Shopify Inc. Q2 FY2024 Earnings Call

Good morning and thank you for joining Shopify's Second Quarter 2024 Conference Call. I am Carrie Gillard, Director of Investor Relations, and joining us today are Harley Finkelstein, Shopify's President, and Jeff Hoffmeister, our CFO. After their prepared remarks, we will open it up for your questions.

Good morning everyone and thank you for joining. We cannot wait to walk you through all the outstanding results from the last quarter. Our relentless focus on our mission has not only empowered our merchants but has also strengthened Shopify significantly. We are at our strongest yet and we could not be more excited about the future of commerce and the future of Shopify. So first, let's break it down at a high level. In Q2, we saw 25% revenue growth when excluding logistics, with gross profit growing faster than revenue. Operating expenses decreased quarter-over-quarter and our free cash flow margin more than doubled to 16% from last year. A couple of other highlights from Q2 were the release of our latest editions at the end of June with over 150 new product updates and features, passing a massive milestone as we cross the $1 trillion mark for cumulative GMV that has been processed through Shopify, and our offline business surpassed $100 billion in cumulative GMV. These results reiterate what we've been saying all along, we are building for the long term, and our business model is working. As you may have seen in our recent edition, unification was the central theme. So what do we mean by that? Well, we believe that the mark of great software is that as it scales and grows, each new feature is built as if it were there from the very beginning. Everything works together harmoniously, crafted in consistent style and quality. This is a key value proposition for Shopify and something that as we have evolved from an online store to a comprehensive unified operating system for commerce anywhere, anytime is becoming increasingly more important. Whether online or offline, direct-to-consumer or B2B, domestic or global, Shopify captures it all. What makes Shopify so powerful is how seamlessly all parts of the product work together, reducing complexity at every stage of a merchant's journey. We understand that starting a business is hard and expanding into new markets adds even more complexity. As our merchants grow, Shopify tackles these challenges so they don't have to. So one of the coolest things we rolled out at this edition was Markets. What used to be Markets and Markets Pro are now streamlined into cross border products, international selling and managed markets respectively. This means our merchants no longer have to worry about juggling multiple stores or wrestling with new workflows. Whether you're aiming to sell in a new country, break into a B2B market, or launch a physical retail store, the process is straightforward. You set up a new market, you tweak it to your liking, and boom, you are good to go. I remember sitting down with one of our merchants in the UK about 18 months ago and discussing this exact challenge with them. And to see how quickly we moved to address it is really huge. I can't understate how big of a game changer this will be for so many merchants globally. No other platform on the planet offers merchants the opportunity to expand their reach at this scale, this speed, this efficiently with this level of seamless integration and control, all out of the box. Okay, now let's dive into how we're fueling merchant growth across offline, B2B, international and the Shop app. Let's start with our offline business. Our point of sale solution continues to rapidly gain traction, unifying online and offline commerce in ways that no one else can match. In Q2, offline GMV was up 27% year-over-year as we continued to attract larger global merchants with multiple store locations. Two of our most recent examples of this are multinational brands EVEREVE and MAJOURI, both of whom are launching online and offline with Shopify, which combined includes over 130 locations across four regions. Offline commerce is still a huge deal for us, still happening in physical stores. So we are taking advantage of this by continuing to roll out targeted marketing initiatives that target our point-of-sale offering. We're introducing the features they care about most, like improving operating efficiency such as the new remote smart grid layout editor, omnichannel return rules, and the ability to stack multiple discounts at checkout which makes it easier for merchants to customize their promotional strategies. And with point-of-sale’s seamless integration with markets, multinational retailers can now manage their entire omnichannel business from a single Shopify admin. Just as we've streamlined operations for SMB retailers, we are now removing barriers for global omnichannel businesses on Shopify. Another long-term and largely untapped channel we're unlocking is B2B commerce, and we're making great progress. In Q2, we recorded our highest ever B2B GMV month with a 140% year-over-year increase fueled by the growth of our Plus merchants. Our B2B offering also saw a 6x increase in online orders compared to last year, underscoring the value of self-serve B2B purchasing. We're making our B2B offering even more competitive with features like deposits at checkout and manual payment methods. This functionality combined with our modern approach and unified back-end makes it easier for merchants to manage and track their business seamlessly across channels. Plus, we've seen a 34% increase in the number of merchants getting B2B orders on Shopify compared to last year. This is something that many large brands have been searching for, and is yet another example of the work we are doing to drive our leadership position in unified commerce. So, how do we know that we're hitting the mark? Well, brands like home fragrance company Pura and skincare brand Dermalogica have recently adopted B2B and are attracting new brands like Progress Lighting and Therabody who recently signed up to join Shopify because they're attracted by the ability to manage all their channels from a single admin. Ultimately, B2B is a great example of how we're expanding our total addressable market. Let's talk about cross-border. Cross-border sales made up about 14% of our GMV in Q2, and merchants are really eager to reach new regions, especially when they notice more and more international traffic on their sites. So, just like when they branch out into social channels or B2B, they have to think about everything from pricing and localization to availability in merchandising, all tailored for the end consumer. And that is why we've made it super easy to sell globally right from the start. With our new Markets feature, merchants can expand wherever they want and customize what they need really effortlessly. Take well-known baby apparel company, Caden Lane. After signing up for Managed Markets, Caden Lane experienced a 692% year-over-year growth in international sales. Or wine glassware merchant Glasvin, which experienced 71% international sales growth and over 100% boost in conversion to sales in Canada and Australia. Both of these merchants signed up for Managed Markets and are very quickly reaping the benefits. And lastly, we know that one of the biggest challenges that merchants face when selling internationally is after they make the sale. Now they've got to actually get the purchase to the buyer. So, we've added support for UPS and managed markets in Q2, which makes it even easier for merchants to get great expedited shipping rates to their international buyers. We've also made it simple to understand catalog restrictions that we automatically apply based on customs rules, which prevent packages from getting stuck at customs and adds the ability to make prices inclusive of duty and tax to improve international conversion. Let's talk about Shopify Payments and our accelerated checkout, Shop Pay, which are crucial parts of our unified commerce platform, especially as our merchants scale globally. In Q2, Shopify Payments penetration was 61% and Shop Pay facilitated $16 billion in GMV, up 45% from last year. We see significant growth potential for payments through international expansion, enterprise, and increasing activity in offline and B2B channels, all of which will drive higher GMV and GPV, boost merchant adoption, and ultimately strengthen our ecosystem. Now, whether it's merchants like Grove Collaborative or Tonal signing up or existing brands like SodaStream and Athletic Greens adopting our payment solutions, it's all fueling our growth. Recognized as the world's best converting accelerated checkout, Shop Pay is not just boosting conversion rates across our merchant stores. Time and time again, it's a major draw for enterprise brands considering Shopify. I can personally attest to this, as I am often on the call with the CEOs of these brands, and without fail, they cite checkout as one of the biggest historical challenges and one of the top reasons they want to move to Shopify. Our conversion rate enabled by these products is absolutely a key differentiator that helps Shopify close the deal time and time again. For merchants, Shop Pay is more than just a digital wallet. It offers comprehensive order tracking via the Shop app and allows buyers to earn Shop Cash redeemable for purchases within the app. This builds greater customer engagement and unlocks additional opportunities to reach customers. During Shop Week in early June, we teamed up with brands like Stanley and Glossier to widen their audience. Thousands of top consumer brands joined in, leveraging Shop Cash and shop campaigns to draw in new buyers. This led to over 10,000 merchants posting their best GMV week ever on the Shop app, showcasing the solid progress we're making in helping merchants strengthen and expand their customer relationships. Now beyond the ways we're helping our merchants grow, which in turn fuels our own growth, let me quickly touch on the great progress we're making across two other growth strategies for Shopify, international and enterprise. Our international GMV growth continues to outpace North America, up 27% from last year, driven by two main goals, expanding our presence and introducing more products in more markets. And in Q2, our marketing and go-to-market efforts led to a 30% increase in international merchant growth year-over-year. Notably in Europe, where GMV grew by 32%, we welcomed major brands like UK football club Newcastle United and French luxury apparel company Ami Paris to Shopify. We also signed a global agreement with Luxottica, the Italian eyewear conglomerate, to launch the first of what we hope will be many brands coming to Shopify in the future. And with their recent announcement on acquiring Supreme, who is already on Shopify, we know that the best brands come and stay on Shopify. From a product standpoint, we remain obsessively focused on simplifying the signup process and localizing more products to enhance the user and end-user customer experience. In Q2, we rolled out Point of Sale terminal to eight additional countries, contributing to an impressive 2.4x increase in GMV through our Point of Sale terminal compared to Q1. And in Japan, we rolled out Shopify plans available in Japanese yen and launched our latest first-party flagship theme called Rise, which is specifically designed with the unique aesthetics of Japanese e-commerce UX in mind. Every market-specific product feature we launch enhances our competitiveness and helps merchants succeed locally. This relentless commitment to helping merchants start and grow in all facets of their business ultimately brings more merchants into Shopify, fueling our flywheel and extending our ability to make commerce better for everyone. Now within the enterprise opportunity, our flexibility, our speed and our value is strongly resonating with larger high-volume brands and they continue to flock to Shopify. We sign new deals across a diverse set of verticals, industries, and geographies. Brands like shopping channel, QVC, bookseller Barnes & Noble, luggage brand Away, golf apparel brand TravisMathew, trading card company Topps, designer footwear line Vince Camuto, and mattress manufacturer Casper. Additionally, the well-known toy retailer Toys 'R' Us launched on Shopify along with some incredible celebrity brands like Mas+ by Lionel Messi and Dios Mio Coffee by Sofia Vergara, all launched on our platform during the quarter and are now powered by Shopify. Our progress in continuing to bring on these high-profile, high-volume merchants underscores the growing recognition of Shopify as the premier commerce platform. Combined with our growing partner ecosystem, including a new partnership that we announced with Oracle in the quarter, these wins not only validate our strategy but also convey our ability to cater to the unique needs of the biggest brands on the planet. Now looking at our marketing strategy for this year, you can see that we are all in. It's about leading confidently, leveraging our strength, and continually adapting to stay ahead of the game. This strategy is not new, but how we implement it is continually evolving, thanks in large part to the truly sophisticated marketing platform that we've built. Our aim remains clear: push the envelope, maximize returns and stay ahead of the curve. This is Shopify doing what Shopify does best, leading from the front, data informed and backed by strategies designed to maximize returns and create value. But here's where we truly excel: data-driven decision-making. We relentlessly test and optimize every single channel, keeping well within our average 18-month guardrail. Our tools and our AI models are crafted not just to operate but to excel leveraging emerging technologies to enhance our feedback loops. These tools provide sharper, more iterative feedback, enable more precise analysis, and deliver quicker signals, letting us identify patterns faster than ever, so we can swiftly adapt and respond. Now to give some examples of this agility and this discipline, consider this: After experimenting in a leading digital channel, a new emerging social platform in Q1, and observing substantial growth, we intensified our efforts in Q2. This led to a 51% increase in merchant acquisition quarter-over-quarter on that platform, all while staying within our financial guardrails. We also saw a boost in our growth internationally with over 50% of the merchants that joined our platform in Q2 coming from outside the core English-speaking markets of the US, Canada, UK, Ireland, Australia and New Zealand. At the same time, we scaled back in other channels focusing on further testing and experimentation to uncover new high-return opportunities. Now for the back half of 2024, we will continue with this playbook, testing, exploring and optimizing our core performance marketing within our guardrails. By remaining flexible in our approach across our portfolio of investments, we can better target and support our growth efforts, especially in areas such as enterprise, point-of-sale and international markets. By dynamically allocating resources across all of these channels and growth areas, we believe we can continue to drive our performance from the front and redefine industry standards. Now, before I turn it over to Jeff, I want to briefly share my thoughts on the incredible success of our recent Shopify Summit in Toronto. This annual event brought our entire company together to discuss Shopify's future, to align as a team in our priorities, and to host our Hack Days, which have produced some of our best products over the years. The energy, optimism and enthusiasm coming out of the event were incredible, which reconfirm that this is truly the best team and the best version of Shopify yet. Before I close, I feel I need to make something really clear. Shopify is rapidly strengthening its position as a leading enabler of global commerce and entrepreneurship. We are investing in sustainable growth and driving profitability for the long term. This very unique ability that we have to serve the largest brands while also inspiring new entrepreneurs to launch and scale businesses makes Shopify an incredibly durable company. We are so well positioned to power more commerce globally for the years to come. And with that, let me turn the call over to Jeff.

Thank you, Harley. Our second quarter was incredibly strong, demonstrating the power of our business model and our ability to execute across every metric we delivered. Let's discuss our Q2 results. GMV in Q2 was $67.2 billion, up 22% year-over-year. The strong Q2 GMV was driven by same-store sales growth of our existing merchants, led by our Plus merchants, continued growth in the number of merchants on our platform globally, strength in Europe, which grew 32% 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 a slightly larger contributor this quarter. This quarter represents the fifth straight quarter where we have delivered GMV growth in Europe exceeding 30%. Our strength in Europe was broad-based with growth in both our larger markets of the UK, Germany, France, Spain and Italy, as well as EMEA more broadly. And the last key driver was point of sale, which grew 27% year-over-year. We saw solid growth across verticals with robust performance in health and beauty and food and beverages. We also saw solid growth in our largest category, apparel and accessories. Notably, this strength in GMV came against a backdrop of mixed consumer spend. We continue to gain market share in the US e-commerce market and abroad. Q2 revenue was $2 billion, up 21% year-over-year, which equates to 25% year-over-year growth when excluding the logistics businesses. This marks the fifth straight quarter where our revenue growth, excluding logistics, has grown 25% or greater. Our consistency and stability of performance reflect the quality and breadth of our software solutions, the success of our merchant acquisition engine, the breadth of the industries, geographies and merchant sizes that we serve, and quite simply, our ability to execute. For the quarter, the key drivers of our revenue growth were the GMV strength I just discussed, growth in subscription solutions revenue stemming from the growth in the number of merchants on our platform, the pricing changes that have been implemented in the past year, both standard, and to a lesser degree, Plus, and the impact of the shortened paid trials, and as a third key driver, increased payments penetration, which is 61% for Q2. Relative to our outlook, revenue came in better than expected, primarily from stronger GMV from Plus merchants and outperformance in Europe, notably with the FX headwinds playing out largely as we anticipated. Q2 Merchant Solutions revenue was $1.5 billion, increasing 19% year-over-year driven by the continued growth in GMV and the penetration of Shopify Payments. Those primary contributors were partially offset by the absence of the logistics business and lower non-cash revenue from strategic partnerships. As a reminder, this is the final quarter where the year-over-year revenue growth rate is impacted by the sale of our logistics business. And as noted above, the absence of logistics had an approximate 400 basis point headwind to total revenue, and all of the logistics revenue sat within Merchant Solutions. $41 billion of GMV was processed on Shopify Payments in Q2, 30% higher than last year. The penetration rate of Shopify Payments as a percentage of GMV was 61%, compared to 58% in Q2 of 2023. Several factors powered the quarter's higher gross payments volume, including the strong performance of those merchants utilizing Shopify Payments, an increasing percentage of which are Shopify Plus, more merchants across the globe adopting payments and greater penetration of Shop Pay, which was 39% of GPV in the quarter. 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 $563 million, up 27% over Q2 of last year. The primary source of the growth was an increase in the number of merchants on our platform, driven by three items: shortening the paid trial offering on our standard plans from three months to one month, strong growth internationally, and the work of our marketing initiatives. This growth in the number of merchants was complemented by the change to our pricing plans for Standard and Plus. Two reminders regarding our pricing plan changes. Our existing Plus merchants had until the end of April to commit to existing rights or move to a new pricing plan. So our Q2 subscription revenue included two-thirds of quarterly impact of the Plus pricing change. As stated on our last call, we are not anticipating as much of a benefit from the pricing change on Plus as we did from the pricing change on our Standard plans. Our Standard pricing changes went into effect at the end of April of last year. So for purposes of the year-over-year comparison, Q2 of this year had a full quarter of the Standard pricing change, whereas Q2 of last year had only two-thirds of a quarter. The impact of these two pricing changes, though, was a smaller contributor to this quarter's subscription revenue growth versus overall growth in the number of merchants. Q2 MRR was $169 million, up 25% year-over-year. We saw growth both year-over-year and quarter-over-quarter in each of Standard, Plus, and offline point-of-sale. The largest driver for all three segments was the growth in the number of merchants on our platform, with growth internationally being a key component contributing to our growth in our Standard plans. Standard and offline point-of-sale benefited from the shortening of paid trials, which went into effect near the end of the first quarter and the marketing initiatives that we have discussed. For Plus MRR, the largest driver of the year-over-year increase was the acquisition of new merchants, with the change in Plus pricing providing some benefit as well. In Q2, our attach rate was 3.04%. As a reminder, and as we discussed back at our Investor Day, we consider attach rates an output of platform activity, not an input or metric that drives our growth strategy. Our Q2 attach rate was up year-over-year when excluding the logistics business. The key drivers of this increase were the continued gains in GPV penetration and higher subscription revenue, offset by lower non-cash revenues from strategic partnerships. On a sequential quarter basis, our attach rate was down slightly as the gains in GPV penetration were offset by lower non-cash revenues from strategic partnerships and lower shipping revenue. Moving to gross profit. Gross profit was $1 billion for the quarter, up 25% year-over-year, growing faster than our revenue growth rate. Our Q2 gross margin was 51.1%, compared to 49.3% in the prior year. Breaking it down a bit more. Gross margin for Subscription Solutions was 82.8%, compared to 80.9% in Q2 of 2023. The increase is primarily driven by pricing changes on Standard plans as well as the impact of merchant growth from the shortened paid trials. Gross margin for Merchant Solutions was 39.1%, compared to 38.1% in Q2 of 2023. Our improvement in gross margin for Merchant Solutions was primarily from the absence of logistics. When excluding the impact of logistics, our Merchant Solutions gross margin was down year-over-year, primarily from lower non-cash revenues from certain partnerships and growth in our lower-margin payments business. Operating expenses were $804 million for the quarter, which includes a benefit of a reversal of a $55 million litigation accrual that we established in Q3 of 2022. Without this reversal, operating expenses would have been $859 million or 42% of revenues. Compared to the prior year and excluding one-time items in both periods, Q2 operating expenses were up $41 million or 5% year-over-year, driven primarily by four items. Increases in marketing, we had a year-over-year increase in our affiliate partner payouts. And since these payouts happen only upon a new merchant joining, there's a clear sign of adding more merchants to the platform, and incremental marketing to support our growing enterprise and point-of-sale businesses. Secondly, our Summit event, which, as a reminder, was our first in-person summit event since 2018. Higher absolute dollar losses on capital loans and payments losses, simply as a result of higher volumes from both of these growth businesses. And offsetting these was the absence of the logistics business. Our Q2 operating expenses came in better than expectations, driven primarily by three items. First, lower marketing expenses. Some marketing related to enterprise we shifted out of Q2 into the second half of the year, stemming largely from one campaign that we decided we will launch towards the end of Q3. We also cut back spending in a couple of channels in Q2. We consistently run tests to assess where we can further enhance the returns of our marketing spend, implementing the learnings from these tests, and scaling back spending in some areas. We recognize that a returns-based approach to marketing can cause fluctuations in spending in any given quarter, however, it prioritizes the quality and efficacy of our spend. The second component of better-than-expected OpEx was lower compensation expense. And thirdly, we executed our extremely successful Summit event under budget. Worth noting that this 5% year-over-year growth in OpEx stands in contrast to the impressive revenue growth over that same period. Moving to operating income. For the quarter, operating income was $241 million or 12% of revenue, marking our fourth consecutive quarter of operating profit since the sale of our logistics businesses and our headcount reduction in Q2 of last year. Stock-based compensation for Q2 was $109 million and capital expenditures were $7 million for the quarter. Q2 free cash flow was $333 million or 16% of revenue, more than doubling as a percentage of revenue versus our Q2 2023 free cash flow margin of 6%. This came in better than our expectations largely as a result of stronger GMV and the resulting flow-through to revenues and lower operating expenses. We believe that we can continue to drive operating leverage through four key things: disciplined growth in headcount, which we have kept essentially flat for five quarters and where we expect we can keep headcount growth well below revenue growth; strategic returns-based marketing to support and sustain our long-term revenue growth; internal use of AI and automation to drive productivity; and leveraging and continuing to enhance our internally built GSD and Shopify OS systems, which allow us to smartly aim the product development work and size the team for maximum impact and efficiency. One other item to cover before we move to outlook. Since our last earnings call, we made three small acquisitions. The first acquisition added some enhancements to allow Plus merchants to do easier customizations of the checkout process. The second gives mid-market and enterprise merchants greater visibility into their inventory across our multiple stores and channels. The third brings a team that will enhance our abilities to get early-stage merchants on platform and ramp the success of their businesses. All three of these acquisitions were small in terms of dollar amount and immaterial to our financials, but are important additions to enhancing our merchant efforts. Moreover, these acquisitions bring us some great founders who were specifically drawn here by the quality of our existing team. Let's now turn to our Q3 outlook, which as a reminder is the first quarter where we will no longer have the impact of the sale of logistics on our business. First, on revenue. We expect Q3 year-over-year revenue growth to grow at a low to mid-20s percentage rate, driven by the same factors that have contributed to our growth throughout the first half of the year. Q3 gross margin is expected to be up approximately 50 basis points from Q2 of 2024, stemming from a higher mix of subscription solutions. Turning to operating expenses. We expect our GAAP Q3 operating expenses to be 41% to 42% of revenues, representing a 300 basis point to 400 basis point improvement over Q3 of last year at 45%. As we stated last quarter, we believe considering operating expenses as a percentage of our revenue, especially as we lap the sale of our logistics businesses, better aligns with our goal of striking an optimal balance between growth and operational leverage to deliver improving profitability over time. The largest drivers of our Q3 operating expense growth compared to the prior year are marketing and compensation expenses. On marketing, we plan to continue spending on opportunities that fall within an average 18-month payback period and the opportunities to support our key growth initiatives, including international markets, enterprise and point of sale. This includes increased marketing spend to support our enterprise efforts that I mentioned earlier. Higher year-over-year compensation expense is expected to be driven primarily by two items: First, we implemented pay increases on July 1 as part of our biannual review cycle, similar to what we discussed in Q1. This resulted in a low single-digit percentage increase across our overall employee base. Additionally, while our headcount has remained essentially flat for the past five quarters, in Q3, we do plan to hire some key roles within sales and R&D. Even with these additions, we still expect to end the year with minimal headcount growth compared to the 8,300 employees that we had at the end of 2023. Moving to stock-based compensation. Q3 SBC is expected to be $120 million. On CapEx, note that we will no longer guide to CapEx separately given that following the sale of logistics, CapEx has averaged over the past four quarters only $4 million, and we do not expect that to change materially. Finally, on free cash flow. For Q3, we expect our free cash flow margin to be similar to Q2 of 2024. We continue to expect to deliver double-digit free cash flow margin for the rest of the year. Over each of the past five quarters, we have delivered top line growth, excluding logistics, of 25% or more and positive free cash flow, with our free cash flow margins consistently improving over that time and reaching double digits over the past four quarters. We have accomplished this growth while keeping our team size steady and have accomplished these margins even as we ramped up investments. This business can deliver growth and margins, all while concurrently creating and leading into opportunities that enhance our future growth. The strength of this business allows us to accomplish all three: growth, margins and investments for the future. In closing, we are showing quarter after quarter that we are executing against the plans that we have laid out and that our business model is incredibly compelling with plenty of runway ahead. With that, I'll now turn the call back over to Carrie for your questions.

Our first question comes from Bhavin Shah at Deutsche Bank.

Great. Thanks for taking my question. Jeff, just on the MRR growth, it was really impressive in the quarter, and it looks like a lot of the strength came from merchant adds. Can you just maybe elaborate on where you're seeing a lot of that success? What type of merchants are you now bringing to the platform? And how much of it is a function of the marketing spend that you've seen kind of bear fruit?

We're seeing a lot of strength in the variety of merchants we're bringing on board, and it has been very strong and impressive. It's a combination of factors, including marketing efforts and the paid trials, particularly in shortening those trials. The key takeaway for us is the robust merchant additions across the board, which have been very healthy and well received. I don’t think there’s a specific area to highlight; it spans all geographies and sizes of merchants.

Thanks, Bhavin. Our next question will come from Ken Wong at Oppenheimer. Are you there, Ken?

Sorry, I was on mute. Can you hear me?

Yes.

My question relates to the take rate. Jeff, you mentioned several factors that may have impacted it this quarter. I'm curious about your outlook on the take rate and attach rate moving forward. Do you anticipate it will increase from the current levels now that we've considered the partner deferred?

Yeah. I think on attach rate, in terms of the overall perspective, I'd go back to a lot of the things I talked about at Investor Day in terms of the general things which help driving up attach rate and some of the things which, in general, are headwinds to attach rate. We do feel strongly that this will continue to move in the right direction given all the things we're seeing in terms of increased payments penetration, in terms of adoption of new products, in terms of pricing, all those things are helping drive attach rates. We will, as we do more in Europe, some of those attach rates will be a little bit lower. As we do more with some high-volume merchants, much larger enterprises, some of that will be a headwind to attach rate. But while there may be some variability quarter-to-quarter, this still is a metric for us which continues to go in the right direction. I would say, though, and I talked about this a little bit on the earnings call, this is an output for us. It's not an input. As we think about on a daily basis how we run our business, we obviously want to have our merchants take more and more of our solutions. But this is not a metric where we track and say how do we drive up attach rate. We're trying to drive as much value to merchants as we can, and that will be reflected in the attach rate.

Great. All right, our next question will come from Brad Sills at Bank of America. Brad?

Great, thank you so much. Can you hear me okay?

Yes, we can.

Wonderful. Just a question here on some of the efforts you alluded to earlier in the call with regard to some of the testing and performance areas that you're exploring with marketing spend. You alluded to some guardrails, Harley. I'd love to get some color from you on just how you're thinking philosophically on testing effort to optimize the marketing spend. Thank you so much.

Thank you for the question. We have developed our marketing systems over a long time, and they are now delivering the results we need. Our goal is to adopt a highly analytical, data-driven approach to attract new customers in various areas. Over the years at Shopify, we've expanded beyond just targeting small businesses in the US and North America; we now serve a broader range of merchants and customers, including B2B, point of sale, and enterprise clients across different global markets. We have created these marketing systems to maximize the effectiveness of every existing channel. We have established important guidelines for ourselves, including an 18-month payback period, which I’ve mentioned before. Additionally, we are exploring new channels to experiment with and, when successful, to invest more heavily in. For instance, we engaged with a new social platform in Q1, tested it, and observed good results, which prompted us to increase our investment in Q2. This led to a 51% increase in merchant acquisitions quarter-over-quarter for Q2. Notably, we also saw international growth outside English-speaking countries, with over 50% of new merchants joining in that quarter. Our strategy is about seeking opportunities for growth while ensuring we maximize returns ahead of trends. Moving forward, Shopify will focus its marketing efforts on the most promising opportunities both in the short and long term. In areas where we see lower returns, we will scale back our investment. The aim is to maintain a flexible and sophisticated marketing approach that allows us to capitalize on opportunities and stay ahead of our competitors in the industry.

Thanks, Brad. Our next question comes from Gabriela Borges with Goldman Sachs.

Hi, good morning. Thank you. I wanted to ask about your progress in the enterprise market. I would love to hear, especially given those investments tend to take a little bit longer, what are some of the milestones that we can be watching from the outside? And if you could just clarify what drove your decision to push that one campaign into the back half of the year? Thank you.

We aim to maximize the effectiveness of each campaign. When we find that we can achieve a better return by slightly adjusting the timing, whether it's by weeks or months, we prioritize that approach. This data point was from a single campaign, so I wouldn’t read too much into it beyond our commitment to optimizing our marketing spend. As for the enterprise sector, we're gaining traction and our marketing efforts are performing well. We're attracting major brands such as Toys 'R' Us, Barnes & Noble, and QVC, as well as first-generation direct-to-consumer companies that previously managed their own operations. We now offer a diverse product mix for enterprises, including headless commerce with Hydrogen, Shopify Plus for an all-in-one solution, and options like checkout and Shop Pay through CCS. This comprehensive offering is very appealing. Additionally, our go-to-market strategy has transformed; we’ve developed a disciplined approach that enhances our market presence and continues to build momentum. We are improving at negotiating effectively and closing deals. As more large brands choose us, it raises questions for others about why they aren't on Shopify. Importantly, our enterprise solutions deliver superior value compared to competitors, with features like Shop Pay achieving conversion rates around 36%—significantly better than the industry average. This creates a competitive disadvantage for those not using Shopify enterprise. We are also pursuing larger partnerships, including our collaboration with Oracle, and many large agencies are constructing entire e-commerce practices around our enterprise offerings. All these efforts are working together successfully, which is evident in the loyalty of existing brands like Gymshark, Viori, Brooklinen, Mattel, and Supreme, along with new clients such as Vince Camuto and Topps, who are all seeing positive results.

Thank you, Gabriel. Our next question comes from Craig Maurer at Financial Technology Partners.

Good morning, thanks for taking the question. I wanted to ask about Shopify Payments and considering that it is a drag on margins as you grow that business, how should we think about the yield in that business changing over time, as you push upmarket into enterprise while also expanding internationally, and how those two factors play against what's already established? Thanks.

It’s to be clear, on the larger enterprise side, we're seeing expansion in enterprise and high-volume merchants adopting Shopify Payments. We're also seeing our offline business, which we primarily monetize, their payments grow as well. So it was historically true that some of the larger brands and merchants that were migrating to us didn't necessarily always take Shopify Payments as they came with their own. That's happening less and less. I mean, this quarter alone, Grove, Tonal, SodaStream, Athletic Greens, these were merchants that were already on Shopify, but now have adopted Shopify Payments more recently. So I think you're seeing more of that. The other thing is, remember that with things like Shop Pay, Shop Pay Installments, Shopify Balance, the Audiences product, these are all incredible features and functionality of the platform that require you to be on Payments. And so I think you're going to continue to see healthy penetration across merchant type, region and channel. Jeff, I don't know if you have anything else to add on that one.

I’d like to add that often Payments is the initial product offered, even though its margins are generally lower compared to some of our other Merchant Solutions. However, it helps to drive demand for those additional solutions, contributing to an overall incremental margin. The situation is quite similar in Europe, where we experience lower attach rates as well. This is primarily due to fewer products being available in Europe than in North America. Over time, we plan to introduce the various products available in North America to Europe, which will enhance opportunities in that region. When we analyze the cohorts and merchant profiles in Europe and compare them to North America, they are very similar. It’s not that there is less buying power or interest in fully utilizing Shopify; rather, it’s a matter of gradually rolling out more solutions in Europe. Thus, Europe represents a significant opportunity for us.

Thank you for your question. Our next question will come from Keith Weiss at Morgan Stanley.

Excellent. Thank you guys for taking the question and congratulations on a really solid quarter. In an environment that I would say investors are probably getting increasingly worried about, particularly when it comes to consumer spending, Jeff, I know you said that it's still an uneven macro backdrop. I was hoping you could give us some directionality to that. Do you see it getting any worse? Do you see it getting any better? How did it trend through the quarter for you guys?

From our perspective, the quarter was quite stable. We are aware that there are discussions about declining consumer spending, and we acknowledge that. Our main focus is assisting our merchants to thrive in this environment. We did not observe any major decline or improvement during the quarter. Previously, we mentioned potential foreign exchange challenges from a European standpoint and discussed consumer spending trends, which unfolded as we anticipated. We understand the discussions from others regarding their experiences, but from our perspective, our merchants are not facing issues. It seems we are simply gaining market share.

The only thing I'll add to that, Keith, is keep in mind, we have a very diverse set of verticals and merchants across geos and merchant types. You think about like we have scrubs from FIGS, we have pet products from BarkBox, and razors from Flamingo. We have Nestle and Heinz and Mattel and Staples. So the wonderful part of our business model is it's not relying on one particular type of merchant and one particular geography. We have merchants coming to us for B2B and merchants that are doing direct-to-consumer. In one particular geography, we also have massive multinationals that are using us to sell to get in front of their consumers as well. And so I think that our merchants do seem to be outperforming and doing better than others. And I think a big part of the reason that we are not seeing the same thing that others might is because we simply have merchants across a ton of verticals and across a ton of geos.

Thank you for your question, Keith. Our next question comes from Paul Treiber at RBC Capital.

Thanks very much and good morning. You're seeing very good success after the changes that you've made in performance marketing. The question is, why is the 12-month payback period, the right return threshold, considerably, you could lower the payback to drive faster growth and market share gains? And then would that view change over time as you scale and operating margins continue to rise?

From my perspective, we have discussed the 18-month payback as a key guideline. We value the insights from data, as Harley mentioned, and we consider these returns carefully. While it is possible to modify our payback periods, we've been cautious and thoughtful about our data usage, feedback mechanisms, and the technology we've developed for marketing. This helps us determine appropriate payback times, allocate our funds effectively, and support our emerging products like enterprise, international, and point of sale. I understand that, in theory, we could shorten the payback further. However, as I mentioned in response to earlier questions, some fluctuations in monthly recurring revenue stem from reduced paid trials, while others are due to our success in onboarding new merchants, driven by our marketing efforts. Overall, this seems like the right balance for us.

From a marketing perspective, we focus on pushing boundaries, maximizing returns, and staying ahead of the competition. We have strong confidence in our effective low-latency marketing platform, which we have optimized within an 18-month framework. However, longer payback periods exist in certain situations, such as in enterprise dealings, where discussions with a merchant may not lead to a launch for a year or two. By adhering to this framework and strategically targeting channels that promise significant returns, we can adjust our spending based on data, enabling continuous testing and experimentation. This approach ensures we remain disciplined in unlocking various opportunities, and the 18-month average payback period serves as a solid guideline that keeps everyone accountable for delivering maximum value.

Thank you for your question. Our next question will come from Tim Chiodo at UBS. Tim, are you there?

I am. Hi, good morning. Thank you for taking the question. I know that you mentioned some of the success that many merchants had with Shop App this past quarter, and I believe that it was in Q4 that you gave a little bit of a sense of the Shop App penetration of overall GMV. I was hoping you could give a little bit more context on how large Shop App is in terms of your overall GMV mix. And then maybe within that, how much of that volume is benefiting from shop campaigns? Thanks a lot.

In Q4, we mentioned that Shop App had nearly reached $100 million in GMV in a single month. We also noted that over 70% of Shopify's online checkouts in the past year occurred on phones or other small devices, indicating that consumers who buy from Shopify merchants prefer this method. Shop App serves as a vital first-party channel for merchants, helping them drive traffic. It was particularly interesting during Shop Week, where 10,000 merchants recorded their best GMV week ever through the Shop App, allowing us to reinforce the app's value as a primary sales channel. We are committed to providing new ways for merchants to engage and create strong connections. From an advertising standpoint, we've introduced shop campaigns that assist merchants in finding new buyers and boosting their sales and checkout rates. Brands like Feastables, Steve Madden, and Spanx frequently utilize this marketing approach on the Shop App. Those who do see growth in GMV and user base, ensuring they continue to return. While we don't have new data on the Shop App at the moment, our recent Edition release demonstrates ongoing improvements for both consumers and merchants, establishing it as a powerful channel for attracting new traffic. To take advantage of this, merchants need to be on Shopify.

Thank you for your question. Our next question comes from Tyler Radke at Citi Investment.

There we go. Can you hear me okay?

Yes.

Awesome. Thanks so much for taking the question. Question on just how to kind of unpack the third quarter revenue guidance. Obviously, you talked about some of the MRR moving pieces in Q2. But I'm just curious how we should be thinking about the growth of MRR in the second half of the year just given what you're seeing in terms of the pricing actions on the Plus SKU. And then is the thought that still we should expect all these performance marketing investments to be an accelerant or an incremental kind of revenue uplift into 2025? Just give us your latest thoughts in terms of the timing of when you see those paybacks and incremental revenue streams coming into the model. Thank you.

There’s a lot to unpack, so let’s break it down into a few different parts, starting from the end. When considering our marketing spend and the average payback periods over the last 18 months, we believe this will contribute more to 2025 than 2024. Previously, I mentioned a strong uplift in MRR during Q2, particularly due to a few factors, including the reduction in paid trial durations. This trend is specific to this quarter and won't carry over into the next quarter. Part of the success is attributed to new merchants joining the platform and effective marketing efforts, leading to a significant increase in the number of merchants on the platform in Q2. I won’t speculate on Q4, but I provided guidance for Q3 regarding revenue growth. If you assess the revenue growth from the past four to six quarters on a pro forma basis, excluding logistics and considering some price changes that may have influenced results, you’ll see a steady and stable delivery of revenue growth, which is also reflected in our Q3 numbers. We’re also considering macroeconomic factors in our outlook. We feel optimistic about increasing the number of merchants on our platform. In relation to MRR, we've made some pricing changes that are factored into the results. The Standard pricing adjustments are well represented, and the Plus pricing changes will have a more incremental impact on Q3 revenues since they were implemented mid-quarter, meaning they won’t fully reflect in this quarter's results. However, we view this as a favorable trend contributing to our revenue guidance. Overall, our business is performing well, which is evident in the results you’ve seen.

Thank you for your question. And our final question will come from Richard Tse at National Bank.

Yes. With respect to point of sale, you seem to be getting some good momentum there. I'm just curious, are you displacing the incumbents in the market? Are these sales to vendors without a service provider, meaning they're sort of newer enterprises?

There are two aspects to consider. On one hand, many retailers are still using outdated systems that are inadequate, and it's time for them to seek better, future-proof options with enhanced functionality that are enjoyable for both employees and customers. On the other hand, a strong aspect of Shopify's business model is our role in nurturing emerging brands. As these brands expand their physical presence, they tend to adopt Shopify. For instance, Mejuri has had numerous stores for a long time, and their decision to upgrade their systems with ours, both online and offline, reflects this trend. We are successfully attracting larger merchants, including those with over 100 physical locations across various regions. We have also introduced point-of-sale terminals in eight new countries within the EU and APAC. It's a strong selling point to promote the idea of consolidating online and offline systems into a single, unified commerce solution provided by Shopify. The results highlight our success, with offline GMV growth of 27% in Q2, and we anticipate this will be a significant driver for the future. Furthermore, we continue to engage brands such as Frank and Oak, Cherry Republic, and Banana Republic Home, which have many locations and are helping us expand our reach to other similar retailers. This growth is a vital component of our business.

All right. Thank you for that question. I'll now turn it back to Harley for closing comments.

I just want to say a few things before we finish up. It's important to highlight that we have always focused on long-term growth since our IPO, and this continues to be our approach. What you are witnessing today is our strategic investment to solidify our leadership in commerce. We are following through on the plans we shared with you last year, evident in our results. These results particularly illustrate a significant trend: we can achieve substantial growth alongside profitability, and we are committed to investing in areas that will be critical in the future. If you're not quite seeing this, I encourage you to take a closer look, as we are developing some of the most impactful products for merchants and businesses of all sizes. I've mentioned this several times during this call, but I will reiterate that this is the best version of Shopify to date. Thank you for being part of this call.

That concludes our call. Thank you.