Thank you for standing by. This is the conference operator. Welcome to the Shopify Fourth Quarter 2019 Financial Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. [Operator Instructions]. I would now like to turn the conference back over to Katie Keita, Director of Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. We are glad you can join us for Shopify's Fourth Quarter and Year-end 2019 Conference Call. We are joined this morning by Tobi Lütke, Shopify's CEO; Harley Finkelstein, our Chief Operating Officer; and Amy Shapero, our CFO. After prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are based on assumptions and therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements except as required by law. You can read about these risks and uncertainties in our press release this morning as well as in our filings with U.S. and Canadian regulators. Also, our commentary today will include adjusted financial measures, which are non-GAAP measures. These should be considered as a supplement to and not as a substitute for GAAP financial measures. Reconciliations between the 2 can be found in our earnings press release, which is available on our website. And finally, note that because we report in U.S. dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated. With that, I turn the call over to Harley.

Thanks, Katie, and good morning, everyone. 2019 was a phenomenal year for Shopify. Our merchant base is stronger than ever, with more than 1 million merchants using Shopify to pursue their pass as entrepreneurs. The mix of merchants from outside our core geographies continues to expand as we help more entrepreneurs around the world reach for independence by launching businesses on Shopify. We broke new ground in our journey to make commerce better for everyone by launching the Shopify Fulfillment Network. We made our largest acquisition to date with 6 River Systems to help us transform the fulfillment industry. And best of all, our merchants did great, generating more than $61 billion in GMV in 2019, an average of more than $1 billion per week last year and positioning Shopify merchants on an aggregated basis as the second largest e-commerce retailer in the U.S. These achievements in 2019 point to the strong momentum of Shopify's flywheel as we lower the barrier to entry to entrepreneurship, more people are trying their hand and starting the business on Shopify. This enables Shopify and our expanding ecosystem of partners to keep innovating to help merchants of all sizes sell more and sell more efficiently. This translates into the success that our merchants are seeing today. Encouraged by this momentum, we continue to invest in our merchant's success in 2019, strengthening our platform, expanding our product offering and further differentiating Shopify Plus. Let me highlight some of these enhancements we made in 2019. In the middle of last year, we introduced Shopify Capital to non Shopify Payment merchants, which allowed us to advance more capital to more entrepreneurs. This helped us advance more than $430 million in 2019 through Shopify Capital for a cumulative $885 million since inception to help merchants grow their businesses.…

Thanks, Harley, and good morning, everyone. I'll second Harley's appreciation for all the work the Shopify team put into making 2019 such a success. Making the right strategic investments is meaningless without strong execution, and we did both this past year. Initiatives we've invested in over the past few years, such as Shopify Plus and international expansion contributed to growth across the board. Revenue growth accelerated in our fourth quarter, the first time since 2015, expanding 47% year-over-year to $505.2 million. This acceleration of our top line was entirely driven by Shopify's organic operations as fourth quarter revenue associated with the 6 River Systems acquisition was not material, consistent with our guidance. Subscription Solutions revenue increased 37% year-over-year to $183.2 million. Monthly recurring revenue grew 32% year-over-year to $53.9 million, primarily driven by new merchants joining the platform. Shopify Plus continued to increase its contribution to Monthly Recurring Revenue, accounting for $14.6 million or 27% compared with 25% of MRR in Q4 2018. Strong app and Shopify Plus platform fee revenues contributed to the 5 percentage point difference between the growth of subscription revenue and MRR. Merchant Solutions revenue grew 53% over the same period in 2018 to $322 million. The acceleration in year-on-year growth was driven by continued penetration of Shopify Payments and by growth of other Merchant Solutions revenue, like capital and shipping on the back of strong GMV expansion, which increased 47% year-over-year to $20.6 billion. Newly added revenue streams from 6 River Systems and Shopify Fulfillment Network also contributed, albeit only slightly given their early stages. $8.9 billion of GMV was processed on Shopify Payments in Q4, an increase of 52% versus the comparable quarter last year. Payments penetration of GMV was 43% versus 41% in Q4 2018 as Shopify Plus continued to increase its share…

Over to our listeners for their questions. [Operator Instructions]. With that, operator, can we please have our first question.

Certainly. Our first question comes from Ken Wong of Guggenheim Securities.

I mean, yes, a lot to unpack. Maybe just starting off with fiscal '20 revenue outlook. I know you guys are taking a more conservative approach to SFN, but in terms of how we think about it, any rough guidelines in terms of how much we should be feathering in into our estimates?

Yes. Let me just start kind of overall with how we're thinking about 2020 revenue growth. It's really going to be driven by our portfolio of growth initiatives. And that's what's expected to sustain, strong growth in 2020 and beyond and keep our flywheel energized well into the future. And if you're familiar with our flywheel, it has kind of three pieces. We're going to continue to grow our merchant base. We'll continue to invest in international expansion, as I said. We'll continue to do all the things to attract larger merchants on the Plus side. And we're going to invest in our brand to continue to widen the funnel and inspire more entrepreneurs around the globe. And then moving around the flywheel, we're going to continue to grow our Merchant Solutions. We'll continue to expand our more established solutions like Shopify Payments and Shopify Capital and provide new solutions like fulfillment and, as I said, some additional financial solutions that we'll introduce. That empowers our merchants to generate more GMV. And then as they're successful and generate more GMV and inspires more entrepreneurship and widens the category. This is how Shopify has always grown. It's consistent with our philosophy of energizing this flywheel. With respect specifically to the Shopify Fulfillment Network, as we said when we launched at Unite in June, we would be in the product market fit phase during 2020, which means we'll be limiting the scale, primarily focusing on the merchant experience and our performance metrics. We will scale fulfillments, but only at the rate that we can maintain a high service level. So it will contribute, but it will be small during 2020.

Our next question comes from Mark Zgutowicz of Rosenblatt Securities.

Maybe just a follow-on to SFN. I'm just curious what you learned really from that holiday test run and what that may mean in terms of plans for '20 and specifically in front of the holiday season. I realize you commented on needing to have higher service levels or meet service requirements. Maybe if you can quantify that a bit more? And then just separately, as it relates to the merchants that you foresee using or utilizing SFN, perhaps some characteristics of Plus merchants and non-Plus merchants that would have a need or use of SFN and perhaps those that may not.

It's Harley. I'll take that question. So in terms of SFN, as Amy had mentioned, we currently have dozens of merchants in sort of this early access phase. And really the objective right now is to optimize for experience. We want to make sure that they not only are getting value from it. But eventually, they were also going to become big promoters of what we're doing here. The service that we're providing with SFN is really divided into 4 different categories. You have the pick and pack categories. We obviously have packaged types and kitting. We have storage and then obviously, getting it to the end consumer, which is the open transport. So we're trying to optimize all those things. And as Amy said earlier, this is really still early days of it. The two day shipping is available now to certain merchants, that obviously depends on them having enough inventory and being in the right locations for us, but that is already available. But this is still early innings for us for SFN. We want to get this really right. Then when we add in the 6 RS optimizations, whether it's the automated technology or the optimization of warehouse fulfillment. We think -- and with the chucks, we think we can do something really great here. But the objective here is really -- it has been and continues to remain fast and affordable shipping for our merchants. On the merchant side, your second part of your question, the goal here is that whether you're shipping 3 products or you're shipping thousands of products, that we will be able to fulfill them for you in a way that allows you to compete with the largest retailers in the world. And so as we mentioned earlier, also with the R&D center in Ottawa, we don't just want to make plans from the periphery. We actually want to get into it and really figure out what we need to do. And so the best way for us to do that, as Shopify's always out in sticking hands dirty and get into the trenches, and that's the reason why we're doing this R&D center in Ottawa.

Our next question comes from Colin Sebastian of Baird.

I wanted to ask about Shopify Plus, specifically, the biggest opportunities you see to drive incremental adoption there? And by that, I mean, new merchants that are new to the platform, not just growing into Plus. And with the new Plus experience you talked about, I think, Harley, what are some of the specific improvements this upgrade will bring and whether these are opportunities to update pricing as well?

Thanks for the question. Yes, I mean, pricing is something that we're always taking a look at. It's an ongoing evaluation to figure out if providing value to merchant, how it can provide more value and if there's elasticity of demand in that pricing. That said, in terms of the new Plus experience, which we announced in June at Unite, that hits a couple of different areas. First of all, we're getting more and more merchants that are coming to us with existing large businesses. I mentioned some of those on the call like KitchenAid and Toms and Cirque du Soleil. These are not new DTC brands. These are established brands that come with a large following. And so part of that is they come in new complexities. And our role is to figure out how to reduce the complexity and simplify it. There are some other things that are also -- that we also need to continue to build on top of, which is that some of our merchants are now running stores in multiple locations internationally and the ability to run a number of stores from 1 centralized dashboard, something we talked about in June at Unite, and that is a big part of what we're trying to give. But it also is continue to work on things like Flow and our B2B product with the acquisition of Handshake, new checkout capabilities, which are obviously important to us as well. That are the -- those are the type of things that we're building on top of Shopify Plus. And I think we're getting to the point where a lot of merchants are now thinking about it that previously had not thought of a Shopify Plus.

Our next question comes from Deepak Mathivanan of Barclays.

Any color on element, marketing spend. It looks like the spend on marketing-related programs accelerated in 2019, but majority of that is sort of non-advertising related. Is there any new program like partner payout became bigger last year? So if you can talk about that a little bit.

In 2019, in terms of marketing spend, keep in mind, we introduced brand spend for the first time. We had even given you the number. We said approximately $30 million for the first time. And in addition, if you're looking at the entire sales and marketing line, there was also incremental spend in terms of adding direct sales at Plus and POS. And so on the sales and marketing line, we still showed operating leverage in 2019. We actually had operating leverage on the marketing side with respect to -- mostly like on the personnel headcount side that outweighed that incremental spend that I just mentioned. So we're really happy with the overall portfolio of sales and marketing spend.

Our next question comes from Gus Papageorgiou of PI Financial.

I know recognizing it's still early days on SFN, but in the few customers that you had last year, can you maybe quantify what you think the impacts of SFN was to the revenue? Do you think that getting it down to 2 days and the client getting cheaper rates, how much of an impact it had on their revenue?

Yes, this is Tobi. I think it's too early to really tell. I mean, we have anecdotal feedback that if a business wanted in being able to make promises on delivery speed and -- but be -- it's too early to share any kind of real qualitive takeaways from this. Generally, we found that in SFN, our assumptions that we've held when we decide to go in have been holding strong. And that there have been new things we uncovered as we are getting deeper into this. And as we are understanding more and more detailed parts of the world supply chain that exists to get things from factories all the way to consumers. We don't really uncover anything that we didn't particularly expect in this. To some degree, we're new to this journey, and it's been -- we have an amazing team. We've brought in really, really, really good veterans who have built things like this before, who have been incredibly helpful along the way. We are building this for scale, but we have to start small. It's nothing -- it's impossible to build complex things that work unless you start with something very, very simple and then organically build it. If you build something that tries a for complexity immediately, it fails every single time. So this is the approach we're taking.

Our next question comes from Darren Aftahi of Roth Capital Partners.

Just curious on the non-English speaking, International merchant base. Can you talk about what percentage of that is coming from Plus and then how fast that grew year-on-year from '18 and '19.

Darren, it's Harley here. Yes. So in terms of international, as we mentioned, we grew the mix of international merchants from the 24% of merchant base into this %18 to 29% in 2019. And so obviously, that -- we're happy with that. We'll continue to have more languages and obviously have a strong go-to-market strategies, through partners and other areas to acquire new international merchants. In terms of the mix, it still is predominantly our core merchant base. Shopify Plus, of course, is being introduced into new areas. Some of it is happening organically where merchants in Western European countries are simply coming to us and saying we want to use Plus. But I would say the majority of that merchandise is coming from core. I would also say that the opportunity remains for Plus internationally will be in the future, and that's something that we've been thinking quite a bit about, but the majority is still a core merchant base.

Our next question comes from John Beck of Keybank Capital Markets.

I wanted to ask about point-of-sale. It seems like an area that you emphasized -- one of the areas we emphasized from an investment point of view. So are you feeling better, maybe about the product market fit. And as you evolve the go-to-market there? Do you -- is the goal really just to get a catch rate up within the existing base or is there a longer-term goal to really attract brick-and-mortar first merchants as well?

Yes. The goal is to build the best point-of-sale software in the world. And then if -- actually, the goal is to build the best possible point-of-sale system Shopify can -- and then if merchants deem this valuable and agree with us but versus the one which would give them and wanted to and they purchase it and adopt it. So this is exactly the same as online store and exactly the same as every other channel. They are very -- bit of the split responsibility. We built things of value and then if people agree with us, they adopt them. So we don't really go and say, "okay, we want to go for this particular market segment for this particular subgroup and for this particular growth rates to get that particular slice of the market." That's not -- that's never been the opinion of Shopify. And in fact, we are very strong believers that every market that we can go into and every market we look at is in terms of total size is incredibly depressed by the low-quality office software that exists. And by doing -- if we do our job as well as we really won't like to, then the market grows significantly. That's just what we've observed with our core platform, born in the world of e-commerce. And that potentially colors our view. This is also why you hear us talk so much about new entrants to the market for entrepreneurs, but really we are working value backwards. It's actually much, much harder to build software that works really, really well for people who are starting out because obviously, they are less sophisticated, they have less time, they have less money to spend. They have more task to do at the same time. And so it puts actually strongest requirements on software. So point-of-sale is -- it's been -- it has done really well. This has been a really, really, really strong year compared -- if we adjust its age to the online store, it's tracking ahead on online store's growth at a particular, like in distance from year 0 perspective. But, of course, and also, like we've shared a bunch of things that we are doing. We are launching a new version of it. This is going to be really, really needed, I think, as it keeps going. So very excited about it. We have been, as Amy or Harley brought up earlier, also bringing in some direct sales, which is also the new thing for point-of-sale. So this is also, I think, a good sign that we are feeling pretty good about where that product is, and especially where that product is going.

Our next question comes from Brad Zelnick of Crédit Suisse.

Congrats on a fantastic year and all the success. My question is on the marketing strategy. Can you maybe give us an update how you're thinking about marketing at this point, just given some of the leadership changes that you've made more recently?

Yes. I mean, the marketing has worked really well. And it's -- in terms of effectiveness, has been very good. There have been leadership changes because this is mostly internal-motivated, and but it's -- we've been really comfortable with this particular programs we've been running. Brand has been very successful for us. That's been a new discovery of something that's going to be a part of Shopify's future, and we're going to continue scaling it and building it out.

Our next question comes from Nikhil Thadani of Mackie Research Capital.

I want to go back to Shopify Pay and perhaps how that sort of plays into the flywheel and some of the branding initiatives that you have going on there. Does it make sense from a high-level philosophical perspective to maybe think about Shopify Pay becoming something akin to Amazon Prime or something along those lines?

I mean, we are certainly excited about Shopify Pay, but there are no such plans right now.

Our next question comes from Ygal Arounian of Wedbush Securities.

I want to ask on Plus. And you talked on this call about increasingly being able to solve enterprise solutions. I think, historically, we've tried to strike a balance between customizing for what a more complex enterprise customer would need. And I think you even kind of getting to certain points where you would maybe even push really complex enterprise customer off of Shopify Plus and say, Shopify Plus isn't really a solution for you. Maybe I'm not characterizing that the right way. So let me know if that's not true, but does feel like you are continue to move -- continue to building the enterprise solutions and the complexity around that. So I'd love to hear kind of the philosophy around the high end of what Shopify Plus could have.

Yes. So thanks for the question. You're absolutely right. There are certain merchants that come to us and we simply say no to. And that takes a ton of courage at something the most companies would not do. But partially, it's because we want to work with brands on Plus that want to make commerce better for everyone and are thinking about it in a very modern, contemporary way. We do not want to be dragged down to the complexities of legacy systems, where they're going to begin to dictate a roadmap, they're going to begin to pull us into their mess that they have internally. The good news is that because direct-to-consumer is becoming such a major part of retail commerce, a lot of those direct-to-consumer brands were built in the last decade and they don't have the traditional enterprise complexity and Shopify Plus is perfect for them. . The other good news is that some of the more legacy brands, I mentioned a couple of them today on the call, they are willing to shed some of their internal legacy systems because there is not working anymore. And so they're beginning to rethink how they want to run their retail operations and Shopify Plus is a great way for them to do that. So is Shopify Plus for everyone? Absolutely not. We -- there are merchants that we say no to on an ongoing basis. Oftentimes, they do come back to us and say, okay, well, we actually have rethought this, and we're not going to bring all these integrations with us. We need to shed some of those because it's making us too slow, and we want to compete in a modern retail landscape. And that's kind of what we're thinking about it. But that being said, there are certain new functionality and features that we're building right now because we realized that as part of the future of commerce, things like Flow and Scripts and Checkout capabilities and be able to run multiple stores from one single dashboard on the international side. These are things that we are working and building. And we think that the growth of Plus for now over 7,000 plus merchants, names that are coming to us, again, our wonderful mix of more traditional CPGs, but also very modern brands in some cases that are migrating over, in some cases, they're migrating from a home-run system. And we're really happy with where that's at right now.

Our next question comes from Kevin Krishnaratne of Paradigm Capital.

I just wanted to go back to the strength in international and the move in the merchants picking up there, 24% to 29% of the base could you comment on some of the more mature markets and what you might be seeing there in terms of GMV merchant or just subscription revenue and apps uptake? I'm just trying to get a sense of the potential upside from international. It's very early days and just thoughts on how things have been progressing in some of the more mature markets?

Thanks for the question. I mean, international, as we mentioned, is doing really well. We'll be getting -- we're adding more and more languages. We now have 20 languages available in the admin, and we're continuously adding more of those languages as well. We're introducing new Merchant Solutions to those new markets, which, of course, will increase the take rate we have there. But it's impossible to bucket every one of those markets into 1 single narrative. Each of those markets are very different. France is very different than Japan, which is, of course, different than Germany. And so part of, I think, a sophisticated international strategy and a sophisticated growth plan internationally is to identify what each market needs from a product market fit perspective, but also how to -- what the go-to-market strategy is there. And those are all very, very different. We think that we're able to do that. We have teams on the ground in these places that are focused on making sure that we are the best product in those markets. We're not there yet everywhere, but we're certainly on our way.

Our next question comes from Thomas Forte of D.A. Davidson & Company.

Great. So the question I had is, how should investors think about the potential of the coronavirus to disrupt the supply chain for your merchants, who are sourcing out of China.

Yes. To date, we've not observed a material impact on Shopify's overall GMV. We're obviously continuing to monitor the situation and offering guidance to potentially impacted margins, but we don't have enough information at this time to know what, if any, impact this might have on supply chains or production velocity.

Our next question comes from Richard Tse of National Bank Financial.

Yes. So you guys have a lot of [indiscernible] and I'm just kind of curious what do you think is the biggest obstacle of executing your growth plans? And what do you do to sort of mitigate that risk?

I mean, the biggest obstacle to -- for us to executing our growth plans is finding an upgrade engineer to do it all. That's like this is an engineering-limited company, like, I think, the entire world of the software industry. So we recruit, like, I mean, I do -- when I talk to my board members, for instance, they -- and I complained that it's really, really, really hard to hire great engineers, than they tell you that I should consider myself lucky because for everyone else its absolutely impossible. So it sounds like we're in slightly better shape still. But in this plan, it has not been educating enough engineers over the last 20 years.

Our next question comes from Koji Ikeda of Oppenheimer.

Great. During the opening commentary, when talking about 2020 investments, the road process automation for Shopify Plus really caught my ear. It sounds like there could be some AI mix within some -- a little bit of RPA involved with that. Maybe I'm reading too much into it, but could you talk a bit more about how you're thinking about road process automation, the value for merchants, maybe especially with the bigger merchants that are deploying Shopify Plus.

Thanks for that question. I mean, to be clear, we've been thinking about business optimization and automation for merchants for a couple of years now. We announced Shopify Flow and Shopify Scripts, I think it was 2 or 3 Unites ago. And so we've been thinking about this a lot. Again, one of the things that we want to do is not necessarily -- is not necessarily import the complexity that these merchants bring that are unnecessary, but rather help them modernize their own businesses. And so there are certain optimizations that we will help them with, and that's where Scripts and Flow give them this incredible amount of flexibility to build new automation practices. That being said, often, when merchants come to Shopify Plus, it's part of a recalibration of what they need to be successful. They often have to rethink what they want to have in terms of the retail offerings and commerce offerings. And so we often see them coming to us with some idea of what they want to do. But if they're coming to Plus, it means they're looking for something different than the traditional enterprise offerings are not getting them. And so it's a great opportunity for us to help them work through that.

Our next question comes from David Hynes of Canaccord Genuity.

So we're hearing a lot more from industry participants around headless commerce. And I just want to ask about that as it pertains to Plus sales cycles. I assume you're having the same conversations with prospects. So do you think this is the direction that the mid-market and enterprise is moving? Can you give us a feel for what percent of the Plus base is running headless today? And then, I guess, is there anything additional that Shopify needs to do from a product perspective to embrace that evolution?

Yes. So yes, there's a lot of talk about headless commerce. It's -- I personally think it's probably amongst like definitely ranks near the bottom of a industry buzz terms we've ever invented, like I think we should come -- we should go to what had full content commerce because I just think the entire thing is a little bit silly on the premise. So what it is, is like it's a move to try to get everyone to build their own and so in a completely new way. It's based on some sound fundamental technical ideas, but it's been incredibly oversold. And if you ask why a couple of times, what you will hear is what people want is they want to have a lot of control over their experience, and they wanted to be very fast and so on, which is things you honestly you get out of a box of Shopify to begin with. And so we see a lot a bit about it, but people are asking for it to kind of -- not entirely issue why they're asking for it. On a technical level, but what you need to implement is a good set of front-end APIs, which Shopify has been shipping with out-of-the-box since 2008. So it's available. We've always had some people who run their businesses in a completely headless way. And so for all of our customers, it's ready to be used in this particular way. And we see a lot of failed experiments in this space. So I don't want to say it's not going to be a factor because in some instances, it actually makes a lot of sense for customers of certain CMS strategies that are already implemented and already scaled. It's a wonderful way to use Shopify then and fit it into a larger ecosystem. It's a great way to fit it into like our systems like apps and so on. But it's -- we think that's going to be a bit like a straw fire of abuzz term.

Our next question comes from Chris Merwin of Goldman Sachs.

I just wanted to ask about take rate on Merchant Solutions. It looks like that stepped up by about 4 basis points this quarter, and that's more than what we've seen in the prior quarters. I guess, mix shift has kept that take rate flattish. I believe, but did anything change this quarter in terms of that mix shift or just a higher take rate for 1 of the components. Just curious, any other color you could add there.

Yes, sure. Yes. So mix shift does continue to play a role here, and it will continue in 2020 with international growing very rapidly. But what we saw in the fourth quarter was just continued increase in Shopify Payments penetration. That was the biggest contributor to the uptick in take rate, but also closely followed by the growth of other merchant solutions, revenue streams, like shipping and capital. And then we also had Shopify Fulfillment Network and 6 River Systems contribute, although still immaterial given their early stages.

Our next question comes from Todd Coupland of CIBC.

I think you called out revenue acceleration for the first time in several years. But yet, you gave a fairly conservative annual revenue guide revenue decelerating. Can you just talk us through your thinking on that as we set up for 2020?

Yes. So we think our guidance at the midpoint of 36% year-over-year revenue growth for 2020 is great growth for a company of our size. Specifically thinking about moving from Q4 into 2020. Q4 was just a spectacular quarter. Every part of the business was contributing. We had strong merchant growth. We had significant increased penetration of Merchant Solutions on the back of stellar GMV growth and a high seasonal quarter. That's not something that we expect can happen every quarter.

This concludes today's question-and-answer session as well as today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.