Turning to operating expenses. We believe that our Q2 operating expense dollars on a GAAP basis will be up at a low to mid-single-digit percentage rate compared to our Q1 operating expenses of $871 million. As a percentage of revenue, we expect our Q2 GAAP operating expense dollars to be approximately 45% to 46%, implying a decrease of 100 to 200 basis points versus Q1. I previously have not been guiding toward operating expense as a percentage of revenue. Q2 will mark a full year since we began to operate in the new fitter, faster shape of Shopify as well as the sale of the majority of our logistics businesses. Given these changes, the year-over-year comparability of operating expenses has been less telling over the past year. Hence, why I’ve been talking about sequential changes to OpEx dollars.
Going forward, I plan to talk about operating expenses as a percentage of our revenue as it better aligns with our goal of striking the optimal balance between growth and operational leverage to deliver improving profitability over time. For this quarter, I wanted to provide you both metrics. For the second quarter, the two primary drivers of the operating expense dollar increase over Q1 are marketing spend and our Summit event, which will happen at the end of June with Summit being the primary driver of the increase. Summit is our annual event where we engage in a collaborative week dedicated to aligning on the bold ideas that we have as a company, a spotlight on our mission, our product roadmap and the mental models that we are using to build incredible things.
We consider it a critical week for our product development efforts, company culture and work with external developers. This will be our first completely in-person Summit since 2018, and everyone is really looking forward to it. We highly value and remain committed to our remote-first culture and concurrently believe that getting teams together periodically is a critical load-bearing element that enables our remote-first culture to thrive. This year’s Summit will be aggregated into one event what in other years is multiple discrete events, including our three-day internal Hack Day event where we ask our teams to start new projects. Our Hack Days have kickstarted many key products and features like point-of-sale and the Shop App. This week’s work also includes a series of events for our external development partners, Editions.dev, which includes hands-on technical walk-throughs and immersive workshops.
Editions.dev gives us an opportunity to share our vision with our developer partners and get external feedback on our products and roadmap. It is one of the most highly anticipated events for developers within the Shopify ecosystem, both internal and external. And we consider it an investment in our team, our product road map and our partners. Regarding marketing, Harley shared with you some insights into our thinking and some of our recent successes there. We intend to continue to invest when opportunities are within an average 18-month payback period. And we are finding a lot of them right now as well as supporting longer-term initiatives such as international, enterprise and point-of-sale. Moving to stock-based compensation. Q2 SBC is expected to be $120 million, and Q2 capital expenditures, $5 million.
Finally, on free cash flow. For Q2, we expect our free cash flow margin to be similar to Q1 of 2024. We have now delivered three consecutive quarters of double-digit free cash flow margin with no expectation for this trend to change. In summary, Q1 was a very strong start to the year. We continue to deliver on the product initiatives that we have laid out. Our merchants are performing well, and we continue to expand the value that we can provide our merchants. We are making key investments in our future and continuing to build an even stronger Shopify, all while delivering a compelling mix of both growth and profitability. With that, I’ll now turn the call back over to Carrie for your questions.
A – Carrie Gillard: We will now open the call for your questions. [Operator Instructions] Our first question comes from Trevor Young at Barclays.
Trevor Young: Great. Thanks. Just on the core standard MRR, only up slightly Q-on-Q, can you just give us some color on why that was up maybe a smaller amount than we would have expected seasonally? Is that just a definitional change? Or is there something going on just in terms of merchant demand?
Jeff Hoffmeister: Yeah. No, that’s just a definitional change. It would have been up 5% if you look at it in terms of Q4 to Q1. And so it’s just a function of that change. The merchant acquisition engine overall is doing really, really well right now. So there’s nothing else to read into that.
Carrie Gillard: Okay. Thank you. Our next question will come from Matt Coad at Autonomous. Matt, are you there?
Matt Coad: I am. Sorry about that, guys. I didn’t click unmute. So wanted to double-click on sales and marketing expenses. So they’re increasing again at a pretty fast clip. You guys touched on that a little bit in your opening remarks. Kind of just wanted to get some incremental color on how that’s translating into merchant and bookings growth. Are there any commentary that you could provide on the 2024 cohort and how that’s looking compared to 2023 would be helpful.
Jeff Hoffmeister: Yeah. I think from a sales and marketing perspective, and let’s just talk a little bit in terms of how we think about our margins overall. I mean our sales and marketing, as Harley talked about in the broader call, is going very, very well right now in terms of some of the things we’ve been doing recently to improve the tools and the methodologies we’re using. And Harley talked through some of those results not only over the past few quarters as well as some things we’ve done over the past few months. As it relates to margin specifically in terms of how we think about it, I’d go back to what we talked about in terms of free cash flow margins. And the guidance I gave there, we are — let’s effectively start with what we said as it relates to Q1 results and then obviously Q2.
Q1, we did 12% free cash flow margins on 29% pro forma revenue growth. I consider that a strong result. And that also gets into an uptick from Q1. We had expected an uptick from Q1 to Q2 in terms of margin. Q1 outperformed, which is great. We did, as we talked through some of the things that Harley mentioned in his script around the payback periods and kind of when this is going to hit our top line, that’s a key piece in terms of how you think about the merchant acquisition engine. But also going back to just how we think about the margins. Our guidance for Q2 points to the free cash flow margins being similar to 12% that we achieved in Q1. And that is combined with the pro forma revenue growth in the low to mid-20s. So the business can deliver both growth and margins, all while we are concurrently creating and leaning into opportunities that enhance our growth.
So we feel really good about the strength of this business as it allows us to accomplish all three. And this marketing spend for us is an investment in our future and continuing to do all the things, which, again, we think will continue to strengthen the business for the long term.
Harley Finkelstein: And, Matt, let me just take a moment just on the types of merchant that are coming to Shopify because that is really important to understand. Historically, I think it was fairly well known that in the SMB direct-to-consumer segment, we were winning these merchants. But remember, not only do we continue to win those merchants, but now we’re seeing different types of merchants, too. I mean there’s some talk around the state of the consumer. We think the consumer remains resilient. We’re seeing consumers buying in their favorite brands they love and feel affinity to. Those brands are on Shopify. But we also have other brands that have recently joined that are more — or sorry, less discretionary. I mean FIGS, for example, are in hospitals all over the country.
Hines, Nestle, Staples, BarkBox, ButcherBox, these are less discretionary brands also coming to Shopify. When you add to that new brands that are coming for things like B2B, for example, which is growing beautifully in our view and will continue to grow, a huge opportunity there or international merchants, you’re seeing all these different on-ramps into Shopify all working really, really well. Now to Jeff’s point around the spend — one thing that’s important to understand is think about marketing the same way we think about products. We build great solutions. We use the best internally developed tools, and we drive decisions through data. And we can be agile at times and at times that they may seem countercyclical. But what it really does is it means we can have — we can drive sustained top line growth and be profitable.
But all these different growth drivers, all these different on-ramps lead to a much stronger business long term with a variety of very, very strong different types of merchants.
Carrie Gillard: Thanks for your question, Matt. We will now move to Mark Zgutowicz at Benchmark. Mark, are you there? Okay. We will put Mark back in the queue. Let’s go instead to…
Mark Zgutowicz: I’m here.
Carrie Gillard: There you are. Okay. Great. Mark, go ahead.
Mark Zgutowicz: Sorry about that, Carrie. Thought I hit it. Harley, maybe just picking up on that last point. You talked a little bit about vertical expansion there on the merchant ad component. But maybe if you could talk about geo and sort of where you’re seeing merchant ads from a geo perspective, sort of what the strategy is there and how that payback period, I guess, fits into that 18 months? Is it higher in US versus some of these other geos? Is that sort of an average 18-month payback? If you look across deals, that would be helpful. And then just one other quick one, if I could, just in terms of your audience scale, just in terms of advertising scale broadly. Just trying to get a sense of how your audience target numbers will look this year scaling relative to last year. Thank you.
Harley Finkelstein: Yeah. Let me start, Mark, with international. I mean Shopify is no longer just for small business in North America. We are seeing great — really strong revenue growth across channels, cross-sell, regional. And Q1 international GMV growth outpaced North America. In fact, in particular, Europe continues to lead our growth outside North America. I think Q1 GMV growth was like 38% in that region. That’s the third consecutive quarter of growth above 35% there. So there’s a lot of opportunity there. I think we’ve captured less than 1% market share in global retail sales even as our product and geographies have expanded. If you go back to 2015, we have five products in four countries. Today, we have more than 20 products in more than 30 countries just on the Merchant Solutions side.
