Earnings Call Transcript
Shopify Inc. (SHOP)
Earnings Call Transcript - SHOP Q3 2022
Operator, Operator
Good morning, and thank you for joining Shopify's Third Quarter 2022 Conference Call. Tobi Lutke, Shopify's CEO; Harley Finkelstein, Shopify's President; Amy Shapiro, our CFO; and Jeff Hoffmeister, our incoming CFO, are with us this morning. After their prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are based on assumptions and therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements, except as required by law. You can read about these assumptions, risks and uncertainties in our press release this morning as well as in our filings with U.S. and Canadian regulators. We'll also speak to adjusted financial measures which are non-GAAP measures and not a substitute for GAAP financial measures. Reconciliations between the two are in the tables at the end of our press release. And finally, we report in U.S. dollars. So all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I will turn the call over to Harley.
Harley Finkelstein, President
Thanks, Amy, and good morning, everyone. As you can see from our Q3 performance, merchants continue to succeed on Shopify, growing sales and using more of our mission-critical tools to run their businesses. Shopify's essential tools serve as a business' central operating system. These tools help our merchants stay ahead of the curve as commerce continues to rapidly evolve. This is particularly important today as businesses grapple with the consequences of rising interest rates and inflation. This is a key reason why merchants choose Shopify: We make the important things easy and everything else possible. Later, Amy will discuss our Q3 financial performance and expectations for the rest of the year. I'm going to focus on the investments and the progress we've made in Q3 that further our competitive positioning and enable merchants to build buyer relationships to go global, to advance from first sale to full scale and simplify logistics, all of which plays a vital role in making commerce better for everyone. Starting with building buyer relationships. For our merchants, discovering and connecting with more buyers and deepening relationships with existing customers are critical to a merchant's ability to create long-term success. Whether that connection is online or offline, Shopify has a suite of innovative products, like our best-in-class retail point-of-sale offering, that is rapidly becoming the solution of choice not only for SMBs but also for large retailers. During the quarter, the outsized pace of offline growth on Shopify continued as we brought on 8 new merchants with over 20 locations each and 1 with over 175 locations. With our commercial teams increasingly selling to larger retailers, Plus merchants accounted for approximately 35% of all point-of-sale Pro sales closed in Q3, and that's up from 14% in the same period a year ago. Well-known brands, including department store Schoffields and designer apparel Totima, implemented our point-of-sale Pro solutions for their locations, driving Q3 offline GMV growth by 35% year-over-year or 41% in constant currency. Since the beginning of 2021, over half of the rapid adoption of point-of-sale Pro is being driven by new SMB retailers coming to Shopify to get their start as a new omnichannel business. Additionally, over 1/3 are from established offline retailers who are entirely new to e-commerce or selling only on point of sale. These stats demonstrate the power of our commerce platform and the breadth of capabilities we have built to make it easier for our merchants to reach customers on every surface. In late September, we launched our new first-in-class mobile hardware device, point-of-sale Go. POS Go was developed to empower merchants to meet consumers wherever they are, however they want to purchase, from curb to counter. With POS Go, merchants can close sales anywhere and take payments securely and smoothly. POS Go is one more pathway to bring even more merchants into our flywheel. In just 3 weeks since launch, POS Go has seen enthusiastic adoption among new and existing merchants with strong performance right out of the gates. Building buyer relationships is paramount as our merchants gear up for Black Friday and Cyber Monday. Shopify is already. Our platform is equipped to handle the influx of orders and volume because we don't just do this a few times a year; we support merchants through these types of flash sales all the time. For example, last month, during New York Fashion Week, we supported a top designer during an online drop. During the flash sale, this Shopify merchant sold hundreds of thousands of units and achieved tens of millions of dollars in sales within only a few hours. Shopify made this possible. Today, brands have to be more sophisticated in how they reach and sell to consumers as shopping continues to evolve. It has become critical for merchants to be discoverable across multiple platforms and services, showing up directly where their consumers are shopping. While still very nascent, GMV through native checkout integrations on key partner services such as Facebook, Instagram, and Google, more than tripled from Q3 last year. The more merchants continue to invest in multichannel sales, the more successful they become in building brand value among their consumers. Another way that Shopify is enabling merchants to build buyer relationships is through Shopify Audiences, our new tool that helps Plus merchants find high-intent customers. Since launching in May of this year, Audiences has significantly improved conversion rates, return on ad spend, and other important metrics for those Plus merchants who have opted in. Last quarter, I mentioned a couple of merchants who have really benefited from Audiences. Today, I want to share a couple of additional examples. Haya, a children's wellness brand, worked with Snow Agency, a Plus-certified partner, to onboard into Audiences. As a result, Haya has seen their return on ad spend increase over 170%. Their conversion rate has increased over 150%, all while driving down cost per acquisition by 35%. Fast-growing home furnishing brand Nathan James attributed over 500 new customers to their use of Shopify Audiences. They also saw a 200% increase in purchases, a 5.6x return on ad spend on the targeted campaign, over $100,000 in new revenue, all while customer acquisition costs declined by over 50%. Examples like these fuel our excitement about how Audiences can drive merchant growth, especially going into the upcoming holiday season. Additionally, we're excited to continue to deepen our partnership with Google with upcoming new features for Shopify merchants to improve their impact on Google. Another marketing tool that we launched in early access in mid-August is Shopify Collabs, which brings brands and creators together. It has generated approximately 50 million organic impressions across social channels in less than 2 months. Collabs allows creators to monetize their talents by discovering and partnering with independent brands and sharing their favorite products with their followers. This gives merchants yet another new channel to grow their brand reach and find new customers. We're also investing in our merchants' ability to grow by helping them go global. Shopify Markets, which launched in Q1, allows merchants to identify, set up, launch, optimize, and manage their international markets from a single storefront. To date, more than 175,000 merchants across the world have used Markets to help launch their international businesses. By reducing the barriers to international selling, U.S. merchants utilizing Markets now sell into an average of 14 additional countries. Shopify Markets Pro, which debuted in mid-September in early access, is our cross-border solution built on top of Markets. By combining global use features with Markets capabilities such as the Translate and Adapt app, Markets Pro makes it easier for merchants to accelerate their global expansion to over 150 countries overnight without increasing their operational costs, risks, or complexity. So when merchants add languages to their store, they will now be able to leverage automatic translations and create localized buyer experiences with duty prepaid express international shipping. And this is just the beginning. Our own studies have shown that a merchant's GMV increases when customers are showing localized content. We are confident that adoption will continue to increase as merchants look for ways to grow their businesses beyond their domestic borders. Like everything we do, we are laser-focused on lowering the barrier to entry in entrepreneurship globally. In May, we introduced localized subscription plans in over 200 countries. International retailers outside of North America continued to grow our overall merchant mix, comprising 45% of all merchants in Q3 and demonstrating the continued success of our investments. As we continue to expand our geographic reach, we launched Shopify Payments in Finland, Switzerland, and Portugal. We launched Shopify Capital in Australia and Shopify Shipping in Italy and France. Also during the quarter, we launched Shopify point-of-sale with integrated payments in Singapore and Finland, which brings the total number of countries where merchants can use our point-of-sale offering to 14. Shopify is built to help merchants as they grow from first sale to full scale and everywhere in between. Solutions like Shopify Shipping and Shopify Capital help smaller businesses grow, while development features like Shopify Functions enable customized pricing and discounts to increase consumer engagement and loyalty. Shopify Capital has come a long way since its humble beginnings in 2016. Even back then, Shopify had our merchant's backs when no one else did, supported them by providing a few thousand dollars to a handful of retailers. Fast forward until 2020, capital hit the $1 billion mark. And in 2021, it surpassed $2 billion in funding. At the end of August of this year, capital broke another record. We've provided cumulative funding of $4 billion since inception to our merchants. The team continues to fund and advance money to more merchants as they ramp up for Black Friday, Cyber Monday. Capital has made a real difference in merchant success rate, particularly as more and more banks and lenders are shutting off the spigot to smaller businesses. We also continue to improve the back office experience. Earlier this year, we launched Shopify Tax, a new product that takes the stress out of sales tax for our merchants so they can focus on what matters most to them: Their products and their customers. Our strategy of making certain high-value features available only in our Plus package continues to pay off. In Q3, we saw our Plus base continue to expand, not only from upgrades, but also from entirely new merchants coming on to Shopify for the first time. New to Shopify Plus merchants came from a wide array of verticals, driving growth of Shopify Plus GMV in Q3, which continued to outpace overall GMV growth. Some examples of brands that have joined Shopify Plus during the quarter and into early October include beauty care creator Glossier, electronics manufacturer Panasonic Technics, footwear and lifestyle accessories maker Cole Haan, jewelry designer Stella and Dots, fitness apparel provider Zumbawear, children's toy maker Melissa and Doug, and pet food manufacturer Greenies. Our Plus team continues to gain traction outside of North America as well. International brands new to our platform included a leading athletic footwear company Converse Japan, nutrition and vitamin supplement manufacturer GNC India, footwear line Superga Italy, and sports apparel designer New Era Hong Kong. The world's biggest superstars are also building their brands on Shopify Plus. In Q3, the Kardashian brand continued to build their Empire on Shopify with their latest brand, Courtney Kardashian's vitamin and supplement company Lemme. Additionally, Food Network star Jada Dialaurentiis introduced Jetsi, a new line of sauces and condiments. Ciara launched On Emission, her new line of clinical skinware. And homegrown Toronto celebrity Matti Matheson launched a new workwear brand, Rosa Regusa. Shopify continues to invest in global partnerships to support the adoption of Shopify by some of the world's largest brands. And during the quarter, we officially signed partnership agreements with Ernst & Young and KPMG, adding to our relationship with Deloitte. Our strategic alliance with Ernst & Young, or EY, serves and scales to the needs of the client's enterprise. EY will be training an initial cohort of 500 technical professionals across their EY Wavespace network at 50 locations globally on Shopify. And we'll further support those professionals by enabling up to 10,000 consultants through exposure to the Shopify platform. This access will enable co-creation of unique, immersive experiences that will help reimagine the online customer experience and unlock new markets for certain regulated industries and products. In addition, Shopify is thrilled to announce that we signed a collaboration agreement with KPMG in Canada. As one of Canada's largest systems integrators, our collaboration will help bring Shopify solutions to KPMG's clients to enable seamless commerce on their transaction platform of choice. On the development front, we are currently beta testing Hydrogen as a front-end web development framework or headless infrastructure. Hydrogen gives bigger retailers with in-house creators the tooling needed to accelerate development and deploy their bespoke storefronts with just one click on a hosting solution, Oxygen. With unique features such as Audiences, B2B, Hydrogen plus Oxygen, and the expansion of our partner program for ERP and systems integrators, we expect Shopify Plus' momentum with larger merchants to continue. Last, I'll provide more context on our fourth major investment area: Simplifying logistics. The Internet has leveled the playing field for so many parts of an independent retailer's business, but not for logistics. We have set out to change that paradigm with Shopify Fulfillment Network. Last quarter, we outlined the three complex stages of a merchant supply chain across freight, distribution, and fulfillment as inventory moves from port to port. Today, I'll share updates on our integration of Deliver, how we are accelerating our vision for SFN to become an end-to-end logistics platform for merchants, and most importantly, how we are shifting the logistics conversation with merchants to focus on driving value through fast and reliable fulfillment. First, since closing the Deliver acquisition on July 8, we have developed an ambitious plan to create a new fulfillment app for Shopify merchants and also combine the Deliver and Shopify Fulfillment Networks into a single network, spanning a merchant's full supply chain. We have made significant progress in our first quarter together with lots more still to come. We've also started creating a unified network built on top of the Deliver software platform. The combined scale of SFN and Deliver allows us to consolidate volume, streamline operations, and expand our carrier relationships. This unified network will enable Shopify to operate a small number of regional hubs that will serve several functions, including cross-docking, multichannel distribution, inventory balancing, and some local fulfillment. These hubs will absorb as much complexity as possible for the rest of the network. We will continue to partner with the highest-fit 3PLs around the U.S. to enable local fulfillment, leveraging our proprietary warehouse management software, FMS. The first combined SFN and Deliver facility is already operationally functional in Atlanta and has seen a tenfold quarter-over-quarter increase in the number of merchants holding inventory in that facility. We anticipate that unifying the network will be complete in Q1. Second, as we mentioned last quarter, we are building an end-to-end logistics platform that will connect every single part of a merchant supply chain. It enables merchants to dynamically route inventory across all their channels from B2B to D2C. Ultimately, we will create a fulfillment network that can accept orders and make customer delivery promises from the moment of merchants' goods leave their supplier. Since last quarter, we have seen a threefold increase in the number of shipped containers with our freight partner Flexport. Initial runs have shown that, as we expected, SFN merchants are experiencing up to 20% faster service from origin ports with significantly lower cost per pallet than average. This will allow SFN to guarantee that merchants' inventory is Black Friday, Cyber Monday ready the moment it leaves a supplier's facility. Let me share with you some of the initial stats on the rest of the supply chain. We have seen a 75% year-over-year increase in merchant inventory being received into Deliver cross docks, a nearly 80% growth quarter-over-quarter in the number of merchants using more than one of our logistics services across all three stages of the supply chain. And a 450% year-over-year increase in orders fulfilled by FMS across both Shopify and partner-run facilities. Finally, and most importantly, we are shifting the conversation with merchants to focus on logistics being a tremendous value driver for their operations. When done right, fast and reliable fulfillment can significantly increase cart size, conversion rate, order value, and turn buyers into repeat customers. In Q3, we completed the rollout of Shop Promise to all SFN merchants. Shop Promise is a consumer-facing badge indicating fast and reliable delivery across Shopify's online store and other popular direct-to-consumer channels. Shop Promise has already significantly boosted sales as participating merchants increased buyer conversion by up to 9% during the initial rollout. In September alone, SFN saw over 2/3 of domestic packages delivered within 2 business days, an exponential increase from less than 2% predicted delivery before SFN's software update in early 2022. All new SMN merchants are now automatically qualified to display the Shop Promise badge out of the box. We are confident that Shop Promise's impact on merchant value will continue to increase as it evolves and matures. And we believe that SFN has the opportunity to become the de facto fulfillment solution for independent merchants in the consumer packaged goods and apparel categories. The highlights I've shared so far are just skimming the surface on why we continue to increase Merchant Solutions revenue as a percentage of GMV or the Merchant Solutions attach rate, which reached an all-time high of 2.14% in Q3 compared to 1.98% in Q2 on a sequential basis, with 8 basis points in Q3 coming from Deliver. Our record-setting merchant solutions attach rate is a primary component of our total revenue attach rate of 2.96% in Q3, defined as total revenue as a percentage of GMV, compared to 2.76% last quarter. Turning now to recent leadership changes. Starting with the promotion of our team member in September to Chief Operating Officer. I've worked with Kaz for over 3 years and know him to be the real deal. He embodies the best of Shopify with his product-driven mindset and an uncanny ability to see the alignment between product, sales support, and go-to-market strategies, all of which he oversees in his new role as COO. Reporting to Kaz includes the newly created role of Chief Revenue Officer and Chief Growth Officer. As our new Chief Revenue Officer, Bobby Morrison comes to Shopify with more than 25 years of experience transforming multibillion-dollar enterprises. Formerly, he was the Chief Sales Officer at Intuit, joined Shopify in January 2020. He previously oversaw growth in Facebook and TripAdvisor. Luc was recently promoted to Chief Growth Officer, where he leads our new merchant additions and new business development efforts. And finally, the announcement of our new Chief Financial Officer, Jeff Hofmeister. Jeff has known Shopify for many years as he has led numerous transactions for us, including our IPO during his 20-plus years at Morgan Stanley. Let me turn the call over to Jeff to say a few words before I conclude my remarks.
Jeff Hoffmeister, Incoming CFO
Thanks, Harley. I am extremely excited to join the company. Thank you to Amy for all the leadership, stewardship, and hard work over the past 5 years. You built a finance team that has a breadth and depth of expertise that is multiples of what you inherited. I'm proud to be able to take the baton from you and work with the team that you've built. To the investors, I got to know many of you during my years at Morgan Stanley and look forward to working together with you in my new role. As many of you know, I had the opportunity to work with Tobi, Harley, and team on the IPO 7 years ago and on numerous projects since then. That vantage point has allowed me to understand the complexities of the business with a head start, but also have an appreciation for all the incredible things that Shopify has accomplished since its IPO. The decision to join Shopify was an easy one, given my historical context and the tremendous potential ahead for the company. I look forward to working closely with Tobi, Harley, Kaz, and the rest of the senior leadership team to support the company's mission and next phase of growth.
Harley Finkelstein, President
Thanks, Jeff. This is my last earnings call with Amy. And before I turn it over to her, I want to say what an honor it has been to work with her over the past 5 years. Amy has been a true partner. Under her watch, she has built an incredibly talented finance team and has supported the company's rapid growth and massive scaling. On behalf of the entire Shopify leadership team, I want to thank Amy for her service and her dedication to Shopify. To wrap it up, Shopify's commerce operating system serves as a central nervous system that powers millions of businesses all over the world. If you talk to our merchants, you will hear repeatedly that they love the simplicity of our technology and the experience it offers to their buyers. As our merchants get ready for their busiest shopping season of the year, we are here to help them capture every opportunity. We remain steadfast in our mission to solve the most difficult problems facing our merchants as we continue to make commerce better for everyone. And with that, let me turn the call over to Amy.
Amy Shapero, CFO
Good morning, everyone, and thank you, Harley, for your kind words and sendoff. As Harley mentioned, I will first provide an overview of our Q3 results, highlighting our disciplined operations as we aim to be a lasting company. I will then summarize our new compensation system and conclude with our expectations for the rest of the year. Starting with our Q3 results, I want to remind you that we completed the Deliver acquisition on July 8, and this marks the first quarter of results including Deliver. Our total revenue for Q3 reached nearly $1.4 billion, a 22% increase over the same period last year, primarily driven by growth in Merchant Solutions revenue. Over the last three years, our revenue has compounded at an annual growth rate of 52%. The significant strengthening of the U.S. dollar against foreign currencies in Q3 negatively impacted our year-over-year revenue growth by about 2 percentage points. Regarding Gross Merchandise Volume (GMV), last year’s Q3 GMV growth was 35% year-over-year due to increased online consumer spending during the pandemic. This year, our total GMV in Q3 was $46.2 billion, which grew 11% year-over-year, or 15% when adjusted for constant currency, outperforming U.S. retail growth of around 9%. The challenging macroeconomic conditions we experienced in Q2 continued into Q3, with high inflation causing consumers to favor discount retailers and limit discretionary spending. Merchant Solutions revenue was $989.9 million, up 26% year-over-year, driven by GMV growth and merchants using our solutions to manage more of their operations during inflationary times. This growth stemmed from increased GMV penetration of Shopify Payments, Shopify Capital, and Shopify Markets, the greater revenue contribution from partners, as well as contributions from Deliver. Excluding Deliver, Merchant Solutions revenue increased by 21% year-over-year. The impact of the strong U.S. dollar on foreign currencies was most evident here, affecting Merchant Solutions revenue growth by approximately 3 percentage points. In Q3, approximately $25 billion of GMV was processed through Shopify Payments, a 22% increase compared to last year’s Q3, or a 26% increase in constant currency. Payments accounted for 54% of GMV, up from 49% in Q3 of 2021 and increasing by 113 basis points quarter-over-quarter. Over the past six quarters, we have seen strong GPV performance driven by merchants on Shopify Payments, with a growing percentage being Shopify Plus GMV, new merchant adoption in both North America and internationally, gains in ShopPay—which has facilitated nearly $66 billion in GMV since its inception—and expanded availability of POS Pro hardware in stores across 14 countries. Subscription Solutions revenue reached $376.3 million, representing a 12% increase compared to a year ago, fueled by monthly recurring revenue growth and the lapping of our changes that allow partners to sell in our app and theme stores for free up to their first $1 million annually. Monthly recurring revenue totaled $107 million, an 8% increase year-over-year in Q3, with a higher number of Shopify Plus merchants contributing to an increase in its share of total MRR from 28% to 33% since last year. Additionally, thousands of retail locations began using POS Pro year-over-year, and Q3 marked our first full quarter of traction for our starter plan aimed at creators and entrepreneurs needing a simpler offering to get started. However, these MRR gains were partially offset by free and paid trial experiences for non-Plus plans that go beyond our typical 14-day free trial. Entrepreneurs in these trials do not significantly contribute to our MRR until they opt for one of our non-Plus subscriptions. While these factors slowed MRR growth in Q3 and may continue to affect near-term gains, our efforts have provided valuable insights as we explore ways to enhance the top of the funnel and improve the merchant onboarding experience. Adjusted gross profit was $681.8 million, nearly an 11% increase from $616.4 million in Q3 2021, with a 46% compound annual growth rate over the last three years. Compared to Q3 2021, adjusted gross profit growth was affected by a larger proportion of lower-margin Merchant Solutions revenue, reduced margins in Shopify Payments due to shifts in merchant and card mix, industry-wide network cost increases, the impact of Deliver, and increased investments in our cloud infrastructure. Our adjusted operating loss for Q3 was $45.1 million, compared to adjusted operating income of $140.2 million a year prior. This loss was mainly due to rising headcount, including Deliver, our new compensation framework, and increased marketing expenditure. The adjusted operating loss in Q3 this year does not include one-time charges for approximately $30 million in severance related to the workforce reduction we announced in July, as well as accruals for two pending litigation cases concerning patent infringement and publishing copyright infringement, totaling around $97 million. As consistent with our outlook last quarter, excluding severance and other one-time items, we did observe a sequential slowdown in year-over-year operating expense growth from Q2 to Q3, reflecting our efforts to streamline our commercial organization and other actions from July onwards to align spending for long-term success. Our Q3 adjusted operating loss was stable quarter-over-quarter, thanks to greater cost efficiencies achieved and reduced marketing expenditures as the team focused on trials noted earlier. Adjusted net loss for the third quarter stood at $30 million, or a loss of $0.02 per diluted share, compared to adjusted net income of $102.8 million or $0.08 per diluted share in Q3 2021. Turning to our balance sheet, our cash, cash equivalents, and marketable securities totaled $4.9 billion on September 30, which is $2 billion less than on June 30, reflecting $1.7 billion used for the Deliver acquisition. Our cash position remains strong, underscoring our commitment to prudent and disciplined capital allocation. We continue to prioritize opportunities expected to significantly enhance our merchants' businesses, speed up our product roadmap, and deliver strong returns from improved operational efficiency. Before I move to our outlook, I'd like to discuss our new compensation system, Flex Comp, which we rolled out on September 1, 2022. This system is aimed at attracting, rewarding, and retaining top talent and offers our employees greater transparency and flexibility regarding their compensation. Employees who opt into Flex Comp receive a single total compensation figure and can choose how to allocate their pay between cash and newly granted equity in the form of restricted stock units or stock options. Furthermore, previously granted unvested equity was canceled, and the new quarterly equity grants will vest monthly. Employees have the option to adjust their cash and equity allocation each quarter based on their personal preferences. We have closely aligned Flex Comp with our mission and long-term vision of becoming a hundred-year company, so employees selecting extra equity beyond the default structure receive an additional 5% bonus on that equity amount. In the future, we plan to incorporate other mission-driven components, such as charitable donations and Shop cash. All financial consequences of Flex Comp are included in our Q3 results and our full-year expectations. Turning to our outlook. As we have stated since the onset of this year, we are in a transitional period in which we are investing in our core themes that Harley mentioned earlier to ensure our long-term success. We expect these investments will allow us to emerge from this macro cycle stronger and will position us well for long-term growth and sustainable profitability. As a reminder, our financial outlook includes the expected impact of Deliver, our new compensation system and currency headwinds from the stronger U.S. dollar, and assumes that higher inflation and rising interest rates will continue to negatively affect the consumer's purchasing power of discretionary goods and services. In light of these assumptions, our expectations for our own results as we close out 2022 are as follows. Our GMV growth will continue to outpace the broader retail market in the fourth quarter, aided by our omnichannel capabilities. Merchant Solutions revenue growth year-over-year will be more than double that of Subscription Solutions revenue growth for the full year 2022. Both GMV and total revenue in 2022 to be more evenly distributed across the four quarters, similar to 2021. Because of this larger mix of Merchant Solutions contributing to overall revenue and dilutive impact of Deliver, gross profit dollar growth will meaningfully trail revenue growth. And we continue to anticipate that operating expense growth year-over-year in Q4 will sequentially decelerate from Q3. From an adjusted operating loss perspective, we continue to expect a loss for the full year. For Q4, based on our updated outlook, we now expect an adjusted operating loss dollar amount that will be fairly comparable to the adjusted operating loss in Q3. Finally, the full year estimates of stock-based compensation and related payroll taxes, CapEx, and amortization of acquired intangibles are now $575 million, $125 million, and $55 million, respectively. In closing, the flexibility and scalability of our technology has proven time and time again to be a must-have for our merchants, enabling them to quickly pivot as commerce continues to evolve. The discipline and rigor that we continue to apply across the organization, beginning with software development to ultimately the commercialization of our solutions, will position us well for long-term growth and improving profitability when exiting this macro cycle. And finally, I'd like to thank Tobi, Harley, and the rest of the management team, the finance team, all ShopiFolk around the world, and the Board for their support and partnership. Being the CFO of Shopify will always be one of the crowning highlights of my career, and I'm so proud of my team and what we've accomplished over the years. I look forward to cheering on the company in its next chapter of growth and success as it empowers merchants across the globe. I'll now turn the call back to the other Amy to open the call for your questions.
Operator, Operator
Thank you, Amy. We will now open the call for your questions. Please use the raise hand feature in Zoom to ask your question. Also, please note that Jeff Hoffmeister will not be taking any questions on this call. Our first question today will come from Brian Peterson from Raymond James.
Brian Peterson, Analyst
So first one, we did see a noticeable improvement in take rates, even if you exclude Deliver. Curious if you could give a little bit more color on what drove that sequentially, that would be helpful.
Amy Shapero, CFO
Yes, I'll take that one. Yes. We did see a sizable increase year-over-year in Merchant Services solutions take rate. It was largely driven by mainstays of payments and capital new products, including installments and markets, and yes, the addition of Deliver. Also, additional revenue from partners contributed. It's important to also note that on an organic basis, excluding Deliver, it still would have risen significantly quarter-over-quarter.
Operator, Operator
Our next question will come from Mark Mahaney from Evercore ISS.
Mark Mahaney, Analyst
Let me ask two questions. There seems to be a small change in your outlook commentary regarding merchant growth in the second half compared to the first half. What prompted this change? Additionally, I’d like to discuss the Shopify fulfillment work and its position in your investment plans. Are there any updates in that area? Following the Deliver acquisition, do you believe you have all the necessary assets? Are there further acquisitions needed, or are there areas where you feel you need to strengthen your capabilities? Do you have the required solutions in place, or is it still a work in progress, like many other aspects?
Amy Shapero, CFO
Yes, I'll take the first question. The key point to emphasize is that our main goal is always to help more entrepreneurs and merchants achieve success. Let me break down our Q3 monthly recurring revenue, as we did see total MRR growth compared to last year, primarily driven by increases in point of sale. Additionally, the number of Plus merchants has increased year-over-year and quarter-over-quarter, with Plus now capturing 33% of MRR. Furthermore, thousands of additional retail locations have adopted POS Pro.
Harley Finkelstein, President
I think we're losing Amy. It's Harley here, Mark. I'll address the second part of the question, and then Amy can join back when her connection improves. We're very pleased with our current position regarding SFN. We don't believe there's a need to increase our overall investment. Our goal is to develop this so that it's not just a cost driver; we believe fulfillment can generate significant value for our merchants. We anticipate that fast, reliable fulfillment will enhance customer conversion rates, which I mentioned earlier. We're already seeing a rise in the number of SFN orders with a predicted delivery time of two days or less, now exceeding 65%. We're on track to surpass 75% by the year's end. We are very satisfied with the progress of SFN, and we believe it will attract new customers to Shopify while providing our merchants with a formidable competitive edge. We're particularly excited about Shopcom. By integrating these elements into an end-to-end logistics network, we can equip merchants with a powerful tool to inform their customers about package delivery expectations, which we believe will significantly enhance conversion rates. However, there is no change in our investment strategy. We think we can accomplish this with an asset-light, software-first approach, and Deliver is certainly helping us expedite our product development in this area.
Operator, Operator
We will take our next question from Tom Forte from D.A. Davidson.
Thomas Forte, Analyst
Great. So first, Jeff, welcome to Shopify. Amy, it was a pleasure working with you, and I wish you all the best in the future. On its earnings call yesterday, when comparing and contrasting the current economic environment against the last downturn, Google's CEO discussed the emergence of mobile in the last downturn and his expectations about the emergence of artificial intelligence in the current market downturn. Tobi, can you talk about Shopify's efforts in AI and how they may advance over the next 10 years?
Tobias Lutke, CEO
Yes, I'd be happy to. I believe AI is currently at a pivotal moment, especially with the rapid advancements in transformers and large language models. My role involves monitoring the fastest evolving technology fields, which gives me insight into future trends, as our product decisions often require a year or two to implement. We need to anticipate future needs to make informed choices. AI is experiencing significant hype, and there's a substantial possibility that this hype underestimates its potential impact in the latter half of this decade. While it may seem vague, it's difficult to predict how various developments will converge. Shopify is heavily invested in machine learning. Our fraud prevention products utilize machine learning for underwriting, and our payments system involves ongoing engineering tied to this technology. This is why Shopify is crucial for small and medium-sized businesses, as we manage their operations during times of rapid technological change. Individual merchants struggle to keep up with these advancements, but Shopify can collectively invest in and swiftly provide improvements to all our users, often enabling SMBs to access features not yet available to larger retailers. A great example is our success with Shopify Audiences, where machine learning plays a significant role. I see important trends in creative fields, particularly image generation, which could democratize marketing asset creation. While it's traditionally not expensive, it often requires emails and designer relationships, which, while beneficial, can complicate the process. Being able to generate ad copy and assets simply from a prompt will allow more individuals to experiment early on, and we welcome these changes because we find that simplifying previously challenging tasks increases the success rates for new merchants. From a product standpoint, this is the most rewarding impact we can have at Shopify. We will leverage everything at our disposal to rapidly achieve these advancements and will make practical solutions available as soon as possible. This is a key reason why merchants choose Shopify.
Operator, Operator
Our next question will come from Deepak Mathivanan from Wolfe Research.
Deepak Mathivanan, Analyst
Great. Harley, maybe a question for you. Where do you think fulfillment adoption of SFN can reach under the current model long term, either as a percent of merchants or maybe as a percent of GMV? Any color on kind of how you're approaching it in the early days with Deliver would be super helpful. And then maybe a quick follow-up for Amy. On the SMB side, MRR was down 3% quarter-on-quarter, like my math is correct. Can you unpack the impact of sort of the local market pricing being lower than your prior levels versus margin growth?
Harley Finkelstein, President
On the SFN front, we have a clear understanding of the types of merchants we can support. For instance, we are not looking to work with perishables for the foreseeable future. We are becoming more strategic about identifying the right product-market fit and the target merchants. There are many merchants to consider, such as CPGs and apparel, which represent our ideal customers—those selling items smaller than a microwave, which aligns well with our model. One key aspect we want to address is ensuring merchants don’t have to worry about logistics. When they choose Shopify, it should alleviate some of their headaches. At the same time, we aim to enable them to offer consumers something they increasingly expect: a clear delivery timeframe. Whether that's two days or three, we want to empower Shopify merchants, starting with those in the U.S., to provide that. We believe this will greatly enhance buyer conversion. As I noted, Shop Promise has already significantly improved buyer conversion by 9% among participating merchants during the initial rollout, translating into real business and sales for them. Therefore, while we believe there is a substantial segment of our merchant base we can assist, we are also focused on being specific and targeted about our offerings to ensure the right fit for those who will truly benefit.
Operator, Operator
We'll take our next question from Matthew Pfau from William Blair.
Matthew Pfau, Analyst
Wanted to ask about your strategy to target larger merchants. So you've been making some big changes in the strategy with Hydrogen, Oxygen, functions, and partnerships. Maybe you can just discuss these changes. Because years ago, it seemed like you thought you could target that segment of larger merchants with a more packaged solution, but that seems to be changing. So just curious as to what's driving that.
Harley Finkelstein, President
I'll address that question. I mentioned these companies on every call because more established brands are increasingly moving to Shopify, either from larger enterprise solutions or their own in-house systems. Shopify Plus has become a compelling option for them. For example, I mentioned Glossier and Panasonic, along with our international efforts with Converse and companies like New Era. Originally, Plus was seen as a great migration path for our most successful merchants, but it's becoming the best platform for selling at scale. While total cost of ownership and simplicity are important, the introduction of features like Hydrogen and other enterprise capabilities such as Audiences allows for greater customization on Shopify. We anticipate more large-GMV merchants will join Shopify Plus and our enterprise offering in the months ahead. Part of our strategy involves understanding how these enterprises prefer to purchase. For instance, I noted several systems integrators like Deloitte and KPMG that many large brands choose to collaborate with when modernizing their retail operations. By closely partnering with these integrators and positioning ourselves as their preferred enterprise e-commerce solution, we believe we can attract more merchants more quickly. Additionally, Ernst & Young is currently training 500 technical professionals in their network on how to sell and leverage Shopify. When you combine flexibility and simplicity, along with competitive pricing relative to the value offered by Shopify Plus, it explains why we are seeing Plus growth outpace GMV growth in recent quarters. As a result, we expect many more merchants to upgrade to Plus, and we will also see brands not currently on Shopify migrate to us to take advantage of this enterprise functionality. This will play a significant role in our future, and we are optimistic about it.
Operator, Operator
Our next question will come from Terry Tillman at Truist Securities.
Terrell Tillman, Analyst
I wanted to build on that last question, Harley, and I love Terry. I love to see these new logos each quarter that are really household names. I guess just a quick 2-part question, and it is a single question is first, when you have these Cole Haans and some of these other brands, is it across all of their storefronts? Or is it maybe some of their smaller GMV-producing storefront, so they want to kind of test you out on the enterprise side? I'm just trying to understand, are you kind of getting kind of wall-to-wall across all their storefronts? And then secondly, with some of these really big brands, what are the attach rates on some of the other products around Merchant Solutions?
Harley Finkelstein, President
It's a great question. When you look at companies like Glossier or Cole Haan, we now manage their entire business. In some cases, our strategy is to show them that we are the best enterprise e-commerce platform. For instance, with Converse in Japan, we aim to take on more of their business, which is owned by Nike, but we want to start by demonstrating our excellence in enterprise solutions. For other clients like Spanx and Mattel, we fully host the American Girl store, one of the largest operations. By showcasing our capabilities in enterprise e-commerce, we encourage them to incorporate more stores onto our platform. Additionally, with brands like Glossier, we manage their entire operation as well. Part of our objective is to expand our presence with various merchants, while some prefer to migrate their whole business to us. On the topic of Merchant Solutions, I want to emphasize that discussing the Merchant Solutions attach rate in this call reflects the value we add to these merchants. We aren’t just an e-commerce partner; we also provide capital, shipping, and payment solutions. The Merchant Solutions attach rate indicates the value we create for them. It’s particularly exciting because it's at an all-time high for our company due to the multitude of features we are developing that they need. We're not only serving small businesses; we are also seeing an increase in payments and capital usage among Shopify Plus merchants, which are our larger brands. With Audiences, which is exclusive to Shopify Plus, we expect to further enhance the take rate. All these factors strengthen the partnership between Shopify and our merchants. You will continue to see more brands joining our platform and utilizing more of our products and features.
Operator, Operator
We'll take our next question from Andrew Boone from JMP Securities.
Andrew Boone, Analyst
It sounds like Audiences is really helping merchants to improve return on ad spend. Can you just talk about what you're doing to facilitate the expansion of Audiences within your merchants? And just bigger picture, what's the role of Shopify within advertising over the next 3 to 5 years?
Tobias Lutke, CEO
Yes, I'll take this. We typically don't announce new products during these calls. The key takeaway so far is that we are helping reduce customer acquisition costs for our Plus customers through an opt-in feature that leverages the platform we have built. The adoption of Audiences occurs by installing the first-party app we developed, which connects with our overall platform strategy. In today's digital landscape, given current challenges, we are positioned to play this role effectively and are committed to making significant investments in it, especially focusing on machine learning with Audiences. The advertising landscape is changing rapidly, making it difficult to predict future trends regarding the types of ad units available to both small and medium-sized enterprises and larger businesses. Some approaches may work well one day and not the next, while others may succeed after being utilized for a couple of years. Changes in technology can lead to unexpected high-conversion opportunities, but many of our customers struggle to take advantage of these due to their focus on delivering quality products and experiences. Whenever we engage, it's in areas where we can simplify and improve our customers' operations greatly. I hope this explanation sheds some light on how we enter these markets; it involves a different decision-making process than what is generally believed. This area remains a focus for us as it's where we can make a substantial impact compared to others, given current circumstances. Many of our customers have offerings that intersect various interests, making it increasingly challenging to target the right audience. We aim to compensate for what has been lost for merchants regarding audience targeting. Most of our products cater to buyers looking for personalized experiences, as without robust advertising channels, discovering exceptional products can be difficult. We will continue to prioritize this area and plan to introduce more products and enhancements to these programs in the upcoming year.
Operator, Operator
We'll take two more questions. Our next question comes from Jeff Cantwell at Wells Fargo.
Jeffrey Cantwell, Analyst
Can you hear me?
Operator, Operator
Yes, we can.
Jeffrey Cantwell, Analyst
Okay. Great. Sorry about that. My first question is a follow-up on your recent product launches, specifically regarding B2B. I'm curious if you have any updates or signs of progress to share. We understand it's still early days, but I'd like to know what excites you about this area and what you're observing from that launch. Secondly, on profitability, it looks better than expected. Can you discuss the sustainability of that? From our perspective, we're trying to get comfortable with the macro environment, and investors are clearly focused on profitability, especially given the recent slowdown. Do you see yourselves becoming increasingly focused on profitability? Essentially, I’m trying to understand how we should assess your ability to improve profitability moving forward.
Harley Finkelstein, President
I'll address the first question regarding B2B and wholesale in general. As I've stated in earlier calls, our goal is to be the central nervous system for our merchants' businesses. We aim to serve as their retail operating system, recognizing that retail isn't limited to just direct-to-consumer for all merchants; many have wholesale and B2B operations as well. It's crucial for us to integrate everything seamlessly, making the Shopify admin truly their central hub. We have many merchants on our platform who also engage in B2B, and this allows us to add more value and become more integral to their operations. Additionally, this gives us the opportunity to launch a dedicated B2B offering for B2B merchants specifically. In the past, wholesale sellers might not have considered Shopify, but we believe the B2B services we are offering will be world-class. This enhances our ability to target a new segment of the market. Amy, if you want to comment on profitability, feel free to jump in. I do want to mention that Shopify has historically maintained a disciplined approach to operations. Most of our growth prior to Deliver has been organic, with all our gross profits reinvested back into the business. We have strategically raised cash externally, which has been used to accelerate our growth plans, and we are reducing the growth of our operating expenses year-on-year. Our company values profitability; in fact, since our IPO seven years ago, we have been profitable for five of those years. We intend to reach profitability again. While we highlighted this year as a time for investment, we are committed to managing expenses and increasing revenue effectively. In the end, our company aims to be profitable, and we will achieve that goal.
Amy Shapero, CFO
Sorry, can you hear me? I have strange Internet problems. Yes. We show discipline in our Q3 OpEx in the face of adding major acquisition with Deliver. And our new flexible compensation system, we managed to only have a slight increase in OpEx expenses quarter-over-quarter. And you saw a sequential improvement in our subscription margin quarter-over-quarter. That's the operating discipline that we've always exhibited and will continue to exhibit into the future. As Harley said, we had increasing profitability from 2017 to 2021, we intend to get back there.
Operator, Operator
Our last question today will come from Gabriela Borges at Goldman Sachs.
Gabriela Borges, Analyst
Harley, I'd love to get an update on how negotiations integration with Amazon is going success-wise. And then help us get inside the head of a Shopify merchant a little bit. How do you think merchants will evaluate the pros and cons of buy with Prime versus...?
Harley Finkelstein, President
Gabriela, I'll take that one. Look, I think we said previously, any time a large company is making their infrastructure available to small businesses in a way that levels the playing field, we think is a great thing. And so Buy with Prime is no different than that, but obviously, it has been in the right way. And we have nothing to announce now, other than that we are, as we said last time we spoke, we were talking to Amazon about how we implement this in the right way. What's important for merchants is they want to be able to manage their entire business from one centralized place. They want all the information they need to make really, really good decisions. But at a high level, at a macro level, when great companies or any company for that matter makes infrastructure available to small businesses and does so in a way that levels the playing fields further for small businesses, that is a very, very good thing.
Tobias Lutke, CEO
And that was I think our last question. And I just wanted to quickly jump in here because I just want to personally thank Amy Shapero for her leadership and bringing Shopify here, being a teacher to me and to the company. And like these are journeys are best done together with friends. And thank you for everything you've done and being a friend and a teacher over all the years.
Amy Shapero, CFO
Yes. Thank you.
Operator, Operator
And with that, thank you to all of you who have joined us this morning, and for your questions. This concludes our earnings conference call for the third quarter of 2022. We look forward to providing our fourth quarter and fiscal year-end results next year. Thanks again, and goodbye.