Shopify Inc. Q1 FY2024 Earnings Call

Good morning, and thank you for joining Shopify's First Quarter 2024 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'll turn the call over to Harley.

Thanks, Carrie, and good morning, everyone. The start of 2024 has been very strong for Shopify with more and more merchants thriving on our platform. This is the strongest version of Shopify yet. We're helping millions of merchants around the world to both start and scale their businesses. For four straight quarters, we have demonstrated our ability to drive results at scale, growing revenue over 25% excluding logistics. And as we have proven over the last two decades, the more hard problems we solve for merchants, the more we add to our flywheel, and the better off commerce is for everyone today, tomorrow and for many years to come. We've talked a lot about this new shape of Shopify and how it's enabling us to drive greater growth and profitability at a larger scale, and it's working. The penetration of payments is on the rise. We're making significant strides in our offline and enterprise sectors. Our efforts towards international growth are yielding positive results, and our attach rate is expanding. Our operating discipline has been a key factor in the success, ensuring that we maintain efficiency, invest from our position of strength and deliver value at every turn. Shopify has always been high volume, high velocity when it comes to building and shipping products. In the span of just two years, we've rolled out more than 400 new features and updates to our platform, setting a pace that demonstrates our leadership in building for the future. In that time, we've launched what we call Editions twice a year, changing how we present and unveil Shopify's progress. These biannual moments have not only increased engagement, product adoption and visibility with our merchants and partners, but also reinforced our leadership in commerce. In fact, in our recent Q1 Edition, 62% of businesses that installed Shopify subscriptions had never previously installed a subscription app on Shopify, demonstrating the impact these key storytelling moments can have on driving adoption. We're dedicated to continually creating great software that allows brands to start and scale, finding their desired features quickly and intuitively as if each feature had been integrated from the start. From foundational elements like expansion of variant limits to 2,000 and the rollout of our web performance dashboard, which can improve search rankings and boost conversion, to new AI-enabled editing tools and within point of sale, the launch of email capture at offline checkout. We are relentlessly working to reduce friction and make it easier for merchants to run and manage their business. Our additions have become key milestones for Shopify and the innovation engine we are powering at scale, not only extending our reach to a broader audience, but also redefining how our ecosystem engages and builds with us. Touching briefly on AI. Our unique position enables us to tap into the immense potential of AI for entrepreneurship and our merchants. Currently, the most practical applications of AI are found in tools that simplify business operations and enhance productivity, all of which we've been developing deeper capabilities with our AI product suite, Shopify Magic. However, we also firmly believe that we're just scratching the surface of what's possible as we're still in the nascent stages of understanding the vast potential that AI holds for businesses and commerce. Launched over a decade ago, our most scaled product is Shopify Payments. Its GMV penetration has steadily increased, reaching 58% in 2023, with Q1 achieving 60% GMV penetration. We expect it to continue to be a key contributor to our growth moving ahead. Our seamlessly integrated payment solution continues to be a key gateway for other product offerings like capital, installments and Shop Pay, the world's highest converting accelerated checkout. In Q1, Shop Pay increased 56%, processing $14 billion in GMV, and accounting for 39% of our gross payments volume as it continues to be the preferred choice for consumers seeking a fast, secure and hassle-free checkout. Ensuring that these checkouts are fast loading, secure and compliant can be complex, which is why Shopify works to make it simple. At Shopify, we stay ahead of what's next for our merchants. We inherently build in potential updates to compliance, including the latest PCI security standards for payments so that merchants will be compliant with no additional work required. Shopify Payments and our accelerated checkout will continue to play a vital role in the expansion of our unified commerce platform. As we continue to improve our features and global integrations and expand our offline and enterprise segments, we anticipate increased growth and adoption. This will be partially driven by the new avenues and flexibility provided by our Commerce Components offering. Notably, the internationally acclaimed fashion brand, Coach, recently committed to join Shopify via Commerce Components, intending to lead Shop Pay off-platform across all of their U.S. and Canada outlet businesses in the coming months. This mix of composability, reliability and speed will further solidify the position of Shopify Payments as a crucial tool for merchants with Shop Pay continuing to become the go-to choice for quick, secure and seamless checkout at scale. Moving to our channels and growth drivers. More merchants are leveraging the value of Shopify point-of-sale, a true omnichannel solution as the number of locations using our new point-of-sale Pro increased substantially over the prior year. Key feature enhancements like draft order functionality and fully customizable printed POS receipts continue to advance our offering. As a result, more merchants, especially large, complex, multi-location merchants are coming to Shopify. We saw location growth of 52% in the quarter for merchants with 20 or more locations. Our increased investments in performance marketing for Shopify point-of-sale, as well as experimenting with other acquisition tactics are yielding positive results. For example, Frank And Oak, a Montreal-born apparel brand, launched our point-of-sale in more than a dozen of the retail locations in this past quarter as did Michigan-based food company, Cherry Republic. In Q1, we saw growth across merchants, locations and geographies, supporting our 32% offline GMV growth year-over-year as we continue to gain share. Moving to B2B. Shopify has been making significant strides with Q1 B2B and GMV growing over 130% year-over-year after doubling in 2023. B2B merchants are loving the power of self-serve purchasing by customers with a sevenfold increase in the number of orders coming in through the online store than a year ago. So why does this matter? Well, it means that there are fewer manual orders having to be entered by merchants using draft orders, which gives merchants back the value of time to focus on winning new business. B2B represents a significant growth opportunity for Shopify, allowing us to reach new verticals and cater to merchants focused on B2B transactions. We understand the specific needs of B2B businesses and are continually refining our platform to address those needs and boost efficiency and growth. For example, we've made it easier for existing customers who previously managed B2B buyers through their DTC storefront and third-party apps to move their entire wholesale business to our B2B solution, a key feature for Plus merchants. Further validation of just how competitive our B2B offering is, two days ago, Forrester's 2024 B2B commerce platform Wave Evaluation came out, and Shopify was placed in the leader category. This is our first appearance on a top two enterprise validation report for B2B and a clear signal that Shopify is increasingly becoming a leader in unified commerce for online, offline, B2B and everywhere in between. Moving to International. Q1 International GMV growth outpaced North America with continued strength in Europe, posting Q1 GMV of 38%, marking our third consecutive quarter of GMV growth above 35%. With International making up less than 30% of our revenue base last year, the opportunity remains significant for us to equip merchants with the tools to make selling globally as easy as locally. Now to do this, we are laser-focused on building products and tools that cater to the unique needs and preferences of our international merchants. This quarter, we continued to make headway on our localization efforts in international markets with tools like shipping localized brochures in Japan, Spain and Italy, helping our merchants ensure a tailored experience and expand their reach. We've also been working to get more of our products into more countries. For example, in Q1, we successfully launched our Point of Sale Go and Point of Sale terminal in Australia, further increasing the on-ramps into Shopify in this key market. Enabling merchants to sell cross-border to buyers anywhere in the world has been a key focus for us. In Q1, we saw a 70% increase in our Markets product over last year, which makes it easy for merchants to sell in local currencies. We are further simplifying international expansion with Markets Pro, our native all-in-one cross-border merchant of record offering, which became generally accessible in the U.S. in September of 2023. Brands are leveraging Markets Pro to enter global markets within days and see immediate increases in their global sales. Take Chicago-based apparel company, Suit Shop, which grew international orders by 600% since adopting Markets Pro or New York-based skincare brand, Beekman 1802, which experienced 137% international sales growth in 6 months. And with cross-border GMV up 15% in Q1, representing roughly 14% of total GMV, we will continue to enable greater cross-border transactions for our merchants. As we mentioned on the last call, we continue to aggressively pursue enterprise brands in 2024, and we are seeing results. Whether it was key events like NRF and Shoptalk, our engagements with the larger brands are escalating every single quarter with our Plus and enterprise GMV growth continuing to outpace overall GMV growth. Additionally, following our leadership rankings in IDC and Gartner last year, an independent study recently validated that Shopify's total cost of ownership is up to 36% better than competitors in the enterprise space. This study proves that our unified commerce platform offers exceptional value and cost savings that only Shopify can provide. And in turn, we pass on the economies of scale we capture to our merchants, saving them money. What we are hearing from our conversations with enterprise-level brands is that there are really two primary reasons that are driving their decision to move to Shopify. The first is the exceptional value of Shopify, the powerful and reliable infrastructure and the cutting-edge products that offer composability and choice, making the total cost of ownership hard to pass up. The second is Shopify's core value proposition of innovation, scale and ease of launch. Let me dive into that point about ease of launch as it's really important. While Shopify moves fast and certainly faster than the competition, making the decision to replatform is incredibly hard, and larger brands can typically take anywhere from 12 to 18 months to completely migrate over. But that is not always the case, especially when it comes to Shopify. Take Overstock.com, the well-known online discount retailer. We had them up and running in under 100 days, which, considering the size and complexity, is nothing short of amazing. That's what we do at Shopify. On the flip side, we recently signed Barkbox, a leading subscription service for dog products with over 2 million subscribers. They recently made a decision to migrate all of their business to Shopify. Their debut on our platform is anticipated for 2025 and will be the largest subscription merchant to join Shopify to date. While timelines to market vary, the main point is that we are winning businesses and migrations with larger, more complex brands. The launch of these brands and the work we are doing today is building a sustainable foundation that will continue to deliver growth for years to come. Beyond the two brands I just mentioned, we are seeing more high-volume merchants sign up and launch with Shopify across the board, adding more companies across verticals, industries and geographies to further energize our flywheel. Brands like consumer packaged good companies Harry's and PrettyLitter; fashion apparel brands like Laura Canada and Intersport; fitness and wellness companies, Juice Plus, Balance of Nature and SoulCycle; home goods retailer, Rugs USA; consumer electronics company Skullcandy; manufacturer of cleaning equipment, Kärcher; health and beauty brand, FragranceNet.com; and celebrity brands like Serena Williams' beauty brand, WYN BEAUTY; Beyonce's hair care brand, Cécred; and Dwayne 'The Rock' Johnson's skincare line, Papatui. The past years show that we can cater to both start-ups and large companies. And we continue to invest in both to expand our merchant base. Our business model focuses on accelerating the success of our merchants and driving long-term value rather than short-term gains. We are a product-led company, and we will invest in those products and strategies that ultimately offer greater value for our merchants and thereby for Shopify. We think about marketing the same way we think about products, building great solutions, using the best internally developed and externally available tools, driving decisions through data and being world-class. Our goal is to always get the most out of every existing channel up to our guardrail limits and continually find and experiment with new channels. That is what we build our tools and AI models to do, and we're using them to create some incredibly compelling opportunities. Let me give you a very recent example. At the end of last year and early into January, we drove significant efficiency improvements in one of our primary channels in performance marketing, where teams have created and leveraged advanced models using AI and machine learning, which now allows us to target our audiences with unprecedented precision. Using these models and strategies, we drove nearly a 130% increase in merchant ads within our primary marketing channel from Q4 to Q1, while still remaining squarely within our payback guardrails. Similar to how we build products, we continually assess emerging technology and how we can leverage them to improve our own tools. We are also advancing our operational rigor with our marketing data team using our tools to connect data inspections at a faster velocity and more granular level than ever before. This agility allows us to quickly seize opportunities and boldly move forward when others may hesitate. These are two of our Shopify-wide principles: agility and finally, the unobvious opportunities. Leaning into those opportunities when others pull back, even when, and often especially because to others, they may appear unobvious. And we know it's working. Back in Q3 2022, as we mentioned in our July earnings that year, we began a wave of new marketing tool production and tightened our payback guardrails even further. Our initiatives have successfully driven significant improvements in both new merchant acquisition and CAC in core performance marketing, our largest component of marketing investment. Comparing Q3 2022 to Q1 2024, new merchant acquisition has grown 108%, while CAC has improved almost 60%. You can see why we're investing heavily and why we feel confident in our future and our growth in 2025 and beyond. You should expect to approach every quarter with the same model, testing and opportunistically investing into the areas where we know it will contribute well to our growth and stay within our guardrails. We intend to continue spending when market opportunities are within an average 18-month payback period, which we are finding a lot of right now, along with increasingly supporting longer-term initiatives such as expanding into international and to point-of-sale. Right now, you're seeing the strongest version of Shopify in our history. And we see an excellent opportunity to further our lead in our established products and fuel the strong momentum of our emerging products. Today, we are building an even stronger Shopify. We know our team is one of our most valuable assets. And given that it makes up over half of our cost base, we believe we've architected ourselves to be faster and more agile, which has enabled us to consistently deliver 25% revenue growth, excluding logistics, all while keeping our headcount flat for three straight quarters. More importantly, because of the structure and automation we have worked to put in place, we think we can continue to operate against very limited headcount growth while achieving a continued combination of consistent top-line growth and profitability. As Kaz mentioned at our Investor Day in December, over the past 18 months, we've committed significant effort into building efficient infrastructure and systems, which are instrumental in streamlining our work and maintaining our high velocity product releases. We do this through our Shopify operating system, the foundation for every role and purpose at Shopify that uses data to help tell us how many resources we need for any project and the skill set or craft needed for the project. Essentially, these systems and this infrastructure act as catalysts, enabling us to operate with increased efficiency and speed. So as we create a crafter's paradise, empowering teams to pursue their passions while having an incredible impact on our mission, we are doing it in a way that optimizes our talent and ensures we continue to make the most important thing, the most important thing. To close, we are proud of the strides we've made in Q1 and the execution we continue to deliver consistently quarter-over-quarter. The strength of our business model, the commitment of our team and our unwavering focus on serving our merchants has positioned us to lean into the opportunities we see ahead and invest responsibly to sustain our long-term growth objectives. The best companies are built this way, staying grounded in their reason for being and committed to their mission. For Shopify, our team's dedication, coupled with our evolved marketing strategy, is reshaping the company and moving us forward. We look forward to sharing our journey with you in the quarters to come. And with that, let me turn the call over to Jeff.

Thanks, Harley. We have started off 2024 incredibly strong, building on our momentum from 2023. Let's launch into our Q1 results. GMV in Q1 was $60.9 billion, up 23% year-over-year. The strong Q1 GMV was driven by same-store sales growth of our existing merchants, continued growth in our merchant base globally, strength in EMEA, which grew 38% year-over-year from both strong same-store sales growth from our existing merchant base and new merchant acquisition, with same-store sales growth being the slightly larger contributor this quarter. And finally, 32% growth year-over-year in our offline business, driven primarily by larger retailers joining the platform. Revenue for the first quarter was $1.9 billion, up 23% year-over-year, which equates to 29% year-over-year growth when excluding the logistics businesses. This represents the fourth consecutive quarter that our revenue growth has been greater than 25% on an organic basis, excluding logistics. The key drivers of this growth were: the GMV strength just discussed; growth in Subscription Solutions revenue from both new margin growth and the pricing increases on standard plans; and lastly, increased payments penetration, which hit 60% for Q1. Q1 Merchant Solutions revenue was $1.4 billion, increasing 20% year-over-year, fueled by growth in GMV, continued penetration of Shopify Payments, continued growth of our scaled products, most notably markets, and growing adoption of our emerging products, including installments and Shop Cash. Those contributors were partly offset by the absence of the logistics business. $36.2 billion of GMV was processed on Shopify Payments in the first quarter, 32% higher than in the first quarter of 2023. The penetration rate of Shopify Payments as a percentage of GMV was 60% compared to 56% in Q1 of 2023. Several factors powered the quarter's higher gross payments volume compared to the prior year, including the strong performance of those merchants utilizing Shopify Payments, an increasing percentage of which are Shopify Plus; more merchants across the globe adopting payments, greater penetration of Shop Pay, which was 39% of GPV in the quarter; and continued growth of our point-of-sale solution. These items were partially offset by the continued strength of our business in Europe, which was a larger percentage of GMV, but where we have a lower GPV penetration than North America. Subscription Solutions revenue was $511 million, up 34% over Q1 of 2023, with the two largest drivers being the impact from the pricing increases of our Standard Plans, which went into effect for existing merchants in the second quarter of 2023; and the growth in the number of merchants. These two factors were roughly equally balanced contributors. An increase in revenues from variable platform fees was also a contributor to the quarter. As a reminder, existing Plus merchants had until the end of April to commit to their existing rates or move to a new pricing plan. As of today, the majority of our existing Plus merchants have chosen to commit to three-year contracts at existing 2023 rates, a clear testament to the exceptional value that we provide and the trust and confidence our merchants place in us to consistently deliver the solutions they need for their success. We expect more of the financial impact from these changes to occur in the second half of the year. We are not anticipating as much of a benefit from this pricing change as we did from the changes to standard pricing in 2023. MRR was $151 million, up 32% year-over-year. We saw growth year-over-year in MRR across each of Standard, Plus and offline Point of Sale. This strength stemmed from increases in the number of merchants in each of these three categories combined with: for Plus, growth from both new Shopify merchants joining and existing merchants upgrading from one of our standard plans, with Plus representing 32% of MRR for Q1 of this year. You should expect the Plus pricing changes to have more of an impact on our second quarter MRR as existing Plus merchants did not have to commit until after the end of Q1. For Point of Sale MRR, which was up 50% year-over-year, growth was driven by improvements in our go-to-market strategy and our new retail plan. And for Standard, the pricing change that we implemented last year. On a sequential quarter-over-quarter basis, MRR increased in Plus, Standard and Point-of-Sale, primarily from growth in the number of merchants in each of these groups. It is important to note, we refined our MRR calculation for Standard. We adjusted how we factor in merchants transitioning from a paid trial to full price status. Previously, we reflected an MRR the full price plan when the merchant's paid trial ended but before the first payment was received. Now we do not capture an MRR the change in the pricing until after we have received the first full price payment. We believe this approach better reflects the way we look at our business. The change does not impact revenue. In Q1, our attach rate was 3.06%, up from 3.04% in Q1 of 2023. Key drivers of attach rate expansion in the quarter were the continued gains in GPV penetration and higher subscription revenues, largely offset by the logistics business in the prior year and lower noncash revenues from strategic partnerships. Moving to gross profit. Gross profit was $957 million for the quarter, up 33% year-over-year. Gross margin for Subscription Solutions was 81.4% compared to 78.0% in Q1 of 2023. The increase stems from pricing changes on standard plans and, to a lesser extent, continued support and hosting efficiencies. Gross margin for Merchant Solutions was 40.1% compared to 37.2% in Q1 of 2023. Our improvement in gross margin for Merchant Solutions was primarily due to the benefit from the absence of logistics, which was dilutive to margin. When excluding the impact of logistics, our Merchant Solutions gross margin was down year-over-year, primarily from lower noncash revenues from certain partnerships and the continued growth of our lower-margin Shopify Payments business, with these impacts partially offset by growth in products like Shop Cash and Installments. This brings our overall Q1 gross margin to 51.4% compared to 47.5% in the prior year. Operating expenses were $871 million for the quarter, in line with our expectations and representing 47% of revenue. Compared to Q1 of 2023, operating expenses of Q1 2024 were down 4%. The decline year-over-year was primarily due to the sale of the logistics business and lower headcount, partially offset by increases in marketing spend. I know many of you look at operating expenses both pre and post stock-based compensation. OpEx, excluding SBC and related payroll taxes or adjusted OpEx for the quarter, was 41% of revenue compared to 51% of revenues in Q1 2023. We continue to remain disciplined on headcount with total headcount remaining essentially flat for the past three quarters, all while maintaining and, in fact, accelerating our product innovation capabilities and continuing the top line momentum of our business. How we leverage AI internally is an important element of how we are able to do that. And as an example, let's talk about how we are using AI in merchant support. A couple of data points for you. During Q1, over half of our merchant support interactions were assisted with AI and often fully resolved with the help of AI. AI has enabled 24/7 Live Support in eight additional languages that were previously offered only during certain hours of the day. We have significantly enhanced the merchant experience. The average duration of support interactions has decreased. And the introduction of AI has helped reduce the reluctance that some merchants previously had towards asking questions that they might perceive as trivial or naive. Additionally, our support staff has experienced a significant reduction in the amount of toil that is part of their jobs. We are improving the merchant support process and achieving much greater efficiency than ever before. Moving to operating income. For the quarter, operating income was $86 million or approximately 5% of revenue compared to an operating loss of $193 million in Q1 of 2023. Stock-based compensation for Q1 was $111 million, and capital expenditures were $6 million for the quarter. Free cash flow was $232 million or 12% of revenue, doubling as a percentage of revenue versus Q1 2023 free cash flow margin of 6%. Turning to our balance sheet. Our cash and marketable securities balance was $5.2 billion as of March 31, and we had a net cash position of $4.3 billion after consideration of the outstanding convertible notes. Before turning to our outlook, a few comments regarding the broader economy and the macroeconomic assumptions that underpin our Q2 expectations. We see consumer spend in North America remaining resilient, that we have factored in headwinds related to FX from the strong U.S. dollar and some softness in European consumer spending in our Q2 outlook. We have and expect to continue to outperform the e-commerce growth rates in North America and Europe. We otherwise assume that the macroeconomic environment remains consistent with current conditions. Keeping all this in mind, let's now turn to outlook. Our expectations for the second quarter of 2024 are as follows. First, on revenue. We expect Q2 year-over-year revenue growth to be in the high teens on a GAAP basis, which equates to a year-over-year growth rate in the low to mid-20s when excluding the 300 to 400 basis-point impact from the sale of our logistics business. An important dynamic to highlight is the impact of the standard and plus pricing changes and how they affect our growth rate for Q2 versus Q1. The impact of the pricing changes in standard and plus will have a smaller combined benefit in Q2 versus Q1. In Q2, we begin to lap the initial pricing changes on our standard plans that went into effect in April of 2023, resulting in a headwind to our revenue growth quarter-over-quarter. While the plus pricing billing cycle went into effect today for those existing merchants who did not sign up for the three-year contract, this uplift is expected to be minimal in Q2, given both the mid-quarter timing of the change and the fact that the majority of our merchants did choose to opt into three-year contracts at their existing 2023 prices. Q2 will simply be a quarter where the lapping effect of the Standard plan changes exceeds the initial benefit of the Plus pricing changes. We remain resolutely confident in the great products and go-to-market initiatives fueling our continuous growth and our ability to further strengthen our position as a leader in unified commerce. We expect Q2 to be a continuation of our strong momentum. Q2 gross margin is expected to be down approximately 50 basis points from Q1 of 2024. The primary drivers of the decline quarter-over-quarter are the expected growth of our lower-margin payments business and lower revenue contribution from a high-margin noncash partnership revenue agreement that we'll have fully amortized. Offsetting these factors are the expected positive impacts from the Standard and Plus pricing changes that I just referenced above and the benefit from shortening our trial length from 3 months down to 1 month. Turning to operating expenses. We believe that our Q2 operating expense dollars on a GAAP basis will be up at a low to mid-single-digit percentage rate compared to our Q1 operating expenses of $871 million. As a percentage of revenue, we expect our Q2 GAAP operating expense dollars to be approximately 45% to 46%, implying a decrease of 100 to 200 basis points versus Q1. I previously have not been guiding toward operating expense as a percentage of revenue. Q2 will mark a full year since we began to operate in the new fitter, faster shape of Shopify as well as the sale of the majority of our logistics businesses. Given these changes, the year-over-year comparability of operating expenses has been less telling over the past year. Hence, why I've been talking about sequential changes to OpEx dollars. Going forward, I plan to talk about operating expenses as a percentage of our revenue as it better aligns with our goal of striking the optimal balance between growth and operational leverage to deliver improving profitability over time. For this quarter, I wanted to provide you both metrics. For the second quarter, the two primary drivers of the operating expense dollar increase over Q1 are marketing spend and our Summit event, which will happen at the end of June, with Summit being the primary driver of the increase. Summit is our annual event where we engage in a collaborative week dedicated to aligning on the bold ideas that we have as a company, a spotlight on our mission, our product roadmap and the mental models that we are using to build incredible things. We consider it a critical week for our product development efforts, company culture and work with external developers. This will be our first completely in-person Summit since 2018, and everyone is really looking forward to it. We highly value and remain committed to our remote-first culture and concurrently believe that getting teams together periodically is a critical load-bearing element that enables our remote-first culture to thrive. This year, Summit will be aggregated into one event what in other years is multiple discrete events, including our three-day internal Hack Day event where we ask our teams to start new projects. Our Hack Days have kickstarted many key products and features like Point of Sale and the Shop app. This week's work also includes a series of events for our external development partners, additions.dev, which includes hands-on technical walkthroughs and immersive workshops. Additions.dev gives us an opportunity to share our vision with our developer partners and get external feedback on our products and roadmap. It is one of the most highly anticipated events for developers within the Shopify ecosystem, both internal and external. And we consider it an investment in our team, our product roadmap and our partners. Regarding marketing. Harley shared with you some insights into our thinking and some of our recent successes there. We intend to continue to invest when opportunities are within an average 18-month payback period. And we are finding a lot of them right now, as well as supporting longer-term initiatives such as International, Enterprise and Point of Sale. Moving to stock-based compensation. Q2 SBC is expected to be $120 million, and Q2 capital expenditures, $5 million. Finally, on free cash flow, for Q2, we expect our free cash flow margin to be similar to Q1 of 2024. We have now delivered three consecutive quarters of double-digit free cash flow margin with no expectation for this trend to change. In summary, Q1 was a very strong start to the year. We continue to deliver on the product initiatives that we have laid out. Our merchants are performing well, and we continue to expand the value that we can provide our merchants. We are making key investments in our future and continuing to build an even stronger Shopify, all while delivering a compelling mix of both growth and profitability.

Our first question comes from Trevor Young at Barclays.

Great. Just on the core standard MRR, only up slightly quarter-on-quarter. Can you just give us some color on why that was up maybe a smaller amount than we would have expected seasonally? Is that just a definitional change? Or is there something going on just in terms of merchant demand?

Yes. No, that's just a definitional change. It would have been up 5%, if you look at it in terms of Q4 to Q1. And so it's just a function of that change. The merchant acquisition engine overall is doing really well right now. So there's nothing else to read into that.

Okay. Thank you. Our next question will come from Matt Code at Autonomous. Matt, are you there?

I am. Sorry about that, guys. I didn't click unmute. So wanted to double-click on sales and marketing expenses. So they're increasing again at a pretty fast clip. You guys touched on that a little bit in your opening remarks. I kind of just wanted to get some incremental color on how that's translating into merchant and bookings growth. Are there any commentary that you could provide on the 2024 cohort, and how that's looking compared to 2023 would be helpful.

Yes. From a sales and marketing standpoint, we are currently seeing positive results thanks to the recent improvements in our tools and methodologies. Harley discussed some of these results over the past quarters and months. Regarding margins, I want to refer back to our free cash flow margins guidance. We achieved 12% free cash flow margins with 29% pro forma revenue growth in Q1, which I believe is a strong outcome. We had anticipated a margin increase from Q1 to Q2, and Q1 exceeded our expectations. In terms of payback periods and their impact on our top line, it's important for understanding our merchant acquisition engine. For Q2, we expect free cash flow margins to remain around the 12% we achieved in Q1, combined with pro forma revenue growth in the low to mid-20s. This indicates that our business can achieve both growth and margins while also pursuing opportunities that enhance our growth. We are confident in the strength of this business, which allows us to achieve all these objectives. Our marketing expenditure is an investment in our future, aimed at continually fortifying the business for the long term.

Let me take a moment to discuss the types of merchants coming to Shopify, as this is crucial to understand. Historically, it's been known that we were attracting merchants in the SMB direct-to-consumer segment. However, we are not only continuing to draw in those merchants but also welcoming a variety of new ones. There's been talk about consumer behavior, and we believe consumers are still resilient. They continue to purchase from their favorite brands they know and trust, many of which are hosted on Shopify. Additionally, we've seen brands that are less discretionary join us, such as FIGS, which supplies hospitals nationwide, as well as Nestlé, Staples, Barkbox, and ButcherBox. We are also experiencing growth from new brands in sectors like B2B, which presents a significant opportunity, alongside international merchants. This variety of paths into Shopify is functioning exceptionally well. Regarding spending, it's important to view marketing similarly to how we approach products. We create outstanding solutions, utilize top-tier internally developed tools, and base our decisions on data. This allows us to be agile, even when our strategies may appear countercyclical. Ultimately, this approach supports sustained top-line growth while maintaining profitability. All these diverse growth factors and merchant types contribute to strengthening our business for the long term.

We will now move to Mark Zgutowicz at Benchmark.

Okay. We will put Mark back in the queue. Let's go instead to... I'm here.

Oh, there you are. Okay. Great.

Sorry about that, Carrie. Thought I hit it. Harley, maybe just picking up on that last point. You talked a little bit about vertical expansion there on the merchant ad component. But maybe if you could talk about geo and sort of where you're seeing merchant ads from a geo perspective, sort of what the strategy is there and how that payback period, I guess, fits into that 18 months? Is it higher in U.S. versus some of these other geos? Is that sort of an average 18-month payback? If you look across deals, that would be helpful. And then just one other quick one, if I could, just in terms of your audience scale, just in terms of advertising scale broadly. Just trying to get a sense of how your audience target numbers will look this year scaling relative to last year.

Yes. Let me start with international. Shopify has evolved beyond just serving small businesses in North America. We are experiencing strong revenue growth across various channels and regions. In the first quarter, international gross merchandise volume grew at a rate comparable to North America, with Europe, in particular, driving our growth outside North America. In fact, Q1 GMV growth in Europe was around 38%, marking the third consecutive quarter with growth above 35%. There's significant opportunity in this market, as we have captured less than 1% market share in global retail sales despite our expansion in products and regions. Back in 2015, we had 5 products in 4 countries; today, we offer 20 products in over 30 countries on the Merchant Solutions side. We see a massive opportunity ahead, with approximately a $380 billion market potential focused on our core regions, indicating we are still significantly underpenetrated. Product localization and commercial initiatives are crucial, which involves partnerships, collaboration with app developers, and engagement with large systems integrators in those areas. We will maintain our focus on the successes in Europe, and there are also excellent opportunities in APAC and Latin America. Now, regarding audiences, I think it's a key point. We've discussed advertising generally on Shopify, but audiences specifically is something we take pride in. Launched in May 2022, this feature assists merchants in achieving better results from their digital ads. The algorithms are improving daily, aiding in identifying high-intent customers and leading to up to a 50% improvement in customer acquisition costs in some instances. This feature is increasingly a reason merchants upgrade to Shopify Plus. We’re also running experiments, such as a free 45-day trial launched in April, allowing merchants not on Shopify Plus to try it out. While the goal is to encourage upgrades, we aim to get them actively using it as well. In our January winter edition, we shared updates on enhanced retargeting and new benchmarks for ads. The audience product represents our commitment to improving our services, and we intend to continue investing in it. Advertising at Shopify is distinguished by our ability to analyze data, experiment, and capitalize on opportunities. Everything mentioned in my prepared remarks reflects our commitment to excelling in all facets of our business, including our own marketing efforts and assisting our merchants. Audiences serve as a prime example of this commitment. Additionally, we are experimenting with Shop Campaigns, formerly known as Shop Cash Offers, which has shown promise in increased visibility and better conversions for merchants and brands. Importantly, to leverage features like Audiences and Shop Campaigns, brands and retailers need to be on Shopify.

Our next question will come from Andrew Boone at JMP Securities.

Jeff, can you talk about the reaction to Plus price increases? And you laid out Q2 pretty clearly but how do we think about that flowing through the P&L in the back half of the year?

Thank you, Andrew. I wanted to highlight a few points I made earlier. We've had most of the Plus merchants sign three-year contracts, which speaks to the value we offer and their willingness to commit to our platform and tools for an extended period. This is a strong endorsement of our efforts. As anticipated, similar to the recent standard pricing changes, we will see the impact on Monthly Recurring Revenue (MRR) first. MRR will be affected in Q2 since today marks the beginning of the billing cycle, but we won't see an impact on revenue and margins until Q3. Thus, this will primarily influence the second half of the year, and the timing will be comparable to the changes we implemented for both Standard and Plus pricing. Nevertheless, since most Plus merchants have opted for three-year contracts, I do not expect the impact to be as significant as what we experienced with the Standard pricing last year.

Our next question comes from Mark Mahaney at Evercore ISI.

Ian Peterson. This is Ian Peterson on for Mark. Can you help us unpack the Q2 guide a little bit more in the puts and takes in your high teens year-over-year revenue guide? How big is the FX headwind embedded in the guide? And how should we think about the balance between Subscription versus Merchant Solutions in the quarter, given the price increases flowing through more enterprise customers coming online?

Yes, I'll begin by addressing that. Thanks, Ian. I'd like to emphasize that the main factor affecting the comparison between Q1 and Q2 growth rates is the pricing changes. In Q2, the year-over-year increase in the Standard Plan pricing changes is starting to diminish before the benefits of the Plus pricing become apparent. This is the primary influence on our results. Separately, I want to highlight the strong performance across all our product lines, as Harley pointed out. Merchant additions are robust in Standard, Plus, and Point of Sale, contributing positively to MRR numbers. Payments, Enterprise Plus, Point of Sale, and B2B are all performing exceptionally well. Some broader economic factors are impacting us, including the strengthening of the U.S. dollar and a year-over-year effect from the leap year that gave Q1's growth rate about a 100 basis points boost. For normalized Q1 growth rates, that's an important consideration. In Europe, particularly in the U.K., we are observing some economic slowdown, but it's important to keep in context that EMEA accounted for 18% of our revenues last year, and we've previously mentioned that growth rates there have been in the high 30s. We are performing well in that region and expect to continue exceeding market growth, not just in Europe but also in North America. Thus, the pricing change is the primary factor affecting Q2, but our merchant acquisition strategy and product offerings are performing strongly, giving us confidence in the business right now.

Our next question will come from Michael Morton at MoffettNathanson.

The #1 question we get from investors is the impact that the growth in enterprise will have on the attach rate. It's just really tricky to try to forecast it from the outside and probably not growing as quickly as some people might expect at the moment. Would just love to hear some more about the moving parts behind this as you see success in the Enterprise and how investors should think about the attach rate going forward?

Enterprise is continuing to gain traction. Large enterprises have various ways to utilize Shopify, with some opting for headless solutions like Hydrogen and Remix, while others may prefer the out-of-the-box experience of Plus. For those requiring more customization, we also offer CSS. We now provide solutions tailored for every enterprise-level brand, integrating the advantages of Plus for complex, high-volume brands. We've seen brands like Everlane and Coach that traditionally didn't consider Shopify now using our platform for specific components, and we believe that over time, they will adopt more from our offerings. The product attach rate is crucial as it reflects the value we add through our various solutions, such as capital and payments, which are essential for merchants building their businesses. The increased interest from brands like Overstock, BarkBox, Intersport, and Skullcandy indicates that Shopify offers the best product in the market. An independent study confirmed that our enterprise offering has a total cost of ownership 36% better than competitors, showcasing a strong value-to-cost ratio. Merchants are choosing Shopify because of its quality and value, and we expect this trend to continue. As for the attach rate, we anticipate that as more merchants integrate into our platform, they will adopt additional solutions like CSS, Hydrogen, and Plus as gateways into our enterprise product. Once they are in the enterprise system, we can provide them with enhanced value on various offerings like payments and audiences. Our more aggressive go-to-market efforts over the past 24 months are yielding positive results, and we expect to see continued growth in product attach rates as an indicator of the value we provide to Shopify users.

Okay. Thank you for your question. Our next question comes from Martin Toner at ATB Capital.

Free cash flow margins have been greater than adjusted op income margins last two quarters. Is that something we should expect will continue?

Well, yes, from a free cash flow margin perspective versus operating income, there's a few things in play. But yes, in general, it's been and we expect it to continue to be a few points higher. And that's just a function of how you think about our P&L and kind of how that flows through the P&L, but yes.

Okay. Our next question will come from Andrew Bauch at Wells Fargo.

Just wanted to unpack the Shop Pay growth. Three straight quarters over 50%. And Harley, you mentioned the off-platform opportunity and its interplay with commerce components really starting to show traction. So can you give us a sense on what the drivers of Shop Pay's growth are at this point? And what does the pipeline look like for Shop Pay off-platform as we get into the back half of this year?

Yes. Simply put, Shop Pay is the highest converting checkout on the Internet, outperforming the competition by 36% and averaging 15% more. Currently, there are 150 million buyers who have opted into Shop Pay. In the first quarter alone, we facilitated $14 billion in gross merchandise volume, marking a 56% increase year-over-year. Cumulatively, that's about $140 billion to date. People are choosing to use Shop Pay, and its mere presence at checkout increases conversion rates by 5%. It's becoming essential for brands and retailers to implement it. We're encouraged that people are seeking us out for Shop Pay, which helps us establish business relationships with brands we may not have engaged with before. We are committed to making Shop Pay the default checkout option online because it speeds up the process, reduces friction, and drives greater adoption among merchants and buyers, resulting in increased demand from merchants. We are excited about our focus on enhancing the checkout experience with Shop Pay and extending its availability to more platforms. The pipeline for Shop Pay is new and holds significant promise.

And our last question will come from Samad Samana at Jefferies.

I appreciate it. So I wanted to ask a question maybe on the Point of Sale GMV and Point of Sale MRR. Jeff, I know you guys gave off-line revenue targets last year at the Analyst Day, which is really helpful. Could you give us any sense of maybe what the MRR contribution from Point of Sale is and maybe how you're expecting the overall Point of Sale growth this year? And then not to make it a multiparter, but just trying to understand maybe what the GPV for offline merchant dynamics are versus online.

Yes, certainly. A few points regarding the growth rates we mentioned during Investor Day about retail Point of Sale. The performance of that business is consistent, and while our core business is strong, the offline segment continues to excel even further. This is a great sign from our perspective. It reflects positively on many merchants, particularly larger multi-location retail merchants, who are increasingly utilizing point-of-sale systems. From their perspective, our platform is beneficial because it provides a cohesive tech stack; they can access superior technology for both online and offline operations. This unified approach allows for streamlined data analysis and insights. It’s a compelling value proposition that has driven growth. As we discussed a couple of quarters ago, we’re integrating features like installment options from our core online business into our offline offerings for retailers. We are also expanding our Point of Sale presence into more countries. However, in terms of the attach rate, we currently do not offer as many functionalities for Point of Sale as we do online. This presents an opportunity for us to enhance the Point of Sale capabilities, which we believe will increase the attach rate and overall opportunities over time. The retail portion of our Point of Sale primarily consists of payment processing, alongside a subscription component, which together constitute the majority of our retail revenue. Unfortunately, we can't break down the exact percentage of monthly recurring revenue that comes specifically from retail. However, you can anticipate that, as the trends continue, this area is performing well, reflecting all the points that Harley and I have discussed. With that, Harley, I'll hand it back to you.

Yes. Before we wrap up the call, I want to highlight something that might be overlooked but is very important. We just achieved 29% pro forma revenue growth and 12% free cash flow margins. For Q2, we expect our free cash flow margin to be similar to the 12% we reached in Q1. Combined with pro forma revenue growth in the low to mid-20s, our business can achieve something quite rare compared to nearly every other company. We can generate growth and maintain margins while seizing opportunities that will drive our future growth. It's crucial to emphasize that the strength of this business allows us to accomplish all these goals and build a more robust company in the long run. This is what exceptional companies do, and this is how sustainable long-term growth is achieved. I have never been more optimistic about Shopify and our business, and I take immense pride in working with this world-class team. I believe this is the best version of Shopify we've ever had, and thank you for joining us today on the call.

This concludes our First Quarter 2024 Conference Call. Thank you.