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Edited Transcript of SHOP earnings conference call or presentation 1-Aug-19 12:30pm GMT

Q2 2019 Shopify Inc Earnings Call

Ottawa Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Shopify Inc earnings conference call or presentation Thursday, August 1, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Amy E. Shapero

Shopify Inc. - CFO

* Harley Michael Finkelstein

Shopify Inc. - COO

* Katie Keita

Shopify Inc. - Senior Director of IR

* Tobias Lütke

Shopify Inc. - Founder, Chairman & CEO

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Conference Call Participants

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* Ato Garrett

Guggenheim Securities, LLC, Research Division - Associate

* Brad Alan Zelnick

Crédit Suisse AG, Research Division - MD

* Brian Christopher Peterson

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

* Christopher David Merwin

Goldman Sachs Group Inc., Research Division - Research Analyst

* Colin Alan Sebastian

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

* Darren Aftahi

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

* David E. Hynes

Canaccord Genuity Corp., Research Division - Analyst

* Deepak Mathivanan

Barclays Bank PLC, Research Division - Research Analyst

* Koji Ikeda

Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst

* Mark John Zgutowicz

Rosenblatt Securities Inc., Research Division - Senior Analyst

* Nikhil Thadani

Mackie Research Capital Corporation, Research Division - Analyst of Technology

* Richard Tse

National Bank Financial, Inc., Research Division - MD & Technology Analyst

* Ronald Cunningham Bookbinder

IFS Securities, Inc., Research Division - Analyst

* Samad Saleem Samana

Jefferies LLC, Research Division - Equity Analyst

* Suthan Sukumar

Eight Capital, Research Division - Research Analyst

* Terrell Frederick Tillman

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

* Thomas Ferris Forte

D.A. Davidson & Co., Research Division - MD & Senior Research Analyst

* Todd Adair Coupland

CIBC Capital Markets, Research Division - MD of Institutional Equity Research

* Ygal Arounian

Wedbush Securities 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 Heidi and I will be your conference operator today. At this time, I would like to welcome everyone to the Spotify (sic) [Shopify] Second Quarter 2019 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. - Senior 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 2019 Conference Call. We are joined this morning by Tobi Lütke, Shopify's CEO; Harley Finkelstein, our Chief Operating Officer; and Amy Shapero, our CFO.

After our prepared remarks we will open it up for your questions. We will make forward-looking statements on our call today that are based on assumptions and therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements except as required by law, you can read about these risks and uncertainties in our press release this morning as well as in our filing with US and Canadian 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 a substitute for GAAP financial measures, reconciliations between the two can be found in our earnings press release which is available on our website and finally, note that because we report in US dollars, all amounts discussed today are in US dollars unless otherwise indicated.

And with that, I will 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. This past quarter, our momentum has certainly continued. Our efforts to expand internationally accelerated with new global additions to our partner network. And the largest ever mix of international merchant store base. Our merchants reached new levels of success with the year-over-year GMV growth accelerating from Q1. In fact, merchant sales reached a major milestone, selling on average $1 billion per week in Q2. An impressive number considering it was not very long ago, that it took our merchants an entire year to sell $1 billion worth of their products. And more than 1,500 partners and developers from more than 50 countries joined us for our sold-out Shopify Unite Conference. Our largest ever, where we announced many of the features we've been working on.

I want to highlight a few of these new features before updating you on our progress of Shopify Plus and our partner ecosystem as we continue to level the playing field for entrepreneurs. We announced a new online store design experience, making it easier than ever for merchants to design an update their stores, while creating their own unique brand and buyer experience. We're adding new functionality to enable businesses of any scale to showcase their products in 3D, AR and through video, creating a more immersive browsing experience. This also makes Shopify the first major platform ever to natively support 3D. And based on our early tests, buyers interacting with 3D were more than twice as likely to complete a purchase. We announced our long-awaited order editing feature an API, which will enable both merchants and partners to create flexible solutions for managing upsells and changes during the post-purchase process.

We announced checkout app extensions allowing partners to integrate new functionality into Shop Plus checkout so that buyers can choose things like recurring payment transactions seamlessly. We made big steps towards connecting merchants and buyers around the world with the announcement of our translations API and multi-currency for all of our merchants. We're incredibly excited with all these announcements, but our biggest news of the day with the Shopify Fulfillment Network. We expect to spend $1 billion over the next five years to democratize fulfillment, making accessible and affordable for merchants of any size to offer, what used to be reserved for only the largest companies in the world. No other company is as well positioned as Shopify is to offer this. By leveraging our scale with machine learning, demand forecasting, smart inventory allocation across warehouses and intelligent order routing, we expect merchants will be able to get their goods to buyers, faster and cheaper than any other option they have today, while keeping their own brand front and center.

We're also focused on an increasingly important part of our business, offline commerce, which we're enhancing so merchants can provide a far better in-store buyer experience. We announced our new point-of-sale software which is faster, more intuitive and more scalable point-of-sale software for retailers to grow their brick and mortar businesses. Following the launch of our new retail hardware [in April,] we released the card app extension, which let merchants apply loyalty points and discounts directly into the point-of-sale. In other way, we've helped merchants sell more and improve the buyer experience with Shopify Pay by removing friction at checkout. Shopify Pays popularity continues to grow in Q2 with millions more buyers opting in. This led to Shopify Pays order volume doubling compared to the same period last year and reaching nearly $1 billion in GMV for the quarter.

In Q2 we released new features for Shopify Pay by giving buyers the ability to add discount codes and edit saved shipping addresses. Shopify Capital and Shopify Shipping both experienced robust growth year-over-year. Growth in these areas are particularly important to us because these are products that our merchants increasingly use as they become more successful. Shopify Capital exceeded $630 million in total merchant cash advances in the second quarter and more than half of that was distributed in the past 12 months alone. Simply put, merchants have a better shot at success when they have timely access to affordable capital and that's why this July we introduced Shopify Capital to non-Shopify Payment merchants in the US, expanding our eligible market and help it even more entrepreneurs accelerate the growth of their business.

Shopify Shipping adoption continue to growth with more than 42% of eligible merchants using shipping in the second quarter, which was up from just a third of eligible merchants in the same period last year. Merchants now have access to shipping profiles, which gives merchants the flexibility to define shipping rates, by product and sourced location, while improving the accuracy of shipping prices. And of course, Shopify Plus, which had another phenomenal quarter. The agility and flexibility of the platform gives these large merchants the ability to move fast, offer exceptional buying experiences and grow their business.

Some of the brands that launched this quarter include fashion labels BB, A.P.C and Frances Valentine, which was founded by the late fashion icon Kate Spade. International electronic brands including Dolby, Sony, Uniden and Palm, more brands from some of the largest influencers on the planet like Kylie Jenner new skincare line, Kyle Skin and Katy Perry's new footwear line the Katy Perry Collection. One of Canada's largest sellers of office supplies retailer Staples Canada, footwear brand Clark's, Beer Company Heineken and we continue to see more launches in the world's largest consumer packaged good companies.

Shopify Plus is set to become an even more compelling solution for complex and large scale businesses, when we release our new Shopify Plus product later this year. The all-new Shopify Plus will give merchants an overview of the performance of every single one of their stores, with the ability to manage all stores, staff accounts, user permissions and automation tools like Shopify Flow in a single place.

Finally, let's turn to our partners. As I mentioned, Shopify held its fourth annual Unite Partner Conference this June, where we shared glimpses of our product road map with our partner community. This event gets bigger and better every year as we surface all the opportunities available to our ecosystem to help build the world's best multichannel retail operating system. The Shopify Fulfillment Network, our international expansion and the continued growth of our sales channels like point-of-sale or just some of the exciting areas where our incredible partner ecosystem plays a vital role, and our partner ecosystem has been busy. 22,000 partners referred merchants to our platform in the last 12 months, up from 19,000 in Q1 and this was primarily driven by international growth. Our partners play an important role in helping us localize the platform internationally. In fact, I've been on the ground meeting with partners from around the world, and I always come home energized by their enthusiasm to enable our merchants from every corner of the globe.

Our app store also continues to grow, with more international partners building new functionality for Shopify. We added another 200 apps, bringing the total number 2,900 at the end of Q2 and translated the Shopify app store into 18 languages, that our non-English speaking merchants can add the specific functionality they need regardless of where they are located. It's incredible, what we're getting them at Shopify. We're shipping important features at a strong pace as we invest and build great products enabling more capabilities, I'm confident that we will continue to unlock unprecedented opportunities for merchants around the world, making commerce better for everyone, everywhere.

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Amy E. Shapero, Shopify Inc. - CFO [4]

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Thanks, Harley, and good morning, everyone. We delivered a strong second quarter, one that highlighted both the power of our business model as well as the strength of our execution. We grew revenue 48% year-over-year to $362 million. Subscription Solutions revenue increased 38% to $153 million driven by monthly recurring revenue growth of 34% to $47.1 million. Shopify Plus increased its contribution to MRR, accounting for $12.4 million or 26% compared with 23% of MRR in Q2 2018. Subscription Solutions revenue grew faster than MRR in the quarter, mainly due to strong growth in app and Plus platform fee revenue, which is not included in MRR. Merchant Solutions revenue grew 56% over the same period in 2018 to $208.9 million. This growth was driven by GMV expansion, which accelerated to 51% year-over-year to $13.8 billion.

Our merchants are selling more than ever, as our investments across international pass and POS are paying off. $5.8 billion of GMV was processed on Shopify Payments in Q2, an increase of 51% versus the comparable quarter last year. Shopify Payments penetration of GMV grew 42% in the second quarter versus 40% in Q2 2018, primarily due to increased Shopify Plus penetration as well as the addition of new Shopify Payments geographies. Gross profit dollars grew 50% from Q2 of 2018 to $204.8 million, outpacing revenue growth in the quarter principally due to new payment partner pricing terms, which included a onetime benefit.

Adjusted operating income in Q2 was $4.8 million or 1% of revenue compared with a loss of $4.3 million or 2% of revenue in the second quarter of 2018. We achieved better than expected adjusted operating results in Q2, due in part to the onetime payment partner pricing benefit I just mentioned and timing of brand spend with Q2 underspend shifted to the second half of 2019. Early indications are that the brand campaign has nearly doubled unaided awareness in our test markets, while there was minimal increase in similar control markets. This has resulted in an increase in traffic to the platform, how and when that takes effect down the funnel and impacts conversion remains to be seen, but this is certainly a positive early readout. Adjusted net income for the quarter grew significantly to $15.8 million or $0.14 per share over income of $2.5 million or $0.02 per share for the same period last year.

Finally, our cash, cash equivalents and marketable securities balance was approximately $2 billion generally consistent with the balance at the end of 2018. The appeal of entrepreneurship is universal, attracting entrepreneurs around the globe to Shopify. Why Shopify? Because our merchant-centric business model is inclusive, ensuring that multiple voices contribute to the future of commerce regardless of scale or location. Investing in their aspirations and growth keeps our flywheel in motion, leading to a diversity of merchants joining the platform, more channels and capabilities to help our merchants succeed and greater opportunities for merchants to grow their sales and reinvest in their businesses.

Harley discussed our achievements and continued investments in platform and Plus, I will provide updates for international and Shopify Fulfillment Network starting with international. We made great headway, improving our product market fit across a number of regions in the second quarter, adding 11 more languages to the platform, enabling more merchants to start using Shopify in the language they are most comfortable. We also translated the partner dashboard into 11 additional languages as we leverage our growing international ecosystem to support our localization efforts. We introduced more product solutions to fuel merchant growth. In Q2, we launched Shopify Payments in Denmark and the Netherlands, which features an integrated local payment method that allows for bank transfers in addition to credit card payments.

Multi-currency is now available to eligible core merchants using Shopify Payments with a full rollout planned for later this year. Early signs of growth are promising since launching this feature to Plus merchants in Q1. Optimizing product market fit on a localized basis is clearly the right approach, while still early days, we are pleased with our progress. Our mix of international merchants continue to grow relative to total new merchant adds. International also contributed to the re-acceleration of GMV with its contribution relative to overall GMV continuing to expand in the second quarter.

Moving to Shopify Fulfillment Network, a major new product expansion area for our merchants. As I discussed at our Investor Day, our merchants need for fast, reliable, affordable fulfillment is clear and growing, and can be the difference in whether merchant makes a sale or not. In other words, the success of our merchants depends on it, which is why it is among our top investment priorities. Since announcing Shopify Fulfillment Network at our Unite Conference, we have received an incredible amount of interest that exceeded our expectations. Thousands of merchants have expressed their desire to be a part of our early access program and dozens of partners are eager to join us and being a part of the solution.

We have spent the past six weeks on boarding merchants, we've approved so far, are in discussions with thousands of other merchants in our assessing interested partners, given that the uptake and interest for Shopify Fulfillment Network has been much stronger than anticipated. Our plan is to accelerate investing, so we can move fast and execute on this opportunity for our merchants. All in, we are pleased with our second quarter results. The topline momentum continuing in the back half of the year and are committed to investing for the long term.

As a result, we are raising our revenue expectations for the full year to be in the range of $1.51 to $1.53 billion with an adjusted operating income ranging between $20 million to $30 million. For the third quarter, we expect revenue of $377 million to $382 million and an adjusted operating income between $0 million and $3 million. Stock-based compensation in 2019 is expected to be approximately $175 million for the full year, with about $47 million of this in the third quarter. This is higher than originally expected, primarily due to an anticipated increase in payroll taxes related to option exercises resulting from Shopify's strong share price performance this year. In closing, we're excited about the future of commerce and Shopify's role to level the playing field for entrepreneurs everywhere. Given the success of our merchants, we are confident that we are making the right investments that will continue to energize the flywheel and deliver strong and sustained growth well into the future.

With that, I'll hand the call back to Katie.

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

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Thank you, Amy. Before turning it over to the operator to open it up to everyone's questions, let me remind you to please try to limit yourselves to just one question, and that way everyone can get a chance to ask a question on the call today. With that operator, do we have anyone in queue?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Brad Zelnick with Credit Suisse.

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Brad Alan Zelnick, Crédit Suisse AG, Research Division - MD [2]

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My question is for Tobi or perhaps for Harley. As we look out on the horizon, what can you do with all of the rich and insightful data that you have to drive merchant success perhaps in ways you're now already doing?

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Tobias Lütke, Shopify Inc. - Founder, Chairman & CEO [3]

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I'll take this Tobi here. It is an interesting type of data, right. I want to be careful because that's a really, really strong principles in this company, like which around that the data is the merchants and we use it to the exact benefit, right. And you see like I think grades implementation of this with our plans for the shopping cycles in the network because there, we would be talking about this on stage. We can based on history of via sales, demand, costs and so on we can predict -- right now, we are about 85% accuracy from which region the next order is going to come and where demand is going to be needed and so on.

So it's -- these kind of things -- it's taking data to either make something that would previously have been impossible for the merchant, impossible for them or take something that would otherwise be incredibly difficult or full of manual labor and to simplify it, most of the kind of use case if you're looking at. And so it's going to -- I haven't got anything terribly concrete to point out because I think we also just gave a good example of the kind of thing that we can do, but it's important to say that what steps I want to is take the sort of aggregate total of and act on build earnings to our benefit. It is this sort of -- we see this in the history of retail, a lot of large vendors go and create retail brands based on -- or in-house brands based on the insights that they are only marginally entitled to and this is just not the right move for platform such as us.

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Operator [4]

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It's from the line of Colin Sebastian with Baird.

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Colin Alan Sebastian, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [5]

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I guess in terms of the interest that you're seeing for fulfillment services, I wonder how much of this is coming from merchants that are not currently on the platform. Meaning, could we anticipate this to be an incremental driver of new customer adds? And in any other observations you have from the channel as well?

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Harley Michael Finkelstein, Shopify Inc. - COO [6]

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Thanks for the question, Harley here. Certainly, with the way we're looking at SFN, we have more than 800,000 merchants that many of which are shipping, particularly in the US where SFN will be rolled out first and we think we can certainly help with and add value to their shipping and fulfillment practices.

In terms of new merchants, that may not be exploring entrepreneurship because of all the different challenges, it's just one more place where we can reduce the barrier to entry into entrepreneurship, so that in the same say they don't want to think about designing or coding up their own website, they don't want to think about integrating some sort of complex payment system, they don't have to think about integrating some sort of complex payment, they don't have to think about any new functionality, they can just go grab it from our app store. The fulfillment network is just one more piece of the puzzle that people may be risk adverse about in terms of jumping into entrepreneurship and the more we can level that playing field, the more people will participate in entrepreneurship and more and more that is happening all on Shopify.

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Operator [7]

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Your next question is from the line of Ken Wong with Guggenheim.

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Ato Garrett, Guggenheim Securities, LLC, Research Division - Associate [8]

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This is Ato Garrett on for Ken. I just had a question about some of your merchant adds in the first half of this year. Just given the focus you guys have placed on filling the top of the funnel, do you think that merchant adds are kind of consistent with the first half what you saw in the first half of last year or they coming in better?

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Amy E. Shapero, Shopify Inc. - CFO [9]

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Let me just kind of talk about the first half and kind of what we're seeing. We obviously had a record Q1 in terms of net merchant adds and when we think about Q2 relative to Q1, we attribute the movement largely to the seasonality. So you're seeing some of that. We saw a consistent pattern from Q1 to Q2 this year in terms of funnel, gross adds and net adds that we saw last year Q1 to Q2, 2018. In fact, we think we saw it at a little bit magnified as we get larger, our scale gets greater and our international presence is greater. So we're seeing a very consistent pattern year-over-year.

Our Q2 adds were in line with our forecast and expectations and we continue to be very optimistic about our long-term growth of our merchants globally with our investments internationally as well as brand. The early indications as I said earlier from the brand spend are great. We just concluded this first brand campaign a couple of weeks ago, so it's still early and we're still analyzing and we did see an increase in traffic to website at the top of the funnel. But as I said, it's too early to tell how that's going to translate into merchant adds going forward, but we're very encouraged.

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Operator [10]

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Your next question comes from the line of Samad Samana with Jefferies.

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Samad Saleem Samana, Jefferies LLC, Research Division - Equity Analyst [11]

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Amy, maybe this is for you, but I guess expanding Shopify Capital to non-payments customers, how should we think about that maybe in terms of expanding the dollar opportunity or did the rate of change in terms of capital and the dollars that you guys have been putting out? And does it also change the risk dynamics since non-payments customers are little bit -- tend to have a little bit higher churn?

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Amy E. Shapero, Shopify Inc. - CFO [12]

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So yes, with capital, I'll just kind of give you a little bit of context here. We've actually managed our loss ratio in a very, very tight range. In fact, it's lower than the top of the range where we think we could go with us, which says the power of our algorithms are working. And so it's one of the reasons why we felt comfortable offering the capital product to non-Shopify Payments merchants. We feel like we're in a good position. With respect to non-Shopify Payments merchants, we still have significant visibility into their operations. We see their orders. We see the engagement with the platform. And so we are very comfortable moving in that direction.

It does expand our addressable market about 10% and we see other opportunities to increase our addressable market over time as well. If you recall, we are only in like 14 states right now and we've got some initiatives underway to take that nationally, timing to be determined. But we certainly see opportunities to continue to grow that business aggressively over time and in a smart way. We'll do it prudently and pull those growth levers and watch the loss ratio, but we're very comfortable where we're at right now.

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Operator [13]

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Your next question comes from the line of Ygal Arounian with Wedbush Securities.

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Ygal Arounian, Wedbush Securities Inc., Research Division - Research Analyst [14]

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I just want to get into the retail POS a little bit more and maybe get your take on how much of a selling point the POS software has been since you launched it, particular how the kind of cross integration between e-commerce platform and the POS software helps drive merchant growth especially on the Plus side when merchants are debating between your platform and maybe a different one. Then as you think about going further into retail, you've obviously put a lot of effort into the POS and the software there, how do you think about kind of hand points in areas where you can solve for that, might be lacking in the marketplace today? And then as you think about going further into retail and you've obviously put a lot of effort into the POS and the software there, how do you think about kind of -- points in areas where you can solve for that might be lacking in the marketplace today. Thanks.

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Harley Michael Finkelstein, Shopify Inc. - COO [15]

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It's Harley, I'll take that question. So as I mentioned in my prepared remarks, we are certainly focused in a new rejuvenated way in terms of point-of-sale. We already have more than 100,000 physical retailers using our point-of-sale product, but we feel like new hardware and new software, our point-of-sale offerings can be best-in-class. So part of what we're doing now is obviously making sure that anyone who is currently using Shopify for e-commerce begins to you Shopify as well for point-of-sale, and there is some low hanging fruit there for us as well. But also if you think about what we talked about with channels, point-of-sale is just another entryway into Shopify.

Some merchants come to us to sell online, some are coming to us sell offline as well. As their business grows, they are able to take more channels and expand with us. So we are excited about our point-of-sale offering -- our new point-of-sale offering. We think with the hardware kit, which is proprietary, which is something that we're really proud of, coupled with a brand new software, which we think is the best out there right now. We can really win in this fashion in this particular market.

The other thing that we're working on with point-of-sale is sort of a new go-to-market strategy. Obviously, the way that merchants and small businesses purchase point-of-sale is different than the way they purchase e-commerce And so by having the right marketing, the right salespeople and the right go-to-market strategy, we think we can do a really great job of increasing the 100,000 merchant mark to much more than that.

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Operator [16]

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It’s from the line of Thomas Forte with Davidson.

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Thomas Ferris Forte, D.A. Davidson & Co., Research Division - MD & Senior Research Analyst [17]

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So I had a question for Tobi. So Tobi, with the Four Horseman as big technology Amazon, Apple, Facebook and Google, facing increasing government scrutiny on a global basis as evidenced recently by their testifying in front of the House Judiciary Committee. So to what extent is this potentially a problem for Shopify to the extent we partner with some of those companies, and then more importantly, to what extent is this creating an opportunity to Shopify?

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Tobias Lütke, Shopify Inc. - Founder, Chairman & CEO [18]

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Well, I guess first of all, I think it's a very, very healthy debate for every country, society to just -- at least meditate on how the largest companies fit into society and what roles they should play and so on. So I think this is all good. More about Shopify, but the nice thing is like Shopify -- again the thing that's so great about this company from -- I mean from my perspective, frankly it makes my job easier is that, Shopify is really -- we are on the same side of the table with all the stakeholders, all the way down, not just partners, merchants and buyers and so on. It's like even the externalities of Shopify, that there is more entrepreneurship, which leads to more successful small businesses.

And when I talk about politicians then I do -- the thing that we get too pretty quickly is that the future needs millions and millions of small businesses, creating good jobs for 10 to 50 people or maybe beyond in certain cases. So it's -- I'm super comfortable that's how Shopify fits into this picture. And to the extent of -- like I've spoken with other companies, I do think -- again they are so large in scope and some of them are very beneficial for the same thing for the [SMB] space. And so they are -- we collaborate with them and try to create a situation where the Internet is a place which is beneficial to entrepreneurship, which then leads to all the good side effects to society that we'd like to see.

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Operator [19]

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Your next comes from the line of Darren Aftahi with ROTH Capital Partners.

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Darren Aftahi, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [20]

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When you look at your international merchant base today and then kind of look at it compared to your domestic base, when it was similar size, way back when -- I'm curious faster that international base reaching kind of those same GMV benchmark level that they have achieved?

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Harley Michael Finkelstein, Shopify Inc. - COO [21]

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It's Harley, it really depends. In the same way that there is no way for us to get product market fit in every country at once. So we actually have to go and understand the nuances of each geography and understand what they need from a product perspective, what they need from an ecosystem, like a partner perspective. The same sort of thing happens in terms of merchant type. So we will see a very different type of merchants in a place of Japan, then we would in a place like France as well. That being said, there are opportunities for us to not only get more merchants in each of those countries, but also for those merchants that grow really successfully. And the way that we think we can do -- we can help them with that is by making sure they have all the tools they need.

So as I mentioned in my prepared remarks, translating the app store into way more languages than we initially had, making sure we have third parties in each country building new apps for country-specific merchant needs, that was always that we think we can not only get more merchants on the platform, but make those merchants internationally way more successful at a faster clip.

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Operator [22]

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Your next question comes from the line of David Hynes with Canaccord.

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David E. Hynes, Canaccord Genuity Corp., Research Division - Analyst [23]

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Maybe for Harley. Harley, how do you think about the relationship between the fulfillment network in Shopify Capital? I mean obviously, the goal is to help merchants be as efficient as possible in enabling faster delivery. But I also assume for most, it's going to require a degree of inventory build. So is it right to think that a scaling fulfillment network is going to be a tailwind to your capital business?

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Harley Michael Finkelstein, Shopify Inc. - COO [24]

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Look, obviously, what you're seeing with SFN, which is Shopify Fulfillment Network and Capital and Shipping and Payments and all these sort of different Merchant Solutions is -- we want to complete the picture of what merchants required to not only start a business, but to go really big. Obviously, the more services and solutions that our merchants take from us, the easier it is for us to provide them with assistance. So if we know how much inventory they have in the SFN, we obviously can make faster, smarter, more intelligent capital decisions. But all these things fit together, which you're beginning to see what we have been talking about, is this first global retail operating system, where a merchant to come to Shopify and whether it's their inventory, shipping other products, providing them capital, providing them shipping labels or payment opportunities, we wanted to do more for these merchants once they come onto the platform. And so you're seeing more of that now.

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Operator [25]

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Your next question comes from the line of Deepak Mathivanan with Barclays.

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Deepak Mathivanan, Barclays Bank PLC, Research Division - Research Analyst [26]

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Amy, can you elaborate on the onetime benefit to Merchant Solutions gross margin? You noted onetime partner payment, is that incremental revenues? How should we think about the magnitude of that and also going forward?

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Amy E. Shapero, Shopify Inc. - CFO [27]

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Sure. In the normal course of businesses as we've scaled, we've obviously -- we were able to negotiate volume discounts with our various partners and the second quarter we concluded a contract renegotiation with the payment partner where we were successful in negotiating future volume discounts, along with that came a onetime benefit that was recognized in the second quarter.

If we had not had that onetime benefit in Q2, Merchant Solutions margins would have been roughly flat quarter-over-quarter and year-over-year. So that should give you a sense of the magnitude. So on a go-forward basis, this obviously is a benefit to our payment margin and recognizing the greater volumes that we'll be bringing on over time.

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Operator [28]

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Koji Ikeda with Oppenheimer.

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Koji Ikeda, Oppenheimer & Co. Inc., Research Division - Director & Senior Analyst [29]

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I had a quick question on the fulfillment network. Obviously, big news coming up from the Unite Conference and I know it's really, really early here. But any sort of commentary on the initial demand from the customers out there? Or maybe how has been sign-up requests been for the early access program with about as expected, maybe higher, maybe a little bit lower, any sort of color there would be helpful?

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

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So in terms of progress, we've made since announcement, we've received a ton of interest for merchants and partners. I can just say this bluntly. We exceeded our expectations on that. So we've spent the last six weeks onboarding merchants we've approved so far, and we're currently in discussions with thousands of other merchants and assessing interested partners. So generally we're really pleased with where things are out right now. As we've mentioned, we've signed on seven nodes for 2019, each of those notes are in various stages of implementation. There certainly may be more coming on as well. But the idea really is, we think we can provide this fulfillment network to provide lower-cost to allow merchants to keep the brand and allow them to have a much smoother business. So we're really happy where things are at right now. But these merchants that we're bringing on now, it's still really access and again this announcement was made less than two months ago.

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Operator [31]

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Chris Merwin with Goldman Sachs.

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Christopher David Merwin, Goldman Sachs Group Inc., Research Division - Research Analyst [32]

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Maybe just keeping on the fulfillment, you mentioned a very strong uptake so far. And it was the seven fulfillment partners, you have to date. Do you think that's enough to kind of handle the near-term demand or could you potentially be starting to build your own in the near future and just at a higher level to the extent that GMV and revenue continues to exceed your expectations for fulfillment? Should we think about you mostly reinvesting all of that into growth given the magnitude of the opportunity?

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Amy E. Shapero, Shopify Inc. - CFO [33]

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I'll sort of tackle the last part of the question about. We obviously saw greater demand than we expected coming out of Unite for our early access program. So yes we want to be able to accelerate some spend as I said earlier in my remarks. Largely, the way I would look at the $1 billion that we said that we would spend over five years, the timing of that is going to be driven by a variety of factors. It's going to be, merchant demand, merchant on boarding, our ability to bring on our partners, the capacity and so those things are going to some extent determine how we spend.

We will continue to give you progress, updates as we go. It's too early. I think to make generalizations other than the early indication is that there is significant demand, and we want to make sure that we meet the demand of our merchants, especially through the [FCM]. So there'll be a lot more coming in the coming quarters on SFN and how that's going to roll out. In terms of the -- you said seven partners, actually what we announced at Unite was seven nodes, no seven partners that we expect to have online in 2019 and they're all and kind of various states of implementation. But we expect that will be sufficient for this year, but again we'll be assessing it as we move through this early access program.

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Operator [34]

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Nikhil Thadani with Mackie Research Capital.

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Nikhil Thadani, Mackie Research Capital Corporation, Research Division - Analyst of Technology [35]

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Maybe for Amy. Could you just remind us of your FX hedging program and how that changes with all this ongoing sort of interest rate and fed drama?

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Amy E. Shapero, Shopify Inc. - CFO [36]

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I mean I don't think it really changes our FX program. As you probably recall, we currently bill most of our revenue in US dollars, so there is almost no impact on that and where we hedge is on the expense side. Significant amount of our operating expense is denominated in Canadian dollars, so to mitigate fluctuations in our results. Short term and longer term, we do have a pretty mature hedging program that we've utilized and so the FX impact, in fact, for the first six months of this year was minimal because of that hedging program. So we expect that will continue, and I don't see those other factors playing much of a role here.

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Operator [37]

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Mark Zgutowicz with Rosenblatt Securities.

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Mark John Zgutowicz, Rosenblatt Securities Inc., Research Division - Senior Analyst [38]

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Just a follow-up question on SFN. Tobi if you could maybe quantify, even if I accelerated investment there and what it potentially means for new timing in terms of an official launch? And then how you see SFN sort of pulling CPG volumes off Amazon? And you've talked about CPG, DTC initiatives, so in that regard, if you could comment on sort of that dynamic?

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Amy E. Shapero, Shopify Inc. - CFO [39]

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I'll take the accelerated spend piece of that. So we just for forecast, we took revenue up for the year, reflecting how optimistic we are about our continued growth opportunity. And none of that is dropping to adjusted operating income. We kept our guidance flat from last quarter. So obviously when I said accelerated spend, that's what I was referring to is that a good chunk of that spend will go to accelerate SFN and do a larger early access program than we anticipated.

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Harley Michael Finkelstein, Shopify Inc. - COO [40]

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I can add it too on the CPG side of that. So as I mentioned earlier on Q2 was quite strong push up by Plus, and we continue to see more brands come on from the likes of Johnson & Johnson, Procter & Gamble, Unilever whether or not they leverage the SFN or not, we will see in time. But we certainly are seeing more of the CPGs creating brand-specific stores on Shopify Plus. We're also seeing much larger and more established companies like Staples Canada, build their entire online retail operations on Shopify Plus as well. So we are beginning to see a lot more of these established and more complex retailers, which is one of the reasons that we're excited about the new Plus product.

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Operator [41]

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Todd Coupland with CIBC.

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Todd Adair Coupland, CIBC Capital Markets, Research Division - MD of Institutional Equity Research [42]

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I was wondering if you could just comment the granularity on international success so far this year. Which countries are you seeing the strongest take-up and where are there bottlenecks that you'd like to work out?

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Harley Michael Finkelstein, Shopify Inc. - COO [43]

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It's Harley. I'll take that question. In terms of what we had mentioned is being some of our priority countries, they remain our priority countries and all of them are growing at different clips. That being said, I think the most important thing that we've discovered in the last year or so is that, as I mentioned earlier as well that these -- these merchants in different countries require different functionality from Shopify. They require different payment methods in some cases. They require different types of partners to help them get onboard and build their custom integrations as the case may be.

So one of the things we've been focused on and you've sort of seen this just from the partner referral number is growing to 22,000 partners referring merchants in the last 12 months. We are leaning heavily on more of that ecosystem internationally, which we had not historically done and by translating both the partner dashboard into 11 languages and translate in the app store into 18 languages, we think that we can better help these merchants internationally find product market fit, which will inevitably will make them more successful.

So I wouldn't say that there's any one country that is doing way better than any other country, they're all growing at different paces. And again the size of the merchants in each country does differ depending on where they're at. But it's been a really exciting new initiative for us and again, it's been about just over a year since we began to focus on international merchants to translate in the admin and so far so good.

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Operator [44]

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Terry Tillman with SunTrust.

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Terrell Frederick Tillman, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [45]

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Harley, kind of building on a question earlier about Plus. As you're increasingly enterprise hardening the Plus platform and seeing bigger brands and well-established merchants actually coming -- looking at it, does it change the go-to-market? And also when you're seeing these bigger brands, are you replacing something that's usually a home-grown system or is it a prior generation commercial system?

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

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Thanks for the question. In terms of the go-to-market strategy, it remains generally the same. We're still not going out for golf games with anyone that come into Shopify Plus, that's just not out strategy. We obviously understand now a lot better than we did in the past, how to speak to these larger merchants, the CPGs. Clark's Shoes was founded in 1825 and convincing them to leave at home-grown system to come to Shopify Plus, obviously take some -- takes a different type of model then going after Allbirds, which started on Shopify in 2015.

So I think we're building sophistication inside our go-to-market strategy for Shopify Plus and we're able now to approach these different variety of merchants in new ways. To the first part of your question in terms of enterprise hardening Shopify Plus, look these merchants require things that small merchants just don't, whether it's multi-store, multi-currency, multi geographies, whether it's things that Shopify Flow provides in terms of putting more of their business operations on rails. We are really focused on making sure that we can provide them with product market fit and the announcement of the new Shopify Plus product that we made at Unite, we think provides a way more opportunity for us.

And so even as I mentioned some of the examples of stores that have come on, you're seeing a lot more established retailers that either have had a homegrown system in the past or an enterprise platform that have migrated over or have never sold direct to consumer before, as is the case with some of the CPGs. So generally we're firing on cylinders when it comes to Shopify Plus and we think the new Plus product will give us far more ability to help us this type of merchants.

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Operator [47]

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Ronald Bookbinder with IFS Securities.

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Ronald Cunningham Bookbinder, IFS Securities, Inc., Research Division - Analyst [48]

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The new POS system, could the new POS system be used by businesses outside of retail, such as restaurants? Have you been talking to new merchants outside of traditional retail? And how does the new POS system and the distribution initiatives expand your TAM, which you used to estimate at being around $50 million?

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Tobias Lütke, Shopify Inc. - Founder, Chairman & CEO [49]

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I'll take this. So it depends on how far you go with this. I think it's important to understand about Shopify that be more interested in going deeper rather than wider. And so we are not looking to go after restaurants because that's really -- like data model up, that's a completely different kind of business to model. There are some used cases around point-of-sale in the B2B space that are interesting, and we sort of went a way of it and then we make sure about work really well. There's always a little bit -- all customers eternally stretching Shopify into all directions for us, sometimes very successfully, because it's very flexible, hopefully by well-crafted software. And in many of those cases, there is an opportunity for us to learn about some place where Shopify is of value, which we previously didn't realize.

At such point, we either encourage it or we make product adjustments to make that particular idea really even better. But we want to want to take this area of physical shippable products and make it so that entrepreneurship around that idea is going to be very, very simple. And then we are really interested on full life cycle technical abilities so that Shopify can stay with you from that first sale all the way to running tens, maybe hundreds of millions of dollars, maybe billions of dollars businesses, and grow our role in this [inbox] businesses and other things such as I mean capital and all these other things we talk about, SFN probably the best example of that.

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Operator [50]

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Suthan Sukumar with Eight Capital.

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Suthan Sukumar, Eight Capital, Research Division - Research Analyst [51]

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Just wanted to touch on Fraud Protect. It's been more than a few quarters now that you've rolled this out, kind of curious to know what type of results and feedback you're getting with the offering? And how has that been helping drive payments adoption?

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Harley Michael Finkelstein, Shopify Inc. - COO [52]

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It's Harley here. So it's been about -- it's been less than a year since we launched Fraud Protect. It's shown promising growth across key metrics like merchant adoption, eligible GPV and protected GPV. Fraud Protect is still only available to Shopify Payments merchants and only in the US. So obviously there's a lot of room for us to grow there, But generally it's one more thing that we can do to help our merchants and over time, the more merchants that adopt fraud protect, the smarter our algorithms become, the greater our ability to make good decisions for them or show them good decisions become. So we're generally happy with where Fraud Protect is right now. Again, it's still in a limited geography for a limited set of merchants and that will continue to grow, but it's been less than a year and so far we're quite pleased with where it's at.

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Operator [53]

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Brian Peterson with Raymond James.

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Brian Christopher Peterson, Raymond James & Associates, Inc., Research Division - Senior Research Associate [54]

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So maybe one for Harley, just on the Plus business, I know one of the legacy solutions in the space will no longer be supporting their product at the end of next year. I'm curious, how much of that has been a factor in acquiring new merchants on the Plus side and anything that you can share on how the new merchants coming to the platform on the Plus business are turning?

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

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Yes, thanks. In terms of migrations from our legacy e-commerce system, some that are being supported, some that are being deprecated, we've always gone fairly aggressively to migrations and have had fairly aggressive migration campaigns. You don't often see Shopify calling out competition, but when we know that there is an opportunity for us to bring on a whole bunch of wonderful merchants to our platform because either their existing platform just doesn't work properly or because it's being deprecated, we go after those opportunities with gusto. So we'll continue to do that as well.

In terms of them coming on, again as I mentioned, the reason I go through different categories of merchants in my prepared remarks is, I think it's important to understand the types of merchants that are coming onto our platform, whether it's new businesses from Kylie Jenner or it's companies like Sony or Heineken, and generally we're just becoming more sophisticated the way we onboard these merchants in the way we're able to attract them. And you're seeing Shopify Plus at places that we may have not shown up in the past like enterprise e-commerce trade shows, which traditionally wasn't our thing and we now, we feel that there are some places we want to be because there is an opportunity for us to migrate a lot of these larger more legacy brands onto Plus and frankly make their lives 10 times better.

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Tobias Lütke, Shopify Inc. - Founder, Chairman & CEO [56]

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Since I've been here, I think one thing which is kind of important to understand about Plus story is that, like we're talking about it in our enterprise, trade shows and about large consumer packaged good companies and so on. It's not really, I mean, we certainly are stretching up, but it's really that -- the approaches that work in retail are just different from approaches that people thought should work like in the last decade and that realization means that actually those companies often giving up on the enterprise approach of software, all right? They need something significantly more agile. I talked about this in previous calls, but really it's important when looking at the Shopify Plus success story, that what we offer is something that works really, really well. It's super agile, exists and functions at the speed that even the most ambitious marketing department wants to move that. And so I think a lot of companies are not -- it's not what we come around to the enterprise, it's a lot of companies coming around to our board view. And so that's what's driving a lot of that adoption.

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Operator [57]

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Richard Tse with National Bank.

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Richard Tse, National Bank Financial, Inc., Research Division - MD & Technology Analyst [58]

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With a fairly tight labor market and tech, I'm kind of wondering if it's creating any challenges for you from a hiring perspective given your -- it's a heavy investment mode? And if so how do you navigate that?

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Tobias Lütke, Shopify Inc. - Founder, Chairman & CEO [59]

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It's tight. When I talk to my Board members, I certainly can be found sometimes complaining about how hard is to hire engineers and then they tell me that Shopify is the one Company, they run about of -- which complains about how hard it is, everyone else tells them it's impossible. So I think we might even be in better shape than most. I mean there's a conference of things that have to happen right now and luckily, we are really well prepared like, we started outside a major labor pool market as a company. We have extremely adopted to hiring people for potential and then getting them trained up like towards their potential and much, much faster, you will find, when looking at their bios, even the executives for Shopify and a lot of us. This is the first job. So there's a lot of precedent here of people just sort of growing into the roads that Shopify needs of them, so that's a big component.

Again, we are sort of drawing people from a very, very far reaches. I mean people are moving from all parts of the world for jobs at Shopify, but also our home markets are exceptional, like we sort of see Canadian EST as like our asset core and there is a lot of talent here. So it's tight, but it's possible as long as you're not trying to not just look at hiring in San Francisco and hiring only fully formed engineers that happened to have exactly, which skills you need. If you're willing to compromise on those things, which I think everyone should, because I actually think that it looks better, building more sophisticated systems of hiring than -- if it works, it's good.

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Katie Keita, Shopify Inc. - Senior Director of IR [60]

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Thank you, Richard. I think we're out of time today. So I just like to say thanks to everybody for dialing-in and we will talk to you throughout the rest of the quarter.

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Operator [61]

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And this concludes today's conference call. You may now disconnect.