Shopify Inc. (NYSE:SHOP) Piper Sandler’s Digital Awakening Day November 10, 2020 1:00 PM ET

Company Participants

Katie Keita – IR

Conference Call Participants

Brent Bracelin – Piper Sandler

Brent Bracelin

Good morning or good afternoon, depending on where you are at. Want to really welcome Katie at Shopify for next session around the Digital Awakening. Katie joined in 2015. We’ve worked together and your entire career, it’s great to working with you again and thank you so much for joining us on the call today.

Katie Keita

It’s my pleasure, Brent. Thanks for having me. I think [indiscernible] last kind of Investor Day they had before, we all went into lockdown. So this feels appropriate.

Question-and-Answer Session

Q – Brent Bracelin

I do remember that, we were having a conversation about this all or what could potentially happen and that was actually the last plane I was on in 2020. So interesting year to say the least. So listen, I think the goal of this discussion is really to kind of dive down into three areas and this is going to be an interactive event. I really appreciate any investors that have questions, lobbying in. We’re trying to group the questions around kind of three different areas and I think that’s what makes the most amount of sense and again, we’ll make this interactive.

So let me start out here as we just think about the opportunity for Shopify, can you frame when you say retain operating system, what’s the scope of that? It’s kind of a generic, it has potentially encompassing all encompassing capabilities, but just when you think about the opportunity around the retail operating system, what does it encompass today? Every day you add more features, so?

Katie Keita

Probably the best place to start when you think about that is kind of the whole supply chain of a transaction and I am not saying that we’re going to get into manufacturing things, but when you do think about the manufacture of a good and everything it takes to get it to a retail outlet and then what it takes for that retail outlets and find its way to a buyer who then consumes it and then actually has to dispose of it in some way, so just think very systems like around the whole circle there that accompanies commerce and so think of it in that framework of the last 150 years how you were Geo [ph] limited as a buyer to whatever anyone made available to you and this is since the dawn of humankind, this is the way the world has worked.

And the big shifts now not a shocker here is that the data itself can travel. There is not a need to ship goods to a certain place to go sit and wait and find buyer. You don’t really have nearly as many unknowns as before when it comes to the whole distribution of goods to the world. So when you think about it really big picture like that, that’s important because that’s exactly what happens to the world. Everything’s being digitized, however the systems in place for commerce are still very manual and there is still very physical because we’re talking about the delivery of physical goods to people and it’s a bit of a shift of those physical goods kind of becoming digital goods. This is really appearance and rounds like design and fashion and there’s a whole bunch of our — we’ve seen it in photography with a lot of companies that have been successful with a completely new approach.

So there is really basically, when we think and talk about a commerce operating system, it is sort of a trigger to get people thinking about that entire cycle that has to do with commerce because there is — it’s no secret that there is a heck of a lot of modernization that still has to happen in that whole grand scheme of things and that is what Shopify is building out.

Now I joined Shopify before we went public and I remember the conversations about the TAM and when you’re introducing yourself to a whole brand-new audience that never heard of you, Canadian company, tiny. I was employee 725 and you need a TAM slide, you need to show people how much headroom you had and we got so much resistance from execs on that because their vision and building out a 100-year company is it goes so much beyond what this conventional wisdom would tell you, this is your market, it’s just people who are selling goods online today and stuff there, because I think that neglects to acknowledge that you are kind of building the market in a lot of ways, because you’re making it so much easier for people to come online and start selling. So that means you’re also creating the market at the same time.

So when we talk about a commerce operating system, we are also talking about not just the multichannel retail and all of the functionality that we built into the platform from order management, inventory management and apps, the payments, the capital, it’s not just all of that. It’s also that entire chain of command that the pallets of parcel transition and that server systems is helping with and all the way through to the delivery. So that is sort of like the scope of our imagination, but we only get 24 hours in a day and there’s only so many people who are really good at writing software.

So we’re limited, we’re limited in other ways, but I’d tell you like to do list could go up many, many years into the future and there’s a lot of building that needs to be done.

Brent Bracelin

And maybe narrow, so you have a lot of scope relative to where you can go. Is there bounce? Are there boundaries what you do and what you don’t do and is that defined by what you can like write in software and so it’s going to be more software-centric and then everything that is not software-centric like you get a lot of questions around what the balance of what you’re going after because there are a lot of problems. There’s a lot of challenges and I think SFN is one of those that people are trying to understand what’s the balance of what you do in these areas?

So walk through just at a high level what’s the bounce and the NordStar [ph] that is going to guide? What you do and what you don’t do solving that commerce problem?

Katie Keita

That is a question that gets answered in terms of time like what are you going to do when because if you are going to paint this picture of that the world is sort of your oyster, you can’t do all of that today. So we’ve operated under a sort of a matrix-like what makes sense to do today like what it is closest and what can you be good at, which most merchants need most of the time and 8020 rule and then everything else, let’s share that with partners. They are going to be better in a lot of this stuff than we would be anyway. So it really makes it kind of sense to help them create value and then that also is helping with our flywheel.

So for Shopify today here and now, we have a pretty clear picture of what we consider to be kind of core stuff making money on it. We’re really good at it. We’re doing it now. This is sort of our platform, this is Shopify plus. A lot of the merchant services are in that bucket because we have at least a few years history of doing those and doing those well and so then it’s okay when we look at our roadmap and we look out in front of us, we have this next kind of slim lane if you will sort of just expansion, how are you expanding.

Point-of-sale we just launched sort of the all new point-of-sale, which is a lot more representative of what we can do on the technology side, but as a software company,, this is our first foray into hardware and getting that out there and getting this is a perfect year to do that, given that switch that everybody had to make, they didn’t have a choice in international. So we’ve gotten our feet wet with international starting in 2017, translating blocks and translating the admin. We’re now in 20 languages and the ad man we have payments available in 17 countries across the globe.

So localizing is hugely important to making it really work for merchants in whatever country they are and then you’ve got finally at the end this whole ambition bucket where Shopify Fulfillment network lives today 6 River Systems is in that bucket and Shop App is one. So if you think about all of the possibilities available to Shopify today, think about it in terms of like timeline and scope. So if you will, could you do accounting or could you do marketing and the way we think about it is, whatever it’s going to help merchants, most merchants most of the time on Shopify i.e. purveyors of goods, we don’t optimize for services or even for restaurants.

So most of them are going to need it most of the time and can we be like a decent enough at it that it’s going to add value relative to what we could get today in the App store. So a good example of that would be Shopify email. Plenty of email apps in the app store because we need to do marketing. Well, we’re going to do parts of marketing that are going to help a lot of people especially the starter merchants and that’s exactly what our email does right. So if you’ve never done email marketing, you’re probably going to underrate in terms of effectiveness and so here, try it, see if you like it, this is a good way to develop that relationship with buyers who are using — who like you already and to come back to them.

And then some fancier bells and whistles, more sophisticated tools also doing email that remain in the app store that we will leave and look the envelope is always being pushed forward either by us or more often by partners and so there’s always going to be room to add value because that is a pretty limitless circle of opportunities and new ones are being invented all the time, right. We do have augmented reality things that we’re working on, but it’s a pretty small team compared to what there is out in the world. The best ideas come from everywhere and I think our approach to this acknowledges that, let the best ideas come in and we kind of take them in and make them available to merchants in a way that is going to pay off. It’s quick enough of them as needs be, so they can feel confident and move forward and growth their business.

Brent Bracelin

Got a great list of investor questions keeping come in, I want to just close out this broader discussion with two things; one monetization of that opportunity, you have this merchants solutions business, it’s very fast-growing. As you go and expand the scope, is it the right way to think where the bias is to monetize the emergent solutions and kind of success based business model, we’re seeing more of the cloud companies move to transactional consumption usage based model. Is that the right way to think about how you’re thinking about modulation or do you look at all of these products and say well this one we’re going to monetize via subscription and this one we’re going to monetize via merchant solutions? Just trying to understand the monetization appetite between software or more of a success based fee.

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Katie Keita

Well, far more of a bias on the success basis of it that’s always been the way we’ve rolled. We’ve had the $29 platform in place at that price for at least the last six years and even going before that, but do you know if you were to look at Shopify today, it is world of difference, it’s crazy. This is got to be some like the best value in software and who knows how long. It’s still $29 yet it does so much more than it ever did before. So that right there is great evidence that we’re really keen on keeping that value proposition squarely and solidly in place. We know well that disruption almost always if not always comes from below.

So having that available as a starter package for merchants is really important and then the other, the monetization of all of these pieces of value that you have the optimality to build into your platform keeps it square in the merchants mines. So when money comes out that they’re paying for, then they understand the value that they’re getting and that matching of value proposition is really important.

When you look at our point-of-sale software like before if you were on $79 plan, that was kind of built-in and now we’ve started charging for it. So that’s a good example of what a lot of people in a lot of time and money and resources went into making these features available to you and so now we’re charging for it. So yes, the bias is still to charge on the merchant solutions line because it’s also the more flexible way to do it.

When you have over million merchants on a platform and some of them are like way up here and they’re massive enterprises selling tons of stuff on a basis and then you’ve got — a friend of mine started this on Shopify four months ago and is actually doing okay. You’ve got both of those users of the same software, the needs are going to be really different. So you need to be able to opt into the need that’s important to you and your success as a merchant should help cover the cost of that. We kind of think about it that way too. You need to support the cost of ongoing developments and continuing to innovate and so when we charge for things that’s what’s it’s covering.

Brent Bracelin

Got it. Let’s shift gears. We’ve got a backlog of investor questions, maybe we’ll kind of piece off of these as we kind of pivot now to kind of a new segment. Getting a lot of questions just around the social commerce opportunity, obviously you announced new your relationships with WhatApp, TikTok, YouTube, Instagram, there’s a question here from a client, how do you view commerce opportunity and how differentiated is it as a channel versus appears like commerce.

Katie Keita

Well, I think everybody is trying to do this because everybody recognizes that merchants need to meet their customers for ever they are, wherever conversations are happening or ever you’re feeling inspired and you really just need to have it, that’s where it should be available and so everybody has spending lots more time in apps and we recognize this years and years ago, which is why we started building it.

So I think it’s a differentiator even though everybody else is trying to get there for a couple of reasons. One is if you’re a merchant like let’s talk about that 13-year-old I told you about, he’s going to be an completely different prices talking to people about the gamer glasses that we sell than this snickers bars that were made available to healthcare workers are doing it somehow different.

So my point is you’re going to use different Facebook is kind of like old school for Maxis Group but for Snickers and these groups that makes a ton of sense. So you need to have the different ones available and then for the merchant standpoint, they need to be able to see that converged sort of dashboard of what’s doing well, where and it has to be really easy not just to have the transaction happen because that’s relatively new, where does the checkout happen, but just because in all of these crises.

So when we talk about rehab and integration with Facebook, with Amazon, with eBay, with Fintree [ph], some of those have different checkouts in different places. So we’ve been doing work on this for a long time. We made our software development kit available to people ages ago. Walmart used it to build their channel, so people could because Max isn’t going to go list its gamer glasses on Walmart. There Walmart has put in place hurdles that you need to achieve before they let you list in their marketplace because it’s their check, you become — the buyers are kind of their customer at that point.

So having gotten ahead of that and built out the software and the APIs and things that make it easy for all of these channels to build that is huge, that’s hugely important because like I said, we can’t be all things to all people, but we can make the platform available in a way that they can build what they need and so this goes for partners as well and I am not sure that that’s the approach. It’s certainly isn’t — they certainly — the others in that competitive landscape haven’t spent this amount of time solving these problems before. I think I told you I came on and I wanted to reach out to various people in Shopify, so Satish Tanwar who I think maybe some of the people on the call had met before it feels really strongly about this because he was the one overseeing the channel strategy ever since I joined.

And so how important of a differentiator is it. It’s pretty important. Merchants are going to choose it because they want to be where their customers are Shopify is kind of known for this and so not only can they get to the channel that they need because we’ve made it available but they can get to all the other things that we’ve made available right. They can have payments up and running really easily, they have shipping labels ready to go. They’ve got all the other parts of the platform. So it’s important to look at all of these things together and not just what channels you have and because a merchant is going to choose on the basis of more than just the channel availability.

Brent Bracelin

It totally makes sense and its helpful. I guess my question is, is it incremental? Is it driving incremental revenue for some of your merchants or is it just providing more flexibility where I was going to buy the product, I was going to buy the gamer glasses anyway and that’s just a little bit easier for me in reducing friction. Is it too early to tell if it’s incremental driver by having Walmart and Facebook for your merchants or how hard it’s today?

Katie Keita

I don’t think it’s hard to say at all. I mean this multichannel approach has been our approach for years and we’ve done really well with it and we’ve attracted a lot of merchants because of it. So you ask that question from two standpoints. One was the merchants obviously come because they want to interact with their customers and when you’re not just a third-party stocker of for Amazon and you’re building your own business, your number one challenge is discovery and so you’re going to try to do everything you can to get discovered wherever you can to be in those places of the conversations are happening. So that’s a massive value add.

On the checkout side, it probably makes more sense for more — for certain items and for others right where the checkout happens because the checkouts, Shop Pay is a great example. If I click through an ad and go to a store and my Shop Pay is up and running, that’s a pretty frictionless check out, but if you’re on Facebook and there is a buying out button and you know exactly what you want, it’s not your first discovery with that merchant then you might just go ahead and click it.

So different things for different people, but I think it’s pretty — I think it’s — I don’t think there’s any question that multichannel is pretty important to merchants and that’s how they’re finding their buyers. So from a buyer standpoint, I don’t know how much they care where the checkout happens. I think it really does depend on what they’re buying.

Brent Bracelin

Makes sense. Another question from a client, stem from this review of what you want to do and the scope of this is big and this has more to do with the strike as you think about the long-term ambition there, good partners of your today, how are you thinking about that payment infrastructure, how has it evolved, how the partnerships evolve over time? You have a new pay functionality, buy now pay later through other partners. So how do you just think about that commerce payment partnership and why partner today and will that be the case in five years, ten years, just walk us through that?

Katie Keita

High alignment I think culturally and sort of philosophically between Shopify and Stripe on just make, why is the world still set up this way when we have all the tools available to make everybody’s life so much easier and more livable and just make value go where it’s meant to go as opposed the incumbent infrastructure that rents keep if you will.

So I think that alignment has served us so well over the years and as far as credit card processing goes, it’s been a phenomenal partnership and we’ve worked very well to go for a long time, but it’s important to recognize you’ve brought up the firm partnership that there’s all kinds of other ways to pay for things now and people are leaning in on this and they’re leaning in on it hard. Before the partnership with the firm, we had seen there were lots of merchants taking advantage of these tools to allow installments to happen on their platform especially the ones that were selling bigger ticket items.

So that was a pretty natural partnership to go with really best-of-breed company that opts for huge transparency, no hidden costs. So that made a lot of sense for us and to the degree that we can continue moving on moving further than we will, but I think both parties understand there’s going to be room for other things, a firm is one, some of those local payment methods that we call out especially in Europe where people are using a different ACH debit type way of paying where a stripe doesn’t work as well and stripe is on another partner there, they’re also in the mix on the Shopify payment side of things.

So that partnership is working really well, first set of tight payments and then there is going to be other ones coming down the road as you’ll see. We talked I think, earlier this year, we announced Shopify Balance, so that’s another when you think about value, exchange and transitions that’s another way that merchants can be delivered even more value because they’ve got a balance already because they had a great sales month, they had a flat sale or whenever and they have cash already on hand, they should be able to have access to that and we can facilitate that, why wouldn’t we do it if it’s going to save them money in the long run.

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So I guess the takeaway is it’s a phenomenal relationship, but I think we both knowledge that there is going to be new and different cooler ways of doing things in the future, the processes are in place today.

Brent Bracelin

Totally makes sense. Shifting gears to kind of this is COVID question from a client, timely given we’ve seen this digital acceleration, this is a Digital Awakening Day that comes two days after the promising news about the vaccine. So I guess the base here and question is how much demand pull forward is driven by a pandemic and as you think about the next six to nine months and return to normal, how is that going to impact the GMV growth and I know it’s an impossible question to answer, but how are you generally thinking about that eventual return to normal that we all rea hoping for and look forward to having a drink in New York some time?

Katie Keita

Maybe in spring, we’ll see. I think we think about it like you have — what happened with the Shopify the merchants solutions take rate in the quarter is a good example so you just got this trendline going up. This is going up into the right and then you’ve got these crazy swings around it with a trendline still obviously going up and so all that noise from Q2 and Q3 will come back and haunt us next year in Q2 and Q3, not just from a tough comps perspective, which is from the fact that suddenly consumers mainly in North America, but this is a global phenomenon, but I’m not sure the extent to which subsidies helped in other places, they have that, they were spending money on movies and concerts and travel indications they couldn’t. They’re spending in on stuff. They’re building home gyms and all kinds of stuff like that’s a huge spending surge that’s happening now.

So we’re highly cognizant of the fact that that’s not sustainable, that’s going to come back, but we are kind doubling down on our high conviction that some habits were reforms by buyers as well as their merchants in this pandemic and that are going to stick. One of them is kind of online shopping for things that might be a little bit more nondiscretionary in nature and a pretty good test case for that just on some of the like we go through like gallons of hand soap. It kills me to keep buying these 12 ounce bottles.

So putting that on subscription and just having it just makes a ton of sense. It’s not like I don’t get a ton of pleasure shopping for that kind of stuff. So we think that I’m not the only one like that and so I think some of those things are going to stick around, but what we don’t know are how much disposable income is going to still go to shopping. The other thing that changed in COVID that’s going to stick is that we have more nondiscretionary things happening on the platform. So food beverage tobacco is the category that we look at like that and so that has grown at a greater rate than the GMV on our platform has grown year-over-year in part because of this phenomenon.

And then finally, the local pick up, the curbside delivery feature for brick-and-mortar merchants, that’s pretty nifty and I think when you see the stores getting boarded up and the closer that have afflicted probably every neighborhood, I think that hurts the people who live in the neighborhood and I think they do have desire actually for the first time ever to step into friction right. So there’s a couple kinds of friction to think about. One is the friction that we hate and we remove friction in a lot of points on the process.

But the other one is friction that invites a bit of a challenge or something interesting and I think that would probably be I think I will go there because I know that merchant, I like that merchant and I like all the dresses she got in or whenever, I think there might be a little bit of that going on to the fact that we’ve made that feature really accessible to brick and mortar merchants is really helpful to kind of the local commerce and they no longer have to be limited to their nine-to-five hours, which is kind of like shut out anybody who works nine to five because now that they are more seamlessly online and offline, that works a lot better for people who are used to doing online shopping, but also want to pick it up or exchange it in store, which on the point of sale or elsewhere.

Brent Bracelin

Got it, makes sense. I guess you do have couple offsets or some pretty big headwinds, what is the — this is a question here on international, just as you think about, can you invest in international as a potential offset or sheer gains internationally as you think of some of those headwinds next year, how fast are you investing internationally, you talked about it in 20 languages now and how fast can you iterate how fast are you pushing on that international side, which potentially is a minor offset, but could be an offset next year?

Katie Keita

I think it’s a lot less about getting sales teams in the field and getting them running and getting lots of merchants on, let’s not that more about the products. We’ve always been kind of product-led company, the software should stand on its own, shouldn’t have to do a ton of customization if you do need to do it at those partners. So I think it’s going to happen at the speed of products and a lot of places that’s where we see the uptick happen is when we have payments in a place and the take rate in markets that aren’t our core geographies is lower because you don’t have shipping outside of North America yet, capital we do just have in the UK but these things are going to happen at the speed I think of product development.

So it’s not as if you could just go buy somebody or do something quick and easy because the product needs to feel pretty organic and like I said we started this a few years ago and it’s come along quite nicely. If you look at any — I think if you look at the revenue that we’ve gotten from rest of world, so we talk about our core goes as speaking here because for language and also they tend to use credit cards more and everything. The rest of world was 15% last year of our revenue, which is still pretty small. There’s still a lot of room to grow there but that’s a big pickup from just a couple of years before that when it 11% in 2017.

So you see this trajectory happening where the share is moving more towards rest of world and I think that’s a natural follow-on from making the product — making the platform just better and more usable in those places.

Brent Bracelin

We tend to think about international expansion is like sales driven but forget, this is really about product. This is not ordinary product, this is the right time to motivate that merchant. So super helpful color there. Couple of questions on competition, specifically with big e-commerce it sounds like from two to three questions from investors here. So I’ll lump it together; how do you differentiate versus the big commerce different swim lane, similar swim lane, how do you see them there and how often are you seeing them coming head to head engagements.

Katie Keita

They don’t have the same kind of merchant base as we do. It’s not anywhere near the size of the merchant base and there hasn’t been any kind of pickup and where we’re seeing them, the price is growing really, really quickly. So it makes sense the baby growing, but they’re still kind of growling at a fraction of our rate. So I don’t think we’re seeing them more. I think that their value prop is really is just different. So I think the one kind of major sort of mode that we have in this regard goes back, let’s say it’s international as an example, when you have this global network of even small merchants and seating A, your Intel about what’s happening, but also sort of offsetting things are happening in different parts of the globe.

If you got an event in one country and that can make things calm and slow for a week and they you got an event in other country that is happening like a Cyber Monday sale or something that you’ve got its diversification basically, you’ve got much greater diversification, which I think it really powerful and moving forward. So that scale is huge, making that scale available to somebody on a really small basis is massive. So when you a smaller customer base or just out elephant hunting you’ve completely sacrificed the advantages of scale that have made so many companies really successful today right.

Taking scale and delivering it to a smaller company like AWS, look at Stripe, look at Shopify, like that’s really powerful until if you don’t have it’s kind of completely different ball game.

Brent Bracelin

That’s helpful color and in that larger enterprise cohort I know your mission is all about powering the small business the entrepreneur, but you’re getting some large businesses and large enterprises coming to Shopify. Did you see more of a pickup scenario in that environment or again are you this scale easy use, easy to launch craft times, wants to sell catch up, they may do it for small little things and they then launch you or are you started to see big bake offs with big larger enterprise deployments that want to move in different commerce platform?

Katie Keita

Yeah I think there’s always going to be some of those and as we’ve gotten into some of the larger enterprises who want to take greater advantage of digital for the sales of goods, we probably had more bake off kind of things but you covered when I was at EMC, it’s a totally different sort of ballgame, it’s nothing like these multimillion dollar deals where you’ve got legions of people coming in and training you on how to do this, that or the other and customizing your software.

So there is a degree of which we really wouldn’t even compete because we don’t have that, it’s not that part of what we’re offering to you. So the companies at plus level subscription that have come to Shopify have usually come in for the value, the value of it. So I would say it’s probably a little more the latter of what I just talked about of the coming trust for the value and probably fewer of like head or head or I got to win this account kind of situation. We had record growth for the past two quarters of merchants coming on to Shopify Plus and a healthy chunk of each of those quarters were just merchants on the platform who have grown up.

So let’s not forget that the CAC for them was the CAC of maybe a $29 customer and that with this growth that they’ve seen, they’ve been able to grow up and take advantage of the economics that are available once you’re scaled up from a GMV perspective.

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Brent Bracelin

Absolutely, so there is a lot of question on SFN that it sounds probably good pivot now not to talk about that, but maybe before we go, let’s talk about the logistic strategy and maybe state of the union right now in logistics starting with maybe shipping. So maybe frame how they’re shipping, what’s the attach rate, it sounds like US-only, how hard was it to take shipping internationally. Just walk us through state of the union on shipping today and then we’ll pivot to SFN

Katie Keita

Yeah so shipping is still relatively small when you compare it to everything else like from a revenue perspective, which means there is still a ton of room for shipping to grow. So we are now also in Australia and when we talk about that Henry of merchants for whom it’s available we’re only talking about North American there. So little over half with the last quarter but that doesn’t count the Australia where we’ve got a new offer with the partner. So any merchant who is coming on to the platform being faced with not just getting discovering and getting the sale but getting it out the door there’s almost no reason if they qualify why they wouldn’t use it drop shipping. People use it for a reason because you’re skills are in the marketing and the merchandising and finding of a buyer and finding exactly the most awesome thing that this particular buyer would want. Getting out the door is not really a value-added thing.

So if you are at Shopify and you can come along and you can say hey, we’ve gotten again scale, let’s talk about making the advantages of scale available to really small merchants. We’ve done that with shipping. So not only can you just leverage the address and everything we’ve got in their system, but you just like print out a label and you print it out at a rate that’s far more favorable than you would do if you’re locking it down on to the post office.

So shipping I think it’s only ever gone up since we launched it in 2016 I think. So that’s kind of on track to continue to add value to mainly smaller merchants, shipping is for self shippers, rights. So when we talk about eligible merchants, these are people who A, aren’t grab shipping or B, aren’t sung a digital good. A lot of goods can be delivered digitally or using a third-party logistics provider or which a lot of the Shopify Plus merchants will be doing, which takes us into SFN so unless you have anything outside of shipping you wanted to talk about.

Brent Bracelin

So where we’re at — how many customers have you opened up to just kind of any sort of getting the questions around readiness out of the bake [ph] season and just any questions around framing where it is today? I know it’s early days, but let’s frame the scope of it and then readiness for holiday season here where shipping and where could be journey.

Katie Keita

Yeah no doubt, I think that we’ve done a lot already to make sure that people are totally aware of that and you have to kind of have been living under a market, you’re not aware that some of the shipping is going to be kind of an issue because of the inundation that a lot of the transportation providers are having to deal with now. So the way that we’re kind of helping out there is just making sure that our partners. So just as a quick overview of our strategy on some type of Summit network last year in June we told the world that we’re going to try to tackle fulfillments because this is a big nut to crack for merchants. The experience today could be so much better than it is.

You have a lot of capacity believe it or not in warehouse, whole network stretched across the United States, but those are run by partners who have limited visibility and to skew histories or don’t have the data to be able to predict what items need to be stored at what nodes and so there is just a ton of improvements that could be made if the software existed there kind of have what’s going to be needed and how can we get it to people. So building bridge is a lot of what Shopify Fulfillment network is about.

So knowing that there was a ton we didn’t know, we said this is going to take years, like its going to take years before we are like scale and rock ‘n rolling on this. So we’ve come along that trajectory kind of nicely adding a little bit more merchants every quarter as we go. In Q2m there was a bit of a pause in the minimum merchants number of goods going out of network because of that that inundation that we all felt, but everybody asks like why don’t you grow faster like clearly there is massive opportunity here and the fact is if we could grow faster we absolutely grow faster but it goes back to what we’re talking about earlier it’s sort of like the speed at which you can build software and for Shopify Fulfillment network make it really, really, really high quality.

With software kind of okay to MVP something and iterate and make it better as you go. That’s not really the case with Fulfillment, like Fulfillment you have to — you’re kind of responsible not just for that merchant Shopify relationship but the merchant buyer relationship and you are touching physical goods and show up at their buyers door and so you have to be sure that that is just locked and loaded and just near perfection, not to mention if you scale something that’s not almost perfect then you’re in for a lot of pain at scale. So this is kind of why the timeline is taking like why we’ve given ourselves that much time to do this.

Brent Bracelin

What is the biggest challenge for us, is it like the software coordination with these third-party warehouses? Do you kind of need to control the warehouses? What is the as you think about the biggest challenge, what is that challenge that needs to be overcome?

Katie Keita

I think it’s just time. We need time to build the software like we had lots of little challenges and getting a process down and getting it really phenomenal shape to scale and an example would be the on-boarding of a new merchant that is still pretty manual today, that needs to be a lot more automated than it has been before we can scale it. So where this is really this is going to start making money and adding more value to more merchants.

Brent Bracelin

When you had 400,000 merchants in one quarter, mainly on-boarding SFN was probably not the best most efficient.

Katie Keita

That’s right. If scale is our value prop then and we need to deliver scale and what was I going to say on that topic? It was I think you had asked about do you need to build your own warehouses and we would need to build own warehouses if the partner network wasn’t getting the job done. I think so far they’ve done a phenomenal job. They’ve done really well. Capacity is in place. We did build our own in Ottawa, so we could be close to it and learn at shipping real goods and the partners are — we had nine nodes out there today. Four of them are using Six River systems to just getting the velocity even higher than it could be. Those are kind of the robots that are an assistant to the warehouse worker.

So there’s I would just say that there is a lot just a lot of work that needs to be done and a lot of things that need to be learned and you can’t really fast track learning, but that said like we’ve been very validated in our decision to go in that direction and I think that our conviction on the need for this is only — has really only grown.

Brent Bracelin

Couple more here and we’re kind of getting close to the end here, appreciate your time. This is just a high level question, when you think about Shopify Plus right, thinking longer term that’s next three to five years, what percentage of revenue could that Shopify Plus business become particularly as you focus on larger high-volume customers?

Katie Keita

We don’t really think about it too much in that way. It’s here subscription and if you look at Shopify Plus, it’s not all that different from our own merchant base and that you still have a really small subset at a very large scale and then you still had a ton of Shopify Plus subscribers or customers that are doing much lower scale. So that’s why it doesn’t make a ton of sense to think about it like that and in fact also because really their minimal contract value per month is still only $2,000 so yes again it’s like 70 times the smallest one on this. So it’s good, but really the real value in the real money always whether you’re tiny or whether you’re big is going to come in from what you’re able to sell and yet Shopify Plus merchants can sell that.

But our favorite is a merchant who comes in at $29 and then grows into that level. So it’s not like we’re going to over index on just grabbing a bunch of Shopify Plus merchants and we still welcome them.

Brent Bracelin

Last question as we wrap up for you, just as you think about 2021, what are you most excited about outside of the vaccine and some return to normalcy that we all are hoping for, but what are you most excited about from a Shopify perspective, if you’re thinking about ’20 next year?

Katie Keita

I think I am really excited about how — we’ve seen a little bit of a reversal with COVID. I know a lot of people are finding silver linings and one is silver linings is this kind of it feels like a resumption of entrepreneurship and new business start up and sort of this return to just like people’s own ingenuity and to me and you know, we did talk about this on the call, this sort of like if felt like a recent hire of new merchants coming to Shopify which is great, which is cool, but to us it’s pretty exciting that the world itself is kind of it feels like maybe the pendulum is swinging a little bit more towards people having their own businesses and taking charge of their own destiny and getting a lot of fulfillment from that.

So I think what I am and this is me talking, but I think a bit this is how Shopify feels about new business start up. We’re pretty excited about. So I think that 2021 is going to be hopefully that will continue and we’re right there for them if that’s what happens. So pretty still.

Brent Bracelin

Well Katie, thank you so much. It sounds maybe like Harley’s new TV show is working bringing good inspiring all sorts of new entrepreneurs switch here but listen, take a lot of your time today, a lot of investors were interactive here asking questions. I appreciate that and thank you for sharing your thoughts on all these questions. So as always, nice seeing you.

Katie Keita

All right. Thanks for the invitation. Take care. Bye, bye.

Brent Bracelin

Take care. Bye.



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