Shopify Inc. Q1 FY2022 Earnings Call

Good morning, everyone. We're glad you can join us for Shopify's first quarter of 2022 conference call. We are joined this morning by Tobi Lütke, Shopify's CEO; Harley Finkelstein, Shopify's President; and Amy Shapero, 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 U.S. and Canadian regulators. Note that the adjusted financial measures we speak to today are non-GAAP measures, which are not a substitute for GAAP financial measures. Reconciliations between the two can be found in our earnings 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 turn the call over to Harley.

Good morning, everyone. For the past two years, we have been on an extraordinary journey with merchants, helping them sell on any and every channel as commerce shifted numerous times during the pandemic. Throughout the last two years, we showed up for our merchants when they needed us most, and now the trust we built with them throughout the pandemic with our platform is being rewarded with more of their business. This momentum encourages us to continue to invest for the long term. The more hard problems we solve for merchants, the more energy we add to our flywheel and the better off commerce is for everyone for years to come. As we start to put the pandemic behind us, there is yet another shift happening in commerce, and the good news is Shopify is again on the right side of that change. Beginning in February, many people, myself included, celebrated the easing of Omicron and rolling back of mandates with travel, dining out, entertainment, and in-person shopping. While this new mobility moderated the explosive growth in online activity that we've seen over the last couple of years, it drove home the importance of commerce everywhere, online, in-app, and in real life. Brick-and-mortar merchants learned this lesson two years ago when they were forced to close their doors almost overnight. Tens of thousands of physical retailers pivoted quickly and moved online using Shopify. Shopify played a mission-critical role for these businesses over the pandemic when they needed it most. And we directed all of our energy to making sure businesses could stay open when their physical presence had to immediately shut down. Everyone from mom-and-pops to merchants with large operations and considerable existing sales came fully online with Shopify, which, at the time, was the only sales channel that mattered. Now that physical retail is reopening and retail in general is rebalancing, this bigger position we've earned and the trust that we've earned with our merchants represents a huge opportunity for us. The hundreds of thousands of businesses that shifted their business to Shopify during the pandemic and stayed with us since can now take advantage of our powerful retail point-of-sale offering for a unified view of their sales online and offline. Shopify has been developing the world's best point-of-sale retail software for years, and it's now at the point where all merchants who came to Shopify during the pandemic can leverage it. No need to go back to their old, dilapidated POS systems. As we mentioned last quarter, we are growing our sales team and marketing support to help ensure that any merchant doing in-person selling on Shopify knows how much stronger the Shopify point-of-sale value proposition is relative to standalone offerings, and this is because we've done a great job building our point-of-sale channel. For example, luxury label Philipp Plein adopted our point-of-sale for multiple retail locations this past quarter as did the clothing retailer Fear of God. As point-of-sale Pro added more merchants, locations, and geographies in Q1, we grew offline GMV by nearly 80% year-over-year as we continue to gain share. Even with the current resurgence in offline retail, we still believe that e-commerce will continue to grow and take share of overall retail over the long term, and we are well positioned here with our online commerce GMV posting a 51% compound annual growth rate since the start of the pandemic in Q1 2020, faster than overall e-commerce over the same period, and we took share this past quarter as well. Our overall GMV, including offline, grew even faster at a 57% compound annual growth rate since Q1 2020, demonstrating that the opportunity for Shopify is beyond just online. It's to be the commerce platform of choice in any environment and on any surface. The result of these past two years is that our trust battery with merchants is fully charged. To prove it, merchants are taking more of our offerings to compete in the fast-moving digital commerce landscape. A central value proposition of our business model is that the platform gets more robust and more relevant to a merchant over time. Here, we showcase three merchants that illustrate a common theme: newer and smaller merchants get great value from a few features; as they become more established, they add more; and with increased volume, even more. FIGS, a publicly traded company built entirely on Shopify, started on our $79 plan. They grew into features, which help them scale and are still only just getting started. Merchants rely on Shopify for these needs not just because they trust us, but also because it's easier, more reliable, and importantly, saves them money. And in the inflationary environment we're in now, this is especially important. By passing the economies of scale we capture down to our merchants, Shopify saves merchants money compared to what they would pay to secure each of those solutions separately, allowing them to free up capital to grow their businesses. We are training more of our sales and support teams to be able to highlight to merchants ways they can benefit from making fuller use of our platform. As a result, we believe there's an opportunity to deliver more services to merchants while saving them money. Our Merchant Solutions revenue expanded by 29%, driven by increased penetration of Shopify Payments and Capital as well as growth in revenue from our partners, helping to extend the value of our platform. Because we are on the same side of the table as our merchants, they can thrive in the platform and they do. Shopify Plus once again saw a large percentage of its merchant additions this past quarter come from upgrades, such as luxury menswear brand, Thom Sweeney; coffee house, Dogwood Coffee; and fragrance company, Ellis Brooklyn, created by New York Times beauty columnist, Bee Shapiro. These last several years have proved that serving both start-ups and large companies is not mutually exclusive, especially when you have an entire ecosystem of support from both ends of the market, and we continue to invest in both. For example, with our new link-in-bio tool, Linkpop, our unmatched capabilities for creators got even better. This is only one example of how commerce can happen anywhere. What we've seen over the past two years through the pandemic has been a shift of transactions to digital venues beyond the online store, where buyers are discovering goods. For years, we've invested in APIs to more easily connect our merchants with buyers across surfaces and directly transact on partner platforms, starting with Meta and Google. Orders completed on key partner services more than quadrupled year-over-year. While it's still a small percentage of the $43 billion of GMV we did in the quarter, it indicates growing momentum on this multiyear trend towards commerce everywhere. This should not be surprising. With the shifting landscape of the digital ads industry, merchants are becoming increasingly focused on finding new ways to reach buyers, and they're finding success with commerce completed directly in the app or on the search surface itself. For larger enterprises, Deloitte and Accenture are now officially partnering with Shopify on systems integrations to help some of their largest clients achieve and maintain marketing agility. We have already collaborated with the team at Deloitte Digital for Audi, World Vision, and Inkbox. And as Fortune 500 companies move fast to keep their brands top of mind, we look forward to working with systems integrators to bring more of the world's best-loved brands onto Shopify Plus. The energy at Shopify Plus right now is terrific as the team finished Q1 with their best month ever, closing 20% more deals in March than ever before. The variety of merchants and ways they're using Shopify Plus continued to grow, with new launches in the quarter spanning well-known brands in food, footwear, art supplies, cosmetics athletic gear, tech companies, and video games, including the legendary Miami beach restaurant, Joe's Stone Crab; Havaianas, Mexico; Crayola; Fiora Cosmetics; Bridgestone Cycle; TRX Training; Figma; and Call of Duty. The Internet's favorite influencer, Mr. Beast, launched his own chocolate brand on Shopify Plus this past quarter, and the NBA followed the lead of the Chicago Bulls, who launched the sale of NFTs last summer with their own All-Star NFT store on Shopify in the quarter. Our track record and our momentum with merchants tell us we are on the right track, investing for the long term to solve more hard problems for them, and in doing so, energizing our flywheel. I'd like to double-click on what we mean when we talk about our flywheel as this approach differs from the zero-sum approach of a lot of other companies. Direct monetization from the customer in the short term is good. However, building something that may be less immediate and direct but will generate more value for the customer and for Shopify over the long run is much, much better. We have many examples of how we've applied the flywheel over the years from APIs to liquid to our app store and the long-term relationship we have with our community developers, an ecosystem built over a decade. None of these were very material in the short run, but over time, they strengthen every aspect of our platform. Keeping our momentum, our approach to investing for the long term is consistent with our continued investment in the Shopify Fulfillment Network. Supply chain management and fulfillment are some of the biggest challenges merchants face running their businesses. Millions of small merchants struggle to scale even once they've built a product they know buyers want. To actually get an order to a buyer, they have to fumble through a maze of freight providers, third-party logistics, and middle- and last-mile carriers. We know merchants trust Shopify to offer simple, reliable, cost-effective solutions to their biggest problems. That's why we're creating the world's most merchant-obsessed, end-to-end software and logistics platform, fully integrated into the Shopify ecosystem. We are simplifying logistics across every stage of a merchant's supply chain, from inventory inbounding to inventory distribution across all merchant channels, to fast and affordable direct-to-consumer order fulfillment and returns. Making this end-to-end supply chain easier to navigate for merchants reduces the barriers to becoming a successful entrepreneur, increases their odds of success, and offers a durable source of energy to the flywheel and differentiates us even more. So today, we're announcing the acquisition of Deliverr, our largest acquisition yet to strengthen Shopify's Fulfillment Network and accelerate our path to an end-to-end merchant supply chain solution. Fulfilling more than 1 million orders per month, Deliverr's asset-light, technology-driven service is trusted by thousands of merchants across the U.S. to connect all stages of a merchant supply chain and manages distribution and fulfillment to all merchant channels. For the post-order phase of the merchant supply chain, SFN has made considerable progress towards our core offering, which includes inventory balancing, delivery promises, and simple returns functionality. Our proprietary warehouse management system we've been developing is now running in our key warehouse locations and will handle all SFN order volume by the end of Q2 2022. Combining Shopify Fulfillment Network, which delivers software, talent, data, and scale, provides merchants simplified inventory management and logistic services, demand-driven inventory placement that eases minimum inventory requirements and offers highly reliable, fast, and affordable delivery. We are thrilled to soon welcome Deliverr's experienced team of software engineers, operations experts, and merchant champions to Shopify. While adding Deliverr this year will impact profitability in 2022, it's well worth it because it accelerates our ambitions around SFN. Despite Q1 not being the easiest start to the year on the macro front, we showed an adjusted operating profit of $32 million on 22% revenue growth. This is on top of a 110% growth last year during lockdowns and boosted by stimulus. This past quarter's growth was partly driven by our Merchant Solutions revenue reaching a record high as a percentage of GMV. That means that our merchants are getting more value from our platform than ever before. It is in times like these that great companies prove themselves through a combination of strategic decisions, executed and timed right and maintaining strong operating discipline. Our merchants need to be ready for whatever the future brings because they know omnichannel is more than just online versus offline. It's commerce on social platforms, in apps, in videos, and it's wherever communities and creators are connecting. The surge in digital commerce pushed transactions far beyond the online store, and they're increasingly happening in-app, in social, in search, and even email. This larger mix of channels is what makes Shopify so valuable in any environment and across every buying surface. Building all the right tools for commerce to happen on every surface where we believe the future of commerce lives is one of our superpowers and why merchants, large and small, are building their own futures on Shopify.

Thanks, Harley, and good morning, everyone. The trends Harley just talked about, how much more important omnichannel is right now, merchants making greater use of Shopify, and the importance of investing now to stay ahead of the curve for merchants were clear in our financial results in Q1. But before we dig into that, I want to first speak to what we're seeing on the macro front and how it relates to what we've seen over the past two years because that's impacted our results in Q1. While our performance in the quarter was consistent with the guidance we provided you in February, a couple of macro factors played a larger role than expected. Before I review these factors, we reminded you in February that last year's first quarter GMV growth was 114% year-over-year as online consumer spending on goods soared, fueled by government stimulus and lockdowns. This surge was not unique to Shopify. Fast forward 12 months, our GMV growth for this year's first quarter was 16% year-over-year. The timing of Omicron easing was also a factor with mobility resuming with vigor earlier in Q1 of this year versus Q1 of last year, causing a shift in consumer spend to offline retail and travel starting in early February this year in strong contrast to a year ago, where that shift occurred in late March and into April. Another factor that impacted year-over-year GMV growth more than expected, although to a lesser extent than mobility, was inflation at a record level, pushing more consumer spend, both online and offline, toward discount retailers in Q1 of this year as consumers' wallets were stretched from higher prices, including a surge in gas prices due to the war in Ukraine. Even with these macro factors impacting year-on-year growth in the quarter, our online and offline GMV in Q1 each continued to outpace their respective markets in the U.S. In the case of offline, our retail GMV grew approximately six times the market, underscoring our omnichannel advantage relative to online-only providers and enabling merchants to be prepared for anything. And in the context of the past two years, overall GMV growth of 57% compounded annually highlights just how far omnichannel has enabled independent brands to reach. Our revenue for the first quarter grew to $1.2 billion, which is 22% higher than the same period last year and represents a two-year compound annual growth rate of 60%. In addition to the macro factors that I noted earlier that affected our year-over-year comparison, revenue for Subscription Solutions was also impacted by the app and theme revenue models for partners as well as by the change in recognition of themes revenue from gross to net, which were not yet in place in Q1 of 2021. This change in terms and treatment for apps and themes accounted for about two points and seven points of headwind to our overall revenue in Subscription Solutions revenue growth in the quarter, respectively. Subscription Solutions revenue of $344.8 million grew 8% year-over-year, reflecting the app and theme revenue change I just talked about as well as lower merchant adds in the quarter compared to Q1 a year ago. While increased mobility, along with a robust labor market, tempered our merchant adds in the quarter, monthly recurring revenue was up 17% year-over-year, benefiting from Shopify Plus and the addition of thousands more POS Pro retail locations. Merchant Solutions revenue grew to $858.9 million in Q1, up 29% compared to the same period in 2021. This was nearly twice the growth of GMV due to the increased adoption of Shopify Payments, Shopify Capital, and even Shopify Markets, which has gotten off to a strong start as well, as well as growing revenue from partners. $22 billion of GMV was processed on Shopify Payments in Q1, an increase of 27% over last year's first quarter. Payments penetration of GMV was 51% versus 46% in Q1 2021. Over the past four quarters, we've seen gross payments volume benefit from strong performance by merchants on Shopify Payments, an increasing percentage of which is Shopify Plus GMV; new merchant adoption both in North America and internationally; penetration gains in Shop Pay, which has facilitated $50 billion in GMV since inception; and expanded availability of our POS Pro hardware with integrated payments now being used by merchants in 11 countries. Adjusted gross profit was $646.1 million compared with $565.1 million in the first quarter of 2021, reflecting a greater mix of our lower-margin Merchant Solutions revenue versus the prior year, lower margins in Shopify Payments due to mix, increased investments in our cloud infrastructure, and the impact of the change in terms for our app and theme partners versus the prior year. Adjusted operating income was $31.9 million in the first quarter compared to $210.8 million a year ago as we bolstered our R&D, data and sales teams and stepped up performance marketing in both North America and internationally. Adjusted net income for the quarter was $25.1 million or $0.20 per diluted share compared with adjusted net income of $254.1 million or $2.01 per diluted share in the first quarter of 2021. Finally, our cash, cash equivalents, and marketable securities balance on March 31 was $7.25 billion. This healthy cash balance is testament to the strength of our approach to capital allocation and operating discipline. Since day one, we have funded our growth wisely. Over the past seven years, we've raised $7.7 billion of funds via equity offerings and our convertible note, deployed $1.7 billion for investments in M&A as of March 31, 2022, and have conserved a strategic amount on our balance sheet for optionality. Outside of our acquisition of 6RS, all of our growth thus far has been organic, funded by redeploying gross profits back into the business to energize the flywheel. As I said in February, Shopify is focused on strategically allocating capital to four key investment themes in 2022, one of which is simplifying fulfillment for merchants. Shopify Fulfillment Network is making considerable progress against its roadmap. We've had great success migrating SFN merchants to the updated version of our new, simplified offering. Not only does it make fulfillment easier, SFN is designed to intelligently rebalance merchants' inventory to maximize their fast fulfillment reach with the lowest committed inventory. As Harley outlined, the acquisition of Deliverr helps Shopify Fulfillment Network accelerate its roadmap by assembling an end-to-end logistics platform that manages inventory from port to porch and across all sales channels for merchants of all sizes on and off Shopify. Soon, merchants will have access to Shop Promise, a new benefit in early access that displays expected delivery dates on merchants' online stores and other channels and consumers will see a new badge on products they browse. This delivery promise extends beyond the online store across surfaces like Google, Facebook, Instagram, and the Shop App, helping merchants improve trust and increase sales with billions of potential customers by meeting them where they like to shop. And we'll leverage SFN's and Deliverr's fast fulfillment capabilities to power two-day and next-day delivery promises. We view simplified, fast, and affordable fulfillment across all sales channels as incremental to the Shopify flywheel with the aim of helping millions of future merchants start and scale their businesses. So it is with much excitement that we announced the acquisition of Deliverr. Under the terms of the agreement, Shopify will acquire all of Deliverr's outstanding securities in a transaction valued at approximately $2.1 billion, consisting of approximately 80% in cash and 20% in Shopify Class A shares. Most of the stock-based portion of the transaction consideration will be received by Deliverr's key management, will vest subject to certain conditions and will be treated as stock-based compensation. We expect the transaction to close following regulatory review. Our financial outlook for the rest of 2022, which includes the impact of Deliverr, is as follows: our outlook for the full year is guided by the same assumptions we gave you in February; we're operating in a more measured macro environment relative to 2021, moderated by inflation; e-commerce will continue to penetrate commerce overall; and the prospects for entrepreneurship and digital commerce are greater now than at any point in our history after two transformational years for the industry and for Shopify. What these trends mean for expectations for our own results is as follows: the year-over-year growth will be lower in the first half of 2022 and highest in Q4 given the absence of stimulus payments and expected higher inflation relative to the first half of 2021, that the number of merchants joining the platform in 2022 will be comparable to 2021 and that Merchant Solutions revenue growth will be more than double that of Subscription Solutions. Because of this larger mix of Merchant Solutions contributing to overall revenue, we expect gross profit dollar growth will trail revenue growth, which we still expect to be rapid and faster for the full year than our revenue growth in the first half. Our intention to reinvest all of our gross profit dollars back into the business this year remains intact since the pace of change independent brands need to get ahead of is not slowing down. Factoring in the effects of an inflationary environment on consumer spending, we expect our adjusted operating results to reflect the reinvestments in our four key themes outlined in February as well as the impact of Deliverr, which we expect to be dilutive to operating margin this year. As we help our merchants build buyer relationships, go global, grow from first sale to full scale and simplify fulfillment, we're arming them for long-term success. Finally, the estimates of stock-based compensation and related payroll taxes, capital expenditures, and amortization of acquired intangibles incorporating the impact of Deliverr are now $800 million, $200 million, and $62 million, respectively. Before turning it over to Katie to start the Q&A, I want to underscore the importance of long-term thinking that underlies our capital allocation decisions is how great companies are built. In the past, we have reinvested knowing we were laying the foundation for what we expected to be a much bigger company in the future. While we're much bigger today because we reinvested, the building that lies ahead of us is considerable, and that is a good place to be. Putting technology to work to help independent brands with everything from discovery to delivery guides us as we continue to build for the future of entrepreneurship.

Thanks, Amy. We'll now open the call for questions. You should be familiar with the raise hand feature in Zoom, so that shouldn't be an issue. We'll take questions in the order they come in. While we have tried to keep our prepared remarks concise and provided much of the information on the Events page of our Investor Relations site beforehand, we still have limited time for questions. Please ask just one good question so we can address as many as possible.

Just parsing out the GMV commentary into the key buckets, POS up nearly 80%, social, I think, quadrupling. If we assume social is like a low single-digit share, POS maybe mid-teens, that would imply the remaining 80% or 85% of e-com actually saw a very low single-digit growth year-on-year, call it, a few percentage points. Is that the right way to think about it?

So we gave you a little bit of information in the prepared remarks on e-commerce. We outpaced the overall U.S. market. The U.S. market grew, according to U.S. commerce data, approximately 10%. So that should have given you some view into the online performance.

Deliverr counts some of your competitors as customers. What are your plans on maintaining a relationship with them, considering Deliverr likely benefits from the data, but its shipping capabilities would be a differentiator for you?

I'll take that question. Look, the great part about Deliverr is that it accelerates what we've been planning to do with this end-to-end logistics network. It gets there faster. And the fact that they have great experience, they have great software, great talent, and scale means that we can give more of our merchants more control and more full visibility. And of course, they can own the relationship with the end consumer. So the idea here is we want to get our merchants high-reliability, fast, affordable delivery, and we think we can do that much faster with Deliverr. Now that being said, in terms of their existing businesses, obviously, we're going to adopt those businesses in. But we really are excited by the fact that Deliverr is asset-light, tech-driven, trusted by thousands of merchants. Some of those merchants are not on Shopify; some of them may come to Shopify eventually, but the idea is really about product acceleration here.

So I wanted to ask you a question that other companies have discussed this quarter. Given the weakness in your shares, how should investors think about your ability to attract and retain tech talent in a tight labor market?

Yes, it’s Tobi. I'll take that. We have amazing people coming on board, and it's an excellent time to join Shopify. While the share price can influence decisions, it's not as significant as one might expect. Many individuals are looking for companies that align with their values and the changes they want to see in the world. People are very enthusiastic about the role Shopify played during the pandemic, especially as many have helped local businesses set up their Shopify stores. This experience has motivated them to join Shopify to continue assisting in a more impactful way. We've seen significant changes in the workforce lately, but I believe this narrative around The Great Resignation is somewhat overstated. Instead, it's more about people exploring new opportunities. We are attracting highly talented individuals from various backgrounds, and with our ability to hire globally, we’ve encountered some of the most exceptional people. While there may be more movement in the job market, retention at Shopify is strong. Interestingly, we’ve observed a trend of many individuals returning to their previous companies, a phenomenon we refer to as the boomerang effect. This evolving labor market has empowered employees to choose their employers more freely. It’s crucial for companies to present interesting challenges and foster an environment that attracts the right talent. I believe Shopify excels in this regard. Although the stock price is a factor, it’s just one of many elements influencing long-term decisions, especially as people adjust to a life post-pandemic.

Our next question comes from Colin Sebastian at Baird.

A question on the fulfillment initiatives and the vision for the end-to-end platform sounds quite compelling. Just hoping to dig a little bit more into how the build-out will work, in particular, given Shopify's engineering orientation, perhaps some additional context around the need to buy versus build on the software side. And then on the physical footprint, maybe help us with additional context around the scale of this operation in your vision and the potential investment required there to realize that long-term vision.

Thanks, Colin. I mentioned this in my prepared remarks, but I want to reiterate it. Currently, merchants struggle with navigating various freight providers, third-party logistics, and carriers. SFN addresses the post-order phase of the merchant supply chain, which includes aspects like inventory balancing, delivery promises, and straightforward returns. We have also implemented our proprietary warehouse management system across all warehouse locations. Adding Deliverr, which is fulfilling one million orders a month, enhances this asset-light software product, managing distribution fulfillment across all merchant channels effectively. Ultimately, we achieve a comprehensive software and logistics platform focused on merchants. Deliverr's software-first approach and asset-light, tech-driven model align well with our capital expenditure management and fit seamlessly into our existing product lineup. This strengthens our product roadmap for developing a complete logistics network. Additionally, we introduced Shop Promise, which helps consumers make informed decisions by showcasing two-day and one-day delivery promises on merchants' online stores and platforms like Facebook, Instagram, and Google, boosting consumer trust and benefiting our merchants. As with all our acquisitions, the fit in culture and product is paramount, along with a business model and approach to capital and operational expenditure that mirrors ours in being asset-light.

Our next question comes from Gabriela Borges from Goldman Sachs.

Either for Harley or for Amy, some of the key macro dynamics that you're talking about with merchant adds and e-commerce GMV, how would you describe trends in the month of April compared to March and relative to perhaps however you think about a normal base length for seasonality?

Yes. So I'll take that one. So let me just kind of land on Q2. So year-over-year, Q2 of 2021 still had stimulus in it, especially in the early part of the quarter, April, in particular. So there's still a year-over-year headwind with respect to that for April and Q2 of this year. Then we spoke about the shift in rebalancing consumer spend to travel and services and in-person shopping, and we expect some of that to continue into Q2 with that normalizing into the back half. But if you look at any sort of mobility stats, it's now getting closer to what would be deemed normal, but there is still some rebalancing happening. And then the third factor that we talked about was inflationary pressure that we saw in Q1, which was not as big of a factor as the first two that I just talked about, but a factor. We're continuing to watch that one closely, and we expect that to ease as well into the back half of the year.

Our next question comes from Samad Samana at Jefferies.

I want to discuss the spending and operating expense plans. Considering the decrease in net additions, I understand the tough comparisons due to the surge in new merchant formation. However, the projections indicate significant growth in sales and marketing for 2022. With net additions expected to remain consistent with 2021, is it becoming more costly to acquire customers? Is the sales and marketing expense focused on different types of customers you plan to target? Can you help clarify what this means for spending and unit economics in the medium term?

In a challenging quarter for the market, we managed to achieve a profit in AOI. Over a two-year period, our revenue has grown at a compound annual growth rate of 60%, and GMV at around 57%. An important aspect that may be overlooked is the strength of our value proposition, especially in an inflationary environment. Our Merchant Solutions revenue as a percentage of GMV is at an all-time high, indicating that our merchants are not only joining us but are also increasing their usage of our products and solutions, such as Capital Payments. This signifies that we are adding more value and addressing more of their challenges. In terms of sales and marketing, our goal is to onboard more merchants across the globe, not just in our core markets. Once they join, we plan to effectively cross-sell our various products to meet their needs. Our business model has remained consistent; new users typically come to Shopify to address a specific issue, only to discover we can help with additional challenges. For instance, merchants that transitioned online during the pandemic are now returning to physical locations and are integrating our direct point of sale products. We aim to be an indispensable software solution for all aspects of their business, both online and offline. Currently, we are focused on ensuring that every new merchant on the platform adopts more of our offerings, which is essential for our growth and is reflected in our positive performance numbers.

Our next question comes from Josh Beck at KeyBanc.

I wanted to go back to fulfillment. Certainly, it's really encouraging that you're planning on having, I believe, all of the SFN volume on your own WMS by the end of Q2. I'm just curious, when you step back and now factor in the contribution from Deliver, if the scale phase is still targeted for the second half of '23 or '24 or if there's potential acceleration. Just curious on that transition now that we certainly have a larger team and more capabilities in this area.

And we did say that Deliverr does accelerate fulfillment volumes. We gave you the number. They are currently over 1 million fulfillments per month and growing. So that certainly does give us additional volume more quickly. The expectation is that scale will still be towards the back half of 2023 and into 2024, and we've always said that's where the unit economics really start to shift to favorable. So we fully expect the volumes to continue to increase into that timeframe.

Our next question comes from Matthew Pfau at William Blair.

I wanted to just ask on the announcement of Amazon extending Prime to merchants' owned sites. Does that have any impact on your business or maybe perhaps more specifically on how you're thinking about your fulfillment efforts?

Yes. I think it's important to discuss this because it might be more interesting than people realize. Shopify is focused on its mission to provide the Internet as an entrepreneurial platform for everyone. We want to enable individuals to explore entrepreneurship when their initial plans don’t succeed. We're excited about shared infrastructure for small businesses. Historically, much of the internet infrastructure has primarily benefited large companies. The Software-as-a-Service model has largely been directed at enterprises. Initially, Shopify catered to consumers, often serving as the first step for individuals starting their businesses. We're enthusiastic about Amazon's decision to share its excellent infrastructure with small merchants online. We're eager to integrate this into Shopify, similar to how we've incorporated infrastructure from Meta, Google, TikTok, and others. This aligns perfectly with our vision. It’s not as concerning as some may suggest. Anything that benefits merchants will foster more entrepreneurship, which supports our company’s goals. From a business standpoint, having more valuable sales channels makes Shopify tools even more essential because managing these channels can be complex. Our software integration helps simplify this complexity, allowing small businesses to pursue sophisticated retail strategies without needing extensive staff. This is actually very positive news for us.

Our next question comes from Tyler Radke at Citi.

So Amy, I wanted to ask you just how we should think about the moving pieces in the guidance and specifically, kind of what has changed in terms of your assumptions. So it looks like you're calling for merchant additions for the full year to be similar to last year. I think last quarter, you'd expected a bit higher. And so just help us understand how much you're kind of revising things down, given the macro challenges that you saw out there this quarter.

Yes, we’ve discussed GMV a bit already. Regarding merchant additions for the year, we anticipate numbers similar to those in 2021. However, as I mentioned in my opening remarks, we observed lower merchant additions compared to last year. We mainly attribute this to a very tight and changing labor market. While we see a correlation between our merchant additions and the circumstances in the first quarter, it's important to note that it’s correlation, not causation. We expect that the labor market will start to improve, and we are already seeing signs of that easing. Additionally, we have sales, marketing, and other growth initiatives in place that are gaining momentum, which we believe will have an even greater impact in the latter half of the year. We remain confident about the opportunity to onboard more merchants worldwide, especially in regions outside of North America, which remains a strong market for us. Another change we made involved reinvesting all our gross profits back into the business, as we mentioned last quarter, and noting that Deliverr would dilute our operating margin. To clarify the impact of Deliverr, we expect it to contribute a couple of points to Shopify's top line growth in 2022, reflecting about half a year of ownership. We anticipate Deliverr will slightly dilute Shopify's 2022 adjusted gross margin, with approximately 80% of their operating expenses driven by headcount, which stands at around 400 employees. This should give you a clearer picture of the operating side.

Our next question comes from Paul Treiber at RBC.

A question for Tobi. There's various views out there on the proposed founder share. Could you provide your perspective on governance in general? And then perhaps more directly, can you just put in your own words to shareholders why you feel that shareholders should vote for the proposal?

Yes, thank you. Our Board of Directors has been considering this for quite some time. We included the B-share structure in our IPO, which the Board sees as very positive for the company. It aligns well with being a founder-led organization. We went public at a $1 billion valuation, which has worked to our advantage thus far. However, to be honest, we were somewhat rushed in our decision-making during the IPO and opted for a standard structure that didn't fully reflect our preferences. There are aspects we would like to change. This proposal aims to modify some of our governance elements. For example, it involves adjusting the B Class founder shares, limiting majority control to a cap of 40%. It also removes certain awkward elements like intergenerational transfer rights. Shareholders can rest assured that this structure is designed to support the founder-led nature of the company by instituting service-based requirements for my involvement. Overall, this proposed governance change is meant to be favorable and will ultimately result in more balanced control. The Board believes this is a better governance structure moving forward, which is why it's being presented.

I want to mention something that I believe reflects my experience at Shopify and my long collaboration with Tobi. Anyone familiar with our management knows that Tobi is a founder who is genuinely committed to building a company that lasts for a century. He has a strong history and excels at scaling businesses effectively. He makes sound decisions in complex and rapidly changing environments. His success stems from a mix of technical expertise, vision, and considerable insight. Additionally, he is a considerate leader, and this leadership has resulted in over 60% annual compounded returns since our IPO. Although he may not say it himself, I certainly will.

Our next question comes from Deepak Mathivanan at Wolfe Research.

Amy, can you add a little bit more color on the retention trends on the SMB merchant side? Are you seeing a higher level of activity or merchant churn in the non-Plus side of the business? And specifically on the e-commerce side, given that e-commerce trends are moderating and entrepreneurship activity may be kind of like moderating, I just want to hear a little bit more color on that.

No, we really haven't seen any significant changes in the churn rates in any of the segments, Plus or non-Plus.

Our next question comes from Siti Panigrahi at Mizuho.

So I wanted to understand a little bit about the offline commerce opportunity that you highlighted, offline commerce. So is it mostly the customer who heard brick-and-mortar store, they move to online there going after your offline solution? Or do you see just incremental merchants as well? So if so, what percentage of your merchants right now have the brick-and-mortar store?

I'll address that question. As retail and commerce adjust with reopenings, we're seeing more merchants interested in selling offline. Many offline merchants who were primarily focused on a single location before the pandemic and came online during the pandemic are now coming to us to extend their offerings from online to offline. This is reflected in the nearly 80% growth in our point-of-sale gross merchandise volume in Q1, which surpasses the overall offline retail market, as they adopt more of our solutions. Additionally, our point-of-sale and point-of-sale Pro adoption continues to expand beyond North America into new regions. We have introduced new integrated hardware and payment systems. We're also attracting new businesses to Shopify. So, similar to our other offerings like Shopify Plus, you will see both existing Shopify users expanding their usage and new customers coming in to utilize our point-of-sale product. This is why we are making significant investments. We've been developing point-of-sale for quite some time, and it is now available in 11 countries, equipped with what we believe is the best hardware and software. We expect to continue attracting customers to Shopify for point-of-sale while they also explore our other solutions, and this trend should persist.

Our next question comes from Ygal Arounian at Wedbush.

I want to go to Harley's comments in the shifting digital ads landscape and maybe if you could just paint a little bit more picture of some of what you're seeing around IDFA, the challenges that Facebook is seeing. And then the stuff you pointed out with Deloitte and Accenture and larger advertisers sounds like something that could potentially be powerful and promising. If you could expand on that a little bit.

Thank you for your question. I'll address the second part first since it's shorter. We've been expanding into larger markets for some time. Shopify Plus was introduced about seven or eight years ago, and now we're noticing that larger brands like Audi and World Vision are interested in using Shopify. These brands often prefer to engage with us in a different way than our typical self-service model with agency partners. Collaborating with firms like Deloitte and Accenture, with whom we've been formalizing agreements, simplifies the onboarding process for these large brands. This partnership also helps us build strong trust with Deloitte and Accenture, enabling them to promote Shopify more effectively, which we appreciate. Their clients expressing interest in Shopify is a significant endorsement. Regarding the IDFA, as we've mentioned before, we haven't observed any noticeable impact so far. However, we acknowledge that these changes have introduced some challenges for merchants and affected their advertising returns, particularly hurting small and medium-sized businesses. That's why we continue to connect with and transact with buyers across various channels, such as social media, search, email, and our shop, which helps mitigate the risks posed by these advertising changes. In terms of social commerce, we're excited to see significant growth, with orders placed through those services more than quadrupling compared to last year. An increasing number of merchants are utilizing platforms like Snap, Spotify, TikTok, Facebook, Instagram, and Google via Shopify to access buyers directly. The fourfold increase year-over-year reflects real momentum in the social commerce space, which is encouraging.

Our next question, and it looks like it's going to be the last question we have time for, comes from Darren Aftahi at ROTH Capital Partners.

Can you just kind of speak to relative growth of non-English-speaking Plus merchants versus those that are English-speaking?

Yes, regarding Shopify Plus, I mentioned this in my prepared remarks, but I'll reiterate. It was an exceptionally strong quarter for Shopify Plus. We achieved our highest number of deals closed in a single month, which is 20% more than any other month in March. We also saw an increase in our share of Plus merchants outside of North America, and I anticipate that trend will continue. Additionally, we are experiencing both significant upgrades and new sign-ups to Shopify. Some notable brands include Havaianas in Mexico, which is one of the largest footwear brands globally, as well as companies like Fiora and TRX. We believe Shopify Plus is the ideal solution for growing brands that seek modern commerce and retail. Therefore, we will keep investing in this area and are adding more features and functionalities like Shopify Flow. I think Shopify Plus is gaining substantial traction, not only in North America but also globally.

Great. Thanks, Harley. Well, we are out of time. You know where to find us if you have any follow-up questions. Thank you, everyone, for your time today. This concludes this morning's call and webinar. Everyone can now disconnect.