Shopify (NYSE: SHOP)
Q4 2020 Earnings Call
Feb 17, 2021, 4:30 p.m. ET
Corporate Participants:
Katie Keita — Senior Director, Investor Relations
Harley Finkelstein — President
Amy Shapero — Chief Financial Officer
Tobi Lutke — Founder and Chief Executive Officer
Analysts:
Brad Zelnick — Credit Suisse — Analyst
Thomas Forte — D.A. Davidson & Co. — Analyst
Craig Maurer — Autonomous Research — Analyst
Kenneth Wong — Guggenheim Securities — Analyst
David Hynes — Canaccord Genuity — Analyst
Mark Zgutowicz — Rosenblatt Securities — Analyst
Colin Sebastian — Robert W. Baird & Co. — Analyst
Siti Panigrahi — Mizuho Securities — Analyst
Matthew Pfau — William Blair & Company — Analyst
Paul Treiber — RBC Capital Markets — Analyst
Trevor Young — Barclays — Analyst
Drew Foster — Citigroup — Analyst
Ygal Arounian — Wedbush Securities — Analyst
Josh Beck — KeyBanc Capital Markets — Analyst
Brent Bracelin — Piper Sandler — Analyst
Brian Peterson — Raymond James — Analyst
Presentation:
Operator
Thank you for standing by. This is the conference operator. Welcome to the Shopify Fourth Quarter 2020 Financial Results Conference Call. [Operator Instructions]
I would now like to turn the conference over to Katie Keita, Director of Investor Relations. Please go ahead.
Katie Keita — Senior Director, Investor Relations
Thank you, operator, and good morning, everyone. We are glad you can join us for Shopify’s fourth quarter and year-end 2020 conference call. We are joined this morning by Tobi Lutke, Shopify’s CEO; Harley Finkelstein, Shopify’s President; and Amy Shapero, our CFO. After some brief prepared remarks by Harley and Amy, 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 assumptions, risks and uncertainties in our press release this morning, as well as in our filings with US and Canadian regulators.
Note that the adjusted financial measures we speak to today are non-GAAP measures, which are not a substitute for GAAP financial measures. Reconciliations between the two can be found in our earnings press release. And finally, we report in US dollars. So all amounts discussed today are in US dollars, unless otherwise indicated.
And with that, I turn it over to Harley.
Harley Finkelstein — President
Thanks, Katie, and good morning, everyone. 2020 was the year of the entrepreneur. Entrepreneurs worldwide demonstrated grits, meeting the challenges presented by a global pandemic that forced businesses to think completely differently and which also pushed more buyers online. Our merchants inspired Shopify to level up and pursue our mission of making commerce better for everyone with even greater energy. I’m proud to say that entrepreneurship is in a better state and more businesses are surviving the pandemic because of the work that we do here at Shopify.
We broke new ground across the Company in 2020. A number of merchants from early stage entrepreneurs to enterprise level brands show Shopify to launch and to scale their business. At the end of 2020, we had more than 1.7 million merchants around the world reaching further economic independents with Shopify, with merchants from outside our core English-speaking geographies continuing to increase as part of our mix. Approximately 3,000 merchants joined Shopify Plus, our subscription plan for larger and more complex merchants, bringing the total number of Plus merchants to more than 10,000 at year-end. Shopify reimagined new ways of working as we permanently shifted to a remote work model, which gives employees the freedom to work from almost anywhere and empowers us to recruit top talent from around the world. And our merchants generated approximately $120 billion in GMV, which nearly doubled year-over-year for three consecutive quarters in 2020.
Shopify is getting more entrepreneurs to that magic moment of their first sale. In 2020, a new business on Shopify made their first sale every 28 seconds on average versus nearly every minute in 2019. On an aggregated basis, our merchants would rank us the second-largest e-commerce retailer in the US, a lead that further expanded this past year. At the center of gravity of retail shifts firmly from off-line to online, Shopify continues to innovate for the future of commerce for merchants of all sizes. Today, I want to talk about four key trends that we believe will define this new era. First, consumers are voting with their wallets, so we’re making it easier for them to go directly to the merchants and the brands they want to buy from. In April last year, we launched Shop, our all-in-one mobile shopping assistant, which helps form authentic and lasting relationships between buyers and their favorite brands. Shop features curated merchant lists, including local shops and Black-owned businesses and from day one of Shop’s launch 100% of the delivery emissions produced by every single order using its accelerated checkout, Shop Pay, have been automatically offset at no charge to Shop users or the brand.
Second, retailers are prioritizing buyer retention. We see large companies are pushing acquisition costs up in their bid to attract customers. So, we’re innovating some merchants can build strong and lasting relationships with buyers and keep them for years. The Shop experience is built for buyer retention with features like our accelerated checkout, Shop Pay; our buy-now-pay-later product, Shop Pay Installments, and real-time delivery tracking. By the end of 2020, Shop had more than 100 million registered users, including both buyers that have opted into Shop Pay, as well as users of the app, of which more than 19 million were monthly active users at the start of this year. By the end of 2020, Shop Pay had facilitated close to $20 billion in cumulative GMV since its launch in 2017.
Third on the list is the growing popularity of modern financial solutions. Products like Shopify Capital are increasingly sought out by entrepreneurs and small businesses that face unnecessary barriers to access from traditional banks. Merchant empathy runs deep at Shopify, when traditional institutions were turning away small businesses because of perceived high risk, we financed a record number of merchants when they needed it most. And we also introduced Shopify Capital to Canada and to the UK in 2020 to expand where we can help merchants.
Shop Pay Installments, which we began rolling out to US merchants in our third quarter, let’s merchants offer flexible payment options to their buyers. Buy-now-pay-later product, especially resonate with young consumers, who since the start of the pandemic have contributed to the significant shift in online spending. We also made Shopify Balance available for early access in Q4, enabling merchants in the US to easily open no fee business accounts, separating business finances from the personal finances and giving them greater clarity on the health of their business.
Finally, the power of omnichannel. As e-commerce captures a greater share of retail, omnichannel commerce becomes even more critical for businesses. We continue to strengthen our multi-channel value proposition in 2020 adding more ways to help merchants get discovered by new buyers, including Facebook Shops, Walmart, Pinterest and TikTok. We are also making it faster and easier to checkout in other channels. Earlier this month, Shop Pay was made available for the first-time off the Shopify platform to Shopify merchants on Instagram and we’ll rollout to Facebook in the coming weeks. Once fully implemented, with Shopify Payments as the processor of all transactions with Shopify merchants on both the social services, not only will merchants have a conversion advantage of accelerated checkout through Shop Pay, but it will enable merchants to manage all of their Facebook and Instagram selling directly within Shopify.
Brick-and-mortar merchants that came to Shopify as their storefronts closed during the pandemic discovered the importance of omnichannel commerce as they opened online stores attracting broader buyer audiences. And with the release of the Shopify all-new point of sale software combined with our tap-and-ship hardware, these retailers are enjoying the benefits of a unified back-office that allows for integrated view of business operations and various omnichannel functions. These include buy online pickup curbside, buy in-store ship to customer and local delivery, all of which increasing popularity with buyers during the pandemic as a convenient way to get their products.
Shopify Shipping offers merchants another simple and affordable way to get products to buyers. In Q4, adoption of Shopify Shipping by eligible merchants increased to 52% up from 45% this time last year and we continue our work to democratize fulfillment for entrepreneurs through the Shopify Fulfillment Network, offering fast and affordable services to buyers. The progress we made through the year on our platform set our merchants up for success during the global Black Friday, Cyber Monday shopping weekend, when Shopify merchants exceeded $5.1 billion in GMV, selling to more than 44 million consumers worldwide. In addition to this record setting weekend, we saw holiday shopping start earlier and with more consumers supporting local independent businesses.
Merchants on our Shopify Plus plan benefited from the power of the entire platform. Strong sales by merchants on Shopify Plus throughout the holiday shopping season was an outsized contributor to our phenomenal fourth quarter GMV and revenue growth, which has been typical for our fourth quarter. Shopify Plus offers greater value and simplicity to the most complex brands compared to non-Shopify alternatives. We are enabling more traditional retailers to directly reach their customers with speed and agility as their in-store sales channels vanished during the pandemic and giving digital-native brands the tools to distinguish themselves in this modern era of commerce.
With a record number of merchants subscribing to Shopify Plus in 2020, we saw a diverse fleet of notable brands launch in Q4, including international skincare brand, Dermalogica; fashion designer Elie Tahari; Japanese motorcycle brand, Yamaha; California surfwear brand, O’Neill; International Furniture Company, Herman Miller; famous greeting card company, Hallmark; one of the world’s largest makers of wines and spirits, Diageo; ALDI mobile from discount grocery chain, ALDI; and popular dog food brands from Nestle’s Purina.
Our summary of 2020 would be incomplete without acknowledging the enormous contribution of our partners to our merchants success. Over the course of the year, more than 42,000 partners referred a merchant to Shopify, up 72% compared to the 12 months ending December 2019, underscoring the strong demand for our partner skill sets in the shifting commerce landscape. Our partners played an incredibly important role in helping our merchants to adapt to the rush to online shopping, getting stores up and running fast and preparing our merchants to maximize new opportunities. To shape their stores with the features that are important to them, merchants made heavy use of our incredibly rich portfolio of more than 6,000 apps. With our app partners alone earning more than $230 million from Shopify in 2020. We are excited to continue expanding our partner ecosystem in 2021 outside our English-speaking geographies in particular. And Shopify would not have been able to accomplish the amazing things we did in this unprecedented year without our employees. I want to say thank you to all of our employees for your heart and your unfailing dedication to our mission and to our merchants.
To wrap up, if 2020 taught us anything it is that the world needs more entrepreneurs. Their ability to remain resilient and embrace change is why we believe the future of commerce is brighter than ever. Entrepreneurs are the backbone of our economies and we need them to help our nation’s recover from this pandemic. Shopify is here to give them the tools they need to adapt and evolve through the future that emerges, making commerce better for everyone.
And with that, I will turn it over to Amy.
Amy Shapero — Chief Financial Officer
Thanks, Harley. Our merchants truly exemplified the spirit of entrepreneurship in 2020 and, along with years of strategic investment and strong execution by Shopify, they helped propel us to exceptional Q4 and 2020 results.
Revenue nearly doubled once again in our fourth quarter to $977.7 million, up 94% over the same period last year. Subscription solutions revenue of $279.4 million accelerated to 53% growth year-over-year, largely due to exceptional growth in monthly recurring revenue. MRR growth also accelerated to 53% year-over-year to $82.6 million in Q4 as a high number of new merchants joined the platform in the quarter following record merchant adds in the third quarter. Q4 MRR also benefited from incremental new revenue from our Retail POS Pro subscription offering as subscription pricing came into effect in November 2020.
Shopify Plus contributed $21 million to MRR or 25% compared with 27% of MRR in Q4 of 2019, while Shopify Plus MRR grew significantly, non-Plus MRR grew faster, benefiting from a significantly higher number of merchants on standard plans joining the platform in 2020, as well as from our Retail POS Pro subscription beginning November 1.
Merchant solutions revenue grew 117% to $698.3 million in Q4 compared to the same period in 2019. This outstanding growth was driven primarily by merchant strong sales with GMV nearly doubling year-over-year to $41.1 billion in the fourth quarter alone. Strong Q4 GMV was the result of a greater share of retail spend going to online purchases and extended Black Friday, Cyber Monday shopping season and higher GMV per merchant. This strong growth in merchant sales combined with merchants increased adoption of Shopify Payments, Capital and Shipping drove revenue from these products higher. $19.1 billion of GMV was processed on Shopify Payments in Q4, an increase of 116% versus the comparable quarter last year. Payments penetration of GMV was 46% versus 43% in Q4 2019 and more than 1 percentage point over Q3 this year. The majority of new merchants coming on to Shopify opted to use Shopify Payments and Shopify Plus and international merchants expanded their share of GPV year-over-year.
Demand for Shopify Capital remained strong in Q4 with merchants receiving $226.9 million in funding across the US, the UK and Canada, up 96% versus the same period last year and the highest year-over-year increase in funding in 10 quarters. Our data algorithms and prudent risk management help keep loss ratios in line with historical periods. We are proud to stand with our merchants and provide them with convenient access to funding to help get them through the most difficult of times because we know that ultimately when our merchants succeed Shopify succeeds.
Adjusted gross profit dollar growth accelerated to 89% over last year’s fourth quarter to $510.6 million, reflecting strong revenue growth despite the significantly greater mix of lower margin merchant solutions revenue versus last year and the ramp-up of investment in Shopify Fulfillment Network.
Adjusted operating income was $200 million in the fourth quarter compared to adjusted operating income of $28.5 million in the fourth quarter of 2019 as our strong revenue performance in the quarter greatly outweighed spending.
Adjusted net income for the quarter was $198.8 million, or $1.58 per diluted share, compared with adjusted net income of $50 million, or $0.43 per diluted share in last year’s fourth quarter.
Finally, our cash, cash equivalents and marketable securities balance was $6.39 billion on December 31. With a strong balance sheet, we are well positioned to fund our growth initiatives and help merchants capitalize on the trends that Harley spoke to earlier.
Shopify enters 2021 stronger and more mission-focused. This year, we will continue our important work of building a global commerce operating system to arm independent merchants everywhere with the tools they need to build their own businesses and take advantage of the strong secular shift to online commerce. This translates to executing on a portfolio of growth initiatives that put Shopify into the hands of more entrepreneurs, unlocks the value of the platform for our merchants and increasingly delivers scale benefits. Three key areas of incremental investment in 2021 are Shopify Fulfillment Network, the Shop app and international expansion.
Starting with Shopify Fulfillment Network. We capped off a year of significant progress with the successful fourth quarter, advancing the development of our fulfillment service. In Q4, we continued to harden our systems, executed multiple flash sales and smoothly processed record volume through the peak holiday season. We also shipped our first self-service onboarding system, making it easier for merchants to access our network. We announced Shopify Fulfillment Network 18 months ago to reduce the complexity of fulfillment for our merchants and our network is taking shape. In 2020, we opened an R&D warehouse in Ottawa to test fulfillment technology, built out a network of warehouse and transportation partners, enhanced our merchant-facing app to provide updates on inventory and orders and assembled a team of fulfillment success managers to simplify the merchant experience. We also learned a few things along the way that are informing the development of our product, most important of all kind of optimize to provide fast, accurate and affordable fulfillment with great customer service. This will be reflected in much of our decision-making, including the partners we work with and the design of our network.
As we planned when we started this journey a year and a half ago, we will use 2021 to continue improving product-market fit to focus first on quality and merchant delight before we scale our fulfillment capabilities. This means iterating on the software that tightly integrates fulfillment into our tech stack, optimizing our node network, which may involve adjusting our network of warehouses to best serve our merchants needs and accelerating our merchants onboarding journey. We also plan to continue to invest in the automated fulfillment technologies of 6 River Systems, which recorded strong revenues in our fourth quarter and exceeded 2020 bookings expectations. 6 River Systems technology has helped improve the productivity of Shopify Fulfillment Network and we believe will play an important role in supporting our scaling efforts.
Our Shop app is another area we plan to invest aggressively in 2021. We launched the Shop app just 10 months ago to help merchants strengthen their relationships with buyers with the ultimate goal of increasing customer lifetime value for our merchants. Since then we have placed the app into the pockets of millions of buyers, making it easier for them to rediscover and purchase from the merchants they love and introduced features to discover local shops and Black-owned businesses. In 2021, we will continue to develop the Shop app into a must-have shopping companion that fosters buyer loyalty and retention. We plan to invest in building features that will further reduce friction for buyers that more points along the shopping journey from discovery to delivery, creating value for both our merchants and their buyers.
And third international expansion. 2020 demonstrated just how big our addressable market is, year-over-year GMV growth by our international merchants outpaced overall GMV growth and our international merchant base grew within the overall mix. We continue to localize the platform in several regions in 2020, making it easier to sell cross-border and from a mobile device and launching Shopify Payments with a local payment method in Belgium, as well as in Austria. In Q4, we introduced local pick-up points in France, a popular delivery method in Europe. In 2021, we are focusing heavily beyond our core geographies to bring our omnichannel capabilities to more merchants. We expect to continue to localize our solutions and countries where we have established a foothold and increase investments in sales and marketing to bring Shopify to more merchants around the globe.
Another area we will incrementally invest albeit at a lower level is Retail POS. Retail merchants demonstrated resilience in a tough year, adapting to socially distant selling, our Retail POS product, especially resonated with businesses, wanting to seamlessly bridge their online and off-line operations and buyer-facing experience. Momentum continued in Q4 as more merchants adopted our POS offering and GMV increased to record levels, delivering a real turnaround from the first half of the year. In 2021, we will continue to grow merchant adoption of our Retail POS and POS Pro offering by investing in foundational technologies to make things like onboarding easier and our sales team expanding our POS products to more countries and in executing our go-to-market strategy. We believe our investments in international and Retail POS will help expand Shopify’s presence and enable us to capture more of our TAM, while encouraging more entrepreneurs around the world to start businesses on and off-line. We’ve intentionally invested in both these areas over the past couple of years and expect them to deliver returns over the next couple of years.
As always, we intend to invest in our future across the business, including our platform, which encompasses our core and Shopify Plus offerings and our established merchant solutions Shopify Payments, Shipping and Capital. These products, which are profitable today, give merchants the fundamental tools to start and grow their businesses and have been critical in setting Shopify’s flywheel in motion. While these tools are designed to make selling easy, our platform also allows for extensibility and a focus in 2021 is on continuing to enhance developer tools for merchants who want to customize their experiences beyond what’s available out of the box.
In 2020, years of investment in our platform paid off as the future of retail was pulled forward, enabling Shopify to act fast to help our merchants adapt during the pandemic and encourage more entrepreneurs to begin their journey. In 2021, we plan to execute on our product roadmaps, bringing our solutions to more merchants around the world and strengthening our value proposition as a leading global commerce platform.
2020 was an exceptional year of growth in revenue and adjusted operating income for Shopify, driven by the unprecedented acceleration of e-commerce by COVID, which drove an acceleration in the growth of GMV and new merchants on the platform and the increased adoption of merchant solutions. We believe the change behaviors adopted by merchants and consumers in 2020 have expanded the prospects for entrepreneurship and digital commerce significantly.
Our outlook coming into 2021 assumes that as countries rollout vaccines in 2021 and populations are able to move about more freely, the overall economic environment will likely improve. Some consumer spending will likely rotate back to off-line retail and services and the ongoing shift to e-commerce, which accelerated in 2020, will likely resume a more normalized pace of growth. For the full-year 2021, we expect subscription solutions revenue growth to be driven by more merchants around the world joining the platform in a number of lower than the record in 2020, but higher than any year prior to 2020.
The growth rates of subscription solutions and merchant solutions revenues are likely to be more similar than in the recent past as we do not expect the surge in GMV that drove merchant solutions in 2020 to repeat. And merchant solutions revenue growth to be driven by continued GMV growth from existing merchants and new merchants joining the platform and expanded adoption of Shopify’s growing menu of merchant solutions, including established offerings, such as Shopify Payments, Shopify Shipping and Shopify Capital, both geographically and as merchants grow into them, while newer solutions, such as Shopify Fulfillment Network and 6 River Systems contribute nascent but incremental revenue in their early stages. As a result, we expect that we will continue to grow revenue rapidly in 2021 albeit at a lower rate than in 2020.
With regard to seasonality, while we expect that Q1 will still likely contribute the smallest share of full-year revenue and Q4 the largest, the revenue spread may be more evenly distributed across the four quarters than it has been historically to the degree the rollout of the vaccine shifts more spending to services and prompts more off-line shopping towards the back half of the year. 2020 catapulted commerce into a period of incredibly rapid change, presenting Shopify with unprecedented opportunities in 2021 to accelerate innovation. We expect rapid growth in gross profit dollars in 2021 and plan to deploy substantially all of these dollars effectively, investing back into our business as aggressively as we can.
In research and development, we are launching an ambitious hiring campaign for engineers that we expect will gain strength over the course of 2021. In sales and marketing, we expect to increase online marketing spend into increased global demand, add to our global sales teams to capture more Shopify Plus and POS merchants, both in North America and internationally and expand product marketing to help merchants take advantage of the full range of capabilities on the platform. For 2021, we anticipate stock-based compensation expenses and related payroll taxes of $465 million and amortization of acquired intangibles of $21 million.
As many of you, who have followed us for years know, we have always prioritized long-term value over short-term financial opportunities because we don’t manage our business to achieve short-term discrete financial results, we are replacing quarterly and annual numeric ranges with information on directional indicators, the primary levers driving our financials and the assumptions that guide our planning. Spending more time discussing the inputs instead of trying to predict a specific financial output should build a greater understanding of the many moving parts at Shopify, the areas that are profitable today those where we are incrementally investing and trends that shape our revenue and cost structure over time. We ultimately hold ourselves accountable for returns on our investments by whether or not they move the needle for our merchants because it is their success that ultimately drives our own.
In closing, Shopify has a massive opportunity to shape the future of commerce and we are excited about 2021. We believe we are investing in the right initiatives to urgently build out the commerce infrastructure that will give our merchants and Shopify the edge to win, positioning us and our merchants for success this year and into the future.
I’ll now hand the call back to Katie.
Katie Keita — Senior Director, Investor Relations
Thanks, Amy. Before handing it over to Ariel for Q&A, let me remind you to limit yourself to just one question, that includes related question. It’s still another question, so just keep yourself to one, that way we should have enough time to get to everyone who has question on today’s call. Ariel, can you now open up the line?
Questions and Answers:
Operator
Certainly. [Operator Instructions] Our first question comes from Brad Zelnick of Credit Suisse. Please go ahead.
Brad Zelnick — Credit Suisse — Analyst
Great. Thanks and congratulations on the strong Q4. My question is in respect to your focus on helping solve merchant pain points and how you’re thinking about the investments required to help merchants with discovery heading into ’21? And related to that, how should we think about the impacts of the iOS app tracking transparency changes on a merchants’ ability to directly reach targeted customers?
Tobi Lutke — Founder and Chief Executive Officer
Yeah. Hey. This is Tobi. I mean, no concrete, like things that announced right now. Obviously, I mean, Shop’s clearly the most relevant surface for discovery. There’s some minor potential of discovery right now because it pointing you to look at businesses and then the con businesses. So, that’s — we expect that to continue and — but again, like the purpose of a app is not a — is to increase LTV of customers, not necessarily optimize for your transactions in which way, it’s like — and a lot of differences that you will see in the Shopify [Phonetic] flow from this particular optimization target, that’s not a norm in retail.
And then the related question, like it’s too early to tell on the tracking changes. It will remix a whole lot of things in the advertising space, but that’s totally normal. That space is rapidly evolving usually in the form of new tools that’s coming online or new discovery is being made or people staying the time in new channels. Everyone in this space say that’s used to rolling out new strategies when the boundaries change. So, it’s usually of entrepreneurs that — who are the most adaptable, I think they’ve proven this during COVID, and people that