Shopify (SHOP) Q4 2021 earnings call transcript

Thank you, operator, and good morning, everyone. We're glad you can join us for SHOPIFY's fourth quarter 2021 conference call. We are joined this morning by Toby Lutka, SHOPIFY's CEO, Harley Finkelstein, SHOPIFY's president, and Amy Shapiro, our CFO. After their prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are based on assumptions and therefore subjective risks and uncertainties that could cause actual results to differ materially from those projected.

We undertake no obligation to update these statements except as required by law. You can read about these assumptions, risks, and uncertainties in our press release this morning, as well as in our filings with U. S. and Canadian regulators. Note that the adjusted financial measures we speak to today are non-GAAP, which are not a substitute for GAAP financial measures. Reconciliations between the two can be found in our earnings press release, and finally, we report in U. S. dollars, so all amounts discussed today are in U. S. dollars, unless otherwise indicated.

With that, I turn the call over to Harley.

Thanks, Katie, and good morning, everyone. The digital commerce revolution, which accelerated as a result of the pandemic in 2020, continued in full force in 2021. The direct-to-consumer and omnichannel commerce trends that got supercharged with COVID were reinforced, as more consumers bought directly from their favorite brands, engaging in unforgettable shopping moments that are possible when commerce is everywhere. The evolution in commerce that fast-forwarded over the past two years offers more selling opportunities to makers, creators, influencers, and curators. These entrepreneurs are ready. Their resilience and our drive to build them the best products for modern commerce puts Shopify and our merchants out ahead. We closed 2021 with annual revenue nearly triple 2019 levels. Our merchant base nearly twice as big as 2019, as the share of merchants outside of North America continued to grow as part of our mix over the past year.

More than 14,000 merchants on Shopify Plus, with approximately 4,000 of these coming on in 2021, the strongest year ever for standard upgrades as well as new merchants on the platform. And our merchants GMV more than doubled 2019 levels, reaching $175 billion in 2021. In Q4 of 2021, our merchants had their most successful Black Friday cyber money selling period, generating $6.3 billion in GMV, significantly outpacing growth in the broader e-commerce market. In 2021, nearly 600 million shoppers made a purchase from a Shopify merchant, up nearly 31% from 2020.

Seven companies that grew their businesses on Shopify reached a new threshold for growth by becoming publicly traded. And we got stronger, growing Shopify's team to 10,000 people, enthusiastically taking on the big opportunities ahead of us. Shopify's impact comes from the combined power of our total offering, our infrastructure, platform, merchant solutions, and our partner ecosystem. This is coupled with our belief that the work we do creates value not just for merchants, but for everyone who has the privilege to interact with them, our partners, our communities, our shareholders, and more.

Our merchant-first, product-led approach keeps us at the center of commerce and building the future for entrepreneurs. And today, I will discuss four key investment themes for 2022 to further future-proof our merchants by giving them superpowers.

First, in building buyer relationships. Second, going global. Third, growing from first sale to full scale. And finally, simplifying fulfillment. Starting with building strong buyer relationships. As the lines between on and offline commerce blur and consumers seek direct relationships with brands, we will continue to innovate so merchants can meet buyers and serve their customers wherever they are. As you saw last week, Shopify merchants in the U. S. will be among the first to be able to accept contactless payments simply by using iPhone. And with our Point of Sale Pro offering, which we introduced in 2020, our merchants can seamlessly connect their offline operations to their centralized dashboard, giving them a single view of their business across every sales channel.

This allows merchants to offer buyers an easy way to shop, whether that's buy online, pick up curbside, or shopping in person at their favorite store. More merchants benefited from these features, with the number of locations subscribing to Point of Sale Pro nearly doubling in Q4 2021 versus the same period in 2020. In 2021, we expanded availability of our new SHOPIFY Point of Sale hardware with integrated payments to retail merchants in the UK, Ireland, Australia, New Zealand, the Netherlands, and Germany, and have entered Belgium, Denmark, and Spain so far in 2022. In Q4, we saw healthy adoption of our point of sale hardware in North America, as well as in the new geographies we entered last year.

And with more merchants around the world using our world-class point of sale system, GMV from point of sale ended the year at its highest level ever.

With our integrated payments hardware ready to be rolled out to even more countries this year, more brands will be able to meet their customers on Main Street while continuing to strengthen those relationships online through the market. on your own channels like their online store, email campaigns, and social media. As customer acquisition costs rise and new privacy restrictions reduce the efficacy of advertising, embedding commerce into more apps and digital services is critical to help our merchants discover new buyers. Social media and search will play key roles, and Shopify made great progress on both in 2021. In August, we introduced TikTok shopping, bringing organic product discovery and shopping tabs to TikTok following the launch of our TikTok marketing channel in October 2020.

And in October last year, we launched our Spotify channel for musicians. Since introducing our TikTok channel, more than 100,000 merchant creators have installed the channel, and merchants are starting to sell via our Spotify integration. Creators selling through these channels have more power to connect directly with their buyers in an inspired moment and offer them a great shopping experience via Shopify secure checkout while owning their brands.

Our checkout using Shopify payments is also directly integrated with Google, Facebook, and Instagram, enabling merchants to seamlessly sell across these channels. With more channels to sell on, merchants are able to manage orders, returns, and payments, all from within the merchant admin. This reinforces the strength of our back office and Shopify's position as a multi-channel leader. In Q4, thousands more merchants use these three channels compared to the previous quarter, getting them in front of billions of potential new buyers. While still early, social commerce is growing, with sales via social channels expected to double in the US by 2025, presenting a huge opportunity for entrepreneurs. More buyers are following recommendations and inspiration from the people they trust on social media and discovering new brands to fall in love with.

Shopify is equipping our merchants for this future by creating a fantastic shopping experience for buyers with ShopPay, our accelerated checkout now available on Facebook and Instagram. In Q4, more buyers use ShopPay to checkout on Facebook and Instagram, with sales volume growing four times quarter over quarter for Shopify and non-Shopify merchants. We plan to begin rolling out our fast and frictionless SHOPPAY checkout on Google to Shopify merchants over the coming months, making it available to all Shopify and non-Shopify merchants selling on Google later this year. The benefits of SHOPPAY also extends to our SHOP app, our digital shopping assistant that offers buyers a delightful end-to-end commerce experience. In addition to in-app checkout with SHOPAY and our buy now, pay later product SHOPAY installments, SHOP provides buyers with real-time order tracking and delivery updates and relevant product recommendations from their favorite brands.

In Q4, millions more buyers enjoyed fun and easy shopping on SHOPAY, and by the end of the year, SHOPAY had facilitated a cumulative $43 billion in GMV since its launch in 2017. The benefits of SHOPPAY also carry over to SHOPPAY INSTALLMENTS, the most transparent installments product on the market, with no hidden fees and no late fees. GMB through SHOPPAY INSTALLMENTS more than doubled quarter over quarter, as did the number of repeat buyers using our product.

I'm pleased to report that SHOPPAY INSTALLMENTS is now the largest installments provider for Shopify merchants in the U. S. after only six months of being generally available. Next, helping merchants go global. Since the dawn of humankind, the greatest hurdles and opportunities for commerce have come down to geography. Digital commerce offers a completely new way to navigate these boundaries. But with different laws, regulations, and customs in different countries, selling globally is incredibly challenging. What Shopify does best is make the complex simple, which is where Shopify markets comes in. Optimizing international selling for merchants to improve sales conversion and create a better customer experience. We began rolling out Shopify markets in late January, and already thousands of merchants are using Shopify markets, benefiting from features like currency conversion, language translation of store content, as well as calculation and collection of duties and taxes.

We are excited to see the difference it makes to merchants. Also in January, we launched the JD Marketplace sales channel, opening our merchants up to the biggest e-commerce market in the world. China's e-commerce market is estimated to be worth $3.3 trillion by 2025. That is five times larger than the U. S. market. This channel integration opens up the China market to our merchants, who can now reach JD's 550 million active users. This enables our merchants to start selling quickly while providing end-to-end fulfillment from JD's U. S. warehouses directly to consumers in China.

It also provides them smart price conversion to local currency based on foreign exchange rates, an intelligent translation of product names and descriptions. This integration removes barriers to one of the most important e-commerce markets and is a major step in solving cross-border commerce for our merchants.

Third, growing from first sale to full scale. After a merchant gets started and finds product market fit with their first sales, they need the right tools to move from one phase to the next. That's why we continue to enhance and build new tools to simplify and support merchant's journey from start to scale. An example of this is simplifying business finances. In January, We rolled out our money management product, Shopify Balance, to hundreds of thousands of eligible merchants in the U. S. Shopify Balance helps merchants manage their business finances and their business all in one place, so they can better manage their cash flow and plan for the future.

Thousands of merchants are already actively using it. As merchants build momentum, inventory and marketing need to grow alongside it. And this is where Shopify Capital comes in, offering merchants the funding they need to expand their business. In Q4, we advanced nearly $324 million, up 43% from the same period last year, outpacing our overall revenue growth for the quarter and bringing the cumulative amount advance since we launched Shopify Capital in 2016 to over $3 billion. Once a merchant has reached scale, the challenges they face are different.

Shopify Plus helps brands continue their growth journey and reach for the stars at scale. In 2021, we introduced our global ERP program so high-volume merchants can seamlessly manage the complexity of their business operations at scale. We also partnered with Global E to simplify cross-border commerce for our merchants with more complex global operations, offering them a fully outsourced solution to conduct international sales on their behalf. With our scalable and flexible enterprise offering, we saw a diverse slate of brands from a broad range of verticals, including food and beverage, apparel, entertainment, furniture, and medical devices launch with Shopify Plus in our fourth quarter, including Canadian dairy giant Saputo, global fashion retailer French Connection, Dental device company Invisalign.

German meal kit company HelloFresh. American furniture retailer Our House and manufacturing company Kohler. Brands by some of today's hottest musicians from labels Sony UK and Warner Electra Atlantic, Adele and Cardi B. Brands from French spirit company Remy Quintreau, Westline Distillery, Maison Brilette, and Champagne Talmont. Pleasing, a celebrity brand by singer Harry Styles, and more brands from CPG Unilever. And of course, just last month, Tom Brady launched Brady Brand, his line of performance apparel designed for athletes by athletes on Shopify. In 2022, we will continue to innovate on behalf of our merchants, bringing more exciting opportunities and capabilities to these brands, enhancing their ability to sell in new and creative ways, such as selling NFTs. Selling NFTs on Shopify, which is currently in beta, creates a new way for brands, artists, and creators to engage with their communities by selling their own NFTs across multiple blockchains.

And fourth and final key theme simplifying fulfillments Since most of what merchants sell are unlike NFTs and need to actually be handled and delivered we are building Shopify Fulfillment Network We are excited to update you today on what we've learned, how far we've come, and especially on where we're heading as we move out of the prototype phase and into the build phase. We are consolidating our network to larger facilities. We'll operate more of them ourselves, and we'll unify the warehouse management software that we've been building and testing. We expect that these changes will enable us to deliver packages in two days or less to more than 90% of the U. S. population while minimizing the inventory investment for SFN merchants.

While Amy will go into more detail as to what our evolved vision looks like from a financial perspective, I can tell you from a merchant's perspective, Shopify fulfillment can be life-changing for their businesses. We hear from merchants that fulfillment is only something you think about when it isn't working well, and they are thrilled that they now never have to think about it. That the stockouts and pre-orders that took the shine off strong demand for their new releases largely became a thing of the past with Shopify Fulfillment. And just recently, I heard from a merchant who tells me that he sleeps even better because Shopify Fulfillment just works. Comments like these fuel our ambition and will continue to explore opportunities to give merchants more visibility and control over their most important assets.

In addition to the progress we made with SFN, in 2021, we also invested heavily in our extensive partner ecosystem. By eliminating our rev share on their first $1 million of app and theme earnings annually, we made it even more enticing for developer partners to build on and for Shopify. By the end of 2021, our app developer partners grew their earnings on Shopify by 76% to $411 million. And the number of app developer partners that had an app used by merchants in 2021 grew by nearly a third over 2020. Over the past 12 months, 40,000 partners referred at least one merchant to Shopify. I am thrilled by what we accomplished and eager to see the amazing solutions our partners helped build with us this year.

We could not have made the strides we did last year without the strength and talent of our amazing team. Thousands of engineering, commercial, and support talent around the world joined Shopify last year to help build the infrastructure of commerce on the internet and enable more entrepreneurs around the world to reach for their economic independence. As part of this, we welcome three great additions to our leadership team. Alan Linewand as Chief Technology Officer, Jess Hertz as General Counsel, and John Asante as our first Chief Information Security Officer.

With their rich domain and leadership experience, we are excited to see them take their teams and Shopify to the next level. I want to welcome all the new members of our team to our rocket ship and thank everyone on board for bringing their best game, even on the toughest days. We have an incredible bench of talent, more than 10,000 strong, building the future of commerce. Together with our partner ecosystem, we are working relentlessly to bring more Shopify to the world and make commerce better for everyone.

Thanks, Harley. With commerce evolving faster than ever, after the step change brought on in 2020, our merchants adapted and continued to prosper in 2021. Our past investments and execution to build the most modern technology for the future of retail paid off, with Shopify and our merchants rounding out an incredible year with a strong fourth quarter. Revenue in our fourth quarter grew to $1.38 billion of 41% over the same period last year.

Subscription solutions revenue of $351.2 million grew 26% year over year, largely due to strong growth in monthly recurring revenue. MRR grew 23% year-over-year to $102 million in Q4 as more new merchants joined the platform and the number of retail locations using POS Pro increased. Shopify Plus added a record number of merchants in Q4 from continued strong upgrades and new merchants and continued to grow its mix of merchants outside of North America, contributing $29.8 million, or 29% of MRR, compared with 25% in Q4 of 2020.

Subscription Solutions year-over-year revenue growth was also impacted by the first full quarter for our new app and theme revenue models implemented in Q3, and by a change in the way we recognize themes revenue from gross to net, which reduced Subscription Solutions revenue by $21 million in Q4 2021, This is a great opportunity to discuss this discussion of our business. As I said, March 1st on June 1st, the short term of $3.6 billion for the first quarter of July 1st, and the first quarter of July 1st, we have a lot of $1.1 billion. March 1st, the short term of $1.1 billion, and $3.6 billion, and $1.7 billion, partially offset by strong Shopify plus variable platform fee revenue growth.

This high level of Q4 GMV was the result of an extended Black Friday Cyber Monday shopping season, which began 28 days ahead of Cyber Monday compared to 19 days in 2020. Strong online and offline consumer spending and higher average order values in North America. Robust growth in merchant sales, as well as increased penetration of our expanding menu of products, drove merchant solutions revenue with growth led by Shopify payments, Shopify capital, and rev shares from partners. We also recognized $21 million of revenue in the fourth quarter relating to non-cash consideration for merchant solutions product performance obligations to strategic partners. $27.7 billion of GMV was processed on Shopify payments in Q4, an increase of 45% versus the comparable quarter in the prior year.

Payments penetration of GMV was 51% versus 47% in Q4 2020, and up two percentage points over Q3 2021. Gross payments volume growth was fueled by strong performance by merchants on Shopify payments, new merchant adoption, and shop pay penetration gains. Plus merchants significantly expanded payment penetration as well as their share of GPV year-over-year, and with our POS Pro hardware with integrated payments available in eight countries as of Q4, Shopify payments penetration for our POS channel expanded further ahead of overall payments penetration. Adjusted gross profit grew 37% over the fourth quarter of 2020 to $700.6 million, reflecting strong revenue growth and a significantly greater mix of our lower margin merchant solutions revenue versus the prior year. Adjusted operating income was $130.2 million in the fourth quarter compared to $200 million in the fourth quarter of 2020, as we accelerated our investments over the prior quarter, adding more engineering and commercial talent and executing on our marketing programs.

Adjusted net income for the quarter was $172.8 million, or $1.36 per diluted share, compared with adjusted net income of $198.8 million, or $1.58 per diluted share in the fourth quarter of 2020.

Finally, our cash equivalents and marketable securities balance was $7.77 billion on December 31st. Nearly 1 million merchants have launched businesses on Shopify since 2019, bringing with them a surging demand for our commerce solutions to thrive in a sea of opportunity. The investments we made in the years leading up to 2020 prepared Shopify and our merchants for this unprecedented wave of digital commerce that pulled forward the need for modern retail technology and drove our exceptional results. Our consistent track record of growing our base of merchants and overall GMV is evidence that our formula to build for the future of commerce is working.

Now that we have turned the page to this new era of e-commerce, the road in front of us is teeming with opportunities that we must act on now to add more momentum to our flywheel. Therefore, in 2022, we're moving full steam ahead with investments that build on the foundation of our commerce infrastructure that will further power our base of merchants to expand, become stronger, and succeed now and on the other side of this digital commerce transformation.

Harley addressed the why behind our four key investment themes earlier, so I will build on each of them from an investment perspective. First, building buyer relationships. In 2022, we plan on extending ways for merchants to connect with more buyers, deepen buyer relationships, seamlessly operate their businesses across more channels, and offer memorable shopping experiences while maintaining control of their brand. I'll talk briefly about two areas, SHOP and SHOPIFY POS. In 2021, we made excellent progress with making SHOP a great place to shop. On top of the features Harley went through, we added a host of curated lists and made our product recommendation algorithms better to help buyers with brand-first product discovery. In 2022, we will continue adding more features and creating fantastic shopping experiences so buyers want to keep coming back to their favorite brands.

As the world emerges from the pandemic, physical retail is making a comeback. In-person selling is one of the best opportunities for merchants to deepen relationships with buyers through experiences, services, and often a shared community. As there is still a huge opportunity ahead of us to bring our leading omnichannel capabilities to more retail businesses in 2022, we will increase our investments to put Shopify POS into the hands of more brick-and-mortar merchants and more geographies. Which brings me to our second investment theme, going global. This means we plan to do more in 2022 to help merchants thrive in their local markets and reach buyers globally. In 2021, our base of merchants in GMV outside North America increased as part of our overall mix compared with 2020, as we improved product market fit and introduced more of our solutions to our focus regions.

We plan to continue this in 2022, bringing Shopify POS and Shopify payments with local payment methods to even more countries. We also expect in 2022 to introduce more local currency subscriptions, which we began testing in 2021. And we intend to expand our sales and marketing investments in these markets to make it obvious that Shopify is the solution of choice to launch a business with and succeed.

Finally, Harley noted some key examples of ways we will continue to help merchants also reach buyers outside of their local markets in 2022, notably extending global reach via Shopify markets and our partnership with JD. com.

Moving to our third investment theme, growing from first sale to full scale. In 2022, we will keep making the important things easy and everything else possible. For entrepreneurs who are just getting started, this means continuing to lower the technical barriers to launch a business, such as making onboarding easier, and then helping them define product market fit so they can achieve their first sale. As merchants scale, their journey is simplified by features like Shopify Shipping and Shopify Capital. As Shopify Plus merchants like Allbirds and Figs have demonstrated, brands can show up as their authentic selves on Shopify and grow to the next stratosphere, never having to replatform. In 2022, enhancements to products like Shopify Balance, Shopify Capital, and B2B for direct-to-consumer merchants will keep powering growth journeys on Shopify.

And finally, our fourth investment named Simplifying Fulfillment. We are moving into a new phase in 2022 for building simple and fast fulfillment for our merchants. Over the past 18 months, we built a prototype to make fulfillment more simple and seamless. We honed in on direct-to-consumer, hyper-growth self-shippers who met criteria that made them a good fit. We began building out a self-operated lease warehouse in Atlanta and conducted pilots with simple inventory onboarding and management, a buyer experience fully integrated with Shopify across channels, a network with two-day delivery coverage for more than 90% of the U. S. population, simple returns, and simple pricing. The result of these actions was encouraging, as the percentage of surveyed merchants who were very satisfied more than tripled by the end of 2021 relative to the end of 2020, informing us that we're on the right path in building a solution that helps merchants easily manage their products, orders, and inventory from their SHOPIFY admin and gain control, visibility, and confidence in fulfillment.

So as we look ahead to 2022, we will continue building our solution by operating more major hub warehouses ourselves, while still leveraging high-performing partners where it makes sense. We will also unify the network with our own warehouse management software, while still using partner software in some cases, to highly integrate with Shopify's back office and checkout, so merchants can seamlessly offer and achieve delivery promises. Over the next three years through 2024, our planned investments expand the merchant value proposition even more, including increasing one-day delivery coverage in the U. S. and increasingly enhanced returns functionality.

And we are planning to be able to handle progressively larger merchants with a broader set of needs as we build through 2024. When we launched SHOPIFY Fulfillment Network in mid-2019, we said that we expected to spend $1 billion over five years. Through 2021, about halfway through the original asset-like plan, we spent $117 million, which includes funding cash operating losses and a small amount of CapEx. In conjunction with our updated, more direct approach, we will take this opportunity to reorient you on our expectations going forward. First of all, our expectations for Shopify Fulfillment Network, revenue, operating expenses, and capital expenditures will be incorporated in our overall Shopify outlook, as they are for 2022.

And second, we are providing today a one-time view of our expectations with regard to CapEx and scale under this updated approach. CapEx related to Shopify Fulfillment Network will start to ramp in 2022 with an expectation for 2023 and 2024 of approximately billion in capital expenditures over those two years for self leased warehouse hubs in key U geographies To make the transition from prototype to build while still maintaining the merchant delight we achieved we expect fulfillment volumes to progressively scale toward the back of 2023 and into 2024.

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

Investments above this would be based on allocating capital to opportunities that either significantly expand the opportunity set for merchants and Shopify, or have strong paybacks from improved operating efficiency. We are pleased with our progress on SHOPIFY Fulfillment Network, proud of the team we've assembled that's been doing groundbreaking work and confident that what we are building will help merchants in ways never thought possible. With these important areas of focus and investment in mind, let's turn to our outlook for 2022. We believe that change behaviors adopted by merchants and consumers in 2020 and 2021, driven by COVID, have expanded the prospects for entrepreneurship and digital commerce. And these past two years have been game changing for SHOPIFY, with our merchant base, GMV revenue, as well as the size of our team doubling over 2019 levels.

This momentum sets us up to expand our ambitions on behalf of merchants into 2022 as the world continues to find normalcy living with and moving beyond COVID. Our outlook for 2022 assumes continued secular tailwinds for entrepreneurship and digital commerce transformation against a more measured macro environment relative to 2021. While we believe that the COVID-triggered acceleration of e-commerce that spilled into the first half of 2021 in the form of lockdowns and government stimulus will be absent from 2022, and there is caution around inflation and consumer spend near term. For the full year, we see economic growth supporting the continued penetration of retail by e-commerce.

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

First, we do not expect the COVID-triggered acceleration of e-commerce in the first half of 2021 from lockdowns and government stimulus to repeat in the first half of 2022. It's worth noting that revenue growth in Q1 of 2021 was our highest ever as a public company at 110% year-over-year.

Second, our new terms with app and theme developers create a couple of differences from last year's first quarter. The elimination of our rev share on their first million dollars of revenue annually reset on January 1st, and the switch from gross to net revenue recognition for the sale of themes as a result of revised contract terms with our theme partners. Since these terms didn't come into play until the second half of last year, these will be a headwind of subscription solutions revenue in the first half of 2022, particularly in the first quarter.

And third, we expect certain commercial initiatives and sales and marketing investments will gain momentum over the course of 2022. Subscription Solutions revenue growth to be driven by more merchants around the world joining the platform than in 2021 as we introduce new commercial initiatives and aggressively invest in sales and marketing to expand our addressable market and more deeply penetrate existing markets. Our objective in 2022 will be on optimizing our efforts around getting more merchants on the platform and to success. Merchant solutions revenue growth to be more than twice the rate of subscription solutions revenue growth year over year, as merchants make greater use of our offerings, and we expand existing products into new geographies and roll out newer features like Shopify markets.

The increase of merchant solutions in our overall revenue mix means gross profit dollar growth will trail revenue growth. The evolution of retail to digitally empowered commerce is far reaching, ranging from new ways for merchants to improve buyer discovery and loyalty to new commercial opportunities on social channels to a data enabled revolution in shipping and logistics. To keep independent brands at the forefront of this revolution, Shopify intends to reinvest back into our business aggressively throughout 2022, deploying all of our gross profit dollars back into the business. In research and development, we expect to hire more engineers than in 2021, despite an exceptionally competitive market for top talent. In sales and marketing, we are accelerating hiring and sales, initiating a new offline performance marketing program, and stepping up marketing efforts internationally.

Lastly, for 2022, we anticipate capital expenditures of $200 million, stock-based compensation expenses and related payroll taxes of $800 million, and amortization of acquired intangibles of $28 million. In closing, Shopify is building in 2022. We are building the infrastructure of commerce so our merchants can continue to compete and lead in the future of retail, A future in which commerce happens everywhere across digital services, physical spaces, and global regions. The value of Shopify lies in its simplicity for merchants to easily start and scale their business, so much so that merchants fall in love with our solutions and never want to leave, no matter how big they get.

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

I will now turn the call back to Katie. Katie McLeod Thanks, Amy. Before we open the call up for your questions today, I would like to remind everyone to please limit yourself to just one question. Juan, can we open the line up for questions?

Yeah, thanks for the question. Tech talent is in high demand across the technology sector. And so, you know, we obviously want to remain competitive in attracting the best talent in And so as you can see from our stock-based compensation outlook that we provided to you, that does incorporate both reflects the full year impact of hiring from last year as well as hiring that we'll do this year and some expected adjustments that we will make. I continue to believe that based on the hiring that we did last year that we were able to more than double our R&D hiring year over year, and Shopify remains the best place in tech to work.

Compensation clearly plays a factor in that, but I would say equally as important are the exciting things that we're doing in our continued innovation.

And obviously, technology, I mean, it's tight. Like we have not, like Planet Earth has not made enough engineers to deal with the rapid digitalization that we've gone through with COVID and so on. So the money component is a big component, and SOAR component is a big component, and Shopify is among the best paying companies in the world in both things.

And increasingly, talent gravitates to companies that have other things to offer. Like, for instance, personal growth is just incredibly important. Everyone gets that most of the return in your career comes in the future, especially when you're pretty early and right out of university. So just some of the company values, like being constant learner, work really, really well in this way. I think people can get an enormous amount of experience here. Engineers can report through an unbroken chain of other engineers, all the way to, including some people of the board of directors. And for me, people on the design side, the company is one which sweats all details. And that's really, really appreciated by people in that craft.

And the product discipline is super well established, with me playing a very active role and teaching what I've learned over the last 17 years. So a lot of people, there is a big talent scramble in the world. There's a lot of shuffling going on. Shopify is on the good side of the shuffling, it seems. And that's what's really, really well for the merchants that we are building for every day.

Thanks, Toby.

Hey, Matt, it's Harley. I'll take that question. So a couple things in terms of the SFN model. So we are shifting the network model really to larger capacity hubs, and we want to operate more of them ourselves for things like better control quality, but also on cost here. As part of this, we're also unifying the network across with the warehouse management system, and so we think that will also continue to optimize things. But the goal here is clear. We expect to enable two-day delivery coverage to more than 90% of the U. S. population. And at the same time, we want to obviously minimize inventory investment for SFN if needed. So, you know, Amy talked about the additional spend.

We expect spend to be about $2 billion through 2024, including that $1.4 billion in CapEx. But really, you know, if volumes are what we expect them to be, we need to have enough capacity. That's really important. But also the capacity has to be of very high quality, and that is what we're preparing for. Now, you know, we run larger hubs as a backbone, but we're also taking advantage of partners. It's not as if this will be entirely SHOPIFY owned, but we want to match SHOPIFY warehouses with partner warehouses, and we expect that quality will increase and the capacity will increase because of this change. So a good way to kind of think about it is that I think we were in sort of this prototyping stage for SFN the last couple of years.

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

Thanks, Matt.

Yeah, so let me just clarify a little bit first on the investment. So we said CapEx would start to ramp in 2022, and that in 2023 and 2024, we expected to spend about a billion dollars on the warehouse hubs that Harley spoke about. So, during 2022, we're transitioning from prototype into build, and during that transition, we will continue to focus, first and foremost, on maintaining high merchant delight that we've worked so hard to achieve that I talked about earlier. That's critical. And scaling in 2022 with that in mind. And what I said also was that in the back of 2023 and into 2024, that's when we expected we would start to see scale of the size where we can really start to optimize the cost of the network.

And so largely that's how you would think about revenue ramping as well.

I mean, here's the heuristic, basically. Maybe that's the best way to compress this. If most of the merchants need something, most of the time, it goes in the core. That's the first step at this. And that changes over time. So for a while, it was most people needed support for a payment gateway. I'm talking like ancient history. At some point, most people needed support for a payment gateway. So we supported a lot of them. And then it just was like, eventually, payment gateways, we knew exactly what they would need to support. And then we built one which was included with everyone by default. And people can just sort of choose another one if they need to.

It sort of evolves. But the contours of what Shopify does and addresses is not really defined by industry. Like, this is very interesting. At some point, there was a point of sale industry, and an online store industry, and logistics industry. And they were all separate. I think verticalizing through all this was a really important step here because merchants, again, just need to solve e-commerce problems. Or like, need to solve, sorry, I shouldn't even say e-commerce. They just need to get their products into the cloud and then from there everywhere, right, into every channel. And that, like, integrating a whole lot of systems together is just a complexity that limits the potential for growth. And the thing is about logistics.

But there's also fairly bright lines around this, like physical shippable products are kind of all bread and butter. And that's a huge market. It's incredible how often in my career I've had conversations that are kind of difficult to have, partly because people just kind of underestimate the size of the retail industry to begin with, and then also massively underestimate the size of the internet. And given the SHOPIFY is at the intersection of four, four things, there's always been a very, very large opportunity, but also like lots of opportunity for us to get distracted when we build things. Since in the last two years, we've really, really focused on not getting in too many adjacencies and being clear with our partners what it is we want to accomplish.

And just really, really, really sweating the details of the core parts of the business. So I think if you're trying to predict the direction we are going, just imagine like us, like, I think we told everyone roughly which part of the space we want to solve. And we are going to get better and better and better in both parts. And sometimes a little bit deeper integrated, wherever that is a big product advantage. But this is, past that, it's really case by case and a very, very complicated conversation involving assumptions about what the future looks like and things like this. But again, that's a really, really big topic with fascinating one though.

I'll start. It's a Harley here. So, look, I think the SHOP app is certainly getting more and more attention now. Really, the value prop that we've always talked about around it is strengthening the merchant relationship with buyers in an effort to increase customer LTV. So, you know, it offers things like real-time order tracking, in-app checkout, with SHOPPay, SHOPPay installments, has product recommendations, post-purchase marketing. It really is a great way for merchants to better engage with their end consumer. In terms of how we can evolve that, I mean, look, in Q4 2021 alone, millions more buyers signed up and used SHOP app to make purchases directly from the app during the holiday season, and that obviously continues as well.

The other thing to sort of think about is as a consumer decides that they like a particular brand, this is a way for them to go direct to that brand again when they want to buy either more products or they want to rebuy a product they've already purchased. And when you combine that with SHOPPAY, which, as I mentioned in the opening remarks, has now facilitated $43 billion in GMB since it's launched, it's four times faster. It has a 1.7x higher checkout rate. It is becoming consumers' favorite way to shop for their favorite brands. So we'll continue to innovate on that from a product perspective. In terms of the monetization of that, look, the more ways that merchants can sell, the higher their LTV becomes.

Obviously, Shopify's business model is a flywheel of entrepreneurship, and the better our merchants do, the better we do, and so that's really where we're focused.

Great.

I would say that just, I mean, I mentioned some of this earlier on, but the goal is now that we have a sufficient amount of insight and information and feedback from merchants, we really, you know, we want to continue to build these foundational features for SFN. So what we're focusing on is how do we offer this fast and simple fulfillment that will enable them to delight their customers.

Mark Moss, Ph. D. : Part of that will be things like testing fees across like one simple fee across things like inbounding and pick and pack and storage and supplies. Mark Moss, Ph. D. : But what we're trying to do is just enable it so as I said in my opening remarks that merchants don't have to think about fulfillment. Mark Moss, Ph. D. : Again, being able to offer this to 90% of the US two day affordable shipping that really is the goal and this mix between self owned warehouses, but also leveraging partners, we think is the best way to get there.

But look, this is complicated stuff, and this is stuff that is not easy to do. That's sort of where Shopify shines. We've always shined, where we take things that are really complicated, and we simplify them for small businesses and now larger businesses as well. So our plan is really to, again, move into this phase of build, scale these operations, figure out where we can find greater control over efficiency layers, where we can find automation. There's obviously cost levers as well here. But the goal is to make fulfillment something that our merchants, particularly in the U. S. for now, don't have to think about. That's the goal.

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

Thanks.

Yeah, I mean, we don't disclose the particulars, but we know that there's a large percentage of our existing merchant base that has both. And so when you look at our POS performance, as Harley said, not only did it have its best quarter ever in Q4 from a GMV perspective, But we've continued to increase the number of merchants and the number of locations significantly. And in that addition of merchants, we're seeing healthy penetration of our existing merchant base. That's the number one driver of increasing merchants in Q4, followed by new merchants coming to SHOPIFY. So we're successful in both. So this is a significant opportunity for us. And as we also indicated, we're in eight geographies now as of the end of Q4 for POS with integrated payments, and we've already launched three additional geographies already in Q1 of 22.

So this is a major opportunity for us going forward.

We're also beginning to see just that on the retail PO point of sale side of things. We're also starting to see some really larger merchants start using this as well, whether French Connection in the UK or Campos in Italy, FC Copenhagen in Denmark, Allbirds, Parachute, Brooklinen. What we're seeing is that a lot of the brands we talk about from the e-commerce perspective are really making shop flight point of sale part of their offering in a physical location. And so retail is unequivocally growing its impact on the shop flight business. And as more markets open up post-pandemic, I think you're going to see a lot more there. But we're really proud of, you know, it was the best quarter ever for retail business on SHOPIFY.

Yeah, and the general tolerance for bad software is going down across, you know, everywhere. Like I think people just experience the COVID lockdowns and all these kind of things has exposed people to the quality of consumer software everywhere. And then how all the problems can be solved in a business context. So, as people, like everyone's looking at better point of sale systems and top of five point of sale is really, really good. So, certainly helping.

Well, on the SFN commentary about investing levels above what we provided in our outlook, you know, we're not going to get into the details of how we view payback or ROI, but what we can assure you is we've always been strong allocators of capital to the right opportunities to grow the various parts of the business at the right time, and this is no different. So the outlook that we provided you, any investment above that would be based on things like volume growing significantly that would have sufficient payback to justify the investment, and that would be a very good thing to have that kind of volume. So that's how we're looking at it. The space investment gets us to a certain level of scale that we think allows us to start optimizing costs and increase the number and types of merchants that we're serving, and anything above that really is driven by success.

In terms of investing all of our gross profit dollars back into the business, that's exactly what it means. And we'll leave it there. It means we see a significant opportunity in front of us to continue to go after digital commerce transformation. And there are parts of the business today from an adjusted operating income perspective that are positive, and we're deploying all of those profits back in to grow the businesses like international growth, POS that we just talked about. the SHOP app and SFN.

And sure, thanks everybody for dialing in today. This concludes today's call. Thank you so much for joining.