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Edited Transcript of SHOP earnings conference call or presentation 1-Aug-17 12:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Shopify Inc Earnings Call

Ottawa Aug 11, 2017 (Thomson StreetEvents) -- Edited Transcript of Shopify Inc earnings conference call or presentation Tuesday, August 1, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Harley Michael Finkelstein

Shopify Inc. - COO

* Katie Keita

Shopify Inc. - Director of IR

* Russell Norman Jones

Shopify Inc. - CFO

* Tobias Lütke

Shopify Inc. - Founder, Chairman and CEO

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Conference Call Participants

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* Brian Christopher Peterson

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Brian Lee Essex

Morgan Stanley, Research Division - Equity Analyst

* Colin Alan Sebastian

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Darren Paul Aftahi

Roth Capital Partners, LLC, Research Division - Senior Research Analyst

* Deepak Mathivanan

Barclays PLC, Research Division - Research Analyst

* Gus Papageorgiou

Macquarie Research - Associate Director for Technology Research

* James Cakmak

Monness, Crespi, Hardt & Co., Inc., Research Division - Research Analyst

* Jesse Wade Hulsing

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Jonathan Kees

Summit Redstone Partners, L.L.C - MD and Senior Analyst

* Justin Allen Furby

William Blair & Company L.L.C., Research Division - Research Analyst

* Kenneth Wong

Citigroup Inc, Research Division - VP

* Kevin Krishnaratne

Paradigm Capital Inc., Research Division - Analyst of Technology

* Michael Barry Nemeroff

Crédit Suisse AG, Research Division - Director

* Monika Garg

KeyBanc Capital Markets Inc., Research Division - Research Analyst

* Nikhil Thadani

Mackie Research Capital Corporation, Research Division - Analyst of Technology

* Richard Hugh Davis

Canaccord Genuity Limited, Research Division - MD and Analyst

* Ross Stuart MacMillan

RBC Capital Markets, LLC, Research Division - Co-Head of Software Sector

* Samad Saleem Samana

Stephens Inc., Research Division - Research Analyst

* Samuel James Kemp

Piper Jaffray Companies, Research Division - VP and Senior Internet Research Analyst

* Suthan Sukumar

Eight Capital, Research Division - Research Analyst

* Terrell Frederick Tillman

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Todd Adair Coupland

CIBC World Markets Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Sharon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Shopify Q2 2017 Financial Results Conference Call. (Operator Instructions) Katie Keita, Head of Investor Relations, you may begin your conference.

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Katie Keita, Shopify Inc. - Director of IR [2]

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Thank you, operator, and good morning, everyone. We are glad you can join us for Shopify's Second Quarter 2017 Conference Call. We are joined this morning by Tobias Lütke, Shopify's highly-ranked CEO; Harley Finkelstein, our COO; and Russ Jones, our CFO. After prepared remarks from Harley and Russ, we will open it up for your questions.

Once again, we will make forward-looking statements on the call today. These are based on current assumptions, and they're 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. Information about these risks and uncertainties is included in our press release this morning as well as in our filings with Canadian and U.S. securities regulators. Also, our commentary today will include adjusted financial measures, which are non-GAAP measures. These should be considered as a supplement to and not as a substitute for GAAP financial measures. Reconciliations between the 2 can be found in our earnings press release, which is available on our website. And finally, note that because we report in U.S. dollars, all amounts discussed today are in U.S. dollars, unless otherwise indicated. With that, I turn the call over to Harley.

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Harley Michael Finkelstein, Shopify Inc. - COO [3]

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Thanks, Katie, and good morning, everyone. The excellent momentum we started out the year with, continued into the second quarter. The biggest news, of course, has been that the number of merchants joining Shopify continues to expand every quarter, as we recently surpassed the 0.5 million merchant milestone. And while it is very important to us to foster entrepreneurship by removing barriers to commerce, it is even more important to us to ensure our merchants have every possible means to succeed.

We made a lot of progress towards the second goal as well in Q2. We added more sales channels. We rolled out new features, and we continued to grow the value of our ecosystem. Several of the announcements we made at Unite conference came to light over the past few months. Among them: Shopify Pay, which accelerates checkout; and our EMV card reader, designed specifically for the Shopify merchants. Both of these are off to a strong start and should prove to be helpful to Shopify branding and increase name recognition as well as conversions for our merchants, especially, as the Shopify Pay network expands. We view Shopify Pay as a helpful interim step on our journey to streamline checkout even further. The early indicators are good. We continue to expand our sales channels to help merchants reach new customers in new places.

Both Buzzfeed and Wish are now live, and we recently announced that we'll be adding eBay as a channel, making it the second-large e-commerce marketplace, natively available to Shopify merchants. Listing on eBay exposes over 167 million shoppers to our merchants' products and expands the product options for eBay's users. We expect eBay channel to be available to merchants in the U.S. later this year.

Adoption of our Merchant Solutions also continues to grow. More than a quarter of Shopify merchants that are shipping from the U.S. and nearly 20% of those shipping from Canada used Shopify Shipping in Q2. And with all the cash advance offers now benefiting from machine learning for the entirety of the second quarter, we nearly doubled the number of capital advances in Q2 over Q1. The total cumulative amount of cash advanced by Shopify Capital reached $86 million by June 30 and stands at over $95 million as of today.

Moving onto partners. As most of you know, the large number of partners that are building on and for our platform are a key differentiator. Scale makes a difference here. The number of submissions through our app store in Q2 doubled over last year, and those that get approved are making the app store more valuable to merchants overall, as reflected in the continued increase in app spent per merchant. We now have more than 13,000 partners who referred merchants to Shopify in the last 12 months, up from 12,000, just last quarter. This ecosystem has been a steady source of new merchants to Shopify and our third-strongest acquisition channel behind organic traffic and paid marketing.

Partners are particularly important to building our higher-touch Shopify Plus business. Not only did we continue to expand the number of plus partners in the quarter, we augmented our program with the addition of nearly 50 Shopify Plus technology partners. Because Shopify Plus merchants have unique needs, it is important to connect them with proven technology partners that have been vetted and certified by the Shopify Plus partner team. These partners, along with our own Shopify Plus sales hackers continue to onboard some of the largest and most recognizable brands to Shopify Plus. Companies that launched stores on Shopify this quarter, include, Visa, Frito-Lay, Jones New York, Buzzfeed, Elvis Presley, Canadian Tire and The New York Times.

Shopify appeals to renowned brands like these for many reasons, attractive price, scalability and resilience of the platform and ease-of-use. I point this out, because it highlights just how vast our total adjustable market is. It is essentially anyone wanting to make more money than their shop costs them. An appeal that is universal and that helps to explain why we have added ever larger numbers of merchants for the last 3 quarters straight. And while we cannot expect every single merchant to succeed, we are confident that Shopify gives merchants the best chance at success on a platform that we're making better all the time. And with that I will turn it over to Russ to cover the financials.

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Russell Norman Jones, Shopify Inc. - CFO [4]

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Thanks, Harley. Q2 was another strong quarter with an increasing number of entrepreneurs, SMBs and larger brands, both starting and growing their businesses on the Shopify platform. In Q2, we again grew revenue 75% year-over-year to $151.7 million, driven by rapid growth in both elements of our business model. Subscription Solutions revenue growth accelerated from last quarter to 64%, coming in at $71.6 million. This strength was driven by the monthly recurring revenue growth of 64% to $23.7 million, as we had another record number of merchants join Shopify in Q2. In fact, today Shopify is serving over 500,000 merchants on our platform, more than double the number we were serving at the start of last year. The contribution to MRR from Shopify Plus also grew to 18% of overall MRR to -- $4.3 million, compared with 13% of MRR for Q2 of 2016. MRR from Shopify Plus includes only the minimum-contracted subscription value. Any incremental revenues stemming from the variable pricing structure we introduced in February is counted in Subscription Solutions revenue, not MRR. These amounts are not significant at this stage.

Merchant Solutions revenue grew 86% to $80.1 million. Growth of Gross Merchandise Volume was a primary driver aided by Shipping and Capital, as adoption of each of these continued to expand in Q2. Our Merchant Solutions take rate grew to 1.37% of GMV, from 1.28% of GMV in Q2 of last year. GMV grew to $5.8 billion, up $1 billion from just last quarter and up $2.5 billion, or 74% from the second -- from last year's second quarter. $2.2 billion of GMV in the quarter, or 38%, was processed on Shopify Payments. This compares with $1.3 billion, or 38% in Q2 of 2016.

While the percentage of merchants on Shopify Payments ticked up again slightly in the quarter, the Gross Payments Volume held steady at -- as a percent of GMV. This is due, in part, to a greater percentage of GMV being generated at markets where Shopify Payments is not yet offered and an increase in the amount of GMV not processed through credit cards, cash-based POS transactions for example.

Gross profit dollars, once again, grew faster than revenue in the quarter. Margin improvements in both Subscription Solutions and Merchant Solutions more than offset the higher mix of Merchant Solutions in our overall revenue mix. Although both continue to benefit from scale, Merchant Solutions also benefited from the expansion of the higher-margin Shipping and Capital offerings. Our adjusted operating loss in Q2 was $2.9 million or 1.9% of revenue, compared with $3.2 million or 3.7% of revenue in the second quarter of 2016. The adjusted net loss for the quarter was $1.1 million or $0.01 per share. This compares with a $3 million loss or $0.04 per share for the second quarter of 2016.

Finally, our cash, cash equivalents and marketable securities balance grew to $932.4 million, up from $395.7 million in March of 2017. This increase reflects the $560 million in net proceeds from Shopify's successful offering of additional shares in the second quarter. These proceeds further strengthen our balance sheet to fund various growth and operational initiatives.

As we look to the rest of the year, we now expect 2017 revenue in the range of $642 million to $648 million and an adjusted operating loss in the range of $7 million to $11 million. For the third quarter, we expect revenue in the range of $164 million to $166 million and an adjusted operating loss in the range of $2 million to $4 million. We continue to expect stock-based compensation to amount to $55 million for the full year, with about $15 million of this in the third quarter.

As our guidance implies, we continue to expect to achieve operating profitability on adjusted basis in the fourth quarter of this year. With more than 0.5 million merchants and more than 1 million staff accounts now on the Shopify platform, it is clear we're extending our lead as the go-to platform for sellers. Larger brands increasingly look to us for a scalable and reliable platform to support their higher-volume multichannel selling. Also exciting to us is that as we continue to flatten the learning curve and increase our capabilities, more and more entrepreneurs who may have not considered launching their business, are now able to.

And with that I'll turn it back to Katie to start the Q&A.

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Katie Keita, Shopify Inc. - Director of IR [5]

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Thank you, Russ. Okay. Thanks, Russ and thanks, everyone for dialing in. Operator, we can now open the line for questions, but before we do I'll just ask everyone to limit themselves to one question, so we can have enough time for each person to ask a question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Justin Furby from William Blair.

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Justin Allen Furby, William Blair & Company L.L.C., Research Division - Research Analyst [2]

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Russ, I wanted to ask you about Shop Plus, the MRR ticked up to 18%, which is probably no surprise that it's outpacing the core business growth, but I'm wondering if you expect that turn to continue to look out over the medium- to long-term? I guess, is there a scenario where that business could be 40%, 50% or more of your subscription base? And if that's the case, what are, sort of, the longer-term model implications to that?

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Russell Norman Jones, Shopify Inc. - CFO [3]

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Yes, I mean, we'll continue to see Shopify Plus grow, whether it gets to that sort of higher-level that you said, time will tell. From our side of it, Shopify Plus has a higher subscription amount, but also, as we've changed some of our pricing, also contributes to the Merchant Solutions. And so from an overall point of view, that just means that we'll see continued strong revenue growth in the company.

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Katie Keita, Shopify Inc. - Director of IR [4]

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Next question, please?

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Operator [5]

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Your next question comes from Ross MacMillan from Royal Bank of Canada.

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Ross Stuart MacMillan, RBC Capital Markets, LLC, Research Division - Co-Head of Software Sector [6]

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The strength of new merchant adds in the first half has been striking, and I was curious if anything has changed in terms of your investments in customer acquisition this year relative to last? And also, I'd love to understand, what you're seeing in terms of retention improvement as the cohorts of merchants mature?

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Russell Norman Jones, Shopify Inc. - CFO [7]

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Yes, in terms of the overall investments side, no real change in the mix. So organic's still the -- is our #1 source of new merchants, followed by the paid advertising and then the partner side of it. The thing that has changed, and we talked a little bit about some of the experiments we do on the international front, and so some of the work we've done to translate our blog into other languages has resulted in, again, we're seeing more merchants internationally join the platform. And in addition to that, the stuff that we're doing to, sort of, flatten that learning curve, in terms of getting new entrepreneurs up and running on the platform, has really enabled more entrepreneurs to join the platform. On the retention side, we've seen no change in our retention numbers. So I think that sort of bodes both to our ability to track merchants and our ability to get them up and running.

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Operator [8]

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Your next question comes from Darren Aftahi from Roth Capital Partners.

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Darren Paul Aftahi, Roth Capital Partners, LLC, Research Division - Senior Research Analyst [9]

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Just curious, your Amazon and eBay partnerships, just curious on impact to business. I know eBay is not launched yet in terms of, kind of, merchant growth. And then any other platforms or partners you feel like you're not yet -- do you feel like you're fully covered at this point? And then I guess as you reached milestone of 500,000 merchants, can you just give us an update in terms of, kind of, how you view total addressable market?

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Harley Michael Finkelstein, Shopify Inc. - COO [10]

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Yes, it's Harley, I'll take the first part of that question in terms of the Amazon and eBay announcements. In both those cases, our objective here is to ensure that our merchants on our platform can sell anywhere they potentially have customers waiting for them. And so obviously, Amazon and eBay being 2 of the largest marketplaces globally obviously, were obvious fits for us. Amazon, we continue to work with to improve the experience for our merchants. We also are beginning to expand into new categories with Amazon, which is exciting. eBay, of course, hasn't launched yet, so too soon to tell. But again, the goal there, whether it's Amazon or eBay or it's Buzzfeed or Wish or any of the other channels that we're looking into, is to enable our merchants to sell more products. So that really is the goal there. I'll let Russ answer the total addressable market question.

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Russell Norman Jones, Shopify Inc. - CFO [11]

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Yes, I mean, I think it's clear, and it's been clear for a while that even though we talk about, sort of, the SMB side as a very large and big market that, really with the platform, the fact that we can stretch up and pick up a number of these larger brands, and now with a number of things that we've been doing also, pick up a lot of these brand-new entrepreneurs, both in our core markets and now beyond those core markets, I think shows that, that addressable market continues to get larger and larger. And in fact, I would say to a large degree Shopify's actually increasing the size of the pie.

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Operator [12]

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Your next question comes from Nikhil Thadani from Mackie Research.

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Nikhil Thadani, Mackie Research Capital Corporation, Research Division - Analyst of Technology [13]

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Two quick questions from me. Firstly, in terms of your growth plans with all the changes that've been happening, is it becoming easier for you to find R&D talent up here in Canada? And secondly, with some of the changes to the U.S. dollar right now, how does that change your FX hedging plan going forward?

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Tobias Lütke, Shopify Inc. - Founder, Chairman and CEO [14]

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This is Tobi, I can talk to recruiting. I mean, there's all sorts of things that going on right now that make it easier for Canadian companies to recruit R&D talent, and definitely the profile we have now -- I mean, honestly, this is from a first -- when I first sat down with my cofounders and said, hey, what do we -- how should we build this company? We said, this one thing is only going to work out if somehow we establish a large geographical consensus that Shopify is the just best company to work for adding new talent and product and UX and all those kind of people we're working on to make Shopify work. I think, we've been very successful doing this, this has been the case for a couple of years now, and we're getting the kind of recognition for this now. It's -- when I talk to other people in the industry, even to people on my Board of Directors, they usually describe it like this, they say that, we complain how hard it is to get R&D talent and everyone else tells them that it's impossible to get R&D talent, so I think this is, sort of, the way things are right now. I'm going to give it over to Russ for the FX question.

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Russell Norman Jones, Shopify Inc. - CFO [15]

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Yes. On the FX side. Our main exposure as a company is Canadian dollar versus U.S. dollar, not so much on revenue but on the cost side. Over a year ago, we implemented a formal hedging program, that has a bit of a 12-month running view and contracts in place for that. So we even -- with the recent, sort of, strengthening of the Canadian dollar, we don't see a large impact to 2017 and any impact we factored into the guidance that we provided. In 2018, particularly in the second half. If the rates stays at this level, that definitely is something that we need to take it into account.

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Operator [16]

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Your next question comes from Gus Papageorgiou from Macquarie.

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Gus Papageorgiou, Macquarie Research - Associate Director for Technology Research [17]

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I think the last time you guys updated your international customers I think it was about -- I believe it was either 17% or 18% of your customers -- admission customers were outside of your core markets of Canada and the U.S., the U.K. and Australia. Can you give us a sense of, if you look at the adds so far this year, what kind of mix we're seeing globally?

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Russell Norman Jones, Shopify Inc. - CFO [18]

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Yes, so we see good growth in all of our core markets there. In terms of the international, it's now just under 19% of the total merchant count.

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Operator [19]

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Your next question comes from Ken Wong from Citigroup.

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Kenneth Wong, Citigroup Inc, Research Division - VP [20]

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I know it's early for pay and the reader. But any update in terms of kind of what you are seeing from customers and their, you know kind of, just what kind of spend patterns that their customers are having and the impact that you guys potentially expect going forward with those profits --

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Tobias Lütke, Shopify Inc. - Founder, Chairman and CEO [21]

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Yes, it's Tobi, I'll take it. I mean, it is really early, but we also are really, really happy with how things are going, the pickup is fantastic and it does exactly what we expected it to do. It increases conversion rates and people who might otherwise get discouraged by seeing a long checkout form, now push -- like very quickly find a way to skip through this process. I keep getting notes from people who encounter Shopify Pay in the wild for the first time and then just really, really like the experience. So this is just -- I mean, I think, the right way to think about this, this is like an entirely new construction site that sort of has just put up a scaffolding. There's enormous amounts of additional work to be done to get it to the point where every Shopify store, just sort of from a usability perspective, is similar to a place like Amazon, where you might have had an account which already has your address and has your credit card where you can just buy with 1 click or 2 clicks or whatever. And so this is where we want to go. Shopify Pay is 1 ingredient in this, it's this thing that allows us to get there really quickly but our long-term ambition is really to work with, with the hardware vendors and the device manufacturers and the browser vendors to get of all these features into a secure hardware and secure elements and just take this out of a process of a web, the way it's traditionally being done, because we all know in 10, 20 years from now, this is not how we're going to transfer money on the internet anymore, so our interest is to get there faster. And our input into these processes is for everyone to think of the buyer as great, great UX and manufacture likeful experiences. Exactly the same sentence I can say about the chip and swipe reader, its hardware, but built by actually working very closely with the kinds of people, not just the people who actually have to use the device and they want to pay but rather the cashiers who are standing 8 hours a day in the store and have to handle credit cards, like just simple things such as. This reader makes it impossible to put your credit card in the wrong way, like again, why did that take, what, 30 years for someone to build it like this? This was just putting a bit of plastic into the right spot and then it just works. Sometimes this kind of thinking is just sort of absent in our industry, and so we took it upon ourselves to supply it at this point.

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Operator [22]

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Your next question comes from Jesse Hulsing from Goldman Sachs.

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Jesse Wade Hulsing, Goldman Sachs Group Inc., Research Division - Equity Analyst [23]

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You have almost $1 billion of cash now on the balance sheet, and I'm wondering what your thoughts are with regards to uses of that cash, in particular M&A? I know you've done some smaller tuck-in acquisitions, would you ever consider anything more transformational? Or is the strategy going to be focused more on acquiring smaller solutions and integrating those into your platforms?

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Russell Norman Jones, Shopify Inc. - CFO [24]

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So far we've done 6 acquisitions. As you talked about, they've been these small sort of tuck-ins that we've been very successful on integrating. With the amount of capital we do have on our balance sheet as well as our, sort of, market cap as well, I think we're in a position to do some bigger stuff, and so nothing currently contemplated but definitely that option is now available to us.

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Operator [25]

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Your next question comes from James Cakmak from Monness, Crespi.

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James Cakmak, Monness, Crespi, Hardt & Co., Inc., Research Division - Research Analyst [26]

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If we look -- in looking at the results I would say, this is probably one of the cleanest and most impressive growth stories I've seen in a very long time, and it seems like it's virtually frictionless across-the-board and looking at your metrics at all levels. With that in mind, what would you characterize as your challenges and if any?

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Russell Norman Jones, Shopify Inc. - CFO [27]

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Yes. I mean, I think in the business that we're in, which is a trust business, operational elements are something we put a lot of attention on and probably is one thing that does keep us up at night, to make sure that we never do anything that sort of breaks that trust with our merchants, and so that's the key part. The other thing is in some parts of the world, credit card penetration isn't that high, so we need to think about other ways of allowing merchants to transact money with their customers as well as in other places the logistics system's not quite where it needs to be. So it's those things that we also are keeping a focus on, and basically decide where we want to experiment based on those factors coming into play.

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Operator [28]

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Your next question comes from Michael Nemeroff from Crédit Suisse.

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Michael Barry Nemeroff, Crédit Suisse AG, Research Division - Director [29]

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As Plus is -- it's clearly becoming a larger portion of revenue and aside from focusing on the wholesale aspect, what other things are you going to do to feed this larger merchant growth? And then also, do you feel like the core product is robust enough or feature-ish enough to replace an enterprise solution, something like a Hybris or a Demandware, and could that be a direction of the company going forward to after some of these really large commerce platforms that have -- you know cost a lot of money and have been installed for decades in some cases?

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Harley Michael Finkelstein, Shopify Inc. - COO [30]

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It's Harley here, I'll take that question, Michael. So in terms of the additional functionality that some of these larger brands require, one of the reasons that we launched the technology partner program, just a little while ago, was because some of the things that they're asking for, our core base of merchants just simply don't need for example, ERP integrations or cross-border tax compliance, and so by creating a network of partners, who are specifically geared towards these much larger brands, these much larger merchants, we think that helps us fill in lot of gaps that potentially have been missing. Beyond things, you mentioned wholesale, I mean wholesale really was demand-generated, we saw our existing base of merchants that were asking for it, and so it was an obvious thing for us. One of the things we are doing now, that we have a bit of a better handle on who these Plus merchants are is we're now asking them, what are the other things that you're not getting from us and filling those gaps with these other partners. So that's kind of the way we look at it. And in terms of your question about big migrations, we've had migrations from every major platform, including the one that you had mentioned. Certainly the bulk of our migrations come from more of the mid-market, like the Magento, but we've had migrations from all the major ones as well. And as I said on previous calls, the thing that we're noticing is that a lot of these big brands are acting a lot more like entrepreneurs these days. They want things that are easy-to-use, that are quick to market, that are very scalable, easy-to-customize, and so we think that as a package, Shopify Plus, fits really, really well in that vein.

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Operator [31]

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Your next question comes from Deepak Mathivanan for Barclays.

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Deepak Mathivanan, Barclays PLC, Research Division - Research Analyst [32]

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Two questions. First, if you look at your total gross profit as a percentage of GMV, it's currently around 1.5% range, what do you think is a long-term opportunity in terms of economics given that the value prop to some of the large merchants is very attractive with the cloud infrastructure and all the other features for payment processing? Do you think we can see it at a much higher levels? And then one quick one for Ross, payment volumes are growing strong consistently with the GMV growth, can you talk about payment penetration in terms of the Plus program currently? Do you see pretty healthy demand form large merchants? That's it.

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Russell Norman Jones, Shopify Inc. - CFO [33]

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Yes. Maybe I will take that second question first. So in terms of the Plus side, what we're seeing is a lot of the new merchants, that we're picking up as part of Plus, are adopting Shopify Payments. And part of it is some of the changes we've done to pricing but more importantly, I think, it's just from a product point of view, a much cleaner and integrated solution for the merchants there. We've also had a number of, even Plus merchants, move over to Shopify Payments, just in order to be able to access Shopify Capital. And so, again, the nice thing about Shopify is a lot of these things are interrelated and so having strength in one area actually helps other parts of the business.

In terms of your other question on the sort of the growth side. I mean no specific guidance in terms of what that amount can turn out to be, but I think we feel that there's still lots of good opportunity to grow both the subscription side of the business as well as the Merchant Solution side of the business.

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Tobias Lütke, Shopify Inc. - Founder, Chairman and CEO [34]

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I think, it's worth also pointing out that, I always like getting these questions, because you guys always suggest these really, really interesting ways to slice the various gross metrics divided by something really novel. I just have to say, from a perspective of building a business was we never manage a company against these, sort of, financial ratios or goals. Like the way we think about the business is that, we have our core product, which is of enormous amount of value to the people who use it. We are constantly working on thinking about how to make it better, we have a pretty clear-eyed view of what the future of retail might look like and what kind of software it requires. All of these things go on the flywheel, which hopefully will spins faster and faster, faster. And from that, we look at opportunities to get some revenue, especially in places where our customer's already spending money like payment gateways and so on. And that combination then creates really, really robust growth story, where the revenue is then reinvested into allowing us to take advantage of more opportunities to build better product and it all, kind of, feeds back into each other. And so the financial statements at the end of a day are kind of our check-in that things are going in the right direction, but we don't manage directly against them.

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Operator [35]

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Your next question comes from Brian Essex from Morgan Stanley.

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Brian Lee Essex, Morgan Stanley, Research Division - Equity Analyst [36]

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First of all Russ, congratulations on your retirement. If you picked a quarter to announce it, this is a good one. And then I guess for the question, I wanted to follow-up on Michael's question, around Shopify Plus. As you look to expand to more, kind of, feature functionality and broaden your depth with Plus penetration, how do we think about unit economics of those customers? And what kind of value you might capture as opposed to passing through to your partners? And then secondly, are you seeing a greater percentage of exclusivity on that platform as opposed to -- I know when we first did the IPO, there were some pretty interesting [use] cases, for example, as CMOs get more of their budget, they don't have involve their IT staff, but they maybe -- their IT staff would have a solution like Demandware that they kind of went in parallel with, are you seeing more exclusive opportunities? I think that would about do it on my end.

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Harley Michael Finkelstein, Shopify Inc. - COO [37]

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Yes. So in terms of exclusive opportunities, similar to our core app partners, what tends to happen is they begin to build for Shopify and realize that Shopify is the best place for them to access customers at their applications, and they tend to go, in many cases, all in on Shopify after that happens. The Plus technology partner program is still pretty new, so some of these partners obviously work with a variety of different platforms. Our hope is that they see that there's just a ton of value with Shopify, and that's where they invest their time and their R&D efforts to build on top of in that case. On the first part of the question just in terms of economics around Plus, the reason we made the change in Q1 on pricing is really, it's future-looking. The idea is that now as these new merchants grow up on Shopify, eventually graduate to Shopify Plus, get really big, we share in the economics of their GMV through the -- through the fee, the 25 basis points. But also for other brands that are migrating over, that as they grow up on Shopify, in some cases bring on more of their properties to Shopify Plus that we share in that success. So similar to what you'd mentioned, that we talked about around, you know, a while ago around these CMOs that are contacting us for a very small slice of their entire business, we really like that, because it's a bit of a land-and-expand opportunity. So they may bring us -- Sears brought us a very small pop-up that they did last year, and that was the first time engaging with Sears and obviously, the hope is that, that brings on more properties with them. Same thing with some of the other big department stores. So we don't necessarily need to get the entirety of every property from these big brands on right at once. We'd much prefer to get something on, prove to them that Shopify Plus is an ideal partner for their commerce and retail efforts, and then slowly we watch them bring on more and more properties, which certainly has been the case with companies like Budweiser and a lot of other big brands.

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Operator [38]

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Your next question comes from Richard Davis from Canaccord.

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Richard Hugh Davis, Canaccord Genuity Limited, Research Division - MD and Analyst [39]

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I mean, it's self-evident that you guys have executed really well, and you, kind of, touched around this topic of making the platform better near-term, but if you know, let's step back and think, if you're looking back -- if we're looking back here, at least at high levels, like 3 to 4 years from now, what initiatives do you see as kind of the most promising or interesting new growth vectors for the business? You don't have to give us -- well, you can, but -- you don't have to give us the product road map explicitly, but it'd just be helpful to kind of think about this thing a little bit more holistically.

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Tobias Lütke, Shopify Inc. - Founder, Chairman and CEO [40]

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Yes. So, I mean a lot our cards are in play already, right. So we are -- I don't think Shopify necessarily needs the, here's the massive unveiling of the strategy that no one's been seeing and like -- I think that's kind of -- that kind of happened with multichannel, it's like a -- it sounds so silly to say, but now because it's so bloody obvious. But when we were taking the company public, we were worried a lot, talking in our decks about multichannel and specifically our insight that we knew everyone needed multichannel software, but we were an online store software and our insight was, we are in the best competitive situation to get to be the multichannel system for all retailers, right. So we worried and said, hey, let's go public but we need to explain this. The problem is then everyone knows what we're doing and then everyone's going to do this, and here we are 2 years later and kind of no one did, so that's kind of surprising. And that just means how happy we are with this kind of thing. Now in terms of the next couple of years, the key there is really, it's really with multi. There is a lot of things, like multichannel has started this, but there's a lot of work going into being able to deal with the true complexities of, let's say, inventory, like multilocations, we're talking -- when you go to the rest of the planet, you say, okay, now [learn] multiple languages and so on. So really it's I think -- Visa, now we are going to add to the platform, which really, really allow the addressable market of Shopify to just expand in all directions. Every time we do one of those kind of things, it really compounds and acts on the flywheel, and then increases the amount of people who can use us in both directions, and that's the really exciting thing. You know like the pyramid of our -- our addressable market is the pyramid, the demand's almost total, who wouldn't want a business on the side that makes more money than it costs, right? So the only thing that stops everyone from wanting a Shopify store is that it's work and that it requires learning and therefore, potential for failure. So all these things we have input on. we can make it less work, especially with technologies like machine learning, which we invest into. We can make the -- we can manage a fear of failure to a certain degree, which frankly macroculturally already, kind of, happened. And we can just push down the learning curve to building this entire thing and therefore, just massively increase the size of the market we have. And you see a lot of these kind of efforts, like just general work on the platform, things like Kit and so on. So I think the best way to think about Shopify is, now we are on -- like we put this train on the right tracks now, and now we're going to pick up speed into this direction.

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Operator [41]

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Your next question comes from Colin Sebastian from Robert Baird.

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Colin Alan Sebastian, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [42]

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Question on Shopify Capital, with the step-up in cash advances in the quarter, if you could talk about how important the program is related to the -- contributing to merchants and revenue growth, including color on your ability to screen merchants for credit quality? And as a quick follow-up on the bigger growth question, I wonder if you can tie the significant growth and share for platforms like Amazon, as it's creating more urgency among merchants and retailers to upgrade -- to get online and upgrade their existing technology platforms.

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Russell Norman Jones, Shopify Inc. - CFO [43]

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Yes, in terms of Shopify Capital. I mean for a lot of our merchants it is very difficult if not, in some cases, impossible to get working capital financing. And so I think that we're meeting a real need there. And again, although it's its own revenue contributor, I think the bigger value is that it's helping these merchants expand their businesses, which we also then participate in through things like Shopify Payments. We're seeing a number of these merchants who paid off their first, second, sometimes now up to fifth advance. They're looking to refresh that. I expect as we sort of get ready for the Black Friday, Cyber Monday holiday period, you'll see more advances as they want to, sort of, build up their inventory for that site. So I think using the tools that we now have at our disposal, as Tobi talked about, like machine learning. It's really allowing us to make sure that we're providing the merchant with the right proposal at the right time and making sure that we're not taking undue risk and further to that, the fact that these are now -- have been insured almost for 12 months really reduces our exposure. In terms of what Amazon's doing and the urgency that creates, I would say, that's definitely a factor. I would say the fact that mobile is such a big part of the business these days that your existing solution may not have that capability. The fact that you now need to be multichannel, I think all of those contribute to really a good time for Shopify and what we offer.

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Operator [44]

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Your next question comes from Jonathan Kees from Summit Redstone.

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Jonathan Kees, Summit Redstone Partners, L.L.C - MD and Senior Analyst [45]

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So I just wanted to ask about a couple of things. One, is regarding the sales hackers, I assume it's the trajectory for the sales hackers growth, I assume you grew that sales force this quarter, and you'll continue to do that as we go through the year with the growth of Plus. Can you just talk in terms of the trajectory of that expansion, if you're looking to really ramp-up there? And then second, wanted to ask about Russ's departure. Russ, congrats there, and if I can ask -- I'm only asking because more like, I'll be asked this, are you looking to just take some time off, spend time with family and then re-evaluate entering or looking for other opportunities or are you truly retiring?

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Harley Michael Finkelstein, Shopify Inc. - COO [46]

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I'd take the first part of the question and let Russ answer his question -- his own question about retirement. In terms of sales hackers, we continue to hire them. The hacker counter is certainly higher than at where we were in Q1. It really is just a matter of getting the right hackers and getting them ramped up. As we've mentioned in the past, our sales hackers are not your traditional sales people. These are people that have a proclivity for technology, many of them are quite younger and not necessarily as experienced, but we find that, that's a much better way for us to bring them in and train them on exactly how to sell Shopify Plus. So we will continue to grow that hacker team as needed.

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Russell Norman Jones, Shopify Inc. - CFO [47]

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Yes, I'll take -- I guess I'm the best one to answer the retirement question. So yes, it is a retirement. Sort of the normal stuff, travel, spend time with family. I have new -- well, 1 grandchild and another one on the way. Probably do some golf, some reading, I haven't quite figured out the second week yet, of retirement, so I'll keep you in the loop.

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Operator [48]

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Your next question comes from Sam Kemp from Piper Jaffray.

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Samuel James Kemp, Piper Jaffray Companies, Research Division - VP and Senior Internet Research Analyst [49]

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One question. So I guess Harley, you talked about Shopify Pay being an intermediate step and Tobi, you talked about a lot of things around hardware and browser combos to reduce payments friction, I guess, can you, kind of, piece those together from what it looks like from a consumer standpoint? And where you want to take Payments and what kind of timeline we're talking about there? And then the second question is around Kit. You made Kit free during the quarter, can you talk about the strategic rationale there? Are you seeing Kit as more of an onboarding platform for their product rollouts? Or can you just talk about the rationale there?

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Katie Keita, Shopify Inc. - Director of IR [50]

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Hey, Sam, we're close to the end of the call, and we have a lot of more people on line, so do you want the Kit one or the payments one?

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Samuel James Kemp, Piper Jaffray Companies, Research Division - VP and Senior Internet Research Analyst [51]

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Payments.

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Tobias Lütke, Shopify Inc. - Founder, Chairman and CEO [52]

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So with payments, again, our ambition is, you sometimes see people talk about checkout 2.0. Sometimes we talk about 1-page checkout and all these kind of things, like our ambition is no checkout. We think checkout is an anachronism, and we want to get rid of it. And we are looking for ways to do this now and get into this future quicker and that's Shopify Pay. And maybe in the long-term, that ends up being the dominant perfect solution for this, depending on how high we can climb this particular mountain. But again, I don't want to -- like what I don't want to do is say, "hey, measure Shopify's brokers based on how well Shopify Pay is doing." Because the truth is we might be happily turning it off in 2 years. If all the devices get Payments built-in and credit cards and secure elements and so on. I'd love to remove all that curvey road from Shopify and just rely on browser features. So this is really how it stitches together. We thought this would happen by way of browsers with built-in payment transfers and credit cards, and we were convinced this would be imminent after Shopify's release in 2006. And certainly it was talked about. It just never happened. So we kind of just gave up. Like we just said, let's build Pay for now and then we get all our customers into the proper future, and then we are not depending on the browser vendors to do the right thing anymore.

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Operator [53]

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Your next question comes from Monika Garg from Keybanc Capital.

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Monika Garg, KeyBanc Capital Markets Inc., Research Division - Research Analyst [54]

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You had talked about entering B2B market last quarter, could you update as how is that going? How do you see that ramping?

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Harley Michael Finkelstein, Shopify Inc. - COO [55]

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It's Harley, I'll take that question. Yes so as we discussed, we have rolled out a wholesale functionality for Shopify Plus. Still really early but as I mentioned on the last call, I believe, we had some merchants who were kind of doing it on the side, and they were having trouble on bringing it into Shopify, and so now we've made it a lot easier for them. But again, B2B was really something that our existing merchant base has demanded. And so we've been able to provide them with functionality there. The additional piece of that is, now we have merchants who exclusively sell B2B that are now coming to Shopify Plus that historically were not doing so. So again, that product is still pretty early, and we're still iterating and making it better, but it certainly now allows us to go after a new type of Shopify Plus merchant that historically did not sell direct to consumer.

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Operator [56]

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You next question comes from Terry Tillman from SunTrust Robinson.

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Terrell Frederick Tillman, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [57]

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First, Russ, I guess we have some time to try to talk you out of retiring. This is too much fun. But yes, my question just relates to the apps business and the third-party developer ecosystem. How big is that as a revenue generator? And it would seem like you could really leverage machine learning there to actually recommend the next best app for your customers to use, so just kind of curious how you manage analytics around that business and the revenue size?

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Russell Norman Jones, Shopify Inc. - CFO [58]

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Yes, in terms of the revenue size. The theme piece of the business is something that we record on a gross basis where the apps themselves are net, so relatively the theme part is slightly bigger at this stage. And we have started to already use some of the capabilities we have around machine learning to help the merchant really discover which apps are suited for them, for whatever their particular task is, and I think that's an area that you'll see grow. I mean when you have 1,800 apps, it can be a little daunting when someone goes to the app store and tries to, sort of, navigate. So we think that is an area that we can really help with.

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Harley Michael Finkelstein, Shopify Inc. - COO [59]

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It's Harley, I'll just add on to that. One of the things that -- because we have so many merchants on our platform, what we're really trying to do is make sure the right merchant's on the right apps at the right time. So as they're sort of building their journey, they don't need ERP applications when they're just getting started. We know what they need just to get up and running and get some first stuff or sales on their site, on their shop. So one of the things, that we -- as Russ had, sort of, alluded to, what we really want to do is ensure they're finding the right apps at right the time. Again, having so many merchants on our platform, one of the additional benefits is that anyone that's thinking about building new commerce functionality on the planet is thinking about Shopify's app program first, and we love that.

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Operator [60]

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Your next question comes from Samad Samana from Stephens Inc.

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Samad Saleem Samana, Stephens Inc., Research Division - Research Analyst [61]

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Can you help us understand what percentage of each dollar of GMV from merchant that you can think Shop can address over time? In other words, what do you think the maximum take rate can be long-term? And what do see merchants spend today, in terms of their -- as a percentage of GMV on their Merchant Solutions, and what Shop could address over time?

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Russell Norman Jones, Shopify Inc. - CFO [62]

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I think, it depends on what particular merchant solution you're looking at. I mean, if you look at absolute dollars, people'll spend more on shipping than payments for example. And so we don't have a firm view of how high that number can be, we think it will just continue to gradually increase over time, which is really what our objective is here.

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Operator [63]

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Your next question comes from Todd Coupland from CIBC.

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Todd Adair Coupland, CIBC World Markets Inc., Research Division - Research Analyst [64]

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I believe Shopify had had plans for about 1,000 new staff in 2017. And I'm just wondering, with the acceleration of the merchant count, does that also press and require you to hire more than you expected at the beginning of the year? Any color that would be appreciated.

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Russell Norman Jones, Shopify Inc. - CFO [65]

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Yes, we're still having lots of success on the hiring front. Where that merchant count has more of an impact is on the support group. And so you'll see us continue to ramp that side of the business. And Q3 has always been, sort of an investment period for the company, both on that as well as the infrastructure and preparation for the very high volume holiday period.

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Operator [66]

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Your next question comes from Suthan Sukumar from Eight Capital.

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Suthan Sukumar, Eight Capital, Research Division - Research Analyst [67]

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In the past you've spoken about the significant traction you've seen with Kit. And I kind of wanted to understand some of the strategic rationale in terms of making that a free service, kind of the -- I presume there is a strong business case in doing so. And beyond that, your thoughts on how you plan to evolve the offering? And what other types of marketing capabilities do you plan to roll out to your base from a roadmap perspective?

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Tobias Lütke, Shopify Inc. - Founder, Chairman and CEO [68]

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So Kit is what we call a marketing simplification, right? There's an entire industry of marketing automization which is sort of looks a little bit similar but is quite different in terms of its goal. So the reason why we want Kit to be free is just because we wanted to remove obstacles from installing it. We really, really want more people to use it because we see the data and if you can have merchant get their first sale or second sale, these are -- it sounds a little bit hyperbolic but both are life events. When they get the sale, especially as a result of a very pleasant experience of building a store based on their ideas and dreams and then have a completely automated bot kind of help them, find their audience. That sounds worthy of 2017 technology kind of play, right? That's exactly what experience you want people to have. And sometimes people are like -- even a $9 a month kind of fee is really in the way of installing something that really, really might make a difference. So it's really -- the way we think about it is, we're going to -- every time someone gets a sale who otherwise wouldn't have because of Kit. Kit helped out. We're going to have a new merchant that's going to be with us for the long-term, and that's going to be worth way more than a couple of dollars that we otherwise would have made.

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Operator [69]

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Your next question comes from Kevin Krishnaratne from Paradigm Capital.

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Kevin Krishnaratne, Paradigm Capital Inc., Research Division - Analyst of Technology [70]

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Question on net adds. I know that you still drive a good chunk of net adds organic, but just any thoughts on more targeted campaigns on the low-end. I'm thinking more about website builders, sites that are either free or cheaper-free to build, easier to start but might not offer the merchant all the benefits that you offer? Any plans on targeting the low-end potentially offering a free trial -- a free plan, i.e. not a trial?

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Tobias Lütke, Shopify Inc. - Founder, Chairman and CEO [71]

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Now there's lots of discussions about it. I think it's important for us to say, like we want to only suggest to people to use us for things that we know that we're the best in the world for, right? Because I don't think we deserve customers for products that are not the best in their class. And so, I guess, we probably have thousands, probably tens of thousands of people who use Shopify as their CRM website builder because it's really, really good for that. Even if you just remove all the products, then it's a good content management system and in fact, it's a great one. But I think we would really confuse the message to our market if we start advertising this, so it's just not our jam, I think.

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Operator [72]

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Your last question comes from Brian Peterson from Raymond James.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [73]

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First off, Russ, congrats on retirement and great job on the quarter. So Tobi or Harley, just if I think about the Merchant Solutions business and, obviously, from a functionality perspective with Shipping and Capital, et cetera, it's much larger today than it was at the time of the IPO. But if I think about what you could potentially address for your merchants, how much room does that have to expand? And would you look to bring that in-house? Or would you potentially address that with partners?

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Tobias Lütke, Shopify Inc. - Founder, Chairman and CEO [74]

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Yes, it's a good question for [all] of us. I mean it's hard to even have a generalized statement. This is really like we slice every single thing that needs to happen in the businesses and then try -- think of long-term and say, okay in 10 years, what decision right now puts us into the best position? Right? And frankly, very often this means leave something to a partner ecosystem because the partner ecosystem is such a key part of this company. It's so tremendously hard to build. It took -- we've been building it for 10 years, right, already. And so it's very hard to say, hey, here is our presentence mantra and that's the guiding principle by which we make all of our decisions as it relates to merchant services. We had really just looking backwards from our merchants' needs and then figure out how to address them in the best possible way. This is actually -- I would say, the most subtle part of this business, just from a strategic perspective, because it is so simple for us to pull future revenue forward, by making choices that favor the short-term. There's so many opportunities for doing this, and we're really, really, really don't want to. Because again, we are very long-term focused, I wrote that in my -- in the prospectus. And we really try to make the decisions that put us in the best possible position long-term and I think so far we've done that.

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Katie Keita, Shopify Inc. - Director of IR [75]

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Okay, thanks, everybody, for the call. We have a few closing remarks from Tobi.

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Tobias Lütke, Shopify Inc. - Founder, Chairman and CEO [76]

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Yes, so first of all it's -- I mean hugely like 500,000 merchants is just such a crazy number. It's -- just for someone who has seen every single stage of this company, every single version that existed over the years, it's -- I've been -- I have lots of stories about being laughed out of VC offices, because they told me the entire addressable market for my company was 40,000 stores. And so it's amazing to get here and there's so much work left to be done. If you walk the street and ask someone if they want to be an entrepreneur, they say, "yes." If you ask someone if they heard of Shopify, they will say, "no." So there's so much -- we can -- there's so many things we can put on this flywheel to make this go faster, and it's just an amazing ride.

I want to just spend a moment just, actually thanking Russ myself. Russ joined in 2011. At that point the finance department was a part-time bookkeeper, my mother-in-law and 2 Ruby scripts that I wrote. So it's also like amazing to be able to spend so many years to work alongside someone and just see the entire business grow around it. His fingerprint fell on everything. He's absolutely the source of this financial diligence that we have, that allowed -- that we have this massive need to make every single dollar count. I think this is something which, especially with our friends from Silicon Valley, is just so rare in this industry and is absolutely the kind of thing he taught us. Russ has an approach to say that creativity comes from constraints and then an amazing hand at setting these constraints and always prioritizing what's best for the product and best for the company above the, sort of, more obvious quantitative metrics, which I -- even in this entire field that Russ is in, it's also like a rarity. And I think we saw the components that really just made this company work frankly. So thank you very much, Russ. We are going to open the search for the position. I mean we're not in a massive hurry here, because Russ kindly gave us a lot of flexibility. What Russ -- on a more operational side of things, Russ did an enormously well-built financial accounting system here. There's so much automization. If the Shopify story continues on this trajectory for longer, at some point people will write books about how this all happened -- has been put together. There's a lot of fun things you should ask him about when you see him at a conference or so. So I would say, when we go out for the search, this is probably going to be the best possible CFO position that's available out there. There's a no-drama transition coming into an enormously well-built system and -- in a company with tons and tons and tons of potential. So I just figured, might as well use this a little bit for recruiting purposes. Okay, that's it from us. Thank you, very much.

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Operator [77]

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This concludes today's conference call. you may now disconnect.