Shopify Inc. Q4 FY2024 Earnings Call

Good morning, and thank you for joining Shopify's Fourth Quarter 2024 Conference Call. I'm 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. 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. Undue reliance should not be placed on these forward-looking statements. We undertake no obligation to update or revise these statements, except as required by law. You can read about these assumptions, risks, and uncertainties in our press release this morning as well as in our filings with U.S. and Canadian regulators. 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 provided in 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. As we close another year, I have honestly never been more excited by what we've achieved and how it's positioning us for 2025. 2024 was one for the books. We executed with discipline, just as we said we would. We maintained a rapid speed of product innovation marked by three additions, and we further solidified our position as a leader in unified commerce. We continued to expand our global reach and scale, coming in just shy of $300 billion in GMV and $9 billion in revenue for the year. That is nearly 2.5 times more GMV and three times more revenue than 2020, just four years ago. Or to put it in another way, we delivered annual revenue growth of 26% and an annual free cash flow margin of 18%. And we ended the year on a really high note, with Q4 absolutely knocking it out of the park, delivering 31% revenue growth and 22% free cash flow margins, putting us in the rare air of hitting the rule of 50 at a size and scale that very few are achieving. We can deliver the success we did throughout 2024, and specifically in Q4, because Shopify was founded on the belief that we grow by helping our merchants grow and succeed. In other words, their success fuels our own, and that remains the flywheel behind our success today. Our commitment to making entrepreneurship more common is why Shopify has become the go-to platform across all corners of commerce. From local start-ups landing their very first sale to global brands pushing billions in GMV, merchants everywhere are choosing Shopify. I'm especially proud to share that in the U.S. alone, Shopify is now over 12% of the e-commerce market share. And we continue to grow rapidly in places like Europe and Japan. Let's quickly touch on how we closed out 2024. From a regional perspective, North American revenue was up 23%, with the U.S. crossing $5.7 billion in revenue, which is more than our entire company's revenue in 2022. Our international regions continued to outperform North America, achieving a 33% growth rate for the year. With two consecutive years of international growth exceeding 30%, we are driving rapid growth at scale as we continue to expand our global presence. In offline, we grew revenue 33% to $588 million for the year while also crossing $100 billion in cumulative offline GMV processed on Shopify. And finally, our merchants' full-year GMV accelerated to 24% compared to last year, which includes our merchants' most successful Black Friday, Cyber Monday selling period ever, generating $11.5 billion in GMV. What's even more impressive about these growth numbers is that we did it while managing our operating expense growth to deliver an incredible milestone for Shopify. Our operating income surpassed $1 billion for the year, which was 4 times higher than our previous peak of $269 million in 2021. And on top of that, our free cash flow margin expanded to 18%, up from 13% in 2023. I also want to take a minute to mention some major milestones Shopify hit in 2024 that demonstrate our strength. Over 875 million consumers bought something from a Shopify merchant's online store. That is essentially one in every six Internet users. We passed a massive milestone crossing the $1 trillion mark for cumulative GMV that has been processed through Shopify. And we now have hundreds of millions of Shop Pay users, with Shop Pay representing 38% of GPV, up from 33% of GPV in 2023. In my 15 years at Shopify, I firmly believe this is the strongest and most durable version of the company to date. 2024 was nothing short of spectacular, especially with a powerhouse Q4. And if I may, I want to pause for a second here and just make sure that is really, really clear. Nothing matters more than this. Q4 was an incredible quarter. And even more importantly, the entire 2024 was exceptionally strong. On this very call one year ago, we laid out very clear goals, and then we set out, and we absolutely crushed them. We delivered 24% GMV growth, 26% revenue growth and an 18% free cash flow margin. This is not just Shopify doing well, this is Shopify operating as a growth company at peak performance across our team, our products, our business model and with operational discipline, exactly as we said we would. And even though we get to get on here four times a year to walk through the quarterly results, we are laser-focused on the bigger picture. Our vision goes way beyond just the next quarter. We are committed to building a durable 100-year company that doesn't just meet the needs of our merchants but anticipates what they'll need in the next five, ten, even twenty years. We are really pleased with how things are shaping up. Our market position is strengthening. Our operating model is proving very effective. And our profitability levels are exactly where we want them to be. If you walk away from this call with nothing else, I hope it's that. Okay. Where was I? Okay. So in 2024, we focused a ton on optimizing and fortifying the incredible platform we've built. We fine-tuned the edges, we improved performance, and we made sure everything works seamlessly together. Now while there are too many to list on this call, I want to hit on a couple of the most impressive time-saving features and new products that we launched this past year. First, our engineers focus on enhancing Shopify's intuitiveness and ease of use by streamlining operations and reducing friction. We increased variant limits to 2,000 to enable building even more complex catalogs for larger merchants. We enhanced customer account extensions so merchants can add features like loyalty programs without touching code. We launched Shopify Balance for Plus, introducing next-day payouts and attractive APYs and added flexible payment options in Shopify credit to improve cash flow management. We expanded Shopify Tax in the U.K. and EU and enhanced Shopify Inbox, leveraging AI to make customer communications more efficient. In our offline business, we rolled out Tap to Pay in multiple countries, introduced Shopify bundles and customer metafields and launched robust order management features like ship to store and draft orders. We also help merchants turn their retail locations into powerful acquisition channels by capturing more emails at checkout powered by the network effect of Shop Pay. Internationally, we've taken big strides by expanding our POS terminal to eight additional countries and integrating Payments in France. We also made it easier for merchants to discover and engage with their customers. The Shop App introduced a new merchant-focused home feed, highlighting the diversity and richness of brands. We also made Shop campaigns available to all Shopify plans, enabling more merchants to run acquisition campaigns on platforms like Shop, Google, and Meta, targeting new and lapsed customers with incentives in the Shop App. As it relates to helping our merchants go global, we've significantly enhanced the global buyer experience by adding UPS as a carrier option in managed markets, expanding our comprehensive coverage for U.S. outbound labels across economy, standard, and express services. We've expanded multicurrency payouts across select parts of Europe, introduced Shopify plans in Japanese yen, and launched Rise, our first flagship theme tailored for the Japanese e-commerce market. Additionally, we've integrated Klarna into Shopify Payments as a local payment method for certain countries, and we increased our local shipping options across Europe and the U.K., further broadening our market coverage and streamlining operations for our merchants. Beyond our products, one of the greatest strengths is our thriving partner ecosystem. We are widely recognized as one of the best companies in the world at fostering a long-term, mutually beneficial partnership. Last year, we became Roblox's first commerce integration partner. We integrated with YouTube Shopping in the U.S., expanded our payments offering through a partnership with PayPal, launched our first AI-powered search integration with Perplexity, enabling new ways for buyers to find merchants, and launched a new collaboration with Oracle for enterprise. Additionally, over the past year, we have paid out $1 billion to partners for apps benefiting our merchants. We added over 3,000 new apps to our App Store, bringing our total to more than 16,000 apps by the end of 2024, including the over 675 that are part of our Built for Shopify program. This is what differentiates us. We accomplished all of this product innovation in a single year. Again, in a single year. We are building for the long term, and 2024 shows just that. It's one of the strongest and most balanced years across all aspects of our business in our 20-year history. And with that in mind, let me take you through some of the accomplishments from our Q4 across our growth drivers, and then I'll wrap up by sharing an overview of our aims for 2025. So let's dive into Q4. Shopify is expanding its merchant base to include larger, high-volume global brands. Since our last earnings call, brands like Reebok, Champion, Westwing, and BarkBox all launched on Shopify. We also continued to deepen our portfolio of brands across our largest verticals, signing names from the apparel and accessories vertical like the Canadian behemoth, Reitmans, David's Bridal, Uncommon Goods, and luxury handbag designer, Dooney & Bourke, health and beauty companies like Goop, while adding to newer verticals, including the legendary Warner Music Group and the renowned window covering company, Hunter Douglas. In Europe, we also signed iconic luxury fashion retailer, Karl Lagerfeld, who will launch over 70 global point-of-sale locations with Shopify. We're also thrilled to continue welcoming some of the biggest and most renowned sports teams to Shopify. Most recently, FC Barcelona, the iconic soccer team with a global fan base of over 330 million has expanded their use of our platform to include our unified commerce and point-of-sale system, moving beyond just online. They join an impressive roster of major sports teams already leveraging Shopify, including European football giants like Real Madrid and Newcastle United, NBA powerhouses such as the L.A. Lakers, Miami Heat, Dallas Mavericks, and Sacramento Kings, as well as the Toronto Maple Leafs and Red Bull Racing. Not to mention within global eSports teams, including Team Liquid and, of course, our very own Shopify Rebellion. You can say we're knocking it out of the park in the commerce game. Clearly, we are playing in a league of our own as the MVP, the most valuable platform. And that is just the beginning. Think about this, from top sports teams to major music labels and even one of the largest window covering businesses, Shopify powers them all. This diversity isn't just impressive, it proves that Shopify is the most compelling choice for any business looking to grow quickly, reliably, and at scale. No matter your industry, we have got you covered. In addition to new brands consistently choosing Shopify for its comprehensive enterprise-level offerings, the Shop Pay commerce component has also become a compelling entry point into the Shopify ecosystem for enterprise brands. Take Everlane, for example. Everlane was the first merchant to sign up for the Shop Pay commerce component about 15 months ago. But since then, our partnership has only grown stronger. And by Q4 of this year, we've expanded our agreement with them, bringing more of their operations over to Shopify. And we believe this trend should continue to play out over time for the Shop Pay commerce component. We expect that enterprise retailers may often begin with a simple integration of Shop Pay and gradually, over time, adopt more and more of Shopify's products and services. Or here's another example. In Q4, we signed three very large shoe brands: ALDO, Sperry, and Call it Spring, that combined will bring both their online and offline businesses to Shopify, including over 400 physical retail locations through point of sale. Initially, these brands were only looking at our Shop Pay commerce component. But after working closely with our team and seeing what our full unified e-commerce offering can do, they each decided to go all in with us. I love this example because it highlights so clearly that our go-to-market strategy of offering a singular component as an option can open up conversations that lead to merchants adopting our entire platform. Now let's dive into Shop products, the buyer-facing side of Shopify that's all about making shopping simpler, more delightful, and becoming the most trusted brand for commerce everywhere. Our Shop products are anchored by four main pillars: Shop Pay, Shop Pay Installments, sign in with Shop, and the Shop App. Let's start by talking about Shop Pay. The Shop Pay button has become a highly valuable piece of real estate for both merchants and buyers. We believe that buyers are actively seeking it out during checkout, so much so that if not available, they are more likely to abandon their checkout. Now this behavior underscores what we and our merchants have long understood. Shop Pay's ability to drive conversions is very powerful. This quarter, Shop Pay processed $27 billion of GMV, up 50% from last year and double that of the next accelerated checkout on Shopify merchant stores. I want to make sure that everybody caught that: nearly double that of the next closest option. So it's no surprise that the Shop Pay commerce component in particular has been generating very strong interest amongst enterprise-level brands. In 2024, GMV from this component alone surged by nearly 20 times, with major brands like Arctic, Boot Barn, and Bespoke Post adopting it. And this quarter, well-known brands such as Crocs and GameStop also signed up for the Shop Pay commerce component, further expanding our reach. Now the Shop App, which has seen its GMV grow six times in the past two years alone, continues to scale across active users and in-app-native GMV. In fact, Shop App native GMV was up 84% versus the prior year as we continued to make it an even more compelling destination for buyers to find their favorite brands on their mobile devices. Recent improvements include a more personalized and fresh shopping feed, new curated shopping events and category browsing, and the launch of cart syncing, which allows users to complete abandoned Shop Pay web checkout through the Shop App. This is really, really cool. And finally, let's quickly touch on offline and B2B before we turn our focus to 2025. Q4 offline GMV grew 26%, thanks largely to our focused effort on expanding our reach with large multi-location merchants. Notably, we launched three new brands in the Asia Pacific region with over 320 locations and celebrated the opening of SKIMS's first location in NYC and Beams's first pop-up store. Additionally, a recent Ernst & Young market report has validated our leadership in unified commerce, recognizing Shopify point-of-sale for its efficiency and cost-effectiveness. EY highlighted that because of our best-in-class architecture, Shopify point-of-sale enables enterprise retailers to achieve a 22% lower cost of ownership and 20% faster point-of-sale implementation, enhancing both operational and revenue efficiencies. This is a really, really big deal in the physical retail industry. In B2B, Shopify is really crushing it with six straight quarters of over 100% year-over-year GMV growth. In fact, Q4 alone was a 132% increase, and November smashed records with an all-time high in monthly GMV. Throughout the year, our B2B GMV climbed by more than 140% compared to 2023. In 2024, we also secured a top spot in the Forrester Wave rankings, a recognition that not only showcases our robust B2B capabilities but also enhances our appeal to larger merchants. We also welcomed new brands from various industries, expanding our market reach and customer base. While B2B still accounts for a small portion of our GMV, the strong growth we are experiencing highlights the vast opportunities ahead. Our aim is to make Shopify the premier self-serve wholesale purchasing platform, offering a unified solution that powers commerce online, offline, and everywhere in between. And we are well on our way to achieving that. Okay. So yes, 2024 was an incredible year, capped off by a particularly strong Q4. But as you all know by now, we are already full steam ahead into 2025, actively building on the scaling foundations we have built. Every year, Tobi sets the core themes for our company, reminding us of the impact of our work and guiding our focus for the year ahead. This year's aims build directly off of last year's successes, emphasizing a continued commitment to strong operational performance, rapid product innovation, and most importantly, the continued success and growth of our merchants. First, we remain committed to nailing the basics. And as a result, continuing our focus on simplification is front and center. Everything we build and do should make Shopify even more user-friendly for our merchants. This means stripping away unnecessary processes and focusing on what truly adds value. In other words, help our merchants to grow revenue without growing complexity for their business. Next, we will continue to embrace the transformative potential of AI. This technology is not just a part of the future, it is redefining it. We've anticipated this. So we're already transforming Shopify into a platform where users and machines work seamlessly together. We plan to deepen our investment in Sidekick and other AI capabilities to help not just brand-new merchants to launch, but also to help larger merchants scale faster and drive greater productivity. Our efforts to shift towards more goal-oriented software will further help to streamline operations and improve decision-making. This focus on embracing new ways of thinking and working positions us not only as the platform of choice today but also as a leader for commerce in the AI-driven era with a relentless focus on cutting-edge technology. Additionally, expansion remains a cornerstone for our ability to build for the long term. In 2025, we plan to continue to grow our reach across various merchant sizes, from entrepreneur to enterprise, and gain greater presence and market share across all geographies, particularly internationally in Europe and countries like Japan. We will continue to defend and grow our leadership position as the place to start an online business. We are dedicated to reinforcing our position as the go-to platform for starting online business and driving growth in areas like point-of-sale, B2B, and Shop, supported by further strategic marketing and targeted go-to-market initiatives. This expansion is not just about increasing our footprint. It's about strengthening the trust and reliability that our merchants expect from Shopify, all while working to become the gold standard for trusted commerce by buyers across the Internet. And all of this is backed by our continued commitment to a strong free cash flow margin profile. We plan to continue to operate as efficiently as possible to create the flexibility we want for further investment in the multiple areas of growth that we see before us. This disciplined approach allows us to focus on investing in long-term strategies rather than just short-term gains. Okay. To close this out, our path is clear, and we are executing. We've consistently demonstrated our commitment to financial discipline, enabling solid free cash flow margins that position us well for future growth and profitability. In 2025, we will continue to invest in our core platform and in key areas like enterprise, offline, and international markets as these key growth drivers are helping to fuel our top line growth and laying the groundwork for ongoing success and innovation. As the commerce landscape evolves, we firmly believe Shopify is best positioned to thrive, thanks to our proven track record, agile platform, relentless focus on product innovation, and the success of our merchants. We are entering an exciting era of commerce driven by transformative shifts in technology like AI. We are ready to embrace this change and the competition it brings, confident in our ability to continue leading the way. So thank you to the entire Shopify team, our partner ecosystem, and all our merchants for another amazing year of making commerce better for everyone. As I hope is evident at this point, we are ready, and we are excited for what is next. And with that, let me turn the call over to Jeff.

Thank you, Harley. Q4 was an exceptional quarter for us, capping a year where we delivered 25% or greater top line growth in each quarter when excluding logistics and expanded our free cash flow margin to 18% for the year. This marks our seventh straight quarter of delivering pro forma revenue growth of 25% or greater, sixth consecutive quarter of GMV growth rate exceeding 20%, ninth consecutive quarter of positive free cash flow and sixth consecutive quarter of double-digit free cash flow margins. We also achieved some significant milestones on the expense side, but more on that later. We are delivering growth across multiple products, multiple geographies, and multiple merchant sizes and types, all while being disciplined on expenses but thoughtfully investing for Shopify's continued growth. Now let's dive into our Q4 results. In Q4, GMV increased 26% year-over-year, marking the highest quarterly GMV rate since the pandemic-driven growth rate of 31% in Q4 2021. The Q4 GMV results were driven primarily by: same-store sales growth from our existing merchants, led by our Plus merchants; growth in the number of merchants on our platform; continued strength internationally with GMV outside North America growing 33% in Q4. This continued momentum was led by 37% growth from the combined region of Europe, the Middle East, and Africa with growth in that region slightly weighted to same-store sales growth versus new merchant acquisition; and fourth, online, our point of sale, where we had 26% GMV growth year-over-year. In terms of industry verticals, Q4 saw notable growth from health and beauty, food and beverage, home and garden, and apparel and accessories. We also had in Q4 notable strength from a few interesting but smaller verticals for us like toys and games and animals and pet supply. Q4 revenue was $2.8 billion, up 31% year-over-year, and full-year revenue was up 26% to $8.9 billion. The key drivers were the GMV growth that I just mentioned, growth in Subscription Solutions revenue stemming from the growth in the number of merchants on our platform and, to a lesser degree, variable platform fees and apps and domains and increased Payments penetration, which hit 64% for Q4. The revenue outperformance relative to our outlook was driven by North America representing a larger percentage of GMV than expected. More of our products are available in North America versus other geographies, so outperformance in the U.S. and Canada brings higher revenue per merchant. Q4 Merchant Solutions revenue increased 33% year-over-year, primarily driven by the continued strength in GMV and increased penetration of Shopify Payments. $61 billion of GMV was processed on Shopify Payments in Q4, that's 35% higher than last year, and 64% of GMV compared to 60% in Q4 of 2023. Several factors drove the quarter's higher gross Payments volume, including the strong performance of merchants who use Shopify Payments, an increasing percentage of which are on Shopify Plus, more merchants across the globe adopting Payments, and greater penetration of Shop Pay, which was 41% of GPV in the quarter. As a reminder, Q4 is a quarter that traditionally sees the highest percentage of revenue from Payments. For the year, GPV penetration was 62%, up from 58% in 2023. Subscription Solutions revenue was up 27% over Q4 of last year. The growth was driven by an increase in the number of merchants on our platform and to a lesser degree, higher variable platform fees and the benefit from the Plus pricing change. We continue to execute at an impressive scale, driving both commerce overall and our share of the commerce market. Q4 MRR was up 24% year-over-year with continued growth in each of Standard, Plus, and offline, with all three categories seeing an increase in the number of merchants. Plus represented 33% of MRR for the quarter, consistent with Q3. Important to note that during Q4, we started shifting to a three-month paid trial into certain markets versus our previously predominantly one-month paid trials. This change was a headwind to our Q4 MRR growth, particularly in Standard and offline. Moreover, based on the timing of our rollouts, we expect it to impact Q1 and Q2. As you know, we are always iterating on our approach to merchant acquisition, focusing on enabling and accelerating merchant success for the long term. With respect to paid trials, the one-month trials yielded revenue to Shopify faster, but our data also suggested that it came at the cost of durability, specifically giving merchants a little bit more time to experiment with our platform increased the likelihood that they were setting themselves up for greater GMV success over the long term. This point became clearer through testing that we did regarding how quickly merchants from various trial lengths achieved certain GMV milestones. For nearly every lens of our business like geography or merchant type, the three-month trial yielded better long-term results for merchants and Shopify. Therefore, we are moving to three-month trials in most geographies. As a reminder, paid trials are just one of our merchant acquisition tools. Q4 gross profit was $1.4 billion for the quarter, up 27% year-over-year, and our full year gross profit was up 27% to $4.5 billion. Subscription Solutions gross margin was 79.9%, compared to 81.5% in the prior year. The decrease was mainly due to higher cloud and infrastructure hosting costs, in part to support our higher volume fourth quarter. But we do not expect this to have as much of an impact going forward. Merchant Solutions gross margin was 38.2%, compared to 39.2% in Q4 of 2023. The decrease was primarily driven by lower noncash revenues from certain partnerships which carry a high gross margin and the impact from the expanded partnership with PayPal. Partially offsetting these headwinds in Q4 was strength in our other Merchant Solutions products led by international selling, previously known as Markets. Now let's turn to operating expenses. Reflecting on just the past two years, we've made significant strides. In Q4 2022, operating expenses, excluding the real estate charge, were 52% of revenues. That went down to 36% in Q4 of 2023 and further down to 32% this Q4, which was right in line with the outlook we provided. We have come a long way. For Q4, we achieved operating expense leverage in each of R&D, sales and marketing, and G&A, largely due to our disciplined management of headcount. As of December 31, 2024, our headcount was just under 8,100 employees, down from approximately 8,300 at the end of 2023. In the fourth and smallest of our four operating expense categories that we have on the income statement, transaction loans and losses, which does not involve headcount, we saw a slight increase as a percentage of revenue to 3% from 2% the previous year. This increase is simply a function of higher volumes for both our payments and capital businesses. Important to note that our loss ratios for each remained within a consistent range. Payments and capital are growing well and this was an outgrowth of that. I want to take a moment to thank all of my colleagues for the hard work and discipline they're exercising on headcount and the constant innovation and leveraging of automation, all while we continue to invest in key growth opportunities. In my opening remarks, I referenced some milestones on the expense side. In Q4 and for the year, we reached four milestones for the first time since going public nearly a decade ago. Operating expenses for the year were down to 38% of revenues. Operating expenses for Q4 were down to 32% of revenues. Operating margin for the year hit 12%, double that of our previous peak in 2021. And operating margin for the quarter was 17%. All of these metrics represent the strongest profitability levels that we have achieved since going public in 2015, all while maintaining and, in many instances, accelerating growth at scale. Stock-based compensation was $118 million for the quarter. Q4 free cash flow was $611 million or 22% of revenue, coming in better than our outlook primarily due to our revenue outperformance. We delivered increases in both free cash flow margin and free cash flow dollars each successive quarter last year, delivering 12% in Q1, 16% in Q2, 19% in Q3, and 22% this past quarter. For the year, free cash flow was $1.6 billion, up 77%, achieving a free cash flow margin of 18% for the year. Our free cash flow levels are the manifestation of the hard work throughout 2022 and 2023. I believe the strength of our business allows us to achieve these attractive free cash flow margins, but still, importantly, invest in the future. To be clear, we are a growth company. We plan to prioritize investing further in key areas like our core platform, international, B2B, enterprise, and offline, as opposed to driving for higher free cash flow margins in the near term. It's simply the right thing to do with the immense opportunities we see ahead, but delivers a profitability level that we are proud of and believe we can maintain without impacting future growth. Before diving into outlook for Q1, one additional dynamic for the full year 2025 to call out. This year, we expect to return to the normal pattern of Merchant Solutions growing quicker than Subscription Solutions. A recurring theme of Merchant Solutions' outperformance over the years has been the strength of our Payments product, the growing number of our Merchant Solutions products that we offer, and our ability to drive merchant adoption of these offerings. Two things are expected to impact Subscription Solutions growth this year. First, the move to three-month trials. Second, our Subscription Solutions revenue recently benefited from the changes in our pricing plans for Standard and Plus. While we always examine pricing across products and geographies, we don't expect to have substantive pricing changes this year, and therefore expect this benefit to Subscription Solutions growth to normalize. With this backdrop, let's move to our expectations for Q1. We expect Q1 revenue growth to be in the mid-20s year-over-year driven by many of the same factors that supported our strong revenue growth in 2024, noting that Q4 specifically is our seasonally strongest quarter. Turning to gross profit. We expect our gross profit dollars to grow in the low 20s. The year-over-year gross margin impact versus Q1 of 2024 is driven by the mix shift between the growth rates of Merchant Solutions and Subscription Solutions that I just mentioned, the continued strength of Payments, including the growth of Plus and enterprise, and the two dynamics that I mentioned regarding Q4 gross margins, PayPal accounting, and lower noncash revenues. We expect that our Q1 operating expenses will be 41% to 42% of revenues, reflecting a 500 to 600 basis point improvement from Q1 last year. The factors that contributed to our expense leverage in Q4, as I detailed earlier, are expected to continue into Q1. We are committed to finding opportunities for operating leverage, but notably, I want to make sure that we are investing in R&D talent, and we'll continue to invest in marketing to support our key growth areas including enterprise, offline, and international. Stock-based compensation is expected to be $120 million in Q1. Finally, free cash flow margin. Q1 is typically our lowest GMV quarter, which naturally affects our revenue scale and, thereby, our free cash flow margin. Despite this, we still expect our Q1 free cash flow margin to be in the mid-teens, up from 12% last year. It is important to note that while we've significantly expanded our free cash flow margins over the last two years, as we move into 2025, and as I mentioned on our last call, we believe the free cash flow margin profile that we have achieved in 2024 strikes the right balance between profitability and investing in building the best products for our merchants today and into the future. We aim to maintain this level of cash flow profitability rather than optimizing for further margin expansion in the near term. There are simply too many compelling growth opportunities ahead. And with that, I'll turn the call back over to Carrie for your questions.

Thanks, Jeff. We will now take your questions before turning the call back to Harley for some final words. Our first question comes from Andrew Bauch at Wells Fargo.

Nice sort of results here. Maybe we can just start with the free cash flow guide for the first quarter. It looks like you're calling for roughly 200 basis points of free cash flow margin expansion. Is this the right way to think about the margin expansion as we kind of move through the remainder of the year? And then if we think about the investments that you're making, last year was a lot of the performance marketing was a key theme. Is it consistent with what you're kind of investing in now for these new opportunities?

Yes, I'll begin with that. Regarding the quarterly aspect of free cash flow, I won't delve into the specifics of each quarter. I'd like to reiterate my previous comments about the overall level of free cash flow margins and our perspective on it. We believe we have achieved a solid level that enables us to maintain profitability while also investing in our future goals. I've made remarks in the past concerning the quarterly changes in free cash flows, and I stand by those. As you know, the fourth quarter is traditionally our largest in terms of gross merchandise volume, which then translates into revenue and subsequently affects free cash flow margins. Overall, regarding these margins, I believe we are at the right level. Concerning performance marketing, it continues to represent the bulk of our marketing expenditures. We remain focused on the paybacks we have discussed during several calls, and they are performing well. We are consistently testing and analyzing to determine where the best incremental dollar of marketing spend can be most effective. Our strategy in this area has not changed.

Our next question will come from Jeff Cantwell at Seaport Research.

Can you hear me?

Yes.

Great. Okay. Maybe just to clarify. It looks like your Merchant Solutions' take rate was higher than expected this quarter. How should we think about that in Q1? Obviously, there's going to be some seasonality there. But on a year-over-year basis, it sounds like we should maybe be contemplating a higher take rate there in Merchant Solutions given all the momentum you're seeing across the platform. And then on the gross margins, it looks like you're guiding low 20s. Do you mind just drilling down on that a little bit? How much of the delta there versus the revenue growth guide was due to the success of moving upmarket to enterprise? And I think you said PayPal accounting, so just trying to get more clarity on that to think about the go-forward.

Yes. As it relates to Merchant Solutions and the attach rate, obviously, what is going in Merchant Solutions is the strength of payments as well as the continued growth of the products like Capital and Tax and all the additional products which we're adding. And that's, if you look at it on a year-over-year basis, obviously, '24 over '23, you've got to keep in mind the impact to pro-forming out logistics. And so that actually would add some additional strength in terms of what you're seeing on the Merchant Solutions attach rate. So we will obviously continue to drive all the product within Merchant Solutions, and that will be reflective of what you see in the attach rate, recognizing again that, as we've talked about in the past, attach rate for us is more of an output. We're obviously trying to build great products for our merchants, that drives their GMV. And from that will obviously come the success in terms of what we realize in revenue and the monetization there. But yes, we're performing well on the Merchant Solutions side. As it relates to gross margins for Q1, obviously, I talked through from a guidance perspective, the year-over-year impact and the trends that are at play there. Part of what I alluded to in terms of the relative growth rates of Merchant Solutions and Subscription Solutions will have an impact on gross margin. And part of that is just a function, as I alluded to, in terms of what we're seeing on the paid trials this year, which will be something which will have some headwinds for the first half of the year, but obviously, that will then normalize. So I don't think there's anything beyond what I covered in the primary call. Those are the key drivers.

Our next question comes from Craig Maurer at Financial Technology Partners.

First, I wanted to understand how the de minimis exemption impacts your business and how we should think about that should tariffs include that and come into play. Second, I just wanted to understand how AI can help you with content or listing moderation considering the controversy around the Super Bowl advertisement that took place?

I'll start there with that question. Let's sort of start with the question of de minimis and just tariffs in general. Look, I think small and medium-sized businesses are responsible for something like two-thirds of all jobs created. They account for almost all the new job creation. And our merchants alone move billions across the border. So obviously, tariffs impact real entrepreneurs that are carving out livelihoods for themselves. And what we try to do with Shopify every day is we try to protect and empower every business we can, but obviously, especially, we care about the underdogs. So as soon as we've seen anything, whether it's tariffs or de minimis, we usually get to work from a product perspective. And we did that right away. I mean all merchants can now display and collect duties during checkout. Consumers can actually easily shop from their home country using Shop App's new search filters. And specifically when it comes to de minimis, I mean, we think protections like de minimis are crucial for small businesses that engage in trade. By exempting these sort of low-value shipments from taxes and duties, they keep costs down and allow entrepreneurs, I think, to compete at a much larger scale. So I think rather than eliminating de minimis, countries should really try to streamline these custom processes and improve digital duty collection to make things a lot easier.

Okay. And our next question will come from Mark Mahaney at Evercore ISI.

Okay. Great. I have two questions. First, you've mentioned that headcount declined in the fourth quarter. How do you view headcount moving forward? Should we anticipate only modest headcount growth for Shopify in the next year or two due to operational efficiencies? Secondly, reflecting on the pricing actions taken over the past couple of years, what insights have you gained, and how confident are you that the value you're providing to customers will enable you to implement further pricing adjustments when necessary?

I will begin by saying that we believe we are at a stage where we can continue to grow our business, including our merchant base and revenue, while keeping our headcount stable. We are satisfied with the current size and structure of Shopify. It's been around 24 months since we shifted our focus to prioritize key initiatives aimed at assisting entrepreneurs and enterprise merchants in selling across multiple platforms, not just online with us. It's crucial for us that merchants utilize a broader range of our products. We feel confident that we can achieve our goals without significantly increasing our headcount. Regarding the value of Shopify's product, especially for enterprise customers, we've observed that many merchants still view Shopify as the best option available, even at the enterprise level. For instance, companies like Everlane initially approached us for a single component and later transitioned to using our entire platform. Similarly, with ALDO, our discussions began with a commerce component before evolving into a complete unified commerce solution. We are increasingly seeing merchants wanting to engage with Shopify, and my personal experience at NRF in January showed that nearly every major retailer and brand is now considering Shopify for collaboration, which was not the case a year ago. Two key factors are driving this interest: the robustness of our product and its exceptional value. Shopify is designed to be long-lasting, enabling merchants to sell wherever they choose in the future. Relative to other enterprise options, Shopify remains the best value on the market. While there is some potential for us to adjust pricing upwards, we are currently attracting many larger merchants, creating a positive flywheel effect, suggesting this is not the right time for a price increase. As for previous pricing changes, we discussed increasing our basic plan from $29 to $39 in past earnings calls. Even at this higher entry price, we received minimal complaints, indicating that our price-to-value ratio remains strong and that customers still perceive excellent value in our offerings.

Our next question comes from Brad Sills at Bank of America.

Wonderful. I wanted to ask about international. It sounds like some exciting expansion opportunity there. Could you just give us a sense for which regions, which countries you're making a bigger push? And also, what is the kind of investment that you're making there? Is it more setup experts, direct marketing presence? Any color on how you're investing in some of these new geographies?

Yes, I'm glad you asked the question. Look, international expansion is a key growth driver for Shopify. It certainly was in Q4 and for all of 2024. And in particular, you saw GMV delivered 33% growth in Q4, which outpaced North American GMV. In particular, obviously, EMEA and Europe, Middle East and Africa, GMV grew 37% in Q4 year-over-year. That was led by countries like U.K., Germany, France, Netherlands. We're also seeing a lot of very large brands, a lot of the large retailers, whether it's FC Barcelona or Karl Lagerfeld or Luxottica or On Running or Ami Paris come to Shopify now. So it's an area that we keep investing in, certainly, from a product perspective, things like frictionless sign-up to drive adoption, things like localization of Shopify.com, compliance improvements, rolling out Klarna as a local payment method. There's been new local shipping methods that we've integrated with Shopify point-of-sale, is now available in more countries. So from a product perspective, we're making Shopify available to more places and integrating it. Obviously, to your point about some of the agencies and partners, that comes with it as well. We've made a ton of headway in terms of growing our international merchant base. And as we speak, 50% of our merchant base are currently now outside of North America. And we'll continue to work on that. We think that's an area where we have a huge opportunity. I mentioned on the call that if you look at U.S. e-commerce, we're just over around 12% now of market share. But if you look at global retail, we're less than 1%. We have so much room for us to grow on a global scale across not just online but also offline.

Yes, Brad, the only additional point I would like to make is that in many previous calls we've discussed several countries in Europe, particularly in Western Europe. The strong performance in these regions continues, including Great Britain, Germany, Italy, France, the Netherlands, and Denmark, all of which are doing exceptionally well. When we evaluate the balance between same-store sales growth and new merchant acquisition, the growth rates we are achieving in same-store sales continue to exceed the e-commerce growth rates in each of these countries. This indicates that we are effectively aligning our product offerings with market needs.

Our next question comes from Gabriela Borges at Goldman Sachs.

Harley, I wanted to follow up on your comments on the momentum in the enterprise at NRF. Maybe talk a little bit about any other internal indicators you have or anecdotes on momentum in enterprise being a change in trend rather than just a continuation of a trend. And anything that you'd highlight on the product roadmap that you're excited about from a milestone standpoint that can help you lift and shift some of this enterprise share over given how sticky we know the incumbents can sometimes be?

Thank you, Gabriela, for the great question. What I’m referring to is that brands like David's Bridal, Hunter Douglas, Warner Music, and Crocs, which historically didn’t use Shopify, have now signed with us this quarter. These companies either had their own complex systems built by large engineering teams or were tied to outdated commerce software. Many of them wanted to leave those systems but found themselves unable to do so due to various constraints. Now, with new leadership focused on innovation and a desire for better cost management, they are turning to Shopify. The launch of brands like Westwing, BarkBox, and Reebok, which happened at record speed—taking just three months instead of the usual 12 to 18 months—has made Shopify even more appealing. Overall, enterprises are shifting towards Shopify. We’ve created several options for them: Hydrogen for headless solutions, Plus for all-in-one systems, and CCS for specific components. We're pleased to see more merchants adopting our complete offerings. Additionally, with large agency partners and independent software vendors building practices that integrate Shopify for their enterprise clients, our strategy is proving successful. I’m particularly excited about our strong product offerings and our effective go-to-market team focused on winning over the enterprise sector. Being on the board of NRF, I've gained insight into industry sentiments, and I believe Shopify would stand out as one of the largest cloud solutions discussed there. Enterprises are choosing us for our exceptional value, product quality, and ability to enable sales across various channels. Furthermore, our new features like B2B and point-of-sale capabilities for up to 1,000 physical retail locations are coming together in a remarkable way.

Our next question comes from Mark Zgutowicz at Benchmark.

Harley and Jeff, just glancing at your cohort analysis in your 10-K and noticing that the '23 cohort accelerated in terms of its contribution to GMV accelerated quite a bit into '24 relative to what you saw from the '22 cohort. So two questions related to that. Sort of what do you attribute that acceleration to and sort of what that might imply in terms of the '24 cohort into this year?

We spend considerable time analyzing our merchant additions from a cohort perspective and how they progress over time. As these merchants remain on the platform and utilize more of our solutions, contributing to our success, this is a key area of focus for us. There isn’t much more to say regarding your question about what this means for 2024. Looking back to 2023, especially about two years ago, we started rolling out several initiatives. We've had Capital available for quite some time, and we successfully launched services like Tax, B2B, and point of sale, alongside our enterprise initiatives. It was around this time when we significantly improved our product-market fit in Europe. Consequently, much of what you've seen in the past couple of years reflects the growth of these offerings in our Merchant Solutions. While I can't predict the specifics for the 2024 cohort, I believe we've done well in broadening the range of tools available to our merchants, enhancing their potential for success, regardless of their location or whether they focus on online or offline sales. This is an encouraging trend for us. I don’t have specific metrics to share, but I appreciate your interest in this area, as it's something we are also actively considering.

Our next question comes from Paul Treiber at RBC Capital.

Just a question in regards to AI and the use of AI internally. Over the last year or so, you've made significant investments. Where are you seeing it operationally having the most impact? And then what has been the magnitude of productivity gains that you've seen?

I have a question about that earlier point that I didn't address, so let me clarify now. I believe Shopify will be a significant beneficiary in this new AI era. We are recognized as one of the top companies fostering long-term partnerships. Regarding partnerships in AI, we are working with Perplexity by enhancing their search results with our product catalog and utilizing OpenAI’s APIs for our internal needs. We are maximizing our use of these technologies. From a merchant perspective, we aim to help our merchants succeed faster and more effectively. Tools like Sidekick, the media editor, Shopify Inbox, and Semantic Search are essential for both new and scaling businesses. These are exclusive to Shopify and designed to simplify routine tasks, allowing merchants to focus on what they uniquely can do. With Mikhail as our new CTO, we expect to attract more talent from the AI and ML sectors while keeping our overall headcount stable. Internally, it’s not just about enhancing developer effectiveness; it also improves our support organization. We can ensure our support team has high-quality conversations with merchants, as AI can efficiently handle routine issues like domain configuration or password problems. Overall, we are in a unique position to leverage AI, unlocking remarkable capabilities for both our merchants and Shopify.

And our final question will come from Colin Sebastian at Baird.

Appreciate the opportunity. I guess, Harley, you highlighted the increasing use of Shopify products, Shop App, Shop Pay, et cetera. I mean, what's maybe the ultimate vision here for the buyer-facing platform? You're seeing a lot of traction. It seems like there are lots of opportunities to add functionality like combined shopping carts, things like that and maybe investing in a larger base of shoppers using the app. And then, Jeff, any comments on sort of capital allocation plans for the year ahead? I mean, you're generating a lot of cash and have a nice cash balance, so you have a lot of flexibility there.

As I mentioned, Shop App's Q4 native GMV increased by about 84%. We are making it an even more attractive platform for buyers to discover their favorite brands on mobile devices. We view Shop as the buyer-facing aspect of Shopify with the aim of simplifying and enhancing the shopping experience. It's clear that more consumers are recognizing it; I've often heard that some will only complete their purchase if they see the Shop Pay purple button. We will keep investing in it. Our objective is for Shopify to become the gold standard for online commerce. As Shop's array of products improves, it will foster trust and enhance security across all commerce. It's important to note that Shop serves as a proprietary channel for merchants to drive traffic as they see fit, which is exclusive to Shopify users. You can expect ongoing significant investments in personalization, the introduction of high-quality brands to the Shop App, and new ways for merchants to engage authentically with their customers. This is an advantage unique to Shopify users.

Yes. Regarding capital allocation, we actively discuss this internally and understand the importance of managing our capital wisely. I still believe it’s essential to maintain a solid cash cushion. We regularly assess our cash balance in relation to various benchmarks and the total amount. We consider capital allocation in our daily decisions, which cover everything from R&D spending to marketing, and of course, the question regarding potential capital returns. Keep in mind that we have a convertible bond outstanding that matures later this year, valued at just under $1 billion. As you may have noticed in recent calls, we have made approximately six smaller acquisitions and acqui-hires in the past year. These have been minor but crucial for acquiring AI and other talent. We plan to keep making strategic investments in our partners. To clarify, we don’t have any plans for large acquisitions; these have been carefully planned AI hires. We intend to be thoughtful and cautious regarding our cash management, though I don’t have any announcements to make today about capital returns. Harley, I’ll hand it back to you.

Thank you all for joining the call. I wanted to take a moment to express my gratitude and highlight a few points. Since our inception, we've been highly focused on ensuring the success of our merchants. It's important to remember that when we achieve this, the financial outcomes naturally follow. Our narrative is straightforward: a clear mission, effective execution, and sustainable growth. Q4 2024 exemplified this: we saw our sixth consecutive quarter of over 20% growth in GMV, our sixth straight quarter of double-digit free cash flow margins, and our seventh quarter of 25% or greater revenue growth. This demonstrates our identity as a growth company, coupled with strong operational discipline. We're also capturing more market share in a rapidly expanding industry. The most exciting aspect of Shopify is that we are not only increasing our share but also contributing to the overall market growth. Consistently, we’re delivering some of the strongest results in the software sector, and 2024 truly showcased this. We are confident in our ability to sustain this performance going forward. I want to emphasize that this is the best version of Shopify I've witnessed in 15 years since joining the team. You can expect us to keep enhancing our offerings in the coming years. Thank you once again for joining the call, and now let's continue our focus on building for our merchants.

With that, this concludes our fourth quarter 2024 conference call. Thanks for joining us.