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Shopify Inc. (SHOP) Q3 2017 Earnings Conference Call Transcript

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Shopify Inc. (NYSE: SHOP)
Q3 2017 Earnings Conference Call
Oct. 31, 2017, 8:30 a.m. EDT

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Virgil, and I will be your conference operator today. At this time, I would like to welcome everyone to the Shopify Third Quarter 2017 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. If you would like to ask a question during this time, simply press star and the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Katie Keita, you may begin your conference.

Kathryn Keita -- Director of Investor Relations

Thank you, operator, and good morning, everyone. We are glad you can join us for Shopify's third-quarter 2017 conference call. We are joined this morning by Toby Lutke, Shopify's CEO, Harley Finkelstein, our dynamic chief operating officer, and Russ Jones, our CFO. After prepared remarks, we will open it up for your questions.

Once again, today, we will make forward-looking statements on the call. These are based on current assumptions and are 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. Information about these risks and uncertainties was included in our press release this morning, as well as our filings with Canadian and U.S. securities regulators.

Also, our commentary today will include adjusted financial measures, which are non-GAAP measures. These should be considered as a supplement to -- not a substitute for -- GAAP financial measures. Reconciliations between the 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 we tell you otherwise. With that, I turn the call over to Toby.

Tobias Lutke -- Chief Executive Officer

Thanks, Katie. Good morning, everyone. Thank you for joining the call. This is going to be a fun one. Let me get started by saying that I personally love the experience of taking a company from nothing and growing it to be a trusted public company. What I get out of this journey is the opportunity to learn about such a large variety of different things. I love learning about new things. For this quarter, we learned about something new that I haven't fully encountered before, and I realize that many people on this call are here because you would like us to talk about that.

First, we don't know -- during this quarter, we were targeted by a short-selling troll who made all sorts of preposterous claims. Before we get into it, I want to address some criticism that the company didn't respond strongly and quickly enough. We take this as constructive feedback, but our rationale is the following: All of us at Shopify are laser-focused on building a valuable, enduring company. We are busy growing our merchant base, launching new features, and getting everyone ready for Black Friday and Cyber Monday, which is coming up soon, and I honestly believe that the best companies do not engage in short-term stock price management, if you will -- and neither do we. Some days, the stock is higher, and some days, it's lower, but over a course of years, it will approximate to how well the company is doing.

So, given that -- and, as I tweeted -- we will deal with this during the financial call because this is the time we reserve every quarter for these kinds of activities. So, I want to correct 3 key points of misinformation, and just to be absolutely clear, we consulted with outside legal counsel that also categorically dismissed these claims as unsubstantiated. I can definitely state that 1). We do not sell business opportunities, we sell a commerce platform, 2). We comply with FTC rules and consistently inform our affiliates of their legal obligations, and 3). We do not promise merchants success -- far from it. In fact, most of our content is about how hard entrepreneurship is, because it is hard, and we are here to help those who are willing to try it. Every 90 seconds, an entrepreneur makes their first sale on our platform. We celebrate and cherish this accomplishment because it's not easy. This is what we are most proud of, so implying that these businesses are somehow illegitimate is an insult to their hard work.

And, here's the really important piece that somehow got missed: While we see ourselves as a catalyst ambition, and we strive to lower the learning curve for entrepreneurship so everyone can participate, most of our revenue actually comes from our merchants successfully selling on Shopify. The more merchants sell, the more payments we facilitate, the more shipping we assist with, the more working capital we provide. This is how we have been able to deliver the results that we do quarter after quarter -- because our merchants are succeeding. So, even though some entrepreneurs have failed and stopped paying $29.00 per month for their store, hundreds of thousands are thriving, and we thrive alongside of them. Okay, I hope this clears up things on the matter. Let's move on.

I want to talk about why we are so well-positioned to be a hundred-year company. Companies that want to be around for 100 years need to solve a real problem in the real world. Now, I realize that Silicon Valley has sort of ruined the phrase "change the world" for all tech companies, but I want to say that we are trying to change the world in one significant way, and that we don't use this as some hollow phrase for just promoting some new app in the App Store. When you open the New York Times business section, what you will read is that small companies are struggling, and big companies are getting insanely big. There's a little variance and noise in this data because non-digital companies of all sizes are failing at the same time, but oh well, that's the trend.

I don't have the time here to dig into why this is, but the change we want to make is that we want to give the small business a chance to survive and thrive. The world needs millions of small businesses to ensure a sustainable future for economies and jobs instead of a handful of major companies. We are fully focused on retail and commerce, and here are a few trends we are seeing -- and which we are supporting -- to make this happen.

First, slow and long-established large retails are vulnerable to disruption by laser-focused small brands that share common values with their customers. Retail is shifting to a form of experience with an emphasis on storytelling, and that gives small businesses a leg up. Second, manufacturing is changing. Most brands in the world get their products created in the same factories, but today's small business can access quality manufacturing sites which have previously been prohibitive due to CAPEX.

Third, innovations with supply chain and shipping are leading to a new kind of approach, one that is forcing big changes in the retail landscape. The winning formula for retail is now an asset-light infrastructure combined with a highly personalized interactive consumer experience. Finally, stores like Shopify -- with its built-in data reporting, inventory tracking, shipping, retail stores, social channels, multichannel in general -- actually mean that new businesses -- on Day 1 -- are using better technology than any of their competitors in the market they enter, or at least, they might if their competitors aren't using Shopify themselves.

You put all these things together and end up with a new formula. Not everyone can wrap their heads around this new retail and distribution model, though. They think, for some reason, that there's something wrong with not holding any inventory and building a drop-shipping business, or not having a brick-and-mortar store at a time when physical stores are closing in record numbers, or that not having tens of millions of dollars of sales means that you don't exist. We fiercely disagree.

While we do have stores selling tens or even hundreds of millions of dollars a year on Shopify, because of the changes I just described, we have many, many stores just getting launched. All kinds of merchants use Shopify. They are the creators and innovators, they are students trying to pay for school, they have a little art gallery around the corner, they are merchants that have scaled from first sale to multimillion dollars. You saw some inspiring examples of these at our Build a Bigger Business celebration just last month, when we took them to ring the bell at the New York Stock Exchange, or at any of our numerous shop class events all across North America.

Of course, it would be easier for us to focus exclusively on serving large businesses and large enterprises with big budgets. We would be part of a very crowded market where we fight for single-digit changes to market share, but we have never gone for easy. What we do instead is grow this market, invite people to try to build new businesses, tell them what they need to do, and be honest with what we need to hear. All future big success stories have started somewhere. With that, I'm going to give it over to Harley.

Harley Finkelstein -- Chief Operating Officer

Thanks, Toby, and good morning, everyone. In the third quarter, we kept up our relentless pace of innovation and simplification, particularly in areas of directly help merchants get ahead of their biggest selling season of the year. This means exciting developments -- not just across our own platform, but also within our partner ecosystem and at Shopify Plus.

The number of channels over which merchants can list and sell their products to new audiences continues to expand. We've added shopping on Instagram as a channel to tens of thousands of merchants, and the channel's SDK we made available last year continues to be leveraged by new channels. For example, List, the global fashion search engine, is now integrated into Shopify, allowing our merchants to access their 60 million shoppers from 200 countries. We expanded the capabilities of Shopify shipping, both in terms of functionality by adding bulk label printing and by integrating a new shipping carrier, DHL, to augment USPS and Canada Post. With DHL Express, our U.S.-based merchants can now ship internationally, more easily, at better rates, and with free pickup -- directly through the Shopify platform.

Since our last call, we've made a number of enhancements to help merchants further grow their businesses. We expanded our marketing analytics capability so that merchants can now easily see all the results of their marketing activities, even when they're done via third-party apps. We added 8 new reports from merchants on the Basic plan, giving them greater insights into their visitors, where they come from, where they land, and what they're looking for. And, just yesterday, we launched the eBay Sales Channel, which gives Shopify merchants the opportunity to service their brand and products to a massive new audience of more than 169 million active eBay buyers.

Let me now take a few minutes to provide an overview of our partner ecosystem, the value we deliver for merchants, and how we compensate our partners. It's important to understand that Shopify partners help our merchants at every stage of their business, and of the 14,000 partners who referred merchants to Shopify over the last 12 months, the large majority of them provide additional value-added services to help merchants build and grow their business. These include initial store setup, app and theme development, and services like photography, marketing, SEO, and brand strategy.

Any one of these partners can refer new merchants to Shopify and get approved as a value-added partner, or an affiliate if they qualify. For instance, it may make sense for an app development agency who builds apps for shops to refer new merchants to Shopify using a link on their company blog. It is also important to note that our partners do not get paid to recruit other affiliates or partners, nor do they get paid for anything other affiliates or partners do.

These affiliate partners are mostly bloggers, publishers, and business coaches who refer new merchants to Shopify. Our team individually approves every affiliate partner who applies after looking at their website, their profile, and whether they're a fit for brand. Once approved, we onboard partners to the program, and they agree to our partner terms, which includes their disclosure responsibilities. In terms of compensation, our affiliate partners typically earn an up-front commission for each referred merchant. As we've said in the past, our partners are a part of our competitive advantage and help us identify potential merchants we may not otherwise be able to reach. Our partner ecosystem continues to grow, and the tremendous value it brings to merchants is unmatched in our industry. We've built strong relationships with thousands of partners globally, and are aligned economically in our mission to help merchants over the long term.

Moving onto Shopify Plus: With continued upgrades, the execution of our sales hackers, and our partner ecosystem, Shopify Plus drove a record number of launches in Q3. These included brands like the Phoenix Suns, Arby's, Josie Maran's cosmetics line, and earlier this month, fashion powerhouse Rebecca Minkoff. A number of branded consumer packaged goods also launched -- including the gourmet and iconic mustard brand Maille, Blue Diamond Growers, and Beer Nuts -- as did companies selling the coolers to put them in, including both Igloo and Yeti. Mufflers Express also launched on the platform in the quarter, showing that the demand for digital commerce goes far beyond traditional consumer goods. I love this list because it illustrates the new ways brands are interacting with their consumers and using Shopify to do it.

To accommodate the rapid growth of Shopify Plus, we will be expanding our footprint in Waterloo with the opening of a second location, slated for Q1 of next year. We expect to add hundreds of jobs in the next 2 to 3 years across sales, sales support, and R&D in the region. We are excited about what we are building at Shopify and the positive impact we are making on the world, on the communities of Waterloo and the other 6 cities we call home, on the value propositions of our partners, and on the lives and livelihoods of our merchants globally. Our passion for disrupting the status quo and empowering merchants to grow their businesses will continue to drive our roadmap. This is what we live for.

As we move into the busiest selling period for our merchants, we are ready to help them have their best selling season ever, and we look forward to helping new merchants realize their potential. At Shopify, we strongly believe that entrepreneurship is the foundation of the global economy, and it's not easily done alone. That is why we've made it our life's work to encourage anyone anywhere to become an entrepreneur. And, with that, I will turn it over to Russ to cover the financials.

Russ Jones -- Chief Financial Officer

Thanks, Harley. Our results in the 3rd quarter once again highlighted the strength of our business model and our strong position to leverage the feral trends in retail that Toby and Harley spoke about. In Q3, this meant not just continued rapid revenue growth, but also achieving adjusted operating profitability a quarter sooner than we anticipated, and for the first time since becoming a public company 2½ years ago.

We grew revenue 72% year over year to $171.5 million, with both revenue lines contributing to this rapid expansion. Subscription solutions revenue grew 65% to $82.4 million. The underlying monthly recurring revenue also grew 65% and ended the quarter at $26.8 billion. The slight acceleration over last quarter is due primarily to another record number of merchants paying to run their business on the Shopify platform. Within this, subscription revenue from Shopify Plus continued to expand. 20% of overall MRR came from Shopify Plus in the 3rd quarter, or $5.3 million, compared with 18% of MRR for Q2 for 2017.

Merchant Solutions revenue grew 79% to $89 million. Merchant Solutions revenue is directionally tied to merchant success, as this is the part of our business where we deliver back-office capabilities that save merchants both time and money, thus allowing them to focus on sales activities. GMV grew to $6.4 billion, up $2.6 billion or 69% from last year's 3rd quarter. Gross payments volume was $2.4 billion, or 37% of GMV, versus $2.2 billion or 38% in Q2 of 2017. This slight percentage downtick was driven primarily by the growing mix of GMV and merchants in countries where Shopify Payments is not yet offered. Recall, though -- when merchants use a payment gateway other than Shopify Payments, we receive transaction fee revenue, as well as -- in most cases -- a rev share from that processing gateway.

The growth of overall gross margin dollars accelerated to 86 percent year-on-year to $100 million. This is notable, as it was only 3 quarters ago that we first exceeded $100 million in quarterly revenue. This was driven by volume increases, as well as improvements in both Subscription Solutions and Merchant Solutions margins. Merchant Solutions margins in the quarter benefited from the non-Shopify Payments fees described above, as well as from the impact of the growing mix of higher-margin Shopify Shipping and Shopify Capital.

Our adjusted operating profit in Q3 was $1.7 million, or 1% of revenue, compared with a loss of $2.2 million or 2.2% of revenue in the third quarter of 2016. The adjusted net income for the quarter was $5 billion, or $0.05 per share. This compares with a $1.8 million net loss, or $0.02 per share, for the third quarter of 2016.

Finally, our cash equivalents and marketable securities balance was $926.6 million, down slightly from the $932.4 million at June 30, 2017 due to the continued success of Shopify Capital. This working capital financing, which exceeded a cumulative $130 million by September 30, is even more critical as merchants prepare for the holiday season. The popularity of Capital underscores how underserved small businesses are. This is the case not just for working capital, but for other areas as well, like payments and shipping. It is through Merchant Solutions that we meet these needs, and this is a key part of our business model. Let me explain.

We take our role as a catalyst for new business creation seriously, which means we continually challenge those who want to be entrepreneurs to try it, and why shouldn't they? We have dramatically lowered the barriers to starting a business. What people may not understand about Shopify is that we benefit from more people trying Shopify, not fewer, even if they don't succeed at first. So, while this broad-based approach means that not every merchant will be successful, their outlay is low, and our business model allows us to offset any merchant losses with the remaining cohort, upgrading plans, purchasing apps, leveraging our merchant solutions, and most importantly, making sales. So, while there will always be merchants that stop subscribing -- and we make it easy to do so -- these merchants that are thriving on our platform sell more, and as they succeed, so do we, which is why we work so hard to assist with their success.

As we look to the rest of the year, we now expect full-year 2017 revenue in the range of $656 to 658 million and adjusted operating loss in the range of $1.5 to 3.5 million. This means that for the fourth quarter, we expect revenue in the range of $206 to 208 million and an adjusted operating profit in the range of $2 to 4 million. We expect stock-based compensation will be $54 million for the full year, which puts $16.5 million of this in the fourth quarter.

While we will wait for February to comment on our 2018 outlook, I will take this opportunity to remind investors of the following: As we continue to grow Merchant Solutions revenue, we will see a larger impact of seasonality in Q1 versus Q4 results. Although foreign exchange has a minimal impact on revenue, it can have a significant impact on operating expenses, of which approximately 50% are in Canadian dollars. And, although we have clearly demonstrated our ability to achieve adjusted operating profit, our focus continues to be on growth. Said another way, given both the growing opportunity set and our long-term focus, we will continue to prioritize adding merchants to the platform and rapidly increasing its capabilities. And, with that, I'll turn it back over to Katie to start the Q&A.

Questions and Answers:

Kathryn Keita -- Director of Investor Relations

Thank you, Russ. We have about 40 minutes for questions this morning, and a lot of people in queue, so I would ask that you limit yourself to just one question, please. Virgil, can we start pulling for questions, please?

Operator

Certainly. As a reminder, if you would like to ask a question, press star, then the number 1 on your telephone keypad. Your first question comes from Ken Wong from Citigroup. Please go ahead.

Ken Wong -- Citi Investment Research -- Analyst

Hi, Toby and Harley. Thank you guys for clarifying investment information about your partner channels. Can you maybe elaborate a little bit on just maybe what kind of mix you see from those various channels, and then, any changes that you guys might be thinking about implementing in terms of how you guys approve partners?

Harley Finkelstein -- Chief Operating Officer

I'll take that question. When we talk about the thousands of partners that referred us merchants over the last 12 months, the majority of those partners are value-added partners, meaning these are people that are doing services for merchants. So, they may be setting up their stores, building a custom app, and maybe helping with things like product photography or even doing some SEO optimization for those partners. That is the majority of the partners that we see come in.

In terms of the affiliate partners, that is a fairly strict process. In fact, I think there was an analyst that wrote a post a couple days ago or a couple weeks ago about trying to become an affiliate partner and being rejected. The reason for that is because every single affiliate partner that we bring onto the platform has to be fully vetted, and once we agree that there's someone that could refer business to us, they have to comply and agree to our partner terms, which specify all FTC regulations. So, as I mentioned in my prepared remarks, our partners in generally typically bring us merchants that may not otherwise know about Shopify, and that gives us a great advantage.

Kathryn Keita -- Director of Investor Relations

Thank you. Next question, please.

Operator

Your next question comes from the line of Richard Davis from Canaccord. Please go ahead.

Richard Davis -- Canaccord Genuity -- Managing Director

Hey, thanks. Just real quick -- so, I noticed you guys launched -- and, you kind of touched on this -- the marketing analytics tools that actually look pretty slick with regard to attribution. I didn't see...it didn't look like this was an add-on in terms of cost. So, the question is is it free, and more broadly, how do think about adding features -- some free, some not? I also saw that KIT is now free. We've seen this with -- HubSpot has done a pretty good job of titrating free stuff and not-free stuff to improve onramps and retention. So, broadly, how do you think about these things? Thanks.

Tobias Lutke -- Chief Executive Officer

I think one thing that's so unique about Shopify is our ability to ride alongside the success of our customers. It's superior to probably most other places in this space. So, we go through an entire -- a big decision-making process every time we are rolling out something new, figuring out in which plans does it fit and so on. But, the things we rolled out here -- people need to know where their traffic comes from because it allows them to direct their better direct their marketing spend afterwards and make their business more successful. These activities are our prime objective with Shopify, so it's included in all plans, analytics, and general data work. That's the kind of thing that really makes people more successful, more sophisticated. So, we give that away.

Richard Davis -- Canaccord Genuity -- Managing Director

Great, thank you.

Kathryn Keita -- Director of Investor Relations

Thank you, Richard.

Operator

Your next question comes from Nikhil Thadani from Mackie Research Capital. Please go ahead.

Nikhil Thadani -- Mackie Research Capital -- Analyst

Great. Thanks, guys. I just wanted to clarify if you've had any conversations or discussions with the FTC in the past three weeks or so since the short report and if so, if you could maybe just give us a quick update on that. Thanks.

Tobias Lutke -- Chief Executive Officer

We did not. We have not been contacted by the FTC and had contact with someone on this matter. If there would be anything material, this would have been part of our disclosure, so, nothing to report.

Kathryn Keita -- Director of Investor Relations

Thanks, Nikhil. Next question, please.

Operator

Your next question comes from Colin Sebastian from Robert Baird. Please go ahead.

Colin Sebastian -- Robert W. Baird -- Managing Director

Great, thank you. My question is related to integration with marketplaces -- first, with respect to Instagram, in terms of any early reception to that channel, or any commentary on volumes. And then, more broadly, many of us think about these as incremental sales channels for your clients, but I wonder if the reverse is also true, meaning that you're seeing new customer volume coming to Shopify specifically as a result of the integration, and perhaps, merchants that want to diversify away from the large-scale platforms. Thank you.

Tobias Lutke -- Chief Executive Officer

There's a lot of angles to this. So, "yes" is the quick answer. People come from our existing customer base. We want people to be able to sell through every app, for every icon on their phone's home screen. I've said this before, but Instagram is on almost everyone's home screen, so now, merchants can sell through that. And, by the way, the Instagram experience specifically is fantastic. It's a really great channel. We do have people come sign up for Shopify for the first time because they might actually have run a business on Instagram. Especially in some countries, this is a very common form of e-commerce, so that's really good.

And, in some cases, this works across the entire spectrum of Shopify, so it's not just new businesses being launched that are Instagram-focused. Often, it's actually potentially a new Plus customer that we pick up because even though they have an existing e-commerce system, they sign up for Shopify just to be able to take advantage of one or many of our channels, which their current systems don't offer. And, of course, this gives great potential for land and expand. So, this strategy of multichannel platform has been very strong.

Kathryn Keita -- Director of Investor Relations

Thanks, Colin. Next question, please.

Operator

Your next question comes from Jonathan Kees from Summit Redstone. Please go ahead.

Jonathan Kees -- Summit Redstone -- Managing Director

Great. Thank you for taking my question. That was great for addressing those claims head-on. That was very much needed. If I can just add to that -- just continued disclosure of the merchant account, or more information disclosure of the revenue mix of how you get your revenues between partners versus organic, for example. And then, within the partners, you talked about the affiliates, how much they are versus the rest. That's always helpful.

My question is for the claims that you see on social media, are you looking to police some of them, making sure that they are affiliates, that they are certified with you, and if they're not, kicking them out, or at least not associating themselves with Shopify? Thank you.

Harley Finkelstein -- Chief Operating Officer

I'll take that question. So, just to be clear, some of the allegations about these so-called affiliates of ours -- some of them are not even selling on Shopify. In some cases, they're selling at their own course where they're teaching things like digital advertising or digital commerce, and Shopify happens to be a piece of that course. So, in some cases, they're not even affiliates of ours. In other cases, the ones that actually are affiliates -- these are people that have been vetted, and we have a team of people, as I mentioned, that manually approve these affiliates, and those that don't comply, we simply kick out of the program. We're consistently monitoring this. We have a team of people here who are focused on ensuring that our affiliate quality is always very, very high. So, just to be clear, some of those are simply not even Shopify affiliates that were alluded to.

Kathryn Keita -- Director of Investor Relations

Great. Thanks, Jonathan.

Jonathan Kees -- Summit Redstone -- Managing Director

Great. Thank you.

Operator

Your next question comes from Monika Garg from KeyBank. Please go ahead.

Monika Garg -- KeyBank Capital Markets -- Analyst

Hi. Thanks for taking my question. I have a question on shipping. Currently, you have shipping in the U.S. and Canada. You announced DHL. Maybe talk about what are your attach rates, and where attach rates could go forward in these geographies, and also, when do you look to announce shipping partners in other geographies like U.K. or Australia? Thank you.

Russ Jones -- Chief Financial Officer

I'll take that one. As we've said before, shipping is another big pain point for merchants, so it's an area that we're really focused on to help them get to the point, like with payments, where they just don't have to think about things -- the shipping side of it. To date, our focus has really been North America. We've been adding new carriers to that; we've been adding new capabilities. The most recent one was DHL also allows the U.S. merchants to more cost-effectively sell internationally, so that's really been the focus. Similar to payments, we do see other geographies as a potential for shipping, but that's a later activity for us.

In terms of the other piece, we continue to see the number of merchants using shipping in both Canada and the U.S. increase. Roughly 30% of our U.S. merchants -- where we have the addressable side of it -- are using Shopify Shipping, and in Canada, that's roughly 20%.

Monika Garg -- KeyBank Capital Markets -- Analyst

Thank you.

Kathryn Keita -- Director of Investor Relations

Thanks, Monika.

Operator

Your next question comes from Jesse Hulsing from Goldman Sachs. Please go ahead.

Jesse Hulsing -- Goldman Sachs -- Vice President/Analyst

Thank you. I wanted to follow up, Russ, on your comment about GPV percentage, and that ticking down due to international mix. First, can you remind us of your plans for payments rollouts internationally? I think that'd be helpful. And also, how do you expect GPV percentage of GMV to trend over the next few quarters? Do you expect it to tick back up, or do you think it'll flatten out around here? Thank you.

Russ Jones -- Chief Financial Officer

It's hard to say, particularly with the holiday period, because you'll also see some larger Plus merchants that use their own payment system also have a bigger impact in the 4th quarter, for example. But, we continue to have success internationally, and so, that is one of the factors. We also see an increase in non-credit card activities on the platform as well, and so, that -- because we're primarily doing credit card processing on payments -- is a factor in place. Just to add a little bit more color -- if you actually take it to the decimal place, in Q2, it was 37.6%, and in Q3, it was 37.3%, so when you round it, it looks like a bigger delta than it actually is.

In terms of our plans, we've pretty well covered our current core geographies with payments. We just recently announced adding Singapore, so you'll see us continue to add new regions over the next 12 to 18 months as well. So, continuing on the path that we've been on.

Jesse Hulsing -- Goldman Sachs -- Vice President/Analyst

Thanks, Russ.

Kathryn Keita -- Director of Investor Relations

Thank you, Jesse.

Operator

Your next question comes from the line of Richard Tse from National Bank Financial. Please go ahead.

Richard Tse -- National Bank Financial -- Managing Director/Analyst

Yes, thanks. You talked about Q3 being potentially an investment period. I read that to mean that there might be some pressure in the quarter on margins, but the margins seem to be picking up, so should we take that to mean that the investment wasn't as big as expected, or that the operating leverages contained a pickup here?

Russ Jones -- Chief Financial Officer

It's probably more the latter that we are...not only seeing the operating leverage on expenses but in terms of the impact of some of our higher-margin businesses, like Shipping and Capital -- even some of the transaction fees I talked about contributing there. On the subscription side, we're still in the process of testing out the cloud as part of our offering there, and so, there is a bit of timing there where we've been able to reduce a little bit of the capital in terms of services that we need in our data centers. So, there is sort of an impact of that sort of rollout. This year is very much a hybrid approach, so we do see some duplications in the short term.

Kathryn Keita -- Director of Investor Relations

Thank you, Richard.

Operator

Your next question comes from Michael Nemeroff from Credit Suisse. Please go ahead.

Michael Nemeroff -- Credit Suisse -- Analyst

Thanks for taking my question. It looks like when I strip out Plus, the MRR from the core business actually accelerated, so really not a question there. But, on the Plus side, given side the value prop that you guys were offering, particularly for the larger established brands, do you expect to increase the economics? I know you charge a fee -- 25 BPS over $10 million. Any thought to changing that? Also, Harley, if you maybe could -- I think you've given us an update on the Plus customer count in the past, and also, the mix of the Plus merchants -- the percent of them coming from net new versus homegrown. And then, lastly, on the Plus sales force, maybe you can tell us the size of that, so we can evaluate whether that growth in Plus MRR can remain above 100 percent for a longer period of time. Thanks.

Harley Finkelstein -- Chief Operating Officer

I'll take that question. So, in terms of the pricing, which we announced earlier this year, the real reason for that is we want to set ourselves up for the future. So, by providing that 25 basis points, it means that as merchants grow really large on the platform, we actually do share in that success, so that's the reason why we made that change. So, I don't expect that we'll change the pricing again anytime soon, but that's because I think we're set up really well for that.

In terms of the split between upgrades versus net new, the majority of new Plus merchants for the quarter were net new to the platform, and that's not too surprising. Our sales team is really ramping up. But also, most of the merchants that are on the platform that should have been on Plus have upgraded, too, and really, the focus is on net new to the platform, so you should continue to see that in the future.

And then, finally, in terms of the sales force -- our sales hackers -- there are now dozens of them, and we continue to build on that. As you may have heard in my prepared remarks, we are also expanding our presence in Waterloo to accommodate more sales hackers and more R&D folks focused on Shopify Plus, so it's a really exciting piece of our business.

Kathryn Keita -- Director of Investor Relations

Great. Thank you, Michael.

Operator

Your next question comes from Gus Papageorgiou from Macquarie. Please go ahead.

Gus Papageorgiou -- Macquarie Capital Partners -- Associate Research Director

Thanks for taking my question. Russ, on the merchant solutions, looking at gross margins, they've expanded over 100 basis points year over year. Can you just dive into that a little more... break it down for us? Is Shopify Payments now more profitable than it was a year ago? And then, just -- could you give us a sense of capital and shipping, how material it is now? Any sort of detail you can give on that would be appreciated.

Russ Jones -- Chief Financial Officer

Sure, happy to answer that. In terms of capital and shipping, from a revenue point of view -- because we record both on a net revenue basis -- a little less impact than, certainly, our payments business, but because the margin is more in line with subscription-type margins, again, it's definitely a great tailwind to the margins on the merchant solutions piece. In terms of payments, we have seen improvements, and our agreements that we have in place around payments means that as our volume continues to increase we do get more favorable rates there. Also, as I've said, in the past, international -- we do achieve a higher margin than on the North American side, so all of those together is what you're seeing on the merchant solutions.

Now, when you're thinking about Q4, the thing you should remember is, again, a lot of the holiday Black Friday/Cyber Monday activities are a little bit more North American-focused, where margins on payments are a little bit lower. And so, we do see margins coming down in Q4, which will be offset by improved operating leverage -- so, net-net is why we still think, as a percentage, you'll see that adjusted operating percentage improve in Q4.

Gus Papageorgiou -- Macquarie Capital Partners -- Associate Research Director

Sorry, are you suggesting margins on payments will come down in Q4, or in Merchant Solutions in general?

Russ Jones -- Chief Financial Officer

I'm saying Merchant Solutions in general, just because of the weighting toward North American payments.

Gus Papageorgiou -- Macquarie Capital Partners -- Associate Research Director

Great, thank you.

Kathryn Keita -- Director of Investor Relations

Thank you, Gus.

Operator

Your next question comes from Brian Essex from Morgan Stanley. Please go ahead.

Brian Essex -- Morgan Stanley -- Analyst

Hi. Good morning, and thank you for taking my question. Russ, one for you: In terms of the CFO search, any updates there in terms of what you guys are looking for? And, as you make your travel plans for the future, any sense of what timing might look like? And then, any insight into -- with reaching profitability a quarter sooner than expected, what the trajectory of that profitability might look like going forward?

Tobias Lutke -- Chief Executive Officer

I'll just quickly jump on the CFO because it's not actually Russ doing it.

Brian Essex -- Morgan Stanley -- Analyst

Good point.

Tobias Lutke -- Chief Executive Officer

I kicked this off on the last quarterly call. Since then, a lot has happened. Amazing people have put up their hands. We're meeting great candidates. I think this is as good as anything -- any obvious search goals. So, everyone's pretty excited, but I have not much else to report, other than that I think this part of the company will remain in really good hands.

Russ Jones -- Chief Financial Officer

And then, Brian, on your second part -- I think as I said in my scripted remarks, our focus is not on profitability. It's still very much on growth. And so, even though we did achieve it a quarter earlier and we do expect a strong Q4 on that front as well, Q1 -- because of the seasonality -- I wouldn't expect us to be back to that level. Again, as we make investment decisions, you'll see a little bit of a more bumpier ride on that number, as we really want to make sure that the revenue growth continues.

Brian Essex -- Morgan Stanley -- Analyst

Got it. That's helpful. Thank you.

Kathryn Keita -- Director of Investor Relations

Thanks, Brian. And, I'll just put out another reminder to please limit yourselves to one question. Next question, please.

Operator

Your next question comes from the line of Justin Furby from William Blair Company. Please go ahead.

Justin Furby -- William Blair -- Analyst

Thanks. I had a question for Toby. Toby, I was looking at Square's GMV trajectory, and it looks like from the time that they hit $15 billion in GMV, it'll take them 4 years to get to $60 billion. You guys did $15 billion last year, and I'm wondering if you think it's fair to compare you guys to Square and suggest that you get to $60 billion of GMV in 2020, or do you think there's opportunity where you can actually surpass their pace, just given the powerful secular trends you guys see? Thanks.

Tobias Lutke -- Chief Executive Officer

Interesting question. I have to admit I haven't looked at Square's financials, so I'm not really familiar with them. I admire the company, and in fact, feel a little bit of kinship with them because they're looking at a similar market segment, and I think are also looking on getting better software into SMBs. So, my relationship to them is on that level. Once we get to the numbers, I think every company is in a process of trying to figure out how to build a business model around their mission, and the way that ends up being reflected in the numbers -- if it correlates somehow, that's kind of a happy coincidence. It's not that I'm setting internal goals, saying, "Hey, everyone, have a look at Square's financial statement and chase that." That would be an awful way of running a company. So, if it ends up looking similar, that's cool, but it would be a complete coincidence.

Justin Furby -- William Blair -- Analyst

Got it. Thank you.

Kathryn Keita -- Director of Investor Relations

Thanks, Justin.

Operator

Your next question comes from Deepak Mathivanan from Barclays. Please go ahead.

Deepak Mathivanan -- Barclays Investment Bank -- Analyst

Hey, guys. Thanks for taking the question. The color on the affiliates and partners was helpful, but maybe more broadly, can you talk about how big that channel is for new customer acquisition? Also, we noticed that recently, you made some changes with the Partner Program 2.0 in terms of the payout structure. Can you talk about feedback on that, and should we expect any benefit or impact to financials from it? Thanks again.

Harley Finkelstein -- Chief Operating Officer

We've always talked about that we get merchants from three different buckets. One is organic, the other is paid-search digital ads, and the third is our partners. The partners remain probably the -- in the third spot. We do get more merchants from organic and our paid advertising. And then, when you look at the partner bucket on its own -- as I mentioned earlier -- the majority of our partners that are referring merchants to us are these agencies and freelancers all over the world where someone goes in and says they need an online store. Usually, by default, they end up putting them onto Shopify. So, that's a little bit of color on that. In terms of the partner payouts, we're always trying to make it that it's easier for our partners to get paid, and more convenient, but certainly, there is no impact to us around that.

One other thing that may be worth mentioning is that a couple quarters ago, we mentioned the introduction of a new partner program around Shopify Plus, and those partners tend to be much larger agencies -- in some cases, with hundreds of employees -- and they're bringing us much larger merchants onto Shopify Plus. So, that's a bit of color on the partner program.

Kathryn Keita -- Director of Investor Relations

Great. Thanks, Deepak. Next question, please.

Operator

Your next question comes from Sam Kemp from Piper Jaffray. Please go ahead.

Sam Kemp -- Piper Jaffray -- Analyst

Great. Thanks for taking my question. I've just got one on the composition of your non-Plus merchants. So, it looks like GMV-per-merchant growth has gone negative this quarter, and then, if you look at MRR per non-Plus subscriber -- so, just isolating it down to those non-Plus subscribers -- that looks like it's been declining for about five or six quarters at this point. Can you just talk about what the factors are driving that? How much of that is the mix shift toward international versus the mix shift within existing geographies toward lower-tier subscriptions, or any other color you can provide there?

Russ Jones -- Chief Financial Officer

Sure, I'll take that one. In terms of the GMV per merchant, averages are always a bit misleading in a fast-growth company like ourselves, but we did see a small tick-down in the quarter there. And, to your point, international is having an impact there. It represents -- so, if I look at international being our non-top-4 geographies, it accounts now for roughly 20% of the merchant count and about 12% of the GMV, and so, these international merchants are newer to the platform, newer to get it up and running, and so, we definitely see a little bit of an impact there. We'd expect that to reverse itself in the fourth quarter.

Sam Kemp -- Piper Jaffray -- Analyst

Great. Thanks for that.

Operator

Your next question comes from Samad Samana from Stephens, Inc. Please go ahead.

Samad Samana -- Stephens, Inc. -- Analyst

Hi. Thanks for taking my question. I wanted to ask about Shopify Plus Partner Program. I think that in your partner conference in April or May, you announced you had about 125 Plus partners. I was curious how big that base is now, and what percentage of your Plus customers are coming from that partner channel. Thanks.

Harley Finkelstein -- Chief Operating Officer

I'll take that question. So, we did announce the Plus Partner Program earlier in the year, and certainly, we invited some of those early Plus partners to our Shopify Unite Conference in San Francisco in an effort to engage and understand them a bit better. The partner program around Plus continues to grow on a daily basis. We're seeing partners that traditionally only referred merchants and worked with merchants on some of the more enterprise platforms that are now really phenomenal partners for us for Shopify Plus, so that continues to grow. We're also finding some of our core Shopify partners that have decided that they want to focus more on Shopify Plus as well, and so, that tends to help, too. So, that continues to grow. It's still -- in terms of our total merchants on Shopify Plus, it isn't the largest driver -- not yet, at least -- but certainly, every quarter, we see more and merchants coming to us from our Plus partners.

Kathryn Keita -- Director of Investor Relations

Great. Thanks, Samad. Next question, please.

Operator

Your next question comes from Thomas Forte from D.A. Davidson. Please go ahead.

Thomas Forte -- D. A. Davidson -- Analyst

Great. Thanks for taking my question. So, you were one of the early adopters in allowing merchants to accept bitcoin for sales on your site. Given the recent appreciation of bitcoin, I was wondering if you're seeing any increase in adoption rates for consumers using bitcoin to pay for products. Thank you.

Tobias Lutke -- Chief Executive Officer

I'll take this. So, yes, we were early adopters. We integrated...I want to say 2012 or something like that -- a little bit before bitcoin generally got into the news. Again, we see our objective here at Shopify to just be ahead of the curve on what our customers might need. Clearly, no one -- at this point -- asked us to integrate bitcoin. But, I see -- one of the many reasons that makes it hard for small businesses to compete with larger ones is a general lack of adaptability. This is not to say that's a shortcoming of the small world. They just have more important things to do than monitor the latest tech trends and try to build against the latest things. So, we want to inoculate our customers from having to pay attention to everything new that's coming. So, we integrate things early. We build proof of concept, we integrate the things that matter into the platform, and that's why we integrated.

In terms of latest numbers -- bitcoin is going up because there's general familiarity. More people are familiar with it. I would say that so far, bitcoin is more used as a -- frankly -- exceptionally volatile stored value rather than a transactional system. There's actually some technical reasons behind bitcoin that I probably can't get into, but a lot of people are thinking about how to solve some of those. In general, it's picking up. I think this bitcoin actually fits into the mosaic of Shopify. Similarly, you might have seen -- we worked on an app recently that's a partner with one of our customers called Magnolia where we integrated Apple's ARKit into their iOS app so that people can just look at the beautiful products that are being sold on Magnolia -- put them into their house, see what they look like to scale, and these kinds of things. It's almost the same thing.

So, bitcoin is super interesting. I personally am a strong believer that the internet will eventually have its own currency or set of currencies for its own internet native form of transferring value around. If it's going to be bitcoin, I can't really say, but we will strongly support other kinds of potential ways of transacting, and...this is what we do.

Thomas Forte -- D. A. Davidson -- Analyst

Great, thank you.

Kathryn Keita -- Director of Investor Relations

Thanks, Tom.

Operator

Your next question comes from Ross MacMillan from RBC. Please go ahead.

Ross McMillan -- RBC Capital Markets -- Analyst

Thanks so much for taking my question. Ross, we're just about to enter into the seasonally strong GMV period, and the Plus pricing changes started to flow through in Q3. I'm just wondering if you could remind us approximately of how that GMV basis for the Plus merchants maybe is a percentage of total. And then, for Harley, just on the DHL shipping relationship, did you use a third party to help with the onramp and integration, or was that something you did independently? I know you've used some third parties historically for USPS and Canada Post. Thank you.

Russ Jones -- Chief Financial Officer

I'll take the first part of that. I can also answer the second part, but I'll let Harley do that. So, in terms of GMV, our Advanced and our Plus merchants account for over 50 percent of the GMV, so with the new pricing in place in advance of this holiday period, we expect that to be a good tailwind for what the quarter will look like and how we modeled our guidance on that.

Harley Finkelstein -- Chief Operating Officer

On the DHL Express integration -- so, we worked directly with DHL on that, and one of the reasons that we were especially excited about this particular one is that more than 10% of the millions of packages that are sent every month by Shopify merchants are actually sent internationally, so DHL Express opens up some incredible shipping opportunities for the merchants that they traditionally may not have had.

Ross McMillan -- RBC Capital Markets -- Analyst

Great, thank you.

Operator

Your next question comes from Kevin Krishnaratne from Paradigm Capital. Please go ahead.

Kevin Krishnaratne -- Paradigm Capital -- Analyst

Good morning. Just a question on the subscription revenue growth and transit acceleration there, along with your record ads and Plus stores being added -- just wondering if I could get any comment on any differences on the seasonal retail push versus last year, meaning did you see any merchants adding more apps and themes in advance of the Q4 period? Any differences there, or do we think that you're still going to see some upside related to that retail activity to come in Q4? Just wondering if there was any kind of pulling in from what you'd expect -- what you typically would see from Q4 into Q3.

Russ Jones -- Chief Financial Officer

Nothing really in terms of stuff being pulled in. Again, we just have more merchants that have come to us directly who are also telling their friends, and we continue to invest wisely on the paid advertising, and I think we've talked with a number of points on the partner stuff -- so, all of that. In terms of the growth in apps and themes, we continue to see a steady climb there, so, again, not expecting any sort of big movement one way or the other.

Kevin Krishnaratne -- Paradigm Capital -- Analyst

Thank you.

Kathryn Keita -- Director of Investor Relations

Thanks, Kevin.

Operator

Your next question comes from James Cakmak from Monness, Crespi, Hardt. Please go ahead.

James Cakmak -- Monness, Crespi, Hardt

Hi, thanks. Could you just give an update on your offline efforts -- the card reader -- and the degree of prioritization there? And then, just real quickly, with the additional cash on the balance sheet, just how you're...how does it change your thinking on MNA and the size and scope of it? Thanks.

Russ Jones -- Chief Financial Officer

In terms of the cash, nothing really new to report on that. We really were looking to get some flexibility there, which we have, but nothing imminent on that side. In terms of the card reader stuff, it's a pretty attractive offering that we've rolled out there. We expect to continue to invest in this area. Our point-of-sale channel is our second biggest channel next to the online store, so it is really an important focus for us.

Kathryn Keita -- Director of Investor Relations

Thanks, James. Next question, please.

Operator

Your next question is from Brian Peterson from Raymond James. Please go ahead.

Brian Peterson -- Raymond James -- Analyst

Thanks for taking the question, and I appreciate the color on eliminating some of the noise out there on the market. From my end, I just want to understand some of these new marketplaces and partnerships that you guys have announced. If I think about your Shopify Plus customer base, how are they addressing those opportunities today? Do you see that mostly as green field, or do they not have sophisticated strategies for those markets? Just curious how we should think about that. Thanks.

Tobias Lutke -- Chief Executive Officer

It's a case-by-case. If you talk with the existing merchants...non-consumption is No. 1. It's a weird term to use, but... Most just don't use it. Most just make their own pay-per-posts or something like this. They don't use an integration or automated system behind it. Almost every business is on Instagram, but they don't necessarily annotate their posts with the various products that are in it so that you can buy them right there.

So, a lot of this is new, and for ones who have existing systems, they're often in an even more crazy state where they have every one of these channels there actually adopted and used like a different -- either a point solution or the built-in system like eBay Seller Central to sell their surplus things. This is sort of local, but it creates a lot of internal complexity because once you sell on multiple channels with a non-integrated system, now you have inventory problems. You have to think that a product might double-sell overnight in these kinds of situations, so then, people do bucket a location of inventory, which means that they sell out before they actually sell out. Essentially, life gets significantly better once all these channels get integrated, and this is one of the reasons why we actually have seen adoption of Shopify minus the online store in the Plus world.

Brian Peterson -- Raymond James -- Analyst

Great. Thanks, Toby.

Kathryn Keita -- Director of Investor Relations

Thanks, Brian. Next question, please.

Operator

Your next question comes from Darren Aftahi from ROTH Capital Partners. Please go ahead.

Darren Aftahi -- ROTH Capital Partners -- Analyst

Hey, guys. Thanks for taking my questions. Could you talk to the growth acceleration we saw in Plus MRR? And, I believe that's 20% in the quarter of total MMR. Just curious, as a derivative, where you see that as a percentage of MRR long-term. Thanks.

Harley Finkelstein -- Chief Operating Officer

Yeah, I don't think we have a set target. It continues to grow. It went from 18% in Q1 up to the 20% last year quarter. The same quarter in 2016, it was 15%. So, we just think -- again, as we continue to have success there, and the fact that the price point is higher, that'll drive up our MRR.

Kathryn Keita -- Director of Investor Relations

Great, thanks, Darren.

Operator

And, this does conclude today's conference call. Thank you for your participation. You may now disconnect.

Duration: 59 minutes

Call participants:

Tobias Lutke -- Chief Executive Officer

Harley Finkelstein -- Chief Operating Officer

Russ Jones -- Chief Financial Officer

Kathryn Keita -- Director of Investor Relations

Ken Wong -- Citi Investment Research -- Analyst

Richard Davis -- Canaccord Genuity -- Managing Director

Nikhil Thadani -- Mackie Research Capital -- Analyst

Colin Sebastian -- Robert W. Baird -- Managing Director

Jonathan Kees -- Summit Redstone -- Managing Director

Monika Garg -- KeyBank Capital Markets -- Analyst

Jesse Hulsing -- Goldman Sachs -- Vice President/Analyst

Richard Tse -- National Bank Financial -- Managing Director/Analyst

Michael Nemeroff -- Credit Suisse -- Analyst

Gus Papageorgiou -- Macquarie Capital Partners -- Associate Research Director

Brian Essex -- Morgan Stanley -- Analyst

Justin Furby -- William Blair -- Analyst

Deepak Mathivanan -- Barclays Investment Bank -- Analyst

Sam Kemp -- Piper Jaffray -- Analyst

Samad Samana -- Stephens, Inc. -- Analyst

Thomas Forte -- D. A. Davidson -- Analyst

Ross McMillan -- RBC Capital Markets -- Analyst

Kevin Krishnaratne -- Paradigm Capital -- Analyst

James Cakmak -- Monness, Crespi, Hardt

Brian Peterson -- Raymond James -- Analyst

Darren Aftahi -- ROTH Capital Partners -- Analyst

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