Welcome to the Shopify Fourth Quarter 2021 Financial Results Conference Call. My name is Juan, and I will be coordinating your call today. [Operator Instructions]. I will now hand over to your host, Katie Keita, Director, Investor Relations, to begin with. Please, Katie, go ahead..

Thank you, operator, and good morning, everyone. We're glad you can join us for Shopify's Fourth Quarter 2021 Conference Call. We are joined this morning by Tobias Lütke, Shopify's CEO; Harley Finkelstein, Shopify's President; and Amy Shapero, our CFO. After their prepared remarks, 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 U.S. and Canadian regulators. Note that the adjusted financial measures we speak to you today are non-GAAP, 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 U.S. dollars, so all amounts discussed today are in U.S. dollars, unless otherwise indicated. With that, I turn the call over to Harley..

Allan Leinwand as Chief Technology Officer; Jess Hertz as General Counsel; [Technical Difficulty] and Shopify to the next level. I want to welcome all the new members of our team to our rocket ship and thank everyone on board for bringing their best game even on the toughest days.

We have an incredible bench of talent, more than 10,000 strong, building the future of commerce. Together with our partner ecosystem, we are working relentlessly to bring more Shopify to the world and make commerce better for everyone..

Shop and Shopify POS. In 2021, we made excellent progress with making Shop a great place to shop. On top of the features Harley went through, we added a host of curated list and made our product recommendation algorithms better to help buyers with brand-first product discovery.

In 2022, we will continue adding more features and creating fantastic shopping experiences, so buyers want to keep coming back to their favorite brands. As the world emerges from the pandemic, physical retail is making a comeback.

In-person selling is one of the best opportunities for merchants to deepen relationships with buyers through experiences, services and often a shared community.

As there is still a huge opportunity ahead of us to bring our leading omnichannel capabilities to more retail businesses in 2022, we will increase our investments to put Shopify POS into the hands of more brick-and-mortar merchants in more geographies, which brings me to our second investment theme, going global.

This means we plan to do more in 2022 to help merchants drive in their local markets and reach buyers globally. In 2021, our base of merchants and GMV outside North America increased as part of our overall mix compared with 2020 as we improved product market fit and introduced more of our solutions to our focus regions.

We plan to continue this in 2022, bringing Shopify POS and Shopify Payments with local payment methods to even more countries.

We also expect in 2022 to introduce more local currency subscriptions, which we began testing in 2021, and we intend to expand our sales and marketing investments in these markets to make it obvious that Shopify is the solution of choice to launch a business with and succeed.

Finally, Harley noted some key examples of ways we will continue to help merchants also requires outside of their local markets in 2022, notably extending global reach via Shopify markets and our partnership with JD.com. Moving to our third investment theme, growing from first sale to full scale.

In 2022, we will keep making the important things easy and everything else possible. For entrepreneurs who are just getting started, this means continuing to lower the technical barriers to launch a business such as making onboarding easier and then helping them define product market fit so they can achieve their first sale.

As merchants scale, their journey is simplified by features like Shopify Shipping and Shopify Capital as Shopify Plus merchants like Allbirds and Figs have demonstrated, brands can show up as their authentic selves on Shopify and grow to the next stratosphere never having to replatform.

In 2022, enhancements to products like Shopify Balance, Shopify Capital and B2B for direct-to-consumer merchants will keep powering growth journeys on Shopify. And finally, our fourth investment theme, Simplifying Fulfillment. We are moving into a new phase in 2022 for building simple and fast fulfillment for our merchants.

Over the past 18 months, we built a prototype to make fulfillment more simple and seamless. We honed in on direct-to-consumer hyper-growth self shippers who met criteria that made them a good fit.

We began building out a self-operated leased warehouse in Atlanta and conducted pilots with simple inventory onboarding and management, a buyer experience fully integrated with Shopify across channels, a network with 2-day delivery coverage for more than 90% of the U.S. population, simple returns and simple pricing.

The result of these actions was encouraging as a percentage of surveyed merchants who are very satisfied more than tripled by the end of 2021 relative to the end of 2020, informing us that we're on the right path in building a solution that helps merchants easily manage their products, orders and inventory from the Shopify admin and gain control, visibility and confidence and fulfillment.

So as we look ahead to 2022, we will continue building our solution by operating more major hub warehouses ourselves while still leveraging high-performing partners where it makes sense.

We'll also unify the network with our own warehouse management software, while still using partner software in some cases to highly integrate with Shopify's back office and checkout so merchants can seamlessly offer and achieve delivery promises.

Over the next 3 years through 2024, our planned investments expand the merchant value proposition even more, including increasing 1-day delivery coverage in the U.S. and increasingly enhanced returns functionality. And we are planning to be able to handle progressively larger merchants with a broader set of needs as we build through 2024.

When we launched Shopify Fulfillment Network in mid-2019, we said that we expected to spend $1 billion over 5 years. Through 2021, about halfway through the original asset-light plan, we spent $117 million, which includes funding cash operating losses and a small amount of CapEx.

In conjunction with our updated more direct approach, we will take this opportunity to reorient you on our expectations going forward. First of all, our expectations for Shopify Fulfillment Network, revenue, operating expenses and capital expenditures will be incorporated in our overall Shopify outlook as they are for 2022.

And second, we are providing today a onetime view of our expectations with regard to CapEx and scale under this updated approach.

CapEx related to Shopify Fulfillment Network will start to ramp in 2022, with an expectation for 2023 and 2024 of approximately $1 billion in capital expenditures over those 2 years for self-operated leased warehouse hubs in key U.S. geographies.

To make the transition from prototype to build while still maintaining the merchant delight we've achieved, we expect fulfillment volumes to progressively scale toward the back of 2023 and into 2024. These investments enable the merchant value proposition and network build we described earlier.

While this requires higher upfront spend, it pays back through operating efficiencies over time and allows us to achieve our desired margin profile more effectively than solely via partners. Note that these expectations are based on a set of assumptions that I have described for the next 3 years.

Investments above this would be based on allocating capital to opportunities that either significantly expand the opportunity set for merchants and Shopify or have strong paybacks from improved operating efficiency.

We are pleased with our progress on Shopify Fulfillment Network, proud of the team we've assembled that's been doing groundbreaking work and confident that what we are building will help merchants in ways never thought possible. With these important areas of focus and investment in buying, let's turn to our outlook for 2022.

We believe that change behaviors adopted by merchants and consumers in 2020 and 2021, driven by COVID have expanded the prospects for entrepreneurship and digital commerce, and these past 2 years have been game-changing for Shopify with our merchant-based GMV revenue as well as the size of our team doubling over 2019 levels.

This momentum sets us up to expand our ambitions on behalf of merchants into 2022 as the world continues to find normalcy living with and moving beyond COVID. Our outlook for 2022 assumes continued secular tailwinds for entrepreneurship and digital commerce transformation against a more measured macro environment relative to 2021.

While we believe that the COVID triggered acceleration of e-commerce that spills into the first half of 2021 in the form of lockdowns and government stimulus will be absent from 2022, and there is caution around inflation and consumer spend near term.

For the full year, we see economic growth supporting the continued penetration of retail by e-commerce.

Against these bigger picture secular and economic assumptions, our financial outlook anticipates revenue growth for the full year 2022 that's lower than 2021's 57% but still rapid and outpacing the growth of e-commerce, driven by our many growth levers, including expansion of our services to more merchants and more geographies, the growing contribution of newly added products and our strong value proposition for multichannel commerce, which offers independent brands of all sizes, a way to build a strong, low friction presence across the Internet, in apps and in person.

For 2022, we expect year-over-year revenue growth to be lowest in the first quarter of 2022 and highest in the fourth quarter of 2022 due to 3 factors. First, we do not expect the COVID-triggered acceleration of e-commerce in the first half of 2021 from lockdowns and government stimulus to repeat in the first half of 2022.

It's worth noting that revenue growth in Q1 of 2021 was our highest ever as a public company at 110% year-over-year. Second, our new terms with apps and theme developers create a couple of differences from last year's first quarter.

The elimination of our rev share on their first $1 million of revenue annually reset on January 1 and the switch from gross-to-net revenue recognition for the sale of themes as a result of revised contract terms with our theme partners.

Since these terms didn't come into play until the second half of last year, these will be a headwind to Subscription Solutions revenue in the first half of 2022, particularly in the first quarter. And third, we expect certain commercial initiatives in sales and marketing investments will gain momentum over the course of 2022.

Subscription Solutions revenue growth to be driven by more merchants around the world joining the platform than in 2021 as we introduce new commercial initiatives and aggressively invest in sales and marketing to expand our addressable market and more deeply penetrate existing markets.

Our objective in 2022 will be on optimizing our effort to run getting more merchants on the platform and to success.

Merchant Solutions revenue growth to be more than twice the rate of Subscription Solutions revenue growth year-over-year as merchants make greater use of our offerings, and we expand existing products into new geographies and roll out newer features like Shopify Markets.

The increase in Merchant Solutions in our overall revenue mix means gross profit dollar growth will trail revenue growth.

The evolution of retail to digitally empowered commerce is far reaching, ranging from new ways for merchants to improve buyer discovery and loyalty to new commercial opportunities on social channels to a data-enabled revolution in shipping and logistics.

To keep independent brands at the forefront of this revolution, Shopify intends to reinvest back into our business aggressively throughout 2022, deploying all of our gross profit dollars back into the business. In research and development, we expect to hire more engineers than in 2021, despite an exceptionally competitive market for top talent.

In sales and marketing, we are accelerating hiring in sales, initiating a new offline performance marketing program and stepping up marketing efforts internationally.

Lastly, for 2022, we anticipate capital expenditures of $200 million, stock-based compensation expenses and related payroll taxes of $800 million and amortization of acquired intangibles of $28 million. In closing, Shopify is building in 2022.

We are building the infrastructure of commerce so our merchants can continue to compete and lead in the future of retail, a future in which commerce happens everywhere across digital services, physical spaces and global regions.

The value of Shopify lies in its simplicity for merchants to easily start and scale their business, so much so that merchants fall in love with our solutions and never want to leave, no matter how big they get.

They understand that as they grow and confront new challenges, Shopify and our partners will solve their problem so they can take their business to the next level. That is the power of Shopify's flywheel. We at Shopify are energized to tackle the opportunities that this new phase of commerce brings for making commerce better for everyone.

I'll now turn the call back to Katie..

[Operator Instructions]. And the first question comes from Thomas Forte from D.A. Davidson..

So technology shares have been under pressure in the past few months. There's published reports that Amazon is increasing its cash comp to secure and retain tech talent in a competitive market.

How should we think about Shopify's strategy regarding cash and stock comp to secure and retain tech talent?.

Tech talent is in high demand across the technology sector. And so we obviously want to remain competitive in attracting the best talent in the world.

And so as you can see from our stock-based compensation outlook that we provided to you that does incorporate both reflects the full year impact of hiring from last year as well as hiring that we'll do this year and some expected adjustments that we will make.

I continue to believe that based on the hiring that we did last year that we were able to more than double our R&D hiring year-over-year. And Shopify remains the best place in tech to work. Compensation clearly plays a factor in that. But I would say equally as important are the exciting things that we're doing in our continued innovation..

And obviously, technology, I mean, it's tight like we have not -- like planet Earth has not made enough engineers to deal with the rapid digitalization that we've gone through with COVID and so on.

So like the money component is a big component and stock component is a big the component and Shopify is amongst the best paying companies in the world in both things. Increasingly, talent gravitate the companies so that have other things to offer, like, for instance, personal growth is just incredibly important. Everyone gets that.

Most of the return in your career comes in the future, especially when you're pretty early and right out of university. So just some of the company values like being constant learner work really, really well in this way. I think people can get an enormous amount of experience here.

They can -- engineers can report for an unbroken chain of other engineers all the way to, including some people of the Board of Directors and for me, people like on the design side, companies -- the company is one which sweats all details, and that's really, really appreciated by people in that craft and the product discipline is super well established with me being a very active role and teaching what I've learned over the last 17 years.

So a lot of people -- there is a big talent scramble in the world. There's a lot of shuffling going on. Shopify is on the good side of the shuffling it seems, and that works really, really well for the merchants that we are building for every day..

Our next question comes from Matt Pfau from William Blair..

Just wanted to ask on the decision to operate more fulfillment centers yourselves. Maybe just some more detail on what drove that decision and specifically, leveraging the asset-light model where you're having quality issues or issues scaling and so maybe that's what drove the decision to bring more of those operations in-house..

Matt, it's Harley. I'll take that question. So a couple of things in terms of the SFN model. So we are shifting the network model really to larger capacity hubs, and we want to operate more of them ourselves to things like better control quality, but also on cost here.

As part of this, we're also unifying the network across -- with the warehouse management system. And so we think that will also continue to optimize things. But the goal here is clear. We want -- we expect to enable 2-day delivery coverage to more than 90% of the U.S. population.

And at the same time, we want to obviously minimize inventory investment for us if needed. So Amy talked about the additional spend. We expect spend to be about $2 billion through 2024, including that $1.4 billion in CapEx. But really, if volumes are what we expect them to be, we need to have enough capacity.

That's really important, but also the capacity has to be a very high quality, and that is what we're preparing for. Now we run larger hubs as a backbone, but we're also taking advantage of partners.

It's not as if this will be entirely Shopify-owned, but we want to match Shopify warehouses with partner warehouses, and we expect that quality will increase and the capacity will increase because of this change. So a good way to kind of think about it is that I think we were in sort of this prototyping stage for SFN.

Last couple of years, we've learned a ton. We have new insight. We got great feedback, and now we're really going to the build stage of this, but we're very optimistic..

Next question comes from Ken Wong from Guggenheim Securities..

I wanted to dig into the fulfillment side a little more as well. You highlighted the capital expenditures through 2024. In the past, you guys laid out a roadmap where aggregate revenue would largely align with your total investment spend.

Should we think about the revenue coming in at a similar pace to your investments with this kind of new roadmap?.

Yes. So let me just clarify a little bit first on the investment. So we said CapEx would start to ramp in 2022, and in 2023 and 2024, we expected to spend about $1 billion on the warehouse hubs that Harley spoke about.

So during 2022, we're transitioning from prototype into build, and during that transition, we will continue to focus, first and foremost, on maintaining high merchant delight that we've worked so hard to achieve that I talked about earlier. That's critical.

And scaling in 2022 with that in mind, and what I said also was that in the back of 2023 and into 2024, that's when we expected, we would start to see scale of the size where we can really start to optimize the costs of the network. And so largely, that's how you would think about revenue ramping as well..

Next question comes from Paul Treiber from RBC Capital Markets..

A question for Tobi here. And this is like the age-old question for software platforms, which is how do you choose between what you incorporate into Shopify's core platform versus what you delegate to the ecosystem? And in the past, with things like payments with these partners, fulfillment, it looks like you're choosing to do it more yourself now.

How do you really make that decision there?.

My best question is one of those like files you have and then you double click it and it expands and sells up over this space. Without trying to like give an essay on it. Like I mean here's the heuristic, basically, maybe that's the best way to compress this.

If merchants need something more -- if most of the merchants need something most of the times, it got to the core. Like that's sort of the first step at this and that changes over time. So for a while, it was -- most people needed support for 8 payment gateway. I'm talking like ancient history.

At some point, most people needed support for 8 payment gateway. Thus it's a part of a lot of them. And then it just was like eventually payment gateway, we knew exactly what they would need to support and then we built one, which was included with everyone by default and people can just sort of choose another one, if they need to.

It's sort of a voice of conscious of what Shopify does and addresses is not really defined by industry. Like this is a certain interesting -- at some point, there was like a point-of-sale industry and online store industry and logistics industry, and they were all separate.

But like I think verticalizing through all this, it was a really important step here because merchants, again, just kind of need to solve e-commerce problems, while we need to -- sorry, I shouldn't even say e-commerce. We just need to get the product into the cloud and then from there everywhere, right, into every channel.

And that like integrating a whole lot of system or systems together, just the complexity that will limit the potential for growth. And we think similar about logistics. But there's also fairly bright lines around this, like physical shippable products kind of our bread and butter, and that's a huge market.

Like it's incredible how often in my career I had conversations, which kind of difficult to have, partly because it just kind of underestimate the size of the retail industry to begin with and then also massively underestimate the size of the Internet.

And given the Shopify is at the intersection of both of those things, there's obviously been a very, very large opportunity, but also like lots of opportunity for us to get distracted when we build things.

Since in the last 2 years, we've really, really focused on not getting in too many adjacencies and being clear with our partners, what it is we want to accomplish, and just really, really, really sweating with the details of the core parts of the business.

So I think if you're trying to predict the direction we are going, just imagine like I think we told everyone roughly which part of the space we want to solve, and we are going to get better and better and better in both parts. And sometimes a little bit deeper integrated wherever, but it's a big product advantage.

But this is -- past that, it's really case-by-case and very, very complicated conversation involving assumptions about what the future looks like and things like there's pressure. Again, that's a really, really big topic or as fascinating one though..

Next question comes from Bhavin Shah from Deutsche Bank..

Great. I guess for Harley or Tobias, you guys continue to innovate on the Shop App, adding more and more search functionality.

How are you guys thinking about ways to potentially monetize your scale here, also balancing the need for merchants to kind of remain control of their brand?.

I'll start. It's Harley here. So look, I think the Shop App is certainly getting more and more attention now. It -- really the value prop that we've always talked about around it is strengthening the merchant relationship with buyers in an effort to increase customer LTV.

So it offers things like real-time order tracking, in-app checkout with Shop Pay, Shop Pay Installments has product recommendations, post-purchase marketing, it really is a great way for merchants to better engage with their end consumer.

In terms of how we continue to evolve that, I mean, look, in Q4 2021 alone, millions more buyers signed up in new Shop App to make purchase directly from the app during the holiday season, and that obviously continues as well.

The other thing to sort of think about is, as we -- as a consumer decides that they like a particular brand, this is something -- this is a way for them to go direct to that brand again when they want to buy either more products or they want to rebuy product they've already purchased.

And when you combine that with Shop Pay, which, as I mentioned in the opening remarks, has now facilitated $43 billion in GMV since it's launched, it's 4x faster. It has a 1.7x higher checkout rate. It is becoming consumers' favorite way to shop and -- for further favorite brands. So we'll continue to innovate on that from a product perspective.

In terms of the monetization of that, look, the more ways that merchants can sell the higher their LTV becomes, obviously, Shopify's business model is a flywheel entrepreneurship and the better our merchants do, the better we do. And so that's really where we're focused..

Next question comes from Colin Sebastian from Baird..

I will apologize by adding another question on the fulfillment. And I guess the question is, what will this 3-year investment cycle give you in terms of capacity? I mean the context there being the amount that we're seeing other platforms like Amazon spending per facility.

And if within that capacity ramp, are you embedding anything related to transportation either middle mile or last mile, which is also part of competing logistics offerings?.

I would say that just -- I mean, I mentioned some of this earlier on, but the goal is now that we have a sufficient amount of insight and information and feedback from merchants, we really -- we want to continue to build these foundational features for SFN.

So what we're focusing on is, how do we offer this fast and simple fulfillment that will enable them to delight their customers. Part of that will be things like testing fees across like one simple fee across things like inbounding and pick and pack and storage and supplies. But what we're trying to do is just enable it.

So as I said in my opening remarks, the merchants don't have to think about fulfillment. Again, being able to offer this to 90% of the U.S., 2-day affordable shipping, that really is the goal. And there's mix between self-owned warehouses, but also leveraging partners, we think is the best way to get up there.

But look, this is complicated stuff, and this is stuff that is not -- is not easy to do. That's sort of where Shopify shines. We've always shine where we take things that are really complicated and we simplify them for small businesses and our larger business as well.

So our plan is really to, again, move into this phase of build, scale these operations, figure out where we can find greater control over efficiency layers, where we can find automation. There's obviously cost levers as well here, but the goal is to make fulfillment something that our merchants, particularly in the U.S.

for now, don't have to think about it. That's the goal..

Yes.

And I think I would just add in there that, again, us running, operating some of the larger hubs as a backbone, adding -- and continuing to work with partners for spokes, for sort centers and continuing to iterate on how this evolves, looking at middle mile transportation, anything that increases the speed and efficiency of the network on behalf of our merchants, we absolutely will consider in the mix going forward..

Next question comes from Samad Samana from Jefferies..

Amy, maybe one for you.

I'm wondering how should we think about the brick-and-mortar GMV represented by your existing merchants that have both a physical presence and an e-com footprint? And what percentage of that has been penetrated by the Shop point-of-sale offering?.

Yes. I mean we don't disclose the particulars, but we know that there's a large percentage of our existing merchant base that has both.

And so when you look at our POS performance, as Harley said, not only did it have its best quarter ever in Q4 from a GMV perspective, but we've continued to increase the number of merchants and the number of locations significantly. And in that addition of merchants, we're seeing healthy penetration of our existing merchant base.

That's the #1 driver of increasing merchants in Q4, followed by new merchants coming to Shopify. So we're successful in both. So this is a significant opportunity for us, and as we also indicated, we're in 8 geographies now as of the end of Q4 for POS with integrated payments, and we've already launched 3 additional geographies already in Q1 of '22.

So this is a major opportunity for us going forward..

We're also beginning to see -- just add on the retail point-of-sale side of things, we're also starting to see some really larger merchants start using this as well, whether French Connection in the U.K.

or Campus in Italy, FC Copenhagen in Denmark, Allbirds, Parachute, Brooklinen, what we're seeing is that a lot of our -- a lot of the brands we talked about from an e-commerce perspective are really making Shopify point of sale part of their offering in a physical location. And so retail is unequivocally growing its impact in the Shopify business.

And as more markets open up post pandemic, I think you're going to see a lot more there, but we're really proud of -- it was the best quarter ever for retail business on Shopify..

Yes, and the general tolerance for bad software is going down across everywhere. Like I think people -- just experience to call it lockdowns and all these kind of things has exposed people to the quality of consumer software everywhere and then how the problems can be solved in the business context.

So as people -- like everyone is looking at better point-of-sale systems and Shopify point of sale is really, really good. So certainly helping..

[Technical Difficulty] from Goldman Sachs..

Amy, I wanted to follow up on your comment on payback period as it relates to SFN.

And also a little bit of a broader question, which is when you have a team when you think about internal forecasting for the longer term, could you give us a little bit of color on how you're thinking about ROI on the incremental CapEx and OpEx investments or timing to realize a return relative to perhaps what your typical returns for what may have looked like pre-COVID? And then just one clarification on reinvesting all gross profit dollars.

Does that mean we should take OpEx plus CapEx equal to gross margin dollars? Just a little clarification on how exactly that reconciled in the P&L?.

Well, on the SFN commentary about investing levels above what we provided in our outlook, yes, we're not going to get into the details of how we view payback ROI.

But what we can assure you is, we've always been strong allocators of capital to the right opportunities to grow the various parts of the business at the right time, and this is no different.

So the outlook that we provided you, any investment above that would be based on things like volume growing significantly that would have sufficient payback to justify the investment, and that would be a very good thing to have that kind of volume. So that's how we're looking at it.

The Space investment gets us to a certain level of scale that we think allows us to start optimizing costs and increase the number and types of merchants that we're serving and anything above that really is driven by success.

In terms of investing all of our gross profit dollars back into the business, that's exactly what it means, and we'll leave it there.

It means we see a significant opportunity in front of us to continue to go after digital commerce transformation, and there are parts of the business today from an adjusted operating income perspective that are positive, and we're deploying all of those profits back in to grow the businesses like international growth, POS that we just talked about, the Shop App and SFN..

Thanks so much Gabriella and so thanks, everybody, for dialing in today..

This concludes today's call. Thank you so much for joining. You may now disconnect your lines..