Shopify Inc. (NYSE:SHOP) Q1 2024 Earnings Call Transcript

Shopify Inc. (NYSE:SHOP) Q1 2024 Earnings Call Transcript May 8, 2024

Shopify Inc. beats earnings expectations. Reported EPS is $0.2026, expectations were $0.1717. Shopify Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Carrie Gillard: Good morning, and thank you for joining Shopify’s First Quarter 2024 Conference Call. Harley Finkelstein, Shopify’s President, and Jeff Hoffmeister, our CFO, are with us today. After their prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are based on assumptions and, therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements, except as required by law. You can read about these assumptions, risks and uncertainties in our press release this morning as well as in our filings with the US and Canadian regulators. We’ll also speak to adjusted financial measures, which are non-GAAP and not a substitute for GAAP financial measures.

Reconciliations between the two are in the tables at the end of our press release. And finally, we report in US dollars. So, all amounts discussed today are in US dollars unless otherwise indicated. With that, I’ll turn the call over to Harley.

Harley Finkelstein: Thanks, Carrie, and good morning, everyone. The start of 2024 has been very strong for Shopify with more and more merchants thriving on our platform. This is the strongest version of Shopify yet. We’re helping millions of merchants around the world to both start and scale their businesses. For four straight quarters, we have demonstrated our ability to drive results at scale, growing revenue over 25%, excluding logistics. And as we have proven over the last two decades, the more hard problems we solve for merchants, the more we add to our flywheel and the better off commerce is for everyone today, tomorrow and for many years to come. We’ve talked a lot about this new shape of Shopify and how it’s enabling us to drive greater growth and profitability at a larger scale, and it’s working.

The penetration of payments is on the rise. We’re making significant strides in our offline and enterprise sectors. Our efforts towards international growth are yielding positive results, and our attach rate is expanding. Our operating discipline has been a key factor in the success, ensuring that we maintain efficiency, invest from our position of strength and deliver value at every turn. Shopify has always been high volume, high velocity when it comes to building and shipping products. In the span of just two years, we’ve rolled out more than 400 new features and updates to our platform, setting a pace that demonstrates our leadership in building for the future. In that time, we’ve launched what we call editions twice a year, changing how we present and unveil Shopify’s progress.

These biannual moments have not only increased engagement, product adoption and visibility with our merchants and partners, but also reinforced our leadership in commerce. In fact, in our recent Q1 edition, 62% of businesses who installed Shopify subscriptions had never previously installed a subscription app on Shopify, demonstrating the impact these key storytelling moments can have on driving adoption. We’re dedicated to continually creating great software that allows brands to start and scale, finding their desired features quickly and intuitively as if each feature had been integrated from the start. From foundational elements like expansion of variant limits to 2,000 and the rollout of our web performance dashboard, which can improve a storage search rankings and boost conversion to new AI enabled editing tools and within point of sale, the launch of e-mail capture at off-line checkout, we are relentlessly working to reduce friction and make it easier for merchants to run and manage their business.

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Q&A Session

Our editions have become key milestones for Shopify and the innovation engine we are powering at scale, not only extending our reach to a broader audience, but also redefining how our ecosystem engages and builds with us. Touching briefly on AI. Our unique position enables us to tap into the immense potential of AI for entrepreneurship and our merchants. Currently, the most practical applications of AI are found in tools that simplify business operations and enhance productivity, all of which we’ve been developing deeper capabilities with our AI product suite, Shopify Magic. However, we also firmly believe that we’re just scratching the surface of what’s possible as we’re still in the nascent stages of understanding the vast potential that AI hold for businesses and commerce.

Launched over a decade ago, our most scaled product is Shopify Payments. Its GMV penetration has steadily increased, reaching 58% in 2023 with Q1 achieving 60% GMV penetration. We expect it to continue to be a key contributor to our growth moving ahead. Our seamless integrated payment solution continues to be a key gateway for other product offerings like capital, installments and Shop Pay, the world’s highest converting accelerated checkout. In Q1, Shop Pay increased 56%, processing $14 billion in GMV, accounting for 39% of our gross payments volume as it continues to be the preferred choice for consumers seeking a fast, secure and hassle-free checkout. Ensuring that these checkouts are fast loading, secure and compliant can be complex, which is why Shopify works to make it simple.

At Shopify, we stay ahead of what’s next for our merchants. We inherently build in potential updates to compliance, including the latest PCI security standards for payments, so that merchants will be compliant with no additional work required. Shopify Payments and our accelerated checkout will continue to play a vital role in the expansion of our unified commerce platform. As we continue to improve our features and global integrations and expand our offline and enterprise segments, we anticipate increased growth and adoption. This will be partially driven by the new avenues and flexibility provided by our commerce components offering. Notably, the international acclaimed fashion brand, COACH, recently committed to join Shopify via commerce components, intending to roll-out Shop Pay off-platform across all of their US and Canada outlets in the coming months.

This mix of composability, reliability and speed will further solidify the position of Shopify Payments as a crucial tool for merchants with Shop Pay continuing to become the go-to choice for quick, secure and seamless checkout at scale. Moving to our channels and growth drivers. More merchants are leveraging the value of Shopify point-of-sale, a true omnichannel solution as the number of locations using our new point-of-sale Pro increased substantially over the prior year. Key feature enhancements like draft order functionality and fully customizable printed POS receipts continue to advance our offering. As a result, more merchants, especially large, complex, multi-location merchants are coming to Shopify. We saw location growth of 52% in the quarter for merchants with 20 or more locations.

Our increased investments in performance marketing for Shopify point-of-sale as well as experimenting with other acquisition tactics are yielding positive results. For example, Frank And Oak, a Montreal-born apparel brand launched our point-of-sale in more than a dozen of the retail locations in this past quarter as did Michigan-based food company, Cherry Republic. In Q1, we saw growth across merchants, locations and geographies, supporting our 32% offline GMV growth year-over-year as we continue to gain share. Moving to B2B. Shopify has been making significant strides with Q1 B2B GMV growing over 130% year-over-year after doubling in 2023. B2B merchants are loving the power of self-serve purchasing by customers with a 7x increase in the number of orders coming in through the online store than a year ago.

So why does this matter? Well, it means that there are fewer manual orders having to be entered by merchants using draft orders, which gives merchants back the value of time to focus on winning new business. B2B represents a significant growth opportunity for Shopify, allowing us to reach new verticals and cater to merchants focused on B2B transactions. We understand the specific needs of B2B businesses and are continually refining our platform to address those needs and boost efficiency and growth. For example, we made it easier for existing customers who previously managed B2B buyers through their DTC store front and third-party apps to move to their entire wholesale business to our B2B solution, a key feature for Plus merchants. Further validation of just how competitive our B2B offering is, two days ago, Forrester’s 2024 B2B commerce platform, Wave evaluation, came out, and Shopify was placed in the leader category.

This is our first appearance on a top two enterprise validation report for B2B and a clear signal that Shopify is increasingly becoming a leader in unified commerce for online, offline, B2B and everywhere in between. Moving to international. Q1 international GMV growth outpaced North America with continued strength in Europe, posting Q1 GMV of 38%, marking our third consecutive quarter of GMV growth above 35%. With international making up less than 30% of our revenue base last year, the opportunity remains significant for us to equip merchants with the tools to make selling globally as easy as locally. Now to do this, we are laser-focused on building products and tools that cater to the unique needs and preferences of our international merchants.

This quarter, we continued to make headway on our localization efforts in international markets with tools like shipping localized brochures in Japan, Spain and Italy, helping our merchants ensure a tailored experience and expand their reach. We’ve also been working to get more of our products into more countries. For example, in Q1, we successfully launched our point-of-sale go and point-of-sale terminal in Australia, further increasing the on-ramps into Shopify in this key market. Enabling merchants to sell cross-border to buyers anywhere in the world has been a key focus for us. In Q1, we saw a 70% increase in our markets product over last year, which makes it easy for merchants to sell in local currencies. We are further simplifying international expansion with Markets Pro, our native all-in-one cross-border merchant of record offering, which became generally accessible in the US in September of 2023.

Brands are leveraging Markets Pro to enter global markets within days and see immediate increases in their global sales. Take Chicago-based apparel company, SuitShop, which grew international orders by 600% since adopting Markets Pro or New York based skincare brand, Beekman 1802, which experienced 137% international sales growth in six months. And with cross-border GMV up 15% in Q1, representing roughly 14% of total GMV, we will continue to enable greater cross-border transactions for our merchants. As we mentioned on the last call, we continue to aggressively pursue enterprise brands in 2024, and we are seeing results. Whether it was key events like NRF and Shoptalk, our engagements with the larger brands are escalating every single quarter with our plus and enterprise GMV growth continuing to outpace overall GMV growth.

Additionally, following our leadership rankings in IDC and Gartner last year, an independent study recently validated that Shopify’s total cost of ownership is up to 36% better than competitors in the enterprise space. This study proves that our unified commerce platform offers exceptional value and cost savings that only Shopify can offer. And in turn, we pass on the economies of scale we capture to our merchants, saving them money. What we are hearing from our conversations with enterprise-level brands is that there are really two primary reasons that are driving their decision to move to Shopify. First is the exceptional value of Shopify, the powerful and reliable infrastructure and the cutting-edge products that offer composability and choice, making the total cost of ownership hard to pass up.

And second, Shopify’s core value proposition of innovation, scale and ease of launch. Let me dive into that point about ease of launch as it’s really important. While Shopify moves fast and certainly faster than the competition, making the decision to re-platform is incredibly hard, and larger brands can typically take anywhere from 12 to 18 months to completely migrate over. But that is not always the case, especially when it comes to Shopify. Take Overstock.com, the well-known online discount retailer. We had them up and running in under 100 days, which considering the size and complexity, is nothing short of amazing. That’s what we do at Shopify. On the flip side, we recently signed BarkBox, a leading subscription service for dog products with over 2 million subscribers.

They recently made a decision to migrate all of their business to Shopify. Their debut on our platform is anticipated for 2025 and will be the largest subscription merchant to join Shopify to date. While timelines to market vary, the main point is that we are winning businesses and migrations with larger, more complex brands. The launch of these brands and the work we are doing today is building a sustainable foundation that will continue to deliver growth for years to come. Beyond the two brands I just mentioned, we are seeing more high-volume merchants sign up and launch with Shopify across the board, adding more companies across verticals, industries and geographies to further energize our flywheel. Brands like consumer packaged good companies Harry’s and PrettyLitter, fashion apparel brands like Laura Canada and Intersport, fitness and wellness companies, Juice Plus+, Balance of Nature and SoulCycle, home goods retailer Rugs USA, consumer electronics company Skullcandy, manufacturer of cleaning equipment, Karcher, health and beauty brand FragranceNet.com and celebrity brands like Serena Williams’ beauty brand, Wyn Beauty, Beyonce’s hair care brand, Cecred, and Dwayne “The Rock” Johnson’s skincare line, Papatui.

The past years show that we can cater to both start-ups and large companies. And we continue to invest in both to expand our merchant base. Our business model focuses on accelerating the success of our merchants and driving long-term value rather than short-term gains. We are a product-led company, and we will invest in those products and strategies that ultimately offer greater value for our merchants and thereby for Shopify. We think about marketing the same way we think about products, build great solutions, use the best internally developed and externally available tools, drive decision through data and be world-class. Our goal is to always get the most out of every existing channel up to our guardrail limits and continuingly find and experiment with new channels.

That is what we build our tools and our AI models to do, and we’re using them to create some incredibly compelling opportunities. Let me give you a very recent example. At the end of last year and early into January, we drove significant efficiency improvements in one of our primary channels in performance marketing, where teams have created and leveraged advanced models using AI and machine learning, which now allows us to target our audiences with unprecedented precision. Using these models and strategies, we drove nearly 130% increase in merchant ads within our primary marketing channel from Q4 to Q1, while still remaining squarely within our payback guardrails. Similar to how we build products, we continually assess emerging technology and how we can leverage them to improve our own tools.

We are also advancing our operational rigor with our marketing data team using our tools to connect data inspections at a faster velocity and more granular level than ever before. This agility allows us to quickly seize opportunities and boldly move forward when others may hesitate. These are two of our Shopify-wide principles, agility and finding the unobvious opportunities, leaning to those opportunities when others pull back even when and often, especially because to others, they may appear unobvious. And we know it’s working. Back in Q3 2022, as we mentioned in our July earnings that year, we began a wave of new marketing tool production and tightened our payback guardrails even further. Our initiatives have successfully driven significant improvements in both new merchant acquisition and CAC in core performance marketing, our largest component of marketing investment.

Comparing Q3 2022 to Q1 2024, new merchant acquisition has grown 180%, while CAC has improved almost 60%. You can see why we’re investing heavily and why we feel confident in our future and our growth in 2025 and beyond. You should expect us to approach every quarter with the same mental model, testing and opportunistically investing into the areas where we know it will contribute well to our growth and stay within our guardrails. We intend to continue spending when market opportunities are within an average 18-month payback period, which we are finding a lot of right now along with increasingly supporting longer-term initiatives such as expanding into international, enterprise and point-of-sale. Right now, you’re seeing the strongest version of Shopify in our history.

And we see an excellent opportunity to further our lead in our established products and fuel the strong momentum of our emerging products. Today, we are building an even stronger Shopify. We know our team is one of our most valuable assets. And given that it makes up over half of our cost base, we believe we’ve architected ourselves to be faster and more agile, which has enabled us to consistently deliver 25% revenue growth, excluding logistics, all while keeping our headcount flat for three straight quarters. More importantly, because of the structure and the automation we have worked to put in place, we think we can continue to operate against very limited headcount growth while achieving a continued combination of consistent top line growth and profitability.

As Kaz mentioned at our Investor Day in December, over the past 18 months, we’ve committed significant effort into building efficient infrastructure and systems, which are instrumental in streamlining our work and maintaining our high velocity product releases. We do this through our Shopify operating system, the foundation for every role and purpose at Shopify that uses data to help tell us how many resources we need for any project and the skill set or craft needed for the project. Essentially, these systems and this infrastructure act as catalysts, enabling us to operate with increased efficiency and speed. So as we create a crafter’s paradise, empowering teams to pursue their passions while having an incredible impact on our mission, we were doing it in a way that optimizes our talent and ensures we continue to make the most important thing the most important thing.

To close, we are proud of the strides we’ve made in Q1 and the execution we continue to deliver consistently quarter-over-quarter. The strength of our business model, the commitment of our team and our unwavering focus on serving our merchants has positioned us to lean into the opportunities we see ahead and invest responsibly to sustain our long-term growth objectives. The best companies are built this way, staying grounded in their reason for being and committed to their mission. For Shopify, our team’s dedication, coupled with our evolved marketing strategy, is reshaping the company and moving us forward. We look forward to sharing our journey with you in the quarters to come. And with that, let me turn the call over to Jeff.

Jeff Hoffmeister: Thanks, Harley. We have started off 2024 incredibly strong, building on our momentum from 2023. Let’s launch into our Q1 results. GMV in Q1 was $60.9 billion, up 23% year-over-year. The strong Q1 GMV was driven by same-store sales growth of our existing merchants, continued growth in our merchant base globally, strength in EMEA, which grew 38% year-over-year from both strong same-store sales growth from our existing merchant base and new merchant acquisition with same-store sales growth being the slightly larger contributor this quarter. And finally, 32% growth year-over-year in our offline business driven primarily by larger retailers joining the platform. Revenue for the first quarter was $1.9 billion, up 23% year-over-year, which equates to 29% year-over-year growth when excluding the logistics businesses.

This represents the fourth consecutive quarter that our revenue growth has been greater than 25% on an organic basis excluding logistics. The key drivers of this growth were the GMV strength just discussed, growth in Subscription Solutions revenue from both new merchant growth and the pricing increases on standard plans and lastly, increased payments penetration, which hit 60% for Q1. Q1 Merchant Solutions revenue was $1.4 billion, increasing 20% year-over-year, fueled by growth in GMV, continued penetration of Shopify Payments, continued growth of our scaled products, most notably markets and growing adoption of our emerging products, including installments and Shop Cash. Those contributors were partly offset by the absence of logistics business.