Shopify Inc. (SHOP) Earnings Call Transcript & Summary

Right. Great. Let's definitely talk about AI. I know that's -- we've gone through half the chat without mentioning it. So last call, a lot of great announcements, examples that Harley gave on the call. Maybe just for the audience here, there's a lot of folks in the room, like what is Shopify's approach as it relates to helping merchants with AI? What's the strategy?

Yes. Well, there's a couple of pieces. And obviously, it started with Sidekick, most specifically, which is something that Tobi announced a while ago now. And that is doing what we can to -- and this is why we call it Sidekick to basically capture the brain of an entrepreneur and have it be the Sidekick, the kind of person on your shoulder, helping give you advice in terms of some decisions you should be making to grow your business. And that is, in its own way, separate from everything that Harley talked about last quarter in terms of the things that we're doing, the partnership with Microsoft and things we're doing with catalog and checkout and all that. As it relates to Sidekick, like that is a technology which is focused on the merchant. And so I think what sometimes lost is a lot of people think about what is being developed in Agentic commerce for the consumer, which is excellent and needs to happen because for this "network" to happen, both sides of the network need to grow and need to get more sophisticated. And actually going a little bit back to your SEO comment, if you're a merchant and if the way that consumers find brands is going to change, then you need to adapt and get more sophisticated at the same time, and we're trying to make sure we have the tools for merchants to do that. And so in the "SEO-driven world' where you had to make sure you're trying to figure out the keywords or things to be found as a merchant, obviously, as those algorithms as the search platforms as a starting point for the consumer on their buying journey changes, how does a merchant adapt to that. And so we want to make sure that we are -- the catalog is effectively making sure we're the source of truth, the taxonomy, the library, the hence the name catalog for all the things that merchants have on their websites and capturing that in the most factual accurate way. How do we use our excellence in checkout to continue to via partnerships, make sure that the checkout experience is as wonderful as possible for both the consumer and for the merchant. And how do we help the merchant overall just succeed in a way where they feel like as a merchant, if you're not using the Shopify platform, you're making life harder than it should be. And that's what we're really trying to do.

Right, right. Got it. And in terms of the way this flows through to the financials, is there plans to kind of have incremental monetization of these AI features? Or is it, hey, we just want to make our merchants more efficient. If they're more efficient and can target customers better, obviously, you get paid for that at the end of the day. What's kind of the monetization strategy?

Yes. When you look at Sidekick, this is something that's really been built into the platform. And when you look across all of tech, as you know, there's some business models that are built on monetizing AI. There are some companies that have both some AI platforms that they charge for and other stuff that's built into the platform. For us, right now, this is what we're building into the platform. This is separate from some of the things we talked about Agentic commerce, right? If someone is coming in through an LLM and they're using Shopify Payments or a form of Shopify Payments in the engine, obviously, we get monetized for that. But as it relates to the advice, the Sidekick, helping merchants be successful, where we are right now is building it into the platform. And as you know, like we are still in the very early stages of all this. So business models will change for everyone in this ecosystem, some a little bit, some drastically. But from our vantage point, we're trying to just help this whole process be successful as we do think Agentic commerce is good for the consumer.

Right. And as we think about Agentic commerce for Shopify, I mean, is your sort of take rate and opportunity in an Agentic-driven commerce kind of the same or greater than in a traditional sense? Like how should we think about that?

Yes. It's a good question, but it's just too early. So -- and it's -- and that's just a function of a lot of these -- a lot of the LLMs are figuring out how they're going to do this. Google is adapting. Like everyone involved in the commerce side is adopting, and so there will be some changes I don't think we've seen yet. But I do know from our vantage point, we have an amazing set of merchants that we work with. We've talked about our market share in commerce. We talk about all the different just in terms of running these businesses, effectively the platform that runs these businesses, all the insights we get on that in terms of just from how they are themselves running their business, how they're thinking about marketing their business, how they're thinking about getting more consumers, all that stuff. So I think we're in a position where with the strength of our checkout, our knowledge of commerce, the products that we've built and everything there and especially with what we set in motion a while ago on catalog and how catalog has manifested itself is, again, kind of the source of truth for what's out there on the websites for our merchants. I think that puts us in a good spot.

Great. And I wanted to come back to some of the product innovation that you hit on earlier. But just for the audience, as we think about the biggest drivers for Merchant Solutions growth going forward, obviously, payments is still the bulk of that business, but there have been a lot of new products that seem to be doing well, whether it's tax, installments, markets, et cetera. How would you sort of stack rank the biggest growth drivers on the Merchant Solutions side of the business?

Well, I guess I would -- maybe I'm going to take it slightly differently and think about just the growth drivers overall, some in Merchant Solutions, some not because some of them are just broader. Like we've talked about international a lot, like that's -- that remains a very large opportunity, right? Even as successful as Europe has been as a percentage of our revenues, it's -- again, that's roughly 1/4, and we disclose all this by region. Like we -- do we have a lot of presence in Latin America? Yes. As a percentage of our revenue, is it still very small? Yes. Like in terms of what are we doing in the Middle East, what are we doing in Africa, what are we doing in India, like there's significant opportunity, Southeast Asia. As you know, we're strong in Australia, Japan, New Zealand. But there's a lot of countries where we have massive opportunity still. And so international is a big one. B2B is another important growth driver for us for -- in addition to B2B in and of itself, it's doing two things. It's essentially enhancing what we're doing for enterprises, which is another growth driver I'll get to in a second, but it's also getting us more and more industry verticals where we're serving and it's just really broadening the appeal or maybe the awareness by merchants in Shopify, and that's helped a lot. Enterprise continues to be an opportunity, not only in terms of what we're doing in the actual revenues, but just the breadth of things that merchants are buying from us. And Harley talks about that on a lot of the calls with a couple of big wins. And for some smaller merchants, when they see some very well-regarded large multinational retailer using our platform, that gives them the confidence, there's no way I'm ever going to outgrow Shopify, and so enterprise is helpful in itself, but it also brings a lot of ancillary benefits. Retail point of sale, if you will, is another thing which even though roughly 20% of commerce is online, there's 80%, which isn't, and so this gives us access to the other 80%. There's a lot of things -- good things going on there. We've talked about advertising. There's just a whole slew of things in addition to what's in other merchant solutions. Capital is the one in other Merchant Solutions that's been around the longest. So -- and it's had continued success. And as we talked about, the two new countries where we recently introduced it. So that one is one of the bigger drivers of that segment. But you're absolutely right when you look at like tax has been very successful, installments has been very successful. The FX feature functionality of payments, which is also an other Merchant Solutions have been very successful. So we feel good about it.

Yes. I guess is there anything as you look across the product portfolio that maybe hasn't gone as well as expected and could be an opportunity as you kind of reexecute and reimagine it?

Well, I think the biggest thing for us right now is because a lot of these products are still new, like I don't want it to get lost that these products are still new. The international push is still relatively new, like we have massive opportunity there. And so as we think about durability of growth going forward, it's a compilation of the S curves, the growth rates of all these products that really says, all right, of all these different segments, even if I had one maybe slow down or trip or something, I have so many others that can pick up the slack. But of course, our goal is to have none of them slow down.

Right, right. You hit on enterprise and that opportunity. Clearly, the accelerating GMV growth, I think, is another strong signal that you're adding larger merchants to the platform and certainly we can see from Salesforce and Adobe's disclosures that their commerce offerings kind of continue to slow. So what have been the big unlocks in the enterprise space? And how have you kind of seen that competitive landscape evolve?

Well, I think for the enterprise space, it's -- I think, sometimes forgotten the capabilities of the platform really going into this because it's about 3 years ago -- roughly 3 years ago where we really started to make a bigger push to go to the larger markets. Plus at that point, still had been primarily a mid-market solution. But when you think of the flash sales that we've done for some of the biggest celebrities out there and some of the biggest brands out there that will have a huge spike in traffic on a given day. So for example, if a famous singer who I won't name who like has a big merchant drop and says tomorrow at noon, we're having a merchant drop and the demands on the network on our platform are super high, and if we can handle that, we can handle what some multi -- large multinational needs to do on any given day in terms of what they're doing. And so enterprise for us, I won't call it only a go-to-market effort, but it was largely kind of how do we build the system around what is already there from a technology perspective, and so we started to build some of the partnerships with some of the SIs, which have been very helpful for us because whether the systems integrator is sitting alongside us or the systems integrator is advising the retailer or the merchant on what's the best technology out there, that's wonderful for us, to have like a third-party assessment of what's the capabilities of the platform because we have invested a lot in this platform. And we've built some great things, and we have a team of engineers that can build and enhance the product very quickly. And so how that platform continues to stand out, it's "easier" for the systems integrator to say Shopify is the best platform that use a merchant should be using. We had to grow some of the sales force, and that's something we set in motion a while ago is we've accomplished that in terms of general size. So it's not like we need to add a bunch of people there. B2B was a little bit different for us, but that's where we had to build some new capabilities. We had some B2B functionality in the platform before because even when you go back to some medium-sized merchants, for example, they may have the vast majority of their business be direct-to-consumer, but they probably had 5% or 10% that they maybe were selling through some bigger brand or retailer. And so they had a B2B element of the business. And so this was something which a couple of years ago, we said, hey, we should really make a concerted effort here, build out some of the modules. Sometimes it in terms of industry-specific functionality can get very nichey. And so it's not like you're building a new engine, but you are building out the UI, some of the flows, some of the things that help that. And that's helped the enterprise a little bit, too, because it's just the larger the business, the merchant is, the more likely to have a B2B piece. So that's helped. So in a lot of -- we say enterprise, but I'll just say larger merchants. So a lot of these larger GMV merchants, like it may be an Italian or French fashion house, which is still run by the founder or one of the children of the founder, and so there's still like founder mentality to these businesses, and that really helps, let's say, merchant we know and understand how they make decisions. But ultimately, we're helping platforms, merchants be more successful, and I think as we have -- and I alluded to this before, as we have more and more changes because of AI and other things, it makes a lot of merchants that have their own in-house platforms up into this point, say, I just can't adapt as quickly as Shopify can for me, and I think we're giving merchants for the first time a third-party software solution, which is better than anything that they could have had. And so in the past, they would have decided to build it. And so this enterprise segment is part of a great multiyear continued march for us in terms of maybe for one of the big brands, we get -- many of them have a lot of commerce stacks. So maybe we get one of their commerce stacks or maybe we just get payments across all their commerce stacks or maybe we just get A, B and C, and we kind of slowly start to build trust and build more and more solutions with them. And that's playing out in terms of what we're seeing in the funnel.

Right, right. So a lot of mix of displacing homegrown as well as some of the legacy.

It's still -- at this point, Tyler, it's still more homegrown than anything else, but we are definitely doing some displacements of other vendors.

Got you. Got you. I did want to hit on payments because obviously, that's an important part of the business. So how do you think about just the ability to potentially negotiate better economics on the payments business over time? And obviously, there was a somewhat recent partnership with PayPal. So just kind of walk through those dynamics for the audience.

Yes. I don't think there's anything in terms of renegotiating a contract where people would just say, oh, this fundamentally changes the economics of Shopify. I would -- we've obviously been successful in helping a lot of merchants for many years. And so we've been a platform that I think from a payments provider perspective, you want to make sure you're working with Shopify, just like we want to make sure we're working with all the platforms out there that merchants want to use. I think that's one of the things that's made us very successful is we try very hard to make sure that if a merchant wants a capability, a payments partner, a marketing partner or whatever, like let's give them the capabilities to do that. Let's put that all in the admin, which is what we did with PayPal. Let's put that all in the admin. So this is super easy for them to use whatever they think will help their business be more successful. It's a little bit like what we did with Stablecoin, too. Like there are certain geographies or niches, B2B is one where we say, you know what, we think this can have a real impact. Not everyone is going to use it, but that's okay. And that's some of the things we've seen with the Amazon partnership, too. Like let's give the merchants the tools to be successful. And so from a payments perspective, yes, our payments contracts generally come up every few years, and we have a great relationship with Stripe. We have this relationship with PayPal, which you just alluded to. We've worked with them for a while. We worked with them in France, obviously, working with them now in the U.S. We work with Adyen in Europe, which was a natural evolution as we were doing more in enterprise, and we're doing more in Europe, and that's obviously a particular strength for Adyen, and we had a few merchants in Europe that came to us and said, "Hey, we'd love to be able to do more and more with Adyen." And this obviously goes back a couple of years, and we obviously want to make sure that was in the platform.

Right. Right. And lastly, I did want to hit on margins. So obviously, free cash flow margin improvement was a big focus for you since you came in, and we've certainly seen that growth in the business, which has been great to see. But what are the sort of the next big areas of efficiency you're targeting? And how are you thinking about the role that AI plays in that kind of internally?

We've used AI in a lot of different segments internally. And we've also, as you've seen Tobi's memo, we've made sure that this is something people across the company use it, irrespective of department. And so I can tell you there are certain departments which have seen more aggressive adoption than others. And this is -- for us, this is acceleration of the capabilities of the team. How can we make an engineer accomplish more on a daily basis? How can we make our salespeople more efficient? How can we make our finance people more efficient, et cetera? How can we make our support capabilities even better? And it's not from a support perspective, for example, to say, well, we need to get headcount from X or Y. It's saying, let's make AI a powerful tool so that if a merchant calls in and wants to ask a question, maybe a "dumb" question, which they wouldn't normally ask a human, they feel like they have a sophisticated agent, AI agent that they can ask a bunch of questions with kind of work with that and if they have elevated questions and they get to a person. And so from our vantage point, it's how do we use AI throughout the business and give the whole business more leverage. And you can see that and obviously us keeping headcount flat for 2 years now and continue to grow the top line very meaningfully. And that's a function of using AI or automation more broadly to do everything we can to continue the product development, the engineering engine moving as quickly as possible.

Yes. And you think that's kind of sustainable in terms of keeping headcount flat with the top line growth?

Yes. Without giving specific guidance on anything, I think we feel good about what we can do with this headcount.

Awesome. Well, great. I know we're running out of time, Jeff. Thank you. Appreciate the discussion, and thanks, everyone.

Thank you.