Katie Keita - Head, Investor Relations Harley Finkelstein - Chief Operating Officer Amy Shapero - Chief Financial Officer Tobi Lütke - Founder and Chief Executive Officer

Michael Nemeroff - Credit Suisse Monika Garg - KeyBanc Capital Markets Jonathan Kees - Summit Insights Group Deepak Mathivanan - Barclays Capital Colin Sebastian - Robert W. Baird & Co. Sam Kemp - Piper Jaffray Jesse Hulsing - Goldman Sachs Darren Aftahi - ROTH Capital Partners Gus Papageorgiou - Macquarie Research Koji Ikeda - Oppenheimer & Company Nikhil Thadani - Mackie Research Capital David Hynes - Canaccord Genuity Tom Forte - D. A. Davidson Ross MacMillan - RBC Capital Markets Brian Essex - Morgan Stanley Todd Coupland - CIBC Suthan Sukumar - Eight Capital Ronald Bookbinder - IFS Securities Richard Tse - National Bank Financial Justin Furby - William Blair & Company

Good morning. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Shopify’s First Quarter 2018 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. [Operator Instructions] Thank you. Katie Keita, you may begin your conference.

Thank you, operator, and good morning, everyone. We are glad you can join us for Shopify’s first quarter 2018 conference call. We are joined this morning by Tobi Lütke, Shopify’s CEO; Harley Finkelstein, our Chief Operating Officer; and our new CFO, Amy Shapero, who joined us four weeks ago. After prepared remarks, we’ll open it up for your questions. We will make forward-looking statements on our call today, statements that are based on current assumptions and 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 regulators in Canada and the United States. 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 first quarter of 2018 was another strong one, as the results released this morning show. Entrepreneurs and large brands alike commuted through Shopify to begin their journey multichannel commerce. Their GMV continues to expand at a healthy pace and we are steadily getting wallet share as merchants continue to adopt new solutions like Shopify Shipping and Shopify Capital. These are all good things, but it’s also worth highlighting the progress we’re making in our longer-term investments for the future, in particular, in our platform, internationally and in Shopify Plus. This is where I will focus my comments this morning starting with our platform. There’s a lot of complexity introduced when commerce goes multichannel. Suddenly, merchants are dealing with complications that come from doing business everywhere, adding to the list of things they need to think about. Things like shipping, fulfillments and logistics, which can be complex even for in-person transactions go from being backroom functions to being part of the customer experience. It’s easy to see how merchants can quickly feel overwhelmed. This is why one of our primary design principles is to keep things simple for merchants. Prioritizing simplicity helps small and midsized merchants better compete and continue to fuel the commerce landscape as we believe SMBs and newly established micro brands play an important role in the future of retail. And it also helps higher volume brands incorporate only those capabilities that suit their needs best. Why is this important? Well, two reasons. One, we think simplicity is one of the main reasons small merchants and large come to Shopify. And two, it underscores the wealth of opportunities we have in front of us. At Shopify, by leaning on technology to help solve problems instead of letting technology create them, we level the playing field for merchants. A good example of this is Google Pay, which we added in Q1. With so many options for checkout, including Apple Pay and Shopify Pay, and just a variety of end user devices and preferences, keeping it simple for the merchant and their buyer is key. As with all checkout accelerators, Google Pay can discern whether the consumer’s device is enabled for it and presents the consumer with checkout options accordingly. This focus on simplicity has, for the past 12 years, been centered on merchants in North America first, as this has historically been our largest market. It’s where most of our merchants are today and where most orders on Shopify are shipped to and from. But our addressable market is much larger than that, which is why we are embarking on a multi-year journey towards making Shopify as simple and effective globally as it is in our core geographies. One of the first steps in this journey has been transitioning to a global cloud service provider for production. With the rapid addition of merchants around the world, coupled with the increasing regulations around data sovereignty, we began leveraging the capabilities of a cloud provider last year. Today, the vast majority of our production data and operations are no longer running on our own hardware. All this means increased cost in the short-term for subscription solutions, we expect the benefits of global scale, flexible capacity and increased engineering velocity will grow over time. Another step in developing our platform internationally is language. This means that adoption of Shopify will no longer be limited to just those merchants who understand English. And so many opportunities remain to better localize the platform for things like payment methods, currency and merchant solutions like shipping and capital. We expect these efforts will further boost the percentage of Shopify merchants outside our more established geographies in North America, the UK and Australia, which continue to grow in Q1. Turning to Shopify Plus. While the first quarter of the calendar year is seasonally a slow one for buyers in the enterprise, we still added far more new merchants in the quarter versus the same period last year. Some of the more recognizable names launched in Shopify Plus in the quarter include Varnaie [ph], The UGG Company out of Australia, LeSportsac, Monster Electronics, HarperCollins UK, Vega, Colgate-Palmolive and some great new shops from the likes of Nestle and PepsiCo, including the Smile With Lay’s shop, where consumers can customize a bag of Lay’s potato chips and put their own face on it. Finally, no discussion of the quarter would be complete without an update on our partners. Our partner ecosystem is healthy and thriving, with 2,400 apps available to merchants on the platform today and nearly 16,000 partners having referred merchants to Shopify over the past 12 months. We’re looking forward to welcoming our partners to Toronto next week for our annual Unite Partner Conference. The ecosystem at Shopify has created between merchants and developers, designers and agencies is very powerful. We believe this ecosystem can and will inspire what the future of technology and the future of commerce looks like. Before I turn it over to Amy to comment on the moving parts behind the numbers, I would like to welcome her on the call to our management team, to Shopify and to Ottawa. Amy wasted no time at all adding value to the executive team in her first four weeks. It’s great to have Amy on Board, especially now as we’re so early in our journey towards making commerce better for everyone.

Thank you, Harley, for the warm welcome. I’m very glad to be here. When I was going through the interview process, I was struck by a few things. But probably the most important one, as Harley said, was the vast opportunities still in front of Shopify. Here was a company still in the early innings of the space where it plays with a team that had demonstrated its ability to capture that opportunity. What Shopify had accomplished since its IPO is really impressive not to mention the many character-forming years before that. These factors made this a unique opportunity and the mission-driven team here just felt like a team that I wanted to be a part of. So while I was not here for the quarter I’m reporting on today, the drivers were fairly straightforward. Starting with revenue. Revenue was up 68% from last year’s first quarter to $214.3 million. The larger and fastest growing component was Merchant Solutions revenue, which grew 75% year-over-year to $114.1 million. While Shopify Payments is still the largest piece of this, Merchant Solutions revenue is rapidly diversifying, as revenue from capital and shipping both more than doubled over the last year. Shopify Payments continued to climb on strong growth in GMV, which reached $8 billion, an increase of 64% from the comparable quarter last year. The percentage of GMV processed on Shopify Payments was on par with last year’s first quarter at 38% and was a slight downtick from Q4’s 39% consistent with seasonal trends. Subscription Solutions revenue grew 61% to $100 million. As Harley mentioned, we had another quarter of strong merchant adds. By continuing to flatten the learning curve for entrepreneurship, Shopify is putting the possibility of starting your own business within reach for more people than ever. Monthly recurring revenue grew 57% and ended the quarter at $32.5 million. Shopify Plus’ share of this ticked up in the quarter to 22% of MRR, compared to 17% in Q1 of last year. Gross profit dollars again grew faster than revenue, up 71% from Q1 of 2017 to $123.8 million. We saw strong growth in revenue from partner referral fees, as well as in higher-margin streams like capital and shipping. These more than offset the headwind to Subscription Solutions margins from our transition to the cloud, specifically accelerated depreciation on our own servers and the temporary duplication of costs as we transition from our own data centers, both of which we expect to be behind us by year-end. Our adjusted operating loss in Q1 was approximately $200,000 close to break-even, compared with a loss of $4.3 million, or 3.4% of revenue in the first quarter of 2017. Adjusted net income for the quarter was $4.2 million, or $0.04 per share. This compares with a $3.5 million net loss, or $0.04 per share for last year’s first quarter. Finally, our cash and cash equivalents and marketable securities balance was $1.6 billion. This is about $650 million higher than our December 31 balance of $938 million, as we raised additional funds from our offering of 4.8 million shares in February. Now I’m thinking that one of the first questions I may get once we open up the call for questions is about plans for these funds. As I said at the start of the call, one thing we are not lacking at Shopify is opportunity. And like the rest of this management team, I’m a big believer in the strategic benefit of optionality. So we will ask you now to stay tuned on that front as the year progresses. Our expectations for what we can achieve financially in 2018 have been revised upward from February, based on the better results in Q1, which carry benefits throughout the rest of the year. We now expect to see revenue for the full-year of $1.0 billion to $1.01 billion and adjusted operating income of $0 to $5 million. For the second quarter, we expect revenue of $230 million to $235 million and an adjusted operating loss of $5 million to $7 million. Stock-based compensation in 2018 is now expected to be approximately $110 million for the full-year, with about $27 million of this in the second quarter. Before I turn it over to Katie to start the Q&A, I want to underscore the importance the rest of the exec team and I plays around investing for growth today to lay a strong foundation for what we expect to be a much bigger company in the future. We believe the 50% revenue growth implied by our expectations for 2018 is achievable due to all of the vectors of growth we have near-term. Adding new merchants, Shopify Plus, new product offerings and our push internationally, all aided by tailwinds of growth in mobile, e-commerce and entrepreneurialism. Add to this favorable mix the vitality of the Shopify organization and it is easy to see how and why we’re in a place to make incredible things happen. So with that, I will hand the call back to Katie.

Thank you, Lisa. I’ll ask everyone to please try to limit yourself to one question, so everyone gets a chance to ask a question. Can we have the first question please?

Our first question comes from the line of Michael Nemeroff from Credit Suisse. Your line is open.

Oh, thanks for taking my questions. I’ve actually got two, sorry, Katie. The first one is around merchant count. A lot of us build our models based on an approximation or close approximation of merchant count. And Amy and Harley, thanks for the comments about Plus customers being record year-over-year. But I’m just curious whether you’re going to update us on the merchant count? And then the second one is, you mentioned the language and network changes to become more global. But what about alternate forms of payments in less developed regions of the world, or those where credit card payments aren’t the standard? Thanks.

Sure. Hi, Michael, nice to meet you.

Hi, Amy.

Yes, with respect to merchant count, that’s a year-end disclosure for us. We don’t disclose quarterly numbers. But as Harley said, we had strong merchant adds in Q1, consistent with the last several quarters. It’s largely attributable to our strategy of widening the funnel, reducing the learning curve for new merchants, adding larger merchants via Plus and strong international merchant growth. Tobi Lütke: Yes. Hey, Michael, this is Tobi. Obviously, going international means, we’re going to provide local payments kind of options, right? But this is an interesting thing about any kind of international strategy with Shopify like it’s not just inflating the product, comments that sort of exists at the intersection of a lot of different vectors like culture, general population trust in institutions, there’s logistics infrastructure that has to be in place and, of course, there needs to be some form of digital payments available. Now the really interesting thing is, like credit cards, we are now in love. There is actually many countries around the world now, which are transitioning to think that feel a little bit more in their native credit cards. And so this is actually – and there are some very surprising countries in the world that are actually quite ahead on digital commerce to serve the Western world. It feels a little bit like back then, we installed a lot of cellphone towers and suddenly places very remote that didn’t have landline, suddenly had better wireless infrastructure than the United States and so on. So I think we’re seeing a little bit of that and that’s really encouraging.

That’s very helpful. Thanks. So, Amy, congrats on the new job.

Thanks.

Our next question comes from the line of Monika Garg from KeyBanc. Your line is open.

Hi, thanks for taking my question. Take rates on Merchant Solutions has been steadily increasing. How do you see take rates progressing from here and the big drivers of increasing take rate? Thank you.

Hi, Monika. So the take rate increase in the first quarter was largely driven by renegotiation of rev share agreements with payment partners, as well as the growth in capital and shipping that we’ve noted. We do expect take rates for 2018 to be largely similar to the first quarter with some bias towards upside towards the end of this year, as we see tailwinds for increased share of wallet.

Thanks, Amy.

Lisa, please go to next question.

Our next question comes from the line of Jonathan Kees from Summit Insights Group. Your line is open.

Great. Thanks for taking my question. I’ll just have one question here and welcome aboard, Amy, by the way. I wanted to ask about stock expenses. That was a pretty high percentage of revenues, and it’s the highest level that you had. I guess, my question is more like, in the war for talent, how is that going? Are you seeing that being more difficult to get the talent that you wanted and it’s still more in the technology area? Thanks.

So I’ll take the part about the stock-based comp expense, and then I’ll turn it over to Harley and Tobi on the talent. So with respect to stock-based comp expense, it did increase year-over-year and is expected to be higher this year, largely due to a couple of factors. We’re adding employees headcount, so that’s obviously increasing. We continue to build out our ranks at more senior levels and add R&D talent to continue to grow in areas that we’ve stated. We’ve also recalibrated our stock-based compensation strategy with annual grants for execs, and we’ve changed our vesting schedules from – to three years from four years. That’s all outlined in our circular that we recently filed. We think that share-based grants are an effective way to attract, retain and motivate employees. It is competitive out there. We look closely at the comparable tech companies to us and we expect to keep our overall costs within range of our comps.

Yes, I think, Amy, covered this very well. Obviously, I mean I said from the beginning, the only way to build of a world-class company is to take a sort of geography and then try to become the best company to work for in that larger geography. I think, we’ve done this where we are located now. And because of that, we’re getting incredible people to join Shopify, like people with amazing wealth of experience in all these kind of areas that we’re getting into. And yes, they cost quite a bit to say the least.

Great.

But the good thing is I’ve talked with a lot of other CEOs and who – about, especially R&D hiring and so on. And everyone says, it’s impossible, and for us, it seems to be just really, really hard, so I think we’re in better shape than most.

All right. Thanks, Jonathan. Next question, please?

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

Hey, guys, thanks for taking the questions. Two quick ones for me. First, I wanted to understand the drop shipping use case on Shopify. Can you talk about how many merchants Oberlo has and what’s the primary revenue model there? And then secondly, with ePacket program coming under scrutiny now, can you discuss what percent of your merchants use ePacket shipping arrangements? And what – broadly, what are some other things we can do to mitigate exposure the program becomes kind of economically viable later this year? Tobi Lütke: Okay. Let me unpack that a little bit in sentiment, right, because we’re getting back into like a – there’s sort of general skepticism towards drop shipping, which I think is important to kind of address. I likened this before on this call to cloud computing, right? Everyone build their own data centers and that costs a lot of money. And then, they said, hey, I don’t decentralize this, why don’t we rent servers by the hour instead of buy a three-year depreciation, and that – this was a process improvement that then came to the benefit of everyone who needed servers. That’s exactly cloud – drop shipping really. It’s just a process efficiency improvement. What also happened in cloud computing is, after this was all said and done, a lot of tiny startups said, hey, like suddenly, I don’t actually need to spend ungodly amount of money for servers and I can get my product to market at the end of just using my laptop in a coffee shop. And so the creation of startups became cheaper and therefore, there were more startups. So that is also what happens because of drop shipping. Just to illustrate this point a bit, I once ran – so we have a Shopify store, which is Shopify point-of-sale hyper store, they sell iPad stands, all these kind of things that our point-of-sale customers need. And most of the products is a label printer, receipt printer sort of thermal paper kind of thing. Anyway, it’s a great product. Everyone uses this one printer. Like I said, it’s just by far the best one that exits. So I once checked and there was actually 260 different Shopify stores that all sold the same label printer. And that’s the situation that retail is in, right? Everyone gets these from their supplier and then everyone stores them somewhere and then mails them out when someone places an order. So the drop shipping work just says, okay, let’s keep those central and whenever someone creates a sale, we mail them out from there and so on. And it all kinds of make perfect sense. Oberlo is sort of takes this part of this sort of process improvement and just tries to make it to benefit of the people who are just starting out. And so this is why we’re seeing like a lot of people experiment, as I said, but also just a lot of excitement. People who are accomplishing something that they kind of ask themselves a little surprised about accomplishing, tend to be very vocal about it. And this is why we have just a lot of exposure. Now Oberlo is a fantastic product and we’re really, really proud to own it. And it’s driving a lot of new people into entrepreneurship, which is, of course, the mission. But I think, like people are little bit – I wish it would be as big as what some people seem to think. So similarly, exposure to ePacket, this is not – like Shopify is an incredibly diversified platform, it’s like almost its own economy kind of – if you will, like everyone is doing everything. And just, because there’s a specific route of which packages can take, that is really, really cheap. It doesn’t mean that this is the thing that makes all of Shopify tick, and that we would be very affected by that changing. The stores tend to arrange themselves around the opportunities. So yes, right now, we’re in a situation where shipping things from Hong Kong is often – to United States is often cheaper than shipping something from Massachusetts. But I think, it’s important to realize that a lot of [indiscernible] and it’s like most of [indiscernible] in the United States is like shipping United States to United States. So this – some of these sort of artificially low shipping route becoming a little bit more realistic, that might actually be really good for most people on the platform, because it levels the playing ground and so on and so on. In general, commerce happens, GMV happens because of demands, not really because of supply. So like the way like – people – like our customers are very crafty and they will rearrange themselves around any kind of new realities in shipping costs and I wouldn’t worry too much about it.

Great. Thank you, Deepak. Next question, please?

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

Thanks, and good morning, everyone. Question on Shopify Plus. I wonder if you could talk about how the sales and marketing strategy is evolving there as that becomes a bigger focus clearly? And as well on the product side, where you see the most opportunity to increase the value of Shopify for larger mid-market and enterprise clients? Thank you.

Hey, there, it’s Harley. I’ll take that question. So starting with the second piece around the product of Shopify Plus. As I said in the last earnings call, that is certainly a focus right now for us is to not only get more Shopify Plus merchant on the platform, but also ensure that the product we deliver to them is uniquely valuable to them. So we’ve talked about things like Shopify Flow. We’ve talked about things like wholesale, but there’s a bunch of things that are –that we’re working on right now. And certainly, relative to last year and the year before, the focus in Shopify Plus is related to ensure we have the best product for merchants that are at a larger scale. In terms of the sales model for it, in a similar vein to Shopify Core, we don’t get merchants remain in one place on Shopify Plus. We have a very extensive partner program that’s been growing quite a bit. We have our sales team, which is growing also quite a bit since last year. Marketing plays a role in that. But there are also opportunities with Shopify Plus that just may not be relevant to Shopify Core, things like trade shows, for example, which – enterprise trade shows, which we never would have done for a core product, but Shopify Plus actually fits nicely from an opportunity perspective there. So in general, Shopify Plus is firing in all cylinders here. But there isn’t one thing that is driving it, it’s a whole bunch of things and we will continue to do that this year.

Thank you.

Thanks, Colin. Next question, please?

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

Great. Thanks for taking the questions. Amy, I guess, I’d love to take advantage of your fresh eyes in the organization at this point. As you take a look at Shopify, we’ve seen huge growth over the past several years. When you think organizationally and structurally, what are the areas do you think that there’s really need for investment or to build better organizational structure or anything that really needs to catch up with the broader growth that the company has been facing? And then second and totally separately, on the Shopify Plus volume fees for the non-payments customers, can you just comment on how much that’s contributing to Merchant Solutions growth?

Yes, let me take the first one. Sam, nice to meet you. So, I think coming in, I was impressed with Shopify even more so impressed now that I’m here on the inside. As I said in my opening remarks that, there’s a tremendous amount of opportunity still in front of the company. Its mission and vision are absolutely spot on and the team is executing well against that. .: The company has managed to keep very strong unit economics as it scale the business, and we see a ton of opportunity to continue to scale efficiently maintaining strong unit economics and monthly billing retention rate and LTV, the CAC has consistently been strong since the IPO. It’s an amazing business model with a ton of opportunity still in front. And I think, I need you to repeat your second question.

Yes, I think it was about a year-and-a-half years that you rolled out, I think, 15 basis point or 10 basis point fee for Shopify Plus customers that weren’t using Shopify Payments. I’m just wondering now that’s begun to really layer in, and I think in full at this point, how much is that contributing to revenue growth?

Hey, there, it’s Harley. I’ll take that question. So it’s been about, I think, 14 months or so since we introduced the new pricing plan. And along with that came 15 bps, if you don’t use Shopify Payments to – it’s certainly still pretty small. It is a positive contributor for Shopify Plus growth, but it is still quite small. Really the intention there was to get as many people using Shopify Payments as possible. And when they’re not able to or they don’t want to that we still share in the upside. So I would still say that it’s still quite small. And again, the pricing change in general, not just with the 15 bps, is really to future proof our business model for Plus. So that as we get larger merchants on or merchants get really much larger on the platform, existing merchants get larger on the platform that we do share in the upside.

Great. Thank you.

Okay. Thanks, Sam.

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

Yes, thank you. Good morning. Harley, maybe this one is for you. I guess, longer-term as you build out this Plus business, what do you think the, I guess, the incremental drivers of take rate could be? I guess, Payments would be one of those. But are there any other services that you think you could build out over time to drive the take rate higher? And how are you thinking about that? And then a quick follow-up for Amy. Can you remind us what your exposure is to movements in foreign exchange without a tailwind to revenue growth in the quarter? Thank you.

Hey, there, yes. So it’s Harley, so I’ll start with that. Look, I mean, when we initially started Shopify Plus in the first place a couple of years back, it was really for a place for a larger merchants that got big to graduate to and that worked really well. What’s interesting is that over time, it’s developing now more than half of the merchants that joined us in the last quarter were brand-new to the platform. So as they come on, there are new additional Merchant Solutions that they’re taking, obviously, payment and shipping, capital to a lesser extent, because those merchants may not require capital in the same way that small merchants would. But the conversation that I have with my team at Shopify Plus is to constantly reevaluate what are the things that these merchants – larger merchants require that we can provide to them, where they have a better experience, they pay less money, we make more money and we’re always going to evaluate those. But shipping and payments are obviously the two major ones right now and we’re not going to share anything beyond that right now.

With respect to FX, we do enter into cash flow hedges to minimize quarterly fluctuations, but we did see favorable in the quarter, it’s outlined in our footnotes, as well as our MD&A.

Thank you.

Thanks Jesse.

Our next question comes from the line of Darren Aftahi from ROTH Capital Partners. Your line is open.

Good morning. Congratulations, Amy. I had some questions around shipping. You called out, I think, penetration in U.S. and Canada as being about a third of the base in March. Can you just talk about maybe two things. One, where can that penetration within those two geographies go? And then outside of those geographies, can you just talk about kind of the roll out and strategy for shipping going forward? Thanks.

Hey, there, it’s Harley, I’ll take that question. So I mean, in terms of Shopify Shipping, that continues to grow. It’s grown every quarter since we’ve launched it. We think there’s a lot of opportunity there. But I think we’re still in the early innings for Shopify Shipping, whether that’s on the product side, providing more features or it’s new partnerships and geographies. We’re really in the early innings there, so I would say that it’s too early to see the full potential of that at this point. Tobi Lütke: And it’s – the shipping kind of it’s not quite late payments in that people just make a decision then they get the money through a different channel and get some additional features if they happen to be adopting some sort of payment. In the shipping world, everyone has their intricate processes embedded inside of their businesses, like the train staff about how exactly the labels are printed, all those kind of things. So it’s just a much more disruptive switchover within businesses. So this is why it’s always going to be lower than payments and it’s always going to – it will not expand that quickly and that’s something to keep in mind if you are trying to model it.

Okay. Thanks, Darren. And I’ll just take this opportunity to remind everyone that we really would like you to limit your questions to one. We have a lot more questions to get through before 9:30. So next question, please?

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

Hi, thanks for taking my question. I just want to focus on gross margins for a bit. So the way I think about it is that for Subscriber Solutions you are, Amy, I think what you are suggesting is the gross margin should trend back to kind of the 80% level as we go through the year and you make the transition. But on the Merchant Solutions, I mean, you hit 41% gross margins, which is a big number and the highest we’ve seen since 2013. Can you tell us like what kind of progress should we expect on the gross margin line for Merchant Solution through the year? And I’m assuming that capital and shipping were big influences in growing that number, and how should we think about that as we advance through the year?

Yes, let me start with Subscription Solution margins. The first quarter was impacted by the migration to the cloud, accelerated depreciation of our own servers, duplication of cost as we migrate, and we’ve always said that the cost would be slightly higher to outsource than if we had continued to own our own data centers. The migration to the cloud is expected to continue over the next two quarters. And so we expect subscription margins to be at around the same level of the first quarter over the next two quarters. As the migration is completed, we expect subscription margins to improve in the fourth quarter over the current levels. With respect to Merchant Solutions margins, yes, we did have a favorable Q1. As I said earlier, many of the revenue items that we’re strong in the quarter are high-margin revenue streams. In addition in the first quarter, we did have some one-time items related to some billing adjustments from payment partners and cleanup from the fourth quarter that will not repeat. So for the remainder of 2018, for Merchant Solutions margins, we expect each quarter to be higher than their comparable quarter in 2017, but not to the same extent that we saw in the first quarter of this year.

Can you just kind of – can you just – thanks for answering that. Can you just kind of quantify that the one-time items, like how much of an impact was that in the quarter?

Small.

Thank you for answering the question.

Thanks, Gus.

The next question comes from the line of Koji Ikeda from Oppenheimer. Your line is open.

Oh, great, thanks for taking my question and I welcome to the team, Amy. I wanted to ask the question on the B2B opportunity. Majority of your subscribers, I would think, they are primarily focused on the B2C model. But I was wondering, if you could talk a bit about the B2B opportunity? I noticed on the Plus website in additional to wholesale, B2B commerce became a solution option sometime last month. Is this a new SKU? And was this a customer-driven initiative? And I guess, are there any technological differences between the B2B product and the wholesale product and any commentary on the pricing would be helpful? Thank you.

Hey there, it’s Harley. So just in terms of B2B and sort of the wholesale opportunity, initially, we launched it for a small subset of existing merchants who were doing both B2B and B2C and they were asking for additional functionality to run a wholesale business, as well as the retail business on top of Shopify. That’s why it was started and we were sort of pulled into that area. We now do have a very early B2B product and we now have merchants that are joining us to use that product, but it’s still very early days. What we like about B2B is that provides us with a wider product market fit, so now there is a – there are groups of merchants who only do B2B, but now Shopify can be a great solution for and previously it may have not been. But there’s a lot of additional functionality that comes into it beyond just password protection. B2B merchants require different things that that B2C merchants just simply don’t need. So working on that right now, but again, super early days with that.

Thanks, Koji.

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

Thanks, guys. How should we think about the competition going forward? With Square buying Weebly here, it seems like a bunch of other guys are sort of trying to move to your model of putting online and offline together that you guys were probably the first at. So how should we think about the competitive landscape going forward? Thanks. Tobi Lütke: Yes, good question. Like I mean, one thing, I think, it really confirms that we had it right. So Square buying Weebly, I think, you will see just about every point-of-sale company buying – launching something like Weebly, I mean, buying in the case that they’re really late or hopefully, they’ve been booked for a while already, I’d say, spotted this trend earlier. We are just going for – like this market was very weirdly dominated by different, usually incompatible point solutions for all the different things that retailers had to do. And when we came by some of you on the – during the IPO roadshow, I think that’s what we leaned in and said, hey, we think that’s wrong and I think – we think that retailers need a centralized software that can easily move all the inventory into different channels that might actually sometimes be fairly short lift. They are pop-up stores, they sometimes are campaigns on social media, they – obviously, it involves an online store and point-of-sale if that’s what you need. And all of this should be, you should think about – like you should think about the software needed in this space a lot more like an operating system on which – on the top of which our software is built that specializes depending on the business that – that’s the business needs. And that was our vision all along, that got largely ignored initially. And then, like I think, people have been paying attention and everyone realizes that clearly this is right and clearly this is the driver of all the growth that Shopify has had. And now, more people are coming around to this. We started booking on this about five years ago. We launched it three years ago. We now have – we know a lot of momentum because of it. So it’s like, I mean I think, if you see a growth story like Shopify, you usually see a company that defined a new space. And so that’s – I think it just goes to show that we – our crystal ball is reasonably clear and we are working on all the things that’s next and I’m actually looking forward to having some other people look at the same space and seeing what they are seeing, because I think that’s more fun frankly from a company building perspective than trying to do it all alone, so that’s cool.

Great. Thanks, Nikhil.

Our next question comes from the line of David Hynes from Canaccord. Your line is open.

Hey, thanks, guys. Just one on Shopify Capital. I imagine, there are some seasonal patterns to demand for merchant cash advances. But obviously, that’s something you guys can control. So just help us think about kind of the seasonal patterns as it relates to our efforts to model cash flow? And then remind us, how long are these loans typically outstanding?

Hey, there, it’s Harley, I’ll take that one. So in terms of seasonality on Shopify Capital, it’s important note that the use of proceeds for Shopify Capital for most of our merchants tend to be in the realm of inventory or marketing spend, which we quite like, because that leads to more sales, which makes it easier for them to return the capital to us. Obviously, there’s the seasonality of capital reflects the seasonality of retail in general, which is certainly more of a Q4 issue than it is a Q1 issue. Just keep in mind, these are not loans, these are cash advances, so I want to be very clear about that. And then in terms of the payback period, it is less than a year typically.

Okay, got it. Thanks.

Thank you.

Our next question comes from the line of Tom Forte from D. A. Davidson. Your line is open.

Great. Thanks for taking my question. On the last earnings call, Tobi mentioned the small merchants leverage technology. These examples augment the reality to compete against larger companies. Can you update your efforts specifically to artificial intelligence and what you’re doing to enable small merchant to leverage AI to compete against larger companies? Thanks. Tobi Lütke: Yes. Look, the – it’s an interesting topic we face in it. I think, one of the most important thing from our perspective is, all data is our merchants data. And what we want to do is give it back to them and to their own benefit in different ways, right, like make it to their own benefit. So the most obvious example of this is, one thing Shopify ships is absolutely excellent fraud detection. It’s – we’re getting, I mean, it’s – fraud always a problem in the retail world, but we’re trying to drive it as close to possible as to being a non-problem. This is directly powered by AI and by machine learning models that have – that are trained on what’s happening on the platform. So this is the good – the good news there is that, Shopify sees global trends. Shopify can be best actors that are moving across the network. And so this is one of those areas that where – there is a direct benefit, so we’re very comfortable with this kind of book.

Thanks, Tobi. Thanks.

Okay. Thanks, Tom.

Our next question comes from the line of Ross MacMillan from RBC. Your line is open.

Thanks so much and my welcome to Amy as well. My question is actually for probably Tobi or Harley. And I was just curious, given the potential changes in the data privacy environment, whether it’s Facebook controversy or GDPR. What do you think, if any are the implications on your merchants businesses as a result of this? Tobi Lütke: Yes. So I’ll take that. So we’re actually well diverse GDPR. So what’s happening is, like I said in the previous answer, we have very sort of strict principles of our own data, our own privacy, which we have internally. And the way we see GDPR is that, the rest of the world is sort of coming around to our vision of how data should be handled and put that into law and put some fines in place. And I think that’s honestly really, really, really good for the Internet. So we’re very happy that this is happening. We’re going to be – like Shopify is going to be ready for GDPR, and so I think, that’s going to be a very important thing. I think, we’re delivering next month and – yes, I could go more in-depth on this topic. But I’m – we’re, of course, monitoring the conversation as everyone is in the tech industry. We made some very important choices at very early stages of this company. We looked at opportunities of doing things with data that just didn’t fit in like the – would have made a lot of sense for the growth or maybe revenue of the business or so, but didn’t conform to our opinions of what ought to be done and what we would – like the standards we hold ourselves to. And so we walked away from those things and I’m very proud of that.

Great. Thank you, Ross.

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

Hi, good morning, and thank you for taking the question. Amy, welcome to the call. Question for you on, if I could revisit Merchant Solutions and Payments and the contribution, anyway we can get some kind of quantification of incremental take rate from payments? How much was contributed by capital and shipping versus what the rate of payments? I think, a few quarters ago, we got some kind of insight, which kind of implied that the take rate for payments specifically was relatively flat. And the incremental take rate expansion was primarily from shipping and capital. What is the environment there look like this quarter? And then what do you anticipate particularly on a payment side with international expansion the impact you might expect for each on take rate going forward?

Well, I can’t say that for the first quarter, the primary increase in the take rate was driven by the renegotiation of rev share agreements with payment partners and shipping and capital. Payments was largely consistent year-over-year. But having said that, we see opportunity in payments going forward – strong opportunity as we grow internationally. We see the opportunity for those take rates to move up in new geographies. And we expect payments to largely follow our international expansion with Asia Pac next in countries with high credit card penetration and then Western European countries, where we see strong merchant growth. So opportunity across the Board.

Great. Thanks, Brian. Next question, please?

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

Yes, good morning, everyone. I wanted to ask about international. So you’ve seen strong merchant count in Western Europe for, at least, a year, you’ve been calling it out as an area of strength. Can you just talk about the countries where the merchants are maturing the best? And give us some examples of which countries are working well? And are they likely to see the focus of your efforts in international, whether it’s in shipping or in foreign currency tools? Thanks? Tobi Lütke: Yes, we don’t want to go into breaking that out. So think of Shopify as a portfolio, lots of countries.

Thanks, Todd. Next question, please?

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

Good morning, guys, and welcome, Amy. On the Plus segment with respect to customer growth, we’re obviously seeing good traction here. And often how you guys noted a large part of that was being merchant adds that are being new to the platform. Can you speak to what the mix of growth is being driven by the direct sales channel versus the partner channel kind of these competitive displacements?

Hey there, it’s Harley, I’ll take that question. As I said earlier, the growth model and the growth strategy for Plus is a mix of a variety of different sources. We are seeing new – we’re seeing existing partners that have migrated to become Plus partners in the platform. We’re also seeing brand-new partners to the platform that traditionally only worked with some of the more larger enterprise platforms that are now choosing to be Shopify Plus partners, in some cases, they’re going all in on it. In terms of our sales capacity, that’s grown considerably since this time last year, and we’ll continue to grow that as on a as-needed basis. But I wouldn’t necessarily say that one channel is disproportionately winning over another channel, it’s still Pluses. Relative to Shopify, it’s still pretty new and we’re still experimenting with a bunch of different ways to get new merchants on the platform. But in terms of that mix that you mentioned, likely you will continue to see more new Plus merchants to the platform relative to upgrades in the future.

Great. Thank you.

Thank you.

Our next question comes from the line of Ronald Bookbinder from IFS Securities. Your line is open.

Good morning and congratulations, Amy. When looking at the health of your core merchants, what was the growth of the average GMV per merchant that has been on your platform for at least one year similar to a retailer’s comparable store sales, thus excluding market area shifts and new merchant adds? And secondly, how does your merchants on that metric compared to other established online retailers? Thank you.

I can take the first part of that. In terms of GMV growth, we’re not going to break that apart. But I can say that, we did have a strong quarter of GMV growth. And contributing to that was obviously, new merchants added to the platform, but also a strong contributor where merchants who’ve been on the platform for at least a year. Tobi Lütke: It’s hard to benchmark this against everyone else like the nature of – like there are so many different stores on Shopify and like again it’s growing so quickly. So, like – even if you slice by saying everyone who has been on a platform for more than a year, you have still such a large percentage of the people are now – like they are for 14 months, because growth is accelerating. So like averages end up like just confusing in general, so we never look at average revenue per user, average GMV, and I know sometimes you guys do that. I encourage you not to and think of cohorts, that’s a better way of doing it. And I think it’s – the platform is also diverse and large enough to that. It roughly reflects general economic trends. So I think, as of retail in general might be the same as Shopify. I would say, it’s probably skews a little bit better just, because if it’s younger stores and especially in the retail world, as you all know, mediocre retailers over. So that’s the business that a lot of big folk stores run into. And the kind of people on Shopify tend to be the ones who are looking for opportunities to create like more experience in retail and tend to glide the waves rather than being followed by them off what’s going on in the retail. So – but I’m completely guessing, so not really basing this on data.

All right. Thanks, Ron.

Our next question comes from the line of Richard Tse from National Bank Financial. Your line is open.

Yes, thank you. So if we look beyond 2018 and to 2019, what do you think the most notable challenges are to executing your – on your growth aspirations? Is it people? Is it technology? Changes and operations? Maybe give us a bit of insight on that, please? Thanks. Tobi Lütke: Yes, it’s a really good question. I think people that’s probably – like, I mean, the biggest – it’s not that, it’s a – it’s not really in the way, it just makes like if you can’t find the people you need, I think, we’re going to get to the results slower, right, because they also – like Shopify internally, it’s a learners organization like we – our sort of core competency as a company is we’re hiring mostly based on future potential rather than current core skill set and then train people to become as good as they never thought they would be as fast as possible. And so, I think – I tend to think you can do anything, but time is variable. And so this is – there’s now more – some more experienced people joining us, who can become mentors to all these other people who are talked about earlier that accelerates things a lot, and so that’s again our opportunity. And so I have great confidence in our ability to write world-class software, I think, we’ve demonstrated that. I think it’s a very well-built company that absorbs market changes with ease, absorbs shifts in strategy, macroeconomical tidal waves, all these kind of things. So I think, we are very anti-fragile in that particular regard. And again, I think, the last one was competitive landscape, yes, I’m just sort of not seeing much there. So I think we are good.

Okay, great. Thanks. Next question, please?

Our final questions today comes from the line of Justin Furby from William Blair & Company. Your line is open.

Great. Thanks for sneaking me in. I guess, for Harley, just going back to an earlier question. If you – I guess, if you look at the Plus business and you set aside the Merchant Solutions attach and just think about that sort of core 25 basis points fee for the vendors that scale out beyond $10 million. Do you look at that price point as meaningfully below what you’re competing against, I guess? And do you think you have ability to increase that over the next 12 to 24 months? Thanks.

Yes, in terms of the ratio from value to cost, I think Shopify Plus remains very – it looks really good in the eyes of the larger type of merchants. In terms of reevaluating pricing, it’s something that, I mean, we’ve made a pricing change last year, it’s something that I’m looking at. I think our pricing plan order right now is quite good. It allows a larger or a potentially larger merchant to usually start on the platform with Shopify Plus. And then as they grow, we get the share of their upside through the 25 basis points that we have in place there. So for now, I’m feeling really good about where we are in terms of the pricing plan, but it’s something we will continue to reevaluate on an ongoing basis.

Got it. Thank you.

And then – sure, thanks, Justin. Thank you. And we’ll turn it over to Tobi for closing remarks. Tobi Lütke: Yes, so thank you very much for joining us. Again, welcome, Amy, welcome onboard. I think the sort of the emergent theme of this call is, Shopify is a pretty big platform. There is real diversity. Like I said, there’s real strength with diversity of what makes up Shopify like there’s a lot of people doing a lot of different things. It is kind of rare and especially in Software-as-a-Service, right, like Software-as-a-Service tends to be fairly – like we produce software that’s laser-focused to a certain vertical and making something really, really flexible where people can build a business that they have never done this before. At the same time as some people are having $100 million annual run rate businesses, making something that flexible is difficult. And we’ve accomplished this by taking a couple lessons out of the book of the operating system guys, making a platform and then allowing software quite easily be built on top of that adjusts sort of people’s ambitions into – and adjusts to people’s ambitions and unique requirement. So I think that’s well understood. I think, this is sort of why you see more movements of other companies to try to get on the same train tracks we are on. The thing I see a bit right now is, we’ve done and we’ve now done really well for, I think, about the 12 quarters of being public or something like this. And I see it like an interest by a lot of people trying to find Shopify’s Achilles’ heel like because they feel like there must be this one thing that they are not talking about that’s really driving this, it’s like drop shipping now or ePacket is the next day. I would meet these kind of reports of suspicion. There is- Shopify is really just putting something online that humans have been doing for tens of thousands of years, which is commerce, right, like which is – has its roots in bartering and there was an incredible pent-up demand for taking this kind of thing and doing it easily on the Internet for obvious reasons and that’s what we are doing. It’s – it’s actually quite simple and it’s kind of remarkable that this is not a more crowded field I think. So I think that might head this – like fleshing out, sort of understanding of everyone of this – what this company really is doing. For a lot more in-depth, I encourage you to have a look at the Unite live stream starting next week and we are going to announce some really, really cool stuff that I’m really excited about. So hope to see you there.

All right. Thank you. Have a good week, everybody.

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