Shopify Inc. (NYSE:SHOP) Q4 2023 Earnings Call Transcript

Shopify Inc. (NYSE:SHOP) Q4 2023 Earnings Call Transcript February 13, 2024

Shopify Inc. beats earnings expectations. Reported EPS is $0.34, expectations were $0.31. 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 Fourth Quarter 2023 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 will turn the call over to Harley.

Harley Finkelstein: Thanks, Carrie, and good morning, everyone. 2023 was a phenomenal year for Shopify. Commerce moved fast and we moved faster. We reshaped the company to be flatter, more agile, and built to address every corner of commerce, never losing sight of our mission to make commerce better for everyone. And as a result, we continued to break down barriers, accelerate the power of entrepreneurship, and fuel our merchants’ success. No matter which way you look at our business, be it merchants, products, or channels, we delivered an incredible fourth quarter to finish off an amazing year of growth. From a merchant perspective, more businesses of all sizes continue to choose Shopify. Our overall merchant base grew from entrepreneur to enterprise, a direct result of the powerful growth engine, products, and go-to market we have built.

Compared to 2022, we have 35% more merchants from outside North America launch and grow their businesses on Shopify. We have signed and added to our incredible roster of merchants, bringing on more diverse businesses across verticals, geographies, and channels. Brands like Carrier, Nike Strength, Dollar Shave Club, Banana Republic Home, Authentic Brands Group, Tim Hortons, Guthy-Renker, Buy Buy Baby, Oscar de la Renta, Everlane and On Running to name a few. Our unified commerce platform has been meticulously constructed and designed to enable brands to start, grow and scale on Shopify. Every feature we launch and every developer tool we create are aimed at making the heart things easy and everything else possible. In 2023, our momentum was bolstered by our strong foundation as we made it even easier for merchants to run and manage a business using tools that are crafted to be simple and intuitive to enable them to focus on what matters most of their product.

For streamlining expense management, we launched Shopify Bill Pay and for things like managing taxes, the Shopify Tax platform now allows enterprise-grade tax services to manage end-to-end sales tax compliance within Shopify’s existing infrastructure. We expanded our back-office merchant solutions to more countries to allow greater customization, upgrade our checkout extensibility and rolled out one-page checkout to make the world’s best converting checkout even faster. We continue to unlock the connectivity of the platform to sell wherever buyers are with products like Shopify Collective and the Marketplace Connect app. We integrated Shop Pay Installments into point-of-sale, rolled at a point-of-sale terminal for enterprise and made markets pro generally available in the US.

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Q&A Session

We made it easier for merchants to discover and engage with our customers. We continue to build the Shop App with new features, including Shop Cash and Shop on the web, so merchants and buyers can more easily discover each other, connect and build relationships. We further refined our algorithms for audiences, which has shown reductions in CAC of up to 50% while increasing the advertising platform partners to include TikTok, Snap, Pinterest and Criteo. We’ve expanded the on-ramps for merchants into Shopify to thrive at any stage of their growth journey. In just the last year, we enabled two new ways for merchants to choose Shopify. For retailers who primarily operate in physical locations, the retail plan. And for larger volume enterprise brands looking for composability commerce components by Shopify.

Earlier this year, we further expanded our optionality for enterprises, providing a plan that enables them to build with the highest velocity across either the full stack, composable or headless. And the IDC MarketScape 2024 mid-market assessment took note, recently placing Shopify in the leader category ahead of dozens of other software companies. All of this while also being recognized by Gartner as the Magic Quadrant leader for Enterprise, placing us as the highest in our ability to execute. We also expanded and deepened our ecosystem of partners to include systems integrators like IBM and Cognizant. We signed a commercial agreement with Flexport launched Build for Shopify, partner to bring the Amazon Buy with Prime app into our ecosystem and enable a deeper integration with Adyen for Enterprise.

And finally, we cannot talk about 2023 without mentioning AI. We launched our suite of AI-powered tools known as Shopify Magic, an AI shopping assistant on our Shop App and further embedded AI tools within Shopify to increase productivity and streamline administrative tasks that have saved our merchants and our team thousands of hours of work, enabling us to ship faster and make great decisions quicker. What we have known from day one at Shopify is that when our merchants are more successful, Shopify is more successful. Revenue hit $7.1 billion, up 26% year-over-year, with Q4 surpassing $2 billion in a single quarter for the first time ever. Gross profit dollars for the year grew 28% with Q4 hitting $1 billion of gross profit in a single quarter for the first time in Shopify’s history.

And finally, we generated free cash flow of $905 million for the year, successfully growing both free cash flow dollars and free cash flow margin sequentially each and every quarter throughout 2023. In short, we are right where we want to be on our journey to becoming a 100-year company. The trust we have built with our merchants as the best place for entrepreneurship to thrive, combined with the strong operational discipline we have put in place, we are well positioned to continue to deliver a compelling combination of both growth and profitability. So let’s go into more detail on the key accomplishments for the quarter that further demonstrates the progress we are making to strengthen our position as a leader in unified commerce. I will first quickly touch on our Black Friday-Cyber Monday results before diving into our products, channels and international.

Starting with the incredible success of our merchants on Black Friday-Cyber Monday. In that four-day period alone, our merchants collectively generated $9.3 billion in sales, representing 24% growth over the prior year. Approximately 61 million consumers worldwide purchased from brands powered by Shopify, over 17,500 merchants made their first sale and more than 55,000 merchants had their highest selling day ever on Shopify. All of this and our platform handed a staggering 967,000 requests per second, which is the same as 58 million requests per minute, nearly 80% higher than our peak traffic just two years ago. This is a testament to the resiliency and the scalability of our platform that powers more and more of modern commerce. Turning to product.

Shopify is all about choice, constantly iterating, expanding and offering more solutions to meet the needs of merchants and they’re shifting preferences of their customers, which is why a little over two years ago, we launched Hydrogen and Oxygen to give merchants that wanted to go head list in easier development path, helping them to get to market faster. Hydrogen, our react-based toolkit, surpassed $1 billion in GMV in Q4 alone. For the year, the GMV was more than six times what we achieved in all of 2022, reinforcing Shopify’s position as a reliable commerce partner for headless commerce. We are seeing more new brands like ButcherBox and Tecovas joining Shopify and launching Hydrogen and expect this momentum to continue into 2024. We know conversion is king when it comes to making a sale.

And in 2023, we made significant improvements across our platform because we know that not all checkouts are created equal. Our checkout converts better and is now faster than ever before, up to four seconds faster on average, in fact. This year, our team made substantial progress reducing friction for our merchants and their customers by introducing features like Sign in with Shop and One-Page Checkout because when everything works seamlessly together to make the shopping experience better, everybody wins. We’ve always felt that we have the best converting checkout in the world, and in 2023, we got validation of that. In April, an external study by a big three consulting company confirmed that Shopify’s overall conversion rate surpassed the competition by up to 36% and on average is 15% higher than others.

The data also showed that the mere presence of Shop Pay even when it is not used by a buyer result in higher conversion by 5%. And when it is used, can lift conversion as much as 50% versus guest checkout, outpacing all other accelerated checkouts by at least 10%. And it’s showing up in our results. For the quarter, Shop Pay, which is the best converting accelerated checkout on the Internet with over 150 million buyers signed up, facilitated $18 billion of GMV, up 58% year-over-year and a staggering 50% for all of 2023. It has now reached a cumulative $127 billion since its launch in 2017 and continues to become the go-to choice for consumers looking to buy quickly, securely and with as little friction as possible. It also has surpassed all other wallet for Shopify merchants as we look to make Shop Pay the leading checkout across the Internet.

Transitioning to AI. Shopify is capitalizing on the immense opportunity to support our merchants in this new technological era where AI becomes the most powerful sidekick for business creation. Our strategy involves integrating AI at the heart of our platform, simplifying the process for merchants to expand their businesses and adapt to the ever evolving commerce landscape. This is particularly relevant as we begin to shift towards more declarative software versus iterative, a concept that Glen Coates, our VP of Core Product discussed at Investor Day. In 2023, we brought nearly a dozen AI-enabled tools through our Shopify Magic product suite. We’re one of the first platforms to bring AI-generated product descriptions to market and made solid progress towards building Sidekick, a first of its kind AI-enabled commerce assistant.

As part of our winter edition a few weeks ago, we introduced new features to our Shopify Magic suite of AI tools. These new generative AI tools simplify and enhance product image editing directly within the product image editor in the Shopify admin. With Shopify Magic, merchants can now leverage AI to create stunning images and professional edits with just a few clicks or keywords, saving on cost and time. And given the significant advancements in AI in 2023, we plan to seize this enormous opportunity ahead of us and are excited to introduce new modalities and text to image capabilities to Shopify in 2024. Capitalizing on our scale and the trust we’ve established with merchants over time, we continue to unlock differentiated advantages for our merchants as we power millions of global storefronts.

Offerings such as Shopify Collective, Shopify Audiences, Shopify Capital, Shop Cash offers, illustrate how we use the power of our platform and data-informed product development to offer something truly unique in the market that you can only get if you are on Shopify. Take Shopify Collective, which launched in our summer editions in July. Users of this product range from celebrity brands like Drakes, Drake-related, Reese Witherspoon’s Reese’s Book Club to iconic brands like Mattel, elevating its cachet and connecting even more merchants together. It’s incredibly humbling to hear the success stories from independent merchants who optimize on this opportunity to join forces and help each other succeed. Shopify Capital, a product that’s been aiding merchant growth for over seven years continues to gain momentum.

This financial support often plays a key role in making our merchants ambitions more attainable because we help our merchants run their businesses, we are able to get them the funding they need in a few clicks. This helps brands like Nomad, ChocZero and Porter Road get the funding they need to support their growth scale and grow their businesses. And we know the capital product has been effective because we’re seeing a repeat renewal rate of over 70%, a testament to our ability to help merchants access the funding they need for growth, particularly ahead of key sale times, including the crucial Q4 holiday shopping season. A newer product that just launched in the summer of 2023. Shop Cash is a great example of harnessing the power of platform via Shop App to build new ways for merchants to acquire new customers.

As we move into 2024, Shop Cash offers will become a part of a broader product suite called Shop Campaigns. Brands like Netflix, Nike Strength and Caraway have already signed up and launched their first shop campaigns during the quarter, giving them access to millions of highly qualified buyers in the Shop App and creating a new tool for paid customer acquisition. While still early days, we are very excited about the potential of this product in making it easier for merchants to discover and engage with their customers. Encouraged by the momentum across our product offerings, we know that for most of our merchants, Shopify is the online store. But we know that, that’s only a start. As commerce is getting to evolve, transactions and brand engagement have moved far beyond the traditional retail or online source.

In order to discover new customers and build deeper connections with existing ones, you need to be online, offline and everywhere in between. And this is one of our superpowers, and why merchants of all sizes are coming to Shopify to build their own future. Starting with our off-line channel. Our go-to-market efforts, combined with enhancements to our product offering continue to resonate with more merchants that operate both off-line and online presences. In the quarter, offline GMV was up 28% year-over-year, driven by the growth of our merchants combined with the expansion of locations by our merchant base. Our off-line success is broad-based across all of the avenues of growth. For digitally native brands already on Shopify, like FIGS, we were there when they launched their first physical retail location in LA and cannot wait to be part of wherever they go next.