Shopify Inc. (NYSE:SHOP) Q4 2023 Earnings Call Transcript

Or Saje Natural in Canada, which is over 70 retail locations today, chose to migrate over their existing point-of-sale to Shopify. Thanks to the features and functionality we offer, including point-of-sale terminal seamlessly integrated back into the online store and the capability to now support over 1,000 physical stores. In addition, we’re seeing merchants come into Shopify primarily for our point-of-sale. Multi-store brands like Evereve and AKIRA that want to modernize their off-line tech stack with our cutting-edge platform. These on-ramps or entry points into Shopify, further substantiate our role as the unified commerce operating system for merchants whether they come to us to sell online, off-line or anywhere in between. For the year, our off-line revenue was $441 million, which includes revenue from payments, off-line subscriptions and point-of-sale hardware.

This is more than 5x what our off-line revenue was just four years ago and speaks to the strength of this channel as a growing important on-ramp into Shopify. With the TAM for offline and B2B estimated over $450 billion, we have barely scratched the surface of this opportunity and expect it to be a key growth driver in 2024. As we invest further into the unique needs for off-line commerce, we will remain focused on simplifying the tech stack while bringing all of the capabilities that we offer for online to off-line. This remains a big opportunity for us. Especially as our offline offering represents additional pathways to bring even more merchants and customers into the Shopify flywheel. Diving into B2B, a big and exciting growth opportunity for Shopify.

We are continually enhancing our offering, investing in both the product and the go-to-market strategies to support this additional growth driver. During the fourth quarter, our business was up nearly 150% year-over-year with total B2B GMV doubling in 2023. Similar to off-line retail. New channels like B2B allow our merchants to reach more customers and broaden their brand visibility. While our growth in 2023 has primarily stemmed from existing merchants adopting B2B, like Home Decor and furnishing company, Lulu and Georgia; and fashion jewelry and accessories company, BaubleBar, we’ve also secured some B2B-only merchants like Carrier, which signed in Q4, opening the door to a whole new opportunity of industries we previously didn’t serve. In 2024, we will continue to focus on growing our merchant base by catering to businesses who conduct only B2B transactions that were differentiated B2B offering.

We are building on our commitment to help merchants sell to all of their customers from a single unified commerce platform with upgrades to our B2B offering, including headless B2B storefronts, and support for sales reps in the admin, among others, as we look to establish our B2B offering as a leader in commerce. With over 70% of Shopify’s online checkouts in the year made via mobile devices, it is vital for a merchant to integrate commerce into more platforms to effectively discover and engage their customers. Our investment in the Shop App, which offers an instant mobile storefront and built an audience of millions of new buyers continues to become a powerful free channel for our merchants. In Q4, the Shop App nearly reached $100 million in GMV in a single month, underscoring the immense value we can bring to our merchants, a feature that is only available if you are on Shopify.

We also brought in Shop to include web experience, providing more touch points for our merchants to maintain customer relationships. We’ve continued to unlock new ways for our brands to foster genuine connections with their consumers through the Shop App. After our successful collaboration with Drake last quarter, we partnered with MrBeast on a video that has attracted more than 165 million views. MrBeast invited viewers to use the Shop app to request a holiday gift from a Shopify merchants. This helped drive the Shop app into a top three spot in Apple’s free iOS apps chart and hundreds of thousands of fans participated with thousands of gifts from Shopify merchants shipped to their doorstep. All of this is powered by Shopify as we continue to unleash new ways for merchants to engage and drive authentic connections with their customers.

In 2024, we look to further refine the way merchants interact with their customers through the Shop App and drive customer engagement, increase sales and build long-term relationships with their customers. Let’s now talk about our international initiatives. Shopify is continuing to invest in building products that work for more merchants and more buyers across different parts of the world. Cross-border GMV was approximately 14% of total GMV in the quarter. And within Europe, we continue to see strong growth from both our existing merchant base as well as growth in new merchant additions. With EMEA, now over $1.2 billion in annual revenue and representing 27% of our total merchant base, we’ve proven that our go-to-market and investments into expanding our capabilities and localization efforts are working.

Our go-to-market teams have had an incredible year expanding their brands on our platform with the recent international brands that have signed or launched with Shopify, including London-based clothing label Boden, our largest deal in the UK in our history. German curated Home & Living company, Westwing, Berlin-based active brand, OCEANSAPART, Japan headquartered, Suntory, the well-known beverage multinational and On Running, the Swiss athletic sports company that has taken the footwear category by storm, just to name a few. On Markets Pro, we continue to enable our go-to-market to increase the adoption of this product. In the past quarter, thousands of merchants to leverage Markets Pro for cross-border sales and over the Black Friday-Cyber Monday weekend, 15% of all global orders were cross-border.

Brands such as the Red Hot Chili Peppers and Zpacks launched in Markets Pro, and we’re eager to extend this offering to more countries in 2024 and beyond. Our key product initiatives to drive our international growth include additional localization of the online store and themes, more integrations with local shipping carriers, launching Shopify’s tax platform to global merchants, making point-of-sale available in more markets and integrating with local marketplaces and sales channels. We’ve hit the ground running in 2024, maintaining our momentum post-holiday season, just like our merchants, with a strong push to build on our 2023 traction in enterprise and the release of our winter editions. First, on our enterprise efforts. We kicked off 2024 at NRF, which is the conference for enterprise retail and Shopify showed up.

Despite it being only our second year of attendance, the engagement level and pipeline of GMV opportunities we encountered this year compared to the last was remarkably different. Our enterprise offerings, whether full stack, headless or composable are gaining widespread recognition. We engage with hundreds of large established brands and businesses, making our presence felt while also announcing partnerships with Mirakl, Google Cloud Marketplace, Slalom and Manhattan. Just as we developed a robust ecosystem for entrepreneurs and SMBs, these partnerships further underscore our strategic positioning as a key player in the enterprise sector across all facets of commerce. This is steadily paving more enterprise pathways towards Shopify, and we plan to amplify our presence this year as we build on our momentum.

Two weeks ago, our winter addition dropped. If you haven’t checked it out yet, you really should. Our most recent edition span across the pillars of conversion, channels, marketing and operation. All of the areas that are foundational to a merchant success. This is our fourth addition in just two years, each time introducing over 100 new features and updates, a clear demonstration of our commitment to building the best product to make commerce better at a velocity unmatched in the industry. Before I wrap up and hand it over to Jeff, I want to say thank you to our team for consistently bringing their A-Game, their innovative ideas and their challenger mind-set to advance our mission and make the heart things easier. Building a unified commerce operating system that delights millions of merchants across the globe is hard, but Shopify is great at solving hard problems.

We are operating at an unparalleled level in our history from the incredible work of the thousands of people that work at Shopify all over the world. Thank you for your adaptability and unwavering efforts to preserve and expand entrepreneurship and for giving our merchants superpowers. To wrap it up, we delivered in 2023. For 2024, we will not slow down. We will be relentless in our craftsmanship of our foundation to keep us at the center of commerce and building the future for entrepreneurs, for those that are adaptable, unapologetic and ready. With continued advances in technology and the changing consumer landscape, we believe more and more individuals will continue to try their hand and entrepreneurship. When they do, Shopify will be there as we have been for nearly two decades, building commerce to make it simpler, easier and more democratized.

And with that, let me turn the call over to Jeff.

Jeff Hoffmeister: Thanks, Harley. 2023 was certainly a phenomenal year for our merchants and our team. Our powerful platform, mission-driven investments and focus on execution are providing a strong foundation for our merchants to compete and thrive and this past quarter was no exception. Let’s dive into our quarterly results, and then I will provide a summary at the end of my comments. GMV in Q4 was $75.1 billion, up 23% year-over-year, delivering the highest quarterly GMV growth rate since the pandemic driven growth rates of 2021. Moreover, this resulted in our quarterly GMV growth rate increasing sequentially for each quarter of 2023. The Q4 GMV results stem from the following. Same-store sales growth for our existing merchants, continued growth in our merchant base globally, strength in EMEA, which grew 40% in the quarter from both strong same-store sales growth and new merchant acquisition with growth from our existing merchant base being the larger contributor this quarter.

And finally, 28% growth year-over-year in our offline business, driven primarily by larger retailers joining the platform. Turning to revenue. Revenue for the fourth quarter was $2.1 billion, up 24% year-over-year which translates into 30% year-over-year growth when excluding the logistics businesses. This represents the third consecutive quarter that our growth has been greater than 25% on an organic basis ex logistics. Our strong Black Friday-Cyber Monday weekend and continued strength through the holiday season were the key drivers of this Q4 outperformance. Increased payments penetration, which hit 60% in Q4, and strong growth in the number of merchants on our platform were also key drivers of our overall revenue growth. I will now get into the key dynamics of our two revenue streams: Merchant Solutions and Subscriptions, which will provide you some additional detail on our outperformance.

Q4 Merchant Solutions revenue was $1.6 billion, increasing 21% year-over-year, driven by growth in GMV, which came in stronger than our expectations on the back of a particularly strong Black Friday-Cyber Monday weekend and overall Q4 holiday shopping season for our merchants, continued penetration of Shopify Payments and strength in our merchant solutions products, particularly Markets, Shopify Tax and Installments, with those contributions partially offset by not having the logistics business in the quarter, which, as I mentioned a few moments ago, had a 600 basis point impact on our total revenue year-over-year growth rate. $45.1 billion of GMV was processed on Shopify Payments in the fourth quarter, 32% higher than in the fourth quarter of 2022.