Katie Keita - Director, IR Tobi Lütke - Founder and CEO Harley Finkelstein - COO Russ Jones - CFO

Ken Wong - Citigroup Tom Forte - Maxim Group Darren Aftahi - Roth Capital Partners Brian Peterson - Raymond James Gil Luria - Wedbush Securities Monika Garg - Pacific Crest Ross MacMillan - RBC Capital Markets Michael Nemeroff - Credit Suisse Colin Sebastian - Robert Baird Brian Essex - Morgan Stanley Richard Davis - Canaccord Gus Papageorgiou - Macquarie James Cakmak - Monness Crespi Hardt Sam Kemp - Piper Jaffray

Good morning. My name is Dan and I will be your conference operator today. At this time, I would like to welcome everyone to the Shopify Q2 2016 financial results conference call. All lines have been placed on mute to prevent any background noises. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Katie Keita, you may begin your conference.

Good morning. Thank you all for joining us for Shopify’s second quarter 2016 conference call. Opening today’s call is Tobi Lütke, Shopify’s Founder and CEO. After Tobi’s remarks, we will hear from Harley Finkelstein, our Chief Operating Officer and then Russ Jones, our Chief Financial Officer will review our second quarter results and our expectations for the rest of 2016. Then, we will open it up for your questions. During today’s discussion, we will make forward-looking statements which are based on current assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those projected in these statements. We undertake no obligation to update these statements except as required by law. Information about these risks and uncertainties is contained in our press release this morning as well as in our filings with securities regulators in both Canada and the U.S. Also, our commentary today will include adjusted financial measures which are non-GAAP measures and should be considered as a supplement to, not a substitute for our 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 we report in USD, so all amounts discussed are in U.S. dollars unless otherwise indicated. With that, I will turn the call over to Tobi. Tobi Lütke: Thanks Katie, and good morning, everyone. All-in-all, it was another great quarter number wise, and Russ will dive into that later. Product and development wise, there are few things I’d like to talk about today, because overall you can’t see them directly in our or quarterly numbers, while they make a big difference. Unless you are reminded of those things from time-to-time, it’s easy to look at what goes into merchant acquisition, merchant retention and merchant success. In other words, I’m going to talk about the things that cost money but don’t have an obvious impact on immediate returns. However, return of those efforts comes over time. And I’ve made it clear in the past that they are about long-term and so this is I’d like to talk about. The first thing and this is really kind of my wheelhouse is user experience. It’s just a great place to start because it was user experience that had Shopify spread like wildfire in the early days. And frankly, I think it will be user experience that will continue to set us apart. When we poll our merchants and talk with them, they absolutely always reference user experience as a primary differentiator that made them following up [ph] Shopify in first place. User experience is a really big field and there is a lot of sub-parts to dive into. The thing we concentrate most on are two, which is simplicity and performance. Simplicity is the thing you also hear the most reference. It’s just, if you get some simplicity right, the software simply works, just as a learning curve and all these kind of things. The trick is keeping ease of use intact as commerce [ph] becomes so complex. Every new channel added, every new device, every new feature we add inherently affects the merchant and plan to action with Shopify or the buyer’s experience, purchasing things from a merchant. Getting this right is just really, really important to us Over 10% of the Shopify headcount is now U.S. [ph] team, which is led by our co-founder Daniel. They spend hundreds of hours in stores talking to merchants, watching merchants, testing for data and just to really understand how to solve these core problems. These efforts pay-off. Ease of use actually translates to speed for them. Our design decisions which on the surface [ph] might smaller but which are based many hours of we behavior research, make setup faster, administration faster and make purchasing faster. Obviously the time save for merchants add up and let them focus more on building the business rather than running the tools. The great enabler for a lot of this and good user experience is the underlying technology infrastructure. This is again a clear differentiator. I’ve talked about flash sales in the past. Merchants come to us and partners send merchants to us because they know despite surges [ph] of demand Shopify performs. One of the most extreme examples recently sustained well over 1 million requests per minute which we handled by supporting hundreds of thousands of our merchants at the same time. But beyond the flash sales, let’s just look at the day-to-day. While [indiscernible] requests have more than doubled over the past year, we continue to deliver response times faster than 100 milliseconds on average. This matters because directly results in more sales. This is why the addition of Apple Pay and Android Pay to our merchant store front is important. The difference between pinching a mobile screen and zooming in, filling in tiny numbers into a tiny check-out form or simply doing a single tap and have it all said and done is just a profound difference. Additionally, trust and security continues to present a challenge for buyers interacting with brands they are not familiar with yet. Presenting a familiar brand, doing check-outs like Apple and Android has mitigated this. A benefit to Shopify is that unlike many other wallets such as PayPal; Apple and Android Pay leverage for existing shops, credit card processing capabilities. This allows some of our payments to offer wallet like experience on these mobile phones which is going to be very helpful to our GMP footprint. Most important, we expect addition of Apple and Android Pay to improve mobile conversion rates. And because time spent on mobile phones is increasing, increases sales for merchants across the platform. The more powerful driver of sales for merchants however is marketing, which brings me to Kit. Kit is doing exceptionally well since joining Shopify in April and has nearly doubled the number of installs on the Shopify platform. Ironically, there is zero dollars spent on advertising and really do have a power of a platform; in this case, a simple blog post. The recent addition of Kit home card in the app [ph] brings Kit even more front and centre for merchants. And we expect the ongoing successes that we have seen to continue. Merchants simply love Kit. I encourage you to read the reviews of Kit in the Shopify app store because it will give you a taste of just how wonderful and powerful conversation commerce can be. And there is a lot of people super excited about costs [ph] who maybe shouldn’t be quite yet, it is a legitimately great use case. More business today are already on text messages between staff members, and Kit, even though it’s a computer program, joins this process perfectly, nothing new to learn, you already know how to talk to it. It’s amazing, the new ways you can solve problems that have been hanging around for centuries in small businesses. Not only is it fun, it’s also very gratifying. With that I will hand the mic to Harley.

Thanks Tobi. Good morning, everyone and thanks for taking the time to talk about our second quarter. This morning I will limit my comments to highlights around our partner community and Shopify Plus. In both these areas, Q2 was all about execution, really great execution on the initiatives we announced earlier this year. Let me start with partners. Since our partner conference in late March called Shopify Unite, we’ve continued to see our partner ecosystem thrive. As you know, Shopify’s many different kinds of partners. They build apps, they design themes and refer new merchants to us. Some are operational like UberRUSH, Postmates and USPS and some like Facebook, Pinterest and Amazon expand the selling channels our merchants use directly from the Shopify admin to sell more products in more places. So, let me start with these channel partners since there is a lot going on this are right now. GMV over our social channels, including Facebook and Pinterest as well as our Buy Button, while still small continues to grow even faster quarter on quarter than GMV from our online stores, which itself is a fast-growing channel. As you know, we added messenger capabilities to our Facebook channel in April and already there have been more than 1 million conversations between our merchants and our customers by messenger. Our first integrated marketplace channel Amazon is on track for general availability later this year. Already, and in its limited deployment, merchants have completed thousands of orders over the Amazon channel. Merchants are also now generating sales over the integrated channels built by our new sales channel SDK partners Wanelo, eBay and Houzz. While all of these are early stage and still small relative to our total GMV, what’s important to understand here is that with each new channel made available, merchants are selling more finding new customers to buy their products in new places. Partners of course also continue to be an important source of new merchants for Shopify. Our agency and freelance partners referred thousands of merchants to Shopify in Q2, and a growing number of those partners referred merchants to our Shopify Plus offering. In Q2, we expanded our partner program to include a new segment specifically for Shopify Plus, adding world-class agencies like R/GA, One Rockwell Interstellar work with some of the largest and best known brands on earth. These partners look at merchants that are looking to evolve their existing commerce strategies. And as we know, Shopify offers a radically different model which delivers incredible value. So, the result is often a perfect fit. Although this program is quite new, these partners have already brought on dozens of new larger merchants to Shopify Plus. As these ramp up, they will be a powerful complement to our Plus sales team. Speaking of Shopify Plus, Q2 was another stellar quarter for that group where we added a number of large brands. These include Boeing, Bose, Hallmark and musicians Adele, Justin Bieber and Radiohead who launched their new album on Shopify. We also added Ubuntu s a merchant which is selling support contracts for users of its open source software. I love this example because it shows the versatility of the Shopify platform. With the progress we made in Q2, it’s easy to see why Shopify Plus’ contribution to MRR and GMV grew in the quarter as it has every single quarter since inception. Average MRR per Plus merchant has expanded as we have now been able to capture more value for more deals more consistently as our sales organization has evolved. Once again this quarter, about half of the new Shopify Plus merchants in Q2 were homegrown that is they upgraded from lower price lines. They moved, we mentioned last quarter, into our new Plus office in Waterloo, which gives us ample into grow is now complete. Finally, no discussion of the second quarter would be complete without mentioning the winners of our sixth Build a Business competition, which has become one of the largest and most impactful entrepreneurial competitions on the planet. This year, the competition once again drew thousands of newly nearly mentioned entrepreneurs. And over the course of the competition’s six-year history, these contestants have achieved over $600 million worth of sales, which is remarkable considering they were all brand new businesses, when they signed up for the competition. In fact, that is what makes the Build a Business competition so great. These winners are entrepreneurs whose businesses didn’t even exist at the start of last year. Now, while they may not be the well-recognized big brands, I mentioned earlier, one day they could be. This is the market Shopify was built for and who we target, because all of them can grow to be future Shopify Plus merchants and never had originally Shopify. The future retail looks nothing like it did 10 years ago, it is far more data driven, far more efficient and easier than ever for merchants to connect with their customers; transactions are more seamless than ever. Investors often ask me what makes Shopify different. And this is really it that we’re pushing retail into the 21st century and we’re doing it for everyone from the startup entrepreneur to some of the largest global enterprises. It’s about so much more than just online versus brick-and-mortar, it’s about helping people sell period, wherever whenever and however, and that’s why merchants come to Shopify and that’s why they stay. And with that, I’ll turn the call over to Russ to finish out.

Thanks Harley. I will second what Harley said, Q2 was a quarter of solid execution and our numbers are test to this? Q2 was the fourth quarter in a row where we grew revenue year-on-year by over 90%, which speaks to both, the size of our market and our leadership position within. We grew revenue in the second quarter 93% over Q2 2015 to $86.6 million, split almost equally between subscription solutions and merchant solutions. Subscription solutions revenue grew 72% to $43.7 million and merchant solutions grew 121% to $43 million. First, the drivers for subscription solutions revenue. MRR at June 30th was $14.4 million, up 70% year-over-year. We continue to see strong growth in a number of merchants joining the platform and the number of Shopify merchants now exceeds 300,000. We also benefited from higher subscription revenue per merchant as we had more merchants either upgrade to or on-board on higher price plans. Driving merchant solutions revenue GMV growth accelerated to 106% over last year’s second quarter, reaching $3.4 billion. Not only did we process more GMV, the percentage of GMV processed through Shopify payments grew again as well and we surpassed the $1 billion mark in Q2 for payments volume process. Gross profit dollars grew 83% to $46.2 million, geared here both Shopify Shipping and to a lesser degree Shopify Capital helped contribute to this. Q2 results also reflect improved operating leverage both year-over-year and sequentially. Overall, adjusted operating expenses as a percentage of revenue declined to 57% versus 61% in Q2 of 2015 and 62% in Q1 of 2016. Most of this improvement came from higher sales and marketing leverage. As a result of our improved performance and leverage, our adjusted operating loss for the second quarter of 2016 was $3.2 million or 3.7% of revenue, compared with an adjusted operating loss of $1.9 million or 4.2% of revenue for Q2 of 2015. The adjusted net loss for Q2 was $3 million compared with $1.7 million for Q2 a year ago. We ended the quarter with a $179.6 million in cash, cash equivalents, and marketable securities. Looking at our three focus areas for investment for 2016, as Harley said, Shopify Plus has expanded into its headquarters, our new partner program is off to a good start, and the new sales hackers hired in the first half are currently ramping. With regard to the buildout of data centre capacity, we continue to explore the various European alternatives and our planning to add capacity to our existing infrastructure this quarter and early next, ahead of the holiday retail season. Instead of a single large merchant conference, we’ve decided to focus on a larger number of industry conference and city specific events which we are finding to be very effective. So, taking all this into consideration, as we look ahead to the second half, given the strong results in Q2 and our proved outlook for the balance of the year, we now expect to report full year 2016 revenue in the range of $361 million to $367 million. Given the improved operating leverage in Q2 and the stronger revenue outlook for the full year, we expect to report a full year adjusted operating loss in the range of $12 million to $16 million, smaller than we’ve previously forecasted. This excludes stock-based compensation expense and related payroll taxes of $25 million, our forecast for which has not changed. For the third quarter, we expect to achieve revenue in the range of $93 and $95 million and adjusted operating loss in the $2 to $4 million range, which excludes $7 million in expected stock-based compensation expenses and related payroll tax. With that, I’ll turn it back to Katie to start the Q&A.

Thank you, Russ. Dan, we would like to open the line up for questions now please.

[Operator Instructions] And your first question comes from the line of Ken Wong from Citigroup. Please go ahead.

So, you guys added over 25,000 merchants, you guys are up to 300,000 now. Any notable changes to that composition of kind of these net new 25,000 that are coming in that you can perhaps share with us?

This is Russ here. Yes, no real change. So, we continue to get strong growth in sort of all tiers of our target merchant base, so entrepreneurs who are just starting out as well as Harley talked about at the higher end again up a number of new Plus merchants. So, no real change overall and just good strong growth at all levels.

Got it. And then, I guess in terms of the commentary around you got half your customers, your homegrown customers moving up to Plus. Can you maybe help us understand kind of what is driving that dynamic; is it purely they are growing beyond the core capabilities of the lower offering; is it just they wanted the higher touch, maybe specific capabilities? Any thoughts on what you are seeing there?

Hey, there. It’s Harley here. So, I’ll answer that question. So, in terms of the upgrades, people that are moving up from lower level plans to Shopify Plus, we are seeing a variety of reasons. In some cases, they need more dedicated account management or dedicated support. Some of them need specific features that are only offered to Shopify Plus, things that they may be specific to their business or for example, perhaps they need tax compliance and so for them Avalara is really important, which is something we offer to our Plus merchants. So, it’s a variety of reasons, some upgrade because they want to do a massive flash sale and they want to have that peace of mind, and others need particular features. But generally, there is not one reason.

Any sense for what percent of your base this offering might eventually make sense for? It seems like it’s probably compelling for more than just a pure, larger enterprise type of a customer, with so many of your homegrown guys already moving up there.

Yes. so, I mean, in terms of the percentage of total merchants, the number of Plus merchants is still relatively small. Although obviously their impact on the business is much larger. They pay more money; they sell more products. And certainly we’re able to capture that through things like merchant services. But in terms of what that eventually split is going to be, that remains to be seen.

Your next question comes from the line of Tom Forte from Maxim Group. Please go ahead.

Two questions, one, I wanted to know what in particular are you doing to drive the attachment rates for the shipping and the payments offering, and to what extent is that working? And then, I can’t resist to ask Tobi this question, so I apologize in advance, But given the success of Pokemon GO, how does he see augmented reality and virtual reality playing out within the ecommerce space? Tobi Lütke: So, in terms of attach rates, like Shopify Payments to be set up automatically, right? Like this is in our sort of view, we find that the payment gateway you use is sort of a odd implementation detail that traditionally has been put on the merchants to make a choice over. We want Shopify to just simply to be the a commerce system you sign up for which can receive money and put it in your bank account. So, it’s very important for us to ship out of the box. It’s a very quick payment setup. This shipping, it’s a similar story. I would say there we’re still experimenting exactly how to introduce it, because the thing is shipping processes are simply heavily ingrained in the existing business like just the way money takes before it hits your bank account but that’s just a lot more flexibility. So, this is something we’ve been spending a lot of time on since launch Shopify Shipping. And I think we’re making really great progress there. And then about Pokemon GO, what a phenomenon like it’s cool -- it happened so fast, and what was really exciting for me personally was just watching what happened on Shopify. I’ve often said that Shopify is actually, like, just from a data perspective, a wonderful view into global SMB economic activity. The day after Pokemon GO first hit the news and ship, one of our trending stores ended up being a store which as referenced in meetings before, which makes custom Pokemon jewelry and so on. So, you see this kind of -- and this is happens then in Australia and then there are stores in North America with other things related to this. And then of course, what was wonderful is that there was this ability to furbish certain kind [ph] lures. A lot of our customers told us that they were attracting a lot of new buyers into their stores by placing what’s lures and having lots of people with their noses in their phones sort of walking into the store and then sometimes also buying things. So, this is about the peace of information which we nearly pushed out to everyone through our blog and through the home cards and that drove a lot of activity. But, I think like just zooming out a moment, like here is a great example of the things that we just can’t kind of predict, right, like this is why I’m extremely excited about virtual reality. And I think virtual reality is the thing that sets the stage for augmented reality. And the thing that set the stage for both of things is location based programs, and we are only just scratching the surface. Clearly, that is applicable for commerce and I’m, sure there are going to be channels that are going to take advantage of these kind of ideas. I think it will have some impact on the future of advertising and maybe major it’ll be a driver behind what might make smaller merchants more competitive again with the big box stores of sort of the last century. And so, it’s really, really cool. And I think we’re well-prepared for very quickly to not just allow, have great softwares to take advantage of these new trends, but also just push information into the network so that people can happen to have something that’s new.

Your next question comes from the line of Darren Aftahi from Roth Capital Partners. Please go ahead.

Hey, guys. Thanks for taking my questions and congratulations. Two, if I may. First, can you give us a sense for -- I know you talked about merchant upgrades driving ARPU growth, what percentage of your existing base upgraded to a higher price plan in the quarter? And then, number two, it looked like gross margins on Merchant Solutions improved a little bit. Two things: One, what’s the trend going forward for that? And number two, what’s really driving that improvement; is it interchange, a higher percentage of shipping tools, just more color on that would be great?

This is Russ. Yes, in terms of the absolute number of upgrades, I don’t have the specifics on that. But our whole pricing approach is making decision on which plan to pick the merchant decision. And so on higher plans you get for example credit card processing rates or if you’re not using Shopify Payments, you get a lower transaction fee. Also the way, we’ve designed shipping, you get higher discount, the higher the plan. So, it’s really an economic decision. With the exception of Plus, as Harley mentioned, there are some capabilities only available on the Plus side. On the margin, I think there is really a couple of things. So, we do, we are seeing some improvements in terms of the overall interchange rate that we are getting charged. As we expand that beyond North America, we do get better results there. And so both the UK and Australia contributed on the margin side. And then this quarter, we did fair to see some positive impact from both shipping and to a lesser extent Shopify merchant cash advances.

Thanks.

Your next question comes from the line of Terry Tillman from Raymond James. Please go ahead.

Hi, this is Brian Peterson in for Terry. A question for Harley, just wanted to hit on the Shopify Plus customers that are new to the platform. Are those typically Greenfield or are you replacing another technology vendor? And I am curious, of those deals, how many are coming direct versus from partners?

Hey there, I’ll take the question. So, in terms of the -- as I mentioned, 50-50 for Q2 in terms of upgrade versus brand new to Shopify, of the 50% that are new to Shopify, it’s a mix. Some of them have never actually sold direct to consumer before and so in the case of Bose, it’s a new product which is a speaker system that you can build on your own speaker system. That is a new product to the market and so they obviously did not migrate. In other cases, we are seeing companies that are migrating over from some of the more traditional enterprise platforms. And so there is a healthy mix there. In terms of the partnered program that I mentioned earlier, we had a very large and a very successful partner ecosystem for a long time. The big change in the last quarter is that we’re now going after partners that traditionally only work with the largest of enterprise platforms that are now starting to work with us. And so, it’s still early days but we suspect that the partner ecosystem will be a very strong driver of new merchants on Plus in a similar way that it has been to the rest of Shopify.

Awesome, thanks. And a quick one for Russ, the guidance for the third quarter implies that profitability should get better, and I think for the fourth quarter you should be pretty close to breakeven. How should we be thinking about the balance of growth versus profitability as we look forward to 2017 and beyond? Thanks.

So, in terms of our view of profitability, it still remains Q4 of 2017. As we talked about, I think investing back into the business is the key thing we can do right now. We’re in excellent position competitively and the market continues to grow with new opportunities. So, we’ll continue to invest there. Some of the improvement on the top line will fall to the bottom line as we’ve forecasted.

Your next question comes from the line of Gil Luria from Wedbush Securities. Please go ahead.

I want to use my question for a high level one. You talked a little bit in your prepared remarks about why you are winning and how you are improving user experience. But if you took a big step back, ecommerce in general seems to be at an inflection point; there’s been several ecommerce companies that have reported great results. Yours are probably the best and the most impressive. But, there seems to be something going on. Ecommerce seems to be doing better than it has maybe since the beginning. What is it that you think that you attribute this inflection point to, and how is Shopify capitalizing on that right now? Tobi Lütke: Yes, that’s a great high level question. I mean, I don’t think it’s a single thing that’s contributing to this. It’s a mix of a lot of things but although I would say at least for people who have been tracking the industry, we’re quite predictive of, like I think one like how Harley mentioned, Bose store. I think one thing you’re seeing a lot more for the largest brands and as well as that there is a lot of disintermediation like a lot of people are going direct. When Shopify started like a decade ago, we were hoping this would one day be the case and we kind of got it confirmed by the fashion industry because the fashion designers really had very limited way of getting in front of their customers. They usually had to go for a runway in Milan and then of course got all their product copied by H&M and so on. So, there was a much more greater need for disintermediation and going direct to consumer and that happened early. And this is something we are now -- which has absolutely spread into every nook and cranny of the industry of people who want great products for consumer goods. I think the other thing is just -- I think it almost sounds weird to reference this but entrepreneurial savviness is a major factor here. Like, we can actually see this if we compare the cohorts over the years of the people starting completely new businesses. We have ways of detecting this in our data. It just doesn’t take people time any more to build big businesses. People have figured out how to do advertising, how to reach customers, how to do new platforms for customer acquisitions like Facebook, but also kind of Google. They’ve kind of been figured out. So, we see just like the ramp being much shorter. And there is a lot of sort of macroeconomical trends. As much as the hipster movement is sort of like about against everything that exists, they do consume a lot of products, and a lot of new brands have been established for them. And these have been serviced with some things like Shopify stores. So, you have all of these kind of trends on the demand side. Now on the supply side, or I should really say like I should really bring this to the user interface, like finding it even we have products like five, ten years ago often meant like you added a product to your cart and then you could not figure out where to click next or you had to create a customer account and create a new password before you could even see a form where you can enter a credit card. And just I think these are experiences really ground people out and people were not willing to do this kind of thing anymore. So, you saw a lot of this activity simply move to like Amazon, where everyone had one account with a credit card preloaded and which is sort of understood. And now that the user experience with the rest of the internet is really catching up with this kind of thing, you just see this economic activity just spread over a greater number of independent businesses again. And I think that’s what you are seeing in the market.

Your next question comes from the line of Monika Garg from Pacific Crest. Please go ahead.

Very strong GMV growth, can you talk about is it due to adding larger new customers or growing your existing customers, and also how big Shopify Plus is, maybe if you can talk about how many customers in Shopify Plus you have now?

Yes. So, in terms of the GMV, the answer is really both. We are adding a number of large merchants who are doing a sizable amount of business through the platform, but we’re also adding lots of new businesses. And so, collectively, those are having a pretty strong impact. In terms of the merchant number for Plus itself, we are less focused on the number, we’re more focused on the impact that they are having on the platform. But, as we said at the end of last year, we had over 1,000 merchants on Shopify Plus. That’s a number we’ll probably update at the end of the fourth quarter as well.

And the next one, you recently filed prospectus to raise about $500 million from the market. You have close to $180 million cash on the balance sheet. Maybe you can talk about the need to raise capital.

Just as a bit of a background, in Q2 we became eligible under the MJDS, as a dual listed company to file a shelf registration, as a result, we did so effective July 29th and issued a press release. The shelf really provides flexibility over the next 25 months. In terms of specific financing plans, we do not plan to comment until there is something to disclose at which time we’ll issue another new press release on that. If we do nothing over that 25 months, most likely we would renew it for another 25 months.

Your next question comes from the line of Ross MacMillan from RBC Capital Markets. Please go ahead.

Thanks so much. Congratulations on another strong quarter and especially nice to see the operating leverage, and on a personal note to get Radiohead on Plus. So, congrats. Tobi or Harley, just on the Amazon marketplace integration and controlled release, I guess on one level, the way I think about it is it’s going to be profoundly helpful for merchants in terms of reach and therefore GMV growth, but are there any other ways that you would think about how it could impact your business beyond merchant acquisition and GMV growth; are there any other potential ways to monetize that?

We’ve talked about channels for -- on last couple of calls and how important it is, specifically because it allows our merchants sell in more places, certainly allowing merchants to sell more on a place like Amazon, we think is a great idea. As I mentioned in my opening comments, it’s still in limited release, but we are already seeing these merchants that are participating in that beta selling thousands of products. So, we’re hopeful that the Amazon channel will help our merchants sell more. In terms of ways to further monetize whether it’s Amazon or other channels that will come in the future. Again, our main priority right now is opening up these channels that merchants can sell more. And whether there is -- the economics will follow we believe. But keep in mind, the reason that we’re doing these channels is really because we want our merchants sell more in more places. And ultimately, we think that a merchant that starts a store in the next couple of years, won’t just start with one channel but may start with multiple channels. And as new things come out, you’ve heard us talk a little bit about VR that may be a great channel for those merchants to continue selling. So, it’s really important that whatever a merchant is selling, wherever their customers are hiding on the internet that we are providing them with a direct channel to sell there. And so, that’s really why this stuff is important.

And just one for Russ. Russ, we noticed that the advanced tier had had a price increase this last quarter. Maybe you could just help us understand the rationale there. And more generally on pricing, how do you think about making modifications to pricing; what’s the strategy that you are following as you think about tweaks to pricing?

So, as I mentioned, we increased the price of the Advanced; we also renamed it to Advanced from Unlimited, which was probably the bigger change that -- the more important part of the change. In terms of pricing, it’s something we look at on a regular basis. I think at the low end, the pricing will stay relatively stable. I mean, really, our goal there is to make pricing a non-issue in terms of people coming to the platform. At the higher end, particularly on Plus, we have increased the price versus last year, and we still believe there is upward room there. Even at the Advanced that I believe it’s 299, there is still lots of value that we’re providing. So, we do have some flexibility there as well, and a little bit of this was just sort of, as we increase the high end, increase that one as well just to make the migration a little bit easier in the merchant’s mind to justify that. Tobi Lütke: One thing, the way the we post our pricing is that we say that all prices are guaranteed for like about in two-month intervals so that partners can count on prices staying the same, but we do pretty much constantly look at the prices. And especially in years prior, we’ve made a lot of tweaks just because getting pricing right is really difficult, it is actually probably impossible. So we’ve found the only way to approximate correct pricing that looks exactly way we want is by trying a lot of things. And so, I think you’ll see a little bit more of that again.

And your next question comes from the line of Michael Nemeroff from Credit Suisse. Please go ahead.

Nice quarter. One for Tobi. I am curious if you’re tempted given the recent acquisition of Demandware by Salesforce to expand into providing large retailers more of a customized solution set like Demandware offered, given that they’re going to be part of a closed platform. How you would think about that going forward? I know that the Plus product is doing well, but there is an opportunity at some of the larger customers in Plus to grab all of their GMV, if you do that. And I’m curious if that’s something you’ve thought about. Tobi Lütke: I mean, Demandware really targeted a group of people, we’re not hiding here, like Plus, we really sort of like, we sometimes be into the territories calling it enterprise, but that’s still -- this is actually a mistake you’re making because it looks really -- enterprise looks really, really high up from our baseline. But really from a perspective of the industry, this is sort of mid market what we are targeting with Plus. However, that being said, we as a Company don’t want to build out the kind of things that Demandware has, like this massive group of services, it takes 12 months integration cycles that are done by engineers on Shopify’s payroll and so offices of the customers and so on. It’s just different form of a company that has their own pros and cons. And I think we would be -- I would imagine we would make a poor version of one of those because that’s just not our home base. However, the neat thing about Shopify is I think we figured out a way to still get that and that’s the partner ecosystem. And I think this is a way for me to point out here partners solve a lot of these kind of issues for us, because they are often local, they often have existing relationships with these businesses, they really understand them commonly from a branding perspective. They might have designed the best price and then built out engineering capabilities. And now, these same groups that have trust relationships with these larger merchants and larger businesses now can come in, and on top of our platform, on top of our APIs do the kind of custom integration into the financial accounting systems and the ERP systems and all these kind of things which are traditionally down first party. That’s how we are thinking about it.

And then a follow-up for Russ, if I may. I am just trying to understand what the economics would be for integrating Apple Pay and Android Pay just so people do not get the wrong impression; how would you generate money and what would the impact be on the gross margin and payments related to that?

So, where they really play is allowing the merchant’s customers to transact more easily with that merchant. For the merchant, if they are using Shopify Payments, then that will flow through any credit card transaction, so that will just be a normal thing from our side. If they’re not using Shopify Payments, chances are they are using one of the gateways that we have a share in, so we will benefit from that as well.

And your next question comes from the line of Colin Sebastian from Robert Baird. Please go ahead.

On Shopify Plus as another follow-up, presumably you’re seeing a lower churn rate as merchants were able to upgrade to higher end platforms. So, I wonder if that lower rate is having a material impact on the net merchant growth numbers. And then, secondly, with the new Plus sales team coming onboard, what should our expectations be for them in terms of moving the needle either on a number of new Plus merchants or merchant volume overall?

So, you are correct, the churn rate for merchants on Plus is certainly low; it’s in line with the norms for enterprise SaaS companies that you guys will see. But keep in mind that as a percentage of total net new merchants, it’s still small. Again, their MRR and GMV is obviously proportionately higher than a typical Shopify merchant, but in terms of the number of merchants, that number is still pretty small. In terms of sales people on Shopify Plus, as you’ll recall, we really only hired our first salesperson, sales hacker Q1 of last year. So, we’re still ramping up a sales team. But we’re seeing a lot of early success there. And again, as I mentioned earlier with the introduction of a new Shopify Plus Partner Program coupled with sales team which is ramping up to full capacity, we think things are going really well there.

And then, quickly on Shopify Capital, and sorry, if I missed the opening remarks, but did you talk about what level of adoption you are seeing to-date for this and how much additional capacity you have to fund these advances, and then also the margin profile of that program?

So, in terms of the margin profile, our revenue is the amount of the factor rate that we have there, so, really high margin profile. In terms of the adoption, it just got really publicly announced earlier in the quarter. We are seeing a significant increase in the amount of advances. It’s still relatively small, so just north of $5 million of advances, and so, well within our capabilities on our balance sheet to continue to fund that ourselves. We continue to explore other ways to finance that as well as to reduce the risk of that program. Interesting thing there is -- just so people are aware, the dollar amounts that we’re advancing, range from 2,500 up to 50,000 is the largest one we have done. In terms of the people that have paid off their advance, the majority of them have gone for a second advance. In fact, we have one merchant now on his fourth advance. The real driver behind this program is to give the merchants some working capital to grow their business. And that’s fundamentally why we are doing that. Just as an interesting side note, we had one merchant that shortly after the advance had a flash sale and ended up paying the whole thing back within 10 days, kind of unique.

Your next question comes from the line of Brian Essex from Morgan Stanley.

I was wondering if you could talk a little bit about the take rate and how much contribution that might be from increased penetration of GMV versus mix. just to get a better sense of how that -- contributions to that growth we saw in the quarter.

So, the take rate went up slightly relative to Q1. I mean, I think it’s a number of things. So, shipping is starting to have an impact; to a much lesser degree, capital is having an impact. We are trying to get more of the Plus merchants on payments, so that will have a positive impact going forward, as well as, now that we have expanded payments into Australia covering our sort of key core markets, that’s adding an impact there as well.

And the percentage of GMV processed through payments that go up in the quarter as well or did your GMV outpaced that?

Both; so, he percentage of GMV going through payments went up, as well as the overall GMV went up, which is kind of a really sweet spot with our business model and that adding more merchants drives revenue, but having those merchants sell more, also drives revenue. So, I think we’re in a very good position that way.

And maybe if I can sneak one in, on the margins, so nice progression in the margins, but I understand you’ve got that data center build coming up or at least center investment. How should we -- given the expansion that we’ve seen to-date, how should we think about margins going forward, the impact that -- investments on the infrastructure side might impact those margins?

So, historically, on the subscription side, Q3 and Q4, as we sort of ramp the investment, drops the margin a little bit there. On the Merchant Solutions, I think you are going to see a number of factors, so obviously more shipping and more advances improves the margin profile as well as expansion outside of -- payments outside of North America. On the flip side, as we do try to get more Plus merchants, that will have a bit of a headwind in terms of that margin percentage. And the way that we think of it, again as we’ve talked about before is really the gross profit dollars which is really what we are focused.

Your next question comes from the line of Richard Davis from Canaccord. Please go ahead.

Most of my questions have been answered since I am pretty far back in the queue. So, merchants kind of need a site shipping and get paid, you guys are already doing this. But, they also need advertising and provide customer support, which we’re seeing from several vendors, they call it customer experience, whether it’s [indiscernible] or Clear Freight. Why or why not put are those functions on your product roadmap?

In terms of the advertising one, I think that’s really where Kit comes into play. So, it will tell a merchant that you are seeing traffic from Facebook for example, do you want to advertise? You respond with an SMS message, yes, you do, and then, it sort of takes care of the rest. So, I think, we are already making some inroads there. I think on the support side, I think where we’ll really see some strength of the platform is using some of the messenger capabilities, as we talked about over 1 million unique messages already. And I think that’s a good way for the merchant to provide that sort of more customized experience. And so that’s probably the way that we’ll tackle that for certainly the foreseeable future.

Your next question comes from the line of Gus Papageorgiou from Macquarie.

Russ, could you just talk a little bit about Shopify shipping and adoption rates in the U.S. where it’s been launched? Can you give us a sense of what proportion of the merchant base in the U.S. has adopted that solution, and could you contrast it to Shopify Payments in the early days, is it being adopted as faster or slower? And then, a follow-up question, if I can, your average revenue per merchant seems to be doing quite well, up quite significantly year-over-year. Is there a revenue level that kind of triggers these merchants to go into the higher-tier plan or there are other factors that would motivate them to upgrade the plan?

So, in terms of your second question, so going from the Advanced to the Plus is really features, as well as some support, hands-on support there so that the driver -- other than that, it is really just economics on that front. I’m sorry, what was the first question?

Adoption of Shopify shipping.

Yes. So, relative to payments, it is lower than payments. As Tobi talked about, payments is somewhat ubiquitous, you just need to be able to accept credit cards where there is a lot more involved in terms of internal company processes relative to shipping. For merchants that are doing let’s use 150 orders or packages a month, the penetration is quite high there; above that, you start to see merchants starting to use more fulfillment services who also then doing the shipping piece of it. And so, we’ll continue to grow that, both within the U.S. and with USPS, but also as we talked about I think in the past, like we’re fairly early in our journey on shipping. And so, adding other geographies and other vendors is kind of the next phase of that.

Your next question comes from the line of James Cakmak from Monness Crespi Hardt. Please go ahead.

Harley, you talked about successes in winning Plus customers away from established enterprise players. Can you talked about the reasons that these customers feel comfortable coming to you, and if not, what are the hurdles -- or potential things that you can do to win customers at the next level? And then, secondly, Russ, on guidance, what does that contemplate in terms of GMS when you think about the developments and the Brexit in Europe?

I will take the first question, so, in terms of Plus and the migrations over. So, keep in mind, our roots and what we’re so focused on is really that SMB. And so educating the market that we can actually handle some of the largest brands in the world, the largest flash sales in the world is really important. Plus is still fairly new in terms of the Shopify story. So, educating and making sure that large brands know they can come to us and they can do massive flash sales, is super important. A lot of the reasons why those migrations happen tend to be for either cost, ease-of-use or time to market. What seems to be happening is a lot of people that work within these large companies that are looking to go direct-to-consumer on brands with their brands are -- they are acting like entrepreneurs. And what I mean by that is they need something that works really well, easy to customize, and they can get up and running really fast. Tobi alluded to the fact that some large enterprise ecommerce companies can take 12 months to get set up. In 2016, that is just not right and unfortunately it doesn’t work for them. So, we’re seeing a lot of these defectors coming over from these other more traditional enterprise platforms looking for just a better solution that they can get fast and easy and without many headaches. Beyond that, one of the things that we’re still working on is ensuring that we don’t just bring on these big brands, we talk about these big brands, we want to talk about how Justin Bieber and Adele and Radiohead have decided to go direct to consumer using Shopify Plus. So, we are spending time doing that. But it’s still really early days for Plus, but certainly it’s a growth area within a growth company. So, there is a lot of potential there.

And in terms of the GMS, which I think [indiscernible] term, so GMV is I think they order volume that we talk about. You saw in absolute dollars a big increase from Q2 up from Q1. Generally, what we see is again a smaller increase going from Q2 to Q3; and then, Q4 historically has been the strong holiday shopping season. So9, we would expect it there. We do not provide guidance on specific GMV though.

Your next question comes from the line of Sam Kemp from Piper Jaffray. Please go ahead.

Two questions, if I may. First, on the Amazon integration, where do you expect most of that inventory to appear on their side; would that be mostly within the handmade section or do you think that a lot of the merchant inventory will go up in other search? And then second, on payments, obviously a large portion of that non-Shopify payments GMV is going through other gateways and payment options that your larger merchants are using. Can you just talk about what are the key steps taking them to convert from using their existing payment format to Shopify Payments?

I will take the first part of that question around Amazon. So, what you’re going to see is depending on the products being sold, you will see it in different sections. So for example, if a merchant wants to cross sell some sort of home furnishing on Amazon, you may see that on the main marketplace, but they also may cross sell in-houses, which is specifically for home furnishing, home goods and stuff of that nature. Certainly, we do look merchants that do sell crafts; and so, you’ll see those in other sections of Amazon, but the nice part about a partnership with a company like Amazon and [indiscernible] merchants that cross-sell is they can select what is the best venue, given the type of product they are selling.

In terms of the payment side, for the merchants that are upgrading to Shopify Plus, the majority of them are already on Shopify Payments, and so no issue on keeping them there. In terms of ones that are coming to -- like sometimes it’s a corporate decision on what payment gateway that the whole corporation uses, so unlikely to change that. But as we add some other capabilities, including the ability to process things like the Apple Pay, the Android Pay, through the Shopify Payments side of it, I think we will see some there. We do have to be more aggressive in terms of the pricing, because those are kind of the ones that other gateways target as well.

And we have no further questions at this time, I turn the call back over to Mr. Tobi Lütke. Tobi Lütke: So, thanks very much for joining us. There were a couple of great questions there, like one thing which I love about Shopify Plus again, is these homegrown success stories that we have talked about a bit; we talked about what kind of size Shopify Plus represents within Shopify and so. But the really amazing thing about the business really is that we through our work on the product, through user experience, we are increasing the simplicity through making it faster and more approachable. We can actually have a meaningful impact on the businesses of our customers and actually have produced more future Plus customers. And I think this just so neatly wraps up how aligned everything is in our little world here. We are on the same side of the table as our customers and as our partners, and if any of them do well, everyone else does well. I think that’s really part of the secret of this Company. So with that, thank you very much. And I’ll talk to you soon.

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