Katie Keita - Head, HR Tobias Lütke - CEO Harley Finkelstein - COO Amy Shapero - CFO

Brad Zelnick - Credit Suisse Colin Sebastian - Robert Baird Monika Garg - KeyBanc Gus Papageorgiou - Macquarie Research Ross MacMillan - RBC Capital Markets Terry Tillman - SunTrust Darren Aftahi - Roth Capital Partners Jesse Hulsing - Goldman Sachs Deepak Mathivanan - Barclays Thomas Forte - D.A. Davidson Kevin Krishnaratne - Paradigm Capital David Hynes - Canaccord Genuity Nikhil Thadani - Mackie Research Capital Brian Essex - Morgan Stanley Suthan Sukumar - Eight Capital Todd Coupland - CIBC Ronald Bookbinder - IFS Securities Brian Peterson - Raymond James Jonathan Kees - Summit Insights Group Justin Furby - William Blair

[Abrupt Start] Matthew, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Shopify Conference Call. [Operator Instructions] Katie Keita, Head of HR, you may begin your conference.

Thank you, operator, and good morning, everyone. We are glad you can join us for Shopify's second quarter 2018 conference call. We are joined this morning by Tobias Lütke, Shopify CEO; Harley Finkelstein, our Chief Operating Officer; and Amy Shapero, our CFO. After prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today. These statements are based on assumptions, and therefore subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements except as required by law. You can read about these risks and uncertainties in our press release this morning, as well as in our filings with U.S. and Canadian regulators. Also our commentary today will include adjusted financial measures, which are non-GAAP measures. These should be considered as a supplement to, not 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. We delivered another quarter of strong results in Q2. In the quarter, we spent a valuable three days with partners at our Unite Conference. We announced dozens of new features and capabilities, and we added more merchants than ever to Shopify Plus. In other words, we spent Q2 doing all of the things that, when executed well, produce continued strong results in the future. In fact, this month we hit a really special milestone. The one billionth order was placed on Shopify. What's remarkable about this is the pace at which we've achieved this milestone. It took us more than 10 years to get to half a billion orders, and just a fraction of that time to double it. This rapid growth is a testament to the strength of our platform, our Plus program, and our partner ecosystem. Let's start with our platform. Several of the product announcements we made in the quarter are the result of work we started long ago, and we are looking forward to rolling them out to our merchants before the end of this year. A few of these key product announcements include multi-location, which enables merchants to track and update inventory across multiple locations; fraud protect for Shopify payments, which helps merchants sell with greater confidence; and the introduction of the tap and chip reader to transform in-store shopping experiences. We have already launched several of these products that were announced at Unite, including buy-one-get-one capabilities and quantity discounts. We also launched Ping, our mobile app that consolidates merchants' business conversations with staff, customers, and even their AI employee that are known as Kit. Through Ping, merchants can now run their store and handle their marketing conversationally. Finally, we launched dynamic checkout, which enables shoppers to quickly check out directly on a product page using their preferred payment method. This feature is expected to increase conversions by further reducing friction to complete a sale. All of these, along with other initiatives, are aimed at helping entrepreneurs on our platform sell more and work more efficiently. This will in turn support the continued growth of our merchant base and the expansion of GMV on our platform. Moving on to Shopify Plus, as I mentioned, Shopify Plus really knocked it out of the park in Q2. Four years ago, we invested in Plus to increase the flexibility of our platform for high-growth, higher-volume merchants, and the value of these investments is becoming more apparent than ever. Larger brands who welcomed Shopify Plus this quarter range from consumer goods and clothing to sports gear and jewelry. These include the diamond company DeBeers; Reckitt Benckiser, which manufactures products like Lysol, Airwick, Clearasil and KY Jelly; high-end skin care ReVive; Super Footwear, which sells skateboarding footwear and apparel, and household names such as K-Swiss, Sodastream, as well as new shop launches from CPGs like Unilever. Highlighting our push internationally was the launch of a new shop in Japan by the internally renowned brand Comme de Garcons. We continue to improve the Shopify Plus merchant experience by enhancing support capabilities for these larger brands, and by building more advanced enterprise features directly into our platform. Shopify Flow, for example, which was announced at last year's Unite, brought the power of automation to Shopify Plus. Connectors for Shopify Flow, which we announced at this year's Unite, expands these automation benefits to apps and services, allowing merchants to simplify workflows across the tools that they use every day. We are also on track to release our multi-currency feature later this year for Plus merchants, which will allow them to sell in multiple currencies and settle in their local currency. Finally, our partner ecosystem. We held our third annual Unite Partner Conference in Toronto in May, an event that only gets better every year as a forum to collaborate and celebrate with our partners. With the rapid evolution of retail, and Shopify's position as a retail industry leader, partners are becoming even more important to the merchant experience. More than 16,000 partners referred merchants to the platform in the last 12 months, and the number of apps in the App Store has grown to 2,500. Our continuous improvements, curating these apps, to ensure merchants find the right apps at the right time, seems to be paying off. Today, not only is a greater percentage of our merchants paying for apps than a year ago, per-merchant spend on apps has also increased. Finally, we expect both partners and merchants will benefit from our discovery algorithms which are central to the new Services Marketplace and the Shopify App Store 2.0. As you know, our partner ecosystem extends beyond theme, app and referral partners. We recently announced a partnership between Shopify and Google to help make physical stores more secure. Shopify now offers Nest cam hardware and Google Wi-Fi routers in our Hardware Store, to our more than 70,000 point-of-sale merchants. This gives businesses the ability to manage and monitor their physical locations centrally from the Shopify dashboard, further integrating a merchant's complete view and management of their business directly into the Shopify platform. If any of you are in L.A., you can come check out all of our hardware in person in our new Shopify retail space, which will be open for business in Q4. The common thread connecting all of our partnerships is that Shopify is really delightful to build on, to work with, to support, and to recommend. Our view is that our platform is more of a retail operating system than a software suite, and we believe this is a key part of our sustainable competitive advantage going forward. In closing, we are on a long-term journey to build a holistic system that solves key challenges entrepreneurs face while starting and running a successful business. While we still have a lot of work ahead of us, this quarter's progress demonstrates that we are moving in the right direction and that we continue to be well positioned to lead, to inspire entrepreneurship, and to build a company that thrives over the years ahead.

Thanks, Harley, and good morning, everyone. Shopify showed solid growth in the second quarter. We continued to execute on key initiatives and demonstrated the strength of our business model and the diversity of our revenue base. We grew our revenue in the second quarter 62% to $245 million. Within this, merchant solutions revenue expanded 68% year-over-year to $134.2 million, and subscription solutions revenue grew 55% to $110.7 million. GMV, one measure of our merchant success, expanded 56% to $9.1 billion. GMV growth, along with continued adoption by our merchant base of every one of our merchant solutions offerings in the quarter, drove the strong growth in merchant solutions revenue. The amount processed on Shopify Payments reached $3.6 billion, an increase of 66% versus the comparable quarter last year. The percentage of GMV processed on Shopify Payments ticked up to 40%. This is the highest level of GPV we have seen to date, driven largely by Shopify Plus increasing its share of GPV. Revenue from capital and shipping, both higher-margin solutions, grew over 100% from last year. Subscription solutions growth was driven primarily by monthly recurring revenue, which grew 49%, and ended the quarter at $35.3 million. Merchant adds continue to be the primary driver, however, we are increasingly benefitting from a larger contribution from Shopify Plus merchants who continue to expand their share of MRR to 23% of total MRR, or $8.1 million. This compares with 18% in Q2 of last year. Shopify Plus platform revenue, which is the subscription revenue above what we can consider to be recurring, because it is linked to GMV, contributed slightly. The bigger contributor to the difference between recurring revenue and subscription revenue was apps revenue, which more than doubled over last year's second quarter. Our adjusted operating loss in Q2 was approximately $4.3 million, or 1.7% of revenue, compared with a loss of $2.9 million, or 1.9% of revenue, in the second quarter of 2017. Adjusted net income for the quarter was $2.5 million, or $0.02 per share. This compares with a $1.1 million net loss, or $0.01 per share, for last year's second quarter. Our cash, cash equivalents and marketable securities balance was $1.6 billion, consistent with our March 31 balance. Cash flow from operations was negative in the quarter due to the strong growth of merchant cash advances. This use of funds for MCA is just one example of how we have been putting capital to good use at Shopify. Diversification is critical to good investing, and this is something Shopify has in spades. This may be something casual investors miss, but our results in Q2 certainly highlighted this. Investments we made in past years which diversified our revenue streams are paying off. Shopify Plus had a fabulous quarter and the resources allocated a couple of years ago to start Shopify Shipping and Shopify Capital also continue to show excellent results. This optionality is among the most exciting and also the most challenging issues facing Shopify. Which opportunities do we stand behind and fully focus our efforts on? The three areas we carved out at the start of this year, our Platform, International, and Shopify Plus, were the right ones, albeit with different time horizons. Harley has already spoken to the success in Shopify Plus, which has had the most time to establish itself and gain momentum. The investments in our platform, while not as obvious, are incredibly important to establishing a strong foundation for future growth. Our transition to the cloud, which we began to work on nearly two years ago, is now complete. While it was not without headwinds in the short term to our subscription margins, as this has been a major investment, this transition has made our platform faster, more adaptable to needs globally, and lets us innovate faster than ever. In other words, it is a payoff we expect to benefit from for years into the future. A huge thank you, and congratulations, to this team, and to many others that contributed. We will complete the decommissioning and depreciation of our remaining data center hardware this quarter, and in Q4 begin to look for ways to optimize our costs in the cloud which as you know, are slightly higher than running our own data centers but which we believe are well worth the premium. Finally, our efforts internationally have been deliberate and targeted. Two months ago, we released an early beta for Shopify in six languages: French, German, Japanese, Italian, Brazilian Portuguese, and Spanish. Already, tens of thousands of our merchants have opted in, which is as easy as changing staff-level settings in your store. On-track for launch this fall is our first local payment method for Shopify payments. Local payment methods offer buyers the payment options they know and trust based on currency and regional popularity, which vary greatly by region. We were already seeing a tailwind to international merchant mix from our marketing initiatives in local languages last year, and would expect the native language features to continue this momentum outside our core geographies. And like other investments, we would expect sustained payoffs from our efforts here to fully materialize over the next several years. This long-term thinking is behind the preliminary short-form-based shelf prospectus we filed yesterday evening. Our original shelf expires this quarter. By filing this shelf, we'll retain financial flexibility over the next two years. Optionality is core to strategic success, and by keeping it sufficiently available we mitigate the risk of losing out on important opportunities. We have already put capital to work effectively in our opportunity-rich space over the past several years, and fully intend to continue our favorable track record. To be clear, we consider this to be ordinary course of business, given the pending expiry of our current shelf, and we have no current intention to undertake an offering. Given the strong top-line growth in the quarter, we are raising our revenue expectations for the full year, and now expect to grow revenue at slightly better than 50%, to between $1.015 billion and $1.025 billion. We are maintaining our adjusted operating income expectation, which is between break-even to $5 million. For the third quarter, we expect revenue of $253 million to $257 million, and an adjusted operating loss of $9 million to $11 million. Stock-based compensation in 2018 is still expected to be approximately $110 million for the full year, with about $31 million of this in the third quarter. It is worth reminding you here, that the base supporting our rapid revenue growth is broad, strengthened by new merchants joining our platform from entrepreneurs to larger brands leveraging Shopify Plus; greater merchant adoption of our services as well as those of our partners; and importantly, the growth of our merchants' own businesses, boosted by continued enhancements to our platform that makes selling easier. We believe that investing across this broad foundation supports a growth trajectory that extends well into the future. With that, I'll hand the call back to Katie.

Thanks, Amy. Before we turn it over to question-and-answer session, I'd like to remind everybody on the call today to please limit yourselves to one question. That way, everyone can get a chance to ask a question. Matthew, can we begin polling for questions, please?

[Operator Instructions] Our first question comes from the line of Brad Zelnick with Credit Suisse. Your line is now open.

I appreciate merchant count is something you disclose annually, but can you give us any sense of subscription dollars per merchant across Basic, Advanced, and Plus?

No, that's not a disclosure that we are prepared to give on this call. We did see in the quarter our subscription MRR per merchant stay largely within the same range that we've seen over the last four to six quarters, and we did see an uptick in GMV per merchant, both quarter-over-quarter and year-over-year if that helps.

Our next question comes from the line of Colin Sebastian with Robert Baird.

In terms of the shipping and capital acceleration, was curious if there are any underlying factors or drivers there on the business development-sales side, or is that more of the natural output from how that business began to progress last year? If you could add some color? Thank you.

It's Harley, I'll take that question. So in terms of both shipping and capital, with shipping we've added new partners to it and we're just getting better at making sure that the right merchants are using the right products on our merchant solutions side. Same thing with capital. As you now know, we've optimized capital to be algorithmic-based, and so we're able to make a lot more targeted offers to our merchants at the right time for the right amounts, and make sure that they're tailored to the specific needs of the merchant. So in general, I think both of those products, penetration continues to grow and as we get smarter about figuring out who needs them and when they need them, you'll see that continue as well.

Our next question comes from the line of Monika Garg with KeyBanc.

As Facebook changed its data-sharing policies and Europe implemented GDPR in the quarter, are you seeing an impact from that or do you expect any impact from the same? Thank you. Tobias Lütke: This is Tobias. So, GDPR, we don't see a lot of impact, honestly. In our business it doesn't have a lot of bearing, like our customers, our merchants' data has always been their own. And we did not have to change any policies. In fact, from a philosophy point of view, we have been -- our opinion has always been that data is being taken a little bit too lax generally in the technology industry. We've held ourselves to very, very high standards, and the GDPR data regulations have if anything, fortified the approach we've taken all along. So, when GDPR came around we had to go ahead and make some changes not in spirit to the way we deal with data, but rather just sort of to comply with the precise lettering of the regulations and we were compatible on day one and our merchant base really appreciated that. One thing we do which is probably what you're really curious about, is what we see in terms of impact because there's some marketing impact. Our merchants place a lot of apps across different systems. So we did look into this, and honestly, we did not see much change in terms of effectiveness of marketing. Now we have limited visibility, so I can't say that for sure, but just in terms of volume and advertising referred say across the system, the impact was really, really minor, if there at all. So, not much to report on that front.

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

Just on Shopify Capital and Shipping, both seem to be doing quite well but it seems to me that you're still, they're just both very limited regionally. I think Capital is only available in the U.S., and Shipping only in Canada and the U.S. Do you have plans to roll these out globally, and what have been the barriers to do so? Why is it taking so long to see these kind of roll out on a broader international basis?

It's Harley again. So yes, on the shipping one, certainly as you know one of our priorities for the year is international expansion. So as we look to new geographies, not just with localized payment methods but also localized translation and things of that nature, things like shipping providers will also eventually come as well and that's something we're exploring. On the capital side, we're really trying to get it right. We think that it's really important that we do this properly, and so we're not just arbitrarily rolling this out to geographies where we don't feel like we have a real understanding of the markets. So I think you'll continue to see international expansion with things like payments and shipping, and also capital, all those great merchant solutions. But it'll be done in a very deliberate way, which is just really how we do everything at Shopify.

Do you have a sense of timing for Capital? Do you think that by year-end or next year, that you'll be more comfortable rolling it out globally?

That's not something that we're going to disclose at this point.

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

Payment volume ticked up as a percentage of GMV, and it's been pretty constant for a few quarters. I just wondered if there was anything to call out here, because it feels like most of the international opportunity is still ahead of us. You didn't really open the spigot on new markets this quarter. So was there anything else impacting that and caused it to tick up as a percentage? Thanks.

Yes, you're right in that the payment penetration increase largely came from Plus in this quarter. We did introduce Payments in a couple of new markets in the quarter internationally, Japan and Hong Kong, but they had minimal impact on this quarter.

Our next question comes from the line of Terry Tillman with SunTrust. Your line is open.

It's a question about Shopify Capital and the cash advances. Can you give us any kind of update in terms of correlation of when you're giving out these cash advances, seeing a direct correlation with improvement or accelerating GMV from those customers, and/or their aptitude to move to a higher price point software SKU? Just trying to understand the returns you're seeing, thank you. Tobias Lütke: This is why we do it, right? This is exactly like if you would go into the part of the teams that are working on these products, the dashboards that are hanging in there are all related to general business success metrics, rather than factoring rates and all these kinds of things. I don't want to give the impression we're not looking at those either, but the reason why we started the product was really that just requiring capital was one of those barriers to entrepreneurship that we just really wanted to simplify. And so, I can't give you hard numbers, and frankly they are also very much in flux. They are massively seasonal. They depend very much on industry. There's a lot of different kind of requirements that people need the money for. But we do see, and our servers show, and the conversations that we have and specifically I have with my customers, is that the vast majority it just goes in inventory. People usually use it to do a higher commitment on their product purchases, and therefore get better rates and increase their own profitability. And so in many cases the factoring ends up being completely revenue-neutral to them and this is why it's such a successful product.

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

Just with the completion to the cloud over, can you just give us a sense on the cadence for gross margins for the rest of the year? Thanks.

Yes, sure, let's start with the second quarter performance. As we had indicated on the last call, it would be impacted by the migration to the cloud, which it was. We have subsequently completed migration of our customers over to the cloud, which was a huge milestone and we now in the third quarter expect to just be finalizing elimination of duplicative costs and accelerated depreciation on our servers as we decommission. So we expect to be largely completed in the third quarter. Subscription margins will be impacted again in the third quarter, we expect comparable subscription margins to the second quarter. But as we exit the third quarter and enter the fourth quarter with all of that behind us, we expect a sequential increase in subscription margin.

Our next question comes from the line of Jesse Hulsing with Goldman Sachs. Please go ahead.

Tobias or maybe Harley, this is a question for you. I'm wondering if the cost of advertising on Facebook or other social media goes up, or it becomes less effective, what impact do you think that has on your merchants, and I guess the health of your business? And have you thought about ways to help merchants find their customers in other ways? Thank you. Tobias Lütke: Yes. You're talking about the actual increase of costs of marketing that's going on, or probably the hypothetical of this continuing forever. It's hard to know. So far it has been exceptionally good at coming up with new advertising services, which then allows some kind of bounce to the cost of every particular ad. Now Facebook's clearly running out of humans on the planet in terms of increasing these services, so this is the kind of question we have to ask ourselves now. I think the reality is that because so many of our customers are makers, they end up having fairly high margins because they're the only people to serve the product, and so on. And they are really, really good in an advertising future that might turn significantly more expensive. So, that being said, a lot of what's marketing in general has also really shifted to some other forms that actually are on -- like that have complete different economics. If you look at the Forbes cover right now, it's Kylie Jenner there. Right? We've talked about this before, like she's built in three years, a $900 million business. It's just -- it's absolutely unprecedented and crazy, and there was not a lot of advertising spend. The entire company is a team of eight. Right? Now, she's made it with, had the luxury of doing self-influencer marketing, which is not available to most people, but the category is available with another form of getting the word out. So I think people are too crafty to really let themselves limit as well as if some advertising source dries up, another one will be found. And in fact, things have been shifting significantly away from purchase ads in many of our categories. I think you'll just see people become a little bit more entrepreneurial along those lines.

Would you consider making a marketplace for your merchants? Tobias Lütke: I'm always going to consider it and I've done it many times before, unsuccessfully, though. If you would have come to Shopify.com in let's say 2007, which seems like about 100 internet years ago now, it was a marketplace back then. So the reason why we stopped it back then was we were a fairly small company. We really, really needed focus building just the merchant operating system that we talk about now. It happens to be a dedicated pursuit for even a public company of our size, so we luckily recognized this and stopped the effort. But interestingly, a marketplace is something that really only, like if you think about it, there's really one per decade if even that, that really, really makes it become something that people go to. It requires a whole lot more luck than execution and it usually happens around a time of a significant technology switch-over. So we will, you might participate, but I think that the problem is that marketplaces also exist at a different time scale than I think what we are sort of aiming at, like for instance -- this is sort of our go-to example. With our multi-channel strategy 5 years ago, maybe 10 years ago at this point, Myspace would have probably been the kind of marketplace that we'd really, really have to push out and then of course, that went away. So I think our position with being neutral, like as in not having an own marketplace, and therefore having a very, very easy way to talk to all the people that do happen to have marketplaces like Pinterest, Instagram, have the marketplace right now, makes it so that you can actually integrate all of them and have our customers in that way. So we think about it a lot, but it is unlikely that it's the right move for the company. Now that doesn't mean we have to completely sit on our hands in terms of helping our customers with marketing. I already said when, during the Kit acquisition, that we are very interested in especially marketing simplification because it is just very, very, very difficult. If you use the Google AdWords interface in its normal mode, you really need a Ph. D. in AdWords to even use this thing, right. So, that's one of the barriers. Now the industry it says is trying to make it a little bit more beginner-friendly but this is something we can partake in. And then as we get people to get comfortable spending money, getting return investment on these kind of things, I think we have people greatly in their early days and then they're off to the races.

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

Merchant solutions gross margin was way up, I guess around 170 basis points, despite Shipping and Capital being stronger in the quarter. I know last quarter you benefited from timing of certain one-time items. Can you talk about what drove leverage, or led leverage compared to last quarter this time? Should we expect the leverage levels going forward to be around what we saw in 2Q? Thanks.

So on Merchant solutions gross margin, quarter-over-quarter you're correct. There were one-time items in the first quarter. So, subtracting or excluding that, most of the lift did come from Shipping and Capital. But Payments probably saw a little bit of a decline on the margin side because Plus was such a big component in the second quarter. So they get a reduced rate on Payments, so that definitely played a factor. With respect to the remainder of the year, we're continuing to keep our guidance the same. We said that every quarter in 2018 would be higher than their comparable quarter in 2017 but not to the extent that we saw in the first quarter, because of the one-time items. And we do largely expect that lift to be driven by shipping and capital.

We have a question from Thomas Forte with D.A. Davidson. Your line is open.

I appreciated the comments on the updated shelf, but was hoping you could give us an update on what your current M&A strategy is? Thank you.

Hey there, it's Harley. It's similar to what we've always said. We are very careful and deliberate about M&A. We've done a number of deals that have added a ton of value, not just to our company but to the value we give to merchants. We continue to evaluate that, but I wouldn't tie the two together. The shelf is, filing the shelf is paperwork that we have to do and we're diligent about that, but I wouldn't necessarily tie the two together.

Yes, I'd like to just add a couple of comments while we're on that topic, just to be clear in addition to my script. In Canada, shelf registration statements expire after two years, and our current shelf was due to expire in early September. We renewed at this point in time a little earlier than the expiration because we wanted to have the opportunity to discuss it directly on this earnings call. I want to emphasize, we have no intention of an immediate offering. Unlike the U.S., where there's no fixed dollar amount required for a shelf, under Canadian law we must enter a dollar amount. So, it makes sense for us to maintain flexibility. The amount is commensurate with the growth in our market cap and it's consistent with Canadian comps.

Our next question comes from the line of Kevin Krishnaratne with Paradigm Capital. Your line is open.

Just a question on international. Can you talk about the opportunity for Plus internationally? What do you think the TAM is there? How are you addressing that opportunity? And then you've been seeing Plus MRR disclosed moving up to 23% of total MRR. How early are we on that metric, when you're looking at international markets only?

It's Harley. I'll take that question. So it's important to understand that international growth and our international expansion plan, just like Shopify's overall journey, is going to be a long-term endeavor. We've obviously been at this for a long time in our core geographies, more than 10 years. And so, we understand what those growth drivers are. When it comes to international we're still working through to figure out what are the best growth drivers for us, whether it's through partnerships or it's different advertising methods to get new merchants. To your question on Shopify Plus in certain geographies, Shopify Plus' offering lends itself really well to that, to the nuances and the cultures of those geographies. For example, we have brands like Mercedes-Benz in India on Shopify Plus, which we've said a couple of quarters ago. So in some geographies as we expand, we will naturally and organically see some really great uptick in Shopify Plus adoption but that's going to be dependent on the specific geography itself. But we are excited about international. Again, we're still sort of in the first inning of the game, and maybe just kind of getting started to figure out what works and what doesn't. Again, it's not just about the language. It encompasses different cultural nuances of how people shop in those places. And we don't want to just go ahead and translate language and leave it at that. We actually want to make sure that we truly have product market fit in each geography that we enter into.

We have a question from David Hynes with Canaccord Genuity. Please go ahead.

For Tobias or Harley, I wanted to ask about the acquisition of Magento. Obviously, Adobe is a firm with pretty broad reach, so just curious for any comments, how you see that deal impacting your opportunity? Tobias Lütke: That's always a good question, and how to approach. If I just sort of say, Magento hasn't been that big of a factor, right? I mean, Magento comes up a lot at the Shopify offices as a sort of latent potential acquisition source of Plus customers, and this is the context we usually talk about. There isn't strength in the product, there's no -- most of the reasons why someone would use Magento over Shopify are because of internal politics and poor decision making, frankly, or misguided ideas about wanting to do your own hosting for e-commerce. I do a lot of hosting for e-commerce, and I can tell everyone they should not want to do it. It's quite tricky. So, what do I think about this? I mean, it's interesting that everyone's being picked up around us, like this is having sort of a demand there too just a short term earlier. These are pieces of software that were written in another decade. They are, I don't think, adequate for the modern internet. They don't solve the real challenges that merchants have, and if you talk with people who are running these kind of stores you really hear -- you usually hear a lot of conversations about replatforming, and so on. So now, Adobe is a company I admire greatly. They have a lot of free cash flow. If they are willing to pump it all in, or much of it into Magento, maybe something interesting could come out of it. I would actually frankly welcome a strong competitor of some kind, because it's usually good for markets if people compete. We are having fun increasing our internal powerful quality and trying to get better and better every day, but it's really hard to create internal urgency around these kind of things. There's no one else who sort of at least looks a little bit dangerous. So, that might be fun for everyone, I don't know. I can probably keep going and talk about another 50 irrelevant things about Magento. I think the main message is, I don't think it matters much.

The only thing I would add to that is, you mentioned sort of the Plus acquisition through Magento. We've been at that for quite a long time, same thing with the Magento Gold Partners. We've been trying to get as many over to us as possible, so a lot of the low-hanging fruit that we had in the early days we've already seen, and we continue to see migrations from Magento, and Magento partners moving onto Shopify Plus. But a lot of that, a lot of the major migrations we saw, had happened already. So that won't really change much for us.

We have a question from Nikhil Thadani with Mackie Research Capital.

We've all seen the recent headlines about tech hiring in Toronto and Canada picking up. I was just curious how that impacts your growth plans, if at all? Thanks. Tobias Lütke: Yes, the headlines exist because I think everyone's woken up to the opportunity. I mean, people probably also looked at Shopify at like, why the heck did this thing work as well as it did, and realized we've been working out of talent pools that are completely underappreciated. So Toronto, all our cities, recruiting is getting more competitive, but these are also incredibly deep talent pools and incredible places to build companies at. And frankly, I think in all the cities we have offices, we are the best employer in that particular geography and therefore, this all works to our advantage in hand.

We have a question from Brian Essex with Morgan Stanley.

I just had a question on some of the nuances around changing and pricing arrangements for Shopify Plus, and curious to the extent that the removal of the cap on Shopify Plus on January 1. How did that impact the model, and how should we think about that going forward in terms of if it didn't really impact the quarter, where do you see upside and in what categories going forward?

Yes, the reason we added the cap in the first place was obviously when you change pricing as we did last year to the new pricing model, we wanted to ensure that our merchants can sort of ease into it and made sure that they were able to digest it. And so we thought that having a cap there provided us with a little bit of an easier way to introduce a new pricing model. We feel at this point now, that for all new merchants that are coming on, and obviously merchants that are expiring on their contracts, that are renewing their contracts, that the cap is just no longer necessary. And so in many ways, the removal of the cap is more forward-looking and future-looking in terms of if we have a merchant that comes on now, that is going to sell a lot of products and increase a lot of GMV we want to make sure we share in that upside. And this removal of the cap is exactly that for us as well. So I wouldn't say that the removal of the cap has been a massive driver for us to date, but it really does future prove our pricing model for Shopify Plus to ensure that we consistently share in the upside going forward.

Any merchants in particular?

We don't comment on individual merchants.

No, I was just going to say, any merchants in particular, like just in general have acceleration in the fees that they pay as a result in the removal of the cap?

Well, most of the merchants are on a contract, so when the contract expires they'll be renewed on the new pricing model.

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

Just a question on the B2B opportunity. Can you update us on the progress you are making, you're seeing with the B2B wholesale opportunity? And how has that been driving adoption with existing and new Plus merchants? Thank you.

The way to think about the B2B and the wholesale channel for Shopify Plus is really for a few merchants, it's really, really important. So I don't think it's going to be a product that we use across the larger user base, the merchant base, the Shopify Plus. It'll be for some specific merchants that'll be very, very important. What we like about it, however, is that it further increases our total addressable market because now we can go after larger brands and high-volume retailers that are doing wholesale, that traditionally wouldn't have been able to do that before. And so, certainly we have merchants that are using it and the ones that are using it are quite happy with it. It's still, the functionality continues to evolve on it. We're still adding new features and functionality as we go and as we learn about the nuances of B2B wholesale selling, which is something fairly new to us. But again, the way to look at it is that for a few merchants it's really important, but it will not be something that will be used broadly across the Plus merchant base.

We have a question from Todd Coupland with CIBC. Your line is open.

I got the explanation on monthly recurring revenue shifting to Plus in the quarter, but at a 49% growth rate that's the slowest growth we've seen in that line in quite a while. Can you comment if there's anything else going on there? Thanks very much.

We think our almost 50% MRR growth is pretty solid performance, and was within our expectations. We don't expect MRR growth to accelerate every quarter. Our Q2 results indicated our growth drivers are varied and strong. We continue to add merchants at a healthy pace. Shopify Plus added a record number of new merchants in the quarter. Merchant mix did play a factor in Q2. Merchants continue to expand their GMV. The percentage of merchants adopting merchant solutions grew across the board, Payments, Shipping, and Capital being the key drivers. And so, we really look at it as the totality of the strong business model and that's what allowed us to increase our revenue forecast for the year.

We have a question from Ronald Bookbinder with IFS Securities. Your line is open.

The market seems to be concerned about churn and that you could possibly run out of potential merchants, but isn't it true that entrepreneurs just aren't one-and-done type of people, that the entrepreneurs will have multiple websites as they continue to try and figure out what works for them? Similar to Wayfair started off with 240 websites before consolidating down to one. What do you think is the average number of websites each entrepreneur has on your platform? Tobias Lütke: Love the question. You're exactly right. Again, the entrepreneur process is start up a bunch of things, and figure which one gets the traction, and then hopefully go all in on that one. Right? So, and involves a series of pivots and changes. I mean, this very business used to be a snowboard store, right? So here's a -- I can't give you good numbers around it. Of course, we have internal estimates on it, but it's lossy because the way Shopify, probably one of the regrets I have when I wrote the initial version of Shopify, is that I didn't really anticipate this sort of creation and trial, and therefore what I didn't do is allow people to create one account under which you could create any number of stores and sort of track them against each other. If I had a time machine, this would be one of our little changes in the data model that I would have done. Now we will retrofit this, this is something we've already said we would do at Unite. So once we do that, we will have a much better idea because you can really sort of track the entrepreneur process across different attempts. So this is like, the churn, there's a lot of focus on it. And it's really -- we haven't found the right language to describe why it's simply not a problem. Like for instance, churn almost universally is actually the successful discovery of something that didn't work. So, it's a building block in this process towards being successful, creating something, just as you said. In fact, this actually isn't even so concentrated on the very beginnings. So, what we also see is that even with the Plus store, they add a new product line, maybe a new -- let's say a fashion store adds a new collection. This goes into the main store, but what we will do is actually create a completely separate account, a separate site, just built around the one collection as almost a landing page for their marketing campaign, for some kind of real-life activation and so on. So, even that process continues throughout the line. So it's an interesting component, and it's one of our reasons why just looking at Shopify purely through units, it's a very lossy picture. I'm violently agreeing with you, is what I'm saying.

We have a question from Brian Peterson with Raymond James. Your line is now open.

I wanted to hit on that go-to-market motion for Plus. Obviously, we've seen the partner channel expand quite a bit, but what inning do you think we're in, in terms of addressing established relationships with potential partners, and maybe give us an update on hiring plans for the Shopify Plus sales force? Thanks, guys.

Yes, on the sales part we continue to add new sales hackers to the Shopify Plus team every quarter, as we have in previous quarters, so that will continue. We're hiring some really wonderful people that we think can help us move the needle there. In terms of other channels, with maturity or more maturity with Shopify Plus, we're now four years out since we started, launched it in 2014. We're now realizing which channels work better than others. Certainly the types of partners that we have that are referring merchants to us are not the type of partners that we traditionally saw on Shopify, these sort of 10-person agencies that we're now seeing 300-person agencies that are now becoming wonderful channel partners for us and are referring new large-scale merchants to Plus. We're also utilizing things like trade shows, which are something that traditionally Shopify had never really done. But in the enterprise commerce world, that is something that is really effective. So I would say that we've matured our strategy beyond just sales hackers, to have a multi-prong strategy from partners to in-person selling, and that's working really well for us. But as we continue, we're always going to uncover new opportunities. And again, we still see those upgrades coming from people that started on Shopify just a couple years ago as a small little shop, at a coffee shop. We're still seeing those upgrades come to Shopify Plus as well. So I think the mix of where we're getting these Plus merchants from continues to develop, and it's a really exciting part of our business.

We have a question from Jonathan Kees with Summit Insights Group.

My sole question would be regarding your three priorities, Platform, International, and Shopify Plus, I guess to me those sound like separate investment endeavors. I kind of want to pull in to some of the comments you've made in this call as well as in the previous earnings call. Can you talk about in terms of how the investing is going to go for each of these priorities? In the previous call, in the last earnings call, you talked about for Shopify Plus you were looking to hire about 500 salespeople for that, next couple years. And you just mentioned for the international, that's a long-term endeavor. So you raised the guidance for this year, kept operating margin the same. So I guess beyond 2018, how do you look in terms of the spending for each one of these priorities? Ideally, we could talk about it in terms of sales and marketing versus R&D and that kind of stuff, if it's still going to be -- I'm assuming both are still going to be pretty rapid growth but if you can do a comparison between one versus the other, that'd be great. Thanks.

I'll kick it off, here. They're all three incredibly important, as we've talked about historically. I think what you're just seeing though, I expect the investment will continue to be significant in each one of them and some other growth areas. But they do have slightly different time horizons in how to think about them, plus we started investing in several years ago, and is paying off in spades now, as you saw in the second quarter. But we also see continued opportunity there, both on the product R&D side and sales and marketing. The information that you talked about, the 500 adds, is incorrect. We've never stated a headcount number, but we are investing in sales and marketing capabilities both in our core markets and internationally for Plus because we see a very exciting opportunity there going forward. On the platform, we've just finalized the cloud migration which we said was incredibly important for us in terms of growing into the future. It provides more flexibility as we grow internationally than if we had our own datacenters. It allows us to introduce product faster, and there will be continued investments in the platform as we move forward. Some of them that we've announced later this year in multi-location inventory and things like that, and we'll continue to grow and evolve our platform overtime. With respect to international, I would say those investments are a little bit earlier-stage. We're just now rolling out additional features and functionality as we've talked about on the script, and we see a lot of exciting opportunities there. But international is challenging. Each market is slightly different with different regulations, different go-to-market strategies with partners, and different payment methods, et cetera. And so, that will take time and as we've said, those investments will continue well into the future and we expect those payoffs to be measured in years, not in a quarter or two. So, we see a lot of exciting opportunity, continued investment into the future because the growth opportunities are enormous.

And I'll just pipe in there, Jonathan, I think you're thinking about the Waterloo office expansion, 300 to 500 people over the next few years is probably where that came from. We have time for one more question.

Our last question will come from Justin Furby with William Blair. Your line is open.

Just for Harley, the Google partnership, can you give a sense of did you approach them? Did they approach you? What drove that and sort of the monetization for you guys, that's in that? And then Amy, what are the metrics that we look at, as sort of the incremental MRR you add quarter-over-quarter and compare that to the year-ago period? And it looks like that metric was a little bit negative for the first time in terms of new bookings growth. So I'm just wondering why that is, and maybe if that's not giving us the real picture in terms of subscription bookings? Thanks.

I'll start with the Google question. We're not going to sort of get into where these partnerships come from. We work with the largest and some of the greatest companies around the planet, constantly, so we have a lot of partnerships. The reason that we thought the Google partnership in particular, with the hardware was important, was because we fundamentally want to be the heart of the business for our merchants, and we feel like if those brick and mortar merchants and the POS users of Shopify are able to monitor actually their physical stores directly from Shopify, it further makes us the center and the heart of their business, which we think is really important. So we just think it makes sense for everyone, and we're quite happy with it.

with respect to the MRR added in the quarter, which is I think what the question was relating to, I go back to what I said previously in another question, that we think our growth in the quarter was solid performance. We don't expect to accelerate either added MRR or MRR growth every quarter. There's puts and takes in our model and drivers of growth that will hit at various times, and we're confident in the overall business model to continue to produce strong growth into the future.

Thanks, everybody, for joining today's conference call.

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