Shopify Inc (SHOP) 2019 Q4 法說會逐字稿

Thank you for standing by.

This is the conference operator.

Welcome to the Shopify Fourth Quarter 2019 Financial Results Conference Call.

As a reminder, all participants are in listen-only mode and the conference is being recorded.

(Operator Instructions)

I would now like to turn the conference back over to Katie Keita, Director of Investor Relations.

Please go ahead.

Thank you, operator, and good morning, everyone.

We are glad you can join us for Shopify's Fourth Quarter and Year-end 2019 Conference Call.

We are joined this morning by Tobi Lütke, Shopify's 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 that are based on assumptions and therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected.

We undertake no obligation to update these statements except as required by law.

You can read about these 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 and not as a substitute for GAAP financial measures.

Reconciliations between the 2 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.

2019 was a phenomenal year for Shopify.

Our merchant base is stronger than ever, with more than 1 million merchants using Shopify to pursue their path as entrepreneurs.

The mix of merchants from outside our core geographies continues to expand as we help more entrepreneurs around the world reach for independence by launching businesses on Shopify.

We broke new ground in our journey to make commerce better for everyone by launching the Shopify Fulfillment Network.

We made our largest acquisition to date with 6 River Systems to help us transform the fulfillment industry.

And best of all, our merchants did great, generating more than $61 billion in GMV in 2019, an average of more than $1 billion per week last year and positioning Shopify merchants on an aggregated basis as the second largest e-commerce retailer in the U.S.

These achievements in 2019 point to the strong momentum of Shopify's flywheel.

As we lower the barrier to entry to entrepreneurship, more people are trying their hand at starting a business on Shopify.

This enables Shopify and our expanding ecosystem of partners to keep innovating to help merchants of all sizes sell more, and sell more efficiently.

This translates into the success that our merchants are seeing today.

Encouraged by this momentum, we continue to invest in our merchants' success in 2019, strengthening our platform, expanding our product offering and further differentiating Shopify Plus.

Let me highlight some of these enhancements we made in 2019.

In the middle of last year, we introduced Shopify Capital to non Shopify Payment merchants, which allowed us to advance more capital to more entrepreneurs.

This helped us advance more than $430 million in 2019 through Shopify Capital for a cumulative $885 million since inception to help merchants grow their businesses.

We released a number of new digital marketing features to help brands connect directly with their customers and build lasting relationships.

These include Shopify Email, Shopify Chat and more ad buying tools through partnerships with Facebook and Microsoft, helping merchants reach more potential buyers without ever having to leave the platform.

While digital marketing goes a long way towards helping our merchants sell more online, we know that our merchants are selling both online and off-line.

We made great progress, helping merchants sell more in person with the release of our new retail hardware collection.

The Tap & Chip Reader, Dock and Stand, delivers a seamless online and offline shopping experience.

We plan to launch our more intuitive and scalable all new point-of-sale software in the coming months, further simplifying merchant operations and helping them grow their brick-and-mortar businesses.

The time-saving features we launched last year to help merchants sell more efficiently include: order editing, a long-awaited enhancement that saves merchants time and effort when making changes to customer orders; single sign-on for faster and easier switching between multiple Shopify stores; our translation API, which allows merchants to more easily sell in multiple languages; and Shopify Pay, which continued to help merchants convert sales in 2019.

More than 40 million buyers have opted into Shopify Pay.

Shopify's check out accelerator has been very popular with buyers and facilitated more than $1.5 billion of GMV in the fourth quarter and 65% more order volume than the same period in 2018.

Shopify shipping adoption increased to 45% of eligible merchants in Q4, up from under 40% this time last year.

The strong increase in adoption through 2019 reflects the value we bring to merchants from competitive rates secured through our economies of scale to added features that give our merchants more flexibility such as shipping profiles and parcel insurance.

Of all our announcements last year, the most ambitious was the launch of the Shopify Fulfillment Network.

With consumer expectations rising for fast and affordable delivery, fulfillment poses a challenge to all businesses.

Combining our economies of scale with the automated fulfillment technology from 6 River Systems, we will enable our merchants to better compete with the largest businesses on the planet, while revolutionizing the fulfillment industry as it shifts from pallets to parcels.

Even though we are happy with our initial progress, it's important to remember that we are in the early stages of a 5-year plan for the Shopify Fulfillment Network.

Our merchants need us to get this right and that will take time, but we are committed to the long-term viability of the Shopify Fulfillment Network.

The progress we made across our platform and products in 2019 contributed to an incredibly successful Black Friday/Cyber Monday sales weekend for our merchants who generated nearly $3 billion in sales worldwide to over 25 million consumers.

This demonstrates the increasing power of direct-to-consumer brands around the world.

Not only were our merchant sales outstanding, but from a platform standpoint, we reached peak volumes of over $1.5 million in sales per minute with no downtime.

Let me take a moment to say how proud we are of our infrastructure and support teams and everyone else that made this holiday selling period an enormous success for our merchants.

Shopify Plus merchants experienced the strength of the platform firsthand as their sales over the BFCM weekend blew past expectations.

Sales by Plus merchants over BFCM were up significantly over the previous year.

This contributed to a strong fourth quarter for Shopify Plus, rounding out a great full year.

Merchants join Shopify Plus because we offer what no other platform does, a solution that enables brands with increasing complexity to scale and go global in an agile and cost-effective manner.

Both traditional and nontraditional retailers are embracing our platform.

We make it easier for entrepreneurs within the enterprise to experiment and grow in an ever-evolving retail landscape, helping deliver a powerful buying experience through cutting-edge features like augmented reality, fast and easy checkout, and interactive in-store experiences.

Notable brands that launched on Shopify Plus in Q4 include: iconic houseware brand, KitchenAid; footwear brand, Toms; beachwear apparel fashion brand, Panama Jack; Canadian retailers, Umbra and Mark's Work Wearhouse; U.S. Newspaper publications, The Washington Post and The Los Angeles Times; and global entertainment company, Cirque du Soleil.

And of course, more consumer packaged good brands, influencers and celebrities like Sean John and Travis Scott.

In 2019, we saw an increasing number of well-established brands with higher GMV migrate to the platform, many of them come to Plus with enterprise level requirements, which Plus is increasingly able to solve.

We will continue building out our feature set to help larger volume merchants manage their businesses, expand globally and improve efficiencies through automation.

The new Shopify Plus experience, launching in the coming months, will further reduce complexity for these high-volume merchants and enhance the overall value they receive from Shopify Plus.

Now turning to our partners.

As we grow our international footprint and seek to improve product market fit outside our core geographies, developing our partner ecosystem in these countries grows ever more relevant to Shopify and our merchants.

More than 24,000 partners referred a merchant to Shopify over the past 12 months, up by more than 1/3 from a year ago, with international partners growing as part of this mix.

With the addition of 500 apps to our app store in the fourth quarter, we started 2020 with more than 3,700 apps available to help merchants run their businesses.

Building a commerce operating system that delights millions of merchants across the globe is hard, but Shopify is great at solving hard problems, which is why we take on initiatives like the Shopify Fulfillment Network, international expansion and so much more.

We set out on this 100-year journey less than 2 decades ago, which means the vast majority of our work lies ahead.

Before I hand it over to Amy, I want to say thank you to our talented and merchant-obsessed team, which heads into 2020 more than 5,000 strong.

Thank you for working to preserve and to grow entrepreneurship, for giving our merchants superpowers and for continuing to move the needle towards making commerce better for everyone.

We will continue to arm the rebels.

Thanks, Harley, and good morning, everyone.

I'll second Harley's appreciation for all the work the Shopify team put into making 2019 such a success.

Making the right strategic investments is meaningless without strong execution, and we did both this past year.

Initiatives we've invested in over the past few years, such as Shopify Plus and international expansion contributed to growth across the board.

Revenue growth accelerated in our fourth quarter, the first time since 2015, expanding 47% year-over-year to $505.2 million.

This acceleration of our top line was entirely driven by Shopify's organic operations as fourth quarter revenue associated with the 6 River Systems acquisition was not material, consistent with our guidance.

Subscription Solutions revenue increased 37% year-over-year to $183.2 million.

Monthly recurring revenue grew 32% year-over-year to $53.9 million, primarily driven by new merchants joining the platform.

Shopify Plus continued to increase its contribution to Monthly Recurring Revenue, accounting for $14.6 million or 27% compared with 25% of MRR in Q4 2018.

Strong app and Shopify Plus platform fee revenues contributed to the 5 percentage point difference between the growth of subscription revenue and MRR.

Merchant Solutions revenue grew 53% over the same period in 2018 to $322 million.

The acceleration in year-on-year growth was driven by continued penetration of Shopify Payments and by growth of other Merchant Solutions revenue, like capital and shipping on the back of strong GMV expansion, which increased 47% year-over-year to $20.6 billion.

Newly added revenue streams from 6 River Systems and Shopify Fulfillment Network also contributed, albeit only slightly given their early stages.

$8.9 billion of GMV was processed on Shopify Payments in Q4, an increase of 52% versus the comparable quarter last year.

Payments penetration of GMV was 43% versus 41% in Q4 2018 as Shopify Plus continued to increase its share of GPV and Shopify Payments continued to expand internationally.

Adjusted gross profit dollars, which excludes the impact of stock-based compensation expense and related payroll taxes as well as amortization of acquired intangibles, grew 44% over last year's fourth quarter to $269.9 million.

Even after taking into account the acquisition of 6 River Systems, our ramp-up of investment in Shopify Fulfillment Network and a greater mix of Merchant Solutions revenue versus last year.

This reflects strong growth from higher-margin revenue streams like Shopify Capital and the variable platform fee from Shopify Plus merchants.

Adjusted operating income, which excludes the impact of stock-based compensation expense and related payroll taxes as well as amortization of acquired intangibles, grew 33% in Q4 to approximately $28.4 million or 6% of revenue compared with $21.4 million or 6% of revenue in the fourth quarter of 2018.

Adjusted operating income year-over-year growth was impacted by the addition of operating expenses related to the 6 River Systems acquisition and an $8 million nonrecurring indirect tax charge in the fourth quarter of 2019.

Adjusted net income for the quarter grew 70% to $50 million or $0.43 per share compared with $29.4 million or $0.27 per share in last year's fourth quarter.

Finally, our cash, cash equivalents and marketable securities balance was approximately $2.5 billion.

As we build Shopify to be a company that sees the next century, the North Star guiding us there is simple, delivering a great product to our merchants.

This means building a powerful global commerce operating system that lowers the barrier of entry to entrepreneurship so anyone, anywhere can start a business, arms our merchants with the tools and capabilities to build a successful business and connects our merchants directly with their buyers, allowing them to build their own brand and develop their own customer relationships.

Today, I will update you on the progress of 3 key investments in 2019 that moved us in the right direction: international expansion, Shopify Fulfillment Network and 6 River Systems.

I'll then preview what we're focusing on in 2020.

Starting with international.

In 2018, we began investing in international expansion and we saw promising results following the translation of the merchant admin into 6 languages and other localization efforts.

Our momentum picked up with further investment in 2019 as we continue to improve product market fit across focused markets.

With our merchant admin now available in 20 languages, Shopify Payments available in 15 countries and more localized growth marketing and partner development, the results speak for themselves.

International merchant and GMV growth consistently outpaced that of our established core markets this past year, with both increasing their contribution to overall merchant and GMV mix.

At the end of 2019, more merchants around the world had launched businesses on Shopify with our international merchant base growing to 29% of our total merchant base, up from 24% the prior year.

Turning to Shopify Fulfillment Network.

Fast and affordable fulfillment is table stakes for the success of our merchants.

Since launching in Q2, we have selectively added dozens of merchants and several partners to our early access program, maintaining our focus on performance quality over scale at this early stage and optimizing for the merchant experience.

We also worked with our warehouse partners to bring more nodes online through the fourth quarter.

The busy holiday shopping season was an important test period in the early development of the network, and we were happy with its performance through that critical time, particularly through the Black Friday/Cyber Monday weekend.

With fewer than 1 million fulfillments since its launch, Shopify Fulfillment Network is still in the early part of the product market fit stage, and we're working to ensure performance and merchant experience before we start to scale.

We're off to a good start and most merchants surveyed tell us Shopify Fulfillment Network is a good value for their money and order accuracy rates to date remain high.

This, along with the delight merchants have expressed to us about their experience with Shopify Fulfillment Network, are a testament to the value-add of fulfillment as well as to the quality of our partners.

Lastly, 6 River Systems got off to a great start as part of Shopify, working with teams across Shopify and especially Shopify Fulfillment Network.

One of our partners deployed 6 River Systems technology in a node last month and is already benefiting from the added efficiency and support.

And 6 River Systems operations independent of Shopify fulfillment network continued to grow, adding new products and capabilities to their collaborative warehouse fulfillment solution, supporting warehouses through a record peak season, adding new customers and locations and booking the most collaborative robots in a quarter ever in Q4.

Now for a preview of 2020, which is clearly a year of heavy investment for us.

Over the past 5 years, we have greatly expanded Shopify by pursuing what we see as an incredibly worthy goal, providing a platform for anyone, anywhere to establish and grow new independent businesses.

As Harley said, we are more than 1 million strong at the close of 2019, 1,069,000 to be precise.

This compares with 144,000 merchants just 5 years ago, a compound annual growth rate of 49%.

Our success with merchants has not been by accident.

We have demonstrated the ability to allocate capital wisely and execute against ambitious plans to make the Shopify platform better, bigger, more performant and increasingly relevant for merchants of any size.

This is how we earn trust and grow wallet share from our expanding merchant base.

By investing in multiple opportunities so they deliver returns over the near, mid and longer term, we have been able to sustain rapid growth.

While 2020 represents a continuation of this approach, it is also the first full year of our most ambitious investments yet, Shopify Fulfillment Network and 6 River Systems.

While both have multiyear time horizons, they also hold potential for outsized returns.

As we laid out last June, we expect the build out of Shopify Fulfillment Network to take 5 years from the early access program launch in mid-2019, costing approximately $1 billion.

Most of this spend is expected to be variable based on the cost to fulfill goods.

We expect the Shopify Fulfillment Network to be dilutive to 2020 adjusted gross profit, given growing but still limited scale in terms of volume while in the product market fit stage.

In 2020, we expect to continue to focus on building the software that connects the network and enables merchants with our partners supplying warehouse capacity and services and outbound transportation.

We are directing a small portion of the $1 billion to open a small Shopify-run R&D center in Ottawa, so our product teams can learn fulfillment firsthand, including trialing new warehousing and fulfillment technology.

This R&D center, of course, includes technology from 6 River Systems, which we expect will prove increasingly valuable to Shopify Fulfillment Network as well as to the dozens of other warehouses that have begun to leverage 6 River Systems' technology.

We see many similarities between 6 River Systems and Shopify at a similar size, a dedicated team, innovation for meaningful disruption and, most importantly, a passion to democratize commerce, albeit on the fulfillment end of things.

As such, we will continue to invest for growth of 6 River Systems' collaborative warehouse fulfillment solutions independently as well as in the integration of this technology into Shopify Fulfillment Network.

While 6 River Systems is also expected to be dilutive to adjusted gross profit in 2020, we are motivated by the longer-term expected gross margin and the velocity we expect its technology will add to fulfillments.

Shopify Plus and international expansion also merit incremental investment in 2020.

As we've seen by the expanding contribution of Shopify Plus to MRR and GMV, the demand from larger brands who want the superpowers needed to thrive in commerce today is enormous.

The complexity needing to be solved for larger merchants is far greater than what most of our merchants face.

So we'll continue to lower complexity for them by investing in areas like automating rote processes and enhancing wholesale capabilities.

Expansion outside our core geographies offers another opportunity that lies ahead for Shopify Plus in 2020.

This past year has proven out the massive opportunity still available outside our core geographies.

The good news is that we are still in the early stages of problem-solving for international merchants with true product market fit and focused international regions yet to come.

Because the desire for entrepreneurship is universal and our platform is so approachable, opportunity exists in every country on the globe.

So we will increase our investment in 2020.

Our challenge lies in bringing the full potential of the Shopify platform available to everyone, which we plan to address in part with the help of local partners.

We will also incrementally invest this year in the Shopify platform with one of our biggest focus areas being our point-of-sale offering.

While POS was historically managed as just another channel since it was first introduced in 2014, direct sales efforts initiated in 2019 have delivered promising early results, including 3 quarters in a row of accelerating GMV growth.

This success, alongside the improved product market fit of our POS technologies for small- to medium-sized businesses, with the upcoming launch of the all-new Shopify POS, warrants expanding our go-to-market strategy and scaling sales activities over the course of 2020 in order to see results in 2021 and beyond.

In addition, we expect to bring more financial solutions to market in 2020 to enable our merchants.

Whether it's access to financing or simply better ways to facilitate commerce, we believe we are exceptionally well positioned to add value here.

Finally, we'll increase our investment in the Shopify brand in 2020, building on the foundation we laid in 2019 and encouraged by the increased awareness of and traffic to Shopify.

We are confident increasing brand awareness benefits our ability to inspire entrepreneurs and attract more merchants.

So there you have it.

It's a long list, but a worthwhile set of opportunities to set our sights on.

Building a global commerce operating system that stands the test of time is something very few companies can do well, and no company can do it without investing.

The outsized revenue growth we experience in any 1 year is the result of calculated investments started years prior.

Because we're investing to create more value for more merchants and to empower more entrepreneurs around the world, we expect to see strong top line growth as a result.

Given this year's ambitions, for the full year 2020, we expect revenue to be in the range of $2.13 billion to $2.16 billion, with an adjusted operating loss between $20 million and breakeven, which excludes stock-based compensation expenses and related payroll taxes of $300 million and amortization of acquired intangibles of $24 million.

And we expect our capital expenditures to be in the neighborhood of $80 million in 2020, mostly related to the build-out of new office space to accommodate our growing workforce and only minimally related to Shopify Fulfillment Network and 6 River Systems.

For the first quarter, we expect revenue to be in the range of $440 million to $446 million, with an adjusted operating loss between $30 million and $34 million which excludes stock-based compensation expenses and related payroll taxes of $65 million and amortization of acquired intangibles of $6 million.

Our first quarter 2020 adjusted operating income expectations reflect the inclusion of the first full quarter of operating results associated with 6 River Systems and the launch of our second major brand campaign in our core geographies, the first campaign of which was in the second quarter of 2019.

With that, I'll turn the call back to Katie.

(inaudible) over to our listeners for their questions, (Operator Instructions) With that, operator, can we please have our first question.

Certainly.

Our first question comes from Ken Wong of Guggenheim Securities.

I mean, yes, a lot to unpack.

Maybe just starting off with fiscal '20 revenue outlook.

I know you guys are taking a more conservative approach to SFN, but in terms of how we think about it, any rough guidelines in terms of how much we should be feathering in into our estimates?

Yes.

Let me just start kind of overall with how we're thinking about 2020 revenue growth.

It's really going to be driven by our portfolio of growth initiatives.

And that's what's expected to sustain strong growth in 2020 and beyond and keep our flywheel energized well into the future.

And if you're familiar with our flywheel, it has kind of 3 pieces.

We're going to continue to grow our merchant base.

We'll continue to invest in international expansion, as I said.

We'll continue to do all the things to attract larger merchants on the Plus side.

And we're going to invest in our brand to continue to widen the funnel and inspire more entrepreneurs around the globe.

And then moving around the flywheel, we're going to continue to grow our Merchant Solutions.

We'll continue to expand our more established solutions like Shopify Payments and Shopify Capital and provide new solutions like fulfillment and, as I said, some additional financial solutions that we'll introduce.

That empowers our merchants to generate more GMV.

And then as they're successful and generate more GMV, it inspires more entrepreneurship and widens the category.

This is how Shopify has always grown.

It's consistent with our philosophy of energizing this flywheel.

With respect specifically to the Shopify Fulfillment Network, as we said when we launched at Unite in June, we would be in the product market fit phase during 2020, which means we'll be limiting the scale, primarily focusing on the merchant experience and our performance metrics.

We will scale fulfillments, but only at the rate that we can maintain a high service level.

So it will contribute, but it will be small during 2020.

Our next question comes from Mark Zgutowicz of Rosenblatt Securities.

Maybe just a follow-on to SFN.

I'm just curious what you learned really from that holiday test run and what that may mean in terms of plans for '20 and specifically in front of the holiday season.

I realize you commented on needing to have higher service levels or meet service requirements.

Maybe if you can quantify that a bit more?

And then just separately, as it relates to the merchants that you foresee using or utilizing SFN, perhaps some characteristics of Plus merchants and non-Plus merchants that would have a need or use of SFN and perhaps those that may not.

It's Harley.

I'll take that question.

So in terms of SFN, as Amy had mentioned, we currently have dozens of merchants in sort of this early access phase.

And really the objective right now is to optimize for experience.

We want to make sure that they not only are getting value from it; but eventually, they are also going to become big promoters of what we're doing here.

The service that we're providing with SFN is really divided into 4 different categories.

You have the pick and pack categories.

We obviously have packaged types and kitting.

We have storage and then obviously, getting it to the end consumer, which is the outbound transport.

So we're trying to optimize all those things.

And as Amy said earlier, this is really still early days of it.

The 2-day shipping is available now to certain merchants, that obviously depends on them having enough inventory and being in the right locations for us, but that is already available.

But this is still early innings for us for SFN.

We want to get this really right.

Then when we add in the 6 RS optimizations, whether it's the automated technology or the optimization of warehouse fulfillment.

We think -- and with the Chucks, we think we can do something really great here.

But the objective here is really -- it has been and continues to remain fast and affordable shipping for our merchants.

On the merchant side, your second part of your question, the goal here is that whether you're shipping 3 products or you're shipping thousands of products, that we will be able to fulfill them for you in a way that allows you to compete with the largest retailers in the world.

And so as we mentioned earlier, also with the R&D center in Ottawa, we don't just want to make plans from the periphery.

We actually want to get into it and really figure out what we need to do.

And so the best way for us to do that, as Shopify's always done, is to get our hands dirty and get into the trenches, and that's the reason why we're doing this R&D center in Ottawa.

Our next question comes from Colin Sebastian of Baird.

I wanted to ask about Shopify Plus, specifically, the biggest opportunities you see to drive incremental adoption there?

And by that, I mean, new merchants that are new to the platform, not just growing into Plus.

And with the new Plus experience you talked about, I think, Harley, what are some of the specific improvements this upgrade will bring and whether these are opportunities to update pricing as well?

Thanks for the question.

Yes, I mean, pricing is something that we're always taking a look at.

It's an ongoing evaluation to figure out if we're providing value to merchants, how it can provide more value and is there elasticity of demand in that pricing.

That said, in terms of the new Plus experience, which we announced in June at Unite, that hits a couple of different areas.

First of all, we're getting more and more merchants that are coming to us with existing large businesses.

I mentioned some of those on the call like KitchenAid and Toms and Cirque du Soleil.

These are not new DTC brands.

These are established brands that come with a large following.

And so part of that is they come with new complexities.

And our role is to figure out how to reduce the complexity and simplify it.

There are some other things that are also -- that we also need to continue to build on top of, which is that some of our merchants are now running stores in multiple locations internationally and the ability to run a number of stores from 1 centralized dashboard, something we talked about in June at Unite, and that is a big part of what we're trying to give.

But it also is continue to work on things like Flow and our B2B product with the acquisition of Handshake, new checkout capabilities, which are obviously important to us as well.

That are the -- those are the type of things that we're building on top of Shopify Plus.

And I think we're getting to the point where a lot of merchants are now thinking about it that previously had not thought about Shopify Plus.

Our next question comes from Deepak Mathivanan of Barclays.

Any color on element, marketing spend.

It looks like the spend on marketing-related programs accelerated in 2019, but majority of that is sort of non-advertising related.

Is there any new program like partner payout became [victor] last year?

So if you can talk about that a little bit.

In 2019, in terms of marketing spend, keep in mind, we introduced brand spend for the first time.

We had even given you the number.

We said approximately $30 million for the first time.

And in addition, if you're looking at the entire sales and marketing line, there was also incremental spend in terms of adding direct sales at Plus and POS.

And so on the sales and marketing line, we still showed operating leverage in 2019.

We actually had operating leverage on the marketing side with respect to -- mostly like on the personnel headcount side that outweighed that incremental spend that I just mentioned.

So we're really happy with the overall portfolio of sales and marketing spend.

Our next question comes from Gus Papageorgiou of PI Financial.

I know recognizing it's still early days on SFN, but in the few customers that you had last year, can you maybe quantify what you think the impacts of SFN was to their revenue?

Do you think that getting it down to 2 days and the client getting cheaper rates, how much of an impact it had on their revenue?

Yes, this is Tobi.

It's -- I think it's too early to really tell.

I mean, we have anecdotal feedback that if a business is wanted in being able to make promises on delivery speed and -- but be -- it's too early to share any kind of real qualitive takeaways from this.

Generally, we found that in SFN, our assumptions that we've held when we decide to go in have been holding strong.

And that there have been new things we uncover as we are getting deeper into this.

And as we are understanding more and more detailed parts of the world supply chain that exists to get things from factories all the way to consumers.

We don't really uncover anything that we didn't particularly expect in this.

To some degree, we're new to this journey, and it's been -- we have an amazing team.

We've brought in really, really, really good veterans who have built things like this before, who have been incredibly helpful along the way.

We are building this for scale, but we have to start small.

It's nothing -- it's impossible to build complex things that work unless you start with something very, very simple and then organically build it.

If you build something that tries for complexity immediately, it fails every single time.

So this is the approach we're taking.

Our next question comes from Darren Aftahi of ROTH Capital Partners.

Just curious on the non-English speaking, or international merchant base.

Can you talk about what percentage of that is coming from Plus and then how fast that grew year-on-year from '18 and '19.

Darren, it's Harley here.

Yes.

So in terms of international, as we mentioned, we grew the mix of international merchants from the 24% of merchant base into 2018 to 29% in 2019.

And so obviously, that -- we're happy with that.

We'll continue to add more languages and obviously have a strong go-to-market strategies, through partners and other areas to acquire new international merchants.

In terms of the mix, it still is predominantly our core merchant base.

Shopify Plus, of course, is being introduced into new areas.

Some of it is happening organically where merchants in Western European countries are simply coming to us and saying we want to use Plus.

But I would say the majority of that merchant mix is coming from a core.

I would also say that the opportunity remains for Plus internationally will be in the future, and that's something that we've been thinking quite a bit about, but the majority is still a core merchant base.

Our next question comes from Josh Beck of KeyBanc Capital Markets.

I wanted to ask about point-of-sale.

It seems like an area that you emphasized -- one of the areas you emphasized from an investment point of view.

So are you feeling better, maybe about the product market fit?

And as you evolve the go-to-market there, do you -- is the goal really just to get attach rate up within the existing base or is there a longer-term goal to really attract brick-and-mortar first merchants as well?

Yes.

The goal is to build the best point-of-sale software in the world.

And then if -- actually, the goal is to build the best possible point-of-sale system that Shopify can, and then if merchants deem this valuable and agree with us that this is the one which would get them to then want it and then purchase it and adopt it.

So this is exactly the same as online store and exactly the same as every other channel.

They are very -- we split responsibility.

We build things of value and then if people agree with us, they adopt them.

So we don't really go and say, "okay, we want to go for this particular market segment for this particular subgroup and for this particular growth rates to get that particular slice of the market." That's not -- that's never been the opinion of Shopify.

And in fact, we are very strong believers that every market that we can go into and every market we look at is in terms of total size is incredibly depressed by the low-quality office software that exists.

And by doing -- if we do our job as well as we really would like to, then the market grows significantly.

That's just what we've observed with our core platform, born in the world of e-commerce.

And that potentially colors our view.

This is also why you hear us talk so much about new entrants to the market for entrepreneurs, but really we are working value backwards.

It's actually much, much harder to build software that works really, really well for people who are starting out because obviously, they are less sophisticated, they have less time, they have less money to spend.

They have more task to do at the same time.

And so it puts actually strongest requirements on software.

So point-of-sale is -- it's been -- it has done really well.

This has been a really, really, really strong year compared -- if we adjust its age to the online store, it's tracking ahead of online store's growth at a particular, like in distance from year 0 perspective.

But, of course, I've also -- like we've shared a bunch of things that we are doing.

We are launching a new version of it.

This is going to be really, really neat, I think, as it keeps going.

So I am very excited about it.

We have been, as Amy or Harley brought up earlier, also bringing in some direct sales, which has also been a new thing for point-of-sale.

So this is also, I think, a good sign that we are feeling pretty good about where that product is, and especially where that product is going.

Our next question comes from Brad Zelnick of Crédit Suisse.

Congrats on a fantastic year and all the success.

My question is on the marketing strategy.

Can you maybe give us an update how you're thinking about marketing at this point, just given some of the leadership changes that you've made more recently?

Yes.

I mean, the marketing has worked really well.

And it's -- in terms of effectiveness, has been very good.

There have been leadership changes because this is mostly internal-motivated, and but it's -- we've been really comfortable with this particular programs we've been running.

Brand has been very successful for us.

That's been a new discovery of something that's going to be a part of Shopify's future, and we're going to continue scaling it and building it out.

Our next question comes from Nikhil Thadani of Mackie Research Capital.

I want to go back to Shopify Pay and perhaps how that sort of plays into the flywheel and some of the branding initiatives that you have going on there.

Does it make sense from a high-level philosophical perspective to maybe think about Shopify Pay becoming something akin to Amazon Prime or something along those lines?

I mean, we are certainly excited about Shopify Pay, but there are no such plans right now.

Our next question comes from Ygal Arounian of Wedbush Securities.

I want to ask on Plus.

And you talked on this call about increasingly being able to solve enterprise solutions.

I think, historically, we've tried to strike a balance between customizing for what a more complex enterprise customer would need.

And I think even kind of getting to certain points where you would maybe even push a really complex enterprise customer off of Shopify Plus and say, Shopify Plus isn't really a solution for you.

Maybe I'm not characterizing that the right way.

So let me know if that's not true, but does feel like you are continue to move -- continue to building the enterprise solutions and the complexity around that.

So I'd love to hear kind of the philosophy around -- build out high end of what Shopify Plus could have.

Yes.

So thanks for the question.

You're absolutely right.

There are certain merchants that come to us and we simply say no to.

And that takes a ton of courage.

That's something that most companies would not do.

But partially, it's because we want to work with brands on Plus that want to make commerce better for everyone and are thinking about it in a very modern, contemporary way.

We do not want to be dragged down to the complexities of legacy systems, where they're going to begin to dictate a roadmap, they're going to begin to pull us into their mess that they have internally.

The good news is that because direct-to-consumer is becoming such a major part of retail and commerce, a lot of those direct-to-consumer brands were built in the last decade and they don't have the traditional enterprise complexity and Shopify Plus is perfect for them.

The other good news is that some of the more legacy brands, I mentioned a couple of them today on the call, they are willing to shed some of their internal legacy systems because they're just not working anymore.

And so they're beginning to rethink how they want to run their retail operations and Shopify Plus is a great way for them to do that.

So is Shopify Plus for everyone?

Absolutely not.

We -- there are merchants that we say no to on an ongoing basis.

Oftentimes, they do come back to us and say, okay, well, we actually have rethought this, and we're not going to bring all these integrations with us.

We need to shed some of those because it's making us too slow, and we want to compete in a modern retail landscape.

And that's kind of the way we're thinking about it.

Now that being said, there are certain new functionality and features that we're building right now because we realized that as part of the future of commerce, things like Flow and Scripts and Checkout capabilities and be able to run multiple stores from 1 single dashboard on the international side.

These are things that we are working and building.

And we think that the growth of Plus for now over 7,000 plus merchants, names that are coming to us, again, are a wonderful mix of more traditional CPGs, but also very modern brands in some cases that are migrating over; in some cases, they're migrating from a home-grown system.

And we're really happy with where that's at right now.

Our next question comes from Kevin Krishnaratne of Paradigm Capital.

I just wanted to go back to the strength in international and the move in the merchants picking up there, 24% to 29% of the base.

Could you comment on some of the more mature markets and what you might be seeing there in terms of GMV per merchant or just subscription revenue and apps uptake?

I'm just trying to get a sense of the potential upside from international.

It's very early days and just thoughts on how things have been progressing in some of the more mature markets?

Thanks for the question on that.

I mean, international, as we mentioned, is doing really well.

We'll be getting -- we're adding more and more languages.

We now have 20 languages available in the admin, and we're continuously adding more of those languages as well.

We're introducing new Merchant Solutions to those new markets, which, of course, will increase the take rate we have there.

But it's impossible to bucket every one of those markets into 1 single narrative.

Each of those markets are very different.

France is very different than Japan, which is, of course, different than Germany.

And so part of, I think, a sophisticated international strategy and a sophisticated growth plan internationally is to identify what each market needs from a product market fit perspective, but also how to -- what the go-to-market strategy is there.

And those are all very, very different.

We think that we're able to do that.

We have teams on the ground in these places that are focused on making sure that we are the best product in those markets.

We're not there yet everywhere, but we're certainly on our way.

Our next question comes from Thomas Forte of D.A. Davidson & Company.

Great.

So the question I had is, how should investors think about the potential of the coronavirus to disrupt the supply chain for your merchants who are sourcing out of China.

Yes.

To date, we've not observed a material impact on Shopify's overall GMV.

We're obviously continuing to monitor the situation and offering guidance to potentially impacted merchants, but we don't have enough information at this time to know what, if any, impact this might have on supply chains or production velocity.

Our next question comes from Richard Tse of National Bank Financial.

Yes.

So you guys have a lot of goals and I'm just kind of curious what do you think is the biggest obstacle of executing your growth plans?

And what do you do to sort of mitigate that risk?

I mean, the biggest obstacle to -- for us to executing our growth plans is finding an upgrade engineer to do it all.

That's like this is an engineering-limited company, like, I think, the entire world of the software industry.

So look, we recruit.

Like, I mean, I do -- when I talk to my board members, for instance, they -- and I complained that it's really, really, really hard to hire great engineers, then they tell you that I should consider myself lucky because to everyone else it's absolutely impossible.

So it sounds like we're in slightly better shape still.

But in this plan, it has not been educating enough engineers over the last 20 years.

Our next question comes from Koji Ikeda of Oppenheimer.

Great.

During the opening commentary, when talking about 2020 investments, the rote process automation for Shopify Plus really caught my ear.

It sounds like there could be some AI mixed within some -- a little bit of RPA involved with that.

Maybe I'm reading too much into it, but could you talk a bit more about how you're thinking about rote process automation, the value for merchants, maybe especially with the bigger merchants that are deploying Shopify Plus.

Thanks for that question.

I mean, to be clear, we've been thinking about business optimizations and automation for merchants for a couple of years now.

We announced Shopify Flow and Shopify Scripts, I think it was 2 or 3 Unites ago.

And so we've been thinking about this a lot.

Again, one of the things that we want to do is not necessarily -- is not necessarily import the complexity that these merchants bring that are unnecessary, but rather help them modernize their own businesses.

And so there are certain automizations that we will help them with, and that's where Scripts and Flow give them this incredible amount of flexibility to build new automation practices.

That being said, often, when merchants come to Shopify Plus, it's part of a recalibration of what they need to be successful.

They often have to rethink what they want to have in terms of the retail offerings and commerce offerings.

And so we often see them coming to us with some idea of what they want to do.

But if they're coming to Plus, it means they're looking for something different that the traditional enterprise offerings are not giving them.

And so it's a great opportunity for us to help them work through that.

Our next question comes from David Hynes of Canaccord Genuity.

So we're hearing a lot more from industry participants around headless commerce.

And I just want to ask about that as it pertains to Plus sales cycles.

I assume you're having the same conversations with prospects.

So do you think this is the direction that the mid-market and enterprise is moving?

Can you give us a feel for what percent of the Plus base is running headless today?

And then, I guess, is there anything additional that Shopify needs to do from a product perspective to embrace that evolution?

Yes.

So yes, there's a lot of talk about headless commerce.

It's -- I personally think it's probably amongst like definitely ranks near the bottom of a industry buzz terms we've ever invented, like I think we should come -- we should go to what had full content commerce because I just think the entire thing is a little bit silly on the premise.

So what it is, is like it's a move to try to get everyone to build their [own and so] in a completely new way.

It's based on some sound fundamental technical ideas, but it's been incredibly oversold.

And if you ask why a couple of times, what you will hear is what people want is they want to have a lot of control over their experience, and they want it to be very fast and so on, which is things you honestly -- you get out of a box of Shopify to begin with.

And so we see a lot a bit about it, but people are asking for it who are kind of are not entirely sure why they're asking for it.

On a technical level, but what you need to implement it is a good set of front-end APIs, which Shopify has been shipping with out-of-the-box since 2008.

So it's available.

We've always had some people who run their businesses in a completely headless way.

And so for all of our customers, it's ready to be used in this particular way.

And we see a lot of failed experiments in this space.

So I don't want to say it's not going to be a factor because in some instances, it actually makes a lot of sense for customers of certain CMS strategies that are already implemented and already scaled.

It's a wonderful way to use Shopify then and fit it into a larger ecosystem.

It's a great way to fit it into like other systems like apps and so on.

But it's -- we think that's going to be a bit like a straw fire of a buzz term.

Our next question comes from Chris Merwin of Goldman Sachs.

I just wanted to ask about take rate on Merchant Solutions.

It looks like that stepped up by about 4 basis points this quarter, and that's more than what we've seen in the prior quarters.

I guess, mix shift has kept that take rate flattish, I believe, but did anything change this quarter in terms of that mix shift or just a higher take rate for 1 of the components.

Just curious, any other color you could add there.

Yes, sure.

Yes.

So mix shift does continue to play a role here, and it will continue in 2020 with international growing very rapidly.

But what we saw in the fourth quarter was just continued increase in Shopify Payments penetration.

That was the biggest contributor to the uptick in take rate, but also closely followed by the growth of other merchant solutions, revenue streams, like shipping and capital.

And then we also had Shopify Fulfillment Network and 6 River Systems contribute, although still immaterial given their early stages.

Our next question comes from Todd Coupland of CIBC.

I think you called out revenue acceleration for the first time in several years.

But yet, you gave a fairly conservative annual revenue guide -- revenue decelerating.

Can you just talk us through your thinking on that as we set up for 2020?

Yes.

So we think our guidance at the midpoint of 36% year-over-year revenue growth for 2020 is great growth for a company of our size.

Specifically thinking about moving from Q4 into 2020.

Q4 was just a spectacular quarter.

Every part of the business was contributing.

We had strong merchant growth.

We had significant increased penetration of Merchant Solutions on the back of stellar GMV growth and a high seasonal quarter.

That's not something that we expect can happen every quarter.

This concludes today's question-and-answer session as well as today's conference call.

You may disconnect your lines.

Thank you for participating and have a pleasant day.