Shopify Inc. (SHOP) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Shopify session at Goldman Sachs Technology and Communacopia. I'm Gabriela Borges. When I was debating with Shane from Shopify, how we could amp this presentation up a little bit, we thought it would be really fun to have Archie Abrams, Head of Growth, join us from Shopify and of course, Jeff Hoffmeister, CFO. We really thought this would set us up for a little bit of leveling up in the Shopify discussion beyond all of the good stuff that Jeff quickly shares with us. And look, it's such a great time for us because the investor questions that we've been getting have gotten much more technical and specific on Shopify's modes over the last 6 months.

I want to start this conversation with a little bit of a reflection on the culture that Tobii has built at Shopify. There was a podcast that came out, I think it was a couple of weeks ago now, where Sam Altman, he opened up talking about Tobii and how he's just such a great example of a founder CEO who actually gets -- rolls up his sleeves and gets into the technology. And I know from speaking to you guys for a number of years now that the first principle of thinking at Shopify is pretty unique. So tell us a little bit maybe via an example from your day-to-day where this plays out in practice and Shopify essentially thinks first principles about adopting AI. Yes. Archie, do you want to start with?

Yes. Thanks, Gabriel, for having us and excited to be here. Working with Toby is amazing because he is so hands-on keyboard, right? He is in the technology himself doing it. And so just the other night, we were going back and forth very late into the evening on how different AI models are discovering Shopify merchants and Shopify itself. and really trying to kind of reverse engineer a lot of that discovery and what makes a merchant appear, what makes Shopify itself appear and rethinking and using that as an opportunity to really rethink the information we're giving to merchants and how we're even structuring ourselves. So that depth and that level of understanding, I think is really unique in how we build and what we're doing.

Jeff, an example from your day-to-day?

Well, I think one of the things, and Archie alluded to it, the one point I'd expand on is because Toby is so deep in the technology, he's exceptional at making sure we constantly are questioning how we've built a product. And maybe it was built on an architecture that even though it's only 2 or 3 years old, could be rebuilt in a way, and we see this a lot where he's like, hey, this is phenomenal. But if we want to take this to the next level, we need to do this. So let's use this latest and greatest technology in order to enhance the product so that make sure in the next 2 or 3 years. it's even further along. Or the other thing which I see a lot is we'll be doing product reviews and a bunch of engineers will come in and say, "Hey, we did a bunch of work. We got it down to 10 milliseconds or we did this or we did that? And they'll be like, well, you need to be 2. " -- and like, no, no, we just spent like 2 months trying to get this down to 10 million. He's like, no, it's to be 2. Like the consumer experience demands this. And so he's very good about taking that product knowledge, thinking about how we apply it and make sure we're delivering merchants what they need, not what it is that we're kind of obsessed about building, but what they're actually going to utilize.

Jeff, there was a time, I think it was around COVID actually, when Shopify still used to give us merchant acquisition numbers every quarter. And I remember investors used to ask us, look, at some point, this merchant acquisition gravy train is going to slow down because the depth of TAM just isn't there. So Archie, I know your role focus is a lot on merchant acquisition strategy. Talk to us a little bit about what the strategy is. And Shopify is sustaining these growth rates. It doesn't seem like merchant acquisition is slowing down. How are you able to generate this sort of infinite TAM?

Yes, it's a great question. I think that the key to our strategy is to kind of remain timeless over time, which is that we believe that the next large Shopify merchant is just getting started today. And so our job is always to meet entrepreneurs early in their journey wherever they are and lower the barriers for many people to start. We know that many of those businesses, they might not actually succeed, and that's totally fine. The the businesses that do become brands like FIS, A Yoga and the like. And of course, we grow right alongside them. And one thing that's really interesting about the merchant acquisition piece is one of our goals is always to build trust with entrepreneurs. And as I mentioned, a lot of those businesses, they might churn, they might not be successful in their first attempt. But actually, over 40% of businesses on Shopify started by merchants with their second or third or fourth business coming back to start over. If you look at one example of that, Ben Francis, the founder of Gymshark, actually started multiple businesses before he hit it big with the apparel brand, Gymshark. And so that goes to us really lowering that barrier to making it really easy to start in our integrations with all of the Agentic platforms. So we're there, building trust along the way and then helping more merchants come on, be successful and over and over until they hit that successful business.

There was a couple of secular shifts that happened probably around the time that Shopify was founded, where the start-up costs to start and become a merchant went down. And I'm thinking of dynamics like drop shipping and thinking of Facebook ads. What does that look like in 2026 with AI? Does the barrier to the average American starting a business are actually global. Has it gone down and in what ways?

Absolutely. So I think that one thing I look at is right now, if you look at -- we focus a little bit on the U.S., but obviously, our growth is very global. The 12% increase year-over-year in terms of new business starts in the U.S. But if you look at absolute numbers, still only 1% of the U.S. population that is starting a business. And I think our fundamental belief is that there are many, many more people who want to reach for independence, particularly with AI. And what AI allows one to do is if you think about starting a Shopify business, right, you had to be good at a multitude of skills. We're really good at designing apparel, but can also be really good at marketing, also be good at website design, also be good at running your operations, also be good at analytics. With AI, you might only need one superpower being an incredible product designer but then leverage the Sidekick or other AI tools to become an expert in marketing, leverage Shopify's autopilot, so we can help you run your marketing for you, use Sidekick to run your reports and run your operations. So all of a sudden, the barriers for many people want to reach for independents, they really only need one superpower Sidekick and other AI tools can help them with the other skills that are not as coming naturally. And I think that's really the opportunity with AI and what we're seeing.

Yes. I think if some of you haven't as investors just tried to build the store and use Sidekick, I think it would be really enlightening just for you to get a sense for the experience, the information, the content, all the information in there to just basically say, I have an idea or even help me generate an idea. And with this idea, get a website up and running. So even if it's something where you're just testing it out and trying to figure out I want to just get a feel for how the technology works and really put it in action, I'd encourage you to do it because to Archie's point, it's pretty incredible what it enables.

Let me ask you a little bit about how agented commerce is starting to impact the market. Let's start a little bit more macro. During COVID, people would track the e-commerce trend line and it accelerated. I think it was 3 years' worth of acceleration in 9 months. My question to you is, do you think the e-commerce penetration trend line is changing again?

I'll start. I'm sure AG will have plenty to add. Yes. But I also think it's early days. I think with all the product announcements, it's very easy to get focused on, hey, we think Agented commerce is such a huge percentage of commerce. We're really only depending on how each of a company, a vendor or a software provider defines it. We're kind of 6 to 9 months into seeing real traffic where someone goes to one of the LLMs, does some discovery and then ends up on a merchant's website and then transacts. So with that caveat that we're still in the early days of this, we are seeing an inflection. And as you know, when you kind of normalize across geographies, roughly 20% of commerce globally is done online. And I should know the exact rate of change. But in any given year, it feels like -- and Gabriel, you have a view on this, too. In the last few years, it's kind of a point or so of global e-commerce each year shifts from offline to online. We fully expect Agented commerce to inflect that. And that obviously will play into our strengths into kind of what historically has been our traditional source of where we started with merchants and help them grow. I think the other thing that we're going to see in addition to the adjustment, the inflection of the growth rate is we're going to see more and more discovery happen earlier in the process, which is going to help merchants. And there's a couple of stats, one of which we alluded to in the last earnings call. But when you start with an LLM and you do your searching there, you're 2.5x more likely to end up right on the product page rather than starting somewhere in a general spot on the merchant's website. You're going straight to the product you want. And then that leads to an uplift in conversion. We've seen roughly an 80% uplift in conversion. And so you're doing a lot more discovery, searching, figuring out exactly what you want before you even get to the merchant's website, but it also helps them the merchant transact and convert much faster, which is something that we've seen to be very, very effective. And we're also -- just in terms of how we're interacting with the merchants and all the LLMs for us, we're the only one that has the admin that allows you to work with all the different AI and LLM platforms directly from one admin, one pane of glass and let you decide, hey, I want to sell in this channel or that channel or turn this one on, turn this one off in any one given point in time. So it works really, really well. But importantly, the economics to us do not change. So whether you start on this LLM or that LLM, you're still a channel for the merchant and you're still getting to the merchant's website. So once you're on the merchant websites, you're still going through Shop Pay, you're still going through the process and kind of everything you're doing in terms of obviously exchanging money and getting your goods services, whatever sent to you. And it's -- there's been a lot of announcements around Meta and Me, which obviously is a huge partner of ours, exact same way in terms of everything we've done in terms of how we work with OpenAI and everyone else.

Your point on economics is an interesting one because I would imagine that whether it's Meta or perhaps one of the frontier models on the LLM engines, they would also want to share in the economics. So how does that work? How are you able to preserve your economics and then also make it worthwhile for them to be in this path of discovery?

Well, for the LLMs, they're obviously -- they're trying to do a couple of things. And there's -- the business models, the size of the businesses differ a lot, right? So it's a little hard to make some generalizations across all of them. But for the most part, they're engaging with the consumer in a way largely attached to what they're trying to do on an advertising side to funnel that consumer to a merchant and help them conduct a transaction. But if you're a merchant, the vast majority of the time, you still want the transaction to happen on your website. It may even be within one of the LLMs that makes a reflection or a mirror or it seems like you're actually still within the LLM, but you're really operating with the infrastructure of the merchant in a lot of cases. Because if you're a merchant, you spend a lot of like countless hours, dollars, management bandwidth trying to make sure the pictures are the way you want. The brand is the way you want. The product descriptions that you want. This is kind of the top level and you click down to the second level and you click down to the third. All that information a merchant has spent a ton of time working on. So the LLMs are doing everything they can to engage with the consumers. And I give -- I mean, one of the things, as you know, Gabriel, as we've talked about it, one of the changes that's happened is most of the LLM searches are generally -- when you type in the query, it's generally like 2 dozen words or so. The old traditional search, you probably were typing in kind of 5 or 8 words. So to all the LLMs credit, you're getting more -- they're generating more sophisticated questions, which allows them to get more sophisticated answers and they're trying to compete in addition to what they may be doing on advertising and other pieces, they're trying to compete on the quality of the referral. If you type in something very specific in terms of a product you may want, they want to get you to the right spot. And that's -- I mean, I'm sure we'll talk about catalog at some point, but that's the beauty of catalog in terms of how we interface with the LLMs. But they're trying to build their brand with the consumer.

We get this question, and I think you've already alluded to the any here, but just to crystallize it, every time a new agentic technology comes out that seems to have some way of replicating or disintermediating Shopify in the stack of merchant discovery through to conversion, we'll get questions about it. And I think that's probably a way to answer all of those questions in the same way, which gets to the heart of Shopify's moat. So how do you -- when investors ask you about ABC product that seems like it might abstract part of Shopify, how do you respond to that in a more comprehensive way?

Yes. I -- maybe, Archie, I'm going to let you start on this, too. But part of it is just kind of the -- to your point, the comprehensive element of things we do, which this is one of your near and dear points. I'll let you start, and then I'll pile on.

I mean -- and to Bill, I think the complexity and the fragmentation is actually -- is amazing for Shopify and the value proposition we offer to merchants because if you're a merchant, right now, think about you're starting a business, you need to have a website, you need to sell in the agentic channels. You may also want to do physical retail. And so you want one place that can bring all of that together in a simple way. And that is what Shopify does. So from a merchant perspective, actually, as the fragmentation gets even more over time, all roads lead back to Shopify. You want one place to manage your inventory, you want one checkout, you want all of those pieces to flow back. And that I think is the ultimate moat for what we do in the merchant value.

Yes. I mean, always keep in mind that Shopify is a place that does depending on how you define the products, 12, 18, 20 things for the merchant. There will people -- there are companies angles that will do a piece of that. But to Archie's comment, like we're helping them with the inventory. We're doing -- kind of getting them connected to shipping or calculating the taxes. We're doing the payments. We're doing the consumer context in terms of everything in the -- like we're doing -- we're running their website. We're doing -- we're using Stick to help them figure out which new product to do next or how to price or what to do in terms of this initiative, like all that stuff and at times, people are like, well, I want to do a little bit more of this piece or a little bit more of that piece, but no one's doing anything like we are in terms of the totality of all of it.

Let's talk about catalog. It's one of those innovation that is so simple and obvious and yet so sophisticated because the catalog, as I understand it, doesn't just describe, hey, it's a dark great dress. There is a level of how you can coat that up that makes it incredibly useful to LLM discovery. Talk to us about how catalog does that.

Yes. So I mean, I think one of the things that we've invested a lot in is our real deep understanding of every single product that is in the Shopify merchant has and creating a taxonomy that is incredibly robust around not only it's the most basic facets, but also things like understanding the imagery and really understanding kind of the tone, what type of buyer this is going to appeal to. And then in the process of that, cleaning things up so that if there are multiple products listed from different merchants, we have that unique understanding of a per product understanding versus kind of a scattering of these products are actually the same, but they appear in different listings. And so all of that plus the live inventory data, the live pricing data, those things are extremely unique when you're an LLM who's reaching for and helping a consumer actually find the right product versus using web search or something like that, which will have all sorts of issues, not real-time, bad pricing data, no live inventory. And so all of those things are really compelling for the catalog for both consumers and then also for merchants themselves.

The statistic that I really like from your earnings call was the one about conversion rates for the long tail.

Yes, yes.

How do you think competition is changing in so much of Shopify's value pitch has been -- value proposition has been empowering the Rebels and helping the small guys compete with the power of an Amazon. How do you think share is shifting between the long tail of merchants versus the giants in the room, typically the marketplaces?

Yes. I'll go back to one of the comments I made in terms of the LLMs being really thoughtful in terms of you're asking more sophisticated nuanced questions and you're getting more sophisticated nuanced answers back. And we're seeing that initially play out in a couple of spots, and we alluded this to your point, Gabriel, a little bit on the earnings call. There's 2 immediate spots, and there's a third one, which is rapidly developing. The 2 immediate spots are some of the -- I don't know if I'd want to say nichey products. We had Harley quoted a statistic regarding what percentage of the AI-driven traffic was outside of our top 100 categories. Now obviously, we can define the top 100 categories in a bunch of different ways. But the point is that the significant majority of the AI-driven, the AI started searches, I should say LLM started searches are in some of these products which are maybe less known. It's not the huge brands. It is maybe, for example, some product, some entrepreneur that started 5 or 6 years ago, the brand took off really well, had some phenomenal growth rates and then just plateaued a little bit, had kind of found an initial niche. And then with LLM, you're getting more specific questions. And you're kind of seeing a lot of these brands that have done well, slowed a little bit and a lot of them are taking off again, which has been amazing to see. The other category, the second category where we've seen a lot of initial impact from LLM are things which are very heavy in terms of product specifications. -- electronics or maybe there's a piece of furniture needs to be a certain size or certain height or something that needs to be a certain weight or something like that where obviously, the LLM is going to allow you to put in some very specific requirements that you want and then get more feedback from that and get a better result. The third thing which we're really doing, and we've talked about this a little bit when Archie was talking about catalog. We're really trying to take some of the things that maybe did not have a lot of product heavy searches. And now because of LM, you can take some of the things that merchants have in inventory listing and with catalog, present them in a way which is enhanced in terms of the product description. And so maybe you're looking at, all right, so I want to look and buy this suit. And is this suit a certain level of weight of fabric? Is it breathable? Is it appropriate for this type of event? Is it suitable for this and adding some things which historically you never would have considered within a description or a characterization of a product and now put that in there in a way where the LLMs now for the first time, allow you, if you can ask the question, which, of course, you can because you get in the habit of asking that question, catalog will serve up a product which is even better suited to what you maybe would have planned. And so maybe historically, you would have bought from brand X. But now the LLM will say, well, based on other things you bought in your style and types of things that I see you buying, actually, maybe there's a small manufacturer in Portugal or wherever that that's the manufacturer you should be buying from. And so as we can help merchants do better descriptions of their products, fold that into the catalog, it's really helping a lot of merchants be discovered in that way. It's just -- it's feeding more information and content into the system and letting that content then be accessed by the consumer.