Shopify Inc (SHOP) Q4 2022 Earnings Call Transcript

Shopify Inc (NYSE: SHOP) Q4 2022 earnings call dated Feb. 15, 2023

Corporate Participants:

Harley Finkelstein — President

Amy Feng — Director, Investor Relations Communications Lead

Tobi Lutke — Founder and Chief Executive Officer

Jeff Hoffmeister — Chief Financial Officer

Analysts:

Richard Tse — National Bank of Canada — Analyst

Bhavin Shah — Deutsche Bank — Analyst

DJ Hynes — Canaccord — Analyst

Keith Weiss — Morgan Stanley — Analyst

Todd Coupland — CIBC — Analyst

Tim Chiodo — Credit Suisse — Analyst

Clarke Jeffries — Piper Sandler — Analyst

Michael Morton — MoffettNathanson — Analyst

Andrew Bauch — SMBC Nikko — Analyst

Samad Samana — Jefferies — Analyst

Ken Wong — Oppenheimer — Analyst

Presentation:

Operator

Good afternoon, and thank you for joining Shopify’s Fourth Quarter and Fiscal Year 2022 Conference Call. Tobi Lutke, Shopify’s CEO; Harley Finkelstein, Shopify’s President; and Jeff Hoffmeister, our CFO are with us today.

After their prepared remarks, we will open up for your questions. We will make forward-looking statements on our call today, that are based on assumptions, and therefore, subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements, except as required by law. You can read about these assumptions, risks, and uncertainties in our press release this afternoon, as well as in our filings with US and Canadian regulators. We will also speak to adjusted financial measures, which are non-GAAP and are not a substitute for GAAP financial measures. Reconciliations between the two are in the tables at the end of our press release. And finally, we report in US dollars, so all amounts discussed today are in US dollars, unless otherwise indicated.

With that, I will turn the call over to Harley.

Harley Finkelstein — President

Thanks, Amy, and good afternoon, everyone.

2022 marked another strong year for our merchants and Shopify, a year, that reflects the resilience of our business model and commerce operating system. Our revenue grew 21% for the year, reaching $5.6 billion, as we added nearly $4 billion to our top line since 2019.

The growth rate we saw in 2022 is particularly noteworthy, when you realize that this growth was on top of the incredible 57% growth we saw in 2021, and 85% growth in 2020. Against this backdrop, we continue to see data supporting the strength of entrepreneurship and new business starts. According to the US Census Bureau, applications for new businesses have been approximately 5 million a year for 2021 and 2022, which is a step function, above the 4 million per year average for the previous five years.

Shopify’s penetration of the US e-commerce market is currently 10%, with this year’s GMV surpassing $197 billion as GMV has grown more than three times since 2019. Since our inception, Shopify has powered over $0.5 trillion in global commerce as we increasingly become the platform of choice for brands of all sizes. This past year, our merchants had their most successful Black Friday/Cyber Monday selling period ever, generating $7.5 billion in sales over that period, a growth of 21% year-over-year on a constant-currency basis. For that four-day period, approximately 52 million consumers worldwide purchased some brands, powered by Shopify, representing a 12% increase from the same period in 2021. The breadth and velocity of the new products and enhancements to existing products that we shipped in 2022 are truly incredible.

I will give you the highlights of the key solutions we released last year before diving into our main investment themes. We launched Shopify Audiences, Shopify Collabs, POS Go, Tap to Pay, integrated Twitter Shopping, and YouTube channels and continued to build out the Shop app so merchants can more easily connect with, and build relationships with buyers. We launched Shopify Markets and Markets Pro to lower the barriers for our merchants to sell globally, while also making easier than ever to start a business internationally, with localized subscription pricing, now available in approximately 200 countries.

And third, we made it easier for businesses worldwide to go from first sale to full scale on Shopify, helping merchants succeed at each stage of the growth journey. We also made fully available to merchants Shopify Functions, Hydrogen and Oxygen, and expanded our back-office merchant solutions to more countries to allow greater customization. And last month, we introduced our large enterprise solution Commerce Components by Shopify.

Also in January, we announced an update to the subscription prices on our Basic, Shopify, and Advanced plans. The prices that we had been charging for access to the best tools in commerce have largely remained unchanged for the last 12 years. This will enable Shopify’s exceptional value to continue, as we solve more of the most difficult problems in the industry, and empower more people to become entrepreneurs. These new prices went into effect immediately for new merchants and will take effect on April ’23 for existing merchants. In short, in 2023, we will not slow down. We are committed to simplifying commerce even further this year, as we innovate and invest to future proof our merchants businesses, and allow them to extract greater value from Shopify.

Let’s now talk in greater detail through three investment themes that we think about as we help our merchants grow. Helping them attract more buyers, going global, and first sale to full scale. I will start with how we help our merchants attract more buyers through more channels. Key to a brand success is showing up everywhere their customers purchase. From a channel perspective, as customers have moved back to shopping in stores, we’ve continued to see outsized year-over-year growth in offline GMV, which was up 25% in Q4 and up over 40% on a full-year basis. As more retailers seek to modernize their point-of-sale software, our world class offering continues to gain traction with brands of all sizes.

During Q4, Plus merchants accounted for approximately 27% of all point of sale Pro sales, an increase from 12% from the same period a year ago. Also during the quarter, fast growing brands including Todd Snyder, Tecovas, and Viori expanded to new retail locations with our point-of-sale Pro solution. Additionally, we were thrilled to power the global retail expansion of Culture Kings as the Australian streetwear giant opened a new flagship store in Las Vegas.

Focusing in on the point of sale product, we continued to increase its scalability. Shopify can now power retailers with up to 1,000 physical locations. We rolled out both Shop Pay and installments to point-of-sale in limited beta, so in-store buyers at the point-of-sale can now benefit from the same payment options, and payment flexibility that we offer online. Driving greater integration of Shop Pay and point-of-sale remains a big opportunity for us, and we are excited to scale this more broadly in 2023 and beyond.

Point-of-sale Go, our first-in-class mobile hardware device takes the merchant and customer experience to the next level, by offering buyers a super smooth and quick checkout. Point-of-sale Go which launched in September is an all-in-one fully integrated point-of-sale system, barcode scanner and card reader that accepts tap chip and swipe payments. A key selling point of point-of-sale Go is its proprietary operating system, which allows Shopify to control the end-to-end experience on the device, from app updates, to permissioning, to point-of-sale onboarding. At $399 per device, point-of-sale Go brings incredible value to larger, more complex retailers, who are buying these devices in multiples.

The initial response to this cornerstone product has been exceptionally strong, and we are excited to drive even greater adoption in 2023. Integrating commerce into more services is another way we can help merchants strengthen their relationship with buyers, and discover new customers. The Shop app is an excellent example of how we’re helping merchants increase customer lifetime value, by deepening their engagement with existing customers, while also finding new buyers.

Since we introduced the Shop app in early 2020, it has grown from an accelerated checkout and order tracking utility to become an important driver of many of our merchants’ business performances. Shop gives merchants new ways to stay connected with their buyers like in-app offers and notifications when their favorite products are back in stock.

In a nutshell, Shop enable the Shopify merchant on their first day, to have a storefront in a native mobile app that’s very powerful. In 2022, we shipped dozens of enhancements to Shop, including discounts, and expanded search function, personalized shopping experiences, and embedding Shop Cash, our loyalty program that is currently in early access. With tens of millions using the app every month, we are able to match the right merchants, to the right buyers, creating personalized shopping feeds for the buyer segment, and a new customer acquisition tool for merchants.

Shop is still in its early days, but it’s one of the ways we’re investing to help merchants win over the long term. A key feature of the Shop app is Shop Pay, our accelerated checkout feature that continues to make commerce better for merchants and buyers alike. With well over 100 million buyers opted into Shop Pay, our accelerated checkout facilitated $11 billion in GMV in Q4, and accumulative $77 billion at year end since its launch in 2017. Shop Pay makes for a seamless shopping experience, and it’s one of the main reasons why more merchants of all sizes are adopting Shopify Payments.

Additionally, Shop Pay unlocks our buy now pay later product Shop Pay Installments for consumers. As the highest converting checkout on the Internet, we want more businesses to benefit by offering Shop Pay to their customers, which is why we’ve integrated Shop Pay on social services, including Facebook, Instagram, and YouTube. As a result, GMV through our native checkout integrations with our key partners more than doubled over Q4 last year.

As part of helping our merchants attract more buyers through more channels, we launched Shopify Audiences in early access in May, as an essential feature for our Plus merchants. As we continue to enhance Audiences, in Q4, we expanded the scope of Audiences to support merchant objectives across the marketing funnel, from expanding reach to driving more conversions. We also launched Audiences for Google during the quarter, allowing merchants to reach high intent audiences, from their own store across YouTube, Google Search, Google Display Network and Gmail.

Within our February 9th additions, we announced the launch of Audiences for Pinterest, which operates similar to the Meta integration where Plus merchants can use the tool to find high intent buyers across Shopify and upload to Pinterest for better targeting. With these partnerships, we continue to invest in marketing platforms where merchants are actively looking for their buyers. Most importantly, merchants are telling us how much they love Audiences. In Q4, luxury fashion designer, Jonathan Simkhai turned to Shopify digital marketing partner, MESA Market for help and using audiences, they achieved a 6.6 times return on ad spend, and an over 80% higher conversion rate, and over a 50% decline in cost per acquisition.

Next is going global. Lowering the barriers to entrepreneurship globally is a massive opportunity for Shopify, and for our merchants. At the end of 2022, approximately 45% of our merchants were based outside of North America, making up approximately 27% of our revenue. We expanded our offering in country with Shopify Payments now available in 22 countries, Shopify point-of-sale in 14 countries, Shopify Shipping in seven countries and Shopify Capital in four countries. We also rolled out our localized subscription plan pricing to approximately 200 countries and localized billing to make it easier for merchants to start and grow their businesses on Shopify.

Looking ahead, we’re focused on helping our merchants reach consumers, no matter where they’re located. We want to make selling internationally on day one, as easy as it is to sell locally. In 2022, Shopify enabled approximately $28 billion in cross-border sales, capitalizing on the surge of international interest, with nearly 28% of all traffic to Shopify stores coming from buyers outside of the merchants’ home country. Our solutions allow merchants to sell globally, and provide a localized experience from a single Shopify store, that makes multimarket management easy with a single dashboard that lets brands sell, ship, and scale internationally, while keeping the merchants team and their overhead lean.

Our products are built to boost conversion, with capabilities like local currency, language translations with the translate and adapt app, payment methods and an import duties calculator. Our latest addition to our merchants global toolkit is Markets Pro, which launched in Q3 in early access and is built on top of the Markets product. The unique differences at Pro is a fully integrated merchant of record solution and provides a complete end to end global commerce solution, whereas markets allows merchants to selectively choose only those features that suit their needs. Even in early access, we’ve seen the impact Markets Pro can have, as we’ve seen evidence of cross-border conversion improving by up to 36%, and we can’t wait to bring this tool to even more brands shortly.

Third, enabling our merchants to go from first sale to full scale. After our merchants get started and find product market fit with their initial sales, they need the right tools to advance. That’s why we continue to enhance and build new tools to simplify and support merchants’ journeys for every stage of growth. Our merchants continue to recognize the adaptability and flexibility of our platform, and in 2022, approximately 25% of all Plus additions came from the Plus self-serve upgrade experience. Another example of how we evolve with our merchants is Shopify Capital.

Capital has acted as a lifeline for merchants, especially through the pandemic and this tough macro environment, allowing them to conveniently access capital when they need it most. Capital is now available in four countries, and our machine learning algorithms to underwrite merchants keeps getting better. In Q4, we advanced nearly $400 million, up 21% from the same period last year, bringing the cumulative amount since we launched Shopify Capital in 2016, to nearly $4.7 billion. More merchants accepted Capital in Q4 compared to the same period last year, including a greater number of Plus merchants, and we’re seeing incredibly strong renewals from previous borrowers.

Speaking of Plus, in Q4, Shopify continued to prove that we are the commerce platform of choice for merchants of all sizes. Giant Tiger, one of Canada’s largest retailers, ripped out their entire tech stack and replaced with Shopify Plus. They needed a commerce platform that would up level their customer experience, and deliver the flexibility their customers needed between both online and the physical store. Our out of the box platform modernized this mass department store. We integrated more than 260 locations across the country, with their online store, and enabled Giant Tiger to offer buy online, pickup in store to meet the omnichannel expectations of their customers. This is another example of how Shopify is increasing the go-to platform for department stores and large scale merchants.

The diversity of brands on Shopify Plus continues to expand. Shopify made meaningful headway in the luxury space, welcoming French fashion and perfume house Lanvin to the platform as well as Italian footwear brand Sergio Rossi and Swiss fashion designer, Bally. Consumer favorites including hockey equipment and skate retailer Bauer Hockey and home appliance and tool manufacturer BLACK+DECKER both launched in Q4, as did ButcherBox, which began its migration to Shopify with the launch of their a la carte business. We also continued to increase our geographic footprint in key international markets launching Italy [Phonetic], Reebok, Superdry, Sony Music Entertainment, Skechers, and additional Nestle brands in new markets in Q4. Not to mention, the migration and launch of Mattel’s full suite of brands and Supreme, both of which I’ll talk about shortly.

Shopify continues to be the go-to place for celebrities to launch their unique brands with our roster continuing to expand. Record producer and rapper Pharrell launched his second brand Joopiter on Shopify which is a global digital-first auction house. Shopify is also the platform of choice for creators, fueling the creator economy with brands like Prime by YouTubers and athletes, Logan Paul and KSI launching on Shopify this quarter. We are not only the preferred partner for online, but also offline with Kim Kardashian hosting her first pop-up in LA for her brand SKKN, as well as Eminem’s Mom’s Spaghetti pop-up store in New York City, both of which were powered by Shopify point-of-sale.

We closed out 2022 with more merchants growing their businesses on Shopify and the caliber of brands choosing Shopify is not slowing down. In Q1, we’ve already welcomed the iconic streetwear brand Supreme to Shopify. Supreme is one of the world’s biggest flash sale retailers hosting more than 50 flash sales each year that are live for no more than a few minutes, which makes Shopify the ideal platform for Supreme to continue growing their business.

The tailwinds for brands joining Shopify Plus are only growing, as huge businesses choose to go direct to consumer and migrate to Shopify. Already in Q1, Mars, one of the largest CPG companies on the planet with over a century of history, signed a global agreement with Shopify. With over $35 billion in sales, the company is a global business that produces some of the world’s most beloved brands. This global agreement will pave the way for more Mars brands to build and scale their businesses on Shopify and is a positive signal for others in the industry as Mars joins the ranks of other large CPG brands that are already using Shopify, including Heinz and Nestle.

Our commitment to making commerce better for businesses of all sizes is only growing. To kick off the year, we made a major announcement that we were launching our enterprise retail solution, Commerce Components by Shopify, or CCS. Commerce Components is a moderate and composable stack, where retailers can choose the shop-like components they want, integrate with their existing systems and create incredible customer experiences. One of the first brands deploying CCS is the toy and entertainment industry leader, Mattel.

Mattel is a merchant with over 400 brands in their portfolio they will be bringing to Shopify, a testament to the durability and scale of our commerce platform. Mattel needed an enterprise partner that could deliver incredible speed, endless flexibility and the ability to pick and choose the parts of Shopify infrastructure they needed, as well as execute its flash sale model. While it’s still early days, extending our reach into the enterprise will be a key investment focus in 2023.

As part of our enterprise strategy, in 2022, Shopify signed business partnership agreements with Accenture, Deloitte, Ernst & Young and KPMG to enable greater opportunities for larger brands to adopt Shopify. And last month, we formed an alliance with IBM Consulting. We considered a great testimony to the power of Shopify that such a premier group of system integrators are so quickly building teams to help enable Shopify for large enterprises. These systems integrators will be a critical element in helping us reach more enterprises and in a way which is an extension of our core customer acquisition efforts.

Also in Q4, we launched Shopify Tax, a new product offered to US-based merchants that takes the stress out of sales by simplifying tax compliance. Early data shows that merchant adoption has ramped quickly, speaking to the trust that merchants have in Shopify. As we work to solve their toughest problems, our merchants are eager to utilize more of our products.

Turning now to Shop Promise and Shopify Fulfillment Network. Merchants repeatedly tell us that providing greater visibility and confidence in delivery dates can help improve their store conversion. This is why we launched Shop Promise in 2022, a consumer-facing badge that provides reliable and accurate delivery dates across a merchants’ online store, checkout and on the Shop app. Shopify looks at merchant’s shipping performance to identify which brands consistently ship reliably to determine their eligibility for the program. Merchants in the program have seen up to 25% increase in conversion rates. As part of our edition’s release last week, we are working to expand Shop Promise to all eligible US merchants over the next few months.

With Shopify Fulfillment Network, merchants have access to Shop Promise by default. Over the past six months, we have made significant strides in integrating Deliverr into SFN. We’re creating one unified network that enables data-driven inventory distribution and access to our logistics services. Compared to Q4 of 2021, we’ve seen a 40% increase in orders per merchant, while Deliverr has achieved over 50% growth in units fulfilled and more than doubled its services outside of fulfillment, services like freight, B2B, parcels and returns. In 2023, we will continue to integrate SFN with deliberation and discipline. The team plans to broaden our logistics offering, optimize our network performance and deliver an enhanced fulfillment experience for merchants.

I know I’ve covered a lot and that’s because we’ve accomplished a lot due to the hard work of our exceptional team. Millions of merchants around the world recognize and value the rich set of mission-critical solutions that we provide. Shopify’s commerce operating system is the backbone, powering brands all over the world. Since the very beginning, we have been merchant obsessed and have had their backs when often no one else did. Our merchants’ testimonials speak for themselves, simplicity, reliability, speed and security, and the list goes on. We’ve earned our merchants’ trust over the years. And it is that trust that supercharges our mission to continue to make commerce better for everyone.

And with that, let me turn the call over to Jeff. Thanks, Harley. As this is my first official earnings call, let me start by mentioning how excited I am to be part of Shopify. It’s an incredible collection of talent, and I look forward to helping this team capture the opportunity in front of us. Let’s now talk about how Black Friday, Cyber Monday and all the great product introductions and developments that Harley mentioned translated into a strong Q4 for our merchants and therefore, Shopify. Our merchant GMV in Q4 grew to $61 billion, up 13% year-over-year or 17% on a constant-currency basis, outpacing overall U.S. retail growth of 6%. Our strong Black Friday, Cyber Monday was a key driver of this Q4 GMV outperformance. We saw strong growth in GMV in both our online and offline businesses. Revenue for the fourth quarter grew to $1.7 billion, 26% year-over-year growth or 28% in constant currency, which represents the highest growth rate of any quarter in 2022. Driving this performance were strong Merchant Solutions growth on the back of robust GMV growth. Moving now to our Merchant Solutions business. During the fourth quarter, Merchant Solutions revenue was $1.3 billion, increasing 30% year-over-year or 32% on a constant-currency basis. Our growth in the quarter was primarily due to the increase in GMV, a higher penetration of Shopify Payments and the contribution from Deliverr. $34.2 billion of GMV was processed on Shopify Payments in Q4, 23% higher than in the fourth quarter of 2021. The penetration rate of Shopify Payments as a percentage of GMV was 56% for the quarter versus 51% in Q4 of the prior year and up 210 basis points quarter-over-quarter. Several items drove our gross payments volume for the quarter, particularly strong performance by those merchants on Shopify Payments, an increasing percentage of which are Shopify Plus; new merchant adoption across the globe; expanded penetration in Shop Pay; and the increased footprint of our point-of-sale hardware in brick-and-mortar stores. Subscription Solutions revenue was $400 million, up 14% over Q4 of 2021, driven primarily by an increase in the number of Plus subscriptions, higher variable platform fees from Plus merchants, and the higher revenue shares from ecosystem app developers. Our total attach rate, which is defined as revenue divided by GMV, represents a key gauge of our ability to drive greater value for our merchants. Our total attach rate has grown to 2.85% in Q4 of 2022, up from 2.55% in Q4 of a year ago. Monthly recurring revenue or MRR exceeded $109 million, up 7% year-over-year. Strong gains in MRR from Shopify Plus and Shopify point-of-sale offset the near-term deferral in MRR from new entrepreneurs participating in our trials. During Q4, we also saw an increase in standard merchant MRR, as a significant portion of merchants bypass the paid trial status and convert it directly to full price status. Contribution from our Plus merchants to total MRR increased year-over-year to 33% from 29% in Q4 of 2021, as larger volume brands join the platform and thousands of additional retail locations began using point-of-sale Pro. As we mentioned in our Q3 call, merchants participating in our onboarding trials are immaterial to our MRR until they convert to one of our fully paid plans. Early signals from these trial experiments have shown encouraging positive increases to merchant engagement. These trials help us attract more merchants and provide merchants a better onboarding experience that gives them additional time to unleash the power of our platform to drive their business. For 2022, our MRR per merchant remained relatively consistent with 2021, excluding those on our free and paid trials. We expect to see some incremental benefit to MRR in 2023 from the pricing changes we announced last month. Gross profit was up 15% to $799 million, and gross margin was 46% for the quarter. Compared to our Q4 of 2021, gross margin was primarily affected by the dilutive impact of Deliverr. Gross margin for Q4 of 2022 was also impacted by greater revenue contribution from lower-margin Shopify Payments, as well as pressure within Shopify Payments due to Plus, and a shift to greater credit card usage versus debit cards. Operating expenses were $987 million for the quarter, which includes a real estate impairment charge of $84 million. The increase year-over-year was primarily due to the incremental headcount from Deliverr and the implementation of our new compensation system. Of note, when you compare the operating expenses of Q3 and Q4 and remove the one-time items that had impacted both periods, we were able to keep our operating expense dollars relatively flat and still deliver a strong revenue growth quarter-over-quarter. A key driver of our stabilizing opex for the quarter was a decline in headcount from Q3 to Q4. We also have several other key initiatives already in process in order to help us manage operating expenses, including greater focus on our cloud infrastructure spend, heightened scrutiny of the performance of our marketing programs and their associated payback periods and in general, an increased emphasis on better leveraging technology internally to automate previously manual processes, and thereby improve the speed, accuracy and efficiency of delivering great products and solutions for our merchants. These operational improvements serve as a good indicator of our commitment to make Shopify nimble, lean and highly adaptable, goals that will persist for us well into the future and are not short-term cost fixes. Stock-based compensation for Q4 was $142 million compared to $98 million for the same period a year ago, primarily driven by Deliverr and higher headcount. Adjusted operating income for the quarter, excluding the real estate charge, was $61 million. The decline compared to Q4 of 2021 was primarily a result of lower gross margin year-over-year and higher operating expenses, driven primarily by increased compensation expenses, including our employees’ shift to more cash versus equity for their total compensation. For the quarter, we delivered cash flow from operations of $97 million and cash flow from operations, minus capex, of approximately $90 million, as we held capex in Q4 to less than $8 million. Turning to our balance sheet. Our cash and marketable securities balance grew sequentially from Q3 up to $5.1 billion as of December 31, largely as a result of cash flow from operations in Q4. To recap, we delivered strong fourth quarter financial results. We grew revenue 28% on a constant-currency basis, and our total attach rate increased to 2.85%. We held our operating expenses essentially flat from Q3 to Q4, excluding one-time charges, and delivered cash flow from operations, less capex, of $90 million. Turning to 2023. I’d like to spend a moment talking about two key items affecting our profitability expectations this year, our compensation leveling exercise in 2022 and the expense run rate of Shopify Fulfillment Network following our acquisition of Deliverr. Starting with our new compensation framework. Along with enabling our employees to allocate their total compensation split between cash and equity, we also changed the overall compensation system to be better aligned with the market. We went through an extensive benchmarking exercise to help us make sure that within Shopify, the right people are getting paid the right amount. This process resulted in higher compensation expenses starting in September of 2022, primarily in R&D. Given the timing of when we initiated these changes, the year-over-year comparability will be impacted during the first three quarters of 2023. Moving to the Shopify Fulfillment Network. We currently expect SFN to be a headwind to gross margin and a significant contributor to operating expenses in 2023. This impact on year-over-year comparability will be most prominent in the first half of 2023 given that the Deliverr acquisition closed in July 2022. Before I turn to our outlook, let me first make a few comments regarding the macroeconomic backdrop and its implications on Shopify. Our perspectives on outlook assume that inflation remains elevated, pushing consumers to discounted and non-discretionary purchases. As mentioned previously, we had a strong Black Friday, Cyber Monday and continue to outperform the broader e-commerce market, but we are mindful of the environment in which we are operating now. Let’s turn to our outlook for the first quarter of 2023. First, on revenue. We historically have experienced a sequential seasonal decline from Q4 to Q1 due to the strong holiday selling season. We anticipate a similar trend this year and expect Q1 revenue to grow in the high-teens on a year-over-year basis. We expect Q1 gross margin to be slightly higher than our gross margin for Q4 of 2022. Overall, the same factors that impacted our gross margin in 2022 are expected to continue in Q1, including the annualized impact of the Deliverr acquisition and the continued growth of Shopify Payments. We believe that our Q1 operating expenses will be up in the low single-digit percentage versus our Q4 2022 operating expenses when excluding the one-time charges that we had in Q4. Stock-based compensation for Q1 is expected to be in line with Q4 of 2022. Finally, we expect that capital expenditures for Q1 will be in line with what we spent for the full year of 2022. In closing, 2022 marked the year where Shopify introduced several significant new products and product enhancements, and we look forward to those solutions adding more and more value for our merchants. We delivered strong financial results for the year. We recognized a challenging macroeconomic backdrop and are focused on carefully balancing our growth investments with strict operational discipline. We remain enthusiastic regarding the strength of our Merchant Solutions and the value that they will bring our merchants and therefore, our investors. I’ll now turn it back to Amy and open the call for any questions.

Questions and Answers:

Amy Feng — Director, Investor Relations Communications Lead

Thank you, Jeff. We will now open the call for your question. [Operator Instructions] Our first question will come from Richard Tse at National Bank of Canada. Please go ahead.

Richard Tse — National Bank of Canada — Analyst

Hey, thank you. Clearly, you have a lot going on here and you’ve got a ton of vectors of growth when it comes to opportunity. If we were to step back a bit, how would you rank your kind of biggest priorities here over the next 12 months?

Tobi Lutke — Founder and Chief Executive Officer

Yeah, hey, Richard, I’ll take this question. I mean, the priorities are — I think these are the times where U.S. business learned a lot. I’ve talked in previous calls around — about the tightened feedback loop we just spent through our recent edition’s release, as Harley mentioned, very sure that we are increasing pace of shipping, we are going deeper in the product areas that we have — that Shopify is known for and really bringing focus and deepening the quality of the developer platform and to especially address the needs of the larger merchants and always move into Commerce Components as a result of this as well.

From a company, I mean, here’s what — like Shopify is — like one thing that I would like to remind people of as well internally usually is that, even before Shopify ended up being a venture-backed company, Shopify was a profitable business and have been profitable many times and we are — it is very normal for us to be well operationally managed and look at cash flow and operational efficiency and these kind of things.

I think these times are very useful to get back to that and like really deepen our, like, efficiency of the business, so another priority is specifically through the tail end of a boom times over the last decade that we grew along a couple of vectors where now we can bring in automization, which will help a lot and I think, this is — these are the kind of things that make businesses a lot more — set them up well for the next time we get into boom times whenever that might be. So those are the priorities, deepening product into commerce, really, really finishing a lot of great projects that we started and building the best possible company in this space.

Amy Feng — Director, Investor Relations Communications Lead

Thank you. Our next question will now come from Bhavin Shah at Deutsche Bank. Please go ahead with your question.

Bhavin Shah — Deutsche Bank — Analyst

Great, thanks for taking my question. Just kind of focusing on the enterprise opportunity, either Harley or Jeff or Tobi. Can you just maybe elaborate on what type of merchants you see best entering the Shopify ecosystem from Commerce Components. And then, how should we think about the monetization opportunity for this type of merchants? How does it differ from traditional Shopify Plus?

Harley Finkelstein — President

Hey, it’s Harley. I’ll take that question. Look, the cool part about Commerce Components is that it effectively uses all the things that we’ve perfected over the last two decades, things like checkout, for example, which currently power something in neighborhood of like 10% of all e-commerce in the U.S. and — but it allows these very large merchants, these large brands, these established brands to combine the best parts of Shopify with things that they already have in-house.

And I mean, from a business perspective, it allows us to expand our market because we can go further up the stack of large enterprises, but it also does the thing that we think we’re best known for, which is we provide flexibility, so whether they — things like storefront or the checkout or the data and compliance or shipping infrastructure, they can pick and choose the things that they need and combine them with the things that they already have. And so, we think that it becomes, frankly, it would — it becomes a mistake not to use Commerce Components if you’re a modern and large scale brand who wants to future proof your business.

The cool part also is that post launch in early January, the response and the level of interest has been fairly — it’s been really great. And I think part of it is that, a lot of these large enterprise retailers and merchants are used to working with these legacy systems that are not flexible, that have massively long integration times and we can get them up much better, much faster and they could have something that will continue to evolve over time. So in the case of Mattel, for example, who is one of our launch partners for Commerce Components, they have 400 brands in their vault. They want to be able to take these brands and get them up and running fast, but they also want to be able to do things like massive flash sales on Mattel Creations or be able to launch new functionality around some of their Hot Wheels or Barbie sites. So we think this is an opportunity for us to go further up market even in Shopify Plus.

At the same time, I mentioned this in in my opening remarks, but Shopify Plus continues to really do well. We’re not only seeing merchants automatically upgrade on their own to — from our core product and our core plans to Shopify Plus, but we’re also seeing other brands leave existing platforms to come to Shopify Plus as well. So they come to us for Plus, they want everything that Shopify offers, whereas Commerce Components, they can pick and choose using this composable commerce stack and we think, it’s just — it’s going to be — it will be really interesting for us to see who we’re able to bring on. But so far, the response and the reaction from the enterprise market has been incredible.

Amy Feng — Director, Investor Relations Communications Lead

Our next question will now come from DJ Hynes at Canaccord. Please go ahead with your question.

DJ Hynes — Canaccord — Analyst

Hey, thanks for taking my question. Tobi or Harley, I wanted to ask about your relationship with Amazon. I’m curious how that might be evolving and how are you thinking about managing relationships with merchants and agencies that are interested in using Buy with Prime?

Harley Finkelstein — President

Hey, it’s Harley. I’ll take that question. Look, we’ve said this before, but anything that’s going to make our merchants more successful, help them sell more, help them to convert more of their browsers into shoppers and buyers, we think it’s a great thing. We have a long history of partnering with technology companies. PayPal, for example, was something that many years ago we integrated with because we thought it would help our merchants sell more and we continue to integrate with PayPal.

When it comes to Buy with Prime, we think any company that’s going to make their infrastructure available to merchants to sell more is a great thing. We like it, we’re in talks with Amazon now to make that work, but it has to be done in a way that we think is important for merchants to have a relationship with their end consumer. And so there is no update at this time. We’re still talking to Amazon about that. But again, anything that’s going to make our merchants’ lives better and make sure their business is future proof, new technology that comes out, we want to make available to them.

Amy Feng — Director, Investor Relations Communications Lead

Thank you. Our next question comes from Keith Weiss at Morgan Stanley. Please go ahead with your question.

Keith Weiss — Morgan Stanley — Analyst

Thank you for taking the question, guys. I was hoping to get a clarification. Tobi, it sounded like, because it is a weaker macro environment, you guys are going to focus more on efficiency and profitability. When I look at the Q1 guidance, honestly, I’m not sure if that looks for profitability. You had a nice profitability in Q4. When I think about like high-teens, 18% revenue growth, 3% sequential growth in operating expenses, I get back to a loss position. So how should we be fundamentally thinking about sort of that balance in growth and profitability, specifically for 2023? Are you guys planning on running the business profitably for the full year?

Tobi Lutke — Founder and Chief Executive Officer

Yeah, sorry. Thanks for the question and the clarification. I was making the statements that are more declarative, directive than guiding. Profitability is a consequence of growth and efficiency combined over time and I don’t look towards the quarters, I’m trying to build the ideal company. And the main thing, like, comment I wanted to make was that, like, I do think that companies have to — like, companies are swimming in the waters of a market and are definitely affected by them. To play the game that’s currently on the best, you actually have to change your behavior quite a bit.

In boom times, there’s a certain behavior that, like, looks best and that allows you to get the most out of it. And to some degree, you actually necessitated to some behavior because of what everyone else does, in growth times achieve credit. There’s a certain way to play this in an ideal way.

I think that in the more recessive times, we might not — I’m not making a statement about this being a recession, but like I think in these times the conversation, the feedback loop lends itself much more towards trying to figure out like how to be the best company given the opportunity that’s really in front of you and I believe that over time, profitability will take care of itself if this is the kind of type of company you’re building. And I think, I intend to — I think Shopify has played for boom games. Ideally, I intend to have Shopify play the more recessive times similarly well.

Harley Finkelstein — President

I just want to add to that, just in terms of — one thing that I think a lot of you that have been studying the company for a while know is that one of the best traits, one of the best quality about Shopify is our ability to navigate through different macro environments, different consumer trends, different business changes. Pre COVID, you saw us operating with a particular efficiency, but also a particular eye on growth. During COVID, when things shut down, we went to work to help merchants move online. We also simultaneously during COVID went to work on building the greatest point-of-sale product because we knew at some point, post COVID, stores are going to reopen. And once stores did reopen, we went hard on replacing all those legacy systems with ours.

So I think we’ve always operated well in any environment. But that flexibility, we can adjust to that. And I think economic environments, like the one we’re in right now potentially is when merchants need us most. Shopify lowers the barrier to entrepreneurship and we’re packed with value. Just to repeat something Tobi said because it’s very important. We were not raised on venture capital like a lot of other companies were. If you look at our seven years since IPO, we were profitable five out of the seven and we like being profitable and we’re going to work towards. We were cash flow positive in Q4, we were AOI positive in Q4, which was the highest AOI quarter of the year, and we’re going to continue to push towards greater efficiency and be mindful of capex. That’s just the way we operate. We are incredibly resilient as a business and as a company and we’ll continue to do that.

Amy Feng — Director, Investor Relations Communications Lead

Our next question will come from Todd Coupland at CIBC. Please go ahead with your question.

Todd Coupland — CIBC — Analyst

Great. Can you hear me okay?

Harley Finkelstein — President

Yes.

Todd Coupland — CIBC — Analyst

Yeah. Great. Good evening, everyone. I wanted to ask about the impact of the price increase of your plans. Obviously, it’s not going to impact Q1 very much. So if you could give us some color on that and the expected cadence through the year, that’d be great. Thanks a lot.

Harley Finkelstein — President

Sure. It’s Harley. I’ll take that one again. Look, our planned pricing has pretty much remain unchanged since like I got here, 13 years ago. In the same time, we’ve added significant value to our subscription offering to our merchants. And I — we want to keep making commerce better and so I think the pricing increase reflects a fair value exchange, but it also allows us to keep solving really tough problems and empower more people to become entrepreneurs. And so, it’s still early days. We’re watching this closely. But I think people view Shopify as incredible value, whether you’re just getting started or you are a much larger merchant on Plus or CCS, and so again, the value to cost ratio across every single Shopify product and Shopify plan is very much on the side of value, and so I think that — I think merchants understand it and I think that the merchants that pay for Shopify every month believe they’re getting incredible value from us.

Amy Feng — Director, Investor Relations Communications Lead

Our next question will come from Tim Chiodo at Credit Suisse. Please go ahead.

Tim Chiodo — Credit Suisse — Analyst

Great. Thank you, Amy. I want to talk a little bit about the Shop Pay accelerated checkout button. So the penetration gain’s clearly impressive, now approaching about 20% of GMV. I want to touch on two minor item or quick items. The first one is the 100 million number that you mentioned in terms of the opted in. Could you talk a little bit about the percentage of those or maybe just give a number that or a rough directional number that are more of a monthly active user.

And then the second part is around, yes, you’ve mentioned using Facebook, Instagram, etc., going off platform with social platforms, but what about the possibility of the Shop Pay button appearing on other non-Shopify merchants, meaning traditional maybe enterprise retailers that are not working with Shopify?

Harley Finkelstein — President

It’s a great question, specifically, I guess, because Shop Pay is becoming consumers’ favorite way to checkout. And we won’t go into any more details just in terms of the exact numbers but right — we did disclose that 100 million buyers have opted into Shop Pay. We have in — we have now seen about $11 billion in GMV go through Shop Pay in Q4 alone, cumulative about $77 billion since its launch in 2017. So we know the consumers really love it, we know merchants really like it because it increases the speed and increase conversion rate.

And so in terms of what we’re going to do in terms of our focus for 2023, we want to make it easier as possible for more merchants and more consumers to use it. In terms of moving beyond just Facebook and Instagram and Google and we rolled out Shop Pay on YouTube as well in Q3 of 2022. We’d like to see it in more places and we’re now working towards that. But I think, so far, Shop Pay GMV increased 43% year-on-year in Q4. It is now the Number 1 accelerated checkout across the entire Shopify platform for millions of merchants. So we think that we have a real opportunity to continue to put that in more services. And again, the more places that have Shop Pay, the more merchants make money and we like that. So you’ll see more Shop Pay in more places.

Amy Feng — Director, Investor Relations Communications Lead

Our next question will come from Clarke Jeffries at Piper Sandler. Please go ahead with your question.

Clarke Jeffries — Piper Sandler — Analyst

Hello. Thank you for taking the question. I wanted to ask for an update through learnings on the changes you’ve made to the sale funnel with the rollout of free and paid trial experiences in the second half of last year. And I think in the broader context to the pricing change, maybe you could help us understand where we’re at in terms of demand or merchant growth in the non-Plus category. Do you see that as improving in the coming year, stable, or slowing?

Harley Finkelstein — President

Yeah. So we’ve done a couple of things. And I mentioned this in my remarks. I mean, we have a starter plan we launched in June, which replaced existing light plan, so make it much easier for aspiring entrepreneurs to get up and running on Shopify and test that they are product market fit. We like that because it opens up the funnel for more people to try their hand in entrepreneurship.

We also did international initiative. We did a local — localized subscription pricing and then local currency billing, again, because we want to take advantage of what we’re seeing is demand from international countries and so we think on the localized pricing, it better aligns pricing with our most popular plans and then we can offer that in, as I mentioned, 200 countries. It really — the impact of that is mostly on the Shopify plan and the basic plans. So that, again, is our — that is our desire to expand how many people you Shopify and where they’re coming from.

In terms of the free and paid trial, it’s — it allows us to get more merchants trying playing with Shopify. Again, the idea is, we’re not changing physics here, not every merchant will be successful. But the key for us is that, we want Shopify to be that place that everybody goes to start a business. Some of those businesses won’t succeed. But the ones that do — it’s in our investor deck on our Investor site. The ones that do succeed, stay with us indefinitely, they stay — they take more and more of our merchant Solutions.

I mean, we haven’t even got a chance to really talk about our attach rate, which is almost 2.85% this year relative to 2.55% last year. I mean, that is a proxy for the value and the amount of services and products our merchants use. So all of these, whether it’s the paid trial or it’s international initiative or it’s the starter plan, we want to get as many people using their hand at Shopify as possible, and ensure the ones that are successful become large merchants in the long run, and those things reflect that opportunity for us.

Amy Feng — Director, Investor Relations Communications Lead

Our next question will come from Michael Morton at MoffettNathanson. Please go ahead with your question.

Michael Morton — MoffettNathanson — Analyst

Hello, thank you for the question. With Deliverr integrated and capex being deployed on SFN, I was wondering if you could share how you view your return on investment for the money that’s going to be allocated in SFN going forward. And I do appreciate that there’s a lot of moving parts behind that.

Jeff Hoffmeister — Chief Financial Officer

Yeah. Thanks a lot. This is Jeff. Let me tackle that one. So we are — in terms of backdrop from where we are on the integration of Deliverr, as you know, this was completed in July, so we’re roughly six months into this. And from a capex perspective, as we mentioned, it was $8 million that we spent in Q4. We want to make sure that we get the Deliverr integration fully done before, obviously, we ramp up capex on that. But we are being really, really mindful. I think we’ve learnt with the management team of Deliverr, the technology of Deliverr, the business plan of Deliverr, we’ve been able to do some really interesting things and do some things in a way, which I think is much more capex light than maybe originally anticipated and that has to do with — I mean, Harley has talked a lot in the past around the number of SKUs that we need to manage versus someone like Amazon. It’s very, very different business model and that allows us to be more thoughtful in terms of how we leverage partners.

And so, I think not only the business model, but also the way we leverage partners is going to allow us to do some things, which is pretty interesting in terms of how we think about Deliverr. And this is not even to mention the software which Deliverr brought to us, which has also proven to be a real differentiator.

Amy Feng — Director, Investor Relations Communications Lead

Our next question will come from Andrew Bauch at SMBC Nikko. Please go ahead with your question.

Andrew Bauch — SMBC Nikko — Analyst

Hey, guys. Thank you for taking the question. Just want to get a sense of your guidance philosophy here. Not guidance, but the commentary you’ve made around 1Q, where you’ve kind of seen quarter-to-date. And then, how do you kind of build to that high-teens number? Because when we kind of consider some of the initiatives, they are clearly showing momentum. It was little — came in a little bit lighter than what we anticipated.

Jeff Hoffmeister — Chief Financial Officer

Yeah, let me start with that one. I — reminder of [Technical Issues] is our seasonally low quarter. We still feel very good that you alluded to the new products that we introduced last year and we feel really good about the solutions we had with our merchants, including all the additional solutions that we unveiled last year. And as you know from our commentary around Black Friday, Cyber Monday, that was a very good weekend for us. And overall, when you look at Q4, we definitely outperformed well the market in terms of comparing our results versus the broader e-commerce market.

That said, we’re also mindful of this macroeconomic environment, and that’s just a simple reality of where we are right now. But in terms of our own solution, in terms of our own business, we feel really, really good about what we are doing.

Amy Feng — Director, Investor Relations Communications Lead

We have time for two more questions. Our next question will come from Samad Samana at Jefferies. Please go ahead with your question.

Samad Samana — Jefferies — Analyst

Hi. Great. Thanks for taking my question. So I wanted to follow up on the — on adding new merchants. And we’ve been listening to the commentary, but I guess, just how should we think about the maybe the different proportions at the top of the funnel, the amount of leads that are coming in that are trying the product?

And then, just how are you thinking about merchant growth in 2023, especially as we think about in the context of the last couple of years, where we’ve had some very strong years and had some tough comps against that? Just what’s the Company thinking as far as bringing new merchants on to the platform? And what are you assuming? Thank you.

Harley Finkelstein — President

I mean, there’s — the part of what Shopify’s business model that I think you know at this point is that there are these on-ramps into the Company, into using Shopify. And historically, the main on-ramp was small businesses in English-speaking countries. What we’ve seen over the last couple of years and I think what the results provide for over the last few years is that we now have multiple on-ramps in. We have new merchants coming in just to use Shopify Plus. Now, with CCS, that’ll be a new on-ramp. We have now merchants coming to us primarily for point-of-sale. I mean, now that point-of-sale can now power a 1,000 retail stores, our merchants have come first and foremost for point-of-sale and then expand to online store as well.

Whether it’s international markets or it’s new verticals, the idea is to simply be the best product out there, the best value and the best things you can use to get up and running and then to scale. So just in terms of where these merchants are coming from, it isn’t just one single vertical or one single type of merchant anymore. All these on-ramps continue to expand. And every time we add a new type of service or product, that creates a new healthy on-ramp for us.

And so, I mentioned in my prepared remarks, in the last two years, we’ve seen a record number, at least in the U.S., of new business registrations, and we think that’s going to be good for Shopify. But beyond just simply the U.S., we also are targeting merchants across a whole different bunch of geographies and in different sizes and that will lead to more merchants. But the important nuance here also is that, if you think about just merchant count on its own, it’s doesn’t really reflect the growth of the company.

If you think about Supreme or if you think about Mattel or Black and Decker, these are single merchants, of course, but they bring, obviously, a lot of GMV with them. They take a lot of services with them, they take a lot more of our products and solutions than simply a small business. So I encourage you to think about the Company’s growth not just simply in a merchant count, but merchant count and GMV and especially, our attach rate, which really does reflect the amount of value that our merchants are taking and their usage of those products.

Amy Feng — Director, Investor Relations Communications Lead

And our last question today will come from Ken Wong at Oppenheimer. Please go ahead with your question.

Ken Wong — Oppenheimer — Analyst

Great. Thank you for squeezing me in. Just a quick question for you, Jeff. As we think about opex, I guess, first, how much of the riff [Phonetic] impacted the 4Q operating expenses? And then, you mentioned low-single digits up in Q1. Is that the right way to think about the pace of spend in Q3 through Q4?

Jeff Hoffmeister — Chief Financial Officer

Well, you alluded to the reduction in force that we had earlier in the year. But also keep in mind that in the latter half of last year, we added the employees from Deliverr. For me, when you think about putting it in context, the operating expenses, we mentioned in the prepared remarks that Q4 versus Q3, when you look at it, it was essentially flat. When you pull out the one-time charges related to real estate and the legal and the severance, it grew barely from Q3 to Q4. And as we talked about in the guidance, it grew just — we anticipated growth just a little bit from Q4 to Q1. And so from our vantage point — and this is on top of, obviously, we delivered very strong growth and Harley alluded to this earlier, we delivered very strong growth in Q4 and we obviously see growth in Q1 on a revenue basis as well. So you’ll have two successive quarters, where you’re growing the top line and keeping operating expenses essentially in line.

So we’re trying to be very mindful of what we’re doing to some of the comments that we’ve all made on this call. But that being said, we’re going to continue to invest where we should, but we’re being careful on opex.

Amy Feng — Director, Investor Relations Communications Lead

Thank you to all of you who have joined us this evening and for your questions. This now concludes our conference call for the fourth quarter and fiscal year of 2022. Thank you and goodbye.