Shopify Inc. (SHOP) Q3 2017 Earnings Report, Transcript and Summary

Good morning. My name is Rachel. I will be your conference operator today. At this time, I would like to welcome everyone to the Shopify Third Quarter 2017 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Katie Keita, you may begin your conference.

Thank you, operator, and good morning, everyone. We are glad you can join us for Shopify's third quarter 2017 conference call. We are joined this morning by Tobi Lütke, Shopify's CEO; Harley Finkelstein, our dynamic Chief Operating Officer; and Russ Jones, our CFO. After prepared remarks we will open it up for your questions. Once again today, we will make forward-looking statements on the call. These are based on current assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements, except as required by law. Information about these risks and uncertainties is included in our press release this morning as well as in our filings with Canadian and U.S. Securities Regulators. Also, our commentary today will include adjusted financial measures, which are non-GAAP measures. These should be considered as a supplement to and not as a substitute for GAAP financial measures. Reconciliations between the two can be found in our earnings press release, which is available on our website. And finally, note that because we report in U.S. dollars, all amounts discussed today are in U.S. dollars unless we tell you otherwise. With that, I turn the call over to Tobi. Tobi Lütke : Thanks Katie. Good morning, everyone. Thank you for joining the call. This is going to be fun one. Let me get started by saying that I personally really love this experience of taking company from nothing and growing into to be a trusted public company. When I get off on its journey I was hoping to learn about such a large variety of different things. I love learning about new things. So this quarter we learned about something new that I haven't encountered before and I realized that many people on this call are here because you would like us to talk about that. For those who don't know during this quarter we were targeted by short selling troll who made all made sort of preposterous claims. Before we get into I want to address some criticism that the company didn't response strongly and quickly enough. We take this as constructive feedback but our rationales are following. All of us at Shopify laser focused on building valuable and enduring company. We are busy growing our merchant base, launching new features and getting everybody ready for Black Friday and Solo Monday which is coming up soon. And I honestly believe that the best companies do not engage in short-term stock price sort of management if you will and neither do we. Some days the stock is high and some days it's lower but over the course of a year it will approximate to how the company is doing. So given that as I twitted we'll deal with this during the financial call because this is the time we reserve every quarter for these kinds of activities. So I want to correct three key points of misinformation. And just to be absolutely clear, we consulted outside legal counsel and that also categorically dismissed this claims as unsubstantiated. I can definitely state that one, we do not sell business opportunities, and we sell a commerce platform. Two, we comply with FTC rules and consistently inform our affiliate of illegal obligation. And three, we do not promise merchant success, far from it. In fact, most of our content is about how hard entrepreneurship is because it is hard. And we are here to have those who are willing to try it. Every 90 seconds an entrepreneur makes their first sale on our platform. We celebrate and cherish his accomplishment because it's not easy. This is what we are most proud of. So implying that these businesses are somehow illegitimate as an insult to their hard work. And here is the really important piece that some of us got missed. Why we see ourselves as a catalyst ambition and we strive to low our learning curve for entrepreneurship so everyone can participate. Most of our revenue actually comes from a merchant successfully selling on Shopify. The more merchant sales the more payment we facilitate, the more shipping we assist, the more local capital we provide. This is how we have been updated to deliver results that we do quarter after quarter because our merchants are succeeding. So even though some entrepreneurs have failed and stop paying $29 per month this floor, hundreds of thousands is thriving and we thrive alongside with them. Okay. I hope this case up things in the matter. Let's move on. I want to talk about why we are so well positioned to be 100 year company. Companies who want to be around 400 years need to solve the real problem in the real world. Now I realize that Silicon Valley has sort of ruined the phrase, changed the world for all tech companies. But I want to say that we are trying change a world in one significant way and that we don't use this as some hollow phrase for just promoting some new app in the app store. When you open the New York Times business section what you really read is that small companies are struggling and big companies are getting insanely big. There is a little variance and noise in this data because non digital companies of all sizes are failing at the same time but overall that's a trend. I don't have time here to dig and why this is but the change we want to make is that we want to give the small businesses a chance to survive and thrive. The world needs millions of small businesses to ensure sustainable future for economies and jobs instead of handful of mega companies. We are fully focused on retail and commerce and here few trends that we are seeing and which we are supporting to make this happen. First, slow and long established large retail so one of it is [absent] by laser focused small brands that share common value as a customers. Retail shifting to a form of experience gives an emphasis on story telling and that gives small business a leg up. Second, manufacturing is changing. Most brands in the world get their product created in the same factories. But today small business can access high quality manufacturing site which was previously have been prohibited due to CapEx. Third, innovation in the supply chain shipping leading to a new kind of approach. One is forcing big change in the retail landscape. The winning formula for retailer is now in asset light infrastructure combined with a highly personalized and in directive consumer experience. Finally, to it's like Shopify, this is build in data reporting and then to tracking shipping, retail floor social channel, multi channel in general, actually mean that new businesses on day one are using better technology even any of their competitors in the market they enter. Or at least they might if so compares on using Shopify themselves. You put all these things together and end up with a new formula. Now everyone can wrap their hats around this new retail and discretion model though. They think for some reasons that there are something wrong with not holding an inventory and building a drop shipping business. Or it's not having a brick-and-motors store at a time when physical stores are closing in record numbers. Or that not having tens of millions of dollars with sales means that you don't exist. We fiercely disagree. While we do have stores selling tens or even hundreds of millions of dollars a year on Shopify because of the changes I just described. We have many, many stores just getting launched. All kind of merchants use Shopify. They are creators and innovators. They are students trying to pay for school. They have a little art gallery around the corner. They are merchants but have scaled from first sale than more demand. You saw some inspiring examples of these at our build a bigger celebration just last month when we took them to ring the bell at the New York Stock Exchange or any of our numerous shop clouds events all across North America. Of course it won't be easier for us to focus exclusively on serving large businesses and large enterprises with big budget. We would be part of very crowd market where we fight for single changes to market share. But we've never gone for easy, what we do instead as grow this market. Invite people to try building new business, telling them what things to know and be honest what they need to hear. All future big success stories have started somewhere. And with that I am going to give it over to Harley.

Thanks Tobi. And good morning, everyone. In the third quarter, we kept our relentless pace and innovation and simplification particularly in areas of directly help merchants get ahead of their biggest selling season of the year. This means exciting development not just across our own platform but also within our partner ecosystem and at Shopify Plus. The numbers of channels over which merchants can list and sell their products to new audiences continue to expand. We've added shopping in Instagram as a channel to tens of thousands of merchant and the channel SDK we made available last year continuously leverage by new channels. For example, Lyst, the global fashion search engine is now integrated to Shopify allowing our merchants to access their 60 million shoppers from 200 countries. We expanded the capabilities of Shopify Shipping both in terms of functionality by adding bulk label printing and by integrating a new shipping carrier DHL to augment USPS and Canada Post. With DHL Express, our US based merchants can now ship internationally more easily at better rates and with free pickup directly to the Shopify platform. Since our last call, we made a number of enhancements to help merchants further grow their businesses. We expanded our marketing analytics capability so that merchants can now easily see all the results of their marketing activities even when they are done by third party apps. We added eight new reports from merchants on the basic plan given them greater insights into their visitors, where they come from, where they land and what they are looking for. And just yesterday, we launched the eBay sales channel which gives Shopify merchants the opportunity to service their brand and products to a massive new audience of more than 169 million active eBay buyers. Let me now take a few minutes to provide an overview of partner ecosystem and value delivers to merchants and how we compensate our partners. It's important to understand that Shopify partners help our merchants at every stage of their business. And now the 14,000 partners who refer merchants to Shopify over last 12 months, the large majority of them provide additional value added service to help merchants build and grow their business. These include initial store set up, app and team development and services like photography, marketing, SEO and brand strategy. Any one of these partners can refer new merchant to Shopify and get approved as a value added partner or an affiliate if they qualify. For instance, it may make sense for an app development agency who builds apps for shops to refer new merchants to Shopify using a link on their company blog. It is also important to note that our partners do not get pay to recruit other affiliates or partners nor do they get paid for anything other affiliates or partners do. These affiliate partners are mostly bloggers, publishers and business coaches who refer new merchants to Shopify. Our team individually approves every affiliate partner who applies after looking at their website, their profile and whether they are fit for brand. Once approved, we onboard partners to the program and they agree to our partner terms which includes their disclosure responsibilities. In terms of compensation, our affiliate partners typically earn an upfront commission for each referred merchant. As we said in the past, our partners are part of our competitive advantage and help us identify potential merchants we may not otherwise be able to reach. Our partner ecosystem continues to grow and tremendous value it brings to merchants is unmatched in our industry. We've built strong relationships with thousands of partners globally and are aligned economically in our mission to help merchants over the long term. Moving on to Shopify Plus. With continued upgrades the execution from sales hackers and our partner ecosystem, Shopify Plus did a record number of launches in Q3. This included brands like Phoenix Suns, RBS, Josie Maran Cosmetic Line and earlier this month fashion powerhouse Rebecca Minkoff. A number of branded consumer package goods also launched including the Gurmay, an iconic muster brand Mai, Blue Diamond Growers and Beer Nuts. Asset companies selling the coolers to put them in, including both Igloo and Yeti. Muffler Express also launched in the platform in the quarter showing that the demand for digital commerce goes far beyond traditional consumer goods. I love this list because it illustrates the new waves brands have interacting with their consumers and using Shopify to do it. To accommodate the rapid growth of Shopify Plus, we'll be expanding our footprint in Waterloo with the opening of a second location slated for Q1 of next year. We expect to add hundreds of jobs in the next two to three years across sales, sales support and R&D in the region. We are excited about what we are building at Shopify and the positive impact we are making on the world. On the communities of Waterloo and the other six cities we call home, on the value proposition of our partners and on the lives and livelihood of our merchants globally. Our passion for disrupting the status quo and empowering merchants to grow their businesses will continue to drive our roadmap. This is what we live for. As we move into the busiest selling period for our merchants, we are ready to help them have their best selling season ever. And we look forward to helping new merchants realize their potential. At Shopify, we strongly believe that entrepreneurship is the foundation of the global economy and it's not easily done alone. That is why we made our life's work to encourage anyone anywhere to become entrepreneur. And with that I'll turn it over to Russ to cove the financials.

Thanks Harley. Our results in the third quarter once again highlighted the strength of our business model and our strong position to leverage the favorable trends in retail that Tobi and Harley spoke about. In Q3, this met not just continued rapid revenue growth but also achieving adjusted operating profitability a quarter sooner than we anticipated and for the first time since becoming a public company two and half years ago. We grew revenue 72% year-over-year to $171.5 million both revenue lines contributing to this rapid expansion. Subscription solutions revenue grew 65% to $82.4 million; the underlying monthly recurring revenue also grew 65% and ended the quarter at $26.8 million. The slight acceleration over last quarter is due primarily to another record number of merchants paying to run their business on the Shopify platform. Within this subscription revenue from Shopify Plus continue to expand. 20% of overall MRR came from Shopify Plus in the third quarter or $5.3 million compared with 18% of MRR for Q2 of 2017. Merchant solutions revenue grew 79% to $89 million. Merchant solutions revenue is directionally tied to a merchant success as this is the part of our business where we deliver back office capabilities that save merchants both time and money, thus allowing them to focus on sales activities. GMV grew to $6.4 billion, up $2.6 billion or 69% from last year's third quarter. Gross payments volumes were $2.4 billion or 37% of GMV versus $2.2 billion or 38% in Q2 of 2017. This slight percentage downtick was driven primarily by the growing mix of GMV and merchants in countries where Shopify payments is not yet offered. Recall that when merchant use a payment gateway other in Shopify payments we received transaction fee revenue as well as in most cases the rep share from that processing gateway. The growth of overall gross margin dollars accelerated to 86% year-on-year to $100 million. This is notable as there was only three quarters ago that we first exceeded a $100 million in quarterly revenue. This was driven by volume increases as well as improvement in both subscription solutions and merchant solutions margin. Merchant solutions margin in the quarter benefited from the non Shopify payment fees described above, as well as from the impact of the growing mix higher margin Shopify Shipping and Shopify Capital. Our adjusted operating profit in Q3 was $1.7 million or 1% of revenue compared with the loss of $2.2 million or 2.2% of revenue in the third quarter of 2016. The adjusted net income for the quarter was $5 million or $0.05 per share. This compares with the $1.8 million net loss or $0.02 per share for the third quarter of 2016. Finally, our cash, cash equivalent and marketable securities balance was $926.6 million down slightly from the $932.4 million at June 30, 2017 due to the continued success of Shopify Capital. This working capital financing which exceeded cumulative $130 million by September 30th is even more critical as merchants prepare for the holiday season. The popularity of Capital underscores how underserved small businesses are. This is the case not just for working capital but for other areas as well like payments and shipping. It is through merchant solutions that we meet these needs and this is a key part of our business model. Let me explain. We take our role as a catalyst for new business creation seriously, which means we continually challenge those who want to be entrepreneurs to try it. And why shouldn't they? We've dramatically lowered the barrier to starting a business. What people may not understand about Shopify is that we benefit from more people trying Shopify not fewer even if they don't succeed at first. So while this broad based approach means that although not every merchant will be successful, their rate is low and our business model enables to offset any merchant losses with the remaining cohort upgrading plans, purchasing apps, leveraging our merchant solutions and most importantly make sales. So while there always be merchants that stop subscribe and we make it easy to do so, these merchants that are thriving on platforms sell more and as they succeed so do we which is why we work so hard to assist with their success. As we look to the rest of the year, we now expect full year 2017 revenue in the range of $656 million to $658 million and adjusted operating loss in the range of $1.5 million to $3.5 million. This means that for the fourth quarter we expect revenue in the range of $206 million to $208 million and an adjusted operating profit in the range of $2 million to $4 million. We expect stock based compensation will be $54 million for the full year which puts $16.5 million of this in the fourth quarter. While we will wait for February to comment on our 2018 outlook, I'll take this opportunity to remind investors of the following. As we continue to grow merchant solutions revenue we will see a larger impact of seasonality in Q1 versus Q4 results. Although foreign exchange has a minimal impact on revenue, it can have a significant impact on operating expenses of which approximately 50% are in Canadian dollars. And although we have clearly demonstrated our ability to achieve adjusted operating profit, our focus continues to be on growth. Said another way giving both the growing opportunity set and our long-term focus, we will continue to prioritize adding merchants to the platform and rapidly increasing its capabilities. And with that I'll turn it back over to Katie to start the Q&A.

Thank you, Russ. We have about 40 for questions this morning and a lot of people in queue. So I would ask that you limit yourself to just one question please. Virtual, can we start pulling for questions please.

[Operator Instructions] Your first question comes from Ken Wong from Citigroup. Please go ahead.

Hi, Tobi and Harley. Thank you guys for clarifying the misinformation about your partner channel. Can you maybe elaborate a little bit on just maybe what kind of mix you see from those various channel and then any changes that you guys might be thinking about implementing in terms of how you guys approved partners.

Hey there, it's Harley. So I'll take that question. So when you talk about the thousands of partners -- refers merchants over the last 12 months, the majority of those partners are value added partners. Meaning these are people that are doing services for merchants so they maybe setting up their stores, building a custom app, they maybe helping with things like product photography, or even doing some SEO optimization for those partners. That is the majority of the partners that we see come in. In terms of the affiliate partners, that is a fairly strict process. In fact, I think there was an analyst that wrote a post a couple of days ago or couple of weeks ago about trying to become an affiliate partner being rejected. The reason for that is because every single affiliate partner that we bring on to the platform has to be fully verified. And once we agree that there is someone that could refer business to us, they have to comply and agree to our partner terms which specify all FTC regulation. So as I mentioned in my prepared remarks, our partners in general typically brings us merchant that maybe otherwise knows about Shopify and that gives us a great advantage.

Your next question comes from a line of Richard Davis from Canaccord. Please go ahead.

Thanks. Just real quick so I know this you guys launched a new kind of test on these marketing analytic tools that actually look pretty slick with regard to attribution. I didn't see -- it didn't look like this was an add-on in terms of cost. So question is it free? And then more broadly just kind of how do you think about adding kind of features some free some not, I also saw like kit is now free because we've seen this with PubSmart has done a pretty good job of kind of try trading three stuff, not three stuff to kind of improve on reps and retention. So just broadly how do you kind of think about these things? Thanks. Tobi Lütke : Yes, I think one thing that's so unique about Shopify is our ability to ride along side the success of our customers is just superior to probably most other places in the sales space so like we go through an entire like a big decision making process every time we are rolling out something new figuring out in which plans does it fit and so on but the things we've rolled out here like people need to know where that traffic comes from because it allows them to direct their investment afterward, more better directed spend, marketing spend and making their business more successful which is our prime objective at Shopify. So these are including in all plans and analytics and just all data brokers the kind of things that really makes people more successful more sophisticated so we could be better way.

Your next question comes from the queue of Nikhil Thadani from Mackie Research Capital. Please go ahead.

Great, thanks guys. I just wanted to clarify if you have any sort of conversations or discussions with the FTC in the past call it three weeks or so since a short report. And if so sort if you could maybe just give us a quick update on that. Thanks. Tobi Lütke: We did not. We have not been not contacted there by FTC and have no contact with them on this matter like. And if it would be anything material it would have been part of our disclosure so nothing to report.

Your next question comes from Colin Sebastian from Robert Baird. Please go ahead.

Great, thank you. My question is related to integration with marketplaces first with respect to Instagram in terms of any earlier reception to that channel or any commentary and volumes. And then more broadly I know many of us think about these incremental sales channels your clients but I wondered if the reverse is also true meaning that you are seeing new customer volume coming to Shopify specifically as a result of the integration and perhaps merchants they want to diversify away from the large scale platforms. Thank you. Tobi Lütke: Yes. There are a lot of angles to this. So yes is the quick answer like people come like I mean for our existing customer base. We want people to be able to sell through every app like or for every icon on their phone screen. I said this before but Instagram is almost on everyone's phone screen so now merchants can sell through that. And by way of Instagram experience specifically is fantastic; it's really, really great show. We do have people come sign up for Shopify first time because they might have actually run business on Instagram especially in some countries, this is common form our e-commerce. So that's really good. And in some cases and like this look across entire spectrum of Shopify so it's not just new businesses like being launched to be Instagram focused. Often it's actually like a potentially a plus customer, a new plus customer we pickup because even though they have an existing e-commerce system, they try to sign up for Shopify just to be able to take advantage of one more many of our channels which their current systems don't offer. And of course this gives great potential for land and expands. This strategy of multi channel platform is very strong.

Your next question comes from Jonathan Kees from Summit Redstone. Please go ahead.

Great, thank you for taking my question. That was great for addressing those claims head on that is very much needed. If I can just add to that just said just continue disclosure of -- or like the merchant count or more information disclosure like of the mix, the revenue mix of the -- how do you get your revenues between partners versus organic for example. And within the partners you talked about the affiliates, how much they are versus the rest, that's always helpful. My question is for the claims that you see on social media, are you looking to police some of them, making sure that they are affiliates, that they are certified with you. If they are not kick them out or at least not associating themselves with Shopify. Thank you.

Hey, it's Harley. I'll take that question. So just to be clear I mean some of the allegation about these so called affiliates of ours, some of them are actually not even selling Shopify. In some cases they are selling at their own course where they are teaching things like digital advertising or digital commerce. And Shopify happens to be a piece of that course. So in some cases it's actually -- it's not -- they are not even affiliates of ours. In other cases, the ones that actually are affiliates, these are people that have been added and we have a team of people as I mentioned that manually approve these affiliates and those who don't comply we simply kick out of the program. And we are consistently monitoring this. We have team of people here who are focused on ensuring that our affiliate quality is always very, very high. So just to be clear some of those are simply not even Shopify affiliates that were alluded to.

Your next question comes from Monika Garg from KeyBanc. Please go ahead.

Hi, thanks for taking my question. I have a question on shipping. Currently you are shipping in US, Canada, announced DHL, maybe talk about what are your attach rate and way attach rates could go forward in these geographies? And also when do you look to announce shipping partners in other geographies like UK, Australia? Thank you.

Yes, so I'll take that one. It's Russ. So as we've said before shipping we think it's another big pain point for our merchant. So it's an area that we are really focused on to help them sort of get to the point like with payments where they just don't have to think about things like the shipping side of it. Today, our focus has really been North America; we've been adding new carriers to that. We've been adding to capability. The most recent one with DHL also allows the US merchants to more cost effectively sell internationally. So that's really been the focus. Similar to payments we do see other geographies as a potential for shipping. But that a later activity for us. In terms of the other piece, we continue to see a number of merchants using shipping in both Canada and the US increased roughly 30% of our US merchant where we have the addressable side of it are using Shopify Shipping and in Canada that's roughly 20%.

Your next question comes from Jesse Hulsing from Goldman Sachs. Please go ahead.

Yes, thank you. I wanted to follow up Russ on your comment about GPV percentage and that's again down to two international mix. First, can you remind of us of your plans for payments rollout internationally? I think that would be helpful. And also how do you expect GPV percentage, GMV to trend over the next few quarters? Do you expect to tick back up or do you think it will flatten out around here? Thank you.

I mean it's hard to say particularly with the sort of the holiday period because you'll also see some larger plus merchants that uses their own payment system also have a bigger impact in the fourth quarter for example. But we continue to have success internationally and so that is one of the factors. We also see an increase in non credit card activities on the platform as well and so that's because we are primarily doing credit card processing on payment as a factor in place. Just to sort of add a little bit more color if you actually take it to the decimal place, in Q2 we were 37.6% and in Q3 it was 37.3% so when you rounded it looks a bigger delta than it's actually is. In terms of our plans, we've pretty well covered our current core geographies with payments. We've just recently announced that in Singapore so you will see us continue to add new regions over the next sort of 12 to 18 months as well. So kind of continuing on the path that we've been on.

Your next question comes from the line of Richard Mah from National Bank Financials. Please go ahead.

Yes, thanks. You talked about Q3 being potentially an investment period, I can't read that to mean there might be some pressure in the quarter margin but the margins seemed to be picking up so should we take that to mean that the investment wasn't as big as expected or that the operating leverage is continue to pick up here.

It's probably more the latter that we are not only seeing the operating leverage on expenses but in terms of the impact of some of our higher margin businesses like shipping, capital, even some of the transaction fees I talked about contributing there. On the subscription side, we are still in the process of testing out the cloud as part of our offering there and so there is sort of a bit of timing there. We've been able to reduce a little bit of the capital in terms of servers that we need in our datacenters so there is sort of an impact of just that sort of rollout. This year is very much a hybrid approach and so we do see some duplication in the short term.

Your next question comes from Michael Nemeroff from Credit Suisse. Please go ahead.

Thanks for taking my questions. It looks like when I strip out plus the MRR from the core business actually accelerated so really not a question there but on the plus side, given that the value prop that you guys are offering particularly for the larger established brands, do you expect to increase the economics? I know you charge off see 25 bps over $10 million. Any thought to changing that. And then also Harley if you maybe could I think you've given us an update on the plus customer account in the past and also the mix of the plus merchants, the percent of them coming from net new versus homegrown. And then lastly on the plus sales force, maybe you can tell us the size of that so we can evaluate whether that growth in plus MRR can remain above 100% for a longer period of time. Thanks.

Hey, Michael. It's Harley. I'll take that question. So in terms of the pricing which we announced earlier this year, the real reason for that is we wanted to set ourselves for the future. So by providing that 25 basis points it means that as marking score really, really large in the platform, we actually do share in that success and so that's the reason why we made that change. And so don't expect it will change the pricing again anytime soon but because we think we are set up really well for that. In terms of the split between upgrades versus net new, the majority of new plus merchants for the quarter were net new to the platform. And that's not too surprising I mean our sales team is really ramping up. But also most of the merchants that are on the platform, that should have been on plus have upgraded too and really the focus is on net new to the platform. So you should continue to see that in the future. And then finally in term of the sales force or sales hackers, they are now dozens of them and we continue to build on that. As you may have heard in my prepared remarks, we are also expanding our presence in Waterloo to accommodate more sales hackers and more R&D focused on Shopify Plus. And so it's a real exciting piece of our business.

Your next question comes from Gus Papageorgiou from Macquarie. Please go ahead.

Thanks for taking my question. Russ, just on the merchant solutions mean looks like gross margin have extended over 100 basis points year-over-year. Can you just dived into that little more and kind of break it down for us? If Shopify payments now more profitable than it was a year ago and then just could you give us a sense of capital in shipping how material it is now or just any sort of detail you can give on that would be appreciated?

Sure. Happy to answer that. In terms of capital and shipping, from a revenue point of you because we record both on a net revenue basis little less impact and certainly our payment business because the margin is more in line with subscription type margins, again that's definitely a great tailwind to the margin on the merchant solutions piece. In terms of payments, we've seen improvements and our agreements that we have in place around payments means that as our volume continues to increase we do get more favorable rates there. Also I said in the past, international we do achieve a higher margin than we do on the North American side. So all of those together are what you are seeing on the merchant solutions. Now when you are thinking about Q4, the thing you should remember is again a lot of the holiday sort of Black Friday, Cyber Monday, activities they are little bit more North American focused where our margins on payment are little bit lower and so we do see margins coming down in Q4 which will be offset by improved operating leverage. So net-net is why we still think as a percentage you will see that adjusted operating percentage improve in Q4.

So you are suggesting margins on payments will come down in Q4 or merchant solutions in general?

I am saying merchant solutions in general just because of the weighting toward North American payment

Your next question comes from Brian Essex from Morgan Stanley. Please go ahead.

Hi, good morning. And thank you for taking the question. Russ, maybe one for you in terms of the CFO search, any update there, update in terms of what you guys are looking for as you make your travel plans for the future. Any sense of what timing might look like? And then any insights into with reaching profitability a quarter sooner than expected, what the trajectory of that profitability might look like going forward? Tobi Lütke: I just quickly jump on the CFO, so it's sort of because it's not actually Russ doing it. So I mean this is like I kick this off almost like on last quarterly call right so since then lot has happened amazing, people have put up their hands, we have been meeting great candidates. I think this is as good as anything; any of the searches ever goes. So everyone is pretty excited but I have not much to add report other than that I think this part of company will remain in a very good hand.

Then Brian on your second part. I think as I said in my scripted remarks that our focus is not on profitability, it's still very much on growth and so even though we did achieve it at a quarter earlier, and we do expect a strong Q4 on that front as well. Q1 because of the seasonality I wouldn't expect us to be back to that level and again as we make investments decisions, you'll see a little bit of more bumpier ride on that number as we really want to make sure that the revenue growth continues.

Your next question comes from the line of Justin Furby from William Blair & Co. Please go ahead.

Thanks. I had a question for Tobi. Tobi I was looking at Square GMV trajectory and it looks from the time that they hit $15 billion in GMV it will take them four years to get to $60 billion. You guys did $15 billion last year and I am wondering if you think it's fair to compare you guys to Square and suggest that you get to $60 billion of GMV in 2020 or do you think there is an opportunity where you can actually surpass their pace just given the powerful secular trends that you guys see. Thanks. Tobi Lütke: So interesting question. I have to admit I haven't looked at Square's financial so I am not very familiar with them. I had my own company and in fact feel little bit discontentship because they are sort of looking at similar market segment and I think also looking on getting better software into SMBs and so my relationship to them is on that level then once you get to a number I think every company is kind of in a process of trying to figure out how to build business model around their mission and so way that ends up being reflected in numbers. If it correlates somehow that's kind of happy coincidence or but it's not that I am setting into a goals saying hey everyone have look at Square's financial statement and then chase that. That would be awful way of running a company so if it ends up looking similar that's cool but it might be complete coincidence.

Your next question comes from Deepak Mathivanan from Barclays. Please go head.

Hey, guys. Thanks for taking the question. The color on the affiliates and partners were helpful. But maybe more broadly can you talk about how big that channel is for new customer acquisition? And also we noticed that recently you made some changes with the partner program 2.0 in terms of the way out structure, can you talk about the feedback on that and should we expect any benefit for impact on financial from it? Thanks again.

Hey there, it's Harley. So we've always talked about that we get merchants from three different sort of buckets and one is organic the other is sort of paid search different ad, digital ads, paid ads. And the third is our partners. The partners remain positively in sort of the third spot. We do get more merchants from organic and from our paid advertising. And when you look at the partner bucket on its own as I mentioned earlier, the majority of our partners that we are referring working through us are these is agencies and freelancers all over the world where someone goes and says they need an online store and usually by default end up putting them on the Shopify. So that's a little bit color on that. In terms of the partner payouts, we are always trying to make it that it is easier for our partners to get paid in more convenient but it's certainly there is no impact to us around that. One other thing that maybe worth mentioning is that couple of quarters ago we mentioned introduction of a new partner program around Shopify Plus. And those partners are tending to be much more larger agencies in some cases with hundreds of employees in those agencies and they are bringing us on much larger merchant on to Shopify Plus. That's a bit of color on the partner program.

Your next question comes from Sam Kemp from Piper Jaffray & Co. Please go ahead.

Great, thanks for taking the question. I got just got one e-composition of your non plus merchants. So it looks like GMV per merchant growth is gone negative this quarter. And then if you look at MRR per non plus subscribers, so just isolating it down to those non plus subscribers, that looks like it has been declining for about five or six quarters at this point. Can you just talk about what the factors are driving that? How much of that is mix shift towards international versus mix shift within existing geographies towards lower tier subscription right? Or any other color you can provide there.

Sure. I'll take that one. It's Russ. In terms of the GMV per merchant, I mean averages are always a bit misleading in a fast growth company like ourselves but we did see a small tick down in the quarter there. And to your point like the international is having an impact there. It represents if I look at international being sort of our non top four geography, it counts now for roughly 20% of the merchant count and about 12% of the GMV. And so these internationals merchants are newer to the platform, newer to get an up and running and so we definitely see a little bit of an impact there. We do expect that to reverse itself in the fourth quarter.

Your next question comes from Samad Samana from Stephens, Inc. Please go ahead.

Hi, thanks for taking my question. I wanted to ask about Shopify Plus partner program. I think that in your partner conference in April or May you announced about 125 plus partners. I was curious how big that base is now and what percentage of your plus customers are coming from that partner channel. Thanks.

Hey, it's Harley. I'll take that question. So we did announce the plus partner program earlier in the year and certainly we invited some of those early plus partners to our Shopify conference in San Francisco in an effort to engage and understand them a bit better. The partner program on plus continues to grow on a daily basis. We are seeing partners that traditionally only referred merchants and worked with merchants on some of the more enterprise platform that are now really phenomenal partners for us for Shopify Plus and so that continues to grow. We are also finding some of our core Shopify partners that have decided that they want to focus more on Shopify Plus as well. And so that tends to help too. So that continues to grow. It's still in terms of our total merchants Shopify Plus ,it isn't largest driver not yet at least but certainly every quarter we see more and more merchants coming to us from our plus partners.

Your next question comes from Thomas Forte from D A Davidson. Please go ahead.

Great, thanks for taking my question .So you were the early adopters and allowing merchants to accept pick point for sale in our site. Given the recent appreciation in Bitcoin, I was wondering if you are seeing any increasing adoption rate for consumers using Bitcoin to paper product. Thank you. Tobi Lütke : Hey, I'll take, this is Tobi. So yes we were early adopter to integrate it I think I want to say 2012 or something like this little bit before Bitcoin generally gotten to the news. Again we see our objective like here at Shopify to just be ahead on the curve on what our customers might need like clearly no one at this point ask us to integrate Bitcoin but I see one of the many reasons that makes it hard for small businesses to compete these larger one is just general lack of adaptability and that is not to say that, that's also short coming of the small guys to just have more important things to do than monitor over latest tech trends and try to build against the latest things. So we want to inoculate our customers from having to pay attention to everything new that's coming. And so we integrate things early. We built proof of concepts; we integrate the things that matter into the platform. And that's why we integrated, in terms of our latest numbers I mean like Bitcoin is going up just because its general familiarity, more people are familiar with it. I would say that so far Bitcoin is more used as a frankly exceptionally volatile store value rather than a transactional system. They have actually some technical reasons trying Bitcoin I probably can't get into but a lot of people are thinking about how to --so some of us -- in general it's picking up. This is I guess Bitcoin thing actually fit for in terms of Shopify similarly you might have seen the -- we worked on an app recently that's a partner this one of our customer called Magnolia; they have integrated Apple's ARKit into their iOS app. So that people can just look at the beautiful product that are being sold to Magnolia like put them into their house, see what they look like and that's scale and these kind of things. So almost the kind of same thing. So Bitcoin is super interesting. I personally I am a strong believer of that, the internet will eventually have its own currency or short of currency for its own sort of internet native form of transferring value around. Is it going to be Bitcoin? Can't believe they? But we will strongly support all the kind of potential way of transacting any business that we do.

Your next question comes from Ross MacMillan from RBC. Please go ahead.

Thanks so much for taking my question. Russ we are just about to enter into the seasonally strong GMV period and the plus pricing changes sort of started to flow through in Q3. I was just wondering if could remind us approximately of how big that GMV base is for the plus merchants maybe as a percentage of total? And then for Harley, just on the DHL shipping relationship. Did you use the third party to help with on ramp and integration or was that something you did independently? I know you are using some third party historically for USPS and Canada Post. Thank you.

Hi, Ross, it's Russ. I will take the first part of that. I can actually answer the second part but let Harley do that. So in terms of GMV, our advanced in our plus merchants account for over 50% of the GMV so the new pricing in place and advanced to this holiday period. We expect that to be a good sort of tailwind for what the quarter will look like and how we sort of really model our guidance on that.

Hey, it's Harley here. And just on the DHL Express integration, so we were direct with the DHL on that. And one of the reasons that we were especially said about this particular one is that more than 10% of the millions of packages that are sent every month by Shopify merchants are actually send internationally and so DHL Express opens up some credible shipping opportunities and for further merchants that traditionally that they may not had.

Your next question comes from Kevin Krishnaratne from Paradigm Capital. Please go ahead.

Good morning. And just a question on the subscription revenue growth strength and acceleration there along with your record ads and plus stores being added. Just really can you comment on any differences on the seasonal retail push versus last year? Meaning did you see any merchants adding more apps and teams in advance of Q4 period, any difference is there or do you think that you are still going to see some upside related to that kind of retail activity that come in Q4. Just wondering if there was any kind of pulling in from point of expects-- what you typically would see in Q4 and Q3?

This is Russ. Nothing really in terms of stuff being pulled in. I think again we just have more merchants that have to come to us directly who are also telling their friends and we continue to invest wisely on the paid advertising. And I think we've talked with a number of points on the partner stuff so all of that. In terms of the growth in apps and being I mean we continue just to see a steady climb there. So again not expecting any sort of big movement one way or the other.

Your next question comes from James Takeman from [Indiscernible]

Hi, thanks. Could you just give an update on your offline efforts to card leader and just kind of the degree of prioritization there? And then just really quickly with the additional cash on the balance sheet just how are you -- and does the change you are thinking on M&A of the size scope of it. Thanks.

So in terms of the cash nothing really new to report on that. I mean we really were looking to get some flexibility there which we have but nothing eminent on that side. In terms of the card leader stuff I mean it's pretty attractive offering that we've rolled out there. We expect to continue to invest in this area. Our point-of-sale channel is our biggest channel next to the online store. And so it's really an important focus for us.

Your next question is from Brian Peterson from Raymond James. Please go ahead.

Yes, thanks for taking the question. I appreciate the color on eliminating some of the noise that they are in the market. But from my end I just want to understand some of these new market places in partnerships that you guys have announced. If I think about your Shopify Plus customer base, how are they addressing those opportunities today? Do you see that mostly a screen field? Or do they not have sophisticated strategies for those markets? Just curious how we should think about it. Thanks. Tobi Lütke: I think that I mean it's case by case like if you talk with [Indiscernible] and merchants I mean non consumption is number one right. Like as in like we attempt to use but most just don't use it. Most just make their maybe their on Face book post or something like this. They don't use like an integration or automation system behind it, almost every business is on Instagram but they don't necessarily on the page there post various products that are in it so that they can buy them right there. So a lot of this is new. And for once we have it existing system. They have use -- they often in more crazy kind of state where they have every one of these channels there actually adopted and used like a different either point solution or the build in system like the eBay sale a center to sell you surplus things. This is auto bookable but it's create a lot of internal complexity just because once you sell in multiple channels or non integrating system now you have inventory problems, so you have to soon -- product might double sell overnight in this kind of situation so then people do bucket a location of inventory which means they sell out before they actually sell out. So essentially life get significantly better once all these channels can get integrated in and this is one of the reasons why we've actually seen adoption of Shopify Minus on and still in the plus world.

Your next question comes from Darren Aftahi from ROTH Capital Partners. Please go ahead.

Hey, guys. Thanks for taking my questions. Just could you talk to the kind of the growth acceleration you saw in plus MRR and I believe that 20% in a quarter of total MRR just kind of curious is it derivative or you see that as a percentage of MRR long term? Thanks.

Yes. I mean I don't think we have sort of a set target. I mean it continues to grow. I mean it went from 18% in Q2 up to the 20%. Last year quarter, the same quarter in 2016 it was 15%. So we just think again as we continue to have success there and the fact that the price point is higher that will drive up that MRR.

And it does conclude today's conference call. Thank you for your participation. You may now disconnect.