up 24% year over year as we delivered our fifth consecutive quarter of GMV growth over 20%. the same four consistent GMV growth drivers that we have seen delivered again this quarter. Same-source sales growth from our existing merchants, led by our Plus merchants, growth in the number of merchants on our platform, Continued strong growth internationally, with GMV outside North America growing 33% in Q3. European GMV grew greater than 35% as our largest markets of the UK, Germany, France, and the Netherlands continued to gain traction. The Netherlands was a notable source of strength, delivering year-over-year incremental GMV that outpaced France and was behind only the UK and Germany and demonstrating the broad base of strength that we have in Europe. And fourth, offline, our point of sale, where we had 27% GMV growth year over year. In terms of industry verticals, Q3 saw notable growth from health and beauty, food and beverage, and apparel and accessories. Q3 revenue was $2.2 billion, up 26% year over year. Q3 is the sixth consecutive quarter of revenue growth greater than 25%, excluding logistics. The key drivers of revenue growth for the quarter were... The GMB strength just discussed, growth in subscription solutions revenue stemming from the growth in the number of merchants on our platform, and to a lesser degree, the impact of the shortened paid trials and the plus pricing changes. And third, increased payments penetration, which hit 62% for Q3. Stronger growth across the business, led by international GMV, drove our outperformance on revenue relative to our outlook. Q3 merchant solutions revenue increased 26% year-over-year, driven by the continued strength in GMV and the penetration of Shopify payments. These primary drivers were partially offset by lower non-cash revenue from strategic partnerships, which continues to be a headwind throughout the year. $43 billion of GMV was processed on Shopify payments in Q3, 31% higher than last year, and as a percentage of GMV was 62% compared to 58% in Q3 of 2023. Several factors drove 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 ShopPay, which was 40% of GPV in the quarter, these items were partially offset by the continued strength of our business in Europe, which has a lower GPV penetration than North America. Subscription solutions revenue was up 26% over Q3 of last year. The growth was primarily driven by an increase in the number of merchants on our platform and to a lesser degree, higher variable platform fees and the benefit from the plus pricing change. Q3 MRR was 175 million, up 28% year over year with continued growth in each of standard, plus and point of sale with all three categories seeing an increase in the number of merchants. plus represented 31% of MRR for the quarter, consistent with Q2. Q3 gross profit was $1.1 billion for the quarter, up 24% year-over-year. Our Q3 gross margin was 51.7%, compared to 52.6% in the prior year. Subscription solutions gross margin was 82.3%, similar to Q3 last year. Gross margin for merchant solutions was 39.7% compared to 41.0% in Q3 of 2023. The decrease was driven primarily by the same factors that have been impacting us all year. The largest impact was from lower non-cash revenues from certain partnerships that have now fully amortized. Payments was the other key driver with two roughly equally sized impacts. First, payments constituted a larger percentage of our overall revenue in the quarter, given the strong growth in payments. And second, we had lower margins on payments this quarter as we saw pressure from both a higher mix of plus merchants and a higher mix of credit card usage rather than debit card. These headwinds were partially offset by the growth in our other merchant solutions products, which have higher gross margin rates than payments. Now turning to operating expenses. Q3 operating expenses were $835 million for the quarter, or 39% of revenues. Compared to the prior year, Q3 operating expenses were up $56 million, or 7%, well below our gross profit dollar growth rate of 24%. The largest drivers of our Q3 operating expenses compared to the prior year were higher compensation stemming from our biannual employee review process, which resulted in merit-based pay increases where appropriate. Each of the January 1 and July 1 compensation cycles this year were low single-digit percentage increases to overall compensation. We also hired some key roles within sales and R&D. Within transaction loans and losses, we had higher absolute dollar losses on both our capital loans and payments. But it's important to note that this was a function of volume increases for both of these businesses. The loss ratios remained within a consistent range. And finally, increases in marketing spend as we continue to invest in our core performance marketing, including higher affiliate partner payouts and continued investment to support our growing enterprise and point-of-sale businesses. Partially offsetting these, in terms of year-over-year comparability, was a $38 million real estate impairment expense in Q3 of last year. Our Q3 operating expenses came in lower than our outlook, primarily due to lower-than-expected marketing spend. The lower spend was primarily in non-performance marketing for enterprise and point-of-sale and, to a lesser degree, lower spend in brand advertising. where we don't spend much to begin with given the overall strength of our brand. Performance marketing also came in a little bit lower than planned, which was driven primarily by the decision to run some testing regarding point of sale. We remain firmly committed to carefully managing our investments and continue to operate within our guardrails. For the quarter, operating income was $283 million, or 13% of revenue, with operating income dollars more than doubling compared to Q3 of last year. Stock-based compensation was $115 million for the quarter. Q3 free cash flow was $421 million, or 19% of revenue, delivering an expansion of 300 basis points from Q3 of last year. This high teens free cash flow margin came in better than our expectations, largely due to a stronger GMV driving revenue combined with lower operating expenses. Let's now turn to our Q4 outlook. As a reminder, Q4 is seasonally our highest volume quarter of the year as it includes the key holiday selling period, including Black Friday, Cyber Monday. We expect Q4 to see similar seasonality trends to what we have seen in prior fourth quarters. First on revenues, we expect Q4 revenues to grow year over year at a mid to high 20s percentage rate driven by the same factors that have supported our strong revenue growth results so far this year. These include assumptions around the continued strength of our merchant's GMV. Q4 gross profit dollars are expected to grow year-over-year at a rate similar to Q3. As a reminder, consistent with prior years, Q4 sees a higher percentage of revenue from payments given the high-volume holiday selling season. Turning to operating expenses, we expect our GAAP Q4 operating expenses to be 32% to 33% of revenues. representing a 300 to 400 basis point improvement compared to Q4 of last year. Compensation and marketing are the two largest increases in absolute dollars year over year, but importantly, both of these areas as a percentage of revenues are expected to be down year over year. We also expect higher dollar losses on payments, which is largely driven by sheer volume growth, not loss rates. Regarding compensation, we expect to keep headcount relatively flat year over year, but we'll have the impact of the merit-based pay increases that I discussed earlier in the call and some mixed shifts in terms of headcount per department. Worth reiterating again, though, that while we have a year-over-year dollar increase in OPEX, we expect a 300 to 400 basis points decrease in OPEX as a percentage of revenues, and we continue to grow gross profit dollars much faster than operating expenses. Moving to stock-based compensation, Q4 SBC is expected to be approximately $120 million. Finally, on free cash flow, we expect our Q4 free cash flow margin to be similar to our Q4 2023 margin of 21%. which would result in us increasing both free cash flow margin and free cash flow dollars in each successive quarter throughout the year. Moreover, we have gone from negative 3% free cash flow margin in 2022 to 13% last year to being on track to deliver high teens for full year 2024 based on our Q4 outlook. We are proud of the consistent growth and margin expansion of our free cash flow throughout both 2023 and 2024, all done while delivering exceptional top-line growth at scale. These outcomes are a direct result of the work and disciplined decision-making we have put in place over the past couple years. The free cash flow margin profile that we have now achieved is one we like. It strikes the right balance between profitability and investing back into the business to continue to deliver top-line growth. Looking ahead, we aim to stay within a similar free cash flow margin profile, taking into account the typical yearly evolution of cash flow margins across quarters that we have seen in our business the past two years. One additional topic before closing. In the coming days, Shopify board member and Uber CFO Prashanth Mahendra Raja will step into the role of chair of the audit committee as part of a planned transition. Colleen Johnson, who has served on our board and as audit committee chair for over five years, will step down from the board. I want to thank Colleen for all the excellent service that she has provided Shopify and all the counsel that she has given me and the Shopify leadership team as a whole. Thank you very much, Colleen. I look forward to working with Prashanth more closely in his expanded role. In closing, it was an exceptional quarter. Shopify continues to power an increasing portion of the internet, serving as a system of record for millions of businesses. As entrepreneurship and commerce grow, Shopify is capturing an increasing share of this expanding market, becoming the go-to platform for all of commerce. Our success is not just in our scale, but also in how well we partner and work with other technology companies in order to give merchants a seamless way to run their businesses. Thank you to all of our merchants for your trust. And thank you to the Shopify team for all the hard work done long before this quarter began, making these results and what is next to come possible. With that, I'll now turn the call back over to Carrie for your questions.