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Shopify Inc  (NYSE:SHOP)
Q3 2018 Earnings Conference Call
Oct. 25, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Shopify Q3 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

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

Katie Keita -- Head of Investor Relations

Thank you, operator, and good morning, everyone. We are glad you can join us for Shopify's third quarter 2018 conference call. We are joined this morning by Tobi Lutke, Shopify's CEO; Harley Finkelstein, our Chief Operating Officer; and Amy Shapero, our CFO. After prepared remarks, we will open it up for your questions. We will make forward-looking statements on our call today that are based on assumptions and therefore subject to risks and uncertainties that could cause actual results to differ materially from those projected. We undertake no obligation to update these statements except as required by law.

You can read about these risks and uncertainties in our press release this morning as well as in our filings with US and Canadian regulators. Also, our commentary today will include adjusted financial measures, which are non-GAAP measures. These should be considered as a supplement to and not a substitute for GAAP financial measures. Reconciliations between the two can be found in our earnings press release, which is available on our website. Finally, note that because we report in US dollars, all amounts discussed today are in US dollars unless otherwise indicated.

With that, I turn the call over to Harley.

Harley Finkelstein -- Chief Operating Officer

Thanks, Katie, and good morning, everyone. We had another great quarter at Shopify delivering strong results and advancing key initiatives. In particular, we shipped several exciting features ahead of the busiest selling period for our merchants, Black Friday and Cyber Monday. Our progress over the last few months spanned our priority areas of investment that is across Platform, Shopify Plus, and International. I'll walk through key accomplishments in each of these areas starting with our Platform. As we previewed at the Unite Conference, our product teams are focused on shipping features that help merchants sell more and let them work more efficiently while making the most of our partner ecosystem. We shipped several of these features in the past few months including multi-location inventory, our new App Store, as well as our marketing dashboard.

All of these are now contributing to the incredible value already delivered to our merchants on the Shopify Platform. While few weeks in is not enough to realize the full benefits we are expecting for these enhancements, we are already seeing signs of success. For instance since launch of our new App Store in early September, we have already seen a meaningful increase in conversion rates for app installations following a search. We are also developing features that add value at the point of transaction, which means our revenue from these merchants grows alongside GMV. One feature that launched earlier this month is Fraud Protect. For a small fee, Fraud Protect shields merchants from fraudulent charge backs on protected orders allowing merchants to accept and fulfill more orders with confidence. We extended our far-reaching support for merchants even further two weeks ago when we opened our first physical retail space in Los Angeles.

Within 24 hours of opening for bookings, hundreds of sessions and appointments with Shopify goers were scheduled and several of the opening workshops filled up completely. It's exciting for us to offer merchants and aspiring entrepreneurs a space where they can find support, inspiration, and education. Our new space and all our new features we rolled out are geared toward making commerce better for everyone. To help achieve this goal, we will continue to make platform investments on the following key themes; reducing complexity, simplifying workflows, and helping merchants build the right capabilities to run their businesses. Moving on to Shopify Plus, which completed another fantastic quarter. Hundreds of high growth merchants continue to join Shopify Plus leading up to the busy holiday season. We attracted these merchants with the flexibility and reliability of our platform, which can manage the stress of high sales volumes and capture all the upside that comes with it.

Shopify Plus continues to welcome more well-recognized brands representing diverse industries, including home furnishing, fashion and beauty, and food and beverage companies. These include some of the largest Canadian furniture stores like The Brick and Leon's Furniture as well as DJ Khaled's luxury furniture line. New stores from fashion designers such as Victoria Beckham and Rachel Roy, my personal underwear brand of choice Tommy John, Belgian chocolatier GODIVA, the Bulletproof coffee brand, and meal replacement company Soylent. Shopify Plus continues to add even more brands from the consumer packaged good companies like Unilever. In October, Shopify Plus entered new retail territory in Canada when cannabis was legalized here on October 17th. While we don't normally call out specific verticals, we have been fielding several questions about this one given how new it is and the fact that it is a highly regulated industry.

We have actually already been the platform of choice for license producers of medical cannabis in Canada for years so with the legalization of cannabis for recreational use, Shopify was a natural fit. We are now powering recreational cannabis sales for the largest Canadian provincial governments as well as the leading license producers and private retailers. These retailers recognize that Shopify's technology is uniquely positioned to help them adapt to the demands of regulators and fulfill key requirements. We are proud of what we've been able to accomplish in a tight period of time given the complexities in introducing a new and regulated industry. Turning to International. We are taking a deliberate approach in our expansion efforts building trust with merchants in our new markets and honing our product market fit.

Seven of the 10 largest e-commerce markets globally are in non-English speaking countries, which makes it incredibly important to localize our platform in each region we decide to enter. While it's still early, momentum is building in our priority international regions. Our mix of international merchants relative to total new merchant adds reached its highest level this year. Additionally, our international merchants continue to expand their contribution to total GMV on our platform. A great example of localization is the launch of Shopify Payments in Germany last month. This is special not just because Germany is the largest economy in the eurozone, but also because it marks our first local payment method for Shopify Payments allowing for bank transfers in addition to credit card payments.

This is notable since it's estimated that by 2021, most online transactions won't even use a credit card. Moving on to partners. Throughout our journey, our partners have played a critical role in the success of our merchants and the success of Shopify. Our partner ecosystem remains strong with more than 16,500 partners having referred merchants to Shopify in the past 12 months alone. Currently, there are more than 2,200 apps available to merchants on our platform, which is a smaller number relative to last quarter as not all existing apps were approved to transition over to the new App Store. We continue to work with our partners to deliver the right capabilities to our merchants so they have the tools they need to succeed. As we head toward the homestretch into the busiest selling season of the year, we are ready to help our merchants every step of the way.

And with that, I'll turn the call over to Amy.

Amy Shapero -- Chief Financial Officer

Thanks, Harley, and good morning, everyone. This was another strong quarter for Shopify. We grew revenue 58% year-over-year to $270.1 million with healthy performance from both Subscription Solutions and Merchant Solutions. Subscription Solutions revenue grew 46% compared with Q3 2017 to $120.5 million driven by growth in monthly recurring revenue of 41% to $37.9 million primarily driven by merchant adds. Shopify Plus continued to increase its contribution to monthly recurring revenue accounting for $9.2 million or 24% compared with 20% of MRR in Q3 of 2017. Another item of note is the expansion of revenue within Subscription Solutions that is not MRR. Faster growth of revenue from apps relative to MRR is one driver. Another is the incremental revenue from platform fees for Shopify Plus as the pricing structure change for Shopify Plus that we introduced early last year gradually rolls in with contract renewals.

Platform fee revenue is directly correlated with the GMV growth that Shopify Plus merchants are driving and that growth has been quite healthy. As a result and with more merchants rolling into the revised pricing structure, this component of revenue more than tripled over last year. It is important to note that this greater value we are now retaining from Shopify Plus is not counted in MRR as this portion of the Shopify Plus subscription revenue is not necessarily recurring. Merchant Solutions revenue grew 68% to $149.5 million, on pace with last quarter's growth. This growth was driven by GMV expansion, which increased 55% year-over-year to $10 billion as well as by the continued penetration of Shopify Payments, Shipping, and Capital. GMV reached a new high this quarter exceeding that of Q4 2017, our strongest quarter last year. $4.1 billion of GMV was processed on Shopify Payments, an increase of 71% versus the comparable quarter last year.

The amount of GMV processed on Shopify Payments ticked up to a record high 41% penetration with Shopify Plus continuing to increase its share of GPV. Capital and Shipping, both higher margin solutions, grew revenue over 100% from last year. Gross profit dollars grew 50% from Q3 of 2017 to $149.7 million. As we mentioned in July, our transition to a third party cloud platform was completed in the third quarter. With the Subscription Solutions gross margin headwinds of cost duplication and server depreciation now behind us, we can begin to look for ways to optimize costs on our cloud platform, which as we have said are expected to be higher than running our own cloud. While Merchant Solutions gross margin improved year-over-year, it was down slightly sequentially due to greater mix of Shopify Payments versus Q2. This larger mix was driven in part by the growing adoption of Shopify Payments by Shopify Plus merchants.

Of course, the upside has been continued expansion of GMV take rates driving gross margin dollar growth and enhancing our value add to Shopify Plus merchants, which is a trade-off we're happy with. Our adjusted operating loss in Q3 was approximately $3.6 million or 1.3% of revenue compared with income of $1.7 million or 1% of revenue in the third quarter of 2017. Adjusted net income for the quarter was $4.5 million or $0.04 per share. This compares with $5 million or $0.05 per share for last year's third quarter. Our cash, cash equivalents, and marketable securities balance was $1.6 billion, consistent with our June 30 balance. Cash flow from operations was only slightly positive in the quarter as we continue to see strong demand from our merchants for Shopify Capital, which as you know is funded from our own balance sheet with a mechanism in place to ensure the majority of advances outstanding.

Merchants can thrive on Shopify in ways that aren't possible through single channels or single point solutions providers. That we make it possible for virtually anyone in the world to easily start selling is only the first of many layers of value. The much harder work of marketing, customer order and inventory management, transaction processing, and multiple currency and payments methods, shipping and financing is where we focus most of our efforts and investments. These efforts pay off. Within two weeks of our launch of Shopify Payments in Germany last month that Harley mentioned, percentage adoption by our merchants there was already solidly in the double digits. Moreover, most of the merchants who adopted Shopify Payments in Germany already had a transaction processed on the local payments method. While the full benefit of our investments will materialize over the years ahead, this is a great early indicator that being targeted and sequenced with localization is the right approach to take.

Given our better than expected performance in the quarter, we are raising our expectations for the full year and now expect to grow revenue at over 55% to between $1.045 billion and $1.055 billion and to achieve adjusted operating income of $8 million to $10 million. For the fourth quarter, we expect revenue of $315 million to $325 million and adjusted operating income between $16 million and $18 million. Stock-based compensation in 2018 is now expected to be approximately $105 million for the full year with about $30 million of this in the fourth quarter. The continued growth of our merchant base from entrepreneurs to larger brands and our ongoing expansion of wallet share proved the strength of our platform and the value we add to businesses. As we continue to simplify commerce, expand our capabilities, and broaden our reach; we are confident in our growth trajectory and our position as a leading commerce platform.

With that, I will hand the call back to Katie.

Katie Keita -- Head of Investor Relations

Thank you, Amy. All right. We would like to turn the call over to you for your questions. Before we do, I would like to remind everyone to please limit themselves to just one question so everyone can have a chance to ask a question on the call today. Michelle, can we have our first question, please.

Questions and Answers:

Operator

Certainly. Your first question comes from Brad Zelnick from Credit Suisse. Your line is open.

Brad Zelnick -- Credit Suisse -- Analyst

Excellent. Nice quarter, guys. I wanted to ask a question about Shopify Plus. You have a number of fantastic large merchants, many of which you named in your prepared remarks, and Plus continues to grow its contribution to the business, but the higher end of the market is also very competitive. Can you talk a bit about pricing at the high end as you negotiate and renegotiate with these merchants and as well as the stickiness at the higher end as well? Thanks.

Harley Finkelstein -- Chief Operating Officer

Hey Brad, it's Harley. I'll take that first question. So first of all, I think if you look at the ratio of price to value of Shopify Plus, certainly it still falls on the side of value. Part of that is intentional because we want to -- we believe that there's a lot of opportunity for us in the mid-market especially, but also at the higher end of the market as well. One of the nice parts about Shopify Plus is that it's easy to start on Shopify Plus, but once you start -- once you become a merchant, the product is actually quite sticky particularly with things like Shopify Flow, which allows you to automate workflows. More and more you spend your time in the Shopify Plus dashboard and so the product itself is quite sticky. From a competitive perspective, again I think for the foreseeable future we're quite happy with our pricing. We changed the pricing last year. This way we can share in the upside if merchants sell, but then we're able to also share in that upside and take a larger piece of wallet. But that being said, we are constantly evaluating whether our pricing makes sense and it may change over time, but we're quite happy with the success and the progress of Plus today.

Brad Zelnick -- Credit Suisse -- Analyst

Fantastic. Thanks, Harley.

Operator

Your next question comes from Colin Sebastian from Baird. Your line is open.

Colin Sebastian -- Robert W. Baird & Co. -- Analyst

Great. Thank you. If you look at MRR excluding perhaps the mix of Plus and the Platform fees, just hoping for a little more color on the pace of growth of the net new subscriber adds and where you'd expect that growth to trend over the next few quarters or years? Thank you.

Amy Shapero -- Chief Financial Officer

Yes. We did see a slight uptick, slightly higher merchants added in the third quarter versus the second quarter. One thing that I want to point out if you're looking at net new MRR in the quarter, we did have a slight headwind there and a pricing change that we made that we had announced at Unite around our point of sale product. We had been charging for that $49 a month and we've now eliminated that and that's included in the $79 and above pricing plans. So as you're doing your math, consider that. With respect to merchant adds in the future and MRR growth generally, we're happy with our performance in the quarter. We exceeded our expectations as our guidance implied for merchant growth, MRR growth, and overall growth. We want to steer you toward the robustness of our business model overall. We have two primary growth levers that we can pull from subscriptions, which is mostly captured by MRR and GMV.

Our focus is on long-term growth for our overall business model using these levers and our investments pay off in different ways over different time horizons. Last year two of our key investment areas were growth by widening the funnel of merchants and Plus and we're seeing the payoff of those investments now in continued strong GMV growth. In the quarter GMV per merchant continued to increase year-over-year and quarter-over-quarter and overall GMV growth was sequentially strong. This year our primary investment area is International, which we expect has a payoff over the next several years. So, we're quite confident about the size of our TAM and the runway for growth that these investments and others provide well into the future for both merchants and MRR and also GMV.

Colin Sebastian -- Robert W. Baird & Co. -- Analyst

Very helpful. Thank you.

Operator

Your next question will come from Ken Wong from Guggenheim Securities. Your line is open.

Kenneth Wong -- Guggenheim Securities -- Analyst

Hey, guys. Thanks for taking my question. Harley, you touched on -- you touched on the cannabis market a little earlier and I know you guys have had some experience with this in the past, but kind of the retail side of things is a new opportunity. Can you give us a sense for kind of how much -- how much you guys have baked into Q4 and maybe just some if there's any kind of seasonal trends that we should be thinking about in terms of how that market might scale up?

Harley Finkelstein -- Chief Operating Officer

Yes, hey. Thanks for that question. Look, it's a brand new industry, it's a brand new market. Certainly we've been working with the medical providers of cannabis in Canada for a while now and I think what we have is a really great product, which allows for regulated industries which they require things like nimbleness because compliance laws are always changing. And I think we've actually created a product that is kind of ideal for these sort of industries, which is why we are so happy to get selected by these very large provinces. We won't comment on specific merchants as we never do. But we will say that in terms of the revenue from them, we have built the contracts to capture the upside of GMV from these provinces and from these private providers of cannabis.

That being said, I think the bigger opportunity is that now that we have proven in Canada but also globally that we are an ideal candidate for these type of regulated industries, it means that as more countries think about their own regulated industries whether it's cannabis or otherwise, we become sort of that first phone call which is really important to us. So, I think we've done a really good job in Canada and we've proven that we can handle all these different compliance issues, but also the particular needs of these regulated industries. And we hope that as other countries think about these industries, we're the people they look to. So, we're quite happy. And in terms of Q4, we've sort of baked in the expectations. But again, these are very early days so there's nothing. We'll see how things roll out.

Kenneth Wong -- Guggenheim Securities -- Analyst

Got it. Thank you.

Amy Shapero -- Chief Financial Officer

Thanks, Ken.

Operator

Your next question will come from Monika Garg from KeyBanc. Your line is open.

Monika Garg -- KeyBanc Capital Markets -- Analyst

Hi. Thanks for taking my question. This year the key focus growth items, as Amy talked about, was Plus and growing four big international markets like Germany, France, Japan, Hong Kong. Are there any key focus strategies for 2019? Thank you.

Amy Shapero -- Chief Financial Officer

It's too early to comment on 2019. We're in the middle of our planning cycle. So, more to come on next quarter's call on that.

Katie Keita -- Head of Investor Relations

Okay. Thanks, Monika. Next question, please.

Operator

Your next question comes from Ross MacMillan from RBC. Your line is open.

Ross MacMillan -- RBC Capital Markets -- Analyst

Thanks so much and congrats. Harley, just on International as you roll out these new areas of functionality like local payments and local currency real time presentment, I think a lot of those functions are Plus initially. But I just wondered philosophically how we should think about how those then get rolled out to kind of core lower tier Plus SKUs -- sorry, lower tier Shopify SKUs and what the timing on that sort of move down of that functionality might look like? Thanks.

Harley Finkelstein -- Chief Operating Officer

Got you. So actually I would say in some geographies, certainly our entrance to the market seems to be larger merchants, but that is not the case everywhere. Remember in some of these places we've had merchants -- we've had merchants in more than 150 countries for many many years now and so in some cases there is pent-up demand for us to better optimize our product so they can use our product in those countries. So whether it's local payment methods or its apps that we have in our App Store that are particularly focused on that region and -- or it's for example language support in the Shopify admin or even its partners on the ground there. In some cases we know what we have to do there, it's just a matter of getting it done and that's why we've prioritized it for 2018.

I would say that across the board, every country is very very different. So we may start in one country with more of a Plus push to try to get some of the larger merchants on. In this way they can act as bit of role models for some of the smaller merchants who eventually want to become them. But every country is sort of different and we're sort of looking at each country in a variety of different ways. I would say local payment methods, having the right partners on the ground, integrations with things like apps, and also language are sort of the main things that we're focused on right now at least for those main priority countries. But we have a lot of opportunity there.

Ross MacMillan -- RBC Capital Markets -- Analyst

Thank you.

Operator

Your next question comes from Justin Furby from William Blair and Company. Your line is open.

Justin Furby -- William Blair and Company -- Analyst

Thanks, guys. I wanted to ask just quickly on dollar retention just to how that's trending this year. It seems like one of the benefits of the model is just the ability to grow with your customers, but it seems like there's still opportunity here. I think based on your last disclosure, your annual dollar retention is somewhere under 100%. So I'm wondering if you can give us an update here and sort of how you think about the medium-term view on dollar retention and how that relates to the scaling the model? Thanks.

Amy Shapero -- Chief Financial Officer

Dollar retention is an annual disclosure. So again, we'll be updating that next quarter.

Katie Keita -- Head of Investor Relations

Thanks, Justin.

Operator

Your next question comes from Richard Tse from National Bank. Your line is open.

Richard Tse -- National Bank Financial -- Analyst

Yes. Thank you. Obviously a lot of growth drivers in front of you. I was wondering if you could maybe just talk little about the work structure and any sort of management changes to allow you to effectively capture all those opportunities in front of you here going forward.

Tobias Lutke -- Founder and Chief Executive Officer

Sure. This is Tobi. I mean the team is obviously evolving; Amy's joined us, Jeff joined us in marketing recently. More importantly I think for taking advantage of opportunities we have is within the last 12 months, we reorganized the company around -- we have a functionally organized the company with engineering design and product reporting through different sort of sizable business up to me. And we have now organized around product lines that exist within the company. So Plus is a very easy to understand one, which sort of captures the totality of this particular space and there's a general manager and then the discipline support to them. So, nothing earth shattering. It was a move that we had to take to become more of a motive credit company because like these models tend to work really well. I think it's actually kind of academically interesting that functional organizations worked so well for the company we had even to the point where we had a couple of thousand people and I think at the right time we turned it over. This kind of model also allows -- just has allowed for a lot of new leadership positions within the company. Most of the positions got filled internally and that's been very very good for the bench and the company for succession and all those kind of things.

Richard Tse -- National Bank Financial -- Analyst

That's great. Thank you.

Operator

Your next question comes from Darren Aftahi form Roth Capital Partners. Your line is open.

Darren Aftahi -- Roth Capital Partners -- Analyst

Good morning. Congratulations. Thanks for taking my question. Could I ask on non-English speaking GMV? Can you just indulge us what portion of your overall GMV is coming from that channel? And then as it relates to that, where the relative Plus penetration compared to kind of where the US and Canadian markets launched back when they were early days? Thanks.

Amy Shapero -- Chief Financial Officer

So on non-English speaking GMV, I can kind of try to comment at that. We don't disclose the exact number, but I can tell you that an early indicator of the progress that we're making internationally is that GMV as a mix was the highest it's ever been for Shopify in the third quarter. So it's early days and this is going to play out over several years, but the merchant growth internationally was strong in the quarter as well as the GMV mix. So, we're happy with our progress.

Harley Finkelstein -- Chief Operating Officer

On the -- it's Harley here. I'll take the sort of the Plus GMV side of things. One thing to remember is that although a majority of the new merchants on Shopify Plus this quarter were net new to Shopify, we still have a very very healthy pipeline of upgrades. People that do really well, start their business on Shopify, are sort of core merchants and upgrade. And so remember that as merchants become more successful, they gravitate to Shopify Plus and so that GMV of course moves with them as well. That's a really important point because when you're sort of thinking about GMV from Plus, obviously it's going to be bigger, but there also is an inherent and an organic graduation from core into Plus over time as merchants get successful, which is great.

Katie Keita -- Head of Investor Relations

Great. Thanks, Darren.

Operator

Next question comes from Samad Samana from Jefferies. Your line is open.

Samad Samana -- Jefferies -- Analyst

Taking my question. So looks like you've added more Shopify Plus customers so far in 2018 than you did in all of 2017. I'm just wondering what's driving that acceleration in units. And then maybe just Amy, what percentage of Plus customers are still on legacy pricing that need to get on to the new pricing? Thanks.

Harley Finkelstein -- Chief Operating Officer

It's Harley. I'll take the first part of that question just in terms of where they're coming from. A couple of things are happening. One, there are a couple of macro trends that have been really quite helpful to us. The direct to consumer movement is, as I said on stage a couple of days ago, May 2020. It is not a fad, it is something that is happening and will be steady state for a very long time. So, we're seeing brands particularly like from some of the CPGs that never before went direct to consumer that view Shopify as an incredible place to take those brands. I mean I mentioned Lay's potato chips last quarter on the call. So, we're seeing more of that. We're also seeing a lot of these larger brands, established brands looking to reevaluate their providers. One is obviously a cost issue. But two, they want to be able to be a little more nimble and Shopify Plus because it was forged in the fires of entrepreneurs is a very nimble way.

And so if a new channel comes out, the next day you're able to activate that channel with Shopify and you can't necessarily do that with a lot of the larger enterprise platforms. So, we're seeing people replatforming. We're seeing new direct to consumer brands that never sold direct to consumer before use Shopify to do that. We're also seeing increasing partners that used to work with other enterprise e-commerce platforms come over to us and migrations are still happening as well. In addition to all of that, we still have those great upgrades. So as merchants are successful on Shopify, they upgrade to Shopify Plus as well. And so I wouldn't say there's any one particular channel that's driving it, I think it's all those different channels. And frankly, we're just the best product if you're a large scale merchant and you need to have flexibility and you need to have robustness in your platform.

Amy Shapero -- Chief Financial Officer

Yes. On the contracts, the large majority have shifted over to the new pricing. There still is a percentage that are on multi-year contracts that have not shifted over and those while it's a small percentage do represent some of our largest Plus customers. So, there's still headroom to go on that platform fee over time.

Samad Samana -- Jefferies -- Analyst

Great. Thanks again for taking my questions.

Operator

Your next question comes from Nikhil Thadani from Mackie Research. Your line is open.

Nikhil Thadani -- Mackie Research Capital -- Analyst

Great. Thanks, guys. I was curious if you could maybe talk a little bit about your sort of process as it pertains to cyber security especially given that you have a lot more new products coming out, you're going into the busy Q4 and you're also sort of moving to a new cloud back end. So, how has your thinking with regards to cyber evolved especially given that there seems to be some sort of bad news almost every single day? Thanks.

Tobias Lutke -- Founder and Chief Executive Officer

Yes. So, I think this is one of those advantages of maybe that Shopify being an engineer run company. This was the current coming of age to security and all these things were utterly predictable even a decade ago that the Internet would have this moment. And so, security is something that's very very hard to retrofit on any given product. It's a lot better if you bake it in from this -- even the earliest assumptions of when the software is starting to be crafted. And luckily, Shopify is on that side of the divide. So it's something that like people who run security are very high up in this company, some of the most trusted people. It's part of every process. It is part of our general sort of internal operating system of how software is created.

Shopify is running if not the largest one, definitely one of the largest bug bounty programs that exists out there. And so it's just like I think Shopify's MO that existed for many years is now sort of emerging as the consensus best practice in this world. And so I think we've been in very good shape for a long time and I think it's -- I mean it goes without saying that we ask a lot of our customers, of our merchants. We ask them to trust us frankly their livelihoods. That is a big ask and it comes with a great responsibility of keeping data safe, keeping -- especially observing the privacy of all data involved, and like all these kind of things. These are things we take incredibly seriously and it would probably be surprising to a lot of people on the outside just how much time we spent internally discussing these things and trying to get everything just right.

Katie Keita -- Head of Investor Relations

Great. Thanks, Nikhil.

Operator

Your next question comes from (inaudible) from Wedbush Securities. Your line is open.

Wedbush Securities -- -- Analyst

Hey, good morning, guys. I want to dig in on the marketing solutions a little bit. You rolled out the centralized dashboard after third quarter and I see marketing as a real natural extension of the Merchant Solutions product offerings that you've already put in place. Can you talk a little bit more about how you see this contributing to Merchant Solutions over time, what the pricing structure is like? Seems like a really important service for merchants to me, maybe as important as Shipping would be. Dig in a little bit on that.

Tobias Lutke -- Founder and Chief Executive Officer

I don't think we are sharing the economics there. But I think suffice to say that us helping our customers like this, even getting them thinking about -- in the right direction about how to create traffic, how to create awareness; those are things which are incredibly valuable just even from an obvious retention perspective. Like every time someone signs up for Shopify, this is essentially an exercise in searching for a product market fit. And it's just when we look at a lot of the data at Shopify, we find that it's usually the product that's there, it's the market that could fit but they don't find it. And so I mean that's the obvious role of marketing and we have taken a do-it-yourself position for a long time in the history of this business just partly because we entered marketing world was just evolving at such a clip that like what you did one week was different from the next week and so on. Things are calming down a little bit. I mean obviously there's Facebook and adverts are consensus marketing platforms that products like (inaudible) have already successfully shown can be packaged in a way that makes it simpler than the tools that most platforms tend to give people.

This simplicity is really important again for people in sort of the entrepreneur segment because they have so many new things to learn that if we can just say hey here is how you can allocate the dollars you sort of earmarked for marketing efficiently in the beginning and get them a couple of sales, then this is fantastic. So sometimes in these situations, there's possibilities for economics that really depends on the channel. We built this in a platform first approach so this marketing section is going to be filled with apps that you can add to your store. Some of them might be made by us, many of them they're not. So, I think it's too early to project. I think I would think about it more in terms of revenue contribution, in terms of like additional subscriptions income that we have by retaining the accounts and making more people successful, which of course our entire business model is built around partaking in the success of our merchants.

Wedbush Securities -- -- Analyst

That's great. Thanks.

Operator

Your next question comes from Gus Papageorgiou from Macquarie. Your line is open.

Gus Papageorgiou -- Macquarie Research -- Analyst

Thanks. So in the quarter, 41% of your GMV went through Payments. But if you look at some of your more advanced markets, Payments penetration is 90% plus. So I'm assuming the gating factors to getting to that kind of penetration rate for Payments is just blowing out more international markets and then just adoption by Plus customers. Can you talk about what you're doing to eliminate these gating factors and over the long term what do you think is a reasonable expectation for the portion of your GMV going through Payments? I mean is 90% even possible or are there structural impediments that would prevent that?

Harley Finkelstein -- Chief Operating Officer

Hey there. Yes, so in terms of the International stuff, obviously as we roll out more localized payment methods, that obviously helps with the penetration in those countries. A couple other things that is important to understand is there are some things that you need to have -- you need to be on Shopify Payments in order to take advantage of. So things like Fraud Protect for example or Shopify Capital for example. These are features that more and more of our merchants are asking for and they're finding a lot of success with, but of course they're -- you're required to be on Shopify Payments to use them. And so there are a couple of ways that we can incentivize the adoption of Shopify, Shopify Payments.

In terms of Shopify Plus, in general Shopify Plus merchants have more options because they have larger economies of scale and they have larger negotiation power with the actual credit card processors and some of them even come to Shopify with an existing integration. So what we're trying to do is we want Shopify Payments just to be too good not to use. And so by increasing the amount of products around Shopify Payments that require you to have Shopify Payments, we think we can raise adoption there. But that being said, you will always see a greater penetration of Shopify Payments with our core merchant than you will with the Shopify Plus merchants.

Gus Papageorgiou -- Macquarie Research -- Analyst

Great. So, just one clarification. Is Fraud Protect -- if you adopt Payments, is fraud protection included in that or do you still have to pay a fee?

Harley Finkelstein -- Chief Operating Officer

No, it's separate.

Gus Papageorgiou -- Macquarie Research -- Analyst

Okay. Thank you.

Operator

Your next question comes from Brian Essex from Morgan Stanley. Your line is open.

Brian Essex -- Morgan Stanley -- Analyst

Hi. Good morning and thank you for taking the question. Maybe if I can follow on that line of questioning around Payments. Amy, if you could help us understand the penetration rate of Shopify Plus on Payments. And as we look at some of the margin compression that we're seeing in the Merchant Solutions business, how much of that is mix shift toward Payments and how much might we think of it like to fine tune our models going forward, how much is greater adoption of lower margin business? I'm not sure if Shopify Plus given the add ons would be lower margin or not at this point. But maybe if you can give us a little bit of color there, that would be helpful.

Amy Shapero -- Chief Financial Officer

Yes, sure. We don't talk specifically about Payments penetration rate. But I can tell you with respect to Merchant Solutions margin in the quarter, we did see a sequential decline. It was not due to Payments margin themselves, that was similar quarter-over-quarter. This quarter the margin decline was purely driven by a mix, Payments which is the larger mix of Merchant Solutions in this quarter.

Katie Keita -- Head of Investor Relations

Okay. Thank you, Brian. Next question, please.

Operator

Yes. Your next question comes from Thomas Forte from D.A. Davidson. Your line is open.

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

Great. Thanks for taking my question. Wanted to talk about the entrepreneur space, I think it's an excellent idea. Why was LA chosen as first location over another city such as San Francisco and Toronto? And then how should we think about your plans to potentially expand the initiative to other cities in the future?

Harley Finkelstein -- Chief Operating Officer

Yes. In terms of expansion, we're still evaluating where we're going to go if we're going to go anywhere after this. It really is just trying to understand what that looks like. Can we get more people into the store that never heard of a Shopify and get them to build stores? Can we make existing merchants even more successful? So, the reason LA was selected is just because of concentration of merchants in a very small area there. Some of our more successful merchants have also come out of Los Angeles so it just seemed like it was a hotbed for us to -- and a natural place for us to open up shop. But in terms of where we're going to go next, we're just going to learn about what works, what doesn't and kind of test a bunch of things out.

We like the idea though of having space. Entrepreneurship as many of you know is -- can be quite lonely and the fact that entrepreneurs and frankly more importantly aspiring entrepreneurs can have a place where they can have peers and they could have other people going through the same thing they're going through, we think is really great. And when you add to that that we can do all this type of education, whether it's product photography or help them writing product descriptions or understanding how to drive more traffic to their online store, all these things are things we can do in a physical space really easily. But it's -- LA will be the first one, we'll see where it goes from there.

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

Great. Thank you.

Operator

Your next question comes from Brian Peterson from Raymond James. Your line is open.

Brian Peterson -- Raymond James -- Analyst

Hi. Thanks for taking the question. So, just wanted to hit on the sales and marketing line. That was a little better than expected for me this quarter. And Harley, I believe you used the word deliberate when talking about international investments. I'm curious as you look at the international opportunity, does that potentially scale back some of the investments that you would have made domestically or is that simply a comment on international and looking to balance LTV to (inaudible) as you enter new geographies?

Amy Shapero -- Chief Financial Officer

I can take that one. Let me just talk generally about sales and marketing and kind of where we're investing. I mean we're continuing to invest in our core geographies, but we are increasing our investments in Plus both sales and marketing and then international marketing as well. We're also beginning to invest in some brand marketing. And so our sales and marketing was a little bit lower I believe as a percentage of revenue this quarter, but still growing pretty comparable just a hair below revenue growth as we see those opportunities to invest for current and future growth. And some of that spend international and brand spend has a longer-term return on investment and some of it is learning and it may take some time before we find those efficient channels in some geographies and newer geographies. So, it's an area of investment for us right now. We're starting to see it pay off and we expect it to continue to pay off into the future.

Katie Keita -- Head of Investor Relations

Great. Thanks, Brian.

Operator

Your next question comes from David Hynes from Canaccord. Your line is open.

David Hynes -- Canaccord Genuity -- Analyst

Hey, thanks. Good morning, guys. So you addressed a couple of issues impacting MRR growth, but as we see a bit of a deceleration there we're starting to feel some questions around the quality of merchant adds as you have kind of solved for the long tail and what the implications are on churn. So I guess my question is, is there a GMV threshold at which you see a material inflection in merchant retention. What is that number and is there any way to kind of frame what percent of the merchant base is kind of above that threshold today, the stickier segment of your customer base?

Tobias Lutke -- Founder and Chief Executive Officer

Yes, that exists. We don't share new numbers often on these calls, but I think this is what I can give away. That threshold is $1 TMV. The moment someone sells something, account is really sticky. So therefore we have a lot of efforts on trying to just help people get the best first sale. It's something that happens every minute on Shopify that someone has their first sale. And I think this is one of those facts that may be it doesn't look great in spreadsheets, but it certainly we're kind of seeing that everyone at Shopify here is very proud of because this is sort of what we build around, this is sort of part of -- I mean this is the reason why the company exists, right, helping people. Helping people in their own sort of reach for independence and be successful on their entrepreneur journey. So -- and our analysis is always the same. It's if we get someone to do a sale, if that sale isn't from the same zip code that they live in which usually means that mom bought something, then it's usually the beginning of a successful journey and we build around that.

David Hynes -- Canaccord Genuity -- Analyst

Okay. Thanks.

Operator

Your next question comes from Kevin Krishnaratne from Paradigm Capital. Your line is open.

Kevin Krishnaratne -- Paradigm Capital -- Analyst

Hey there. Good morning. You've noted a couple of times on the call that merchant adds in Q3 were better than Q2 and I understand that International is driving that. But can you talk about what underlying trends have been in North America the past couple of quarters? Thanks.

Amy Shapero -- Chief Financial Officer

I think generally because most of the merchants still are our core geographies, the general trends speak for the North American trends.

Katie Keita -- Head of Investor Relations

Thanks, Kevin.

Operator

Your next question comes from Deepak Mathivanan from Barclays. Your line is open.

Deepak Mathivanan -- Barclays -- Analyst

Yes, thanks for taking the question. Facebook has become more aggressive recently in tightening their advertising solutions. We've heard that from some of our techs in the space. Has that affected any marketing capabilities that you provide from your platform directly? And indirectly, are you hearing anything from your merchants about their demand generation success through Facebook? Thank you.

Tobias Lutke -- Founder and Chief Executive Officer

We do hear. I mean this is something we talk a lot with people about. Again, advertising products that people want to an audience that sort of is generally interested in this area is the most above board advertising that exists. Like this is -- like if the users of Facebook could determine that that's the only advertising -- kind of advertising they'll ever see, then they would very gladly share their interest, right. Like I mean I like technology and I like skateboarding so I like electric skateboards, right. This is the kind of thing that the platform is fantastic at. So, like retailers are not hit by the changes in tightening of the advertising platform.

It's the people who are trying to change your opinion on core matters, specifically politically, most hopefully in my personal opinion should be negatively impacted by the changes. And retailers not really much of -- it's not -- like Facebook wants more retailer marketing because that's easy and OK with everyone. So in terms of success rates, customer acquisition costs outside of some areas just getting more and more competitive with more and more players. We don't hear anything about structural changes and even that tends to be offset by more advertising opportunities coming online like we have some customers who are quite successful advertising on stories and these kind of new app formats that exist. And so, this is just -- everything is being nominal in that space.

Katie Keita -- Head of Investor Relations

Great. Thanks, Deepak.

Operator

Your next question comes from Todd Coupland from CIBC. Your line is open.

Todd Coupland -- CIBC -- Analyst

Hi, good morning, everyone. Given the upside in local payments in Germany, what should be the rhythm -- what rhythm should we expect in the other markets in terms of your local payments plans? Give us an idea on what to expect there. Thanks.

Harley Finkelstein -- Chief Operating Officer

Yes. I mean as we see different markets grow and we see that there is an opportunity for us to work with to get a local payment method set up there, we're going to of course do that. We started with Germany because we know a lot of merchants there and as you know, it's one of our pretty expansion countries for this year and so just an obvious fit. But we have teams that are looking at what are the next ones to go after. I think over time you'll see more and more local payment methods roll out particularly into priority geographies and we're going to hit the ones fastest that are easiest to get into where we have the most pent-up demand.

Katie Keita -- Head of Investor Relations

Right. Thanks, Todd.

Operator

Your next question comes from Koji Ikeda from Oppenheimer. Your line is open.

Koji Ikeda -- Oppenheimer & Company -- Analyst

Great. Congrats on the quarter and thank you for taking my question. I just wanted to touch on the B2B e-commerce opportunity. Any sort of color on what sort of trends or maybe unexpected positives or even challenges that you saw during the quarter with your B2B e-commerce offering would be helpful? Thank you.

Harley Finkelstein -- Chief Operating Officer

B2B and the wholesale offering continues to roll out. We're now offering advanced pricing capabilities, customer specific pricing as well, and new integrations for things like Shopify Flow to automate some of that work. I said this on the last call, but it's worth -- it bears repeating, which is that B2B is going to be really really important to the merchants that require it, but most merchants are not going to require B2B capabilities. What it does do for us though is it does expand our total addressable market with Shopify Plus because there was just some merchants that didn't think about us previously because we really were more of a direct to the end consumer type of model and business and now obviously we're able to have a sales team and particular Shopify Plus partners who are focused more in that B2B wholesale space. So I don't think the B2B product is going to be used by all of our Shopify Plus merchants, but for those that do need it, it is really really helpful. And again that product continues to evolve and get better over time.

Tobias Lutke -- Founder and Chief Executive Officer

And I think it's worth saying that a lot of manufacturers -- B2Bs all they do right now that is sort of more of that industry and has been and then Harley talked a lot about direct to consumer. Again this in every boardroom and every one of our companies, people are thinking about how we're going to start like a direct relationship with our customers because for all sorts of structural reasons it's tough going to have people sit between you and your customers. And so adopting Shopify Plus just for a B2B product is usually an improvement on what they have been doing and this allows the capability, this allows optionality of a single click, now I'm going to have a website afterwards. And it just kind of speaks to this land and expand thing that's going on because again after they then have a wholesale channel, they might think maybe we test waters on Instagram marketing. That seems like a little bit of a leap from B2B, but some people might go this route and all of that is possible once you have the Shopify Platform implemented and both of the things that are just completely out of reach of most retailers if you don't.

Katie Keita -- Head of Investor Relations

Great. Thanks, Koji.

Operator

Your next question will come from Mark Zgutowicz from Rosenblatt Securities. Your line is open.

Mark Zgutowicz -- Rosenblatt Securities -- Analyst

Good morning. Thank you. Just getting back to the comment on sticky merchants. I'm curious if that's more of a function of onboarding of the right merchant meaning that your customer acquisition strategy versus support of that merchant wants to onboard it and if you could also speak to any learnings that you've gained on that front and the -- over roughly the last 12 to 18 months and sort of what the attrition rate trend line has looked like more recently?

Tobias Lutke -- Founder and Chief Executive Officer

So, maybe clarify if I'm not heading off here in the right direction for your question. But I think what you're wondering is how we determine that we get the -- onboard the right customers. Does that make -- is that sort of what you're asking for?

Mark Zgutowicz -- Rosenblatt Securities -- Analyst

Yes. I was just thinking about your customer acquisition strategy and sort of how it's matured over the last 12 to 18 months and how much maybe modifications you made within that acquisition strategy have led to a -- maybe a better prospect or more sticky merchant and sort of comparing that to once you've onboarded a prospect and sort of your support in terms of retaining that customer. So, I guess two separate variables there.

Tobias Lutke -- Founder and Chief Executive Officer

Yes. And if this gets -- it becomes a tricky conversation, right, because there's two separate things happening here. One is if he wanted -- if he set a company goal to get more sticky customers or more converting customers, the problem is that's an average. One only thing Shopify really wants to do when it thinks about it's funnel is it wants to get all the people into the product because like provisioning a new Shopify account costs nothing. It's the same like if someone adds a new product to the database or he adds a new shop to the database is exactly the same cost to us, right. So, marginal cost is nothing. So we want people signing up for such accounts to everyone who has that kind of ambition to reach for independence as I said earlier two questions ago and we want that to be as wide as possible. People come in from all sorts of -- sometimes it's like a high school class, which set themselves a project to sell the cookies and stuff like this, it's like.

So thinking about getting some kind of average up doesn't really make sense because we really want to get as many people who have a chance at getting their first sale to someone they don't know because then what happens. After we get people to that point is even if that wasn't a business that they are willing to go all in on and build into something, they've caught the bug. They are going to be back. They are going to -- because it demystified the process of starting a business, which is really really cool to acquire. And so this is why we are thinking about, this is why I tend to discourage averages in general because this is such a fast growing company and there's so many components of this business that when you try to take an average, you just get -- you get the wrong picture because they -- often things that look bad for averages are actually really good for gross profit dollars which is the thing we actually care about. And I think that's sort of a brain dump on that topic for me. Hope that's helpful.

Mark Zgutowicz -- Rosenblatt Securities -- Analyst

Yes, it is. Thank you.

Katie Keita -- Head of Investor Relations

Thanks, Mark. All right. Thanks, everybody, for dialing in this morning and have a great rest of your week.

Operator

Thank you, everyone. This will conclude today's conference call. You may now disconnect.

Duration: 58 minutes

Call participants:

Katie Keita -- Head of Investor Relations

Harley Finkelstein -- Chief Operating Officer

Amy Shapero -- Chief Financial Officer

Brad Zelnick -- Credit Suisse -- Analyst

Colin Sebastian -- Robert W. Baird & Co. -- Analyst

Kenneth Wong -- Guggenheim Securities -- Analyst

Monika Garg -- KeyBanc Capital Markets -- Analyst

Ross MacMillan -- RBC Capital Markets -- Analyst

Justin Furby -- William Blair and Company -- Analyst

Richard Tse -- National Bank Financial -- Analyst

Tobias Lutke -- Founder and Chief Executive Officer

Darren Aftahi -- Roth Capital Partners -- Analyst

Samad Samana -- Jefferies -- Analyst

Nikhil Thadani -- Mackie Research Capital -- Analyst

Wedbush Securities -- -- Analyst

Gus Papageorgiou -- Macquarie Research -- Analyst

Brian Essex -- Morgan Stanley -- Analyst

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

Brian Peterson -- Raymond James -- Analyst

David Hynes -- Canaccord Genuity -- Analyst

Kevin Krishnaratne -- Paradigm Capital -- Analyst

Deepak Mathivanan -- Barclays -- Analyst

Todd Coupland -- CIBC -- Analyst

Koji Ikeda -- Oppenheimer & Company -- Analyst

Mark Zgutowicz -- Rosenblatt Securities -- Analyst

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