Shopify Inc. (NYSE: SHOP) Q1 2020 Earnings Call Transcript

Shopify Inc. (SHOP) Q1 2020 earnings call dated May 06, 2020

Corporate Participants:

Katie Keita — Director of Investor Relations

Harley Finkelstein — Chief Operating Officer

Amy Shapero — Chief Financial Officer

Tobi Lutke — Founder & Chief Executive Officer

Analysts:

Gus Papageorgiou — PI Financial — Analyst

Brad Zelnick — Credit Suisse — Analyst

Kenneth Wong — Guggenheim Securities — Analyst

Colin Sebastian — Robert Baird — Analyst

Richard Tse — National Bank Financial — Analyst

Deepak Mathivanan — Barclays — Analyst

Matthew Pfau — William Blair — Analyst

Darren Aftahi — Roth Capital Partners — Analyst

Nikhil Thadani — Mackie Research Capital — Analyst

Josh Beck — KeyBanc — Analyst

Samad Samana — Jefferies — Analyst

Ygal Arounian — Wedbush Securities — Analyst

Presentation:

Operator

Thank you for standing by. This is the conference operator. Welcome to the Shopify Inc. First Quarter Financial Results Conference Call.

[Operator Instructions]

I would now like to turn the conference over to Katie Keita, Director of Investor Relations. Please go ahead.

Katie Keita — Director of Investor Relations

Thank you, operator and good morning everyone.

We hope everyone is keeping well during this uncertain time. We are joined this morning by Tobi Lutke, Shopify’s CEO, Harley Finkelstein, our Chief Operating Officer, and Amy Shapero, our CFO. Each of us is dialing in safely from our homes. After some brief prepared remarks by Harley and Amy, we will open it up for your questions.

While much has changed from our call in February, one thing that hasn’t is the requirement to point out that we may make forward-looking statements on our call today, which are based on assumptions as such are subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements except as required by law. You can read about these risks and uncertainties in our press release and in our filings with US and Canadian regulators. Note that adjusted financial measures we speak to today are non-GAAP measures, which are not a substitute for GAAP measures. Reconciliations between the two can be found in our earnings press release. And finally, we report in US dollars, so all amounts discussed today are in US dollars unless we tell you otherwise.

With that I turn the call over to Harley.

Harley Finkelstein — Chief Operating Officer

Good morning everyone and thank you for joining us today.

Before moving ahead, I want to express our gratitude on behalf of the entire team at Shopify to the frontline workers who are in the trenches, for medical professionals, to food store workers, to those in our partners’ warehouses, who are keeping the rest of us safe and fed, and operational during the COVID-19 pandemic. We are incredibly grateful for the tireless service of these heroes.

I typically take this time every three months to review what we saw in the quarter. Today, I’ll keep that commentary to a minimum since January and February saw much different business environment than we have today. Instead, I’ll use most of my remarks this morning to catch up everyone on what we’ve done, what we’ve seen in March and April. This shock to the economy was so sudden that patterns in merchant April may not be predictive of the rest of the year. However, we do have reason to believe that some of the patterns that emerge will continue.

I’ll be covering three areas today, Shopify’s response to COVID, how our merchants have been faring and the world we think is emergent on the other side of this. Our highest priority as the COVID situation unfolded was the health and safety of our employees. In late February, we directed the entire Shopify team to cancel non-essential travel and by mid-March our entire workforce was working from home. We are fortunate to have already been well outfitted for collaboration at a distance. So this shift was minimally disruptive to most employees day to day. Others, whose primary work supported our office spaces are contributing in other ways, many supporting initiatives that directly impact our merchants. No one has been furloughed to due to COVID. Our merchants on the other hand have been far more impacted. So we acted quickly.

In the early days of the pandemic, our guiding principle was the same as always, put merchants first. We prioritize efforts to give existing merchants the tools they need to survive and help get offline businesses online fast. We launched a continuously updated resource center for merchants with tutorials and links to apply for government-provided funding. We rolled out in store and curbside pickup for users of our point of sale product and should merchants how to set up local delivery options. We made gift cards available on all of our plans. And with more than $1 million in gift cards sold since making this change, merchants are accessing much needed cash quickly during this disruption. Both of these have triggered more local activity, including various communities setting up online sales to spur local commerce and more than a quarter of our brick and mortar merchants in English-speaking geographies are now using in-store pickup and local delivery.

We made $200 million additional available through Shopify Capital to extend to merchants for whom working capital will make a difference and expanded the availability of capital beyond the US to the UK and to Canada. The rolled out Shopify Email to all our merchants to help them reach out and build trust with their buyers during this uncertain time. We’re making this feature available at no charge until October 1. And we made our standard plans free to new users for three months. Brick and mortar only retailers have lost their only channel, the street. If these businesses are going to survive, it’s mission critical to get online and we’re giving them more time to do exactly that. This change is also helpful to anyone finding themselves with more free time or wanting to generate supplemental income. We’ve seen a notable increase in online store creation, some of which are established retailers. It is still too early and the macro environment is too uncertain to make predictions about how successful these new stores will be, but merchants can be assured that we are doing everything we can right now to give them the tools they need to succeed.

Merchants will continue to need our help and we plan to continue our efforts to innovate and develop more impactful ways to support them. After all, small businesses are a vital part of the economic and social fabric of our society and support the livelihoods of many people in our communities. So what are we seeing in the platform and among our merchants? First and foremost, we are seeing them find ways to operate under today’s constraints through creativity, grit and determination. Their stories have been incredibly inspiring from pivots by tailors and distilleries now making face masks and hand sanitizers, to 84-year-old grandmother in Italy, who has taken her past to making course online to replace the in-person experience she was offering to tourists before the pandemic. Merchants are eager to mobilize, implementing discount codes at levels usually seen during the holiday shopping season.

On Shopify Plus, verticals we’ve never seen before like food stores are showing up. In April, Heinz signed on to Shopify Plus and launched seven days later, while chocolate maker Lindt launched in just five days. This pandemic is forcing all kinds of merchants to rethink how they sell things, and Shopify Plus offers larger merchants the ability to move fast while managing costs, especially important at a time when economics are pressured. We are seeing our partners around the world step up phenomenal way, even as many of them face hurdles themselves being entrepreneurs and small businesses. Our partners are getting stores up and running significantly faster with the number of stores created in three days or less increasing by 85% between March 13 and April 24, relative to the six weeks leading up. Our partners are advocating for merchants and offering discounted and free services, and they’re working hand-in-hand with other partners to solve problems for both businesses and for their communities.

Some of these trends like product pivots are temporary. Others like distance learning and the growth of omnichannel commerce are likely to persist. This post-COVID world is what we’re building for and we have shifted accordingly. Shopify’s world view has not changed. Our conviction that merchants need to be able to sell to their buyers wherever they may be remains as true today as it was a decade ago. While we are uncertain about what is coming in the months ahead, Shopify is uniquely positioned to help improve the economic lives of our merchants in this difficult environment, and in a retail landscape that is accelerating its shift online. In what is easily the greatest humanitarian crisis in a generation with adverse effects that will last for the foreseeable future, it is important that we all keep building towards solutions. All of these shifts make Shopify which was already a good fit for modern commerce an even better fit for the world that emerges on the other side of this.

Before I hand off to Amy, we wanted to share an exchange with a merchant that illustrates just how critical it is especially right now to make commerce better for everyone. In this case, it’s a farmer. Here it is.

[Video Playing]

Amy Shapero — Chief Financial Officer

Thanks, Harley. That was a great reminder of why we all come to work every day.

I want to echo our commitment to our merchants. We are 100% behind them and doing everything we can to help them through this tough time. We believe we are well positioned to help merchants now and into the future as it has become increasingly important for merchants of all sizes to sell online and to have better options for getting their goods to buyers. We are on that path already and will continue to invest to make commerce better for everyone in 2020 and beyond. Shopify’s momentum in 2019 continued into our first quarter turning in a strong January and February prior to headwinds appearing in March as a result of COVID.

I’ll start by reviewing first quarter results, highlighting any COVID impact. Revenue grew 47% in our first quarter to $470 million. Subscription Solutions revenue increased 34% year-over-year to $187.6 million. Monthly Recurring Revenue grew 25% year-over-year to $55.4 million, primarily driven by new merchants joining the platform. Year-over-year MRR growth was impacted by several factors including Shopify’s removal of thousands of stores from the platform due to violations of our Acceptable Use Policy, lighter international merchant adds, and an uptick in subscription cancellations and merchants downgrading to lower priced subscription plans in March, largely due to COVID.

Shopify Plus continued to increase its contribution to MRR, accounting for $15.3 million or 28% compared with 26% of MRR in Q1 of 2019. Strong app and Shopify Plus platform fee revenues contributed to the approximate 9 percentage point difference between the growth of Subscription revenue and MRR. Merchant Solutions revenue grew 57% to $282.4 million in Q1 2020 compared to the same period in 2019. Year-on-year growth was driven primarily by Shopify Payments followed by growth of other Merchant Solutions revenue like capital and shipping on the back of strong GMV expansion, which increased 46% year-over-year to $17.4 billion. Strong January and February merchant sales further boosted by elevated buying in March driven by COVID of food and other essentials and items such as home office and gym equipment contributed to Q1 GMV. This was partially offset by a decrease in brick and mortar sales giving closures related to COVID.

$7.3 billion of GMV was processed on Shopify Payments in Q1, an increase of 51% versus the comparable quarter last year. Payments penetration of GMV was 42% versus 41% in Q1 2019, as Shopify Plus continued to increase its share of GPV and Shopify Payments continued to expand internationally. Shopify Capital had a notable milestone in Q1, surpassing $1 billion in cumulative capital advanced since we launched this product in 2016. Offering our merchants a fast and convenient way to secure capital, especially in times like these helps them focus on what really matters, growing their business.

Adjusted gross profit dollars, which excludes the impact of stock-based compensation expense and related payroll taxes, as well as amortization of acquired intangibles grew 44% over last year’s first quarter to $263.8 million. Even after taking into account, the acquisition of 6 River Systems, our ramp up of investment in Shopify Fulfillment Network and a greater mix of Merchant Solutions revenue versus last year. This reflects strong growth from higher margin revenue streams, like the variable platform fee from Shopify Plus merchants, efficiencies in hosting costs and improved payment margins.

Adjusted operating loss, which excludes the impact of stock-based compensation expense and related payroll taxes, as well as amortization of acquired intangibles was $7.3 million in the first quarter of 2020 compared to adjusted operating income of $0.3 million in the first quarter of 2019. The loss in Q1 2020 was the result of our first full quarter of operating expenses associated with the 6 River Systems acquisition, significantly more brand spend in the first quarter of 2020 relative to the same period a year ago and a year-over-year increase in the allowance for potential losses related to Shopify Payments and Shopify Capital due to the potential impact of COVID. Adjusted net income for the quarter was $22.3 million or $0.19 per share compared with $7.1 million or $0.06 per share in last year’s first quarter.

Finally, our cash, cash equivalents and marketable securities balance was $2.36 billion on March 31. Because COVID impact presented itself first in March with respect to our results, we want to share March and April merchant and business insights that drove our immediate merchant response that Harley described, and then are expected to have implications on commerce both short and in some cases, long term. So what have we learned so far? First, the shift from offline to online commerce is accelerating. More entrepreneurs than ever before are trying out Shopify with new store creations on our platform growing 62% between March 13 and April 24 compared to the six weeks prior supported by brick and mortar merchants moving online and the extension of our free trial on standard plans to 90 days, providing a healthy balance of existing businesses and new entrepreneurs setting up shop.

While our free trial extension will likely further pressure MRR growth in our second quarter, we expect new business creation to offset this over time. Second, consumers are part of this shift to online and they are broadening their online shopping activities. The number of consumers making a purchase for the first time from any Shopify merchant grew 8% between March 13 and April 24 compared with the previous six weeks. Over that same period, the number of consumers purchasing from a Shopify merchant they’d never shopped at before grew by 45% over the 6 weeks leading up. As more consumer shop on more of our merchants stores, we are helping consumers more easily discover new brands and products such as through our Shop app and we are also enhancing capabilities to get products for merchants to buyers both locally and beyond.

Third, newer product categories are growing as a part of our mix. We have seen a lift in GMV in the food, beverage and tobacco category, which more than doubled between March 13 and April 24 over the prior six-week period. Other essential products such as toilet paper and baby products as well as work from home, fitness, entertainment, and leisure and hobby products also trended upward reflecting the extended shelter in place directives. While we saw an initial softening in apparel and accessories, this category has recovered since the last week of March.

The world we live in today is very different from when we reported our fourth quarter results on February 12. What has not changed however is Shopify’s mission to make commerce better for everyone. This North Star has guided our decision-making over the years to invest in the right initiatives such as building resilient platform infrastructure for low friction online shopping experiences from browsing to checkout, adding essential tools and capabilities for merchants like payments and fulfillments, and lowering the barrier to starting a business. This strong foundation, has allowed us to move with speed and agility to adapt to current circumstances and empower our merchants to do the same. We have historically worked on the right things to help our merchants succeed and those things are even more important now given COVID. Now it’s a matter of turning the dial up or down in various areas based on immediate needs.

I’ll walk through each of our initial 2020 investment areas and address how we are adjusting our plans. Starting with Shopify Fulfillment Network, which remains a top priority. Now more than ever, timely and affordable fulfillment is important for our merchants and their buyers. We intend to continue developing our Fulfillment Network over our planned five-year timeline focusing on achieving product market fit before entering our scale phase in 2021. Demand continued to ramp in Q1 as Shopify Fulfillment Network had its highest number of merchants signings in a quarter since inception. And we fulfilled more volume in the first quarter of 2020 then the fourth quarter of 2019. During this time, we are working with our warehouse partners to help ensure the safety and health of all warehouse employees. Our partners warehouse operations managed to improve service levels from Q4 despite the challenging circumstances presented by COVID. While our transportation partners have also been working diligently to meet agreed upon service levels, they too are pressured, which is impacting the reliability of some deliveries.

Some merchants have also seen delays in receiving inventory due to increased complications in cross-border and port logistics. As we expand the number of merchants we’re on-boarding, we are putting in place the systems and tools that will support a much larger operation in the future. 6 River Systems collaborative warehouse automation technology is helping to boost the speed and reliability of Shopify Fulfillment Network releasing several enhancements in Q1 that strengthen its warehouse fulfillment solution. With increased workspace capacity, expanded safety compliance and an improved user interface, Chuck robots are now bigger, stronger and easier to use allowing operators to maximize utilization.

Moving to Shopify Plus. In this pressured environment large volume merchants are coming to Shopify Plus looking for cost-effective commerce solutions that work well over multiple channels. So for the remainder of 2020, we are shifting our resources to help more merchants benefit from all of the superpowers that Shopify Plus has to offer in our core geographies and delaying some of our original planned investment and international expansion.

We’ll also continue to focus on the product expanding use cases for our work automation tools Shopify Flow, improving business analytics and continuing to develop our wholesale capabilities. And we will also make some adjustments to our international expansion outside of Shopify Plus, as the ongoing global pandemic impacts the livelihoods of billions, the need for a low touch way to exchange goods and services is more apparent than ever. We plan to pause certain expansion activities to get to true product market faster in our focus regions. This includes helping businesses to get up and running as easily on mobile as on desktop and to expand selling opportunities beyond their borders.

We are redirecting our investments in the Shopify platform to fast track what merchants need now. The most pressing of these is capital, which is why we expanded to the UK and Canada within weeks of stay at home measures being put in place. Extending working capital rapidly and responsibly can make a lifesaving difference to a business. And so we work with partners, while taking measures to control losses amidst our expansion. This meant leveraging our dynamic machine learning models and adapting terms so we are helping as many merchants as possible while keeping losses at a prudent level. And as we announced in March, we expedited delivery and curbside pickup features on our point of sale products so merchants could continue operating under social distancing norms. This is only one example of how POS is pivoting for a period where less commerce is happening in person. And earlier this week, we shipped all-new Shopify POS, our intuitive point of sale software that offers our retail merchants a unified commerce experience bridging online and offline, helping them to adapt to a retail landscape that we expect will look different than before.

Finally, the Shopify brand campaign has been suspended in order to free up resources for other initiatives, many of which I just laid out that are more directly impactful near term. In a matter of days, our marketing team and others spun up an in-depth COVID response resource center where merchants can get the help they need now. This includes tutorials such as how to start selling gift cards, where to access government-backed assistance programs and community forums where merchants can share their experiences and learn from each other.

We are not sure what the remainder of 2020 looks like, nobody is. And while Shopify was a very different company when the last extended financial shock occurred in 2008 and 2009, we took lessons from that period as well as from our early years as a bootstrap start-up that have become core to our culture. The first lesson is, we cannot help any merchant anywhere if we are not in good financial health ourselves. As noted, we have already begun to adjust our spend to focus on what is most critical for our merchants at this time. In addition to pausing our brand campaign, we have reduced other marketing activities, canceling most company events planned for the next several months and leveraging in-house creative solutions instead of external resources.

We have also actioned initiatives to achieve hosting and other efficiencies and there are additional measures we can take in the event of an extended recession that allow us to continue delivering what merchants need in challenging times. The second lesson is that many people who circumstances have changed will try to build their livelihoods in an altered world and helping them do this is exactly what Shopify was built for. The increased uncertainty in the macroeconomic environment, makes it difficult to predict how the near term through 2020 will shape up, which is why we are not providing an outlook for our second quarter or the full year. We will continue to closely monitor the factors impacting our business to make great decisions quickly to help our merchants.

We will get through this and we’ve been working hard to ensure that as many merchants as possible do as well and emerge from a better suited for multi-channel commerce. We have a business model that puts merchants first, a fundamental strength as the world tools for lower touch commerce. We have a healthy debt-free balance sheet and a strong cash position and a proven disciplined capital allocation approach to ensure we can operate effectively even through what may be an extended recession.

And finally, we have a long established and trusted network of partners working as hard as we are to support merchants now. As Shopify has always been a company of people that thrive on change and embrace hard problems, we are meeting this challenge head on ready to learn from this collective experience and emerge from it better.

With that, I’ll turn the call back to Katie.

Katie Keita — Director of Investor Relations

Thanks, Amy. And we are glad everyone could join us this morning to talk about Shopify.

[Operator Instructions]

And with that I will turn it over to the operator to begin polling for questions.

Questions and Answers:

Operator

[Operator Instructions]

Our first question comes from Brad Zelnick of Credit Suisse. Please go ahead.

Brad Zelnick — Credit Suisse — Analyst

Great, thank you so much for taking the question. Listen, I appreciate the lack of visibility and why you’re not providing guidance, but you have a very unique view into what’s happening across the economy more broadly. And as you think about your own long range plans what underlying assumptions are you making about the shape of economic recovery from here? And what data points within your business, give you the most optimism and conversely, the most pessimism? Thanks.

Amy Shapero — Chief Financial Officer

Hi Brad. This is Amy. Hope you’re well. Let me take that one. So the way that we’re sort of looking at this is, there is a set of tailwinds and headwinds. And right now those tailwinds are far outweighing the headwinds for Shopify and let me just kind of review each one of those. And then I can go into the economic scenarios that we’re looking at.

So with respect to the tailwind, we said in the remarks earlier there has been this accelerated shift from offline to online. Multi-channel commerce is increasingly important to reach existing and new buyers and direct to consumer is critically important to our merchants to have that direct relationship and control their own destiny with finding buyers.

We expect new norms and trends will benefit Shopify under different economic scenarios. And there is also what I call the multis will likely help us. We’re multi-channel, we’re multi-vertical and we’re in multiple geographies. Those are all playing to our benefit. Also, the diversity of our merchant base has been helping and will continue to help. We’re not dependent on any one merchant. And lastly, I think our agility, speed and balance sheet strength are all helping us in this environment. The headwinds are obviously the uncertainty of COVID and how it plays out, how it impacts the economy and unemployment in particular. The impact of businesses and consumer spending is an unknown the further we go out in time.

And the degree that offline to online continues to offset those economic headwinds is uncertain. Like most companies, we’re looking at both the U-shaped recovery and an L-shaped recovery. The U-shape is a pretty significant downturn in the economy over the next couple of quarters, followed by a fast recovery. In that case, that’s really good for most merchants in a recovering economy. We think that plays well broadly. And we expect all of our merchants will benefit from the new purchasing habits and norms, which started during these lockdowns.

In the L-shaped recovery that we’re looking at, there is a pretty sharp downturn in the next couple of quarters, followed by a much slower recovery well into 2020. In that case, it probably means that COVID is continuing to raise its ugly head. Online remains incredibly critical to merchants and we expect those merchants who are selling non-discretionary items on the platform like food, beverage, healthcare items will continue to increase as a percentage of our GMV. So we step back and none of these economic scenarios is great from an overall perspective, but we do think that Shopify’s tailwinds will benefit us in any economic scenario.

I just want to add that we are well-capitalized to weather any of these economic scenarios with a strong balance sheet and we will continue to invest in those key areas that will benefit our merchants and help us come out on the other side stronger.

Katie Keita — Director of Investor Relations

Thanks, Brad.

Operator

Our next question comes from Ken Wong of Guggenheim Securities. Please go ahead.

Kenneth Wong — Guggenheim Securities — Analyst

Great, thanks for all you guys are doing for merchants, and thanks for taking my question. So I wanted to touch on a point you guys made earlier on just new types of merchants coming into the Plus franchise, also seeing a little bit of merchants downgrading from Plus. Just wondering if that was still a net positive, kind of how you expect that trend to continue? And then any downgrading from the other SKUs like advanced to the primary Shopify SKU or Shopify to basic? Thank you.

Harley Finkelstein — Chief Operating Officer

Hey Ken, it’s Harley. I’ll take that call. So yeah, we certainly are seeing new types of merchant verticals. We had sort of mentioned that we’re seeing brands that traditionally had not gone direct-to-consumer. We mentioned Heinz and Lindt chocolates literally go from contract signing to full launch of their direct-to-consumer store in seven days and five days, respectively. We’re also seeing the grocery category, again, a vertical that Shopify Plus has not traditionally seen become a real thing. In Canada, we’re seeing some of our largest grocery chains, like Loblaws and Farm Boy set up stores on Shopify Plus. So we’re excited by that, obviously. We also have changed our focus from, sort of, focusing on upgrades on Shopify Plus to more helping getting more large merchants online in our core geographies faster and so we’ve sort of pivoted our sales team for the time being to focus on getting brand-new merchants on.

And then in terms of the downgrade question, certainly, we are seeing — downgrade are happening, but what’s more — what’s most important is that they’re staying on Shopify and they’re rightsizing their businesses. And some of those downgrades have actually already reupgraded back to Plus. And so we expect to see some downgrade and some come up as well as they figure out what they need and try to trim some costs. But generally, we are pleased with what we’re seeing. And I have to tell you on a personal level, these are brands that I’ve been after for years to join Shopify and join Shopify Plus that told me that eventually, they’ll do it. They’re now doing it. And so in many ways, what the situation is doing is it’s accelerating the catalyst for people to move from wholesale businesses to direct-to-consumer businesses and move from businesses that traditionally were only brick-and-mortar to being more in a brick-and-click sort of model.

So pleased to see that, and we think that will continue.

Katie Keita — Director of Investor Relations

Thank you, Ken.

Operator

Our next question comes from Colin Sebastian of Baird. Please go ahead.

Colin Sebastian — Robert Baird — Analyst

Great, thanks and good morning, and hope you guys are all safe and healthy. Thanks for the details on the puts and takes on the adjustments to the operating plan. Is there any way to help us quantify the overall impact of those on the level of investment spending for this year? And more specifically on the fulfillment service, I think based on what we’ve heard from other e-commerce platforms and marketplaces, this may be the single biggest pain point for many merchants right now. And it sounds like there isn’t really any change in your time line for rolling out these services, but is that correct? And how do you see Shopify Fulfillment differently today than you did just a few months ago? Thank you.

Amy Shapero — Chief Financial Officer

I’ll start that one off in the first part about the quantifying the puts and takes. We tried to provide some overview in the earlier remarks, and I’ll just speak generally to how we’re thinking about our spend right now. We’ve done an extensive analysis of our overall spend. And what we decided is that any spend that is not impactful, productive or relevant in this time period, like our brand spend, that we would suspend that spend — those expenditures for the remainder of this year and redeploy that money into more useful and productive areas like the 90-day free trial, which we’re seeing great benefits from, as I said, we’ve seen a 62% increase in store creations on the platform.

So that’s largely how we’re doing. How that actually comes out quantitatively, we’re not going to provide guidance, but you should know that we’re scrutinizing our spend very heavily and moving it in the direction where it can be impactful. On the Fulfillment Network, Harley, Tobi, I know we think it’s increasingly more important in this — and COVID validated this direction, and I’ll let them comment more.

Harley Finkelstein — Chief Operating Officer

Yeah, thanks. Harley here. Yeah, so as Amy said, I think that COVID certainly validates the decision to expand to fulfillments. It seems like now more than ever timely and affordable fulfillment is really important for our merchants and their buyers, especially as some of the incumbent delivery networks are straining under heavy volumes. SFN was already building urgently. We don’t slow down at Shopify, but we will continue to develop our Fulfillment Network over the planned five-year time line.

We are making really good progress. We are still getting access, but we are expanding the number of onboarded merchants. We’ve expanded to Canada, so allowing some Canadian merchants and also some product enhancements have rolled out. So things like merchant onboarding experience is getting better, platform resiliency is getting better. But I think our decision to move into SFN is — feels like the right one now more than ever.

Katie Keita — Director of Investor Relations

Great, thanks, Colin.

Operator

Our next question comes from Gus Papageorgiou of PI Financial. Please go ahead.

Gus Papageorgiou — PI Financial — Analyst

Thanks. Thanks for taking my question and congrats on a great quarter. In a recent interview, Tobi, you said that the recent crisis is pulling 2030 into 2020 in terms of online commerce. One of the trends I expect to see is that I don’t think that e-commerce is going to get easier. I think it’s going to get harder as stuff like augmented and virtual reality technologies get embedded into the e-commerce experience. Do you think the current situation has made larger established brands reconsider their strategy of hosting their own sites and maybe saying, we don’t need to do this anymore, Shopify can do it better than we can. Have you guys seen that at all, or not?

Tobi Lutke — Founder & Chief Executive Officer

Yeah, I think that’s exactly what we’re seeing. I really believe that when it comes to the retail industry, like maybe it’s not 10 years, but it’s — we’ve just jumped a lot of years in the future. And I think one really important part our business, I think it’s really worth for everyone to try to use software that was released in 2010 without any updating in patches. If one of us kind of experience this, they’ll say, hey, I remember using this, and I remember really, really liking this back then. But now it seems very old and somehow not appropriate anymore to what I would expect of this particular category of software. So this is really hard to explain bit rot that exists on the Internet, where people can just sort of intuitively tell if a product is kind of made for the current times or not, and if it fits the current times and uses the capabilities that people make assumptions about.

One of my chief concerns of Shopify has always been to — because Shopify is a software that first launched in 2006 to never make it not fit into the current times. And that’s actually significantly harder job than it might sound. And again, this, I think, like the massive jump ahead right now, everyone now has took a 2020 quality software in a basically 2030 world. So everyone’s software just got 10 years worth, given the requirements and the — like needs by the customers. And so everyone has to make up this gap. But we have to — this is why you see Shopify shipping a lot right now. I have intentionally asked the company very early in this crisis to, like, delete all our existing plans and re-derive them from this new reality. I’ve asked the company to lower its minimum acceptable quality bar, to shipping because something has to become variable because there’s only 24 hours in the day. So that we can launch things.

And so we are trying to move ahead because there is this massive vacuum that exists and the gap compared to quality, especially you see this around curves like pickups. And like this is speaking from a perspective of, I think, we’re one company, which actually had a 2020 quality solution for the retail space in the market. I don’t think anyone really had. So that gap just got significantly bigger for many companies that have always sat on fairly outdated software. And I think this is driving a lot more adoption, right, because — I mean, Shopify is very good, like this could be massively better certainly. I’ve spent almost every other meeting I have about some way, how we can make it significantly better. But I think all things considered, it works really well. It fits itself really well.

Some of the things in the press release you might have seen, like that — like based on our particular view in a world of retail, while 70% of retail sales might have disappeared, the businesses — the retails that we’re ready with an online channel at the same time managed to replace up — like up to 94% of their sales through the online channel. Now imagine the vacuums that exists with all the businesses that they’re only available to retail, like this is now a huge driver of opportunity for the challenger brands, and it’s an imperative that people who are unprepared to jump into the opportunity. So I think there’s all sort of effects that are going on right now where that’s important to understand. It’s in no way easy to understand what exactly are the cause and effect here, like this is like a very complex chaotic system right now that — in which a lot of people from rural farmers all the way to Fortune 50 companies find utility in this thing we built.

Katie Keita — Director of Investor Relations

Great, thank you, Gus.

Operator

Our next question comes from Richard Tse of National Bank Financial. Please go ahead.

Richard Tse — National Bank Financial — Analyst

Yes, thank you. I was wondering if you could give us a sense of your wins that are sort of coming from competitive platforms, particularly when it comes to the larger merchants, this might be more applicable to sort of prior to COVID. But can you maybe give us some context on that? Thank you.

Harley Finkelstein — Chief Operating Officer

Hey Richard, Harley here. The truth is a lot of the — in my commentary earlier, I talked about new verticals coming to Shopify. For the most part, they’re not actually replatforming. These are net new direct-to-consumer business models. So either in the case of Heinz Ketchup, they just never sold Heinz Ketchup directly to the consumer before. So these are not necessarily migrations. And that being said, one of the things that COVID has obviously done is for small companies, but also for large companies is look at their cost base and figure out where are they spending on things that they’re not deriving proportional value from. And a lot of the enterprise e-commerce platforms certainly are something that people are relooking.

Now that being said, because time is of the essence right now and sometimes replatforming does take some time, they may be waiting until things become a little bit more normal before they make those migrations. But generally, a lot of the new verticals we’re seeing, whether it’s the CPG brands for the first time going direct to consumer or it’s grocery or it’s things like liquor companies or tobacco companies that we’re seeing, just were not — they just weren’t selling before. And so the migrations are not necessarily the thing that’s driving this. It’s a lot of net new merchants coming to the platform.

That said, I do suspect, as Tobi pointed out, that a lot of people after this things get a little bit more normal, people will relook whether or not they’re getting bang for buck from their existing software providers, particularly the more legacy enterprise players and realizing that, one, it’s too expensive and, two, they’re not getting the flexibility they require.

Katie Keita — Director of Investor Relations

Great. Thanks, Richard.

Operator

Our next question comes from Deepak Mathivanan of Barclays. Please go ahead.

Deepak Mathivanan — Barclays — Analyst

Great, thanks for taking the question, guys. Amy, can you [Technical Issues] MRR from the free trials, the 90-day free trials in 1Q. There’s a lot of moving pieces, obviously on MRR, but it feels like this is a trend which will continue into 2Q as well. How should we think about the impact on 2Q? Thank you.

Amy Shapero — Chief Financial Officer

Yeah, so the 90-day free trial, let me just give you a quick overview. It started at the latter part of March and is ongoing. We’ve not made a decision yet or announced yet when we’ll terminate the free trial. We’re really excited about the results that we’re seeing with new store creation up 62% over the last six weeks versus the prior six weeks. I want to emphasize what new store creation means. They are potential merchants that have come to the platform they’re setting up a store. They’ve given us their billing information, but we are not billing them yet, so we don’t count them as a merchant.

We know that in the mix of those new store creations, they are both established businesses and new entrepreneurs. And the reason why we know there’s a healthy mix of established businesses is the percentage of those merchants selling in their first week on the platform is higher than it has typically been historically. Those new store creations, because they don’t count as a merchant, we’re not billing them. They don’t count towards MRR. So as I said in my earlier remarks, MRR in the second quarter will be impacted by this 90-day free trial, but we expect the benefits from that 90-day free trial to materialize in the third quarter.

Katie Keita — Director of Investor Relations

Thank you, Deepak.

Operator

Our next question comes from Matt Pfau of William Blair. Please go ahead.

Matthew Pfau — William Blair — Analyst

Hey guys, thanks for taking my question. Just wanted to ask on the Shop app. It seems like you’re starting to dip your toe in the water here with demand generation or demand aggregation. Have you thought more about going into the space, especially as perhaps consumer discretionary spending becomes more challenging over the coming months. It might be something that your merchants would be looking forward to help them out. Thanks.

Tobi Lutke — Founder & Chief Executive Officer

Thanks. I’ll take that. So yeah, Shop app is — maybe quickly. The why behind Shop app is like LTV increase, right Like that’s the goal. So we launched it also with a local discovery feature. This is actually a good example of what I meant earlier when I said that we need to redirect our plans and also it’s a product, like something like the local discovery feature in Shop is something we launched partly because we have successfully lowered our minimum acceptable quality bar to launch something. So the way this worked is, Shop is a very valuable piece of software, but I’ll explain a little bit reasoning for why it exists. But local discovery feature was something that came out of heck days that we called right after the COVID thing started, where we just asked the entire company, hey, everyone, like, make an experiment based on what you think would be helpful right now to our customers.

And we launched local discovery features as part of Shop because not because it’s particularly ready, but because it’s actually helping right now, and it is having right now, people are getting satisfied because this is awesome. So that’s what this is about. We will run more experiments. But the goal is, it is to deepen the relationship with the brands you already are buying from. And that’s particular — that’s like our take on this particular product. It is funny. When — again, I come from the — at least in some product mindset. And I like especially to reargue things from first principles. It is a funny world in which we separated out the particular roles in the world of retail, the way we did. I would — like I would like to now — to meet the person who would argue that from scratch, we should design the world of Internet-commerce in such a way that there are these websites, and then you purchase something and then it says, like after you enter your entire address and credit card from scratch every time, you end up then usually with your funds.

You then go to a thank you page, at which point you hope to get an e-mail at some point in which e-mail maybe then a day or two later, there’s a tracking code, at which point you can paste that in one of six logistics providers, usually getting like verified delayed data about where your package might be. Shrouding this entire process in mystery, it will then show up randomly at a door. And if there’s anything wrong with it, you then have to like go find one of those e-mails again. And you sort of know where I’m getting at, right. Like it’s — like this is all poorly tooled and is the only reason for anyone who came with it is because it’s organically grew like this.

So Shop is — what we’re trying to do is the once an end-to-end experience, that’s good where you interact with the brand for any channel you want, and then it — the process of getting this product is actually something that’s delightful and knowable, that you know of the package’s whereabouts, and the process of interacting with the brand, going back and potentially purchasing some more or repurchasing the first items you just received is something that is kind of the same process. So that’s the utility behind Shop. And so this is where we combined a couple of things and business. And this is, of course, there’s going to be a good amount of work, which is going to go into it. It’s an important project. It’s an ambitious project, but it’s also really, really important understanding, I think for everyone is that the goal is lifetime customer value increase. Hope that helps.

Katie Keita — Director of Investor Relations

Great, thank you, Matt.

Operator

Our next question comes from Darren Aftahi of Roth Capital Partners. Please go ahead.

Darren Aftahi — Roth Capital Partners — Analyst

Hey guys, thanks for my questions. Just on the ramp you talked about in store openings and comments around acceleration of April GMV. Could you maybe share what the mix of discretionary versus non-discretionary categories is? Thanks.

Amy Shapero — Chief Financial Officer

Yeah, on the ramp of April GMV, let me just give you some thoughts on that. We did see an increased shift from off-line to online. And a lot of that was food, beverage, home office, home gym increasing as a percentage of the mix in April. As we said, apparel had softened in March, but it did recover by the end of March.

So even into April, apparel was back to its normal levels. So we saw the combination of all of those things hit in April. And I also just — I’ll add in, just to give you a little bit more information too, the GMV acceleration that we saw in April due to all those verticals doing well was broad-based from a geographic regional perspective across the globe.

Katie Keita — Director of Investor Relations

Great. Thank you, Darren.

Operator

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

Nikhil Thadani — Mackie Research Capital — Analyst

Great, thanks, guys. With all these changes, I was wondering if you could maybe give us some color about how you’re thinking about talent acquisition, especially with all the challenges in the VC back ecosystem in California right now. How are you thinking about maybe going after some of those 10x engineers? Thanks.

Tobi Lutke — Founder & Chief Executive Officer

Yeah. So we are expanding. Again, we have economic models that, like Amy talked to, we want to be very realistic. But again, I think one thing that’s absolutely true is that Shopify product fits better into the world that’s going to be emergent here after the crisis is over, however long this is going to be than before. Shopify, like, always prefers hiring kinds of people with high potential who can become the 10x engineers to use your terms here. And then we help them get there. So this is, I think, a core competency of the company.

But yes, we have a lot of inbound interest. We’re bringing in great people who believe in the mission, and we are going to, like, expand. And yeah, not much else to say, I guess. It’s — Shopify is limited by the amount of the kind of people that we need to build this company. This may get easier to find them now. And that will be, I think, great news for acceleration.

Katie Keita — Director of Investor Relations

Great, thanks, Nikhil.

Operator

Our next question comes from Josh Beck of KeyBanc. Please go ahead.

Josh Beck — KeyBanc — Analyst

Thanks for the question and hope you’re doing well. I just wanted to ask a little bit about the subscription cancellations, you provided some color there. As you went into April, did you see stabilization there? Are there any certain verticals? Just any other color there you could provide would be much appreciated.

Amy Shapero — Chief Financial Officer

Yeah, as we said, we did see cancellations in kind of mid-March that start to escalate. It was mostly low GMV merchants due to COVID. As we moved into April, subscriptions moved back to more normal levels from what we’ve seen historically. And also to talk a little bit more about the plus downgrades that we saw in March. Those slowed considerably into April.

Josh Beck — KeyBanc — Analyst

Very helpful, thank you.

Katie Keita — Director of Investor Relations

Great, thank you, Josh.

Operator

Our next question comes from Samad Samana of Jefferies. Please go ahead.

Samad Samana — Jefferies — Analyst

Hi, good morning and thanks for taking my question. Amy, I know you guys don’t normally provide this data point outside of the annual filing, but just given the unique circumstances, I think it might be helpful. But how does the revenue growth or GMV growth look like for merchants that have been on the platform for 12 months or longer? I know that was, I think, 21% in 2019. I’m curious how that cohort is looking so far maybe in the April period?

Amy Shapero — Chief Financial Officer

Yeah, GMV per merchant, especially those that have been on the platform for a longer period of time, has continued to increase year-over-year. We don’t give out the exact percentage other than annually, but we did see those merchants who are successful on the platform continue to grow their GMV.

Katie Keita — Director of Investor Relations

Great, thank you.

Operator

Our final question comes from Ygal Arounian of Wedbush Securities. Please go ahead.

Ygal Arounian — Wedbush Securities — Analyst

Hi guys, thanks for fitting me in. I want to ask about Shopify POS and the new launch. And I guess, especially around POS pro. You guys talked about timing around launches right now and how to help best customers. So first, I want to just get the thought process behind launching it now while most physical retailers actually shut down, and how you see that helping merchants — bring merchants onto the platform, whether that’s in the physical retail or bringing them onto e-commerce. Then any way to help kind of frame the amount of merchants you have that also do have physical. I know it’s — I think you highlighted it as the second-highest sales channel. But maybe the stores — average store per merchant or any kind of way to help frame that as the new software rolls out? Thanks.

Tobi Lutke — Founder & Chief Executive Officer

Quickly about the point-of-sale product. I’m really excited about the new point-of-sale product. I think it’s a great example of — like, I think even our previous one was basically, like, an iPad version of a traditional point-of-sale system, I think there’s nothing terribly wrong with it. I think there’s just — that is a local maxima product category that I think everyone got stuck on, and I think you can make as a global maxima that’s higher if you build something directly for the terminals.

We’re running a little bit of out of time here. So like I think — how can I answer this question the best? The timing question is probably easy to answer. Like right now, it’s a great time to change your point-of-sale system because you don’t have people in your stores. This is the perfect time to bring iPad into the placements and trying on what your life would be like if having a single retail system that’s connected between all the ways you’re selling. And especially with the new point of sale, now you can run all these cross-channel systems like pickup in-store and schedule pickups and there’s going to be a lot more builds, we have tooling, curbside pick up, and a lot more local things. But to term is a little bit in sort of, I guess, final words here because of the timing.

So things that we’ve seen more than — go up than anything else is like sales to within 25 kilometers, right. Like this is where you can really see — everyone is already familiar with this e-commerce and really seamlessly went into — like you started using the channel than the sort of more familiar channels that is not be — not available. And just sort of industry wide, I think at least with our — from our data from our vantage point, now we have a little bit — like our customers might be a little bit more change-adaptable customers than sort of the norm, although it should converge upon the mean at this point, given the size of Shopify.

I think we need to — you really, really, really need to be in multiple channels and across these merchants, we’re not really seeing that big of drop against consumer confidence spending, but people are still spending. And I think the industry looks at bad data time partly because there’s a lot of existing reporting about looking at like the retail industry by just looking at the off-line world and then making assumptions about the e-commerce world, I think we need to stop that. I think this is sort of like the situation of trying to look at TV ratings during the rise of streaming, and everyone got a little bit confused about how people actually spend their time for a while. We need to adjust the digitalization on the metrics you look at.

And yes, well, thank you for — thanks for joining. You’ll see a lot of things shipping from Shopify. Again, we will be at times slightly embarrassed by the things we are shipping. I think that is a sign of strength because that’s exactly what — when things should be shipped. All the things that we’re shipping will be iterated and improved. We take our mission incredibly seriously, which Shopify has banded together like crazy because we see our job as trying to make it so that more SMBs in the world survive because Shopify exists. That’s the role we picked for ourselves and that’s what we are spending all our time on trying to make come true.

So, thanks for joining us for our quarterly call.

Operator

[Operator Closing Remarks]