Shopify Inc. (SHOP) Presents at Canaccord 42nd Growth Conference (Transcript)

Aug. 12, 2022 9:06 PM ETShopify Inc. (SHOP), SHOP:CA2 Comments
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Shopify Inc. (NYSE:SHOP) Canaccord 42nd Growth Conference August 10, 2022 8:30 AM ET

Company Participants

Ana Raman - Senior Manager, Investor Relations

Conference Call Participants

David Hynes - Canaccord Genuity

David Hynes

I think, well, we'll get into it. I'm D.J. Hynes, I'm Canaccord's senior software analyst. Thank you guys all for being here. I think this is the 42nd year that Canaccord has done this event, and we couldn't do it without the support of all of our clients. So really appreciate everyone being here.

We're delighted to have Shopify here. We have Senior IR Manager, Ana Raman with us. We're going to try and keep this interactive, please raise your hand if you have a question. I'll call on you guys. I have a list of questions to go through, but really this is for you, the clients. So -- and I want to assume everyone's pretty familiar with Shopify at this point. So I think, we can kind of get right into it.

Question-and-Answer Session

Q - David Hynes

Maybe we could start with Q2 results. Like what did you see in the quarter, kind of how you're feeling coming out of things. What's top of mind? And then we can dig into some of the details.

Ana Raman

Yes. I mean, what we first saw is that digital commerce continues to grow, and over time we fully expected to continue to grow up into the right. And what we saw from a GMV standpoint, it was 11% year-over-year growth. And we saw omnichannel really being the critical differentiator here. So POS GMV grew 47% year-over-year, as people came back, they wanted to have that in-person shopping experience. So we saw that pendulum initially swing back in Q1 that sustained strong growth in Q2.

But we also saw our online GMV outpace the broader ecommerce market as well. And then GMV through partner surfaces like Google and Facebook, that increased 5x year-over-year. And so omnichannel is really proving to be a superpower for our merchants. We're also seeing that merchants are taking more of Shopify, they're trusting us with more of their business.

And so we saw, greater penetration of Shopify Payments, for example. So up 53% -- up to 53% of penetration of GMV in Q2. We saw thousands more POS Pro locations rolling out in the second quarter. We saw, Shopify Capital funding accelerate up to 15% in Q2 year-over-year. And we also expanded -- continue to expand our Merchant Solutions reach to help merchants expanding Shopify Payments to France, as well as Shopify Shipping and then our POS with integrated payments to Italy and to Singapore.

And so as we look ahead, we continue to be focused -- very focused on helping our merchants through the current environment that we find ourselves in, navigate that environment and come out on the other side of this thriving.

David Hynes

Yes. Macro is clearly top of mind for everybody. I mean, you guys have a really interesting read on kind of the state of the consumer. We'd love to just get your thoughts on like trends that you're seeing. You talked a little bit about reversion to offline behaviour. But with the inflationary environment, like how are you thinking about everything that's happening in the world kind of impacting GMV trends? I mean, that's probably the hardest thing for us as outsiders to try and forecast in the business. I am sure you as insiders as well.

Ana Raman

Certainly, you need a really great crystal ball to really understand the course of an inflation and its impact on the broader economy. But what we have seen is that there is certainly a pressure on consumer spending. And so with that pressure, we want to make sure again, that we are providing the most value that we can to merchants via passing on economies of scale to them.

So in terms of that consumer pressure, we did see an impact on discretionary spending. So, the verticals quarter-over-quarter we did see a slowdown in growth, but where we did continue to see acceleration was in the area of food and beverage, which was much more in line with the macro environment, still a relatively small portion of our overall GMV. But certainly, that was something that picked up during COVID.

We also saw a higher order amount volume happening. We did see higher AOV, average order value also increase year-over-year, but we did see the growth slow quarter -- sorry, month-over-month within the quarter, which tells us that people are looking for lower cost items. They're looking for discounts. And so, in line with that, we did also see a shift of spend to discount retailers. So, there are only so many dollars in the bucket for consumers, they're under incredible pressure these days. And so they're trying to navigate the environment, but we're also supporting our merchants on that side.

David Hynes

So in light of some of those challenges that you talked about, Shopify took some corrective actions to kind of align the cost structure. A few questions there. Just talk about like A, how's it handled internally? B, kind of what were the financial goals that were driving it? And C, like, what does that tell us about kind of your commitment to profitable growth?

Ana Raman

Sure. So yes, certainly took some actions to recalibrate our spend internally, and we did it only after a rigorous and comprehensive review of what was happening in the world around us? And so given the current environment, given this reset that we have seen in the growth trajectory of ecommerce, we had to make some difficult decisions on that side. And so, we unfortunately had to let go of some amazing, amazing talent because we weren't going to make full use of what they had been hired to offer. And so that was done with great care, a very thoughtful, very deliberate. The really great thing about Shopify is that we have incredible support and community internally. And so, we've seen employees really step up, support each other and support the folks who have been let go by helping them find their next opportunities as well.

Sorry, what was the second part of that?

David Hynes

Just around commitments to profitable growth. Like what should we read into that?

Ana Raman

Yes. I mean, so Shopify has been profitable for the past five years. We said at the start of this year, it was going to be an investment year that we would reinvest all of our gross profit back into the business. We outlined four key investment themes that we would be investing in to help merchants build better buyer relationships, to help them go global, to help them go from first sale to full scale and to simplify fulfillment. And these investments are areas that we believe are going to underpin and be integral to the future of commerce and how we are building our commerce operating system. And so, this is going to help us for a future of sustainable profitable growth.

So, coming out of this economic cycle, we're already taking initiatives with the workforce reductions, with the realignment of our commercial org to better align our sales efforts with our marketing investments. And so we believe we will come out of this economic cycle with improving profitability.

David Hynes

One of the things that came out of Q2 was, you said you think second half merchant adds will be better than the first half. What gives you confidence in that to say that now? And maybe you could talk about some of the investments that you've made that are fueling that?

Ana Raman

That's right. Yes. So in our outlook, we did say that we believe that second half merchant adds will be stronger than the first half. And so three areas around this. Number one is that, we have implemented several initiatives, commercial initiatives at the beginning of the year, which we said would ramp-up over the course of the year, more show up in the back half. Among these are localized currency pricing -- sorry, localized pricing for subscriptions, for our merchants. So in Q2, late in May, we introduced local subscription pricing in over 200 countries. And so we've already seen some traction of this as we were exiting June.

The second is local currency billing, something that we had started to implement towards the end of last year, but are now starting to see some of that traction also take hold, and we still have this incredible opportunity internationally. So, we believe that these are really going to pave the way to help capture much of that opportunity as we move forward. Second, is that we have -- we continue to expand our Merchant Solutions. So we are just making Shopify easier, more intuitive, more localized with things like Payments in France in Q2, integrated POS with Payments in Italy and Singapore, and Shipping in France as well. And so we're going to continue to expand our Merchant Solutions, make it more localized, just make it better for people to use around the world.

And the third one, are some of our more nascent products. So things like Shopify Markets, which is certainly more popular, I think in Europe, across border commerce. And so we're already seeing nice traction with that. We think that it's going to be just a great tool for merchants around the world want to use Shopify so that they can broaden their reach.

David Hynes

Yes. Let's talk about some of the newer initiatives. I mean, SFN which is Shopify’s Fulfillment Network is I think a focal area for investors and for you guys. You made a big bet with Deliverr, when you made that acquisition. Can you just talk about what Deliverr brought to the business that maybe you didn't have organically or what attracted you to that asset?

Ana Raman

Yes. Sure. So Deliverr comes with just a really great software driven approach, an asset light approach to fulfillment. It was very much in line with Shopify's philosophy with fulfillment. And so just to take a step back first, what we -- and I mean, we unveiled this in our second quarter call, was that -- what we are building here is port-to-porch logistics, end-to-end logistics. And we outlined three areas: freight, where we're helping merchants to more easily and cost effectively inbound freight from suppliers into the network. There we’re working with Flexport very early days with them. But already we're seeing some promising results there in a very early pilot. Second, is distribution, and this is where Deliverr comes in. So Deliverr is really helping to accelerate a roadmap that we already had planned. Now they're just helping us get there faster. So things like distributing product through channels, so multiple channels. So whether that is B2B wholesale, whether that is brick-and-mortar, whether that is any online channel from marketplaces to social media or the merchant's online store. With their smart inventory placement, we're going to be able to really effectively allocate inventory through the channels and then getting to the third leg with fulfillment and with SFN to intelligently route inventory close to the ultimate buyer as possible.

And through this end to end logistics network, we will be able to -- with a software-driven approach in particular, we'll be able to improve performance, efficiency, speed, so that merchants can minimize the inventory that they need to have on hand reducing their costs by placing it as close to that end buyer as possible, and doing in a cost effective and in a fast manner so that our merchants can offer things like two-day delivery guarantees. And with products with a very large kind of discretionary type of product, buyers are willing to wait. They don't need like the same day type of delivery. Two days is really a great amount of time for this fulfillment and delivery to happen. And so we think this will be a very attractive transparent offering for merchants and their buyers.

David Hynes

One of the questions I get from investors a lot is around Amazon's Buy with Prime program and how significant of a threat is that to SFN? Can you just talk about kind of how you differentiate and any thoughts there?

Ana Raman

Yes, sure. So, I mean, first of all, philosophically, we think this is great. If Amazon is coming over their walled gardens, they're willing to help independent businesses, this is really a valuable thing for merchants to have. As of now, we have not announced anything with Amazon. We are in discussions, but haven't announced anything yet. It all comes back to our approach and philosophy. Shopify is a merchant-first, merchant-driven, mission-driven company. And so everything we do is taken from the merchant’s perspective, with their best interests in mind. And so when it comes to things like owning their buyers, owning their channels, owning their data and their brand, this continues to be the case in terms of the relationship between Shopify and our merchants. And so when it comes to fulfillment, I just described what we were doing there in order to solve a critical pain point for our merchants.

But we also need to think of this holistically in terms of SFN fulfillment being one piece of the much larger commerce puzzle. And because we are fueling the firewheel for -- flywheel from different perspectives, whether that is fulfillment, whether that is finding new buyers or helping them manage their business from their back, and the superpower of fulfillment is tied into the network effects into that flywheel. And so that is an area we're continuing to work on, so that merchants have an end to end commerce experience. We are not just focused on fulfillment. And that is a key area that I hope that investors can take away is that it's really worthwhile to look at Shopify from a much more holistic, the whole is greater than the sum of its parts perspective. And so that's what we're bringing to all of our merchants.

Currently because Buy with Prime is not integrated with Shopify, there's also a bit of a disjointed experience for both the merchant and the buyer. So right now, if anybody has experienced it, if you do click on that Buy with Prime, it actually takes you off-site from a merchant’s store. And so things like orders are not tied back into the merchant [admin]. So there's a bit of a difference in experience there now.

David Hynes

Yes. Last question on SFN, and then we can move on. And I get this question a lot too, is just help us think about financial implications, right? And there's kind of two things that I think about, right, is the impact on take rate on GMV, and then the impact on gross margins. Any like data points that you would give us or point us towards to think about that?

Ana Raman

So, I mean, we’re very early days for SFN plan. We said that we plan to spend $1 billion in CapEx over 2023 and 2024, that's $1 billion over the two years. And then towards the back end of 2023, we expect to start to scale and then continue that into 2024 being able to offer it to even broader set of merchants. We said that our TAM is majority of U.S. GMV. And so once we're fully at scale, we expect to be able to really open up that opportunity to capture that TAM.

So in terms of take rate or unit economics really, we are very much focused on maximizing that unit economics so that we can pass on those economies of scale to our merchants. And so we're going to competitively price this product. We've already rolled out a bundled pricing product that we are testing and learning with our merchants. And we said that once we are at full scale, we expect to get into the neighborhood of Shopify Payments in terms of gross margins.

But again, I'd like to take you back to the thought that SFN is again, really -- it should be taken in the context of a portion of the larger flywheel, one in which it will help to increase sales conversion for our merchants.

David Hynes

Yes. Perfect. I'll ask one more, and then I'll pause, and see if there's questions in the audience. But let's talk about Shopify Plus. What's the biggest catalyst to get a customer to upgrade to Plus, and what are you seeing in terms of trends there?

Ana Raman

Yes. So, I mean, that's the beauty of Shopify, I think, is that no matter where you are in the merchant journey, there is a solution for you. And from that point on, we are going to help you to reach the next level and continue to grow on Shopify without ever having to leave the platform. In Q2, we saw that Shopify Plus' MRR is now 31% of our total MRR. That's up from 26% in the same period last year. And so in terms of GMV, Shopify Plus continues to take share in terms of our total GMV. And so Shopify Plus has been just a really great story, both in terms of merchants upgrading to Shopify Plus, because they are succeeding on the platform, and as well as new brands coming to Shopify, because they're all looking for a lower total cost of ownership, especially important in this environment that we find ourselves.

The speed and the agility of the platform, so that brands can really do whatever from a creative standpoint they wish to do to stand out and really put a stake into what their brand is and how they want to present themselves, and then really leveraging the merchant success support and programs that we have. So we have very high touchpoints that Plus merchants can get guidance on so that they can continue to grow from there on.

In addition to these, there are several features for Shopify Plus that merchants find attractive. And so they want to upgrade to Plus. Things like Shopify Audiences, which is still relatively new, just rolled out to general availability in May. But we're seeing some early success stories there, in terms of increasing return on ad spend, increased conversion. We also recently announced our upgraded B2B experience so that merchants -- Plus merchants can now sell D2C and B2B from the same store. And we're going to continue to enhance the offering there.

David Hynes

Yes. Lots going on there. Maybe I'll pause there. Are there questions in the room that we can get answered? You alluded to Shopify Audiences, maybe just talk a little bit more about what you're doing there? I mean, there's so much focus on kind of building first-party data sets, help. Help folks understand what the strategy is there and what it could mean to the business?

Ana Raman

Yes, I mean, we've certainly seen brands impacted by changes from ATT, privacy changes and that's had a real impact on increasing brand’s CAC in terms of hurting return on ad spend. And we know that discovering new buyers is one of those -- again, one of those top three pain points for our merchants. And so, we are well positioned to help our merchants in this area. And so we have rolled out Shopify Audiences, which helps merchants to discover high intent buyers. And so via machine learning and the data from Plus merchants that have opted into Shopify Audiences, we're able to provide lists, their hashed lists of high intent buyers for the products that they would like to market. They're able to extract -- export those lists from Shopify into their preferred advertising, digital advertising platform of choice. Right now, we've started off with Facebook and Instagram. We have more that we plan to follow and then be able to launch their campaigns targeting those high intent buyers.

And so, our goal again is to help these merchants to increase their sales conversion, to find new buyers that people can fall in love with these brands. And to really, again, fuel that flywheel.

David Hynes

Yes. I want to hit on the Payments business. You talked about a GPV, I think you said 53%, it was up to in the most recent quarter. A, like, is there a ceiling, like how high can 53% go longer-term? And then, B, help us think about some of the influences, positive and negative on Payments gross margin?

Ana Raman

Yes, so 53% in Q2, we still continue to expect Payments penetration to increase. There's such incredible value behind Shopify Payments that more merchants, Plus merchants in particular are starting to see real benefits. So Shop Pay for example, which is now the number one accelerated checkout on Shopify has demonstrated to increase sales conversion, speed to checkout, reduced friction for the buyer and Plus merchants, all merchants are really seeing the benefit there. In addition to that, Shopify Audiences, for example, you need to be a Payments merchant in order to access Audiences. Shopify Markets, certain features there like duties and taxes, FX, you need to have Shopify Payments in order to access that. So there's just incredible value behind Payments, which is driving even further penetration.

We also just expanded Shopify Payments to France. And it's now in 18 countries I believe. So the reach there is also expanding. So, we continue to see a nice promising growth on the Payments side.

Now, will it ever reach a 100%? No. For various reasons, we do not have Payments in all of the geographies around the world. In terms of cash types of transactions, those are not captured via Payments. And there always be a set of merchants who just want to retain the Payments processor that they are with for whatever reason, whether that's Inertia, whether -- we're just not going to compete on a certain price level. But overall, we know that Payments is just a fantastic product and expect that to continue to grow.

David Hynes

Yes. As I see our time tick down, I'm going to ask maybe one more last kind of open ended question, which I'm asking all of our presenters, is just, what are the one or two things that you think investors might still underappreciate about the Shopify story?

Ana Raman

I think, I might have touched upon maybe both of these already. I think, first is that -- just that concept of the flywheel, and to think of things in terms of holistic terms rather than what's that one thing that's going to take you over the moon, it really is the sum of all parts and that being greater than each individual component going in and everything we're doing is to facilitate greater sales conversion, greater increased customer lifetime value for merchants. And this is a long-term journey that we are on.

The second very much related is that, that concept of first sale to full scale, that once a merchant joins Shopify, and they see success on the platform, they're going to continue to build and grow and succeed on the platform, which means that we have a customer for their -- as long as their business exists. And so they don't outgrow the platform, because we are continually innovating, we're continually solving problems for them. And so that is also a component that we believe will fuel long term growth for us.

David Hynes

Yes. Perfect. We'll wrap there. Ana, thank you very much. Appreciate everything. And Shopify is one of the stocks I really love covering, so keep it up.

Ana Raman

Great. Thank you so much.

David Hynes

Thanks.

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