GMV was up 24%, marking our fifth consecutive quarter where GMV growth was greater than 20%. Revenue was up 26%. Operating income more than doubled from last year, and free cash flow margin expanded to 19%. These are not just numbers.

They reinforce that Shopify is an industry leader, delivering on both growth and margins, all while simultaneously creating and leaning into opportunities that bolster our growth. So before we dive in, let me start by saying this: if you walk away from this call with anything, it should be these three things: one, entrepreneurship and commerce are growing and Shopify is capturing an increasing share of this vast and expanding market. Two. Shopify is increasingly the go-to platform of choice, not just for entrepreneurship, but for all of commerce.

We are well-positioned for extensive growth across different merchant segments, size, geographies, channels, and products. And three. As our merchants do better, Shopify does better. Our business model prioritizes merchant first, fueled by a high-velocity product innovation engine that makes the heart things easy and everything else possible.

Now let’s quickly dive into some of the key accomplishments in the quarter. Starting off with the product. We build outstanding tools that work seamlessly together, creating a platform that is packed with value and quite frankly, just works really, really well. This is why we invest so heavily in building the most integrated platform on the planet.

And it’s also why merchants come to Shopify and why they don’t leave Shopify. We are shipping products and enhancements on a literal daily basis. So rather than give you a laundry list, I’d like to spend a few minutes now walking through some of the highlights from the quarter. First, let’s talk about enhancing merchant automation.

Our new features are making it easier for merchants to run their businesses more efficiently because let’s be honest, nobody starts a business with the goal of focusing their time on sales tax compliance or inventory management. These foundational tools make the nitty-gritty stuff automatic so merchants can focus on the reason they started the business in the first place for the products they are selling. Let’s start with Shopify Flow. A low-code workflow automation app that empowers merchants to build custom automations and help them run their businesses more efficiently.

This includes a new automation trigger based on the merchant’s custom data and newly completed admin API connector that provides an additional 304 new actions to use in their automations. And as a result, Flow has become a much more powerful tool, enabling merchants products, process customer form submissions, edit orders, and so much more. And within Shopify inbox, this product now uses AI to suggest replies based on each merchant’s unique store information making it super easy for merchants to respond quickly and accurately to customer inquiries. In fact, on average, merchants are using the suggest replies for about half of their responses, edited or not, showing just how effective this feature has become.

Replying can quickly boost conversion rates, which means more sales for our merchants and in turn for Shopify. And finally, within Shopify Tax, we started rolling out automated filing to eligible merchants. Merchants can now automate their preparation, filing and remittance of their sales tax returns from within the Shopify admin. This saves time and simplifies one of the most complex parts of sales tax compliance.

And as we know, taxes do not get simpler just because you cross borders. That’s exactly why in our focus to make Shopify the best way to sell globally across all channels, we saw a clear opportunity to tackle the complexities of cross-border commerce head-on. And in Q3, we successfully extended our Shopify Tax product to merchants in the U.K. and the entire EU.

We’ve automated value-added tax calculations to make them more accurate. We introduced automated VAT invoices for easy compliance in cross-border commerce, and we’ve developed tax liability insights that track regional and national compliance. All of this ensures our merchants can focus on growing their business. Another product that continues to gain traction by helping our merchants sell globally is managed markets, which allows merchants to easily enter new countries and grow everywhere.

For our merchants, it’s proven to drive some pretty incredible results. In fact, EY recently analyzed the performance of a sample of our merchants after they adopted managed markets and found that 83% increase the number of countries they sold to. And of those merchants, their international sales growth after adoption was on average higher than 40%. Meanwhile, if you look at the top 100 merchants, they saw an increase of greater than 200%, which is truly incredible.

Managed Markets is another example of a product that is yielding incredible result for our merchants globally. Moving to off-line retail. In October, we expanded Tap to Pay across Shopify point-of-sale. Tap to Pay is now available in multiple countries, including Australia, Germany and the Netherlands, and the U.K., as well as to merchants using Android devices.

By utilizing the NFC chips and devices, Tap to Pay processes payments from contactless cards in digital wallets like Apple Pay via Shopify Payments. So why does this actually matter? Because it enables our merchants to create a truly delightful in-person experience for consumers, all powered by Shopify. For merchants using the point-of-sale app, we made significant functionality and usability improvements. Notably, we introduced off-line payment support, which ensures uninterrupted sales even during network disruptions.

We also focus on personalizing the customer experience by enabling access to customer and supporting Shopify bundles, which has seen encouraging adoption rate, especially among mid-market merchants. We also improved operational efficiency and optimized the point-of-sale app for tablet view introducing a split-screen search view. In retail, every second in detailed counts to drive sales, build customer affinity, and foster brand loyalty. And these updates, along with others, like accepting unverified returns and expanding UI extension capabilities reinforce our commitment to making in-person commerce easy and fast.

At Shopify, we do more than just help merchants sell, we also ensure they have the financial tools dated to thrive. Recently, we launched our financial services suite, Shopify Finance, which is a comprehensive package that includes products like capital, balance, and bill pay all integrated through the admin for quicker access. Each component of this suite is designed to offer unmatched financial control and efficiency with features like higher APY and next-day payout in balance for Shopify plus merchants and more flexible payment options in credit to better manage cash flow. Now within Shopify Payments, penetration grew to 62% and Shop Pay facilitated $17 billion in GMV, which was up 42%, highlighting the power and the strength of our payment product, which also unlocks a key gateway for merchants to leverage our other features and products only available when on Shopify Payments, like the Shop App.

And speaking of the Shop App, this quarter, the Shop App launched a new merchant-focused home feed, showcasing the diversity and the richness of brands on shop. The experience uses new machine learning models to help buyers keep up with the brands they love and discover new brands based on their preferences. These changes have already led to early success with an 18% increase in sessions where a buyer engaged with a recommendation. These enhancements, combined with our deep and seamless integration, helps drive higher GMV and GPV and strengthens our overall ecosystem.

On the topic of machine learning, I want to give a shout-out to Mikhail Parakhin, our new incredible CTO, who recently joined the Shopify team. Mikhail spent over a decade at Microsoft, where he spearheaded AI advancements and products like Copilot. He also served as CTO at Yandex, where he developed multiple search engines and cloud services. Mikhail brings a wealth experience in AI and search technologies.

And in just over two months since he joined us, he’s already made a significant impact, enhancing our products, and pushing us forward. I’m convinced that with Mikhail onboard, Shopify is only going to get stronger. Building on that note of strengthening our bench, let’s talk about our ecosystem. We are committed to creating an ecosystem where everybody thrives: our partners, our merchants, and of course, Shopify itself.

This collaborative success is by design. And as a result, we have earned the reputation as the preferred partner in the commerce world. This quarter, we became the first commerce integration partner for Roadblocks, which has, on average, over 88 million daily active users. We integrated with YouTube shopping affiliate program, and we diversified our payments product offering through an expanded partnership with PayPal.

We are increasingly close to a world where commerce flows seamlessly everywhere, and that is what we are building. It isn’t just about providing tools, it’s about creating an interconnected ecosystem, a system of record where businesses of all sizes can thrive, and it’s working. Our go-to-market efforts combined with our product developments are enabling us to make incredible headway across multiple long-term growth drivers of our business, B2B, offline, and international, all of which are increasingly the on-ramps into Shopify and unlocking more opportunities for us to grow our addressable market, and we’ve got the results to prove it. Offline GMV was up 27% year over year and has more than doubled in just the past three years.

Q3 B2B GMV grew over 145% year over year and has now had five consecutive quarters of triple-digit growth. And international GMV continues to outpace the growth in North America, accelerating to greater than 30% growth in Q3 and cross-border was approximately 14% of GMV. So let’s dive deeper into what’s really driving our success in the offline segment. Our go-to-market efforts are really paying off, especially with large complex multi-location merchants.

This segment saw a 50% increase in locations year over year in Q3, highlighting our really strong momentum. This quarter, established omnichannel retailers like British clothing company footwear store and fashion retailers, Akira and Billy Reed, adopted our point-of-sale solution. In Canada, the legendary women’s fashion retailer, Lora, migrated their point-of-sale systems to Shopify, bringing over 130 stores in one of our largest point-of-sale migrations yet. As we continue to power an increasing number of established multi-location brands, we also firmly believe that consumer favorite brands of tomorrow are being built right now on Shopify.

Take, for example, a modern furniture maker that has quickly grown into a very large direct-to-consumer brand on Shopify. Now as they launched their flagship store in New York City, staying with Shopify for their off-line expansion was an obvious choice. This stickiness and trust in our platform are what truly sets us apart, ensuring that as our merchants expand online, offline and everywhere in between, they do it with Shopify. In B2B, we continue to set new records for monthly GMV highs with September marking our largest single month ever.

We are positioning ourselves to keep breaking these records, especially with new enhancements like the ones I mentioned earlier, including Shopify Flow automation templates that streamline B2B workflows and improvements to tax collection and conversion tracking. While much of our growth to date stems from our existing merchant base, in Q3, we also broken new territories in industrial, hardware, and automotive vehicles and parts sectors that hasn’t historically considered Shopify. Now they’re not just considering us, they’re committing to us. We are also continuing to focus on international growth, which continues to outpace North America, especially in Europe, like key countries, Germany and France, where we’re increasing our market share.

We’ve made enhancements to localization, shipping, and compliance and are pairing that with intensified marketing efforts and it’s working. In Q3, international merchants increased by 36% year over year with top brands like watch retailer, Watches of Switzerland, and cosmetics company, the Body Shop signing with Shopify in the quarter. OK. So now that we’ve talked about product and channels, let’s focus on how we’re making waves up market.

Q3 was an exceptional quarter in terms of new enterprise-level brands coming to Shopify. For example, this quarter, we signed a luxury handbag company, Fashion File; jewelry designer, Brilliant Earth; footwear brand, Reebok; fashion apparel brand, Offwhite; cosmetics company, Beauty Counter; and Lionsgate Entertainment to name a few. We are also now powering some iconic apparel brands, including Haynes, Vera Bradley, and Necessities. Our platform’s composability gives large brands the flexibility to choose modular components like Onrunning, who recently adopted our checkers commerce component.

One of the best things about modular components is that integration can happen fast. In fact, we recently had an outdoor gear company go from handshake to full implementation in less than three weeks. Seriously, in under a month, we had the Shop Pay button up and running in their checkout, showcasing not only the robustness of our API, but also our team’s incredible ability to make things happen faster. And the momentum does not stop there.

Victoria’s Secret, Stores, and Shoe Carnival are also coming soon to the Shop Pay Commerce component, further proof that this pathway to growth is really working. Enterprise brands from all verticals are making the move to Shopify. And it is clear that our platform’s flexibility, speed, and value are really what sets us apart. We’re constantly working to make it easier for larger, more complex companies to make the switch.

Take our new data migration tool. New merchants can now import essential data like products in as little as four clicks. Picture this, one merchant recently brought over 44,000 SKUs to Shopify in less than three minutes, a task that used to take hours, if not days. This significant reduction in data migration hassle is a big deal as it removes a major friction point for merchants looking to move to Shopify.

To be clear, enterprise is not a short-term play. It is a massive opportunity to build for the long term, and we are positioning ourselves well to continue to capitalize on it today and in the future. With 16 enterprise launches in Q3 alone, we are truly just getting started with our push into the enterprise commerce market. As we wrap up, let me circle back to how I started.

Q3 was another standout quarter with 26% top-line growth and a 19% free cash flow margin. We continue to deliver some of the strongest results in the industry quarter after quarter. I truly believe this is the best version of Shopify yet. We are really pleased with our overall size and our shape, how we’re operating, and especially our free cash flow profile because it gives us the ability to grow the business and invest in the future.

This is increasingly making Shopify the go-to commerce platform for merchants of all sizes. As our merchants gear up for the busiest shopping season of the year, they can be confident that Shopify has their back equipped with the speed, reliability, and tools needed to capture every sale. We are not just running a platform, we are building a future where anyone can transform an idea into a thriving business. This is the vision and the reality of Shopify.

Great. Thank you, Harley. We had another outstanding quarter. These consistent results, delivering both growth and profitability, demonstrate the durability of our business, our numerous growth drivers, and our ability to balance investing in the future with discipline, delivering double-digit free cash flow margin.

Let’s dive into our Q3 results. Starting with GMV. In Q3, GMV was up 24% year over year as we delivered our fifth consecutive quarter of GMV growth over 20%. The same four consistent GMV growth drivers that we have seen delivered again this quarter.

Same-store sales growth from our existing merchants, led by our Plus merchants, growth in the number of merchants on our platform, continued strong growth internationally with GMV outside North America growing 33% in Q3. European GMV grew greater than 35% as our largest markets of the U.K., Germany, France, and the Netherlands continue to gain traction. The Netherlands was a notable source of strength, delivering year-over-year incremental GMV that outpaced France and was behind only the U.K. and Germany and demonstrating the broad base of strength that we have in Europe.

And fourth, off-line, our point-of-sale where we had 27% GMV growth year over year. In terms of industry verticals, Q3 saw notable growth from health and beauty, food and beverage, and apparel and accessories. Q3 revenue was $2.2 billion, up 26% year over year. Q3 is the sixth consecutive quarter of revenue growth greater than 25%, excluding logistics.

The key drivers of revenue growth for the quarter were: The GMV strength just discussed, growth in subscription solutions revenue stemming from the growth in the number of merchants on our platform, and to a lesser degree, the impact of the shortened paid trials and the Plus pricing changes. And third, increased payments penetration, which hit 62% for Q3. Stronger growth across the business, led by International GMV drove our outperformance on revenue relative to our outlook. Q3 merchant solutions revenue increased 26% year over year, driven by the continued strength in GMV and the penetration of Shopify payments.

These primary drivers were partially offset by lower noncash revenue from strategic partnerships which continues to be a headwind throughout the year. $43 billion of GMV was processed on Shopify Payments in Q3, 31% higher than last year, and as a percentage of GMV was 62%, compared to 58% in Q3 of 2023. Several factors drove the quarter’s higher gross payments volume, including the strong performance of those merchants utilizing Shopify payments, an increasing percentage of which are Shopify Plus; more merchants across the globe adopting payments; and greater penetration of Shop Pay, which was 40% of GPV in the quarter. These items were partially offset by the continued strength of our business in Europe, which has a lower GPV penetration than North America.

Subscription solutions revenue was up 26% over Q3 of last year. The growth was primarily driven by an increase in the number of merchants on our platform and to a lesser degree, higher variable platform fees and the benefit from the Plus pricing change. Q3 was MRR was $175 million, up 28% year over year with continued growth in each of Standard, Plus, and Point of Sale with all three categories seeing an increase in the number of merchants. Plus represented 31% of MRR for the quarter, consistent with Q2.

Q3 gross profit was $1.1 billion for the quarter, up 24% year over year. Our Q3 gross margin was 51.7%, compared to 52.6% in the prior year. Subscription solutions gross margin was 82.3%, similar to Q3 last year. Gross margin for merchant solutions was 39.7%, compared to 41% in Q3 of 2023.

The decrease was driven primarily by the same factors that have been impacting us all year. The largest impact was from lower noncash revenues from certain partnerships that have now fully amortized. Payments was the other key driver with two roughly equally sized impacts. First, payments constituted a larger percentage of our overall revenue in the quarter, given the strong growth in payments; and second, we had lower margins on payments this quarter as we saw pressure from both a higher mix of Plus merchants and a higher mix of credit card usage rather than debit card.

These headwinds were partially offset by the growth in our other merchant solutions products which have a higher gross margin rate than payments. Now turning to operating expenses. Q3 operating expenses were $835 million for the quarter or 39% of revenues. Compared to the prior year, Q3 operating expenses were up $56 million or 7%, well below our gross profit dollar growth rate of 24%.

The largest drivers of our Q3 operating expenses compared to the prior year were higher compensation stemming from our biannual employee review process, which resulted in merit-based pay increases where appropriate. Each of the January 1 and July 1 compensation cycles this year were low single-digit percentage increases to overall compensation. We also hired some key roles within sales and R&D. Within transaction loans and losses, we had higher absolute dollar losses on both our capital loans and payments.

But it’s important to note that this was a function of volume increases for both of these businesses. The loss ratios remained within the consistent range. And finally, increases in marketing spend as we continue to invest in our core performance marketing, including higher affiliate partner payouts and continued investment to support our growing enterprise and point-of-sale businesses. Partially offsetting these in terms of year-over-year comparability was a $38 million real estate impairment expense in Q3 of last year.

Our Q3 operating expenses came in lower than our outlook, primarily due to lower-than-expected marketing spend. The lower spend was primarily a nonperformance marketing for enterprise and point of sale and to a lesser degree, lower spend in brand advertising, where we don’t spend much to begin with, given the overall strength of our brand. Performance Marketing also came in a little bit lower than planned, which was driven primarily by the decision to run some testing regarding point of sale. We remain firmly committed to carefully managing our investments and continue to operate within our guardrails.

For the quarter, operating income was $283 million or 13% of revenue, with operating income dollars more than doubling compared to Q3 of last year. Stock-based compensation was $115 million for the quarter. Q3 free cash flow was $421 million or 19% of revenue, delivering an expansion of 300 basis points from Q3 of last year. This high-teens free cash flow margin came in better than our expectations, largely due to a stronger GMV driving revenue, combined with lower operating expenses.

Let’s now turn to our Q4 outlook. As a reminder, Q4 is seasonally our highest volume quarter of the year as it includes the key holiday selling period, including Black Friday, Cyber Monday. We expect Q4 to see similar seasonality trends than what we have seen in prior fourth quarters. First, on revenues.

We expect Q4 revenue to grow year over year at a mid- to high 20s percentage rate, driven by the same factors that have supported our strong revenue growth results so far this year. These include assumptions around the continued strength of our merchants GMV. Q4 gross profit dollars are expected to grow year over year at a rate similar to Q3. As a reminder, consistent with prior years, Q4 sees a higher percentage of revenue from payments given the high-volume holiday selling season.

Turning to operating expenses. We expect our GAAP Q4 operating expenses to be 32% to 33% of revenues, representing a 300- to 400-basis-point improvement compared to Q4 of last year. Compensation and marketing are the two largest increases in absolute dollars year over year. But importantly, both of these areas as a percentage of revenues are expected to be down year over year.

We also expect higher dollar losses on payments which is largely driven by sheer volume growth, not loss rates. Regarding compensation, we expect to keep headcount relatively flat year over year but will have the impact of the merit-based pay increases that I discussed earlier in the call and some mix shift in terms of headcount per department. Worth reiterating again, though, that while we have a dollar increase in opex, we expect a 300 to 400 basis points decrease in opex as a percentage of revenues, and we continue to grow gross profit dollars much faster than operating expenses. Moving to stock-based compensation.

Q4 SBC is expected to be approximately $120 million. Finally, on free cash flow. We expect our Q4 free cash flow margin to be similar to our Q4 2023 margin of 21%, which would result in us increasing both free cash flow margin and free cash flow dollars in each successive quarter throughout the year. Moreover, we have gone from negative 3% free cash flow margin in 2022 to 13% last year to being on track to deliver high teens for full-year 2024 based on our Q4 outlook.

We are proud of the consistent growth and margin expansion of our free cash flow throughout both 2023 and 2024, all done while delivering exceptional top-line growth at scale. These outcomes are a direct result of the work and disciplined decision-making we have put in place over the past couple of years. The free cash flow margin profile that we have now achieved is one we like. It strikes the right balance between profitability and investing back into the business to continue to deliver top-line growth.

Looking ahead, we aim to stay within a similar free cash flow margin profile taking into account the typical yearly evolution of cash flow margins across quarters that we have seen in our business the past two years. One additional topic before closing. In the coming days, Shopify board member and Uber CFO, Prashanth Mahendra-Rajah, will step into the role of chair of the audit committee as part of a planned transition. Colleen Johnston, who has served on our board and is audit committee chair for over five years, will step down from the board.

I want to thank Colleen for all the excellent service that she has provided Shopify and all the counsel that she has given me and the Shopify leadership team as a whole. Thank you very much, Colleen. I look forward to working with Prashant more closely in his expanded role. In closing, it was an exceptional quarter.

Shopify continues to power an increasing portion of the Internet, serving as a system of record for millions of businesses. As entrepreneurship and commerce grow, Shopify is capturing an increasing share of this expanding market, becoming the go-to platform for all of commerce. Our success is not just in our scale, but also on how well we partner and work with other technology companies in order to give merchants a seamless way to run their businesses. Thank you to all of our merchants for your trust.

And thank you to the Shopify team for all the hard work done long before this quarter began, making these results and what is next to come possible. With that, I’ll now turn the call back over to Carrie for your questions.

Carrie Gillard — Director, Investor Relations

[Operator instructions] Our first question comes from Brian Peterson at Raymond James.

Brian Peterson — Analyst

Hi. Thanks for taking the question, and congrats on the really strong results. So I’d love to understand how the GMV came in relative to your expectations and any comments on linearity through the quarter and early thoughts on the fourth quarter? Thanks, guys.

Jeff Hoffmeister — Chief Financial Officer

Yeah. Thanks for your question, Brian. I’m happy to talk through that. The GMV, and this is a little bit to some of the comments that both Harley and I have as it relates to some of the strength in Europe, that was the key element to the outperformance, and I made a brief comment about that in my comments in terms of the strength we’re seeing.

And it’s pretty broad-based. I made the comment about the Netherlands, so it’s not just — a lot of times in the past calls, I’ve talked about Germany, France, Italy, Spain. All of Europe is performing very well for us, and that’s one of the key elements of GMV outperformance. We’re obviously — and Harley and I both touched on this as well, we’re seeing a lot of strength in Plus.

We had all the success in B2B. It’s really across a bunch of different fronts in addition to all the areas which have traditionally been core pockets of strength for us. It was in terms of linearity throughout the quarter, it was especially toward the back half that we saw some strength in Europe. But that being said, as we think about the quarter overall and we think about the strength we see in Europe and the U.S., I don’t have any specific trends to call out just other than to say we feel really good about what we’re doing right now with the merchants.

Carrie Gillard — Director, Investor Relations

Thank you for your question. Our next question will come from Colin Sebastian at Baird.

Colin Sebastian — Analyst

Great. Thanks. Really appreciate the opportunity here. You guys have positioned Shopify as the levels going up against the larger online marketplaces.

But arguably, the consolidation of e-commerce market share is occurring to a smaller number of platforms, including Shopify. And so I wonder if your views of how the industry is evolving or changing, what that consolidation means for your merchant base and ultimately, how that influences product plans for things like Shop App. Thank you.

Harley Finkelstein — President

Hey, Colin. Harley here, I’ll take that question. A couple of things are happening, I think, when it comes to larger brands and retailers. One is all across the board they’re looking for unified commerce system.

They’re not looking for stand-alone single-channel products anymore. And I’ve used this metaphor before of the browser and the browser tabs. And what we’re seeing is that these large companies, specifically complex ones that have high GMV, they want to collapse those tabs from eight to one. And this idea of having a modern future-proofed retail operating system that is unified across every channel like Shopify is very compelling.

Secondly, historically, when it came to larger brands, our focus was really on Shopify Plus. We had sort of this one size fits off of larger brands. But now we have an enterprise product, we have Shopify Plus, we have commerce components. And commerce components, in particular, is really compelling because I mentioned this in my prepared remarks, but we’re now seeing brands that are calling us.

And three weeks later, they now have Shop Pay installed on their checkout. Or brands, for example, like Onrunning, one of my favorite brands that has Shopify’s checkout as a commerce component that they’ve now taken. So there are all these new sort of gateways into Shopify or on-ramps to Shopify on the enterprise side. The next thing I want to talk about is checkout.

This idea that some of these large brands that are very sophisticated still don’t have an optimized checkout like they would have on Shopify is becoming a competitive liability. And so that’s also driving things quite a bit. And then the third thing — sorry, the fourth thing is total cost of ownership, TCO. The fact that we have this very transparent pricing with very large enterprise brands makes it that they understand exactly what they’re getting.

And when you sort of combine those things, I think you’re seeing a lot of the consumers’ favorite brands, especially the larger ones come to Shopify and they’re coming at a faster clip and they’re coming in larger volumes. I think that will continue to happen, especially now that our go-to-market engine has really ramped up. I think when you combine an incredible enterprise product with the right pricing that is unified and a very strong go-to-market energy and effort, you get these results.

Carrie Gillard — Director, Investor Relations

Thank you for your question. Our next question will come from DJ Hynes at Canaccord.

DJ Hynes — Analyst

Hey, good morning, guys. Congrats on the great quarter. Harley, can you talk about what you focused on from a product perspective to drive further B2B adoption, especially in the enterprise? I mean, you’re obviously seeing nice momentum there, but is there any additional unlocks that you’re focused on?

Harley Finkelstein — President

Yeah. There’s a couple that have recently come out, and you’re seeing us talk more of a B2B around our additions, for example. I think particularly, in Q3 alone, I think we shipped three or four new major features. I mean, things like product bundles supported and draft orders.

There’s now improved conversion tracking and tax collection.There’s now new automation Shopify Flow templates, which means that you can actually sign a sales staff to particular B2B customers, if you’re a merchant. And the result is that you’re seeing companies like Dermalogica and Life Fitness and Daily Harvest and Craft come to us as well. So I think we’re closing those gaps fairly rapidly. I also think that historically, we really focused on existing direct-to-consumer brands on Shopify that also had a strong B2B or wholesale practice, that felt like sort of low-hanging fruit for us.

We are now beginning to see merchants that are specifically and exclusively B2B wholesale merchants come to Shopify now for our B2B product. And eventually, in some cases, we’ve actually seen them begin to dip their toe in the water ongoing direct-to-consumer as well. So back to my comment earlier about this unified commerce system. The beauty of Shopify is that you come in for one particular channel, but once you’re in the ecosystem, you begin to make that your — the entirety of your retail operating system.

But specifically on your point, those gaps are getting closed pretty quickly, and we just think B2B, it is a — I think there’s like a $14 billion TAM. We’re already seeing our B2B GMV doubled since last year. We think that’s a great opportunity, and we’re able to close these future gaps quite quickly.

Carrie Gillard — Director, Investor Relations

Thanks, DJ. Our next question will come from Todd Coupland at CIBC.

Thanks, and good morning, everyone. I wanted to talk about the impact of China with the U.S. election out of the way. Can you just talk about how much of your GMV your estimation is coming from China and whether Trump tariffs will impact merchants? Is there anything you can do to help them? Thanks a lot.

Harley Finkelstein — President

Yeah. Maybe I’ll just sort of start. I mean, we’ve been operating now for over two decades across multiple administrations we can’t anticipate whatever presidential administration is going to do. But what we can do is armor merchants and the people that do Shopify with the tools they need to compete in any environment.

In COVID, for example, where everyone had to move online, we were there for them. In tough times economic cycles, we’re able to provide really transparent competitive pricing. So our job is to support our merchants. Specifically, on China, it’s not a huge area for Shopify.

It has not been historically a big area for us. But again, back to our job is no matter what comes the way of our merchants. We provide them with tools and service and support for them to navigate it really well. And I think we’ve proven to do that over the last 20 years.

Todd Coupland — Analyst

Yeah. And Todd, the only other thing I’d add, there’s nothing in what we’ve heard from Trump nor would there have been anything from Kamala, which we think impacts the overall state of just new business formation and entrepreneurship. So we still feel really good about all the merchants out there, all the entrepreneurs that want to start new businesses, and that’s obviously not going to change with the administration.

Carrie Gillard — Director, Investor Relations

Thank you for your question. Our next question comes from Michael Morton at MoffettNathanson. Michael, are you there?

Michael Morton — Analyst

Hey, sorry about that. I didn’t click the unmute. Thank you for the question, Carrie. This is for Harley.

I know it’s early days, but we’re seeing some of the largest changes that have occurred in years to the search experience, right? AI overlays and even new search start-ups for the first time in decades. I’d love to know how you’re thinking about the changing e-commerce experience, the funnel for consumers and then what it could mean for the discovery experience of some of your e-commerce merchants as search changes.

Harley Finkelstein — President

Yeah. Thank you for the question. It’s a great question. Look, I think I talked a little bit on the call about how we’re using AI internally, and frankly, support engineering, sales, finance, just about every department internally is using AI in some way to get more efficient, more productive.

I have also talked about the fact that from a merchant perspective, we are trying to build tools and build AI across Shopify’s entire product to make their jobs way easily so that they can focus on what matters most. And I mentioned suggested replies and Shopify inbox, which may not seem like a big deal, but it’s a huge deal because it means merchants can spend more of their time focused on the things that they need to be focused on like building our products. But in terms of where consumers find merchants or find products, yes, AI and search is going to change. But to be clear, this entire flow and discovery process has been changing for many years.

It’s the reason that you saw us integrate with places like YouTube or more recently, Roadblocks or TikTok or Instagram. We believe the future of commerce is happening everywhere. And in order for us to qualify and then requalify to be the most important partner in retail for the 1 million stores on Shopify wherever consumers are looking for new products, we have to be there. And so I can’t give any specifics on how we’re working with some of those companies.

But I will say that you can rest assured that when consumers shift their buying preferences, their discovery preferences, their search preferences, and they’re looking for great products from great brands, Shopify will ensure that our merchants are able to do so. And that’s the reason even some of the more nuanced or some of the more — as you know, Shopify has an integration to Spotify. Why? Because some merchants that also have very large followings as a musician have massive followings on their artist profile, the fact that you can now show Shopify products on your artist profile means for that particular segment of merchants, they can easily — they now have a new surface area in which to conduct business. And that’s the same thing when it comes to AI and search.

So we’ve been really talking about Shopify being the central retail operating system, where there may be five channels or eight channels where commerce takes place. Over time, that channel is going to — those channels are going to expand. Not every channel will work for every single merchant, but the idea is when a new channel exists, you’re able to easily activate directly from the Shopify Admin, and that’s the commitment we have to our merchants.

Carrie Gillard — Director, Investor Relations

Thanks for your question. Our next question will come from Siti Panigrahi at Mizuho Securities.

Siti Panigrahi — Analyst

Thanks for taking my question. I just want to dig into the enterprise part of the business, mainly go-to-market. I know that’s a displacement market and also you see some of the big vendors in that space. Help us understand like how you’re — what’s your strategy for go-to-market for the penetrate there? And what kind of trends are you seeing when enterprise customer uptake? Is it like total replacement? Or it’s — or slowly they try to replace their existing solution?

Harley Finkelstein — President

In some cases, it’s total replacement, which obviously is the goal. In other cases, they want to begin to work with us on Checkout or on Shop Pay, or one of the commerce components. But I would say that go-to-market execution is living across the board. And we have done a really great job of shifting this narrative that Shopify is no longer just for small businesses in North America.

We’re now for every sized business, everywhere in the world. And when you have these incredible brands, these iconic brands, the Reeboks and the Onrunnings and the Victoria’s Secret of the world coming to us, it begins to create more — even further momentum. We’re also curating a really important ecosystem where we’re winning over competitors, partners, and in some cases, very large SIs. But we’re also — we realize that in that world, garnering the top awards from IDC and Gartner is really important, which is what we’re doing, too.

You’re also seeing us increase our marketing efforts to support this go-to-market. So bringing the best sales teams with great marketing assets together has really been working. And I think the reason we’re successful here is modern companies, modern brands need modern unified e-commerce architecture and commerce architecture. And I think the speed to market that we’re able to provide to them is commitment to unified.

The volume of innovation, I mentioned this idea of a brand with over 40,000 SKUs being able to migrate those 40,000 SKUs in less than five minutes, that is not something that most companies can do. In fact, that’s not something that any company can do, and we’re really innovating to try to make that a lot better. And we’re displacing the largest enterprise commerce companies in the planet, and the momentum is continuing. And the best part is, we’re winning these deals and they’re not leaving, they’re staying with us and they’re acting as references for other incredible brands, too.

So it’s a really important part of our business, and now they’re sort of there’s something for everyone when it comes to enterprise commerce on Shopify.

Carrie Gillard — Director, Investor Relations

Thank you for your question. Our next question will come from Andrew Boone at JMP Securities.

Andrew Boone — Analyst

Thanks so much for taking my question. Jeff, I wanted to ask about one comment on guidance. You said similar free cash flow margins going forward. Can you just speak to the implications of that? And what are you guys either investing in or how do we think about that as it seems like headcount has been flat?

Jeff Hoffmeister — Chief Financial Officer

Yeah. I think in terms of my comments about similar cash flow margins going forward, one of the things I want to do just in terms of start from a perspective is look at both last year and this year and see how the free cash flow margins have played out throughout each of the quarters through the year. And you can see again to my comment about us getting to free cash flow margins in Q4 of this year in the expectation of where we were last year. I think we’ve gotten to a very good spot, especially over the last two years, where we’ve gotten to solid free cash flow profitability and as I mentioned, I think what we — as I mentioned on the call, I think we’ve now struck a very good balance in terms of where we say this feels like a good free cash flow margin where we can invest every incremental dollar back into the business and continuing to do everything we want to do to sustain the long-term growth of the business.

So that doesn’t, in any way, shape or form mean that we’re not going to slow down everything we’re trying to do to continue the leverage around how we use AI, around automation, around as you alluded to, Andrew, in terms of the disciplined headcount. We talked at investor day, I guess, it’s a little bit less than a year ago now. We talked at investor day about our internal proprietary systems, GST, Shopify OS, some of the things that we’ve built to make ourselves more efficient, really point the team in the right direction and be highly effective in everything we’re doing. So we’re going to continue to do all of that.

But we also see the opportunity right now, and both Harley and I alluded to this in our comments, we also see the opportunity to really make sure the incremental dollar goes back into the top-line growth and supporting that momentum and all the things that we’ve talked about, the durable elements of growth for us in terms of what we’re doing on a point of sale, what we’re doing in enterprise, what we’re doing in international. So it’s really that element of not trying to aggressively push free cash flow margins higher and instead focused on the continued growth of the business. So that’s really the best context I can give you under.

Carrie Gillard — Director, Investor Relations

Thanks, Andrew. Our next question comes from Mark Zgutowicz at Benchmark.

Mark Zgutowicz — Analyst

Thanks, Carrie. I appreciate it. Jeff, you’ve alluded to last quarter or two just in terms of your enterprise pipeline starting to contribute perhaps in the first half of next year. Just curious if you can maybe quantify or qualify the size of that contribution in the first half of next year.

Jeff Hoffmeister — Chief Financial Officer

Yeah. Mark, I don’t have any real numbers to give you where I say this is how we think about the incremental to top-line growth. I would echo some of the comments which Harley made just a few moments ago in terms of what we’re seeing on enterprise and go-to-market and how that’s playing out. Obviously, we’ve been lending some marketing dollars to support enterprise and that’s helping fuel the momentum in addition to all the other things we’ve covered.

I would say, and we’ve talked about this a little bit in terms of just the overall selling cycle and then the implementation cycle. On average, as you know well from following things in the enterprise space, it can take six, nine, 12 months in order sometimes in order to get through the selling cycle. Sometimes it can take an equal amount of time in terms of implementation, not because our technology can’t go much faster, and we’ve had some instances and Harley talked about a couple of those on the last call in terms of how we can get these implementations up and running very quickly. But on average, if you say it’s six, nine, 12 months in the selling cycle, six, nine, 12 months in the implementation cycle, you kind of stack those two on top of each other and say, we’ve really been making a push on enterprise I don’t know, roughly two years now.

And we’re kind of 18 months — kind of nine months and nine months and stack on top of each other, we’re kind of 18 months into really having a lot of these enterprises on platform, taking volume really working with us. I think we’re still very early in the days of this, Mark. So this is going to be more of a 2025 phenomenon than it’s 2024. I just don’t have any exact numbers to give you and say it’s going to add X number of basis points, for example, to the next year’s growth rate.

Carrie Gillard — Director, Investor Relations

Thank you for your question. Our next question comes from Martin Toner at ATB Capital Markets. Sorry, looks like Martin dropped out of the queue. All right.

We’ll take our next question instead from Ken Wong at Oppenheimer.

Kenneth Wong — Analyst

Fantastic. Thank you for taking my question. I wanted to ask about your enhancements with PayPal announced back in September. I guess, one, how does this kind of progress the platform? Any potential uplift to monetization or unit economics over time that we should anticipate?

Harley Finkelstein — President

Yeah. Let me just sort of start before we get into unit economics sort of why we did it because it’s important. I mean, for us, it’s all about optionality. We want to effectively — I mentioned those browser tabs, we want to make it really easy for our merchants to conduct all their business.

So for example, after this integration now, all your PayPal wallet transactions, you can be seen directly from the Shopify Admin. So when we think about these partnerships, what you should sort of think about is what we’re trying to do is make it so merchants can operate more effectively, easier with things they’re already using. And that’s the reason why sort of this made a lot of sense. Optionality really matters to them.

I can take the economics one as well. I mean, for Shopify, the biggest change is really just could be around the PayPal wallet transactions, which are moving to — it will be gross revenue recognition at a sort of premium to typical card transactions on Shopify Payments. Jeff, I’m not sure if you want to add anything else to that.

Jeff Hoffmeister — Chief Financial Officer

Yeah. It’s — and that’s a function of just the level of integration we did with PayPal on these wallet transactions. And so this really specifically goes into make sure we’re differentiating between situations where we would process with PayPal on the back end. This specific situation that Harley and I are alluding to is that the consumer chooses to effectively use our PayPal Wallet, use a PayPal button to pay than given the integration that we’ve done, which we really did for the sake of being able to give the merchants a more holistic view of all these transactions, so they’re Shopify admin from the dashboard that they’re using to run their business.

They have a comprehensive view of all the transactions through the orders, the payouts, the reporting, the chargebacks, all of those things. One of the outcomes of that is the revenue recognition change on those specific types of transactions, which Harley alluded to. So we’re going from what in the past had been a net revenue recognition on those is now going to gross — the gross revenue recognition. Importantly, though, while there’s going to be some headwinds to margins on that, some uplift for revenues, in terms of growth rate, it’s on a gross profit dollars, it’s incremental gross profit dollars to us.

But that will — and we signed that agreement at the this PayPal Wallet transaction activity went into effect at the very end of September. So this will be a little bit more of a 2025 phenomenon.

Carrie Gillard — Director, Investor Relations

Our next question will come from Trevor Young at Barclays.

Trevor Young — Analyst

Great. Thanks for taking my question. Jeff, just back to your comments about feeling comfortable at this kind of high-teens, 20% free cash flow margin. Help us put that with comments earlier in the year about further room to run on optimizing your internal-facing marketing tools and adjusting spend across channels to maximize ROI and so forth.

Should we assume that you might lean in on marketing heading into next year?

Jeff Hoffmeister — Chief Financial Officer

Well, Trevor, I don’t — there’s no change in how we think about marketing, and I don’t think that there’s any change in terms of how we think about free cash flow. From a marketing perspective, we obviously have spent more time on that topic in the last or the prior two calls, but our strategy remains focused on everything we can do on both the performance marketing and the nonperformance marketing in terms of, one, supporting the core Shopify growth engines; and two, obviously, helping expand in things like point-of-sale, enterprise, B2B, etc. So there’s nothing that’s changed from a marketing vantage point, nothing changed in terms of our payback guardrails. I think on the free cash flow, I mean, part of the reason, obviously, why — there’s a few reasons.

One of the reasons why we can get to these free cash flow margins, and I alluded to it before, is everything we’re doing around disciplined headcount, around AI, automation, our internal systems. So we’re going to continue to leverage those. We’re going to continue to be more and more efficient in terms of our internal operations. I don’t think that impacts how we think about marketing.

And I don’t think that in any way impacts saying, well, all right, so now we’ve both topped out on free cash flow margins, which is not clear, we’re making — which is not the case we’re making a proactive decision in terms of how we think about these margins, so we can invest those dollars, whether it be back in marketing, whether it be upgrading in certain spots, maybe the R&D team, maybe adding to the R&D team, product development, AI, all those things. It’s not a marketing specific initiative to say, “Oh, this gives us the additional dollars to go pump that back into marketing.”

Carrie Gillard — Director, Investor Relations

Thank you for your question. Our next question will come from Dominic Ball at Redburn Atlantic.

Dominic Ball — Analyst

Hey, Jeff, Harley and Carrie, thanks for the question. One question on the changing nature of search discovery and the evolution of shortfall content. So can you give us a little bit more color on the Shopify YouTube integration? How is it going to about the merchant uptake? And how big do you think this can really get? Thank you.

Harley Finkelstein — President

Yeah. I mean, when it comes to YouTube, this isn’t a new partnership for us. We’ve been working with YouTube and Google for a very, very long time. The relation with YouTube actually started with live selling.

We were their live sell and launch partner originally. And then what we realize or I guess we realize in collaboration with them is that this idea of actually creating an affiliate program, whereby if one of their content creators is talking about doing a cooking show, for example, and also wants to use a particular product that eventually becomes for sale pretty much every one of the brands that the audience likes and wants to purchase from is on Shopify. So it felt like a really great thing for them because it allows their creators to further monetize through affiliate fees, but it also means that Shopify merchants can now find a new sales channel through these creators across the YouTube audience, which we think is obviously always positive. But at a macro level, these — whether it’s YouTube or also I mentioned Roadblocks in my prepared remarks, any of these other channels, the idea here is to make sure that every surface area where consumers may want to purchase, they’re able to do so through Shopify.

And so you’ll continue to see us do more of those things. In terms of how YouTube in particular is going to fair, that remains to be seen, it’s still pretty early. What I suspect will happen similar to our other channels is that some merchants will find a lot of success there because they’ll find that their audience, their core audience works really well with this particular affiliate dynamic. In other cases, it may just not be that helpful.

But that’s the point. The point is that we want to effectively make it so every merchant on Shopify can get in front of a new audience that otherwise they may not. And again, in order to do that, you have to be on Shopify. And so you’ll continue to see us do more of these commerce integrations and these partnerships.

And actually, one thing — I’ll just sort of mention this. One thing that Shopify has got really good at is we have a great reputation of being a great partner. And what that means is not just technology, not just commercial but more sort of holistically, it means that when a company of any size or in any industry is thinking about commerce, Shopify is usually the first call they make, and the integration doesn’t take months or years. It often happens quite rapidly.

And so I’m very proud of Shopify showing up as a great partnership company.

Carrie Gillard — Director, Investor Relations

Thank you for your questions. Our next question will come from Deepak Mathivanan at Cantor Fitzgerald.

Deepak Mathivanan — Analyst

Hey, thanks, Carrie. Thanks for taking the question. Harley, can you give additional color on what you’re seeing in terms of the consumer behavior or repeat use after all the recent product enhancements you made on the Shop App? How should we think about what informs your product strategy for this going forward, say, in the next two to three years? Thanks so much.

Harley Finkelstein — President

Yeah. I mean, the product strategy remains the same, which is we want to create new ways for merchants to engage and to drive authentic connection with customers. We also want to make it that Shop is an owned channel for merchants that can help them drive real traffic and real sales. And these enhancements are working.

I mean, Shop is becoming the sort of cultural force. We’re seeing incredible brands, Drake, Mr. Beast, Steve Madden, all come to shop to do these incredible — not just promotions, but also they’re launching things directly on Shop. We also think Search and AI together makes the Shop search way more relevant, way more personalized.

That is also very compelling. And then merchant co-marketing, teaming up with these big brands to do these shop cash giveaways has become really important for some merchants, some of the time, it’s one of the major drivers for them. So in terms of where it’s going, I mean, in terms of our goal here, the change that we’ve made, in some cases, have led to an 18% increase in sessions where a buyer engage and a recommendation with our new home feed, for example, — so I think you’ll continue to see new improvements of the Shop App, but ultimately, the idea is can we actually help increase LTV for the merchants who use it. Can we help consumers find brands have not otherwise encountered and also reengage with the brands they already love? And to my point earlier, the key here is that this is something that if you want to engage with, if you want to be a part of, you have to be on Shopify and Shop App continues to do really well.

Carrie Gillard — Director, Investor Relations

Thank you for your question, Deepak. And our final question will come from Richard Tse at National Bank Financial.

Richard Tse — Analyst

Yes. Thank you. You talked about Shopify being a system of record for commerce. So as we look out ahead, is it fair to say that you have an opportunity beyond commerce, so to replace existing systems of records such as ERP, CRM, or supply chain?

Harley Finkelstein — President

In the case of ERP and CRM, we actually feel really good about connecting with the best ones. And so a lot of these large enterprise brands that are coming to us, they come with an ERP system already integrated across their company; in some cases, a great CRM as well. And we make it really easy to integrate. So ERP and CRM is not — is not something that we focus on.

We are a commerce company. We care about retail. However, it is critical that the changes we’ve made over the last couple of years to easily connect your existing systems into Shopify, again, back to the ERP systems, CRM, and others are able to function seamlessly when you come to Shopify. We’ve made that really easy.

But we’re a commerce company. And I mentioned in previous calls, we actually have a very focused — we’re focused on our main quest. We don’t like the sort of side Quest distractions. So our view is that make it really easy to bring the ERP system you prefer and integrate it to Shopify, but it’s not an area that we’re going to go into.

Carrie Gillard — Director, Investor Relations

Thanks for your question. I’ll now hand it back to Harley for some closing remarks.

Harley Finkelstein — President

Yeah. Thanks, Carrie. Look, you’ve heard a lot from Jeff and I on the call, but I just want to say this: For those of you that have been following the Shopify story for quite some time, you know that we are a company that is laser-focused on our merchants. You’ve heard that we have a very long-term vision that we think could help them succeed.

I think you will continue to see us seize opportunities and invest, as Jeff described, with discipline to further establish ourselves as the leader in commerce. And this has enabled us to deliver, as you can see from these results, some of the strongest results in the industry quarter after quarter. I also want to repeat, this is the best version of Shopify yet. We really like our size, our shape.

We like how we’re operating. We really think it gives us the ability to grow the business and invest in the future, and so I just wanted to finish with that point. And now for us, back to helping our merchants crush at this holiday season and well into the future. So thank you all for joining us on this call.

Carrie Gillard — Director, Investor Relations

This concludes our third quarter 2024 conference call. Thank you for joining us. Bye-bye.

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Shopify (SHOP) Q3 2024 Earnings Call Transcript was originally published by The Motley Fool

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