Shopify Inc

NYSE:SHOP

Earnings Call Transcript 2019-Q2

[Operator]

Good morning. My name is Heidi, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Shopify Second Quarter 2019 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Katie Keita, Head of Investor Relations, you may begin your conference.

[Katie Keita, Head of IR]

Thank you, operator and good morning everyone. We are glad you can join us for Shopify’s second quarter 2019 conference call. We are joined this morning by Tobi Lutke, 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 two can be found in our earnings press release, which is available on our websites. Finally note that, because we report in U.S. dollars, all amounts discussed today are in U.S. dollars unless otherwise indicated.

And with that, I will turn the call over to Harley.

[Harley Finkelstein, COO]

Thanks, Katie, and good morning, everyone.

This past quarter, our momentum certainly continued. Our efforts to expand internationally accelerated with new global additions to our partner network, and the largest ever mix of international merchants to our base.

Our merchants reach new levels of success, with the year over a year GMV growth accelerating from Q1. In fact, merchants’ sales reach a major milestone, selling on average $1 billion per week in Q2, an impressive number considering it was not very long ago, that it took number content entire year to sell a billion dollars’ worth of their products. And more than 1,500 partners and developers more than 50 countries joined us for our sold-out Shopify Unite Conference, our largest ever, where we announced many of the features we've been working on.

I want to highlight a few of these new features before updating you on our progress with Shopify Plus, and our partner ecosystem. As we continue to level the playing field for entrepreneurs.

We announced a new online store design experience, making it easier than ever for merchants to design and update their stores while creating their own unique brand and buyer experience. We're adding new functionality to enable businesses of any scale to showcase their products in 3D, AR and through video, creating a more immersive browsing experience.

This also makes Shopify the first major platform ever, to natively support 3D. And based on our early tests, buyers interacting with 3D were more than twice as likely to complete a purchase.

We announced our long-awaited order editing feature and API, which will enable both merchants and partners to create flexible solutions for managing up sells and changes during the post-purchase process.

We announced checkout app extensions, allowing partners to integrate new functionality into Shopify's checkout, so that buyers can choose things like recurring payment transactions seamlessly.

We made big steps towards connecting merchants and buyers around the world with the announcement of our translation’s API, and multicurrency for all of our merchants. We're incredibly excited with all these announcements, but our biggest news of the day was the Shopify Fulfillment Network. We expect to spend $1 billion over the next five years to democratize fulfillment making it accessible and affordable for merchants of any size to offer would use to be reserved for only the largest companies in the world. No other company is as well-positioned as Shopify is to offer this.

By leveraging our scale with machine learning, demand forecasting, smart inventory allocation across warehouses, and intelligent order routing. We expect merchants will be able to get their goods to buyers faster and cheaper than any other option they have today, while keeping their own brand front and center.

We're also focused on an increasingly important part of our business, offline commerce, which we're enhancing, so merchants can provide a far better in-store buyer experience. We announced our new point of sale software, which is faster, more intuitive, and more scalable point of sale software for retailers to grow their brick and mortar businesses.

Following the launch our new retail hardware in April, we released the card app extension, which lets merchants apply loyalty points and discounts directly into the point of sale.

Another way we help merchants sell more and improve the buyer experience is Shopify paid by removing friction at checkout. Shopify pays popularity, continue to grow in Q2, with millions more buyers opting in. This led to Shopify pays order volume doubling compared to the same period last year and reaching nearly $1 billion in GMV for the quarter.

In Q2, we released new features for Shopify pay, like giving buyers the ability to add discount codes and edit saved shipping addresses. Shopify Capital and Shopify shipping both experienced robust growth year-over-year. Growth in these areas are particularly important to us, because these are products that our merchants increasingly use as they become more successful.

Shopify Capital exceeded $630 million in total merchant cash advances in the second quarter, and more than half of that was distributed in the past 12 months alone. Simply put, merchants have a better shot at success when they have timely access to affordable capital. And that's why this July, we introduced Shopify Capital to non-Shopify Payment merchants in the U.S., expanding our eligible market and helping even more entrepreneurs accelerate the growth of their business.

Shopify shipping adoption continue to grow with more than 42% of eligible merchants using shipping in the second quarter, which was up from just a third of eligible merchants in the same period last year.

Merchants now have access to shipping profiles, which gives merchants the flexibility to define shipping rates by product and source location, while improving the accuracy of shipping prices. And of course, Shopify Plus, which had another phenomenal quarter.

The agility and flexibility of the platform gives these large merchants the ability to move fast, offer exceptional buying experiences and grow their business. Some of the brands that launched this quarter include fashion labels, BB, APC, and Frances Valentine, which was founded by the latest fashion icon Kate Spade.

International electronic brands including Dolby, Sony, unident and Palm [ph]. More brands from some of the largest influencers on the planet, like Kylie Jenner's new skincare line, Kylie Skin, and Katy Perry's new footwear line The Katy Perry Collection. One of Canada's largest sellers of office supplies retailer Staples Canada. Footwear brand Clarks, beer company Heineken and we continue to see more launches from the world's largest consumer packaged goods companies.

Shopify Plus is set to become even more compelling solution for complex and large*scale businesses. When we release our new Shopify Plus product later this year. The all new Shopify Plus will give merchants and overview of the performance of every single one of their stores, with the ability to manage all stores, staff accounts, user permissions, and automation tools like Shopify Flow in a single place.

Finally, let's turn to our partners. As I mentioned, Shopify held its fourth annual Unite Partner Conference this June, where we share glimpses of our product road map with our partner community. This event gets bigger and better every year, as we surface all the opportunities available to our ecosystem to help build the world's best multichannel retail operating system.

The Shopify Fulfillment Network, our international expansion, and the continued growth of our sales channels like point-of-sale, or just some of the exciting areas where our incredible partner ecosystem plays a vital role. And our partner ecosystem has been busy. 22,000 partners referred merchants to our platform in the last 12 months, up from 19,000 in Q1. And this is primarily driven by international growth.

Our partners play an important role in helping us localize the platform internationally. In fact, I've been on the ground meeting with partners from around the world. And I always come home energized by their enthusiasm to enable our merchants from every corner of the globe. Our app store also continues to grow with more international partners building new functionality for Shopify.

We added another 200 apps bringing the total number to 2,900 at the end of Q2 and translated the Shopify app store into 18 languages that our non-English speaking merchants can have the specific functionality they need, regardless of where they're located.

It's incredible what we're getting done at Shopify. We're shipping important features at a strong pace. As we invest and build great products, enabling more capabilities, I'm confident that we will continue to unlock unprecedented opportunities for merchants around the world, making commerce better for everyone, everywhere.

[Amy Shapero, CFO]

Thanks Harley and good morning, everyone.

We delivered a strong second quarter one that highlighted both the power of our business model, as well as the strength of our execution. We grew revenue 48% year-over-year to $362 million subscription solutions revenue increased 38% to $153 million, driven by monthly recurring revenue growth of 34% to $47.1 million.

Shopify Plus increased this contribution to MRR accounting for $12.4 million, or 26%, compared with 23% of MRR in Q2 2018. Subscription solutions revenue grew faster than MRR in the quarter mainly due to strong growth in app and plus platform fee revenue, which is not included in MRR.

Merchant solutions revenue growth 56% over the same period in 2018 to $208.9 million. This growth was driven by GMV expansion, which accelerated to 51% year-over-year to $13.8 billion.

Our merchants are selling more than ever, as our investments across international plus and POS are paying off. $5.8 billion of GMV was processed on Shopify Payments in Q2 and increase the 51% versus the comparable quarter last year.

Shopify Payments penetration of GMV grew to 42% in the second quarter versus 40% in Q2 2018, primarily due to increase Shopify Plus penetration, as well as the addition of new Shopify Payments, geographies.

Gross profit dollars grew 50% from Q2 of 2018 to $204.8 million outpacing revenue growth in the quarter principally due to new payment partner pricing terms, which included a one-time benefit.

Adjusted operating income in Q2 was $4.8 million or 1% of revenue compared with a loss of $4.3 million or 2% of revenue in the second quarter of 2018, we achieved better than expected adjusted operating results in Q2, due in part to the one-time payment partner pricing benefit I just mentioned and timing a brand spend with Q2 under spend shifted to the second half of 2019.

Early indications are that the brand campaign has nearly doubled unaided awareness in our test market while there was minimal increase in similar control market. This has resulted in an increase in traffic to the platform how and when that takes effect down the funnel and impact conversion remains to be seen certainly a positive early read out.

Adjusted net income for the quarter, grew significantly to $15.8 million or $0.14 per share over income of $2.5 million or $0.02 per share for the same period last year. Finally, our cash, cash equivalents and marketable securities balance was approximately $2 billion, generally consistent with the balance at the end of 2018.

The appeal of entrepreneurship is universal, attracting entrepreneurs around the globe to Shopify, why Shopify because our merchant centric business model is inclusive ensuring that multiple voices contribute to the future of commerce regardless of scale or location, investing in their aspirations and growth keeps our flywheel emotion leading to a diversity of merchants, joining the platform more channels and capabilities to help our merchant succeed and greater opportunities for merchants to grow their sales and reinvest in their businesses.

Harley discussed our achievements and continued investment in platform and class. I will provide updates for international and Shopify Fulfillment Network starting with international. We made great headway improving our product market fit across the number of regions in the second quarter adding 11 more languages to the platform, enabling more merchants to start using Shopify in the language they are most comfortable. We also translated the partner dashboard into 11 additional languages as we leverage a growing international ecosystem to support our localization efforts.

We introduced more product solutions to fuel merchant growth. In Q2, we launch Shopify Payments in Denmark and the Netherlands, which features an integrated local payment method that allows for bank transfers in addition to credit card payments, multicurrency is now available to eligible core merchants using Shopify payments with a full rollout plan for later this year. Early signs of growth are promising since launching this feature to plus merchants in Q1.

Optimizing product market fit on a localized basis is clearly the right approach, while still early days, we are pleased with our progress, our massive international merchants continue to grow relative to total new merchant adds. International also contributed to the reacceleration of GMV with its contribution relative to overall GMV continuing to expand in the second quarter.

Moving to Shopify Fulfillment Network, a major new product expansion area for our merchants. As I discussed at our Investor Day, our merchants need for fast, reliable, affordable fulfillment is clear and growing and can be the difference in whether merchant makes a sale or not. In other words, the success of our merchants depends on it which is why it is among our top investment.

Since announcing Shopify Fulfillment Network and our Unite Conference. We have received an incredible amount of interest that has exceeded our expectations. Thousands of merchants have expressed their desire to be a part of our early access program. And dozens of partners are eager to join us and being a part of this solution.

We have spent the past six weeks on boarding merchants we've approved so far, are in discussions with thousands of other merchants and are assessing interested partners.

Given that the uptake in interest for Shopify Fulfillment Network has been much stronger than anticipated. Our plan is to accelerate investing so we can move fast and execute on this opportunity for our merchants.

All in, we're pleased with our second quarter results. The top-line momentum continuing in the back half of the year and are committed to investing for the long-term. As a result, we are raising our revenue expectations for the full year to be in the range of $1.51 billion to $1.53 billion with an adjusted operating income ranging between $20 million to $30 million.

For the third quarter, we expect revenue of $377 million to $382 million, and an adjusted operating income between $0 and $3 million. Stock-based compensation in 2019 is expected to be approximately $175 million for the full year, with about $47 million of this in the third quarter. This is higher than originally expected, primarily due to an anticipated increase in payroll taxes related to option exercises, resulting from Shopify strong share price performance this year.

In closing, we are excited about the future of e-commerce and Shopify's role to level the playing field for entrepreneurs everywhere. Given the success of our merchants, we are confident that we're making the right investments that will continue to energize the flywheel and deliver strong and sustained growth well into the future.

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

[Katie Keita, Head of IR]

Thank you, Amy. Before turning it over to the operator to open it up to everyone's questions. Let me remind you to please try to limit yourself to just one question and that way everyone can get a chance to ask a question on the call today.

With that, Operator, do we have anyone in queue?

[Operator]

Yes, certainly. [Operator Instructions] And your first question comes from the line of Brad Zelnick with Credit Suisse. Please go ahead.

[Brad Zelnick, Credit Suisse]

Excellent. Thanks so much, and congrats on another fantastic quarter. My question is for Toby or perhaps Harley. As we look out on the horizon, what can you do with all of the rich and insightful data that you have to drive a merchant success? Perhaps in ways you're not already doing?

[Tobi Lutke, CEO]

Yes, hey, I'll take those. Tobi here. It's an interesting type of data, right? Like, I want to be careful because has a really, really strong principles in this company. Like which around that the data is the merchants and we use it to the exact benefit, right?

And you see, like, I think a great implementation of this, that's our plans for Shopify Plus and the network, because we talked about this on stage. We can -- based on historic of sales, demand course, so only can predict. Right now, we are about 85% accuracy from which region in the next order is going to come and where demand is going to be needed, and so on.

So, it's these kinds of things, it's taking data to either make something that was, would previously have been impossible for the merchants, possible for them or it take something that would otherwise be incredibly difficult or full of manual labor. And to simplify it, most of the kind of used cases we are looking at.

And so, it's going to get got anything terribly concrete to point out, because I think we also just gave a good example of the kind of thing that we can do. But it's important to say that what we want to is take the sort of aggregate total and enact on the learnings to our benefit.

This is sort of -- we receive this in the history of retail a lot there. Large vendors go and create retail brands based on -- in-house brands based on the insights that they are only marginally entitled to. And this is just not the right move for a platform such as us.

[Brad Zelnick, Credit Suisse]

Thanks so much. Thanks so much.

[Katie Keita, Head of IR]

Great. Thank you, Brad. Next question, please.

[Operator]

It’s from the line of Colin Sebastian with Baird. Please go ahead.

[Colin Sebastian, Robert Baird]

Thanks. Good morning. I guess in terms of the interest that you're seeing for fulfilment services, I wonder how much of this is coming from merchants that are not currently on the platform? Meaning? Could we anticipate this to be an incremental driver of new customer ads? And in any other observations you have from the channel as well? Thank you.

[Harley Finkelstein, COO]

Hey, thanks for the question. Harley here. Certainly, with the way we're looking at SFN, we have, you know, more than 800,000 merchants that many of which are shipping, particularly in the U.S. where SFN will be rolled out first, that we think we can certainly help with and add value to their shipping and fulfilment practices.

In terms of new merchants that may not be exploring entrepreneurship, because of all the different challenges. It's just one more place where we can reduce the barrier to entry into entrepreneurship so that in the same way, they don't have to think about designing or coding up their own website. They don't have to think about integrating some sort of complex payment system. Have to think about any new functionality can just go grab it from our app store.

The fulfillment network is just one more piece of the puzzle that people might be risk adverse about in terms of jumping into entrepreneurship. And the more we can level that playing field, the more people will participate in entrepreneurship, and more and more that is happening all on Shopify.

[Operator]

Yes, your next question is from the line of Ken Wong with Guggenheim. Please go ahead.

[Ken Wong, Guggenheim]

Hi. Good morning. This is Eto [ph] on for Ken. I just had a question about some of your merchant ads in the first half of this year, just given the focus you guys have placed on filling the top of the funnel, we think that merchant ads are kind of consistent with the first half what you seen or what you saw in the first half of last year that coming in better? Thanks.

[Amy Shapero, CFO]

Yes, let me just kind of talk about the first half and kind of what we're saying, you know, we obviously had a record Q1 in terms of net merchant ad. And when, when we think about Q2 relative to Q1, we attribute the movement, largely to seasonality. So, you're seeing some of that.

We saw a consistent pattern from Q1 to Q2 this year in terms of funnel gross ads and net ads that we saw last year, Q1 and Q2 2018. In fact, we think we saw it a little bit magnified, as we get larger, our scale gets greater and our international presences is greater. So, we're seeing a very consistent pattern year over year.

Our Q2 adds we're in line with our forecasts and expectations. And we continue to be very optimistic about long term growth of our merchants globally, with our investments internationally as well as brand.

The early indications, as I said earlier from the brand spend are great. We just concluded this first brand campaign a couple of weeks ago. So, it's still early, and we're still analysing, and we did see an increase in traffic to website to your website at the top of the funnel. But as I said, it's too early to tell how that's going to translate into merchant ads going forward. But we're very encouraged.

[Operator]

Your next question comes to the line of Samad Samana with Jefferies. Please go ahead.

[Samad Samana, Jefferies]

Good morning. Thanks for taking my question. Amy, maybe this is for you. But I guess expanding Shopify Capital to non-payments customers? How should we think about that maybe in terms of expanding the dollar opportunity? Or the rate of change in terms of capital and the dollars that you guys have been putting out? And does it also change the risk dynamics since non-payments, customers are a little bit have done -- tend to have a little bit higher return? Thanks for taking my question.

[Amy Shapero, CFO]

So yes, with Capital, I'll just kind of give you a little bit of context here, we've actually managed our loss ratio in a very, very tight range. In fact, it's lower than the top of the range where we think we could go with this, which says, you know, the power of our algorithms are working. And so, it's one of the reasons why we felt comfortable. offering the Capital product to non-Shopify Payment merchants, we feel like we're in a good position.

With respect to non-Shopify Payments merchants, we still have significant visibility into their operations, we see their orders, we see the engagement with the platform. And so, we are very comfortable moving in that direction. It does expand our addressable market, about 10%. And we see other opportunities to increase our addressable market over time as well. If your call we're only in like 14 states right now. And we've got some initiatives underway to take that nationally.

Timing to be determined, but we certainly see opportunities to continue to grow that business aggressively overtime. And in a smart way, we'll do it prudently. And pull those growth levers and watch the loss ratio, but we're very comfortable where we're at right now.

[Samad Samana, Jefferies]

Great, thanks for that.

[Katie Keita, Head of IR]

Thanks so much.

[Operator]

Your next question comes from the line of Ygal Arounian with Wedbush Securities. Please go ahead.

[Ygal Arounian, Wedbush]

Hey, good morning. Thanks for taking the question. I'll just get into the retail POS a little bit more, and maybe gets your take on how much was selling point since the POS software's has been, since you launched it. In particular how the kind of cross integration between the e-commerce platform and the POS software helps drive merchant growth, especially on the Plus side, when merchants are debating between your platform and maybe a different one.

Then as you think about going further into retail, and you've obviously put a lot of effort into the POS and the software there. How do you think about kind of pain points and areas where you can solve for that might be lacking in the marketplace today? Thanks.

[Charlie Elliott, Director of Products, International]

Thanks. Hey, it's Charlie, I'll take that question. So as I mentioned in my prepared remarks, we are certainly focused in a new rejuvenated way in terms of point of sale, we already have more than 100,000 physical retailers using our point of sale product, but we feel like new hardware and new software, this our point of sale offering can be best in class.

So, part of what we're doing now is obviously making sure that anyone who's currently used Shopify for e-commerce begins to use Shopify as well for point of sale and there's some low hanging fruit there for us as well.

But also, if you think about, you know, what we talked about with channels, point of sale is just another entry way into Shopify, some merchants come to us to sell online, some are coming to a sale offline as well. And as their business grows, they're able to take more channels and expand with us.

So, we are excited about our point of sale offering our new point of sale offering, we think with the hardware kit, which is proprietary, which is something that we're really proud of coupled with a brand new software, which we think is the best out there right now, we can really win in this in this particular market.

The other thing that we're working on with point of sale is a sort of a new go to market strategy. Obviously, the way that merchants and small businesses purchase point of sale is different than the way they purchase e-commerce. And so, by having the right marketing the right salespeople and the right go to market strategy, we think we can do a really great job of increasing that hundred thousand merchant mark to too much more than that.

[Ygal Arounian, Wedbush]

Thanks, Ygal. Next question please.

[Operator]

It's from the line of Thomas Ford [ph] with Davidson. Please go ahead.

[Unidentified Analyst]

Great, thanks for taking my question. So, I had a question for Tobi. So, Tobi with the Four Horsemen of big technology, Amazon, Apple, Facebook and Google, facing increasing scrutiny on a global basis, as evidenced recently by their testifying in front of a House Judiciary Committee. So, to what extent is this potentially a problem for Shopify? To the extent you partner with some of those companies. And then more importantly, to what extent did this create an opportunity to Shopify? Thanks.

[Tobi Lutke, CEO]

Yeah, thanks, Tom. Well, I guess first of all, I think it's, it's a very healthy debate for every country society to just, you know, at least meditate on how the largest companies fit into society, and what roles they should play and so on. So, I think this is all good.

More about Shopify, the nice thing is like Shopify again, the thing that's so great about this company from -- I mean, from my perspective, frankly, makes my job easier is that Shopify is really -- we are on the same side of the table with all the stakeholders, all the way down, not just partners, merchants and buyers, and so on. It's like, even the externalities of Shopify, that there is more entrepreneurship, which leads to more successful, small businesses.

And, when I talked with politicians and I do, the thing that we get to pretty quickly is that the future needs the Internet, the small businesses creating good jobs for 10 to 15 people or maybe beyond in certain cases. So, it's, I'm super comfortable with how Shopify fits into this picture.

And so, to the extent of, like, I've spoken to some other companies, I do think, again, they are so large in scope, and some of them are beneficial for the same thing for the SMB space. And so, there we collaborate with them. And try to create a situation where the Internet is a place, which is beneficial to entrepreneurship, which then leads to all the good side effects to society that we like to see.

[Operator]

Next question comes from the line of Darren Aftahi with Roth Capital Partners. Please go ahead.

[Darren Aftahi, Roth Capital Partners]

Hey, good morning. Thanks for taking my question. Just when you look at your international merchant base today, and kind of look at it compared to your domestic base when it was similar size, way back when I'm curious how much faster that international base reaching kind of those same GMV benchmark level has been achieved. Thanks.

[Harley Finkelstein, COO]

Hey, Darren it's Harley. It really depends in the same way that there is no way for us to get product markets fit in every country, one that we actually have to go and understand the nuances of its geography understand what they need for a product perspective, what they need from an ecosystem like a partner perspective, the same sort of thing happens in terms of merchant type.

So, we will see a very different type of merchant in place of Japan then we would in a place like France as well. That being said there are there opportunities for us to not only get more merchants in each of those countries, but also for those merchants to go really successfully in the way that we think we can do. We can help them with that is by making sure they have all the tools they need.

So, as I mentioned in my prepared remarks translating the app store into weigh more languages than we initially had making sure we have third parties in each country building new apps firm for country specific merchant needs. There are always, as we think we can only get more merchants on the platform but make those merchants internationally way more successful at a faster clip.

[Darren Aftahi, Roth Capital Partners]

Thanks Darren.

[Operator]

Your next question comes from line of David Hynes with Canaccord. Please go ahead.

[David Hynes, Canaccord]

Maybe for Harley, Harley, how do you think about the relationship between the fulfillment network and Shopify Capital. Obviously, the goal is to help merchants be as efficient as possible in enabling faster delivery, but I also assume for most, it's going to required degree of inventory build. So, it is right to think that scaling fulfillment network is going to be a tailwind to your capital business?

[Harley Finkelstein, COO]

Thanks for that question. Look, obviously what you're seeing with SFN, which is Shopify Fulfillment Network and Capital and Shipping and Payments and all these sort of different merchant solutions is we want to complete the picture of what merchants required to not only start a business but to go really, really big.

Obviously, the more services and solutions that our merchants take from us, the easier it is for us to provide them with assistance. So, if we know how much inventory they have in the SFN, we obviously can make faster, smarter, more intelligent capital decisions. But all these things fit together, but we're just beginning to see here it is.

We're beginning to see what we been talking about this first global retail operating system where merchants come to Shopify and whether it's housing their inventory, shipping out their products, capital, shipping labels or payment opportunities. We want to do more for these merchants once they come onto the platform and so you are seeing more of that now.

[David Hynes, Canaccord]

Got it. Thanks.

[Katie Keita, Head of IR]

Thanks, David. Next question please.

[Operator]

Next question comes from the line of Deepak Mathivanan with Barclays. Please go ahead.

[Deepak Mathivanan, Barclays]

Thanks for taking the question. Amy. Can you elaborate on the 1-10 benefit to merchant solutions gross margin? You know that one-time partner payment, is that incremental revenues, how should we think about the magnitude of that and also going forward. Thank you so much.

[Amy Shapero, CFO]

In the normal course of business as we scale, we obviously were able to negotiate volume discounts with our various partners and in the second quarter, we concluded a contract renegotiation with a payment partner where we were successful in negotiating future volume discounts.

Along with that came a onetime benefit that was recognized in the second quarter, if we had not had that one-time benefit in Q2 merchant solutions margins would have been roughly flat quarter over quarter and year-over-year, so should give you a sense of the magnitude.

So, on a go forward basis, this obviously is a benefit to our payment margin and recognizing the greater volumes that we'll be bringing on overtime.

[Katie Keita, Head of IR]

Okay. Thanks Deepak. Next question, please.

[Operator]

Koji Ikeda with Oppenheimer. Please go ahead. Your line is now open.

[Koji Ikeda, Oppenheimer]

Good morning. Thanks for taking my question. I had a question on the fulfillment network, obviously big news coming out of the Unite Conference and I know it’s really, really early here, but any sort of commentary on the initial demand from the customers out there, or maybe how has sign up request been for the early access program with about as expected or maybe higher, or maybe a little bit lower any sort of color there would be helpful. Thank you for taking my question.

[Harley Finkelstein, COO]

Yes, so in terms of progress we've made since the announcement, we received a ton of interest from merchants and partners, I can just say this bluntly, we have expectations on that.

So, we spent the last six weeks onboarding merchants, we've approved so far and we're currently in discussion with thousands of other merchants in assessing interested partners. So, generally we're really pleased with where things are at right now. As we've mentioned, we signed on seven notes for 2019. Each of those notes are in various stages of implementation, there certainly may be more coming on as well.

But the idea really as we think we can provide a fulfillment network to provide lower cost to allow merchants to keep their brand and allow them to have a much smoother business. So, we're really happy where things are at right now. But these merchants that we're bringing on now, it's still early access. And again, this announcement was made less than 2 months ago.

[Katie Keita, Head of IR]

Okay. Thanks, Koji. Next question, please.

[Operator]

Chris Merwin with Goldman Sachs. Please go ahead. Your line is open.

[Chris Merwin, Goldman Sachs]

Okay. Thanks very much. Maybe just keeping on the theme of fulfillment. You mentioned a very strong update -- uptake so far, and it was the 7 fulfillment partners you have today. Do you think that's enough to kind of handle the near-term demand? Or to give potentially be starting to build your own in the near future, and just at a higher level. To the extent that GMV and revenue continues to exceed your expectations for fulfillment? Should we think about you mostly reinvesting all of that into growth given the magnitude of the opportunity? Thanks.

[Amy Shapero, CFO]

Yes, I'll sort of tackle the last part of the question about -- we obviously saw greater demand and then we expected coming out of Unite for our early access program. So yes, we want to be able to accelerate some spend, as I said earlier in my remarks. Largely the way, I would look at the billion dollars that we said that we would spend over five years. The timing of that's going to be driven by a variety of factors, it's going to be merchant demand, merchant onboarding, our ability to bring on our partners, the capacity.

And so those things are going to some extent, determine how we spend, we'll continue to give you progress updates as we go. It's too early, I think to make generalizations other than the early indication is that there is significant demand.

And we want to make sure that we meet the demand of our merchants, especially through the FCM. So, there'll be a lot more coming in the coming quarters on SFN. And how that's going to roll out.

In terms of the use of seven partners. Actually, what we announced that Unite was seven nodes, not seven partners that we expect to have online in 2019. And they're all in kind of various states of implementation. But we expect that will be sufficient for this year, but again, will be assessing it as we move through this early access program.

[Katie Keita, Head of IR]

Great. Thanks, so much Chris. Next question, please.

[Operator]

Nikhil Thadani with the Mackie Research Capital. Please go ahead. Your line is open.

[Nikhil Thadani, Mackie Research Capital]

Thank you. Maybe for Amy, could you just remind us of your FX hedging program and how that changes with all this ongoing sort of interest rate and Fed drama? Thanks.

[Amy Shapero, CFO]

Yes, I mean, I don't think it really changes our FX program. As, as you probably recall, we currently build most of our revenue in U.S. dollar. So, there is almost no impact on that. And where we hedge is on the expense side, significant amount of our operating expenses denominated in Canadian dollars, so to mitigate fluctuations in our results, short-term and longer-term.

We do have a pretty mature hedging program that we've utilized. And so, the FX impact, in fact for the first six months of this year was minimal, because of that hedging program. So, we expect that will continue and I don't see those other factors playing much of a role here.

[Katie Keita, Head of IR]

Okay. Thanks, Nikhil. Next question, please.

[Operator]

Mark Zgutowicz with Rosenblatt Securities. Please go ahead. Your line is open.

[Mark Zgutowicz, Rosenblatt Securities]

Good morning. Thank you. Just a follow-up question on SFN. Hopefully, if you could maybe quantify or unify accelerated investment there and what it potentially means for new timing in terms of an official launch. And then how you see SFN and sort of pulling CPG volumes off Amazon. And you've talked about CPG, ETC initiatives. So, in that regard, if you could comment on sort of that dynamic? Thank you.

[Amy Shapero, CFO]

I'll take the accelerated spend piece of that. So, we just for our forecast, we took revenue up for the year, reflecting how optimistic we are about our continued growth opportunity. And none of that is dropping to adjusted operating income. We kept our guidance flat from last quarter. So, obviously, when I said accelerated spend that's what I was referring to is that a good chunk of that spend will go to accelerate SFN and do a larger early access program than we anticipated.

[Harley Finkelstein, COO]

Yes, I can add to the CPG side of that. So, you know, as I mentioned earlier on, Q2 was quite strong for Shopify Plus, but and we continue to see more brands come on from the likes of Johnson & Johnson and Procter Gamble, Unilever whether or not they leverage the SFN or not, we will see in time that we certainly are seeing more of the CPG's creating brand specific stores on Shopify Plus.

We're also seeing much larger, more established companies like Staples Canada, build their entire retail online retail operations on Shopify Plus. Well, so we are beginning to see a lot more of these established and more complex retailers, which is one of the reasons that we're excited about the new Plus product.

[Katie Keita, Head of IR]

Great, thank you, Mark. Next question, please.

[Operator]

Todd Coupland with CIBC. Please go ahead. Your line is open.

[Todd Coupland, CIBC]

Yes. Good morning, everyone. So, wondering if you could just comment some granularity on international success so far this year? Which countries are you seeing the strongest take up and where are there bottlenecks that you'd like to work out? Thanks.

[Charlie Elliott, Director of Products, International]

Hey, there, it's Charlie, I'll take that question. In terms of what we've mentioned, as being sort of our priority countries, they remain a priority country and all of them are growing at different clips. That being said, I think the most important thing that we've discovered in the last year or so is that, as I mentioned earlier as well, that these different -- these merchants in different countries require different functionality from Shopify, they require different payment methods in some cases, they require different types of partners to help them get onboarded and build their custom integrations as the case may be.

So, one of the things we are -- we've been focused on and you've sort of seen this just from the partner referral numbers growing to 22,000. Partners referring merchants in the last 12 months is, we are leaning heavily on more of that ecosystem internationally, which we had not historically done. And by translating both the partner dashboard into 11 languages and translate in the App Store into 18 languages, we think that we can help better help these merchants internationally, find product market fit, which will inevitably make them more successful.

So, I wouldn't say that there is any one country that is doing way better than the other countries, they're all growing at different paces. And again, the size of the merchants in each country does differ depending on where they're at. But it's been a really exciting new initiative for us. And again, it's been about just over a year since we begin to focus on international merchants translating the admin, and so far, so good.

[Todd Coupland, CIBC]

Thanks, Todd.

[Katie Keita, Head of IR]

Thanks, Todd. Next question, please.

[Operator]

Terry Tillman with SunTrust. Please go ahead. Your line is open.

[Terry Tillman, SunTrust]

Yes, thanks for taking my question. Harley, kind of building on a question earlier about plus? Is your increasingly enterprise hardening the Plus platform and seeing bigger brands and well-established merchants actually coming? Looking at it? Does it change the go to market? And also, when you're seeing these bigger brands, are you replacing something that's usually a homegrown system? Or is it a prior generation commercial system? Thank you.

[Harley Finkelstein, COO]

Thanks for that question. In terms of the go-to market strategy, it remains generally the same, we're still not going out for golf games with anyone to convince them to come to Shopify Plus, that's just not our strategy. We obviously understand now a lot better than we did in the past how to speak to these larger, these larger merchants, the CPGs, you know, Clark Shoes was founded in 1825. And, convincing them to leave at home-grown system to come to Shopify Plus, obviously, take some -- takes a different type of model, then going after all which started on Shopify in 2016.

So, I think we're building sophistication inside our go-to market strategy for Shopify Plus. And we're able now to approach these different variety of merchants in new ways.

To the big -- the first part of your question in terms of enterprise hardening Shopify Plus. Look, these merchants require things that smaller merchants just don't whether it's multi-store, multi-currency, multi-geographies, whether it's things that Shopify flow provides in terms of putting more of their business operations on rails, we are really focused on making sure that we can provide them with the product market fit.

And the announcement of the new Shopify Plus product that we made at Unite, we think provides a way more opportunity for us. And so even as I mentioned, some of the examples of stores that have come on, you're seeing a lot more established retailers that either have had a homegrown system in the past, we're on an enterprise platform that have migrated over or have never sold direct to consumer before, as is the case with some of the CPGs, so generally we're filing -- firing on all cylinders when it comes to Shopify Plus, and we have the new Plus product which will give us far more ability to help those types of merchants.

[Terry Tillman, SunTrust]

Thank you.

[Katie Keita, Head of IR]

Great. Thanks Terry. Next question please.

[Operator]

Ronald [ph] with IFS Securities. Please go ahead. Your line is now open.

[Unidentified Analyst]

Good morning and yes, congratulations on another great quarter. The new POS system, could the POS system be used by businesses outside of retail, such as restaurants, have you been talking to new merchants outside of traditional retail and how is the new POS system and the distribution initiatives expanded your time, which you used to estimate at being around 50 million?

[Tobi Lutke, CEO]

I will take this, so it depends on how far you go with this. I think it's important to understand about Shopify in aggregate, but we are more interested in going deeper rather than wider and so we are not looking to go after restaurants because that's really, like data model up that’s a completely different kind of business to model.

There are some used cases in point of sale in the B2B space that are interesting, and sort of way of it and then we make sure that most work really well. It's always -- like all customers are eternally stretching Shopify into all directions for us, sometimes very successfully because it's very flexible hopefully well-crafted software and in many of cases, there is an opportunity for us to learn about some place where Shopify of value we have achieved previously didn’t realize at such point.

We either encourage or we make product adjustments to make that particular idea really even better, but we want to take this area of physical shape of the product and make it entrepreneurship around that idea is going to be very, very simple and then we're really interested on full lifecycles capabilities so that Shopify can stay with you from that first day all way to running tens maybe $100 million maybe billions of dollars businesses. And grow our role within both businesses as I think such as Capital and all these other things, we talk about SFN being probably the best example of that.

[Katie Keita, Head of IR]

Great. Thank you, Ron, for your question. Next question.

[Operator]

A. Kumar with A. Capital [ph]. Please go ahead.

[Unidentified Analyst]

Good morning, guys and congrats on the quarter. Just wanted to touch on fraud protect. It's more than a few quarters now that you roll this out, kind curious to know what type of results and feedback you're getting with the offering and how is that been helping drive payments adoption.

[Charlie Elliott, Director of Products, International]

Hey Charlie, here. So, it's been about less than a year since we launched fraud protection, it shown promising growth across key metrics like merchant adoption, eligible GPV and unprotected GPV. Now fraud protect still only available to Shopify payment merchants and only in the U.S.

So, obviously there is a lot of room for us to grow there, but generally it's one more thing that we can do to help our merchants and over time the more merchant that adopt fraud protect the smarter our algorithms become, greater our ability to make decisions for them or showing them good decisions become.

So, we’re generally happy with where fraud protect is right now. Again, it's still in a limited geography for a limited set of merchants and now that continue to grow but it’s been less than a year, and so far, we're quite pleased with words out.

[Katie Keita, Head of IR]

Thanks A [ph]. Next question please.

[Operator]

Brian Peterson with Raymond James. Please go ahead. Your line is now open.

[Brian Peterson, Raymond James]

Hi, thanks for taking the question. So maybe one for Harley, just on the plus business I know one of the legacy solutions in the space will no longer be supporting their product at the end of next year, I’m curious how much of that is been a factor in acquiring new merchants on the Plus side, and anything that you can share on how the new merchants coming to the platform, on the Plus business are turning. Thanks guys.

[Harley Finkelstein, COO]

In terms of migrations from legacy e-commerce system, some that are being supported some that are being deprecated. We've always gone fairly aggressively to migrations and had fairly aggressive migration campaigns. You don't often see Shopify calling out competition, but when we know there's an opportunity for us to bring on a whole bunch of wonderful merchants to our platform, because either they're existing platform just doesn't work properly or because it is being deprecated.

We go after those opportunities with gusto, so we'll continue to do that as well. In terms of them coming again as I mentioned. The reason, I go through different categories of merchants in my prepared remarks is I think it's important understand the types of merchants that are coming onto our platform, whether it's new businesses from Kylie Jenner or companies like Sony or Heineken.

And generally, we're just becoming more sophisticated the way we on-board these merchants and the way we're able to attract them. And you're seeing Shopify Plus show up at places that we may have not showed up in the past like enterprise e-commerce trade shows, which traditionally wasn't our thing. And we now we feel that there are some places we want to be because there's an opportunity for us to migrate a lot of these larger, more legacy brands on the plus and frankly, make their lives 10 times better.

[Tobi Lutke, CEO]

[Indiscernible] because I think one thing which is kind of important to understand about the Plus story is that like we are talking about in our enterprise trade shows and about large consumer packaged goods companies and so on. It's not really -- I mean, we certainly are stretching up. But it's really bad. The approaches that work in retail are just different from the approaches that people thought should work in the -- like last decade.

And that realization means that actually both companies often giving up on the enterprise approach of software, right? They need something just significantly more agile, I talked about this in previous calls. But really, it's important, when looking at the subscription success story, that what we offer is something that works really, really well as super agile, exists and functions at the speed that even the most ambitious marketing department wants to move at. And, so it's that I think a lot of companies are not like, it's not that we come around to the vote’s enterprise. It's a lot of companies coming around to our view. And so that's what's driving a lot of adoption.

[Brian Peterson, Raymond James]

Great color. Thank you.

[Katie Keita, Head of IR]

Thank you, Brian. Next question, please.

[Operator]

Richard Tse with National Bank. Please go ahead. Your line is open.

[Richard Tse, National Bank Financial]

Yes. Thank you. With a fairly tight labor market and tech, I'm kind of wondering if it's creating a challenge for you from a hiring perspective, given your heavy investment mode. And if so, how do you navigate that?

[Tobi Lutke, CEO]

It's Tobi. I've kind of talked to my Board Members, I certainly it can be sound sometimes complaining about how hard is to hire engineers, and then they tell me that Shopify is the one company, which complaints about how hard it is, everyone else tells them it's impossible. So, I think we might even be in better shape than most.

Like, I mean, there is a confluence of things that have to happen right now. And luckily, we are really well-prepared, like we started outside the major labor pool markets for companies.

So, we are extremely adapted to hiring people for potential and then getting them trained up, like towards the potential and much, much faster like you will find the enterprise even the executives at Shopify and a lot of us -- this is the first job. So, there is a lot of precedent here of people just sort of growing into the roles that Shopify [indiscernible]. And so that's a big component.

Just again -- we are sort of drawing people from a very, very far reaches, I mean, people are moving from all parts of the world for jobs at Shopify. But also, our home markets are exceptional like -- we sort of see Canadian EST, it's like our asset core. And there is a lot of talent here.

So, it's tight, but it's possible, as long as you're not trying to just look at hiring in San Francisco and hiring only fully formed engineers that happen to have exactly the skills you need. So, if you're willing to compromise on those things, which I think everyone should, because I actually think it looks better building more sophisticated systems of hiring. Then -- it works. That's good.

[Richard Tse, National Bank Financial]

That's great. Thank you.

[Katie Keita, Head of IR]

Great. Thank you, Richard. I think we're out of time today. So, I'd just like to say thanks to everybody for dialing in and we will talk to you throughout the rest of the quarter.

[Operator]

And this concludes today's conference call. You may now disconnect.