Shopify (SHOP.US) Q3 financial report call: GMV growth exceeds 20% for the fifth consecutive quarter. Q4 will welcome the peak selling season.

On November 13th, Shopify (SHOP.US) held its third-quarter 2024 earnings conference call. CEO Harley Finkelstein stated that, as discussed every quarter, Shopify is a company focused on long-term growth. The consistent performance quarter after quarter proves that the strategy is yielding incredible results. The third quarter was another amazing quarter. In the third quarter of 2024, GMV grew by 24%, marking the fifth consecutive quarter of GMV growth exceeding 20%, revenue increased by 26% year-on-year, and free cash flow profitability ratio increased to 19%. These numbers not only demonstrate success but also prove that Shopify is a leader in the industry, achieving profit margin growth while creating and seizing opportunities for growth. Therefore, before we begin, allow me to say one thing. If you can take away some inspiration from this call, it should be the following three points: first, subscription and commerce solutions business are growing, with Shopify occupying an increasingly larger share in this vast and expanding market. Second, Shopify is becoming the platform of choice for entrepreneurs and all business activities, prepared to achieve broad growth in different merchant segments, regions, channels, and products. And third, as merchants do better, Shopify will do better, placing merchants first in its business model and driving innovation at high speed to make challenges seem simple and make everything possible. Chief Financial Officer Jeff Hoffmeister stated that looking ahead to the fourth quarter, it is important to mention that the fourth quarter is the busiest sales season of the year, including key holiday sales periods like Black Friday and Cyber Monday. Sales trends in the fourth quarter are expected to be similar to previous fourth quarters. First, revenue is expected to grow by 25-29% year-on-year, driven by factors supporting strong revenue growth so far this year, including the assumption of continued strong performance in GMV from merchants. The gross margin growth rate in the fourth quarter is expected to be similar to the third quarter. It is important to note that, as in previous years, the fourth quarter is a peak sales season due to the holidays, with a higher contribution from payment business revenue. [Analyst Q&A] Q (Brian Peterson): Thank you for taking our questions, and congratulations on the fantastic performance. I would like to know how GMV compared to your expectations this quarter, comment on the linear growth for the quarter, and share your preliminary thoughts on the fourth quarter? A (Jeff Hoffmeister): Thank you for your question, I am happy to address it. GMV has to do with some strengths in Europe, where Europe's strengths were a key factor in outperformance. I mentioned the Netherlands in my introduction, not just in previous conference calls, where I have talked about Germany, France, Italy, and Spain. For us, the performance across all of Europe has been very strong, which has been a key factor in the exceptional GMV performance. Obviously, Harley and I have touched upon that. We see a lot of strength in our Plus area. We have success in the B2B area. In addition to our traditional core areas of strength, we are successful in many different ways. Looking at the linear progression throughout the quarter, especially in the second half, we see some strengths in Europe. Nevertheless, considering the overall situation this quarter and the strong momentum in both Europe and the United States, I cannot predict without any specific trend, I can only say that we are very pleased with everything we are doing for merchants at the moment. Q (Colin Sebastian): Concentration in the e-commerce industry is gradually increasing towards fewer platforms, including Shopify. I would like to know your views on industry developments or changes, what this consolidation means for your merchant base, and what impact it will ultimately have on products like the Shop App? Thank you. A (Harley Finkelstein): I'll answer that question. When it comes to large brands and retailers, I think two things are happening. First, they are all seeking a unified commerce system rather than individual, single-channel products I have used the analogy of browsers and browser tabs in the past. What we see is that these large companies, especially the complex ones with high GMVs, want to reduce these tabs from eight to one. Having a unified, future-facing modern retail operating system like Shopify appeals very much. Secondly, historically when it came to bigger brands, our focus has indeed been on Shopify Plus. With larger brands, we used to have a one-size-fits-all approach. But now, we have enterprise-level products: Shopify Plus and Commerce Components. Particularly Commerce Components are of interest. As I mentioned in my prepared remarks, we are seeing some brands calling us, and three weeks later, Shop Pay is installed on their accounting systems, or some brands, like On Running, one of my favorite brands, are adopting Shopify's checkout as a Commerce Component they are already using now. These are the ways enterprises are starting to engage or introduce Shopify. In fact, our pricing with large enterprise brands is very transparent, which makes it very clear to them what they are getting. When you bring all this together, I think you will see a lot of consumer-loved brands, especially the big ones, coming to Shopify, and they are coming faster and in larger numbers. I think this will continue to happen, especially now that our marketing engine is truly firing up. I believe when you combine an excellent enterprise-level product with the right support...When the unified pricing strategy is combined with powerful marketing efforts and energy, you will get these results.Q(D.J. Hynes): Good morning, congratulations on the brilliant performance you've achieved this quarter. Harley, can you talk about what points you are focusing on from a product perspective to drive more B2B applications, especially in the enterprise sector? A(Harley Finkelstein): Yes, we recently launched a few. For example, you will see us talking more about B2B around Editions. I think just in the third quarter alone, we launched 3-4 major new features, such as supporting product bundling in draft orders. Now, we've improved conversion, tracking, and tax features. The Shopify Flow template now has new automation features, meaning if you are a merchant, you can assign salespeople to specific B2B customers. As a result, companies like Dermalogica, Therabody, Life Fitness, Daily Harvest, and others have also come to us. So, I think we are quickly closing these gaps. I also think historically we have indeed focused on existing direct-to-consumer brands on Shopify, which also have strong B2B or wholesale businesses. Now, we are starting to see those merchants who are specifically in B2B wholesale coming to Shopify to purchase our B2B products. Ultimately, in some cases, we are also seeing them branching into direct-to-consumer business. So, going back to my earlier comments about this unified commerce system, the allure of Shopify is that you only need to enter a specific channel, and once you enter this ecosystem, you start using it as part of your entire retail operating system. But specifically to your point, these gaps are rapidly closing. We believe B2B is a huge market, with a TAM of $140 billion. Our B2B GMV has doubled since last year. We think this is a great opportunity, and we can quickly narrow these future gaps. Q(Todd Coupland): Thank you, good morning everyone. After the US election, I wanted to talk about the impact of Chinese merchants. Can you talk about how much GMV you estimate comes from China, and whether Trump's tariffs will affect merchants? What can you do to help them? Thank you very much. A(Harley Finkelstein): Yes, maybe I can start. We have been operating for over twenty years, spanning multiple administrations. We cannot predict what each president's administration will do, but what we can do is provide the tools necessary for our merchants and Shopify users to compete in any environment. For example, during COVID, everyone had to move online, and we provided assistance to them. During tough economic cycles, we can offer truly transparent and competitive pricing. So our job is to support merchants. Specifically regarding China, this is not a significant area for Shopify. But as I said, our job is to provide tools, services, and support to help them overcome any challenges they face. We have proven this over the past 20 years. A(Jeff Hoffmeister): I'd like to add that we haven't heard anything from Trump or Kamala, and we believe this won't affect the overall state of new business formation and entrepreneurship. So we remain very optimistic for all merchants and entrepreneurs looking to start new businesses. This won't change based on government changes. Q(Michael Morton): I know it's too early to say this now, but we've seen some of the biggest changes in search experiences in recent years, combined with the development of artificial intelligence, and even new search startups appearing for the first time in decades. I'm curious about how you are considering the changes in e-commerce experience, the consumer funnel model, as search evolves? What kind of changes does this mean for the experience of some of your merchants? A(Harley Finkelstein): Thank you for your question. It's a good question. I think I talked a bit on the call about how we are using artificial intelligence internally, supporting engineering, sales, finance, almost every department internally is using AI in some way to improve efficiency and productivity. I also mentioned that from the merchant's perspective, we are trying to build tools and AI throughout the entire Shopify product, so they can focus on the most important things and make their work easier. I mentioned suggestions for replies and Shopify Inbox, which may not seem like a big deal, but it is because it means merchants can focus more on what they need to focus on, like building their products. But in terms of how consumers find merchants or products, AI and search will evolve, but it's clear that the entire process and discovery process has been changing for years. That's why we integrated with YouTube and more recently with platforms like Roblox, TikTok, or Instagram. We believe that the future of business is everywhere. In order to qualify as the most important retail partner for millions of Shopify stores, and to regain eligibility, wherever consumers search for new products, we must be there. So, I can't reveal specific details of our partnerships with some of these companies, but I can say that you can rest assured that as consumers change their purchasing preferences, discovery preferences, and search preferences, when they are looking for great products from great brands, Shopify will ensure that our merchants can do that. That's why, even for more subtle things, as you know, Shopify is also partnering with Spotify.Integration. Why? Because some businesses as musicians also have a large number of fans, and their artist profiles also have a large number of fans. Now, you can display Shopify products on artist profiles, which means for these businesses, they can have a new surface area to expand their business. This also applies to artificial intelligence and search. Therefore, we have always been talking about how Shopify is a central retail operating system, where there may be five or eight channels for conducting business. Over time, these channels will continue to expand. Not every channel is applicable to every business, but our idea is that when new channels arise, you can easily activate and manage them directly from Shopify, which is our commitment to businesses.Q (Siti Panigrahi): Thank you for accepting my question. I just wanted to understand the part of enterprise business, mainly in terms of marketing. What is your market penetration strategy? What trends do you see in bringing in enterprise clients? Is it complete replacement? Are they looking to gradually replace existing solutions? A (Harley Finkelstein): In some cases, their goal is obviously complete replacement. In other cases, they want to partner with us on checkout, Shop Pay, or some business component. But what I want to say is, the execution of entering the market is comprehensive. We're doing very well in the replacement aspect, Shopify is no longer just for small businesses in North America, it now also caters to businesses of various sizes around the world. When you have these incredible brands, these iconic brands like Reebok, On Running, Victoria's Secret, among other globally renowned brands, we start to gain more momentum. We are also planning a very important ecosystem where we have won the favor of competitors, partners, and some large SIs. But we also realize that in this world, it is very important to receive the highest awards from IDC and Gartner, and that's what we are doing. We are also increasing our marketing efforts to support this market expansion. Therefore, combining the best sales team with the best marketing assets is indeed very effective. I believe the reason for our success is that modern companies, modern brands need a modern unified e-commerce architecture. I think the speed at which we can bring products to market, the unified promise, the amount of innovation, and the idea of migrating over 40,000 SKUs in less than five minutes is something that most companies cannot do. In fact, no company can do that. We are constantly innovating to make this even better. We are displacing the largest enterprise commerce companies globally, and this momentum continues. Most importantly, we are winning these deals. They are not leaving. They are with us. They also become a reference for other outstanding brands. So, this is a very important part for enterprises. Now, when it comes to enterprise commerce on Shopify, everyone can find something suitable for themselves. Q (Andrew Boone): Jeff, I want to ask a question related to guidance, you mentioned that the future free cash flow profit margin will be similar to the same period last year, could you talk about the implications of that? What are you investing in, or how should we view this, as the number of employees seems to be staying steady? Thank you very much. A (Jeff Hoffmeister): Yes, regarding my comments on a similar cash flow profit margin in the future, one thing I want to do is look at the performance of the free cash flow profit margin in each quarter of last year and this year. You can see my comments again, that we expect our free cash flow profit margin in the fourth quarter of this year to reach the level of the same period last year. I think we have reached a very good level, especially in the past two years, we have achieved a robust free cash flow profit capability. As I mentioned on the call, I think we have now achieved a good balance, it feels like a good free cash flow profit margin, where we can invest every incremental dollar back into the business and continue to do everything we want to sustain the long-term growth of the business. Therefore, this does not mean that we will slow down in any way or form what we are doing to continue leveraging how we use artificial intelligence, automation, and the number of employees as mentioned by Andrew. We talked about it at our investor day, which was less than a year ago. We talked about our internal proprietary systems, GST, Shopify OS, and some systems we have built to increase efficiency, which steer the team in the right direction, making everything we do very effective. So, we will continue with all of this work, but we also see the opportunity now, as Harley and I both mentioned in our comments, to truly ensure that the incremental funds are invested into revenue growth and to sustain this momentum, as well as all the enduring growth elements we talked about in POS, enterprise, and international business. Therefore, we are not rushing to increase the free cash flow profit margin, but focusing on the continued growth of the business. That's the best explanation I can give you. Q (Mark Zgutowicz): Jeff, in the last couple of quarters, you mentioned that your enterprise products may start contributing in the first half of next year? Can you quantify or determine the scale of contribution in the first half of next year? Thank you. A (Jeff Hoffmeister): I don't have actual numbers to give you, or that's our view on revenue growth. I want to follow up on some of the comments Harley just made, regarding the situation we see in enterprise and marketing, and how this has come about. It's clear that we have already invested some marketing funds to support the development of enterprise business, which helps drive growth momentum, and we have also done some other work. What I want to say is, in terms of the overall sales cycle, we have talked about this before, and as you know, from focusing on things in the enterprise space, sometimes it takes 6 months, 9 months, 12 months to get through a sales cycle. Sometimes the implementation also takes the same amount of time, and it's not because our technology cannot move faster. We have also encountered some situations, a few of which Harley mentioned in the last earnings call, about how we quickly launched and ran these implementations. But on average, if you say that a sales cycle is 6 months, 9 months, 12 months, the implementation may also.The cycle is 6 months, 9 months, 12 months, you can stack them together and say that we have been truly driving the business for about two years. And now we are at 18 months, or 9 months plus 9 months. In the 18 months, we have brought many businesses onto our platform and started working with them. I believe we are still in the early stages. Therefore, this will be a phenomenon in 2025, not 2024, I don't have exact numbers to give you.Q(Ken Wong): I want to ask you, how will the new functionality announced in September by PayPal drive the development of the platform? As time goes on, can we anticipate a potential increase in monetization rate or unit economic benefits? A(Harley Finkelstein): Yes, let me first explain why we are doing this, because it's important. I mean, for us, it's about choice. I mentioned those browser tabs, and we want our merchants to be able to easily conduct all their business. So, for example, now after the integration, all your PayPal wallet transactions can be seen directly from Shopify management. So, when we think about these partnerships, what you should consider is that what we want to do is enable merchants to make better use of what they are already using. That's why this partnership makes a lot of sense. Choice is really important for them. For Shopify, the biggest change is really around PayPal wallet transactions, which will generate a higher premium revenue confirmation than typical bank card transactions on Shopify Payments. A(Jeff Hoffmeister): Yes. This is determined by the level of integration we have with PayPal on these wallet transactions. So, it's really important to ensure that we have a difference in how we handle things with PayPal on the backend. The specific situation that Harle and I mentioned is that when a consumer chooses to utilize our PayPal wallet effectively, paying with the PayPal button, and considering the integration we have done, our real purpose is to enable merchants to have a more comprehensive understanding of all these transactions, so they can see all the businesses they are using from their Shopify admin dashboard. They can view all transactions comprehensively through orders, payments, reports, deductions, etc. One result of this is a change in revenue recognition for those specific types of transactions that Harley mentioned. So, we will move from net revenue recognition to total revenue recognition. Important is that while profitability may be affected, the revenue growth rate will also increase, but this is gross profit, our incremental gross profit. We signed an agreement with PayPal at the end of September, and the PayPal wallet transaction activities will take effect at the end of September. So, this will be a phenomenon for 2025. Q(Trevor Young): Jeff, regarding what you said about a free cash flow profit margin of approximately 20%, can you help us understand how this relates to earlier comments about optimizing internal marketing tools, adjusting channel expenses to maximize return on investment, etc.? Should we expect that next year you may lean towards marketing? A(Jeff Hoffmeister): I don't think our view on marketing has changed, and I don't think our view on free cash flow has changed either. From a marketing perspective, we obviously spent more time discussing this topic in the last one or two calls, but our strategy remains focused on everything we can do in both performance marketing and non-performance marketing to support Shopify's core growth engine and help expand POS, enterprise, B2B, and other businesses. So, from a marketing perspective, our return on investment has not changed. I think there are several reasons I mentioned before about free cash flow. One of the reasons we achieve these free cash flow profit margins is because of everything we do to rigorously control employee numbers, artificial intelligence, automation, and internal systems. So, we will continue to leverage these advantages. We will continue to improve the efficiency of internal operations. I don't think this will affect our thinking on marketing. Now that our free cash flow profit margins have reached their peak, in fact, we are being proactive in making decisions on how to consider these margins so we can invest these funds in marketing, whether it's upgrading in certain areas, maybe the research and development team, perhaps adding to the research and development team, product development, artificial intelligence, etc. This is not a specific measure aimed at marketing, it does not give us extra funds to invest in marketing. Q(Dominic Ball): There is a question about the nature of changes in search discovery and the evolution of short-form content. Can you introduce to us the integration status of Shopify and YouTube Shorts? How accepting are merchants? How much development space do you think this will have? Thank you. A(Harley Finkelstein): When it comes to YouTube, this is not a new partnership for us. We have been working with YouTube and Alphabet Inc. Class C for a long time. Our collaboration with YouTube actually started with live sales. We were originally their live sales launch partners. Then, we realized, or I think we realized in our collaboration with them, that the idea of actually creating an affiliate program was that if their content creators were talking about doing a cooking show, for example, and they also wanted to use a specific product that almost all viewers love and want to buy, that brand is on Shopify. So, this is a very good thing for them, because it allows their creators to further profit from affiliate fees, but it also means that Shopify merchants now have a new sales channel through these creators in the YouTube audience, which we think is always a positive thing. But from a macro perspective, whether it's YouTube or Roblox that I mentioned in the prepared remarks, or other channels, our idea is to ensure that every channel consumers want to buy from can be achieved through Shopify. So, you will continue to see us doing more.Many such things. As for the future of YouTube, it remains to be seen. It's still too early to tell. I suspect that similar to our other channels, some merchants will find huge success there because they will discover that their audience, their core audience, align very well with this unique alliance dynamic. In other cases, it may not be as helpful. But that's the point. The key issue is that we want every merchant on Shopify to effectively reach new audiences, otherwise they may not be able to reach those audiences. Likewise, to do this, you have to be on Shopify. So, you will continue to see us do more business integrations and partnerships. Actually, there's one thing I just want to mention. One thing Shopify is very good at is being renowned for being a great partner. This doesn't just mean technically, it doesn't just mean business, it means that when companies of any size or in any industry consider business, Shopify is often their first choice, and the integration doesn't take months or years. This integration is usually very quick. So, I'm proud of Shopify for being a great partner company.Q(Deepak Mathivanan): Harley, you have made a lot of product improvements on the Shop app recently. Can you provide us with more information about consumer behavior or repeat usage? How should we consider your product strategy in the next two to three years? Thank you very much. A(Harley Finkelstein): Yes, our product strategy remains the same, that is, we want to create new ways for merchants to engage with customers and foster real connections. We also want to make Shop a proprietary channel for merchants, helping them bring in real traffic and sales. These improvements are working. Shop is becoming a cultural force. We see some incredible brands like Drake, Mr. Beast, Steve Madden, Feastable, Spanx doing amazing things on Shop, not just promotions, but also directly launching products on Shop. We also believe that the combination of search and artificial intelligence is making Shop search more relevant and personalized. This is also very exciting. In addition, merchant collaborations, and partnering with these big brands to conduct Shop cash giveaways, have become very important for some merchants, sometimes even their main drive. So, in terms of our goals, the changes we have made have increased buyer engagement in our new homepage recommendations conversation by 18% in some cases. Therefore, I think you will continue to see new improvements in the Shop app, but ultimately, our idea is whether we can truly help the merchants using it increase their LTV. Can we help consumers discover brands they have never encountered before, and re-engage with brands they already love. As I mentioned before, the key is if you want to be part of it, if you want to be a member of it, you must use Shopify, and the Shop App will continue to perform well. Q(Richard Tse): You mentioned that Shopify is a business system, so can we say that you have the opportunity to surpass and replace existing enterprise systems such as ERP, CRM, or supply chain in the future? A(Harley Finkelstein): In terms of ERP and CRM, we feel very good about partnering with the best companies. So, many large enterprise brands that come to us, their ERP systems are already integrated across the company, and in some cases, a good CRM is also integrated. We make integration very easy. So, ERP and CRM are not our focus. We are a commerce company. We focus on retail. However, critically, the changes we have made in the past few years can easily connect your existing systems to Shopify, seamlessly back to ERP systems, CRM, and other systems, so that when you come to Shopify, it can run smoothly. We have achieved this. But we are a commerce company. As I mentioned in a previous call, we focus on our main pursuit. We do not like to deviate. So, our view is that integrating your favorite ERP system into Shopify is really easy, but this is not the area we want to get into. Closing(Harley Finkelstein): We have already said a lot in the conference call, now I just want to say, for those who have long been paying attention to Shopify, you know we are a company focused on merchants. You have heard about our very long-term vision, which we believe can help Shopify succeed. I think, as Jeff described, you will continue to see us seize opportunities, make strict investments, and further establish our leadership position in the commerce field. As you can see from these achievements, this enables us to achieve the strongest performance in the industry quarter after quarter. I want to say again, this is the best version of Shopify so far. We really like our product, scale, operating model, and we truly believe this gives us the ability to grow our business, invest in the future. So, I just want to end my speech with this. Now, for us, what we need to do is help our merchants succeed this holiday season and beyond. Thank you all for participating in this conference call. The third quarter conference call for 2024 ends here. Thank you for your participation, goodbye.