Shopify Inc. (NYSE:SHOP) Citi 2022 Global Technology Conference September 7, 2022 9:45 AM ET
Company Participants
Amy Shapero – CFO
Conference Call Participants
Tyler Radke – Citi
Tyler Radke
Good morning. I’m Tyler Radke. I Co-Head the Software sector here at Citi, and welcome to day one of the Technology Conference. Really excited to have Amy Shapero here from Shopify, who is also a New York resident. So very close to her location. I think this is going to be a great discussion, given all the conversations going on in e-commerce. So I really appreciate you coming and supporting our conference.
Amy Shapero
Absolutely. Thank you for having me, and good to see you all.
Tyler Radke
So maybe we could just start high level before drilling into some topics that I know investors are excited to talk about. Just give us a short history of Shopify. How do you view yourself in this e commerce market as a disruptor?
Amy Shapero
Yeah. Let me take you all the way back to understand Tobi Lütke’s vision of Shopify and how it got started. So taking back to 2004, Tobi had been a software developer, but he also had a deep love of snowboarding, and he decided to sell snowboards. And he was looking for a way to sell online and found that it was just too complex, too, too difficult and said, as a brilliant software developer would, I’ll just build the software. And so he did, for his own snowboarding store. And through that process fell in love with the software and decided that was more fun than selling snowboards.
And so, Shopify’s commercial product was launched in 2006, and we went public in 2015. And what’s incredibly great about this story is that Tobi’s vision has largely remained the same over that entire period even to now. And that vision was really to develop a commerce operating system with the merchant in mind, merchant-obsessed, helping entrepreneurs start and build the business.
And it started online, but then very quickly became channel agnostic to help merchants sell whether it’s online, offline physical retail, social channels, marketplaces to help the merchant find buyers wherever they are and the right channels for their particular business. And then in so doing, it became evident that there were additional things that we could do to help merchants be successful. So add payments, shop by capital markets, installments, balance, all of the products that we are adding on top of the merchant solutions. That enables merchants to be more successful as they generate more GMV. It really has a network effect, it attracts more merchants. And so today, we serve millions of merchants in 175 countries.
And what really makes this unique and disruptive is, we have never said that we could do it alone. We have been on this journey with partners and we’ve always had a mentality of Plus some thinking that if other players, merchants, buyers, partners, communities win along the way with us, they’ll stay in this infinite game with us. And so you’ve seen us gain in scale. And the larger the scale, the more merchants, the larger the data set, the more products we’re able to do that is unique, that other companies just simply couldn’t do. And so you’re seeing us now move into fulfillments. It’s a scale gain. We have the scale, we can do it. Shopify Audiences. You need a lot of data to be successful in helping merchants find high intent buyers.
And so this is gained momentum, and we always say, for every — we do an economic impact review every single year for 2021. For every dollar we made, our merchants made $38. Our partners made seven times in aggregate our revenue. And the communities that our merchants serve generated $444 billion of economic activity. So this is like a real thing that’s gained momentum with a deep moat.
Question-and-Answer Session
Q – Tyler Radke
It’s a wonderful overview. So maybe we can fast forward to today, talk about the environment that you’re seeing out there, particularly e-commerce, consumer spending environment. What are you seeing, what are you hearing from your merchants and how are you just thinking about the next 12 months in terms of where you’re investing in, and really trying to prioritize for the company?
Amy Shapero
So, I think it’s really important to separate out the long-term potential for e-commerce here versus the near end environment that we’re seeing. There is still a massive opportunity for e-commerce globally. Most countries, physical retail still is the majority of overall retail sales. And we know that over the long-term, e-commerce will continue to gain share of overall retail. So there’s a big opportunity out there at the intersection of the internet and commerce still to be played out.
Near end, what we’re seeing is, we saw the acceleration in e-commerce that happened in 2020 and 2021, given COVID, it shot up. Everyone thought we had reset the curve three to five years out, and that’s proven not to be true. It’s come back in — it’s — e-commerce is still slightly above the pre-COVID trend line. It’s just growing at a more normalized pace now, but still plenty of runway ahead. But you layer on top of that, the current macroeconomic environment with high inflation, and so we have dubbed 2022 a reset year, where we’ve said — we expect to continue to see high inflation impact, consumers purchasing of goods for the remainder of this year.
Now, in terms of investing, because of that long-term opportunity that’s still massive, we’re still going continue to invest. So, we’ve talked consistently on the last two earnings calls about four key investment areas building buyer relationships. So, things like Shopify Audiences and extending the POS offering that we have. We’ve been doing that for years, but with a shift to in-person shopping, it makes sense to go even faster there. Going global is the second theme.
So we think with merchants, it should be as easy for them to sell outside of their local market as in their local market. And so we’re continuing to focus on product market fit and international markets by introducing payments. Most recently, we just introduced Shopify Capital in Australia, and then we introduced Shopify Markets to help merchants sell outside of their local markets, and we have over a 100,000 merchants using that product already. It’s a relatively new product, it’s really exciting. Attraction is really, really good.
Third investment theme is going from first sale to full scale. So we’ve always said that we’re about enabling the entrepreneur and many of our merchants that are on the platform today that are Plus merchants started as entrepreneurs. So by continuing to offer products that help them be successful, whether it be payments, capital, installments, the balance card, but then also helping them scale. And so you heard us in our Shopify Editions say that we’re going to be doing more in the B2B area. We know that over half of our Plus merchants have B2B businesses, and that’s still a big untapped opportunity for us to go after.
And then lastly, the fourth key investment theme is simplifying logistics. And I know there’s more questions on that, we’ll get to that. But just staying high level for right now, we know that logistics and fulfillment is in the top three pain points for merchants. And as I said earlier, we’re uniquely qualified to go solve that for merchants, given our scale and our data. And I just want to add, our entire product roadmap is always directed by our merchants. We listen to them, we know what they’re — what they need to be successful, and we’re driving every day to meet that.
So our key investment theme’s really, we don’t anticipate them changing. Those are what our merchants are telling us, and we know there’s still a big opportunity in front of us, and so we will invest. Now we have made some adjustments to our spend this year as you’re aware in order to realign for that long term success. So we did the 10% headcount reduction. We’ve slowed hiring we’ve stopped spending in sales and marketing that just wouldn’t be effective in this macro environment. We’ve reorganized our sales and marketing efforts to be more efficient and unified under a single leader. And we’ve taken these measures that we know we need to do short term so that we can continue to invest for the long term.
Tyler Radke
That’s great. And I know we’ll get more into detail on fulfillment. But just a quick follow up on that. So you talked about the near term being challenging high inflation as you mentioned. I guess what’s your expectation, it’s obviously hard to predict consumer behavior multi quarters out, but what’s your expectation internally on how long this lasts? And I guess as you think about next year, do you feel like the changes that you’ve implemented on the slowing hiring are in line based on what you’re seeing out there from a demand perspective.
Amy Shapero
So yes, I think, we, like everybody else are still assessing 2023. So it’s too early to comment on that. We have said, for the remainder of this year we do expect inflation to remain a factor. As you saw, in July, the U.S. inflation number ticked down a little bit, but it was still quite high. And now some concerns in — like the UK. So it very much will continue to be a factor.
We don’t have a crystal ball on when this resolves itself. The only thing we can do is focus on what we can control, and what we can control is making sure that we’re making the right investments and managing our expense base in the right way so that we exit this cycle with those investments paying off on the top-line and improving profitability. And that’s what we stated on the last earnings call is our commitment that, that’s what we’re focused on. And so that’s what we have right now. Yeah.
Tyler Radke
Yeah. Okay. Great. So let’s talk about fulfillment, one of your favorite topics.
Amy Shapero
Right.
Tyler Radke
So it’s obviously a big discussion point among investors. Maybe we could just frame at a high level why it’s such a big challenge for merchants? And secondly, what are Shopify’s goals and aspirations to be in fulfillment?
Amy Shapero
Sure. It’s an enormous challenge for most merchants, especially when they reach a certain size of orders per day. We’ve done studies with our merchants that indicate that merchants between the supply chain and fulfillment and logistics have to work with as many as ten different vendors. So many are trying to manage freight forwarding and last mile transportation, warehouse partners, et cetera. It’s very complex and in many cases, they’re also trying to negotiate rates on their own.
So we know there is a critical, complex problem to be solved for them and we’ve been at it now for about three years. We’ve made a lot of progress. The Deliverr acquisition accelerated our efforts in many areas. It added great talent. It added additional software. It added certain parts of the network. And so to summarize what essentially the Deliverr acquisition has done is, it provides the ability to have a, what we call, porch to porch logistics network. And it also — that enables delivery promises and one to two day delivery promises with more visibility into what’s happening to inventory, where it’s at, which we know drives higher conversion and trust between merchants and their buyers.
And so, just summarizing what it sort of looks like, the vision of Shopify Logistics is Deliverr really kind of specialized in how do you get inventory into the network, so from the manufacturer into the warehouse network in the most efficient way. It lands in a warehouse and then software, machine learning and AI say, where is the demand for that inventory that’s coming into the network and how can it be most efficiently placed in warehouses across the country in order to make sure that you are managing inventory costs for the merchant, but also reducing last mile transportation costs and the like. So the deliver software sort of does that.
What 6RS was focused on for the logistics network was then what happens in a warehouse, the storage, the picking and the packing, and then the outbound? And then the Shopify piece was focused on the merchant side, where does the order come in? How does it get fulfilled in the best way? And so all of that’s being integrated across the software and the network.
The network that is being integrated, as we said, Shopify would operate — self-operate a handful of larger warehouse hubs in key metro areas, so New York, LA, Atlanta kind of areas. These are bigger facilities that are multifunction, inventory comes in, there’s cross stocking facilities, there’s extra storage facilities. Then the inventory is further distributed across a network of partner nodes and Deliverr brought 40 partner nodes that act as smaller warehouses in other geographic areas and sort centers. So it’s an extremely efficient network operation that’s largely driven by pretty sophisticated software. So, we’re really excited about the progress, beginning of July, we’ve said the integration efforts will continue for several quarters, but we’re really excited about the progress that we’ve seen so far.
Tyler Radke
So, if we could kind of summarize, it sounds like you’re still approaching it from a software perspective, obviously software assets. There will be some occasional large warehouses in Metro areas, but intent is not to —
Amy Shapero
Relatively asset light, yeah. It’s still a very much — a network built with partners and operated with partners both on the warehouse side and the transportation side. And again, I’d encourage you to not think of this as like this isn’t just another 3PL play, this is far beyond that. We know that when merchants can offer one and two day delivery promises that drive significantly higher conversion, there are significant network effects here that are in play for merchants by doing this for them.
Tyler Radke
So in that context, one of the questions that we get asked a lot about is the Amazon’s Buy with Prime program. How should we think about that in the context of SFN and what are the key reasons you think SFN will win at the end of the day?
Amy Shapero
Yeah. Well, let me just start with the SFN piece, we know from merchants that they want to control their brand experience and they want to own their own data of what’s happening to their business. And so for that reason, many merchants will never use Amazon’s fulfillment operations or want alternatives.
Buy with Prime, I know it’s been in the press, recently there was another article this morning I think by Ben Thompson. And the way to think about that is, we’ve always encouraged large tech companies to open their infrastructure to entrepreneurs and merchants, we think it’s a good thing. We have always supported approved integrations for our merchants to sell on Amazon as a channel. We continue to believe that we are agnostic in terms of where our merchants sell. We want them to be successful.
With respect to Buy with Prime, there just is no formal integration at this time. And so it’s a very disjointed process for the buyer when they go to checkout. They actually have to leave the merchant’s online store. And so we have stated publicly that we want to work with Amazon to provide an approved integration and a better merchant buyer experience, and we’re in discussions, but there’s nothing new to report at this time.
Tyler Radke
Got you. Okay. So as we think about some of the investments that you’re making, including fulfillment, just walk us through how you’re thinking about the — how you assess those returns on investments? What’s the time frame? And how should investors think about long-term profitability at Shopify?
Amy Shapero
Right. We like profits. We always have. And if you look at 2017 to 2021, our adjusted operating income was increasing and you can use that as a proxy for the leverage that’s in the business. As we said, 2022 is a reset year and with the macro environment, things are different. But our expectation is absolutely that we will return to a path of profitability. But the way we think about our investments, because of the massive long-term opportunity we still have in front of us is as follows.
We look at the more mature parts of the business, the core platform, the merchant solutions that we’ve offered for many, many years, payments, capital, there’s still investment to be made there, and we are investing. So it’s really just — payments in new markets, capital in new markets, et cetera. We’re constantly adding features and functionality of the core platform, and a lot of our investment dollars go there. But it is very much profitable and it’s on an adjusted basis, and those profits are being taken in order to reinvest in other long-term growth initiatives.
So the second bucket that we invest in, we kind of call expansion investments, and that would be our international expansion into new markets and our POS investments that we’ve been making for several years and there’s still several years of investment, but there’s huge traction on both of those, and we want to continue to lean into those opportunities and they pay off more near term, kind of in the next 2 to 3 years.
And then there’s a last bucket that we kind of refer as our ambition bucket, which is more Shopify logistics and the Shop App and other newer things that we don’t talk about that have payoffs that are more 3 to 5 years out. Our expectation is that all 3 of those buckets will be profitable over time since we have investments that are in different stages of maturity right now.
Tyler Radke
So maybe coming back to the current environment. And as you’re thinking about the second half of the year, I think on the last call, you talked about an expectation that you’ll see higher net adds for merchants in the second half versus the first half. Maybe we could just go through some of the assumptions that are underpinning that outlook?
Amy Shapero
Yes. So there are several areas where we expect to see merchant growth in the second half. Let me start with International merchants. They’ve been increasing in our mix year-over-year for quite some time. And we made the decision in late May to change pricing, we call it local pricing in like 200 markets. We’ve applied a purchasing price index against our subscription pricing in order to make it feel like a more local experience in some markets.
We also began actually last year, billing in local currency in the Eurozone and the U.K. again, to make it feel like a more local experience. If you’re a merchant, and an international market to be shown U.S. pricing levels in U.S. dollars isn’t the most personalized experience. So we’re seeing some of those initiatives that were launched again in late May, gained some traction internationally. We also have some marketing and promotions and things that we’ve been working on, where we’re also seeing some good traction, moving into the second half.
And then keep in mind, Plus is doing incredibly well, has for the entire year. We’re continuing to see significant upgrades from standard merchants to Plus merchants and new Plus merchants come to the platform. In this inflationary environment, we know merchants are looking for strong value propositions so that they can make more money. And so we’re seeing great traction there. And then also keep in mind, we have POS — most of the POS Pro merchants are coming from our existing installed base of merchants. But we’re seeing a strong percentage of those merchants come to POS Pro, come from the outside who want a more unified online/off-line e xperience. And then also a number of locations, we’re seeing that grow by thousands every quarter, POS locations that our merchants take.
And then lastly, we’re testing a starter plan right now that’s aimed at creators who don’t necessarily want to start an online store but need a light way to sell into social channels and get started, and we’re seeing some really good traction there as well.
Tyler Radke
Great. So if we talk about GMV, maybe we could go through how you’re forecasting and thinking about overall GMV growth this year and your expectation on that number going forward. I know it’s obviously difficult to predict given the uncertainty we’re in, but.
Amy Shapero
Yes. One thing — with the macro environment uncertainty, the 1 thing we have seen consistent is us do better than the broader retail market. We usually use the U.S. market as an example. And we’ve continued to outpace — our GMV growth has outpaced the growth of the U.S. retail market and largely attribute that to the multichannel capabilities that we offer merchants. And so for instance, last quarter, you saw our offline GMV grew 47% year-over-year. Now it’s a much smaller percentage of our overall GMV mix than online GMV, but it’s continuing to take share significantly even in this environment. And so it’s really the combination that I think helps us outperform the broader market.
Tyler Radke
And maybe we could touch on the off-line or POS side. As Tobi mentioned on the last call, we’ve kind of seen this dip as a percentage of e-commerce as a percentage of overall GMV. I guess how has that dynamic kind of altered your investments in the POS offerings? And how should investors think about the size of the POS or off-line offerings today? And then do you have a target on how big they will become over time?
Amy Shapero
Yes. So obviously, as Omicron eased and I guess earlier this year, kind of February, March, and we saw the shift to in-person shopping. We’ve obviously mobilized as fast as we could and said, what can we do in order to really accelerate our POS offering. And so we definitely have had a more concerted sales and marketing effort on that. We know many of the 2020 cohort merchants who came to us, have physical retail. And so believe me, we’re marketing to them. It’s one of the reasons why the majority of our POS merchants are still coming from the installed base because we got a great installed base to go after.
In terms of the POS opportunity though, it’s enormous. Our product itself just keeps getting better and better. We — if you look back a couple of years ago, the product market fit for our POS was like maybe
[Call Ends Abruptly]
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