Shopify Inc. Q2 FY2021 Earnings Call

Thank you for your patience. This is the conference operator. Welcome to the Shopify Second Quarter 2021 Financial Results Conference Call. All participants are in listen-only mode and this conference is being recorded. There will be a chance to ask questions after the presentation. I would now like to turn the call over to Katie Keita, Director of Investor Relations. Please proceed.

Thank you, operator and good morning everyone. We are glad you can join us for Shopify's second quarter 2021 Conference call. We are joined this morning by Tobi Lutke, Shopify's CEO, Harley Finkelstein, Shopify's President, and Amy Shapiro, 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 US and Canadian regulators. Note that adjusted financial measures we speak to today are non-GAAP measures, which are not a substitute for GAAP financial measures. Reconciliations between these two can be found in our earnings press release. And finally, we report in US dollars. So all amounts discussed today are in US dollars unless otherwise indicated. With that, I turn the call over to Harley.

Thanks Katie, and good morning. Shopify's momentum continued in our second quarter as strong commerce trends prevailed and more merchants joined and succeeded on our platform. In fact, GMV reached its highest level ever as physical stores in more regions reopened their doors in the early days of the post-pandemic recovery and as buyers continued to value the convenience that online tools bring to shopping. Case in point, in places that have begun to reopen like the UK, GMV grew faster than our overall GMV in the quarter year-over-year indicating that online and in-store commerce are no longer mutually exclusive. And while we did start to see a shift in some consumer spend back to services and recreation towards the end of the quarter, which we expected, all regions remain at GMV levels above pre-COVID levels. This may be why Shopify remains the go-to platform for entrepreneurs around the world, to launch and to grow their businesses as they sell directly to their customers. Merchants using Shopify are exceptionally well prepared to make commerce happen on every surface area that it needs to, whether it's online, in-store or through your favorite apps. Our brick and mortar merchants illustrated this as they adapted to the accelerated shift to digital commerce in 2020 and are now navigating the early stages of returning to in-store selling. Retail point of sale GMV is nearly back to pre-COVID levels as a percentage of overall GMV, even on these higher GMV levels as physical stores reopen and merchants are better equipped with our upgraded hardware and software. More locations adopted point of sale Pro in our second quarter for its modern omnichannel features like buy online, pickup in store, which was adopted by 63% of brick and mortar merchants in English speaking geographies at the end of June. This is up from just 2% in February last year. Social commerce is another way that merchants are expanding their presence and succeeding. In fact, in Q2, year-over-year GMV growth from Facebook and Google channels were several times that of the online store, with consumer spending more time than ever on apps. We continue to expand key partnerships. We deepened our partnership with Google in Q2, making it easier for our merchants to sell on Google through a simplified onboarding process and extending our accelerated checkout, Shop Pay, to all US merchants selling on Google whether they are Shopify or not. Buyers love using Shopify to checkout. The speed and ease of making a purchase strengthens the relationship between merchants and their buyers, which is why we are bringing Shop Pay to more services. Shop Pay is available now to US merchants on Facebook and will be available to Shopify and non-Shopify merchants selling on Facebook and Google in the US later this year. We're seeing early traction for Shop Pay on Facebook and Instagram with more buyers opting in and a larger share of GMV through these services since we announced the integration in February. We remain on track to add Shopify Payments as the processor for all Shopify merchant transactions on Facebook properties by year-end. As global retail e-commerce sales are expected to continue shifting to mobile devices, mobile shopping from Shopify merchants has to keep getting easier and more fun if they are to compete. Our online shopping assistant, Shop, is built for easy shopping on mobile with buyer-friendly features like order tracking and Shop Pay. Starting in Q2, merchants can manage how this shows up in the Shop by customizing their store profile in the app. They can also track the impact of the Shop on their business from a new analytics dashboard or driving repeat purchases from customers through automated marketing tools. Shop now supports in-app purchases allowing customers to add to cart and checkout with Shop Pay within the app. In Q2, we also introduced new filters for discovery on Shop for local businesses, LGBTQ+-owned businesses, and Indigenous-owned businesses. At the end of Q2, Shop had more than 118 million registered users including both buyers that have opted into Shop Pay as well as users of the app, of which approximately 23 million are monthly active users. At the end of June, Shop Pay had facilitated nearly $30 billion in cumulative GMV since its launch in 2017. The increasing complexity that comes with selling everywhere makes Shopify and our suited solutions even more valuable. As a result, merchants are making greater use of our merchant solutions. Shopify Capital is a great example. We funded more merchants than ever this past quarter and directed more capital to them than ever, a record $363 million. This is 137% more funding than in last year's second quarter and represents record growth for us in capital, bringing us to over $2.3 billion in cumulative capital funded since we launched it in 2016. Not only does Shopify Capital help fuel our merchants' growth, our data tells us that merchants who accept capital stay with Shopify longer as they succeed on the platform and take more of Shopify's other solutions, namely Shopify Shipping, Apps, Themes and Domains. And maybe most importantly, extending capital when their business needs it reinforces the trusted relationship that we have with our merchants, one that goes beyond what they have with their bank or any other vendor. When we talk about Shopify's flywheel, this is exactly what we need. Shopify Shipping and the Shop Pay fulfillment network complete the cart-to-door experience for our merchants' buyers. In Q2, label volume for Shopify Shipping increased quarter-over-quarter and we focused on transitioning merchants who are a good fit from Shopify Shipping to the Shop Pay fulfillment network to benefit from our full-service fulfillment offering. Merchants and their buyers are also making use of our newer merchant solutions. In June, we made our Buy Now Pay Later product, Shop Pay Installments, available to all eligible merchants in the US with the product automatically enabled for new merchants signing up for Shopify Payments and simple self-serve onboarding available to existing merchants. While early GMV transacting through Shop Pay Installments more than tripled in Q2 over the prior quarter as more buyers are using our product to checkout. We are pretty excited about the potential here over the long term and more merchants are signing on to Shopify Balance, which is an early access until later this year. Shopify Plus had another great quarter as large brands continue to turn to Shopify Plus to help make the complex simple. In Q2, more merchants on standard plans upgraded to Shopify Plus and more international brands joined Shopify Plus to grow their businesses. The list of brands that launched on Shopify Plus recently is stellar. Global entertainment platform Netflix, luxury fashion designer Diane Von Furstenberg, world-renowned winery Robert Mondavi, people footwear from well-known Shoe Company Aldo, global fashion brand and a huge personal favorite of mine, James Perse, and vintage clothing retailer ModCloth, famous coffee brands Stumptown Coffee and Peet's Coffee, children's clothing brand Justice, and more CPG brands from Nestle and McCormick. Shopify is leveraging the entire ecosystem to create a global retail operating system for the future of commerce. More than 22,000 viewers tuned in to this year's virtually held developer-focused partner conference Shopify Unite where we announced major upgrades to our platform on which we are building the internet's commerce infrastructure. These include Online Store 2.0, a flexible and customizable storefront so our merchants can build their stores quickly without touching code, while giving maximum code access to developers, allowing them to extend and customize both the storefront and the checkout. Powerful new APIs and developer tooling give our partners and merchants more creative control without sacrificing speed or scalability. A faster and more powerful checkout designed to give each individual shop the ability to handle as much sales volume as we served at the peak of Black Friday, Cyber Monday in 2020. And a scalable payments platform enabling partners to build third-party payment gateways as apps. We also announced 0% revenue share for app and theme store developers on their first million dollars of revenue annually starting in Q3 2021, making it even more attractive for tech talent to want to build the future of commerce with Shopify. Our teams at Shopify have been heads down innovating over the past year during the platform updates announced at Shopify Unite to life. Their incredible work has formed an even stronger commerce infrastructure for developers to build on. We look forward to seeing the hard problems they will help us solve for our merchants. As we double down on our efforts to make Shopify the best place to build, our partner ecosystem continues to grow. In Q2, the number of partners selling business to us continued to expand as over 46,000 partners referred at least one merchant to Shopify over the past 12 months, up 53% year-over-year. As the post-pandemic future emerges, it is clear that retail has changed forever. Shopify is making sure those changes are for the better. Entrepreneurship remained strong and opportunities to thrive in a modern retail era with the right tools are boundless.

Thanks, Harley. Merchants' success combined with sustained e-commerce tailwinds and strong execution by Shopify contributed to a fantastic second quarter. Revenue in our second quarter was up 57% year-over-year to $1.1 billion, marking the first time Shopify exceeded $1 billion in a single quarter. This was driven by strong performance from both our subscription solutions and merchant solutions segments. Subscription Solutions revenue increased 70% over the same period last year to $334.2 million, largely due to strong growth in monthly recurring revenue. MRR growth accelerated to 67% year-over-year to $95.1 million as more merchants joined the platform and the number of retail locations using POS Pro increased. Remember, MRR in the second quarter of last year was impacted by the 90-day free trial on standard plans offered until May 31. And that we experienced a double cohort effect in our third quarter last year as users from the 90-day free trial and 14-day free trial converted into paying merchants in that quarter. Compared with Q1, MRR added in Q2 was more normalized as economies reopened. Shopify Plus contributed $25.2 million or 26% of MRR, compared with 29% in Q2 of 2020 when standard merchant MRR was impacted by the extended free trial I just mentioned. While Shopify Plus MRR grew significantly this past quarter, non-Plus MRR grew faster benefiting from a significantly higher number of merchants on standard plans joining the platform in 2020 and new incremental revenues from our Shopify POS Pro subscription offerings over the same period last year. Merchant Solutions revenue grew 52% over Q2 2020 to $785.2 million. This growth was driven primarily by GMV expansion, which was up 40% year-over-year to a record $42.2 billion. The strong growth in merchant sales combined with increased GMV penetration of Shopify Payments, merchant adoption of Shopify Capital and shipping and partner-related revenue compared with the same period last year drove revenue from these solutions higher. $20.3 billion of GMV was processed on Shopify Payments in Q2, up 51% versus the same quarter last year. Shopify Payments penetration of GMV was 48% versus 45% in Q2 2020. This increase was driven by GMV penetration gains through online and retail POS channels while Shopify Plus and international merchants expanded their share of GPV year-over-year. Merchant Solutions revenue also benefited from the recognition of revenue in Q2 associated with non-cash consideration or warrants we received from our strategic partnerships with the firm and Global E relating to performance obligations with respect to our Shop Pay installments and cross-border commerce offerings respectively. The warrants associated with these partnerships were valued at the start of the prospective commercial contracts are deferred and then recognized into revenue ratably over the expected life of the contracts. While there are other revenue components to these products, the non-cash consideration component from those commercial agreements added approximately 3 percentage points to our year-on-year Merchant Solutions revenue growth. Adjusted gross profit dollars grew 64% over last year's second quarter to $627 million and outpaced revenue growth primarily due to the larger mix of subscription solutions gross profit relative to last year's mix which was depressed by the extended free trial. The combined strength in revenue improved margin profile and lower overall OpEx spend as a percentage of revenue contributed to strong adjusted operating earnings in Q2 compared to the same period last year. Adjusted operating income was $236.8 million in the second quarter compared with adjusted operating income of $113.7 million in the second quarter of 2020 as our revenue growth outpaced growth in spend. Adjusted net income for the quarter was $284.6 million or $2.24 per diluted share compared with adjusted net income of $129.4 million or $1.05 per diluted share in last year's second quarter. Adjusted net income in Q2 2021 excludes a $778 million unrealized net gain on our equity investments, including Global E which we wrote up to its fair value upon and subsequent to the company's IPO. Finally, our cash, cash equivalents, and marketable securities balance was $7.76 billion on June 30, compared with $6.39 billion at year-end. Our healthy balance sheet gives us optionality that we believe increases our competitive advantage. To retain this financial flexibility we filed yesterday to increase the registered room on our base shelf prospective. With so many merchants now building their businesses on Shopify, our job is to make entrepreneurship easier and help our merchants succeed. This is reflected in our three key areas of investment in 2021: Shopify Fulfillment Network, Shop, and international expansion. First, we're heads down building the foundation of Shopify's fulfillment network so that our merchants can access simple, fast, and affordable fulfillment. In Q2, we introduced features that help merchants manage and organize the products fulfilled by our network via the merchant admin and improve shipping speed and accuracy. We also added the ability for merchants to manage preferences like staff notifications. Our focus remains on building a product that offers merchants a delightful experience and optimizes our network of nodes and partners. Six River Systems, which had another strong quarter, continue to deploy fulfillment technology into our partner nodes and customer warehouses increasing the efficiency of their fulfillment operations. Our second key area of investment is Shop. As Harley outlined, we continue to invest in developing new features that add value to our merchants and give buyers a great mobile shopping experience. Our third key area of investment is International Expansion. We introduced new retail POS hardware that is integrated with Shopify Payments in the UK and Ireland in Q1 and then Australia in May. This is helpful for gross payments' volume as POS Pro locations and POS GMV trend upward and, more importantly, helpful to merchants who are benefiting from our leading POS capabilities. We plan to expand our integrated POS offering to additional regions in the coming months. As we expand our commercial efforts into regions, we are localizing our support efforts alongside them to ensure that merchants are able to reach a human who can help them navigate an issue or lead them to the best next steps is an important differentiator for us. And when our support team is armed with data superpowers and speaking our merchants' language, merchants everywhere can go further, faster. A quick note on our equity holdings in companies like Global E, Affirm, and others. We remained active in Q2 pursuing partnerships that position us to work with innovative teams that can help us solve hard problems for our merchants and to continue building the future of commerce. Turning to our outlook, our outlook for the remainder of 2021 is consistent with our assumptions in February. We have seen an improvement in the overall economic environment through the first half of this year. Consumer spending beginning to rotate back to services and offline retail and e-commerce growing at a more normalized pace relative to 2020. In view of these factors and Shopify's performance year-to-date, we continue to expect to grow revenue rapidly in 2021, but at a lower rate than in 2020. For the full year 2021, we continue to expect the following: Subscription solutions revenue growth to be driven by more merchants around the world joining the platform and a number lower than the record in 2020, but higher than any year prior to 2020. The growth rates of Subscription solutions and Merchant solutions revenues to be more similar to each other than in the recent past as we do not expect the surge in GMV that drove merchant solutions in 2020 to repeat. Merchant solutions revenue growth to be driven by continued GMV growth from existing merchants, new merchants joining the platform and expanded adoption of Shopify's growing menu of merchant solutions, including established offerings such as Shopify Payments, Shopify Shipping, and Shopify Capital both geographically and as merchants grow into them, while newer solutions such as Shopify Fulfillment Network and Six River Systems contribute nascent but incremental revenue in their early stages. We expect that the first quarter will likely still contribute the smallest share of full-year revenue and the 4th quarter the largest, and that the revenue spread will be more evenly distributed across the four quarters than it has been historically. We continue to expect rapid growth in gross profit dollars in 2021 and plan to continue reinvesting back in our business as aggressively as we can with the year-over-year growth in operating expenses accelerating in Q3 and again in Q4. Hiring momentum picked up in our second quarter as we nearly doubled the number of new hires joining Shopify quarter-over-quarter, bringing on more engineers and commercial talent to support our growth initiatives. In addition to increasing our commercial talent, we expect to ramp up our go-to-market programs and events in the second half of 2021 as regions reopen. Finally, we expect stock-based compensation and related payroll taxes to be $425 million and amortization of acquired intangibles to be $21 million for 2021. Due to the sustained momentum of digital commerce trends in the first half of 2021 combined with the US stimulus distributed in March and April this year, Shopify generated higher than anticipated revenue while incurring lower than planned operating expenses as a percentage of revenue in the first half of 2021. As a result, we now expect full-year 2021 adjusted operating income to be above the level we achieved in 2020. In closing, Shopify is investing in the future of commerce and we're taking a multi-pronged approach leveraging technology and talent, by building the commerce infrastructure of the internet, innovating new and improved products and expanding our relationships with a diverse community of partners. We are creating a global retail operating system that will help our merchants succeed in the years ahead and make commerce better for everyone. I'll now turn the call back to Katie.

Thanks, Amy. Before we open the call up for questions, I'll remind you to limit yourself to a single question. That way more people will get a chance to ask a question on the call this morning. Ariel, can you take the first question please?

Our first question comes from Craig Maurer of Autonomous Research. Please go ahead.

Yes, hi, thanks for taking the questions. So two questions, one around payments. Regarding the Shop Pay announcement, you guys had during the quarter around making the Shop Pay button available to non-Shopify platform merchants. Is there an opportunity to take the Shop Pay button to a full-stack processing solution and connecting with Stripe on the back end to be a full-stack PayPal competitor? And secondly, we heard that Shopify is now powering a large global brand in Brazil; has that large global brand pulled you into Brazil, and I was wondering what the growth opportunities are for Shopify going forward in that region. Thanks.

Hey, it's Harley. I'll take that question. On the international side, I mean, as Amy discussed in her remarks as well. International remains an important part of our business and our growth story. In fact, merchants from outside North America grew, as a percentage of our total merchant mix in Q2 year-over-year and year-over-year GMV growth in the rest of the world actually outpaced North America in Q2 2021. So we're seeing more international merchants that are joining, and they are succeeding on Shopify. Obviously, we're stepping up our growth marketing, our sales, and our support effort in places like Brazil and all over the world. So it isn't necessarily any particular focus on Brazil per se but there, merchants around the world are looking for retail operating systems and Shopify is certainly a favorite of theirs, and we're able to help them sell in the way that they want. In terms of the Shop Pay question, look, we think Shop Pay is the best way to check out on the Internet; it's fast, it's secure. Merchants love it because it helps with conversion rates. Consumers love it because it allows them to check out really, really quickly. So making that available on more services, whether it's on Facebook or Google or Instagram, Shopify merchants and also to non-Shop merchants, we just think that's the right thing to advance commerce.

This is Tobi; I think you asked a question specifically about how far we can take this beyond the Shopify platform. I think the reason why Shop Pay has been successful is it's highly bespoke to the Shopify platform. We can bid in based on assumptions that you can make about the merchants and their capabilities because of integration. I think if you go beyond a run-of-a-platform for its customers, then we would have to lose a lot of differentiation. So if there is, that would be an adjacency for the product, and we have no such plans.

Our next question comes from Thomas Forte of D.A. Davidson. Please go ahead.

Thanks for taking my question. So wanted to know what the financial implications are of not collecting a commission on the 1st million of revenue for developers in Shopify and lowering your take rate after the first million to 15% from 20%.

The change in the App Store and the revenue models that was announced at Unite are not material to price results in the back half of this year or for the full year. I want to emphasize that while it's not material for us, it is material for our developer partners. We are committed to our developers and believe this is the right long-term benefit for our merchants and our partners to help them be more innovative and creative on behalf of our merchants and to keep more of the dollars in their pockets. Therefore, any short-term loss of revenue in the back half is immaterial to us and well worth the long-term benefits.

Our next question comes from Ken Wong of Guggenheim Securities. Please go ahead.

Great, thank you for taking my question. This one is for Tobi or Harley. Just over the past month the company has introduced Search and Shop App conversion of add-in, in the partner App Store, and we see theoretical headlines like an audience network out there. How are you thinking about advertising as a product category, and in what areas do you think makes sense for Shopify to potentially monetize on those products?

Yeah. There is no one like approach here. I think what you're hearing about is a lot of early experimentation; the nature of advertising is like, it's very hard to conduct a test, but no one sees because I don't think that would lead to any useful data. So, there is a bit of loading and public going on there. We obviously look back for value. Our merchants obviously want to deepen their relationship with existing buyers. Shop is specifically really good, enriched in nature. We are bridging that gap as currently what we are trying to just cover and we are taking some opportunities again with some companies, any product for journeys; some don't quite know where it leads. Suddenly, then I started thought, but we would be bidding Fulfillment warehouses or do loans to a degree and advances to the degree that we are doing now. So again, I think you'll see a very early representation of early attempts there, and we really have no line of sight on what that does to revenue, and that is certainly not why we are trying any of those things, but we are thinking out what the right mix of products is for new merchants who are trying to build a business and reach for independence. And if advertising from us powered us in some means is part of that, we will hopefully know that over the next years.

Thank you, Ken. Our next question comes from Siti Panigrahi of Mizuho. Please go ahead.

Thanks for taking my question. It's impressive to see this record GMV. I know you guys don't disclose merchants, but how do you see the trends in GMV per merchant trending this year and also especially in July? What you're seeing and what's your expectation on that trend for the remaining of the year?

Yeah, the productivity of our merchants has remained strong. On the platform, as Harley said in our opening remarks, the $42 billion of GMV on the platform was a record, and so GMV per merchant remains strong year-over-year. It's really the combination of what Harley talked about. POS, our physical retail GMV has had four consecutive quarters of acceleration and is now back to the percentage mix pre-COVID on much higher GMV levels. We are seeing strong productivity there. With respect to online GMV, we do believe that it has reset at a higher level and is now just growing at a more normalized level. We use the UK as an example of one of the economies that reopened first, and our UK GMV grew faster than our average, suggesting that when we equip merchants with multi-channel, they do better in a very fluid commerce environment. We also saw social GMV increase substantially; it's still small as a percentage of our mix, but the growth quarter-over-quarter and year-over-year was significant. So these are all things with the multi-channel approach that we expect will help continue to keep GMV per merchant strong.

Thank you.

Thanks, Siti.

Our next question comes from Trevor Young of Barclays. Please go ahead.

Great, thanks for taking the question. Can you talk a little bit about the impact either qualitatively or quantitatively that merchants are seeing from their ability to use Facebook and Instagram ad targeting just in light of IDFA? We're hearing a lot of noise around this? And it would just be helpful to hear how it's impacting your merchants and by extension your GMV growth and then how you're adapting to enable that targeted advertising. Thank you.

Thanks Trevor. So I think we mentioned this on previous earnings calls, but just in the near term, we do think it will reduce the efficacy of some ads, but I think it further will incentivize merchants to look for new ways and multiple ways to connect with buyers on top of ads getting increasingly expensive. So, longer-term we expect merchants will benefit from further embedding commerce itself into surface areas across the Internet and in person, whether that's retargeting or it's apps that give more control to the buyer who has actually opted in. Merchants on Shopify have always been resilient, whether it was through the pandemic or through different technological changes, and we think they'll continue to be resilient and find ways to connect with buyers.

That's really helpful.

Our next question comes from Matt Pfau of William Blair. Please go ahead.

Hey guys, thanks for taking my question. Just wanted to ask a question on the impressive point of sale uptake that you're seeing. Do you think that this is more tied to economies reopening and physical stores reopening, or is it more driven by some of the product enhancements that you've made around point of sale? Thanks.

I think a couple of things. In terms of retail point of sale GMV, we are seeing that it is nearly back to pre-COVID levels as a percentage of overall GMV which again as Amy mentioned on the last question is on a much higher GMV. So, as physical stores reopen and merchants are better equipped with our upgraded hardware and software they're going to sell more. We rolled out an all-new Shop by point of sale, with new hardware and integrated payments in places in new geographies like Australia, and we're making great progress in places like the UK and Ireland as well. So we're trying to enable merchants in these regions to seamlessly bridge their online business and their offline commerce, and to Amy's point earlier, that they should not be mutually exclusive. We also saw that 63% of our brick and mortar merchants in English speaking geographies are now using some form of local in-store, curbside pickup, and delivery solutions compared to like 2% at the end of February 2020. So that's part of what you're going to see as re-openings continue to happen, but also as retail has been reset through COVID: it will be retail everywhere, and Shopify is a platform that powers retail everywhere, whether it's online or offline.

Thanks, Matt.

I'm going to just add that the point of sale product is now very, very good. It was previously, it's most differentiated feature, like I said, it was attached and rights for the same real-time database as online store, but it was very valuable in its own right. But we really took that product seriously. I think we are going to rewrite it, and at this point, it started just because there is just a lot of learning, and our initial vertical point of sale has absolutely oriented this, what's the point of sale industry has been doing—but previously like better implementation. I think an effect you are seeing in a lot of spaces is that sort of second, third, fourth ways of software and for being more digitally native, like let's actually use exactly what the power, software power, internet power of touch devices, in the use case to and you never know exactly what they can bring instead of just making touch versions of all the text-based point of sale systems. I'm very, very happy with what the point of sale is, it is really, really ready to be adopted on the platform, and I think that is the additional accelerant that too.

Our next question comes from Colin Sebastian of Baird. Please go ahead.

Thanks and good morning, everybody. I wonder if you could expand a bit on plans for Shopify Plus, maybe where you are focused in terms of product roadmap to drive more merchant adoption and how much of that is geared towards the enterprise tier versus the mid-market. Thank you.

Thanks for the question. I mentioned in my prepared remarks but Q2 was a great quarter for Plus more merchants on standard plans upgraded to Shopify Plus. We also saw more international brands joining Plus to grow their businesses. In terms of upgrades versus net new, we're seeing both. On the upgrade side was adding more than 700,000 merchants in 2020 that really does feed the pipeline for upgrades and obviously cash in that case is incredibly favorable. On the net new on the competitive front, it's important to remember the size of our base relative to others; we add more merchants in a quarter than some of the other enterprise platforms have in total. So the Shopify brand affiliation, it keeps getting stronger. It's now easier to make changes quickly, which is something that a lot of merchants want, even the largest of merchants. The total cost of ownership is still lower relative to most others. In terms of the features and functionality, we continue to add more functionality. We announced a number of new APIs and new ways that you can actually get into the code base of Shopify and be able to customize it to do exactly what you want that came out at Shopify Unite. So generally, Shopify Plus is really becoming a favorite for the mid-market but also for some very large merchants. I've been working on my favorite T-shirt retailer, James Perse, for about six years to migrate over to Shopify Plus, and now it was finally the right time for them to do it. So we think that Shopify Plus is really well positioned to keep not only having more homegrown stories migrate from our basic plan, but also migrations from other enterprise platforms in the future.

Thanks, Colin.

Our next question comes from Samad Samana of Jefferies. Please go ahead.

Hi, good morning. Thank you for taking my question. So maybe just on the cross-border side of the business, we're wondering if you could maybe share anything around cross-border volume is going to Shopify merchants and how we should think about the cross-border opportunity in the installed base, especially with that Global E partnership. Thank you.

I think commerce in 2021 is cross-border. That's how it operates, you know, in the early days of Shopify you started to sell in your own backyard, in your own country and in your own region; that's not the case now. And so whether it's with partnerships with Global E or it's more functionality to do currency conversion, things of that nature, we think in order for us to be the platform of choice for the most important merchants and brands in the world, they by default need to sell internationally. We've been working on international, whether it was things like activating new partnerships with new agencies, new developers and different countries to make sure that our product is well localized or if new languages where it's new payment are pushing Shopify Payments into more geographies. We're a global company and our merchants are also global companies. The way for us to maintain our position, the leadership position of being the retail operating system for the best brands is to make sure they can sell wherever they want. Thanks.

Our next question comes from Josh Beck of KeyBanc. Please go ahead.

Thank you for taking the question. What is the triangulate on a couple of the data points you shared? So the social channels seem to have been very strong. It sounds like there are multiples levels types of growth, and then point of sale also rebounded close to pre-COVID level. So I'm just curious if you play out both of those trends, say, three to five years, do you see the social channels starting to approach maybe the contribution to your business within point of sale? Just curious if you are revisiting that equation on the other side of COVID year.

Listen, I think social channels are becoming an increasingly important part of the way commerce is happening and will happen. The rank order of our GMV mix continues to be the online store, offline POS as second, and then all social channels and marketplaces third, and the social channels and marketplaces today represent a small percentage of the mix but are growing very rapidly. So it will take some time before it becomes a significant part of our GMV mix. But having said that, I mean, I think that's the beauty of Shopify in the multi-channel aspect as we can be anywhere commerce moves to, and the future to be flexible on behalf of our merchants in order to provide additional ways to access buyers. Our aim over time will be to offer multiple channels that you see today and new ones that are created over time.

Thank you, Josh.

Our next question comes from Paul Treiber of RBC Capital Markets. Please go ahead.

Thanks very much and good morning. It's a follow-up question on international. Just regarding your international strategy, what priority are you putting on securing additional partnerships or building on your partnerships with local marketplaces in channels, and in a bigger picture, to what degree can you scale and decentralize your support from more marketplaces and channels?

Whether it's a place like Europe, Western Europe, for example, places like Germany and France or other geographies around the world and APAC, part of making sure that we have a global retail operating system is to ensure we not only have local partnerships in terms of app partners, theme partners that are building software on top of Shopify that actually is relevant and valuable for merchants in that geography, but it's also making sure that the surfaces that consumers in those geographies want to buy on are integrated into Shopify. The partnership strategy around international has always been a part of what we set out to do; just building software and translating is not sufficient, we also need to ensure that it's properly localized. In some geographies, there are marketplaces that in Rakuten, for example, we are integrated with in Japan but would not be relevant as a marketplace in another geography and in Latin America, so that localization is really important. The good news is that because we do demand from merchants in all of these geographies, it's becoming easier for us to develop these relationships with both app developers, theme developers, but also these marketplace partners.

Thanks, Paul.

Our next question comes from Darren Aftahi of ROTH Capital Partners. Please go ahead.

Hey, good morning. Thanks for taking my question. You brought on a lot of merchants as COVID kind of hit last second quarter in that ramp. I'm just kind of curious as we kind of having to go through that, what the sort of sense of retention is amongst those new merchants that were brought on.

Yeah, the retention of the merchants that have been brought on over the past year plus through COVID has actually been very strong, especially the cohorts that came on at the height of COVID, especially in Q3 as the 90-day free trial converted. Those cohorts were more established businesses rushing to get online; the mix has now shifted back more towards pre-COVID levels with a mix of established businesses and entrepreneurs coming to us, but the retention rates have been stronger than pre-COVID levels over the last several quarters.

Thank you, Darren.

Our next question comes from Ygal Arounian of Wedbush Securities. Please go ahead.

Thanks, good morning everyone. And what about online store 2.0 and the impact of having customizable storefronts? How much of a pinch point was that for the merchants that this was a big focus for you guys? Do you see it more of contributor to Shop Pay plus or overall maybe on the conversion from the base here to Shopify Plus? Can you just talk a little bit more about your expectations on how that can drive merchant growth and retention? Thanks.

There’s a lot to unpack here. I wouldn’t say it made anything new possible in the way you're referring to. The introduction of a new template language has really enabled designers to create a wide variety of stores. Shopify is positioned as the go-to platform for such stores, but it can be challenging to quantify how much of that is within reach without involving code. This change significantly increases the number of people who can participate in branding, customization, and creating online stores to convey the stories their brands want to tell. There’s now a better collaboration between designers and the capabilities of the App ecosystem, allowing users to customize their stores effectively and efficiently. Previously, managing the flexibility of Shopify posed challenges, particularly with performance issues stemming from certain apps. However, we’ve improved our monitoring and communication with the app ecosystem regarding performance impacts. The new themes we’ve introduced are incredibly fast, and in e-commerce, fast-loading sites lead to higher conversion rates. It’s somewhat akin to the experience in a physical boutique where subtle elements influence customer perception, just as slow load times negatively affect online experiences. We’re currently working on 20 to 30 different projects, focusing on edge hosting and new virtual machines, and it’s now much easier to present what we believe to be the best solutions for the millions of businesses using Shopify.

Thanks, Ygal.

Our next question comes from Chris Merwin of Goldman Sachs. Please go ahead.

Okay, thanks so much for taking my question. I just wanted to ask about the adoption of payments among Shopify Plus customers. I think historically, they are trying a little bit below what you've seen with core, and just curious, are the 3P payment gateways might be helping to this end? Thank you.

The Shopify Payments adoption for Plus and GPV penetration has continued to increase over time as we've added more value on top of Shopify Payments including the accelerated checkout with Shop Pay, as well as multi-currency and other things. So it continues to be a major contributor to the reason why our GPV numbers and penetration have been increasing over time, and it's increasing in mix year-over-year. So that should give you some view; it's growing nicely.

Thank you, Chris.

Our next question comes from Brian Peterson of Raymond James. Please go ahead.

Hi, thank you for taking the question. I don't know if this is for Tobi or Harley, but you announced some big partnership agreements this quarter. I'm curious, what is the North Star for us to think about in terms of partner or build over buy as you guys have scaled, just curious to get an update on that. Thank you.

In terms of how we make decisions on what to build, what to partner with, and what to buy, look, we want to be the most important piece of software that our merchants use. We are that centralized operating system. I think some of the partnerships you're referring to our work with companies like Google and Facebook for example. Again, going back to what we said at the beginning of the call, commerce is now happening absolutely everywhere and we want to make sure that the merchants that use Shopify can sell absolutely everywhere. The town squares of modern day are social media and on the Internet and offline as well, and they're everywhere, so it's important that wherever consumers could be potentially looking to purchase that Shopify merchants show up there. This feedbacks into a centralized back office, where they can run their business. Whether it's on Google search or if it's on Instagram or it's on all the other channel integrations we have, that is really important. Now again, over time you're going to see more of these surfaces show up where commerce is happening, and it's our responsibility to make sure that we're integrated there to make sure that merchants can access those customers. Of course, as more of those services come to light, that increase the complexity of commerce and running a modern-day business and that also increases, I think, at Shopify provides to customers. In terms of the methodology, we want to provide what most merchants need most of the time; we want to do that at a world-class level, and there are some times where it's faster and better and more effective for us to partner with another technology company. We've developed a really good relationship in the market for being a company that builds incredible software and particularly have been really good partners. But there are other times where we just need to build that ourselves because it's just mission critical, and we think that we can actually deliver the best product on the planet.

Thanks, Brian.

Our next question comes from Keith Weiss of Morgan Stanley. Please go ahead.

Excellent, thank you guys for taking the questions. And congratulations on a really strong quarter and really the almost all inspiring kind of expansion of functionality you guys have been able to push into the platform over time. It has been really impressive to watch. I wanted to talk about one of those expansion areas, Shopify Fulfillment Network, and just trying to get an update on kind of where we are in terms of opening the aperture. Are you guys getting more comfortable with kind of that program, and where are we in terms of the timeline of getting more merchants in there? Because what we do here in terms of feedback from merchants that are using it is very positive. It sounds like there's really good feedback on what you guys have put together so far.

I’ll sort of that. I think SFN, we are continuing to build the foundations for SFN. We have been introducing features to help merchants manage the products fulfilled on our network. We're also improving shipping speed, we're improving accuracy and we're adding things and managing new preferences like staff notifications. I think there were three things that were added in Q2 in particular to SFN which I think are having added a lot of value. One is improved inventory management; now merchants can hide products and variants that are no longer being sold are fulfilled with SFN and so that enables merchants to keep product and various SKUs organized. The second thing was we improved shipping accuracy and speed; we introduced new tools that validate shipping addresses and reduce errors. The third piece is capabilities to manage merchant preferences, I mentioned SAP notifications. These things all in aggregate create real value. We also have a better sense of who the SFN target customers are; again, we are still in this product market phase. We know that self-shippers that are fulfilling between 10 and 10,000 orders a day, durable goods with pick, pack, and ship needs and we're brand experience is front and center, and they want their brand to look good when the consumer receives that, that is really where we're spending our time right now. The volumes in Q2 were similar to Q1 and we continue to add more merchants to SFN, but again this is still really important project for us. We're still in that product market phase, product market fit phase and over time you'll continue to see more of these functionalities come out and more merchants adopt it. But it's important to get this right.

Thank you, Keith.

Our next question comes from Brent Bracelin of Piper Sandler. Please go ahead.

Good morning. A question here for Harley on the online versus offline commerce opportunity. That's majority GMV is driven by powering online commerce, but you talked about POS Pro being very robust for a quarter of accelerating offline retail GMV, then clearly, there is a blurring of the lines between digital experiences customers want online versus offline. I guess, my questions here, what is Shopify doing to capture and enable more offline commerce specifically, is it going to be tied to the POS Pro product, are there new products, you can do to capture more offline commerce? Any thoughts there around just the opportunity and how big offline commerce can be, given historically, the focus has been on powering online?

Remember that historically, most businesses were created offline and then moved online. That's no longer the case anymore. And so by Shopify being the place where more entrepreneurs get started, every 28 seconds, a new entrepreneur gets their first sale on Shopify, businesses are being started online. And by making sure that we are that retail operating system, we keep talking about when they do decide to move offline, if the product is great, and as Tobi mentioned earlier, our point of sale product is great and we've spent a lot of time and a lot of money and effort on making sure that product is best in class, so the fact that they start with Shopify that's where their inventory is, and that’s where they spend their time when they go to work in the morning, they open up their laptop, where they start is the Shopify Admin; it makes it a lot easier for us to be their point of sale partner when they decide to transition. In terms of the legacy point of sale market, we are also starting to see more legacy merchants that are starting to go offline and begin to use Shopify point of sale as well. They're using it because the product is really good but also because every business today, and frankly, for the next 100 years, is going to be omnichannel. Talking about omnichannel going forward will be like talking about color television; every business by default will be omnichannel, and Shopify is the platform that enables that. So I think the opportunity for point of sale is there again back to Tobi's comment about the point of sale, hardware and software and the Pro that we put out in less than a while, it's the best we think that’s out there right now. It will continue to get better; we'll continue to add more functionality to it, but we think physical retail is a really great opportunity, and to Amy's point, it's our second largest channel and it will continue to grow.

Thanks, Brent. And thanks everybody for dialing in this morning.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.