Shopify Inc. (SHOP) Earnings Call Transcript & Summary

Okay. I think we are live. Welcome back. Once again, I'm Brad Zelnick, Crédit Suisse software team, along with my colleague, Bhavin Shah, who is also a member of the team and works with me very closely on Shopify. We are delighted to be joined today by Shopify's CFO, Amy Shapero; as well as Head of all things IR and others extraordinaire, Katie Keita. Thank you both for being with us.

Yes. Thank you for having us. We're just delighted to be a part of this conference.

Awesome. Well, we wish -- we were just talking. We wish it were in sunny Scottsdale as it is every other year, but I think we all understand the unique circumstances. Just in terms of today's session, the format is a fireside chat. I've got a bunch of questions and topics that myself and Bob and I know we're going to want to ask of Amy. And I'll keep my eyes on my inbox. If somebody else has a question you'd like me to weave into the conversation, I'll try to keep my eyes on that. But without further ado, maybe we just jump right in.

So Amy, again, thank you. Exciting. We saw the headline this morning. I just wanted to ask first about some near-term holiday trends. If we think -- this is somewhat of a unique season, it seems. But with your announcement of $5.1 billion in GMV over Black Friday/Cyber Monday, can you maybe help us with how to think about how Black Friday/Cyber Monday could represent as a percentage of the overall season this year or this Q4 for that matter just given 2020 has been such a unique year?

Yes. It has been a unique year. And we're characterizing this holiday season as longer, stronger and more meaningful. And so let me kind of go through how we're thinking about each one of those. Longer in that BFCM is still a big deal. You saw that from our press release with 76% growth year-over-year. And then 84% year-over-year for the full week leading up to BFCM. So it's still absolutely big. But we do know that merchants started their promotions earlier. So we also mentioned in our press release that we saw significant sales increases the 19 days before BFCM. We know from our data that we saw week-over-week growth in order volume increase at a substantially higher rate than prior years in the first couple of weeks of November. So we do believe that this BFCM was elongated more than prior years. It followed a similar trajectory, but it was at a faster, steeper ramp than prior years. So we do think it's been longer and elongated. In terms of stronger, we also put some information in our press release around BFCM has continued to grow beyond just North America. We saw triple-digit increases in countries like Japan, Italy, Germany and the U.K., places where we've been localizing for several years, saw real significant gains there. The intent to purchase online continued in this period that we've been talking about, this elongated holiday season. And we also saw strength across numerous consumer verticals. Apparel and accessories continue to be strong for us, but we also saw strength in home and garden and health and beauty. More meaningful to us, we know that many buyers have indicated a desire to be more conscious and thoughtful about gift giving this holiday season and who they purchase from. And so we know that consumers want to support local businesses. They want to buy sustainable products. We know independent brands are great at telling the sustainability story and they want to buy from Black-owned businesses. And so we're really happy to see that sort of movement. And we supported the sustainability effort by providing offsets -- carbon offsets to all the purchases over BFCM. I think you saw that in our press release as well. We thought that was really important to draw attention to. And we know that many of our merchants promoted that, and it helped them drive sales this holiday selling season.

Well, I want to actually ask you a little bit more about that. We noticed that -- and I think that's fantastic. And Mother Nature thanks you for sure. But curious what might have led to that decision. And how should we think about other sustainability initiatives moving forward?

Yes. We announced earlier this year that we would create a $5 million fund for a variety of sustainability efforts that not only are carbon offsets but actually help to take carbon out of the environment. And so we made some announcements a few weeks ago about some companies that are doing interesting things on the sustainability front and making certain purchases from them. And then this is just part of that $5 million fund, the BFCM carbon offsets. And that will be something that we continue annually. We're committed to this. I think it's important for the future of our world to be good corporate citizens here.

It definitely shows. Maybe, Amy, if I could just ask a broader question. There's been a lot of exciting things happening at Shopify, specifically as it relates to all the support you're providing to new and existing merchants during the pandemic. What excites you the most as you look to the demand environment and the broader opportunity?

Yes. What excites us the most at Shopify is what's always excited us, and that's to deliver on our mission to make commerce better for everyone. And so at the onset of COVID, you did see us pivot very quickly to meet some needs, immediate needs of merchants that we hadn't expected coming into 2020. So things like buy online, pick up curbside, local delivery options, gift card capabilities, expanding Shopify capital in terms of dollars committed as well as the U.K. and Canada expansions. There are others. That's just some of what we did very quickly. But what's even more exciting I think for us is that many of the things that we had planned coming into 2020 were just even more validated by COVID and the acceleration of e-commerce. And how we think about that is helping merchants get online fast and start selling, get their goods discovered, maintaining buyer relationships, a delightful shopping experience and driving conversion and getting goods to buyers. Almost everything that we're planning to do for this year fell into those categories. And you've seen us be incredibly prolific with product announcements and partnership announcements. So Shopify balanced multiple new sales channels with Facebook, Walmart, the TikTok partnership, email marketing, Shop app. Continuing to promote Shop Pay in a delightful checkout experience and then adding Shop Pay Installments on top of that, adding multiple payment methods like Alipay, and then continuing to be extremely committed and focused on the Shopify Fulfillment Network, given how important we know it is to get goods to buyers in a fast and affordable way. And it's more than just each one of these things individually as well. It's how they all work in combination. And going back to the Shopify flywheel, this is how we arm the rebels. This is how we help our merchants be successful. And their success, we share in that success. And we've also seen a significant increase in our scale. And as we increase in scale, we're able to then deliver more economies of scale and benefits to our merchants to help them be even more successful. And so we're seeing that flywheel energized right now and that gets us excited.

There's a lot to be excited about for sure. And Amy, I want to ask you about some of those spikes within the flywheel. But before I do, I want to touch on a statement that Tobi has made, saying that he believes the TAM has accelerated by 10 years. What do you think are some of the more sustainable trends post pandemic? And what are some other trends that might prove to be more transitory?

Yes. So let me just kind of take this up because there's been a lot of talk about our TAM recently. And our TAM is enormous, if you think about it. We sit at the intersection of commerce in the Internet. And there's huge growth potential remaining in that. And yes, the e-commerce aspect has been accelerated but there's still plenty of headroom and opportunity in front of us. And so as we look ahead to post-COVID, we do believe that a lot of the e-commerce gains will stick and we'll continue to grow off of a higher base. And the reasons why we believe that is convenience is habit forming. Most consumers have now -- we've been in this COVID environment for the better part of 2020 and it will continue into the early part of '21. Those new ways of shopping will stick. Buyers have found new brands and merchants to purchase from that they like. Those relationships will continue. They found new ways to shop locally. We've seen a big increase in proximity of merchant within a 25 kilometer radius as buyers find new ways to shop locally that are incredibly convenient. More nondiscretionary GMV moving online. We'll continue to see more of this as we move forward. And I think the other trend that we believe is significant here is entrepreneurship. In times of tough economic climates, we know that business formation generally increases. And we are the entrepreneurship company. There was a recent New York Times article that I think nailed it. We're about supporting entrepreneurs, leveling the playing field, helping to drive economic activity. That's going to be incredibly important over the next 12 to 24 months. We saw a record number of merchants come to the platform in Q3, some which are established, looking for more of an online presence. But we also know there were a lot of entrepreneurs coming to try to start a business. And that's going to continue and we're well positioned to help facilitate that.

Thanks, Amy. I'm going to hand it over to Bhavin to maybe dig in on some of the growth initiatives from here.

Yes. I just wanted to dig in on some of the growth initiatives. First, on the Shopify Fulfillment Network. That remains one of your biggest initiatives. Where are you in terms of your investment cycle? And what has adoption looked like thus far?

Yes. So when we launched Shopify Fulfillment Network 18 months ago, we said we're on a 5-year build path and we're still on that path. We said we would be in the product market fit phase for the first half of that, which takes us through the end of 2021 or soon thereafter. We're making good progress against that in building software. We're really focused on building the software. We've learned a lot that having the end-to-end software and the tech stack harmonization, all the way from how the order is placed to directing where the inventory of the merchant is placed all the way to what's happening in the warehouse, to then the outbound shipping and harmonizing all of that is really critical, driving automation and self-service into this so that merchants of all sizes can take advantage of the Shopify Fulfillment Network. And so we're really delighted with the progress that we've made. And we are scaling it but scaling it at a rate that we know we can maintain high-quality metrics and a delightful merchant experience. The scale phase will come later after 2021 but we're really delighted with the progress so far.

That's helpful. How should we think about the long-term opportunity here in terms of merchant adoption? What's success in your mind? And then can you remind investors of the monetization model?

Yes. So we said at the onset that we thought a significant portion of our U.S. GMV is addressable. It's any merchant that doesn't want to self-fulfill, which we think is a substantial portion of our merchants. Those that have lower volumes and want to self-fulfill can take the Shopify Shipping label product. Those that want to outsource fulfillment, Shopify Fulfillment Network is aimed directly at them. And let me just give you a little like BFCM anecdote that we love to tell merchant stories, in case you haven't noticed. We have a merchant paying us, who's on the Shopify Fulfillment Network. Over 1 of the days of BFCM, we were able to get 400 orders out for the merchant in 1 day. And for -- when you think about either a sole proprietor merchant or a merchant that only has a couple of employees, the time that it would have taken for them to get 400 orders out the same way would just have been like -- either not possible at all or like working 24 hours in a day. And so this like is significant to driving their businesses forward. And to give them the opportunity to have someone just -- to do that for them at an affordable price is huge and that's what we're aimed at. And so the monetization model right now, the current path that we're on is we have partners who do the warehouse part of it for us and partners who do the outbound transportation piece. And so what we're charging the merchant for is the storage in the warehouse, the picking, packing, kitting and preparation for outbound shipping and then the outbound shipping piece of it. And by driving efficiencies into that and trying to lower cost and get volume discounts from our partners over time, we think we can do that in a fast and affordable way. We're looking at ways to reduce the last mile transportation cost, which is a big chunk of fulfillment cost through some creative ways. And so we think there's a lot of opportunity here to do what we've done for merchants over time, which is to aggregate our scale and volume and pass on those cost benefits to them.

It's great to hear those merchant stories. And as we hear more of them, one question we constantly get from investors is why doesn't Shopify accelerate the investments in SFN given your cash balance. What's your answer to that question?

Well, obviously, the cash balance provides us with additional optionality to do just that should we find a path. We have looked extensively at acquisitions in the space. We made one a year ago with 6RS. We're absolutely delighted with that acquisition. We added some great fulfillment expertise on the team, expertise in the warehouse. We've already seen the benefits of deploying their technology in a warehouse and the efficiency gains that we can get. And their team is also helping us build the software, mostly the piece that's in the warehouse. And so we'll continue to look for ways like that. But right now, our general feeling is that this is a very heavy software build. And we will do most of it with the current team that we have. And we'll add more engineers next year to help us do just that. We need to get it right. It's critically important that we do it and we do it well. And it takes time to build great software.

That makes sense. And let's just shift to another growth initiative, international. You mentioned international as part of a lot of the BFCM stats. As we think about just the international adoption more broadly, where are more severe dollars going today? And where have you seen the most success?

Yes. Most of the dollars today are going into localizing in focused markets primarily in Europe and Asia. And by continuing to localize in those markets, what we mean is enhancing the mobile selling experience, facilitating cross-border transactions more effectively, multicurrency capabilities and building partner ecosystems. We're still very, very focused on that. Where we've seen successes to date are primarily in those markets where we've been localizing. You saw that from our BFCM results in the 4 countries that we identified that did really, really well. And primarily standard merchants today. Our focus has been growing standard merchants, getting that playbook down. We just recently announced that Plus will start to move into some international markets. Germany, we announced recently. We'll start to localize for Plus in -- primarily in those markets where we've been localizing for standard merchants and we're excited about that. We've also seen success in payment adoption and growth in GPV in those places where we now have payments capabilities. And we're really happy with the progress that we're seeing in terms of payment growth in those international markets.

That's helpful there. How should investors think about the pace of international growth over the next few years especially in non-English-speaking countries? And then how do you maintain your product leadership in many of these countries that are trying to create their own Shopifys of said country?

I think we'll see a steady growth like we have in international merchants. They will continue to increase in terms of the mix of our merchants as well as GMV mix. We're going to just keep going at this at an aggressive pace but at a pace that makes sense, where we do it well. We don't go too broad too fast. We nail some markets and then we go broader. So we still have a lot of growth opportunity in the markets where we're currently localizing. And then you'll see us add new geographies over time that will add to that. There are local competitors in most of the markets that we're in. They may have a slight advantage over us in terms of localization at this stage in the game. But what they don't bring is Shopify's scale and global reach. And we also know that's critically important to merchants to be able -- they're interested in not just selling in their local markets. They're interested in selling globally and cross border. And we think it's a heck of a lot easier to localize to do what we're doing than to add scale and global reach. And for that reason, we think we're well situated competitively in those local markets.

That makes sense. In terms of other investments, anything else that you'd call out as large investment areas over the next few years?

Yes. So we continue to make great progress on POS with the all-new POS software. Adoption has been strong. We continue to -- we just launched a paid tier for POS. It's early days but we're excited about that. That has more capabilities in it that take advantage of the new software. We just recently announced installments and balance. Those are in launch mode right now. So it's early days but excited. Shopify Capital is not new but we're continuing to see strong growth in that not only in the U.S. but in the 2 new markets, Canada and the U.K. And also, I don't want to miss the core platform. It doesn't get quite the headlines that some of these other newer, sexier things that we're doing but the core platform, we continue to invest in, in terms of its scalability globally as well as speed. We know speed is really, really important for our merchants. And so we're continuing to increase our capabilities there. And I think the most important thing to note is that we still very much follow a philosophy of having a portfolio of investments that have both near-term returns as well as longer term to keep our growth rate strong well into the future. And that's -- these all fit into that in some way, shape or form.

Maybe Amy, I'm going to jump back in and just ask a little bit more about the pace of investment. I think just about every CFO right now is struggling with limited visibility post pandemic and how from here into 2021, vaccines, everything else will play out. And just wondering that as you approach the next phase of investments into the business, how much, if at all, does the demand environment dictate the pace of investment? Or are you just playing such a long-term game that it's not really a factor?

Yes. I think it's the latter. We're playing a long-term game here. We still have a big opportunity in front of us. As I said earlier, our TAM is enormous. Our headroom is enormous. We're modernizing commerce. We're building substantial infrastructure for the future, which means we'll continue to invest in any economic cycle. It just doesn't make sense to slow down on the critical infrastructure for the future. Where you'll see us pivot occasionally is on spend that we don't think is effective or productive in the current environment. So at the onset of COVID, we had entered 2020 believing that we would spend a significant amount on brand investment. We pulled back from that. We said it doesn't make sense. We don't think it would be productive nor resonate in the current environment. And those dollars are better spent on other things like a 90-day free trial or other capabilities that merchants need at the time. So we'll always take an assessment of our spend and make sure that we think it's productive. But we will continue to invest for the long term, for sure.

Makes perfect sense to me. And maybe just following that. Shopify has a very unique business with subscription offering along with a partner-led, shared success Merchant Solutions offering or just in terms of how you segment your reporting. If we think about your expense profile and the investments that you make, is there any sense of the breakdown between Subscription Solutions versus Merchant Solutions because I mean we've always thought that over the long run, there could be very little OpEx tied to Merchant Solutions as most costs sit in COGS. Is that a fair way to think about it?

I think it is generally and let me just sort of break down. I'll start with Subscription Solutions, which has a SaaS-like gross profit margin, which is high. It's sitting in COGS there is mostly the infrastructure and hosting costs. And then moving down to OpEx. A substantial portion of our sales and marketing goes towards the acquisition of new merchants for the subscription product. So you're correct in that assumption. And the substantial portion of the R&D also goes to the core platform. Moving to Merchant Solutions. It does have a lower gross profit margin for a couple of reasons. Payments are in there, which just is -- has a lower margin. But yes, we do secure a lot of Merchant Solutions with partners. And so a lot of the cost does show up in cost of revenue there. It does require very little sales and marketing and significantly less R&D. I won't say it's 0 because even when we work with partners, there's a billed portion usually on our end. But it's a lesser amount than Subscription Solutions for sure.

That's very helpful. And with respect to time, I think we've only got a few minutes left. I'm going to turn it back over to Bhavin to take us home. Bhavin.

Yes. Amy, you spoke a lot about the core offering and how that gets maybe -- it's more under the radar. Can you just speak about the competitive landscape here with just the core SaaS offering? And how has that changed over the last year? What's been a key driver of some of your market share gains over the last year during the pandemic?

Well, our growth is largely attributed to the acceleration of e-commerce, the shift from off-line to online. We've been investing for 15 years. We always saw that big opportunity and so well positioned at the time of the acceleration. I don't think we've really seen that much change in the competitive environment over the last 3, 4 quarters. The same competitors are largely there. I think we're hearing more noise now because the opportunities being more fully identified that we've always seen. That's -- I just think we're competitively well positioned because of the number of years we've been investing here.

Got it. And I think part of your competitive advantage is the amount of partnerships that you have to really help merchants along. I think you've had notable partnerships with Walmart and Facebook recently. I know they are 2 vastly different partnerships but maybe can you touch on each? How is that trending? And what are the long-term opportunities here?

Yes. We don't really over index on any one partnership relationship. I think the real headline story on that one is that we offer multiple channels to merchants and we manage those channels all in one place to help reduce the complexity for our merchants. Each merchant is going to use a combination of channels that works best for their business. And that's why we need to offer multiple channels. They are used differently by our merchants. And so we're really delighted that we've added more to the platform. It is a way for our merchants to get their products discovered and to sell more of their products. So you'll continue to see us add more over time.

Great. Last one for me. Just on Plus, we haven't talked about it too much today but you have a lot of well-known established merchants recently becoming Plus customers. What's driving that migration to Shopify? And how does the typical sales process work with these types of customers?

Well, most of the demand is word of mouth. It's coming directly to our sales teams. And the sales cycle can be different depending on the merchant and what they're trying to accomplish. For those that want to get online very quickly, they're not completely replatforming but they want a direct-to-consumer play. We can get them up and running within like 7 to 10 days from the point that they initiate discussions with us to the first sale on the platform very quick. Those that are looking to completely replatform, it is a slightly longer sales cycle. And it can be up to 6 to 8 months because of the tech stack that's involved but also the desire to not disrupt their operations and to migrate it in a way that makes sense for them. And so we're seeing both types of merchants come to us. And we have sales teams dedicated to supporting the different types.

Awesome. Well, I think with that, we are out of time. Amy and Katie, thank you so much. It's always nice to see you both, even better to see you at the Crédit Suisse Annual Tech Conference. So thank you once again.

Thank you so much. We look forward to seeing you next year in person.

Likewise. And everybody for that matter.

Yes. Take care. Happy holidays, everyone.