Shopify (Minutes): There are too many growth opportunities, and the current profit margin is already satisfactory

The following is the summary of the Q4 2024 earnings call for $Shopify (SHOP.US) . For the earnings report interpretation, please refer to Shopify: The Original Sin of High Valuation, Is Not Being Excellent Equivalent to Being Unqualified? .

1. Core Information Review of the Earnings Report:

2. Detailed Content of the Earnings Call

2.1. Key Information from Executives:

1. Future Plans: In 2025, continue to strengthen foundational work and simplify processes; embrace artificial intelligence and increase investment in related technologies; expand business coverage and increase market share; maintain strong free cash flow profit margins to create flexibility for growth. Focused investments in key areas such as core platforms, enterprises, offline, and international markets.

2. Product Innovation

Online Function Optimization: Increase product catalog limit to 2,000, enhance customer account expansion capabilities; launch Shopify Balancer Plus and new payment options; expand Shopify Tax and enhance Shopify Inbox.

Offline Business Expansion: Launch features like Tap to Pay in multiple countries, capture more emails through Shop Pay.

International Business Advancement: Expand POS terminals to 8 new countries, integrate French payment services, and open marketing activities.

Global Business Support: Increase UPS carrier options, expand multi-currency payments, and launch a team targeting the Japanese market.

Partner Ecosystem: Collaborate with Roblox, YouTube Shopping, etc., paying $1 billion to partners, adding over 3,000 new applications to the app store, totaling over 16,000 applications.

Merchant Expansion: Attracted global brands like Reebok and Champion, deepening brand cooperation across various verticals, with sports teams, music record companies, and businesses from different industries joining.

3. Shop Pay: The Shop Pay button has become a valued asset for both merchants and buyers, with buyers actively seeking the button at checkout; if they cannot find it, they may abandon the checkout, which fully demonstrates Shop Pay's strong ability to drive conversions.

**In this quarter, Shop Pay processed $27 billion in GMV, a 50% increase from last year, and is twice the next accelerated checkout option in Shopify stores Its business components are particularly favored by enterprise-level brands. In 2024, the GMV of this component alone surged nearly 20 times, with major brands such as Arctic, Boot Barn, and Bespoke Post adopting it. This quarter, well-known brands like Croc and GameStop also signed on to the Shop Pay business component, further expanding its coverage.

4. Shop App: The GMV of the Shop App has grown sixfold over the past two years, continuously expanding in terms of active users and in-app native GMV. Compared to last year, the native GMV of the Shop App increased by 84%.

To enhance user experience, the Shop App has undergone a series of improvements. It has added more personalized and fresh shopping information streams, recommending products that better meet user needs based on browsing history and purchasing preferences, thereby improving the accuracy and efficiency of shopping. New curated shopping events and category browsing features have been launched to help users quickly find products of interest, increasing the fun and convenience of shopping. A shopping cart recovery feature has been introduced, allowing users to complete abandoned Shop Pay orders through the Shop App, effectively reducing cart abandonment rates and increasing transaction success rates.

5. Offline Business: In the fourth quarter, offline GMV grew by 26%, primarily due to a focus on expanding coverage with large multi-location merchants. Three new brands were launched in the Asia-Pacific region, with over 320 locations, further expanding the market share of offline business in the Asia-Pacific region.

The market report from Ernst & Young has validated Shopify's leadership position in unified commerce, recognizing the efficiency and cost-effectiveness of its point of sale. Shopify's point of sale enables retail businesses to achieve a 22% reduction in ownership costs and a 20% acceleration in point of sale implementation speed, enhancing operational and revenue efficiency, which is significant for the physical retail industry and provides strong support for Shopify's further expansion in offline business.

6. B2B Business: Shopify's B2B business has performed exceptionally well, achieving over 100% year-over-year growth for six consecutive quarters, with a growth of 132% in the fourth quarter alone, breaking records in November with monthly GMV reaching an all-time high. The annual B2B GMV increased by over 140% compared to 2023.

In 2024, Shopify achieved a top position in the Forrester Wave rankings, showcasing its strong B2B capabilities and enhancing its appeal to large merchants. At the same time, it welcomed emerging brands from various industries, expanding its market coverage and customer base. Although B2B still accounts for a small portion of GMV, its strong growth highlights significant opportunities for the future. Shopify aims to become the leading self-service wholesale procurement platform, providing unified solutions to support online, offline, and hybrid business activities, and is currently making steady progress toward this goal 7. Expectations for Q1 2025

Revenue Growth: Expected to be around mid-20s, continuing the strong growth momentum from 2024, but note that Q4 is a seasonal peak, while Q1 is relatively off-peak.

Gross Profit: Expected to grow around low-20s, with gross margin affected by changes in merchant and subscription solution growth rates, payment business performance, PayPal accounting treatment, and a decrease in non-cash revenue.

Operating Expenses: Expected to account for 41% - 42% of revenue, with continued investment in R&D and marketing to support key growth areas.

Stock Compensation Expense: Expected to be $120 million.

Free Cash Flow Margin: Expected to reach mid-10s, higher than last year's 12%. Note that Q1 is a seasonal low point for margins, but still maintains a high margin. Although we have significantly expanded free cash flow margins over the past two years, as we enter 2025, we are achieving the right balance between profitability and investing in creating the best products for merchants. We aim to maintain this level of cash flow profitability rather than optimizing for further margin expansion in the short term. There are too many compelling growth opportunities ahead.

2.2 Q&A Analyst Q&A

Q: It is expected that the free cash flow margin will increase by about 200 basis points year-on-year next quarter. Can this be seen as a reference for the improvement in FCF margin in 2025? Last year's investment focused heavily on performance marketing; will you continue to invest in this area this year?

A: Regarding quarterly free cash flow, we do not intend to delve into the differences of any specific quarter. The company believes it has reached a very good level of free cash flow margin that allows it to remain profitable while also investing in the future and achieving its goals. Overall, the company feels that the current margin level is appropriate. Q4 is traditionally the largest quarter in terms of GMV dollars, which will convert into revenue and subsequently into free cash flow margin. A slight decline in Q1 margins is normal.

Regarding performance marketing, this is clearly still an important part of the company's marketing spend. The company remains focused on the return on investment in marketing mentioned in previous conference calls, and performance marketing has been performing very well. The company has been testing, analyzing, and always looking for the best allocation of additional marketing spend, and there has been no change in strategy in this regard.

Q: It seems that your merchant services revenue charge rate in Q4 was higher than expected. How should we consider the situation in Q1? The gross margin is expected to be around 20%. How much of the difference in gross margin compared to revenue growth expectations is due to the success of enterprise market expansion?

A: The charge rate for merchant services performed strongly, with other products like Capital and Tax also continuing to grow, along with the company's increasing other products, all of which impact the charge rate. When comparing 2024 to 2023, we must also consider the previously mentioned adjustments in logistics, which actually contribute to some of the growth seen in the merchant solutions charge rate Therefore, the company will continue to promote all products in merchant solutions, which will also be reflected in the fee rates. The fee rate is more of an output indicator for the company, which is committed to creating excellent products for merchants, driving their GMV growth, and thus naturally achieving revenue growth and monetization. Currently, the company is performing well in merchant solutions.

The relative growth rates of merchant solutions and subscription solutions will impact the gross margin, which is partly due to the impact of the paid trial period this year, which will bring some resistance to the gross margin in the first half of this year, but will gradually normalize thereafter. These are the main driving factors.

Q: First, I would like to understand the impact of the de minimis exemption on your business and how you consider tariffs, especially if tariffs are included and start to take effect? Secondly, how can artificial intelligence help with content or listing reviews, considering the controversies surrounding Super Bowl ads?

A: First, addressing the de minimis exemption and tariff issues. Small and medium-sized enterprises create about two-thirds of jobs and account for nearly all new job opportunities. Shopify's merchants drive billions of dollars in cross-border transactions, and tariffs will clearly have a negative impact on entrepreneurs. Shopify has always tried to protect and empower every business, especially those at a disadvantage. Once tariffs or de minimis exemption-related situations are identified, the company typically works immediately from a product perspective. Currently, all merchants can display and collect tariffs at checkout. In fact, consumers can now shop easily using the Shop App, and new search filters have been launched. Protective measures like the de minimis exemption are crucial for small businesses engaged in trade, as they lower costs and enable entrepreneurs to compete on a larger scale, so the de minimis exemption should not be eliminated. Countries should strive to simplify customs processes and improve digital tariff collection.

Q: The number of employees decreased in the fourth quarter. How do you view future employee growth? Has sufficient operational efficiency been achieved so that Shopify can expect relatively moderate employee growth in the next year or two? Reflecting on the pricing actions you have taken in the past year or two, what lessons have you learned from these actions? Are you confident in the value created for customers to the extent that you can take further pricing actions from time to time?

A: First, responding to the employee number issue, the company believes it has reached a stage where it can continue to grow the business without significantly increasing the number of employees, whether based on merchant GMV, revenue, or other indicators. About 24 months ago, the company began focusing on the new Shopify model, concentrating on core tasks to ensure that it helps various merchants achieve sales in various sales scenarios while emphasizing merchant solutions and product adoption. The company is confident in achieving these goals without a large increase in employees.

Regarding pricing actions, merchants recognize the value of Shopify's products, including at the enterprise level, with many merchants starting with one component and eventually fully adopting the platform's products and services. At the NRF exhibition in January, many global retailers and major brands proactively reached out to Shopify for collaboration, which was not the case 12 months ago Products and value are key to attracting merchants. Shopify's products are future-oriented and can meet the diverse sales needs of merchants. Moreover, compared to other enterprise-level participants, the value provided by Shopify is more advantageous. Although there is price elasticity and room for price increases, the company is currently in a phase of winning over large merchants and creating a good development momentum, making it not the right time for immediate price increases. However, the company will continue to advance the relevant processes. Previously, when the base plan price was raised from $29 to $39, there were very few objections from merchants, indicating that the company's products still offer incredible value.

Q: It sounds like you have significant expansion opportunities in international business. Can you provide some clues about the regions or countries where you are increasing your efforts? What kind of resources have been invested in these areas? Is it more about setting up expert teams or direct market promotion? Can you provide some details on how you are investing in these new geographical areas?

A: International expansion is a key growth driver for Shopify, playing an important role in the fourth quarter of 2024 and throughout the year. In the fourth quarter, international business GMV grew by 33%, surpassing North American GMV, with particularly strong growth in the Europe, Middle East, and Africa (EMEA) region, reaching 37%, primarily driven by countries such as the UK, Germany, France, and the Netherlands. Many large brands, such as FC Barcelona and Karl Lagerfeld, have chosen Shopify.

In terms of investment, from a product perspective, the company has launched frictionless registration to drive adoption, localized and improved compliance for Shopify.com, introduced Klarna as a local payment method, and integrated new local shipping options to make Shopify's point of sale available in more countries. At the same time, this process is accompanied by the involvement of institutions and partners. Currently, 50% of the company's merchants are located outside North America, and the company will continue to focus on international business in the future. In the U.S. e-commerce market, our market share has just exceeded 12%. But if you look at the global retail market, we are still less than 1%. We have significant growth potential globally, both online and offline.

In many previous conference calls, the company has specifically mentioned some countries in Europe, especially in Western Europe, where business performance has been outstanding. In terms of same-store sales growth and the balance of acquiring new merchants, the company's same-store sales growth rate in these countries far exceeds the local e-commerce growth rate, indicating that the company is performing well in product market fit.

Q: Following up on your comments about the momentum in enterprise-level business at NRF (National Retail Federation). Can you discuss some internal metrics or anecdotes regarding enterprise-level business that indicate this momentum is a change in trend rather than just a continuation of trends? Also, can you highlight some milestones in your product roadmap that you are excited about, given that we know existing participants can sometimes be quite sticky? A: Brands like David's Bridal, Hunter Douglas, Warner Music, and Croc signed contracts this quarter. These brands typically had their own internal systems or used traditional (outdated) business software in the past. However, with the new management team coming in, they are seeking innovation and reasonable costs, making Shopify their choice. When these brands saw that Westwing, BarkBox, Reebok, and others could launch their businesses on the Shopify platform at a record speed of just 3 months instead of the previous 12-18 months, it was highly attractive to them.

On a higher level, enterprise-level business is migrating to Shopify. The company offers various options for enterprise-level clients, such as the headless Hydrogen, the universal solution Plus, and specific components CCS. Now, some merchants using commercial components are turning to use the complete suite.

The company is optimistic about this. Numerous independent software vendors (ISVs) and large institutional partners, such as WPP, L Catterton, Ernst & Young (EY), IBM, Oracle, etc., have established practices around providing Shopify services to existing large enterprise clients, with significant results. He believes that the combination of unparalleled products and a strong market entry team is key to winning enterprise-level business. He also mentioned that after joining the NRF board, he learned that "Shopify" and "Shopify enterprise-level business" will be hot topics, as enterprises turn to Shopify for its exceptional value, product advantages, and ubiquitous sales capabilities. With the addition of new features like B2B, the company's prospects in the enterprise-level business sector are promising.

Q: Thank you, I briefly reviewed your user group analysis in the 10-K file and noticed that the user group in 2023 is accelerating its contribution to GMV in 2024, growing faster compared to the user group in 2022. What do you attribute this acceleration to? And what might this mean for the user group in 2024 in the new year?

A: The company has indeed spent a lot of time thinking about the merchant user group and its evolution over time. As merchants continue to adopt more solutions on the platform, it drives the company's success, which is a key focus area for the company. However, there isn't much to interpret regarding the forecast for the 2024 user group. About two years ago, the company began launching many new businesses, such as Capital, tax officially operating, and initiatives like B2B, POS, and enterprise-level business, and since then, the company has achieved better product-market fit in Europe. Therefore, many of the results the company has seen over the past few years are related to the expansion in other merchant solutions. We do not intend to predict what this means for the 2024 user group, but he believes the company is doing well in expanding the solutions available to merchants, helping them achieve greater success, regardless of where the merchants are or how their businesses operate online or offline, which is an encouraging trend Currently, there are no specific indicators to provide.

Q: Regarding artificial intelligence (AI) and its internal use. There has been a significant amount of investment over the past year or so. Where have you seen the biggest impact in operations? How much has productivity improved?

A: Shopify will be one of the major beneficiaries in the new AI era. The company excels at cultivating long-term partnerships and, in terms of AI collaboration, has partnered with Perplexity to support Shopify's product catalog through its search results, directly utilizing OpenAI's API to assist internal work.

From the merchants' perspective, the company aims to help merchants succeed and operate more efficiently with AI, launching features such as Sidekick, Media Editor, Shopify Inbox, and Semantic Search, which are currently only offered by Shopify. These features are designed to free merchants from tedious tasks and allow them to focus on their core business. From a talent perspective, the addition of new Chief Technology Officer (CTO) Mikhail has attracted more talent from the AI and machine learning industry, supplementing excellent talent while maintaining a stable total employee count.

Internally, the role of AI is even more significant. It allows developers to work more efficiently and improves the quality of conversations between support teams and merchants. Some low-quality conversations, such as domain configuration issues, can be handled by AI. In summary, the company is in a favorable position in both internal AI usage and helping merchants succeed, with AI unlocking unprecedented capabilities for both merchants and Shopify (specific productivity improvement data not mentioned).

Q: You mentioned the increased usage of Shopify products, such as Shop App and Shop Pay. As a platform aimed at buyers, what is your ultimate vision? There seem to be many opportunities to add features, such as merging shopping carts, and perhaps investing to expand the number of shoppers using these applications. Any comments on this year's capital allocation plan?**

A: Shop App's GMV grew by 84% in the fourth quarter. The company is committed to making it a more attractive destination for buyers to discover their favorite brands on mobile devices. Shop is Shopify's platform for buyers, aiming to make shopping simpler and more enjoyable, and it has gradually gained consumer recognition, such as consumers being more willing to check out when they see the purple Shop Pay button. The company will continue to invest, aiming to make Shopify the gold standard of internet commerce by continuously improving its product suite and enhancing trust and security in the business realm. Shop is a channel for merchants to attract traffic, achievable only through Shopify. In the future, the company will invest deeply in personalization, introducing more high-quality new brands to create conditions for merchants to establish genuine and meaningful connections with customers Capital allocation is an actively discussed issue within the company, which is well aware of the importance of being a good manager of capital. Currently, maintaining a healthy cash buffer is a wise move. The company will examine its cash balance from multiple benchmark percentages as well as overall absolute amounts, considering capital allocation in daily decision-making, including R&D spending, marketing expenses, and capital returns. The company also has convertible bonds maturing soon, with an amount slightly below $1 billion due later this year. Over the past year, there have been about six small-scale talent acquisitions, which have brought important AI talent and other personnel to the company. The company hopes to continue making strategic investments in this way. Currently, the company has clearly stated that there are no plans for large-scale acquisitions and will manage cash cautiously, proactively, and wisely, but there is no specific news to announce regarding capital returns at this time.

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