Shopify Inc. Q1 FY2023 Earnings Call

Good morning, and thank you for joining Shopify's First Quarter 2023 Conference Call. Harley Finkelstein, Shopify's President; and Jeff Hoffmeister, our CFO, are with us today. After their prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are based on assumptions, and therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements, except as required by law. You can read about these assumptions, risks and uncertainties in our press release this morning as well as in our filings with the U.S. and Canadian regulators. We'll also speak to adjusted financial measures, which are non-GAAP and not a substitute for GAAP financial measures. Reconciliations between the two are in the tables at the end of our press release. And finally, we report in U.S. dollars, so all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I will turn the call over to Harley.

Thanks, Carrie, and good morning, everyone. Before we jump into our Q1 performance, let me first touch on the announcements that we shared earlier this morning. We are changing the shape of Shopify significantly today. The decade we're in shows the speed of change accelerating beyond what anyone has ever experienced. The pace of change can never outpace our ability to adapt. So today, we announced that we are reducing our headcount and leaning into our partner model ecosystem, selling the majority of our logistics business to Flexport, who will become the preferred logistics partner for Shopify. For our team, this is an incredibly hard week. Shopify is a company that deeply values the talented builders that make it possible for Shopify to simplify operations that reduce friction and enable merchant success. We would not be the company we are today without the work and the passion that our team puts in every day to pursue our mission. We also realized that in order to adapt and stay at the forefront of commerce, Shopify must operate with even greater speed and efficiency. So we are making changes and refocusing the priorities that we believe will get Shopify to the size and the shape necessary to unlock the next era of growth and innovation, but that does not make this earnings call any easier. I will be doing this call and then quickly turning back to internal matters. And Tobi will not be joining us on the call today as he insisted on focusing his time and attention on our team. On logistics, building logistics infrastructure is a side effort that all e-commerce entrepreneurs are eventually pulled into. Shopify decided to take this on, on behalf of every merchant because we're significantly larger and we can leverage our scale to build this on their behalf. Flexport has been a key partner throughout this journey. And given our long history of building direct integrations into powerful platforms, we believe that Flexport will be the best partner to carry this vision forward. And for our merchants, making it easier for them to access fast, reliable fulfillment from port to porch is a shared vision that Flexport will now take the lead on as our preferred logistics partner, led by world-class operators, CEO, Dave Clark and Founder Ryan Petersen, now with the leadership of Deliverr founder, Harish Abbott, this planned sale will enable Flexport to leverage their DNA in logistics and allow Shopify to focus on what we do best, designing and scaling a breadth of solutions and essential infrastructure that our merchants need to compete in an increasing digital world. We know we have more work to do to achieve our goal of building a sustainable 100-year company. Our actions today should be evidence of our commitment to our mission, our merchants, and our team to not just keep up but to lead and to shape the future of commerce. With that said, I will now turn to our product and merchant developments for the quarter before Jeff discusses the financial results in more detail. This year has started off incredibly strong for Shopify and our merchants. In Q1, we continued to expand our merchant base with strong growth across all geographies and merchant sizes. We realized the incredible amount of trust our merchants have in Shopify, which is why we move quickly, so we can show up for our merchants consistently quarter after quarter, giving them the unified commerce solutions they need to run their business and focus on what matters most, their product and their customers. Our strong Q1 performance is evidence of our ability to continuously adapt and anticipate their future needs at every turn. This is why merchants choose us. Let me start by discussing the progress and key accomplishments that we have made in our three core focus areas, which are centered around how we help merchants. First, expand from first sale to full scale; next, go global; and finally, build consumer relationships. Starting with how we think about expanding from first sale to full scale. On our last call, we talked about the launch of our enterprise retail solution, Commerce Components by Shopify or CCS. CCS is a modern composable stack where retailers can choose the Shopify components they want, integrate them with their existing systems, and create incredible customer experiences using the same software and solutions that enabled Shopify to power over 10% of U.S. e-commerce. Up until the release of CCS, there has been a scarcity of modern commerce solutions for enterprise retailers that can give brands the choice, flexibility, and performance from a single enterprise offering. By making the best of Shopify, such as our world-class checkout and storefront available on an individual basis, CCS is kicking down the door to conversations with retailers that previously weren't aware of the power and versatility of Shopify. There is a perception shift happening in the marketplace as enterprises begin to realize that they are now able to combine Shopify's cutting-edge commerce solutions with their existing infrastructure, all while optimizing their operating expenses. And we are seeing success with large recently signed enterprise brands like food delivery company, Daily Harvest; the iconic Canadian coffee house chain, Tim Hortons; U.K. fashion designer, Ted Baker; Japanese retailer, Yogibo, our largest outbound deal ever in Japan, a multi-brand deal with global retail brands in Australia; and American retail giant, Zulily, which is owned by QVC that actually came to Shopify from a referral from another very large enterprise merchant we have. All of these incredible global brands are trusting Shopify to help them grow, scale, and keep their business secure. A key part of our go-to-market strategy for enterprises will come from our system integrator partnerships. Early in Q1, we signed an agreement with IBM Consulting and entered into an agreement with Cognizant, which is over 350,000 employees generating over $19 billion in annual revenue in 2022. Of note, Cognizant did all of the Shopify-related implementation for a premier consumer products customer. So we are thrilled to have them as a partner for future opportunities. We believe these partnerships will further our efforts to not only grow our merchant base but also expand our offering with existing merchants. To truly enable first sale to full scale requires us to have infrastructure and capabilities to handle massive traffic volumes at any moment in time. For Shopify, we've set a new record in Q1. We hosted the highest throughput flash sale in our company's history with Supreme's February drop, which drove orders per minute that were equivalent to our Black Friday/Cyber Monday levels, a true testament to the scale, agility, and resilience of our platform. It also highlights how the investments we have been making over the past couple of years are strengthening our commerce operating platform to power any brand on the planet. Moving on to going global. One way we are driving greater penetration internationally is by making it easy for a merchant to sell globally as they do locally. During the quarter, approximately 15% of total GMV was cross-border as our primary products that were rolled out last year, Markets and Markets Pro, continue to gain traction. Markets makes it simple to localize the buyer experience for each region a merchant sells to by enabling local currencies, which is a key determinant for consumers, offering local payment options and collecting duties and taxes at checkout to create total cost clarity. All of this can be customized in one place in the Shopify Admin with ease. When we layer on the functionality of the translate and adapt app for our merchants who use markets, our data showed meaningful improvements to conversion rates. Shopify Markets Pro, a fully integrated merchant of record solution, is built on top of Markets. Markets Pro is a great option for merchants looking to scale to new markets quickly without having to navigate international tax compliance or fraud while tapping into best-in-class international shipping options with duties prepaid. Our team has continued to make improvements to Markets Pro and is on track to fully roll out the product in the U.S. this summer and then to the U.K. later this year. We've seen considerable interest in Markets Pro and believe there's a lot of opportunity for us with this product to further unlock our merchants' ability to reach more consumers around the world. Finally, our third core area, building consumer relationships. One of Shopify's strengths is our comprehensive suite of innovative, unified commerce solutions that enable brands to find, engage, and build relationships with consumers across every surface. As commerce is increasingly showing up everywhere, advancing our full suite of commerce solutions to stay at the forefront of our merchants' needs remains paramount for their success. Point-of-Sale, the Shop App, and Audiences are three areas where we continued to drive meaningful product enhancements in the quarter. Our Point-of-Sale solution continued to gain traction in Q1 with offline GMV increasing 31% year-over-year. We continue to expand both the functionality of our Point-of-Sale offering and its ability to handle the needs of retailers with a large number of physical locations. During the first quarter, top-tier apparel brands like Kit and Ace, which was started by the founder of Lululemon, launched our Point-of-Sale Pro solution for all of their stores. And another consumer favorite Gap brand, Banana Republic Home, is planning an omnichannel launch later this year with our Point-of-Sale Pro offering across their initial retail locations. These are just two examples of the growing number of household name brands who are coming to Shopify for not only our online offering but also our brick-and-mortar capabilities. Even as more and more large brands choose Shopify for our unified commerce capabilities, we remain the best commerce offering for SMBs. After Intuit made their decision to sunset their QuickBooks desktop Point-of-Sale product, they chose Shopify to be the preferred partner to migrate new retailers in need of a new Point-of-Sale solution. This partnership recognizes the depth and quality of Shopify's Point-of-Sale offering and opens up the funnel for more SMBs and mid-market retailers to join Shopify and leverage our suite of retail solutions. We're already seeing traction from this partnership with thousands of new merchants having chosen to adopt Shopify Point-of-Sale. Our Shop App is another incredible opportunity for our merchants. Back in February, as part of our winter edition release, we announced some of the biggest product updates to Shop since launching in 2020. We're in the post-cookie mobile era of commerce, where brands are increasingly motivated to build their own mobile experiences to retain ownership of their customer relationships. But for most businesses, the technical and financial resources required to build and maintain their own mobile app just does not make sense. Today, Shop gives merchants an out-of-the-box mobile storefront, making it easy for them to leverage Shop's existing buyer audience to drive new and repeat customers to their brand. And of course, when you layer on Shop Pay, which continues to be the best converting checkout on the Internet, Shop is becoming one of merchants' most important channels. Another example of how Shopify is staying at the cutting edge of commerce is the AI shopping assistant that Shop launched in March. Shoppers tell the assistant what they are looking for, and it serves up relevant product recommendations from Shopify merchants. It's like having your own shopping concierge powered by ChatGPT, one of the most advanced technologies that we have seen in decades. We believe that we are in the early innings of unlocking the true power of AI, not only for our merchants and their customers, but also for Shopify. Moving to Audiences. Shopify Audiences continues to be a dynamic feature for our Plus merchants, helping drive top performance in paid advertising across Meta, Google, and Pinterest. The machine algorithm that powers Audiences is more effective than ever before. In the year since the product first launched, we have shipped dozens of algorithm improvements as frequently as every two weeks. This constant experimentation has resulted in the average return ad spend merchants see on the platform to nearly double what it was originally. We don't expect this trend to slow down. This performance is reflected in the product's adoption. More merchants are using Shopify Audiences than ever before. In fact, our data suggests that Audiences is now a key reason merchants choose to upgrade to Plus, averaging just over a week from upgrade to install the product. As the number of merchants who use the product grows, the algorithm gets smarter, the flywheel moves a little faster, and performance improves further, creating a positive feedback loop. Powered by our scale and the merchant trust we've earned over many years, Audiences is a unique advantage only Shopify can offer. It's an opportunity for independent merchants to join forces and help each other succeed. We could not be more excited by the trajectory of this young product. Stepping beyond our three core themes, I want to talk a little more about our merchants. Earlier, I shared some of the large enterprise wins. But that, of course, is just one portion of the success we are seeing. In this past quarter, Shopify welcomed numerous notable brands representing a broad spectrum of verticals within apparel and accessories, fashion-forward clothing and denim manufacturer, 7 For All Mankind, footwear brand KEEN, and backpack and accessory brand Herschel Supply all launched with Shopify in Q1. On the international front, Japanese watch brand, Seiko, winemaker Pernod Ricard, and watchmaker, Daniel Wellington, launched sites on Shopify this quarter. And earlier this week, Lululemon Studio, formerly known as Mirror, launched on Shopify. Celebrity brands continue to default to Shopify to launch their businesses as well. In Q1, Mary-Kate and Ashley Olsen's luxury fashion designer brand, The Row, John Legend's Loved01, and Kendall Jenner's award-winning 818 Tequila brand all launched on Shopify. In closing, Shopify continues to be the engine powering millions of merchants around the world. Our platform continues to expand, giving our merchants more of the solutions they need to run their businesses online, offline, and everywhere in between. We have worked hard to earn our merchants' trust as Shopify continues to solve the industry's biggest problems to make commerce better for everyone. And with that, let me turn the call over to Jeff.

Thanks, Harley. The investments we have made into building a powerful commerce operating system for merchants of all sizes have delivered strength across all elements of our business. Let's dive into our Q1 results, starting with GMV. GMV in Q1 was $50 billion, up 15% year-over-year or 18% on a constant currency basis as merchants delivered another strong quarter of growth. We achieved this GMV strength primarily through more resilient consumer spend, with strength in Europe being particularly notable, existing merchant same-store sales growth and growth in our merchant base. Revenue for the first quarter was $1.5 billion, up 25% year-over-year or 27% in constant currency, driven by the GMV strength just discussed, growth in our Merchant Solutions business led by payments penetration and growth in Subscription Solutions. Our Q1 revenue came in better than our outlook, largely driven by the outperformance of GMV, strong growth across our Merchant Solutions product suite, and strength in Europe from both consumer spend and more favorable exchange rates than anticipated. Our total attach rate, which is defined as revenue divided by GMV, is a key performance indicator of our business and our ability to generate greater value for our merchants. In Q1, our attach rate was 3.04%, up from 2.79% in Q1 2022. Merchants continue to buy more and more solutions from us, which speaks to both the attraction of new products and the trust that merchants put in us. This represents the highest attach rate in our history. Moving to our revenue streams, starting with Merchant Solutions. Q1 Merchant Solutions revenue was $1.1 billion, increasing 31% year-over-year or 33% on a constant currency basis, driven by the increase in GMV, continued penetration of Shopify Payments, and the contribution from Deliverr. $27.5 billion of GMV was processed by Shopify Payments in the first quarter, 25% higher than in the first quarter of 2022. The penetration rate of Shopify Payments as a percentage of GMV was 56% for the quarter versus 51% in Q1 of the prior year. Several factors drove the quarter's higher gross payments volume, including the strong performance by those merchants utilizing Shopify Payments, an increasing percentage of which are Shopify Plus; new merchant adoption across the globe; greater penetration of Shop Pay; and continued growth of our integrated Point-of-Sale solution in physical retail stores. Subscription Solutions revenue was $382 million, up 11% over Q1 of 2022, primarily due to growth in our Plus subscriptions. Moving to monthly recurring revenue, or MRR. Q1 MRR was $116 million, up 10% year-over-year. We saw strong growth across each of Plus, Standard, and Point-of-Sale, with Plus being the largest contributor of growth in absolute dollars. Our Plus merchants, as a percentage of total MRR, increased to 34% from 30% in Q1 of 2022. Additionally, we are beginning to see the impact from the initial cohorts that were a part of our free and promotional trials that began to roll out broadly in October 2022. We saw these cohorts convert to full-priced Standard subscriptions starting in Q1, which contributed to the acceleration in MRR growth year-over-year and quarter-over-quarter. The merchants comprising the initial cohorts from these trial experiments are demonstrating very positive results. The longer trial period has provided merchants a better onboarding experience, giving them additional time to experiment and familiarize themselves with our rich feature set and have more time to find the right product and market niche for their products. As a result of these trials, we are seeing higher weekly active sales and more merchants achieving their first sale on our platform, contributing to our GMV outperformance compared to the broader market. Separately, as previously announced in January, we introduced pricing changes to our standard subscription plans. The pricing changes had minimal impact on our Q1 financials as the full pricing changes did not take effect until about a week ago, but we anticipate that they will benefit our MRR growth more meaningfully in the second half of the year. Gross profit was $717 million for the quarter, and gross margin was 47.5% in our first quarter. Compared to Q1 2022 gross margins of 53%, our gross margin this quarter was primarily affected by the dilutive impact of Deliverr. Additionally, Q1 gross margin was also impacted by Merchant Solutions being a larger percentage of our business, driven by growth in Shopify Payments. And within our Shopify Payments business, we continued to see gross margin pressure due to the greater mix of Plus and a higher mix of credit cards versus debit cards compared to Q1 last year. Operating expenses were $910 million for the quarter. This represents a sequential increase of 1% over Q4 of 2022 operating expenses of approximately $903 million, when excluding the one-time charges from Q4 of $84 million. Compared to Q1 of 2022, the primary drivers of this increase in operating expenses are related to higher compensation expenses, including Deliverr. As we have demonstrated over the past three quarters, our operating expense dollars, excluding one-time items, continue to stabilize and grow at a much slower rate. This directly reflects our focus throughout the entire organization to drive increased productivity and efficiency across our teams. We continue to rigorously evaluate all of our costs, including greater scrutiny on our cloud infrastructure spend, return on our marketing programs and their associated payback periods, and in general, an increased internal utilization of automation and technology to replace manually driven processes. Let me share a specific example of what I mean. In Q1, within sales and marketing, expenses declined both year-over-year and sequentially as we have been working to diversify our marketing mix over the past year. Prioritizing areas such as direct mail and audio, we've also optimized payback from established channels like digital search and display. As a result, in recent months, we have seen the payback period for our paid advertising improve by over 50%. There's a cross-functional team in place that's assessing the amount of value we can extract from different marketing channels as we continue to improve our paid advertising payback periods and realize even more value from each dollar we spend in this area. Stock-based compensation for Q1 was $135 million compared to $118 million for the same period a year ago, primarily driven by the higher headcount from Deliverr. Adjusted operating loss for the quarter was $31 million. The decline compared to Q1 of 2022 was due to lower gross margins year-over-year and higher operating expenses, primarily driven from increased compensation expenses. Our Q1 adjusted operating loss came in better-than-expected due to stronger top line growth and lower-than-expected operating expenses. For the quarter, free cash flow was $86 million, representing 6% of revenue. You will hear us talk more frequently going forward about free cash flow, which we calculate as cash flow from operations minus CapEx. Turning quickly to our balance sheet. Our cash and marketable securities balance was $4.9 billion as of March 31. Before I get into our outlook, some additional information regarding the sale of our logistics businesses and Shopify reducing our headcount. As Harley mentioned, earlier today, we announced that we reached an agreement to sell our logistics business, including most of our SFN assets and Deliverr to our trusted partner, Flexport. In connection with the transaction, Shopify and Flexport intend to deepen their partnership with Flexport becoming our official logistics partner moving forward and providing Shopify merchants with fast and reliable logistics solutions. Shopify will continue to offer the merchant-facing SFN app, which provides merchants an integrated logistics experience through Shopify, powered by Flexport. Under the terms of the agreement, Shopify will receive stock representing a 13% equity interest in Flexport. When combined with our existing ownership, we will own a high-teens percentage in Flexport. In connection with the closing of the sale, Shopify is entitled to name a director to Flexport's Board. Today, we also announced that we are making changes to our organization, reducing our overall workforce by approximately 20%, excluding employees in our logistics businesses, some of which will move to Flexport and some of which will be part of the reduction in force. While this decision to reduce the size of our team was incredibly difficult, we are moving quickly towards the ideal shape and size that will enable us to build on our momentum and power the future of commerce. We believe that our business remains incredibly strong and our opportunities for sustainable long-term growth are abundant. Partnering with Flexport will allow us to focus on the areas where we as a team have the highest impact and had the most value for our merchants, helping them on some of their most critical challenges, including running and managing the business, selling wherever consumers are, discovering new customers, and thriving at any stage in any market. Keeping all this in mind, let's turn to our outlook. We anticipate that the sale of our logistics businesses will happen towards the end of the second quarter, subject to certain conditions and regulatory approvals as applicable. And accordingly, the majority of the financial impact of these transactions will not materialize until the second half of the year. Here are our expectations for the second quarter. First, on revenue. We expect our second quarter revenues to grow at a rate similar to our Q1 year-over-year growth rate. We anticipate that the pricing changes that just went into effect will be counterbalanced by the pending sale of our logistics businesses. Q2 gross margin percentage is expected to be similar to our Q1 gross margin percentage with the expected benefit from the pricing changes to be offset by the pending sale of our logistics business and the continued growth of Shopify Payments, which is a lower-margin business. We believe that our Q2 operating expense dollars, excluding one-time items related to the pending sale of logistics and severance charges, will decrease a mid-single-digit percentage versus our Q1 operating expense dollars. Stock-based compensation is expected to be approximately $110 million. This excludes the one-time charges related to the sale of our logistics businesses. Finally, we expect free cash flow, which, as mentioned, we define as operating cash flow less CapEx, to be positive for each quarter of 2023. We, as a management team, are committed to profitability, and you will hear us talking more frequently regarding free cash flow. With the pending sale of our logistics business, obviously, our capital expenditures are going to be a lot lower going forward. We currently expect to spend approximately $100 million for the full year of 2023, which includes two quarters of CapEx from logistics. Finally, specifically related to the announcements today, our current expectation is at Q2, we will incur $140 million to $150 million in severance from the workforce reduction and an impairment of $1 billion to $1.5 billion in the aggregate related to the various components of our logistics businesses. In closing, 2023 is off to a very strong start. Our financial outperformance reflects our merchants' trust in Shopify's mission-critical commerce operating system to not only run their business but to grow it. Brands across the globe continue to turn to us for the incredibly rich feature set that we offer, which we believe continues to represent the most exceptional value in the marketplace today. Our teams are adhering to rigorous operational discipline and cost control while achieving greater productivity and efficiencies throughout the company. We are incredibly proud of what our team has accomplished so far this year and will continue to achieve throughout 2023. I'll now turn the call back over to Carrie for any questions.

So I'm curious on the timing of the decision to sell the logistics business. Why now? And maybe how should we be thinking about any changes that you may have in kind of the build by partner decision about future growth initiatives?

I'll take the question. I believe Shopify stands out from many technology companies in how well we manage partnerships. If we reflect back about 8 or 9 years, when we first entered the payments sector, we formed a strong partnership with Stripe, which enabled us to launch a remarkable product quickly. That collaboration is ongoing. We have also worked with companies like Affirm, particularly when we recognized their superior approach to buy now, pay later solutions for global cross-border commerce. Our primary mission, as emphasized today and in Tobi's letter, is to be the best at building commerce software, and that is where our focus lies. When we started developing the logistics business around 4 or 5 years ago, there were no other companies supporting small and medium-sized businesses with logistics and shipping. Even though we anticipated a challenging incubation phase, we believed it was crucial for us to take on this responsibility for our merchants. As we advanced our collaboration with Flexport, led by Dave and Ryan, it became evident that their primary goal is to establish logistics and shipping infrastructure for small and medium-sized businesses. This allows us to accelerate our product offerings while they concentrate on their strengths. Shopify has demonstrated that when we can create something better than anyone else, we will do it, and we have successfully done this across numerous areas. However, when we find a partner who can help us progress more quickly and efficiently, we will pursue that partnership, as exemplified here.

Our next question will come from Josh Beck at KeyBanc.

Are you able to hear me?

Yes, we can hear you.

Yes. Sorry about that. I wanted to ask just a little bit about kind of the second half of the year and how we should obviously think about the cadence of OpEx. You obviously gave us some very helpful color around how to contemplate Q2. Should we be really thinking about that as a partial quarter reflecting the new kind of workforce footprint so as we go into Q3 and Q4, it could be a little bit different. And any other color you can provide there would be great.

Yes, this is Jeff. I'll begin with that. You’re correct regarding the timing; we mentioned that the transaction with Flexport is expected to close in Q2. There are regulatory processes we need to navigate, so we can’t pinpoint the exact closure date. Our Q2 estimates, as provided in guidance, reflect the transaction closing towards the latter part of the quarter. We're already a month into this quarter as we announce our employee headcount, so Q2 won’t be considered a "normalized quarter." When we report our quarterly results next time, we’ll be able to offer more specific guidance. However, your impression that this quarter will show a partial impact is spot on.

Our next question will come from Paul Treiber at Barclays.

I have a question about the transaction with Flexport. The letter mentioned that Flexport would be the preferred partner for logistics. Does that preferred partner mean exclusive partner? Or, similar to Payments, will you support other third-party logistics providers on Shopify?

Paul, yes, that's right. Look, we have millions of stores in the platform. We have lots of small businesses. We also have very, very large enterprises as well. Part of our role is being the centralized operating system for these millions of businesses and brands, is to enable them to bring the best products, the best infrastructure that they need to run their business. So Flexport is going to be the preferred partner. We think what they're doing is exceptional. And as I mentioned earlier, any business that grows at some point, there's sort of this massive floodlight eventually that shines on them on one of the most complex issues, which is that of logistics, and they're going to do a great job there. They've already proven to us they know what to do there. But if there is a particular logistics partner or shipping company that another merchant wants to bring along, we can integrate with that, and we have been doing that for quite some time with our shipping APIs.

Our next question will come from Deepak Mathivanan at Wolfe Research.

So Jeff, after these cost-saving initiatives that you're currently implementing, how should we think about the fixed cost growth beyond into second half and 2024? Do you feel like headcount and other fixed costs are right now at the right place with this restructuring for sort of medium-term opportunities companies see? And maybe is there a margin target or perhaps maybe relative to what you did before that we can expect going forward?

Yes. As I mentioned earlier, our operating expense levels are still subject to change. Regarding gross margin, considering my previous comments about the timing of the Flexport transaction closing, we will experience a partial impact from Deliverr in Q2, which has historically hindered margins. However, we have pricing increases that will take effect in Q2 and will start to influence our P&L soon. This will help counterbalance some of the impacts. On the other hand, as Shopify Payments becomes a larger portion of our revenue, that will negatively affect gross margins. For Q2, we anticipate gross margins to align with Q1, which has improved compared to Q4, where we were at 46%. There are various factors influencing gross margins. At this stage, we are not prepared to provide guidance for the full year, but we expect trends to follow what we've seen historically in the business.

Our next question will come from Colin Sebastian at Baird.

I guess, Harley, after reading Tobi's letter, I mean, it sounds like part of the decision here was based on what you're seeing around generative AI and developments there. And obviously, you've made some iterations to the platform already. But curious to learn more about the vision of how AI or generative AI more specifically integrates. And I guess, Jeff, maybe what the investment implications of that will be from a headcount as well as infrastructure perspective.

I believe we are very fortunate to be one of the companies with the best opportunities to leverage AI for our customers and merchants. Our focus with AI is on integrating it into tools that enable us to create and deliver better products to our merchants. You can see this in several areas of Shopify already. For instance, writing product descriptions has become significantly easier with the incorporation of AI into that process. As a result, merchants can now dedicate less time to product descriptions and focus more on creating beautiful products and connecting with their customers. Recently, we introduced Shop at AI, which I believe is the most advanced shopping concierge available. With Shop at AI, consumers can browse through hundreds of millions of products and specify themes, such as wanting to have a barbecue, and receive great product suggestions, allowing them to make purchases directly through the shopping concierge. We are actively integrating AI into different aspects of Shopify. Most importantly, our vision for AI is to enhance the experience and the products we provide to our merchants, making their work much easier and allowing them to concentrate on what truly matters to them.

Yes. Regarding your question about the size of the organization and the infrastructure spending we need, our current moves reflect our future vision. As we approach Q2 results, which will involve some changes that may impact our finances, we will be able to provide more clarity in the next quarter.

Our next question will come from Tyler Radke at Citigroup.

So Harley, you talked about Shopify doing a really good job on partnerships, especially relative to other tech companies out there. I'm curious just with the exit of the logistics business here. How is that changing your view on potentially partnering with someone like Amazon with the Buy with Prime functionality? Just if you could kind of comment on your overall philosophy now that you've made this decision.

Yes. Regarding the Buy with Prime, we will pursue a partnership with Amazon if it benefits our merchants. Everything related to Buy with Prime is progressing positively, so keep an eye on that. More broadly, Shopify has established significant partnerships like those with Stripe, Flexport, and Affirm globally. A crucial aspect of Shopify's value proposition for millions of merchants is the extensive app ecosystem. The thousands of apps available allow every merchant, regardless of their needs, to achieve optimal product market fit. It's not only about larger partnerships; we've been building our App Store and Theme Store for over a decade. Additionally, as we engage with larger brands like Mattel and Black & Decker, they will expect us to integrate with their existing systems. Shopify excels at ensuring that our clients can access exactly what they need, whether through our core product or by partnering with others. We take pride in this capability. On the merchant referral side, we have a vast network of agencies, third-party providers, and systems integrators continuously directing new business to Shopify. Being recognized as a partnership-driven company, where partners can share in the business success, is vital. This is why we boast one of the most impressive developer ecosystems globally.

Our next question will come from Trevor Young at Barclays.

Jeff, just on the 2Q rev guide of around 25%, pricing largely offsetting the logistics but also assuming that the transaction happens very late in the quarter. So just to be explicit, you're not assuming much lift in 2Q from pricing. And then relatedly, just any initial feedback following the price increase. Are more merchants flipping to annual plans to keep pricing steady versus staying month-to-month and just taking the price increase?

Yes. Trevor, to your point, your first question, we are assuming that the transaction closes towards the latter half of the year. And the price impact, just really about a week ago, went into effect. So it's too early at this stage to fully gauge that. But again, from a top line revenue growth, this would essentially be in line, obviously, for the guidance with what we did last quarter. So we feel very good about our business across all fronts as it relates to merchant additions, as it relates to success in all the different geographies. The business is doing really well. But as we think, again, there will be some lost revenue from logistics, assuming that it closes in the quarter. And so as we counterbalance all those drivers, that's how we think about the Q2 revenue guide. So that's a key piece there. And then as it relates to the plan, the initial feedback on the plans, at this point, again, it's too early to tell. I would say, overall, we've been very pleased with the results. But again, when we have a full quarter of results in Q2, I think we'll be able to give you some better sense, but...

Our next question comes from Darren Aftahi at ROTH Capital.

Your comments about 15% cross-border GMV, could you just kind of speak to kind of Markets and Markets Pro and kind of how fast that GMV cross-border metric has been growing, kind of where you see that going in the next 12 months?

I’ll take that call. Shopify Markets is gaining significant traction. In the first quarter alone, around 100,000 merchants are using either the Markets or Markets Pro features to make cross-border sales. We introduced Markets Pro into early access in September, and more merchants are adopting it now. U.S. merchants, on average, are selling to 14 countries. If we want to be the central hub for their businesses, we need to enable them to sell across all regions. There are still some areas where they have not sold yet, and simplifying that process is crucial. Markets Pro introduces a merchant of record solution that addresses tax and duty compliance while ensuring adherence to local laws and providing chargeback protection. Merchants can also leverage global resources if they choose. Last year, we recorded approximately $28 billion in cross-border sales, and in Q1 of this year, 15% of total GMV was from cross-border sales. We believe that enhancing our merchants' ability to sell internationally with increased speed and efficiency is vital. Additionally, this facilitates the onboarding of new merchants from different regions. While most of our merchants are still from core areas, making it easier for them to sell globally will attract more merchants to Shopify, benefiting both Markets and Markets Pro significantly.

Our next question comes from Matthew Pfau at William Blair.

I wanted to ask one on the Audiences product. It seems like it's already helping you out in terms of driving more sales on the platform as well as driving some upgrades. But any other thoughts on how do you additionally monetize this product longer term?

We continue to enhance Audiences by increasing the number of merchants and improving the algorithms. It's been a year since its launch, and we're observing a significant increase in return on ad spend, which is driving upgrades as mentioned. Shortly after these upgrades, we notice merchants engaging more with Audiences. We're also forming new partnerships with marketing platforms; in addition to Facebook and Instagram, we welcomed Google in Q4 and just added Pinterest in Q1. We're excited about this progress. Our aim is to ensure that our merchants achieve the highest possible return on ad spend, a requirement they have that only Shopify can fulfill, especially since we account for 10% of U.S. e-commerce. Currently, Audiences is monetized indirectly through Shopify Payments, and we plan to explore direct monetization opportunities once we enhance our machine learning algorithms and establish better product-market fit. You can expect more features and functionalities related to Audiences in the upcoming quarters. As I mentioned earlier, it's an early-stage product that is gaining significant traction and is well-received by users. This area of our business is very promising, and direct monetization will evolve in the future.

Our next question comes from Bhavin Shah at Deutsche Bank.

Just on the 23% reduction in workforce, can you give us a sense of how much of that is related to logistics? Maybe those outside of logistics, what areas are most impacted?

Yes. We have not talked about specifically how many of the employees are related to logistics. I would say, as it relates to the areas which have been impacted, this is something which unfortunately has impacted our colleagues across all geographies and all levels within the organization. Tobi did make some comments in his letter regarding how we think about crafting ourselves for our future, and so I would point you back to that. But this is, unfortunately, something that hits us at all perspectives.

Let me add to that. This is a very challenging day for any leader or company to endure. These are not the kinds of things one wishes to experience. However, often the easy choice is not the right one. In this instance, the right choice and the tough choice are the same. What we are building is a more purpose-fit Shopify, focused on our primary mission. We will minimize scope creep, reduce the number of meetings, and prioritize delivering excellent features to our merchants. We aim to achieve a healthier balance among managers, creators, and builders. This will prepare us to seize the opportunities we foresee in the future. The pace of change is unlike anything any of us have experienced. This new direction for Shopify will facilitate the achievement of our very ambitious mission. While it doesn't make today any easier, it is why we are making these changes.

Our next question comes from Andrew Boone at JMP Securities.

I wanted to go to enterprise. Can you talk a little bit about greater components adoption and what you're seeing near term in terms of merchants reacting to it? Is it driving more merchant adoption in terms of enterprise? Or is it more the plus cycle upgrade where merchants are taking all of your products?

Thanks, Andrew. We announced our commerce components in January at the National Retail Federation conference. The goal was to create a modern composable commerce stack. We've had great success with Shopify Plus, as you've heard, with many important and iconic brands joining us quarter after quarter. However, there are other retailers looking for a more modular solution. They want our storefront and checkout but may prefer their own inventory or ERP systems while utilizing us for omnichannel support, data, compliance, and checkout. We aim to simplify this process, making it unwise for a modern, thoughtful enterprise brand to avoid using Shopify if they want to thrive in the coming decades. While Shopify Plus offers a robust enterprise solution, some retailers prefer to combine specific Shopify features with their in-house systems. We're reaching a point where the reasons to not use Shopify for large modern enterprises are dwindling, and the results speak for themselves. More brands that previously shied away from Shopify are now eager to engage with us, which is shifting the enterprise perception of our platform. Our pipeline is expanding as we add more components, with over 30 modular options available for merchants to integrate with their third-party services. This approach enables us to capture a larger share of the enterprise market. Remember, we're providing the same software and infrastructure that has powered 10% of all U.S. e-commerce for nearly 20 years, making it a strong offering that appeals to different types of enterprise customers.

And our last question will come from Ken Wong at Oppenheimer.

I would like to inquire about how we can refine our models. As we consider the second half of the year, could you provide insights on the expected contribution of SFN to our growth, particularly in light of potential adjustments we may need to make after it closes in Q2?

I don't have specific guidance for you beyond what we mentioned regarding our Q2 top line. In the past, we've provided a general overview of the size of the business. Once we determine when this closes in the quarter, we will be able to give you a clearer outlook for the second half of the year. Specifically regarding Deliverr, that will be one aspect, but it's also important to consider the successes we're seeing with other products. Harley mentioned Markets and Markets Pro earlier, and we noted our progress with payments and our geographic activities, especially in Europe, which has shown significant strength. While it's true that Deliverr will affect our revenue, we remain optimistic about the strong momentum in other areas of our business. We've observed robust growth in merchant additions across the board, including Plus and Standard, and Harley just discussed the strength in CCS and enterprise segments. Overall, we're seeing strength across all segments and geographies, and even with the anticipated revenue loss from Deliverr, we are confident about our current business performance.

Just before we finish, I want to emphasize this point. It's a difficult day here at Shopify. We're saying goodbye to some valued team members, which is something no leader ever wishes to do. However, as I approach my 13th anniversary at Shopify, I feel this is the most optimistic and focused our company has ever been. The future holds significant opportunities for us, and despite today being challenging, the new direction of the company aligns with what we need to do to achieve our goals. I'm very confident about our future and excited for what lies ahead. If you appreciated our past efforts, I believe you will be thrilled with our future endeavors.

With that, this concludes our first quarter of 2023 conference call. Thank you for joining us. Goodbye.