Katie Keita - Shopify, Inc. Harley Finkelstein - Shopify, Inc. Russ Jones - Shopify, Inc. Tobias Albin Lütke - Shopify, Inc..

Justin A. Furby - William Blair & Co. LLC Ross MacMillan - RBC Capital Markets LLC Darren Aftahi - ROTH Capital Partners LLC Nikhil Thadani - Mackie Research Capital Corp. Gus Papageorgiou - Macquarie Capital Markets Canada Ltd. Kenneth Wong - Citigroup Global Markets, Inc. Jesse Hulsing - Goldman Sachs & Co. LLC Cengiz M.

Cakmak - Monness, Crespi, Hardt & Co., Inc. Michael Nemeroff - Credit Suisse Deepak Mathivanan - Barclays Capital, Inc. Brian L. Essex - Morgan Stanley & Co. LLC Richard Davis - Canaccord Genuity, Inc. Colin Alan Sebastian - Robert W. Baird & Co., Inc. Jonathan Allan Kees - Summit Redstone Partners LLC Samuel James Kemp - Piper Jaffray & Co.

Monika Garg - KeyBanc Capital Markets, Inc. Terry Tillman - SunTrust Robinson Humphrey Samad Samana - Stephens, Inc. Todd Coupland - CIBC World Markets, Inc. Suthan Sukumar - Eight Capital Kevin Krishnaratne - Paradigm Capital, Inc. Brian Peterson - Raymond James & Associates, Inc..

Good morning. My name is Sharon and I will be your conference operator today. At this time, I would like to welcome everyone to the Shopify Q2 2017 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you.

Katie Keita, Head of Investor Relations, you may begin your conference..

Thank you, operator, and good morning, everyone. We are glad you can join us for Shopify's second quarter 2017 conference call. We are joined this morning by Tobi Lütke, Shopify's highly ranked CEO; Harley Finkelstein, our COO; and Russ Jones, our CFO. After prepared remarks from Harley and Russ, we will open it up for your questions.

Once again, we will make forward-looking statements on the call today. These are based on current assumptions and are 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.

Information about these risks and uncertainties is included in our press release this morning as well as in our filings with Canadian and U.S. Securities 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 two 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. The excellent momentum we started out the year with continued into the second quarter. The biggest news, of course, has been that the number of merchants joining Shopify continues to expand every quarter, as we've recently surpassed the 0.5 million merchant milestone.

And while it is very important to us to foster entrepreneurship by removing barriers to commerce, it is even more important to us to ensure our merchants have every possible means to succeed. We made a lot of progress towards the second goal as well in Q2.

We added more sales channels, we rolled out new features, and we continued to grow the value of our ecosystem. Several of the announcements we made at Unite Conference came to light over the past few months. Among them, Shopify Pay, which accelerates checkout, and our EMV card reader designed specifically for the Shopify merchants.

Both of these are off to a strong start and should prove to be helpful to Shopify branding and increased name recognition, as well as conversions for our merchants, especially as the Shopify Pay network expands. We do Shopify Pay as a helpful interim step on a journey to streamline checkout even further. The early indicators are good.

We continue to expand our sales channels to help merchants reach new customers and new places. Both BuzzFeed and Wish are now live, and we recently announced that we'll be adding eBay as a channel, making it the second large e-commerce marketplace, natively available to Shopify merchants.

Listing on eBay exposes over 167 million shoppers to our merchants' products and expands the product options for eBay's users. We expect the eBay channel to be available to merchants in the U.S. later this year. Adoption of our merchant solutions also continues to grow. More than a quarter of Shopify merchants that are shipping from the U.S.

and nearly 20% of those shipping from Canada use Shopify Shipping in Q2. And with all the cash advance offers now benefiting from machine learning for the entirety of the second quarter, we nearly doubled the number of capital advances in Q2 over Q1.

The total cumulative amount of cash advanced by Shopify Capital reached $86 million by June 30 and stands at over $95 million as of today. Moving on to partners, as most of you know, the large number of partners that are building on and for our platform are a key differentiator. Scale makes a difference here.

The number of submissions to our App Store in Q2 doubled over last year, and those that get approved are making the App Store more valuable to merchants overall, as reflected in the continued increase in app spend per merchant.

We now have more than 13,000 partners who have referred merchants to Shopify in the last 12 months, up from 12,000 just last quarter. This ecosystem has been a steady source of new merchants to Shopify and our third strongest acquisition channel behind organic traffic and paid marketing.

Partners are particularly important to building our higher touch Shopify Plus business. Not only did we continue to expand the number of Plus Partners in the quarter, we augmented our program with the addition of nearly 50 Shopify Plus technology partners.

Because Shopify Plus merchants have unique needs, it is important to connect them with proven technology partners that have been vetted and certified by the Shopify Plus Partner team. These partners, along with our own Shopify Plus sales hackers, continue to on-board some of the largest and most recognizable brands to Shopify Plus.

Companies that launched stores on Shopify this quarter include Visa, Frito-Lay, Jones New York, BuzzFeed, Elvis Presley, Canadian Tire and The New York Times. Shopify appeals to renowned brands like these for many reasons, attractive price, scalability and resilience of the platform, and ease of use.

I point this out because it highlights just how vast our total addressable market is. It is essentially anyone wanting to make more money than their shop costs them, an appeal that is universal and that helps to explain why we have added ever larger numbers of merchants for the last three quarters straight.

And while we cannot expect every single merchant to succeed, we are confident that Shopify gives the merchants the best chance at success on a platform that we're making better all the time. And with that, I'll turn it over to Russ to cover the financials..

Thanks, Harley. Q2 was another strong quarter with an increasing number of entrepreneurs, SMBs and larger brands both starting and growing their businesses on the Shopify platform. In Q2, we again grew revenue 75% year-over-year to $151.7 million, driven by rapid growth in both elements of our business model.

Subscription Solutions revenue growth accelerated from last quarter to 64%, coming in at $71.6 million. This strength was driven by the monthly recurring revenue growth of 64% to $23.7 million, as we had another record number of merchants join Shopify in Q2.

In fact, today, Shopify is serving over 500,000 merchants on our platform, more than double the number we were serving at the start of last year. The contribution to MRR from Shopify Plus also grew to 18% of overall MRR or $4.3 million compared with 13% of MRR for Q2 of 2016.

MRR from Shopify Plus includes only the minimum contracted subscription value. Any incremental revenue stemming from the variable pricing structure we introduced in February is counted in Subscription Solutions revenue, not MRR. These amounts are not significant at this stage. Merchant Solutions revenue grew 86% to $80.1 million.

Growth of gross merchandise volume was the primary driver, aided by Shipping and Capital, as adoption of each of these continued to expand in Q2. Our Merchant Solutions take rate grew to 1.37% of GMV from 1.28% of GMV in Q2 of last year.

GMV grew to $5.8 billion, up $1 billion from just last quarter and up $2.5 billion or 74% from last year's second quarter. $2.2 billion of GMV in the quarter or 38% was processed on Shopify Payments. This compares with $1.3 billion or 38% in Q2 of 2016.

While the percentage of merchants on Shopify Payments ticked up again slightly in the quarter, the gross payments volume held steady as a percentage of GMV.

This is due in part to a greater percentage of GMV being generated in markets where Shopify Payments is not yet offered and an increase in the amount of GMV not processed through credit cards, cash-based POS transactions for example. Gross profit dollars once again grew faster than revenue in the quarter.

Margin improvements in both Subscription Solutions and Merchant Solutions more than offset the higher mix of Merchant Solutions in our overall revenue mix. Although both continue to benefit from scale, Merchant Solutions also benefited from the expansion of the higher margin Shipping and Capital offerings.

Our adjusted operating loss in Q2 was $2.9 million or 1.9% of revenue, compared with $3.2 million or 3.7% of revenue in the second quarter of 2016. The adjusted net loss for the quarter was $1.1 million or $0.01 per share. This compares with a $3 million loss or $0.04 per share for the second quarter of 2016.

Finally, our cash, cash equivalents and marketable securities balance grew to $932.4 million, up from $395.7 million in March of 2017. This increase reflects the $560 million in net proceeds from Shopify's successful offering of additional shares in the second quarter.

These proceeds further strengthen our balance sheet to fund various growth and operational initiatives. As we look to the rest of the year, we now expect 2017 revenue in the range of $642 million to $648 million and an adjusted operating loss in the range of $7 million to $11 million.

For the third quarter, we expect revenue in the range of $164 million to $166 million and an adjusted operating loss in the range of $2 million to $4 million. We continue to expect stock-based compensation to amount to $55 million for the full-year, with about $15 million of this in the third quarter.

As our guidance implies, we continue to expect to achieve operating profitability on an adjusted basis in the fourth quarter of this year. With more than 0.5 million merchants and more than 1 million staff accounts now in the Shopify platform, it is clear we are extending our lead as the go-to platform for sellers.

Larger brands increasingly look to us for a scalable and reliable platform to support their higher volume multi-channel selling. Also, exciting to us is that, as we continue to flatten the learning curve and increase our capabilities, more and more entrepreneurs who may not have considered launching a business are now able to.

And with that, I'll turn it back to Katie to start the Q&A..

Thank you, Russ. Okay. Thanks, Russ, and thanks everyone for dialing in. Operator, we can now open the line for questions. But before we do, I'll just ask everyone to limit themselves to one question, so we can have enough time for each person to ask a question..

Your first question comes from Justin Furby from William Blair. Your line is open..

Hi, guys. Thanks for taking the question and congrats on a stunning quarter. Russ, I wanted to ask you about SHOP Plus. The MRR ticked up to 18%, which is probably no surprise that it's outpacing the core business growth. But I'm wondering if you expect that trend to continue if you look out over the medium to long-term.

I guess is there a scenario where that business could be 40%, 50% or more of your subscription base? And if that's the case, what are sort of the longer term model implications to that? Thanks..

Yeah. We'll continue to see Shopify Plus grow. Whether it gets to that sort of higher level that you said, time will tell. From our side of it, Shopify Plus has a higher subscription amount, but also as we've changed some of our pricing also contributed to the Merchant Solutions.

And so, from an overall point of view, that just means that we'll see continued strong revenue growth in the company..

Got it. Thank you..

Thanks, Justin. Next question, please..

Your next question comes from Ross MacMillan from Royal Bank of Canada. Your line is open..

Thanks so much and my congratulations as well. The strength of new merchant adds in the first half has been striking, and I was curious if anything has changed in terms of your investments in customer acquisition this year relative to last.

And also, I'd love to understand what you're seeing in terms of retention improvement, as the cohorts of merchants mature. Thanks..

Yeah. In terms of the overall investment side, no real change in the mix. So, organic still is our number one source of new merchants, followed by the paid advertising, and then the partners side of it. The thing that has changed – and we talked a little bit about some of the experiments we do on the international front.

And so, some of the work we've done to translate our blog into other languages has resulted in, again, we're seeing more merchants internationally join the platform.

And in addition to that, the stuff that we're doing to sort of flatten that learning curve in terms of getting new entrepreneurs up and running on the platform has really enabled more entrepreneurs to join the platform. On the retention side, we've seen no change in our retention numbers.

So, I think that sort of bodes both to our ability to attract merchants and our ability to get them up and running..

Thank you..

Your next question comes from Darren Aftahi from ROTH Capital Partners..

Congratulations as well. Just curious, your Amazon and eBay partnerships, just curious on impact to business. I know eBay has not launched yet in terms of kind of merchant growth.

And then, any other platforms or partners you feel like you're not yet – do you feel like you're fully covered at this point? And then, I guess as you've reached this milestone of 500,000 merchants, can you just give us an update in terms of kind of how you view total addressable market? Thanks..

Hey, it's Harley. I'll take the first part of that question in terms of the Amazon and eBay announcements. In both those cases, our objective here is to ensure that our merchants on our platform can sell anywhere they potentially have customers waiting for them.

And so, obviously, Amazon and eBay being two of the largest marketplaces globally were obvious fits for us. Amazon, we're continuing to work with to improve the experience for our merchants. We also are beginning to expand into new categories with Amazon, which is exciting. eBay, of course, hasn't launched yet, so too soon to tell.

But again, the goal there, whether it's Amazon or eBay or it's BuzzFeed or Wish or any of the other channels that we're looking into, is to enable our merchants to sell more products. So, that really is the goal there. I'll let Russ answer the total addressable market question..

Yeah.

I think it's clear and it's been clear for a while that even though we talk about sort of the SMB side as a very large and big market that really with the platform, the fact that we can stretch up and pick up a number of these larger brands, and now with a number of things that we've been doing also pick up a lot of these brand-new entrepreneurs, both in our core markets and now beyond those core markets, I think, shows that that addressable market continues to get larger and larger.

And in fact, I would say to a large degree, Shopify is actually increasing the size of the pie..

Great. Thank you..

Your next question comes from Nikhil Thadani from Mackie Research. Your line is open..

Thanks, guys. Two quick questions for me. Firstly, in terms of your growth plans, with all the changes that have been happening, is it becoming easier for you to find R&D talent up here in Canada? And secondly, with some of the changes to the U.S. dollar right now, how does that change your FX hedging plan going forward? Thanks, guys..

This is Tobi. I can talk to recruiting.

There's all sorts of things that are going on right now that make it easier for Canadian companies to recruit R&D talent, and like definitely the profile we have now – honestly, like this is from the first – like when I first sat down with my co-founders and said, hey, like what are we – how should we build this company, we said this whole thing only going to work out if somehow we establish like a large geographical consensus like Shopify is just the best company to work for, for engineering talent and product and UX and all the kind of people who are working on to make Shopify work.

I think we've been very successful at doing this. This has been the case for a couple of years now, and we are getting the kind of recognition for this now. It's – when I talk to other people in the industry – even people on my Board of Directors, they usually describe it like this.

They say that we complain how hard it is to get R&D talent and everyone else tells them that it's impossible to get R&D talent. So, I think this is sort of the way things are right now. I'm going to give it over to Russ for the FX question..

Yeah. On the FX side, our main exposure at the company is Canadian dollar versus U.S. dollar, not so much on revenue, but on the cost side. Over a year ago, we implemented a formal hedging program that has sort of about 12-month-running view and contracts in place for that.

So, even with the recent sort of strengthening of the Canadian dollar, we don't see a large impact to 2017, and any impact we factored into the guidance that we provided, in 2018, particularly in the second half, if the rate stays at this level, that definitely is something that we need to take into account..

Your next question comes from Gus Papageorgiou from Macquarie. Your line is open..

Thanks. I think the last time you guys updated your international customers, I think it was about – I believe it was either 17% or 18% of your customers – your merchant customers were outside of your core markets of Canada, the U.S., the UK and Australia.

Can you give us a sense of, if you look at the adds so far this year, what kind of mix we're seeing globally?.

Yeah. So, we see good growth in all the core markets there. In terms of the international, it's now just under 19% of the total merchant count..

Great. Thank you..

Your next question comes from Ken Wong from Citigroup. Your line is open..

Hi, guys.

I know it's early for Pay and the reader, but any update in terms of kind of what you're seeing from customers in there, kind of just what kind of spend pattern that their customers are having and the impact that you guys potentially expect going forward with those profits?.

Yeah. It's Tobi. I'll take it. It is really early. But we're also really, really happy with how things are going. The pick-up is fantastic and it was exactly what we expected it to do.

It increases conversion rates, and people who might otherwise get discouraged by seeing a long checkout form, now push like they quickly find the way to skip through this process. I keep getting notes from people who like encounter Shopify Pay in the wild for the first time and just we like the experience.

So, this is just – I think the right way to think about this is like an entirely new construction site that sort of like has just put up the scaffolding.

There's enormous amount of additional work to be done to get it to the point where every Shopify store just sort of, from a usability perspective, is similar to a place like Amazon, where you might have had an account, which already has your address and has your credit card, where you can just buy with one click or two clicks or whatever.

And so, this is where we want to go. Shopify Pay is one ingredient in this.

It's a thing that allows us to get that really quickly, but our long-term ambition is really to work with the hardware vendors and the device manufacturers and the browser vendors to get all these features into a secure hardware and secure elements and take this out of – just take this out of a process of the web, the way it's traditionally been done, because we all know in 10, 20 years from now, this is not how we are going to transfer money on internet anymore.

So, our interest is to get there faster, and our input into these processes is for everyone to think of a buyer's great UX and manufacture delightful experiences. Exactly the same sentence I can say about the Chip and Swipe reader.

It's hardware, but it's actually working very closely with different kinds of people, not just the people who actually have to use the device when they want to pay, but rather the cashiers who are standing like eight hours a day in the store and have to handle credit cards, like just simple things such as this reader makes it impossible to put your credit card in the wrong way, like again why did that take about 30 years for someone to build it like this.

This was just putting a bit of plastic into the right spot and it just works. Sometimes, this kind of thinking is just sort of absent in our industry, and so we took it upon ourselves to supply it at this point..

Yeah, got it. Thank you for the thoughtful commentary..

Your next question comes from Jesse Hulsing from Goldman Sachs. Your line is open..

Yeah. Thank you. You have almost $1 billion of cash now on the balance sheet, and I'm wondering what your thoughts are with regards to uses of that cash, in particular M&A. And I know you've done some smaller tuck-in acquisitions.

Would you ever consider anything more transformational or is the strategy going to be focused more on acquiring smaller solutions and integrating those into your platforms? Thank you..

Yeah. So far, we've done six acquisitions. As you talked about, they've been these small sort of tuck-ins that we've been very successful on integrating. With the amount of capital we do have on our balance sheet, as well as our sort of market cap as well, I think we're in a position to do some bigger stuff.

And so, nothing currently contemplated, but definitely that option is now available to us..

Thanks, Russ..

Your next question comes from James Cakmak from Monness, Crespi. Your line is open..

Hi, thanks. Good morning. Look, in looking at the results, I'd say this is probably one of the cleanest and most impressive growth stories I've seen in a very long time, and it seems like it's virtually frictionless across the board looking at your metrics at all levels.

Let's say, with that in mind, what would you characterize as your challenges and – if any? Thanks a lot..

Yeah. I think in the business that we're in, which is a trust business, operational elements are something we put a lot of attention on and probably it's one thing that does keep us up at night to make sure that we never do anything that sort of break that trust with our merchants, and so that's a key part.

The other thing is, in some parts of the world, credit card penetration isn't that high. So, we need to think about other ways of allowing merchants to transact money with their customers, as well as in other places, the logistic system is not quite where it needs to be.

So, it's those things that we also are keeping a focus on and basically decide where we want to experiment based on those factors coming into play..

Thanks, James..

Your next question comes from Michael Nemeroff from Credit Suisse. Your line is open..

Congratulations on a good quarter.

As Plus is – it's clearly becoming a larger portion of revenue, and aside from focusing on the wholesale aspect, what are the things are you going to do to feed this larger merchant growth? And then also, do you feel like the core product is robust enough or feature-rich enough to replace an enterprise solution, something like a Hybris or a Demandware and could that be a direction of the company going forward to go after some of these really large commerce platforms that have cost a lot of money and have been installed for decades in some cases?.

Hey, it's Harley here. I'll take that question, Michael. So, in terms of the additional functionality that some of these larger brands require, one of the reasons that we have launched the technology partner program just a little while ago was because some of the things that they're asking for are core-based emergent (26:01) system they don't need.

For example, ERP integrations or cross-border tax compliance. And so, by creating a network of partners who are specifically geared towards these much larger brands, these much larger merchants, we think that helps us fill in a lot of the gaps that potentially have been missing. Beyond things – you mentioned wholesale.

Wholesale really was demand-generated. We saw our existing base of merchants that were asking for it, and so it was an obvious thing for us.

One of the things we are doing now, that we have a bit of a better handle on who these Plus merchants are, is we're now asking them what are the other things that you're not getting from us and filling those gaps with these other partners. So, that's kind of the way we look at it.

In terms of your question about big migrations, we've had migrations from every major platform, clearly the ones that you've mentioned. Certainly, the bulk of our migrations come from more of the mid-market like the Magento, but we've had migrations from all the major ones as well.

And as I said on previous calls, the thing that we're noticing is that a lot of these big brands are acting a lot more like entrepreneurs these days. They want things that are easy to use, that are quick to market, that are very scalable, easy to customize.

And so, we think that as a package Shopify Plus actually fits really, really well in that vein..

All right, thanks very much..

Your next question comes from Deepak Mathivanan from Barclays. Your line is open..

Hey, guys. Congrats on a great quarter. Two questions. First, if you look at your total gross profit as a percentage of GMV, it's currently around 1.5% range.

What do you think is the long-term opportunity in terms of economics? Given that the value prop to some of the large merchants is very attractive with the cloud infrastructure and all the other features for payment processing, do you think we can see it at much higher levels? And then, one quick one for Russ.

Payment volumes are growing strong consistently with the GMV growth. Can you talk about payment penetration in terms of the Plus program currently? Do you see pretty healthy demand from large merchants? That's it. Thanks a lot. Congrats again..

Yes. Maybe I'll take that second question first. So, in terms of the Plus side, what we're seeing is a lot of the new merchants that we're picking up as part of Plus are adopting Shopify Payments.

And part of it is some of the changes we've done to pricing, but more importantly, I think it's just from a product point of view, a much cleaner and integrated solution for the merchant there. We've also had a number of – even Plus merchants move over to Shopify Payments just in order to be able to access Shopify Capital.

And so, again, the nice thing about Shopify is a lot of these things are interrelated. And so, having strength in one area actually helps other parts of the business. In terms of your other question on the sort of the growth side, no specific guidance in terms of what that amount can turn out to be.

But I think we feel that there's still lots of good opportunity to grow both the Subscription side of the business as well as the Merchant Solutions side of the business..

I think it's worth also pointing out that – like I always like getting these questions, because you guys always suggest these really, really interesting ways to slice the growth metrics divided by something – with another (29:25).

I just have to say like from a perspective of building a business, we never manage the company against these sort of financial ratios or goals. Like the way we think about our business is that we have our core product, which is of enormous amount of value to the people who use it. We are constantly working on thinking about how to make it better.

We have a pretty clear idea of what the future retail might look like and what kind of stuff that requires. All of these things go on the flywheel that hopefully then spins faster and faster and faster.

And from that, we look at opportunities to get some revenue, especially in places where our customers are already spending money, like payment gateways and so on.

And that combination then creates really, really robust growth story, where the revenue is then reinvested into allowing us to take advantage of more opportunities to build better product, and that all kind of feeds back into each other.

And so, the financial statements at the end of the day are kind of our check-in that things are going in the right direction, but we don't mange directly against them..

Your next question comes from Brian Essex from Morgan Stanley. Your line is open..

Good morning and thanks for taking the question. First of all, Russ, congratulations on your retirement. If you picked a quarter to announce it, this is a good one. And then, I guess for the question, I wanted to follow-up on Michael's question around Shopify Plus.

As you look to expand to more kind of feature functionality and broaden your depth with Plus penetration, how do we think about unit economics of those customers and what kind of value you might capture as opposed to passing through to your partners? And then secondly, are you seeing a greater percentage of exclusivity on that platform as opposed to – I know when we first did the IPO, there was some pretty interesting use cases, for example, as CMOs get more of their budget, they don't have to involve their IT staff and – but they maybe – their IT staff would have a solution like Demandware that they kind of went in parallel with.

Are you seeing more exclusive opportunities? And I think that would do it on my end..

Yeah. So, in terms of exclusive opportunities, similar to our core app partners, what tends to happen is they begin to build for Shopify and realize that Shopify is the best place for them to access customers with their applications and they tend to go, in many cases, all-in on Shopify after that happens.

The Plus Technology Partner program is still pretty new. So, some of these partners obviously work with a variety of different platforms. Our hope is that they see that there is just a ton of value with Shopify, and that's where they invest their time and their R&D efforts to build on top of, in that case.

On the first part of the question just in terms of economics around Plus, the reason we made the change in Q1 on pricing is really – it's future looking. The idea is that as these new merchants grow up on Shopify eventually graduate to Shopify Plus get really big. We share in the economics of their GMV through the fee, the 25 basis points.

But also for other brands that are migrating over that as they grow up on Shopify, and in some cases, bring on more of their properties to Shopify Plus that we share in that success.

So, similar to what you'd mentioned, that we talked about around – a little while ago around these CMOs that are contacting us for a very small slice of their entire business, we really like that because it's a bit of a land and expand opportunity.

So, they may bring us – Sears brought us a very small pop-up they did last year, and that was our first time engaging with Sears, and obviously the hope is that that brings on more properties from them. Same thing with some of the other big department stores.

So, we don't necessarily need to get the entirety of every property from these big brands on right at once.

We'd much prefer to get something on, prove to them that Shopify Plus is an ideal partner for their commerce and retail efforts, and then slowly we watch them bring on more and more properties, which certainly has been the case with companies like Budweiser and a lot of other big brands..

That's helpful. Thank you..

Your next question comes from Richard Davis from Canaccord. Your line is open..

Hey, thanks. I mean it's self-evident that you guys have executed really well, and you've kind of touched around this topic of making the platform better near-term. But just let's step back and think.

If you're looking back here at least at a high level, say, three or four years from now, what initiatives do you see as kind of the most promising or interesting new growth vectors for the business? You don't have to give us, well you can, but you don't have to give us the product roadmap explicitly.

But it'll just be helpful to kind of think about this thing a little bit more holistically. Thanks..

Yeah. So, a lot of our cards are in play already, right. So, I don't think somebody necessarily needs the – here is the massive unveiling of the strategy that no one's been seeing. And I think that kind of happened with multi-channel. It sounds so silly to say that now, because it's so bloody obvious.

But when we were taking the company public, we were worried a lot, talking in our decks about multi-channel and specifically our insight that we knew everyone needed multi-channel software, but we (34:50) software and our insight was we are in the best competitive situation to get to be the multi-channel system for our retailers, right.

So, we were worried and said, hey, let's go public, but we need to explain this (35:03) everyone knows what we are doing and then everyone's going to do this. And here we are two years later and kind of no one did, right. So, that's kind of surprising. And that just means how ahead we were with this kind of thing.

Now, in terms of the next couple of years, like the key there is really to really work multi. There is a lot of things – like multi-channel has started this, but there is a lot of work going into being able to deal with the true complexities of, let's say, inventory in multi locations.

We are talking – when you go to rest of the planet, you'll say, okay, now multiple languages and so on. So, really it's – and I think with – now we are going to add the Plus to the platform, which really, really allow the addressable market of Shopify to just expand in all directions.

Every time we do one of those kind of things, it really compounds and acts on the flywheel and then increases the amount of people who can use us in both directions. And that's the really exciting thing.

Like the pyramid of our – like our addressable market is a pyramid, like the demand is almost total, like who wouldn't want a business on the slide that makes more money than it costs, right. So, the only thing that stops everyone from wanting like a Shopify store is that its look and that it requires learning and there's some potential for failure.

So, all these things we have inputs on, like we can make it less work, especially those technologies like machine learning, which we're interested in too. We can make – we can match your fear of failure to a certain degree, which frankly macro culturally already kind of happened.

And we can just – we can just push down the learning curve to building this entire thing, and therefore, just massively increase the size of the market we have. And you'll see a lot of these kind of efforts, like just general work on the platform, things like Kit and so on.

So, I think the best way to think about Shopify is now we are on – we put this train on the right tracks now and now we're going to pick up speed into this direction..

Yeah. No, that's super helpful. Thanks so much..

Your next question comes from Colin Sebastian from Robert Baird. Your line is open..

Great. Good morning, and I'll add my congrats on the strong quarter and to Russ as well. A question on Shopify Capital. With the step-up in cash advances in the quarter, if you could talk about how important the program is related to contributing to merchants and revenue growth, including color on your ability to screen merchants for credit quality.

And as a quick follow-up on the bigger growth question, I wonder if you can tie the significant growth in share for platforms like Amazon that's creating more urgency among merchants and retailers to upgrade, to get online and upgrade their existing technology platforms? Thank you..

Yeah. In terms of the Shopify Capital, for a lot of our merchants, it is very difficult, if not in some cases impossible, to get working capital financing. And so, I think that we're meeting a real need there.

And again, although it's its own revenue contributor, I think the bigger value is that it's helping these merchants expand their businesses, which we also then participate in through things like Shopify Payments.

We're seeing a number of these merchants who paid off their first, second, sometimes now up to fifth advance, they're looking to refresh that. I expect as we sort of get ready for the Black Friday, Cyber Monday holiday period, you'll see more advances as they want to sort of build up their inventory for that side.

So, I think using the tools that we now have at our disposal, as Tobi talked about, like machine learning, it's really allowing us to make sure that we're providing the merchant with the right proposal at the right time and making sure that we're not taking on new risk.

And further to that, the fact that these have been insured almost for 12 months really reduces our exposure. In terms of what Amazon's doing and the urgency that creates, I would say that's definitely a factor. I would say the fact that mobile is such a big part of the business these days, that your existing solution may not have that capability.

The fact that you now need to be multi-channel, I think all of those contribute to really a good time for Shopify and what we offer..

Thank you..

Your next question comes from Jonathan Kees from Summit Redstone. Your line is open..

Great. Thanks for taking my questions, and I'll add my kudos to the quarter's results too. So, I just want to ask about a couple of things. One is regarding the sales hackers.

I assume it's – the trajectory for the sales hackers growth, I assume that you grew that sales force this quarter and you will continue to do that as we go through the year with the growth of Plus.

Can you just talk in terms of the trajectory of that expansion, if you're looking to really ramp up there? And then second, I wanted to ask about Russ' departure. Russ, congrats there. And if I can ask – I'm only asking because more likely I'll be asked this.

Are you looking to just take some time off, spend time with family, and then reevaluate entering or looking for other opportunities or are you truly retiring? Thanks..

Hey, it's Harley. I'll take the first part of the question and let Russ answer his own question about retirement. So, in terms of the sales hackers, we continue to hire them. The hacker count is certainly higher than where we were in Q1. It really is just a matter of getting them – getting the right hackers and getting them ramped up.

As we've mentioned in the past, our sales hackers are not your traditional salespeople. So, these are people that have a proclivity for technology. Many of them are quite younger and not necessarily as experienced. But we find that that's a much better way for us to bring them in and train them on exactly how to sell Shopify Plus.

So, we'll continue to grow that hacker team as needed..

Yeah. I'll take the – I guess I'm the best one to answer the retirement question. So, yes, it is a retirement. Sort of the normal stuff, travel, spend time with family. I have a new – well, one grandchild and another one on the way, probably do some golf, some reading. I haven't quite figured out the second week yet of retirement.

So, I'll keep you in the loop..

Great. Congratulations there. Good luck there. Thanks a lot, guys..

Your next question comes from Sam Kemp from Piper Jaffray. Your line is open..

Question and congrats on the quarter. So, I guess, Harley, you talked about Shopify Pay being an intermediate step, and Tobi, you talked about a lot of things around hardware and browser combos to reduce Payments friction, I guess.

Can you kind of piece those together from what it looks like from a consumer standpoint and where do you want to take Payments and what kind of timeline we're talking about there? And then, the second question is around Kit, you made Kit free during the quarter.

Can you just talk about the strategic rationale there? Are you seeing Kit as more of an on-boarding platform for further product roll-outs or can you just talk about the rationale there? Thanks..

Hey, Sam. We're close to the end of the call and we have a lot more people online.

So, do you want the Kit one or the Payments one?.

Payments..

So, the Payments, again, our ambition is – you sometimes see people talk about Checkout 2.0. Sometimes they talk about one-page checkout and all these kind of things. Our ambition is no checkout. We think checkout is an anachronism and we want to get rid of it.

And we are looking for ways to do this now and get into the future quicker, and that's Shopify Pay. And maybe in the long-term, that ends up being the dominant perfect solution for this, depending on how high we can climb this particular mountain.

But again, I don't want to – what I don't want to do is say, hey, like measure Shopify's progress based on how well Shopify Pay is doing, because the truth is we might be happily turning it off in three years.

If all the devices get Payments built in and credit cards and secure elements and so on, I'd love to remove all that coding road (43:53) from Shopify and just rely on other features. So, this is really how it stitches together.

We thought this would happen by the way if browsers would build in payment, transfers and credit cards, and we were convinced this will be imminent after Shopify's release in 2006. And certainly, it was talked about. It just never happened. So, we kind of just gave up.

Like we just said, let's do Pay (44:18) for now and then we get all our customers into the proper future, and then we are not dependent on the browser vendors to do the right thing anymore..

Thanks for the color..

Thanks, Sam..

Your next question comes from Monika Garg from KeyBanc Capital. Your line is open..

Hi. Thanks for taking my question. You had talked about entering B2B market last quarter. Could you update us how is that going? How do you see that ramping? Thank you..

Hey, it's Harley. I'll take that question. Yeah, so as we discussed, we have rolled out a wholesale functionality for Shopify Plus. Still really early, but as I mentioned on the last call, I believe, we had some merchants who were kind of doing it on the side and they were having trouble bringing it into Shopify.

And so, now we've made it a lot easier for them. But again, B2B was really something that our existing merchant base has demanded. And so, we've been able to provide them with the functionality there. The additional piece of that is now we have merchants who exclusively sell B2B that are now coming to Shopify Plus that historically were not doing so.

So, again, I think that product is still pretty early and we're still iterating and making it better. But it certainly now allows us to go after a new type of Shopify Plus merchant that historically did not sell direct to consumer..

Thank you..

Your next question comes from Terry Tillman from SunTrust Robinson. Your line is open..

Thanks for taking my question. But first, Russ, I guess we have some time to try to talk you out of retiring. This is too much fun. But yeah, my question just relates to the apps – the apps business and the third-party developer ecosystem.

How big is that as a revenue generator? And it would seem like you could really leverage machine learning there to actually recommend the next best app for your customers to use. So, just kind of curious how you manage analytics around that business and the revenue size. Thanks..

Yeah. In terms of the revenue size, the theme piece of the business is something that we record on a gross basis where the apps themselves were net. So, relatively the theme part is slightly bigger at this stage.

And we have started to already use some of the capabilities we have around machine learning to help the merchant really discover which apps are suited for them for whatever their particular task is. And I think that's an area that you'll see grow.

When you have 1,800 apps, it can be a little daunting when someone goes to the App Store and tries to sort of navigate. So, we think that is an area that we can really help with..

Hey, it's Harley. I'll just add on to that. One of the things that – because we have so many merchants on our platform, what we're really trying to do is make sure the right merchant is on the right apps at the right time. So, as they're sort of building their journey, they don't need ERP applications when they're just getting started.

We know what they need just to get up and running and get some first sales on their site – on their shop. So, one of the things that we – as Russ had sort of alluded to, what we really want to do is ensure they're finding the right apps at the right time.

Again, having so many merchants on our platform, one of the additional benefits is that anyone that's speaking about building new commerce functionality on the planet is thinking about Shopify's app program first, and we love that..

Your next question comes from Samad Samana from Stephens, Inc. Your line is open..

Hi. Congrats on a great quarter and thanks for taking my question.

Can you help us understand what percentage of each dollar of GMV from a merchant that you think SHOP can address over time? In other words, what do you think the maximum take rate can be long-term? And what do you see merchants spend today in terms of their – as a percentage of GMV on their Merchant Solutions and what SHOP could address over time? Thank you..

I think it depends on what particular merchant solution you're looking at. If you look at absolute dollars, people spend more on Shipping than Payments for example. And so, we don't have a firm view of how high that number can be. We think it'll just continue to gradually increase over time, which is really what our objective is here..

Your next question comes from Todd Coupland from CIBC. Your line is open..

Hey. Good morning, everyone. I believe Shopify had had plans for about 1,000 new staff in 2017, and I'm just wondering with the acceleration of the merchant count, does that also press and require you to hire more than you expected at the beginning of the year? Any color on that would be appreciated. Thank you..

Yeah. We're still having lot of success on the hiring front. Where that merchant count has more of an impact is on the support group. And so, you'll see us continue to ramp that side of the business.

And Q3 has always been sort of an investment period for the company both on that as well as the infrastructure and preparation for the very high volume holiday period..

Your next question comes from Suthan Sukumar from Eight Capital. Your line is open..

Thank you. And good morning, guys, and congrats on an impressive quarter. In the past, you've spoken about the significant traction that you've seen with Kit. And I kind of want to understand some of the strategic rationale in sort of making it a free service, kind of the – and I presume there was a strong business case in doing so.

And beyond that, your thoughts on how you plan to evolve the offering and what other types of marketing capabilities do you plan to roll out to your base from a roadmap perspective?.

Yeah. So, Kit is what we call a marketing simplification, right. There is an entire industry of marketing automatization, which is sort of – like looks a little bit similar, but it's quite different in terms of its goals.

So, the reason why we want Kit to be free is just because we wanted to remove obstacles from installing, and we really, really want more people to use it, because we see the data. And if you can help merchants get their first sale or second sale, it sounds a little bit hyperbolic, but like both are life events.

When they get their sale, especially as a result of a very pleasant experience of building a store based on their ideas and dreams and then have to completely automate it, but kind of help them find the audience, that sounds worthy of 2017 technology kind of play, right. That's exactly what type of experience we want people to have.

And sometimes, people are like – even a $9 a month kind of fee is really in the way of installing something that really, really might make a difference.

So, it's really – the way we think about it is we're going to – every time someone gets a sale they wouldn't have because of Kit, we're going to have a new merchant that it's going to be with us for the long-term, and that's going to be worth way more than a couple of dollars we otherwise would have made..

Okay, great. Thank you..

Your next question comes from Kevin Krishnaratne from Paradigm Capital. Your line is open..

Hi, good morning. A question on net adds. I know that you still drive a good chunk of net adds organic, but just any thoughts on more targeted campaigns on the low-end? Thinking more about website builders, the sites that are either free or cheaper fee to build, easy to start, but might not offer the merchant all the benefits that you offer.

Any plans on targeting the low-end, potentially offering a free trial – a free plan, i.e., not a trial?.

There's lots of discussions about it. I think it's important for us to say we want to only suggest people to use us for things that we know that we are the best in the world for, right, because I don't think we deserve customers for products that are not the best in their class.

And so, I guess we probably have thousands – probably tens of thousands of people who use Shopify as a CRM website builder, because it's really, really good for that. Even if you just remove all the products, and it's a good content management system – in fact, it's a great one.

But I think we would really confuse the message to our customer – to our market if we start targeting this. So, it's just not our jam, I think..

Okay, great. Thanks for that..

Your last question comes from Brian Peterson from Raymond James. Your line is open..

Thanks for squeezing me in, guys. And first off, Russ, congrats on the retirement and great job on the quarter. So, Tobi or Harley, just if I think about the Merchant Solutions business, and obviously, from a functionality perspective with Shipping and Capital, et cetera, that's much larger today than it was at the time of the IPO.

But if I think about what you could potentially address for your merchants, how much room does that have to expand and would you look to bring that in-house or would you potentially address that with partners? Thank you..

Yeah. It's a good question. It's hard to even have a generalized statement. This is really like we slice every single thing that needs to happen in the businesses and then try to think of long-term and say, okay, in 10 years, what decision right now puts us into the best position, right.

And frankly, very often this means lead something (54:10) partner ecosystem, because the partner ecosystem is such a key part of this company. It's so tremendously hard to build. We've been building this for 10 years, right, already.

And so, it's very hard to say, hey, here's our three-sentence mantra, and that's the guiding principle by which you make all other decisions as it relates to Merchant Services. We are really just working backwards from our merchants' needs and then figure out how to address them in the best possible way.

This is actually, I would say, the most settled part of this business just from a strategic perspective, because it is so simple for us to pull future revenue forward by making choices that favor the short-term. There are so many opportunities for doing this. And we really, really, really don't want to, because again we are very long-term focused.

I wrote that in my – in the prospectus, and we really try to make the decisions that put us in the best possible position long-term. And I think so far, we obviously have (55:18) done that..

Thanks, Brian..

Thanks, Tobi..

Okay. Thanks everybody for the call. We have a few closing remarks from Tobi..

Yeah. So, first of all, it's – like 500,000 merchants is just such a crazy number.

Just for someone who have seen every single stage of this company, every single vision that existed over the years, it's – I have lots of stories about being laughed out of busy offices, because they told me the entire addressable market for my company is about 40,000 stores. And so, it's amazing to get here, and there's so much work left to be done.

Like if you walk a street and ask someone if they want to be an entrepreneur, they'd say yes. If you ask them if they've heard of Shopify, they will say no. So, there's so much – there's so many things we can put on this flywheel to make this go faster, and it's just an amazing ride. I want to just spend a moment just actually thanking Russ myself.

Russ joined in 2011. At that point, the finance department was a part-time bookkeeper, my mother-in-law and two Ruby scripts that I wrote. So, it's also like amazing to be able to spend so many years to work alongside someone and just see the entire business grow around it. His fingerprint is on everything.

He's absolutely the source of this financial diligence that we have that allow – that we have this massive need to make every single dollar count. I think this is something which – especially with our friends from Silicon Valley, it's is just so rare in this industry, and it's absolutely the kinds of things he taught us.

Russ has an approach to say that creativity comes from constraints and then an amazing hand at setting these constraints, and always prioritizing what's best for the product and best for the company above the sort of more obvious quantitative metrics, which even in this entire field that is also like a rarity.

And I think these are all the components that really just made this company work frankly. So, thank you very much, Russ. We are going to open the search for the position. We are not in a massive hurry here, because Russ kindly gave us a lot of flexibility.

What Russ – on more operational side of things, Russ built an enormously well-built financial accounting system here. There is so much automatization like I – if the Shopify story continues on this trajectory for longer, at some point, people will write books about how this all has been put together.

There is a lot of fun things you should ask him about when you see him at a conference or so. So, I would say when we go out for the search, this is probably going to be the best possible CFO position that's available out there.

There is a no-drama transition coming into an enormously well-built system and a company with tons and tons and tons of potential. So, I just figure I might as well use this a little bit for recruiting purposes. Okay, that's it from us. Thank you very much..

This concludes today's conference call. You may now disconnect..