Shopify (SHOP) Q4 2018 Earnings Conference Call Transcript

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Shopify (NYSE:SHOP) Q4 2018 Earnings Conference CallFeb. 12, 2019 8:30 a.m. ET

Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:

Operator

Good morning. My name is Lisa, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Shopify Q4 2018 financial results conference call. [Operator instructions] Katie Keita, you may begin your conference.

Katie Keita -- Director of Investor Relations

Thank you, operator, and good morning, everyone. We are glad you can join us for Shopify's fourth-quarter 2018 Conference Call. We are joined this morning by Tobi Lütke, 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 U.S. 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 as a substitute for GAAP measures. Reconciliations between the two can be found in our earnings press release, which is on our website. And finally, note that because we report in U.S.

dollars, all amounts discussed today are in U.S. dollars unless we say otherwise. With that, I will turn the call over to Harley.

Harley Finkelstein -- Chief Operating Officer

Thanks, Katie, and good morning, everyone. 2018 was another phenomenal year for Shopify and for our merchants. We hit major product milestones while stepping into new and exciting territory. And we continue to evolve as an organization in our mission to make commerce better for everyone.

First off, I want to thank the team at Shopify for their passion and hard work over the past year. We wrapped up an amazing year and delivered an incredible fourth quarter as a result. And together, we achieved a truly incredible milestone this year. No other SaaS company at the $1 billion-revenue mark has ever grown at this rate, 54% in our last quarter and 59% for the full year.

This is historic, not just for us, but for the industry. It is truly something to be proud of. How did we get here? Simple. Merchant success has been and will always be our top priority.

It guides the decisions we make on a daily basis and is infused into everything we do at Shopify. This was reflected in our fourth quarter and across our three priority areas of investment in 2018: Platform, Shopify plus and international. Let's start with platform. We aim for Shopify to be the first thing that merchants open in the morning and the last thing that merchants close at night.

In other words, we want Shopify to be the heart and soul of a merchants' business, helping them sell more and work more efficiently so they can focus on the things that really matter to them. The features that our product team shipped this year were geared toward achieving this. Multi-location inventory, Shopify Ping and our centralized Marketing Dashboard helps streamline operations, while Dynamic Checkout and new discount features are designed to enable merchants to personalize a buyers' purchase experience and increase sales conversions. Our Services Marketplace and our updated app store leverage our data algorithms to further automate and simplify back-office processes.

While Fraud Protect, which we launched in the fourth quarter, allows merchants to automatically fulfill more orders with confidence. These platform improvements along with our core proposition of multichannel sales enablement contributed to our biggest-ever Black Friday Cyber Monday sales weekend, with more merchants and more GMV per merchant than ever before on the Shopify platform. Our merchants generated more than $1.5 billion of GMV during the four days of BF CM 2018, compared to $1 billion over the same period in 2017. And two-thirds of Shopify merchants online orders in the U.S.

came through mobile devices, compared to under 40% for the industry, which shows what a difference mobile-first design makes. To offer our merchants further support, we opened our first physical space in Los Angeles in the fourth quarter, which has exceeded our expectations. Thousands of the people have already visited this space to participate in one-on-one sessions, special events or educational programs. Product photography, formulating a sales channel strategy, paid advertising, email marketing and selling in-person with point-of-sale are just a few of the practical topics we cover to get entrepreneurs launched and selling.

The simplicity, agility, and cost effectiveness of Shopify have attracted merchants across the retail spectrum, including high-volume merchants looking for a powerful solution to manage their increasing business complexity, a quality they have found in Shopify plus. Shopify plus ended the year with approximately 5,300 merchants, with launches in the fourth quarter from a wide variety of verticals, including consumer packaged good companies like Johnson & Johnson, Unilever, Procter & Gamble and General Mills; iconic fashion houses, Steve Madden, Nicole Miller and Jones New York; more traditional fashion retailers like Wet Seal; sporting good companies like Spider Ski Wear; Craft Sports, Helen Nocks and Specialized Bicycle. And we're also seeing increased uptake in new retail verticals. In the fourth quarter, the merch store for the popular videogame Fortnite launched in Shopify plus.

Influencers and celebrities continue to choose Shopify as a home for their brands, including The Obama Foundation; Tom Brady's brand, TB12; and also one of favorite new stores, Ladder, founded by Arnold Schwarzenegger, Cindy Crawford, Lindsey Vonn and Lebron James. The majority of new Shopify plus merchants added in the quarter were brand new to the Shopify platform, but we also continue to see a healthy volume of upgrades. In 2018, we invested in growing the plus sale teams, which, along with the expansion of our plus partner network contributed to the strong growth witnessed this year. We also entered a new retail vertical, the Canadian cannabis industry.

Some of the country's largest provinces and largest licensed producers that selected Shopify experience excellent uptime and performance on launch day and beyond, which demonstrates the fitness of our platform for regulated industries around the world. We are likewise expanding our product market fit for a greater number of businesses by continuing to develop more advanced enterprise-level features and functionality, such as Launchpad, Scripts and Flow, all tools to help merchants upscale, customize and work more efficiently. Launchpad is a specialized tool that lets plus merchants plan and automate flash sales, product launches and sales campaigns. Scripts enables merchants to optimize their e-commerce checkout in several ways, such as automating discounts and promotions.

And Flow is our integration tool that allows merchants to offload repetitive tasks such as reordering inventory, letting merchants focus on growing bigger, faster. By building more sophisticated features to deliver a unique product experience that meets the needs of higher volume, more complex merchants, we've broadened our appeal to an even greater number of potential plus merchants. This approach helps Shopify plus become a more significant contributor to Shopify across every metric in 2018, and we expected to set Shopify plus up for continued success in 2019. On the international front, a key step we took this year was translating the Shopify platform, which is now available in seven languages.

This single undertaking in 2018, boosted merchant access to and merchant success on Shopify outside our core geographies of North America, the U.K. and Australia. Our mix of international merchant has expanded to its highest level ever in the fourth quarter, and our lead-to-conversion rate improved in markets where we translated the user interface. As such, merchants from outside our core geos accounted for 24% of our merchant base in 2018, up from 21% in 2017.

And the contribution from international merchants to total GMV on our platform continued to increase, with the GMV more than doubling over 2017 in three out of our four priority countries. As always, a very important part to making our mission a reality are our partners who play a critical role in the success of our merchants and the success of Shopify. Our partner ecosystem remains strong, with approximately 18,000 partners having referred merchants to Shopify over the past 12 months. Thanks to the improvements to search and classification that rolled out in the app store in 2018 to nearly 2,500 third-party apps on our platform are finding their way to merchants more efficiently than ever.

It's clear that our merchants are getting value from the apps on our platform as measured by the percentage of merchants using them and the dollars spent per merchant, both of which continue to trend upward in Q4. Before handing the call over to Amy, I want to note that I've never been more optimistic about the opportunity Shopify has and how we're executing on that opportunity. With over 4,000 of us focused everyday on making commerce better for everyone, merchants and buyers alike, our contribution to entrepreneurship and a more vibrant commerce ecosystem across the globe is growing. This is why we do what we do and why we are so excited about our future.

Amy Shapero -- Chief Financial Officer

Thanks, Harley, and good morning, everyone. As Harley mentioned, 2018 was a fantastic year for Shopify as we continued our strong growth trajectory, ending the year with more than $1 billion in revenue and achieving adjusted operating profitability for the quarter as well as for the full year. Shopify's ability to give merchants superpowers was on full display in the fourth quarter. We expanded revenue 54% year over year to $343.9 million on strong performance from both subscription solutions and merchant solutions.

Subscription solutions' revenue grew 42% to $133.6 million as we continue to attract new merchants, ending the year with more than 820,000 merchants on the Shopify platform. Monthly recurring revenue grew 37% year over year to $40.9 million, primarily driven by merchant adds. Shopify plus continued to increase its contribution to monthly recurring revenue, accounting for $10.4 million or 25%, compared with 21% of MRR in Q4 of 2017. Strong app and platform fee revenues contributed to the 5-percentage-point difference between the growth of subscription revenue and MRR.

Merchant solutions' revenue grew 63% over the same period in 2017 to $210.3 million. This growth was driven by GMV expansion, which increased 54% year over year to $14 billion. Continued penetration of Shopify payments, shipping and Capital also contributed to this growth. The highlight of the fourth quarter came during the Black Friday Cyber Monday weekend.

As Harley mentioned, more than $1.5 billion was transacted on our platform over those four days. During this period, peak sales reached $870,000 per minute and $37 million per hour, while our platform experienced zero downtime. This performance is an absolute testament to the resiliency of the Shopify platform and the talent of our infrastructure and support teams. $5.8 billion of GMV was processed on Shopify payments in Q4, an increase of 65% versus the comparable quarter last year.

payments penetration of GMV was 41% versus 39% in Q4 2017 as Shopify plus continued to increase its share of GPV, and we made headway expanding Shopify payments internationally. Capital and shipping, both higher-margin solutions, also turned in strong performances year over year in the quarter, and together, doubled revenue for the full year. Gross profit dollars grew 53% from Q4 of 2017 to $185.7 million despite a greater mix of merchant solutions revenue versus last year, reflecting the greater contributions made by Shopify Capital and Shopify shipping as well as the expected rebound in subscription solutions' margins with the cost related to the migration to cloud now behind us. Adjusted operating income in Q4 grew 72% to approximately $20 million or 6% of revenue, compared with $11.6 million or 5% of revenue in the fourth quarter of 2017.

Adjusted net income for the quarter grew 90% to $27.9 million or $0.26 per share. This compares with income of $14.7 million or $0.15 per share in last year's fourth quarter. Finally our cash, cash equivalents and marketable securities balance was approximately $2 billion, which increased around $390 million largely due to proceeds from a share offering we completed in December. We continue to see a tremendous opportunity for growth at Shopify, and we're still in the early stages of achieving our mission to make commerce better for everyone.

Our decision to raise capital in Q4 was guided by this mission, in order to fund these opportunities to make merchants' lives easier and build for the long term. Merchants of all types choose Shopify to start, manage and grow their business. This is because our platform enables merchant growth and success, no matter their size or scale. The simplicity, agility and cost effectiveness of the platform, combined with the support of our rich partner ecosystem, provides every merchant an opportunity to build a successful business.

There are primarily three types of merchants that join Shopify: early stage entrepreneurs or aspirational merchants, who are the very top of the funnel; more established merchants, who have demonstrated a certain level of success; and Shopify plus, larger brands with greater volumes and higher degrees of business complexity. Understanding the different types of merchants who use our platform informs our product road map in areas of investment to best ensure overall merchant success and expand our total addressable market. In 2018, we focused our investments in Shopify plus, our platform and international, by building a richer set of features and enabling even more merchants around the world to start selling and to sell more efficiently. As a result, today, we are seeing continued strength of Shopify's GMV growth, continued strong merchant cohort performance and an expansion of our international merchant base.

Our success to date would not be possible without investing for the out years, and as such, we plan to continue investing for the long term. We believe that actively managing a portfolio of growth investments with different return time horizons is necessary for continued strong growth in 2019 and beyond. Let's preview our larger focus areas in 2019. First is international.

We first became an international company by accident with no translation and little spend to encourage merchant adds outside our core geographies. In 2017, we saw promising results when we began to translate blogs with a greater mix of merchant adds from international. In 2018, after we translated our platform, this growth in international merchant adds accelerated, again outpacing strong merchant growth in our established markets. These positive signals, along with substantial growth from geographies we haven't yet translated, merit expanding our investments in these markets.

Each geography has its own norms and preferences with respect to languages, partners, payments and design, development of commerce and entrepreneurial culture and affinity for local versus cross-border selling. While we are seeing positive early results, we expect our continued investments in international growth will play out over several years. Second is the Shopify brand, a new area of investment for us. We've enjoyed exceptional organic growth in our merchant base despite having very low brand awareness.

With approximately $30 million of investment in 2019 directed toward building the Shopify brand beyond online and to mass-market media channels, we believe we can reach and be recognized by a far greater number of potential merchants. We are also stepping up our efforts to catalyze new business creation and success as our launch of Shopify Studios last month attests. Overall, the objectives of our brand investments in 2019 are to catalyze entrepreneurship, increase awareness of the Shopify brand, widen the top of the merchant funnel and drive up the efficiency of our direct marketing spend over time. As with all new investment areas, we expect 2019 to be a learning year for us, with most benefits expected to accrue in 2020 and beyond.

The third major focus area for investments in 2019 is product expansion. One thing we have learned over the last 12 years is that merchants love what Shopify does for them and they would like us to do more. This is why we launched Shopify plus in 2014, shipping in 2015 and Capital in 2016. In other words, with our strong track record of innovation on behalf of merchants, they expect us to keep at it, to keep helping them outinnovate, outsell and outcompete.

To be constantly improving for merchants, we have to be constantly improving ourselves. Creating the right version of Shopify for 2019 and beyond means investing in new capabilities in shipping and other areas that will enhance both the merchant and buyer experience and drive higher conversion. While we will not go into specifics today, I can tell you that we are building for the future and there is more to come later this year. Alongside these newer opportunities to expand our total addressable market, increase our marketing efficiency and gain a greater share of wallet, we will maintain our investments in Shopify plus and our platform where our returns have been evident.

We have earned an advantageous position both in the market and within our merchants' own operations. And by continuing to seize opportunities to deliver more value to more merchants as we are doing with these investments in 2019, we are helping to secure Shopify's status as a high-growth company for a very long time. For 2019, we expect to see strong top-line growth, with revenue for the full year in the range of $1.46 billion to $1.48 billion and an adjusted operating income range between $10 million and $20 million. For the first quarter, we expect revenue of $305 million to $310 million and an adjusted operating loss between $13 million and $15 million.

Stock-based compensation in 2019 is expected to be approximately $160 million for the full year, with about $34 million of this in the first quarter. Our expectations for continued strong growth in 2019 reflect our favorable competitive position as well as our ability to benefit from secular trends in global commerce, including multichannel, direct-to-consumer, mobile and others. We are excited about what we can do for merchants in 2019 and about our contribution to maintaining a vibrant and healthy commerce landscape that empowers merchants around the world. With that, I will hand the call back to Katie.

Katie Keita -- Director of Investor Relations

Thank you, Amy. [Operator instructions] Lisa, can we hear from the first questioner, please? 

Questions and Answers:

Operator

[Operator instructions] And our first question comes from the line of Brad Zelnick from Credit Suisse. Your line is open.

Brad Zelnick -- Credit Suisse -- Analyst

Thanks very much and congrats on a strong finish to a great year. I didn't hear Tobi on the call. Is he with us today?

Tobias Lutke -- Chief Executive Officer

I'm here. Hi, Brad.

Brad Zelnick -- Credit Suisse -- Analyst

Excellent. Tobi, I have a big picture question. I know it's super early, but what are your thoughts on augmented reality and the impact it can ultimately have on e-commerce?

Tobias Lutke -- Chief Executive Officer

Love it. Great. I mean, it's very early, right? You're sort of at the foundational infrastructure stage of augmented reality. Now I do think that augmented reality will be the final or at least second-to-last form factor for computing.

We started the mainframes meant to desktop computers, we then transitioned to mobile phones, we're going to go to augmented reality as a primary form of digital consumption somewhere in the next probably decade, decade and a half. And then eventually to direct interfaces. So I think everyone should have a good strategy, but it -- I'm not sure how much it's going to immediately matter. Like we will find initially used cases.

We are -- we have prepared the platform for it, as you can go to a number of Shopify stores and sort of seize a little bit early fruits of that labor. You can look at couches. I think you might want to buy in your web browser on Shopify stores. And then instead of looking at pictures, you can actually place them in your living room and see if they actually fit dimension-wise, all these kind of things, which is really, really cool.

But there is such an enormous amount of work that has to happen to get proper 3D models for -- of all the products, figure out how to permanently place objects in then real world. And then of course, we are sort of all standing by until the -- how the companies can figure out how to miniaturize all the components to put them in client -- proper classes. And so the impact will be significant. I think -- but it almost be more on the side of -- here's what happens every time we do major transitions in technology.

You're going to end up with the companies which are going to adjust to it and the ones which don't. And so one major component -- the story until Shopify came around has been that SMBs had of a lot of trouble competing with larger companies. And one of -- there's many reasons for this in operational efficiency, but one major reason was that we went through so many transitions in technology, and every single time that happened, like, let's say, we go to -- everyone needs mobile-enabled websites or something obviously like this, other SMBs will spend once money for some technology and then -- and didn't have a proper budget set up to keep these things innovative. Just for the high end of bigger companies that had dedicated development teams to keep them relevant.

And so all this missed with new -- to these transitions and then ended up in trouble when consumer behavior changed. One -- what Shopify really wants to do is, we want to solve this problem for small businesses, right? Like, they decided to -- Shopify, we tell us about their products. Every once in a while they come by and say, "Hey, we now need 3D models -- and here's a way to get those and here's our amazing partner ecosystem which can help you with this." And -- but we keep that to a minimum and we just make sure that once consumer behavior changes and everyone wants to see the couches they are about to buy actually placed in their living room through their cellphones or through their glasses, which might be released at this point, that all of our customers are ready for this kind of thing. And so this is the way I -- where augmented reality sits right now.

Brad Zelnick -- Credit Suisse -- Analyst

Thanks so much for the color and thanks for taking my question.

Operator

Our next question comes from the line of Ken Wong from Guggenheim Securities. Your line is open.

Ken Wong -- Guggenheim Securities -- Analyst

Thanks very much. Maybe a question for Amy. You touched on a lot of investments for 2019. Maybe, if you could, just circle a little bit on just gross margins.

How should we think about gross margins relative to 2018 when trying to figure out how to manage to the operating income goals that you guys tossed out there?

Amy Shapero -- Chief Financial Officer

Yes, sure. Let me just break it down for you by subscription solutions and merchant solutions and then we'll talk a little bit of about overall gross margins. So with respect to subscription solutions' margin, we should generally see improvement year over year. The first three quarters of 2018 were impacted by the cloud migration.

And as you saw in the fourth quarter of 2018, we did see a rebound. So generally, for 2019, calling for improved subscription solutions margins year over year. With respect to merchant solutions margins, we expect sort of steady state, with a slight bias toward improvement. There's some puts and takes with respect to what's in there.

We have continued growth of high-margin products like shipping, Capital, Fraud Protect. We expect Payment margins to continue to be relatively strong and steady. Within that, international payment margins tend to be higher than average, but there is some downward pressure on that as plus merchants continue to take Shopify payments. So generally, calling for steady merchant solutions margins year over year.

When you step back and then you look at the overall blended gross margin, there will be some pressure, some slight downward pressure as we continue to see higher mix of merchant solutions revenue year over year. But I'd like to just emphasize that we aren't optimizing for an overall gross margin, we're focused on gross profit dollar growth. That's what we think is important. That's a signal to us that our merchants are successful and that we're sharing in that upside and that's a trade-off we're happy to make.

Ken Wong -- Guggenheim Securities -- Analyst

Got it. Thanks for that, Amy.

Amy Shapero -- Chief Financial Officer

Thanks, Ken. Next question please.

Operator

Our next question comes from the line of Colin Sebastian from Robert Baird. Your line is open.

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

Great. I'll add my congratulations to a strong year. Maybe also a big picture question for Tobi. But given that Shopify's success rests in large part due to the strong underlying technology stack.

I guess, I'm wondering your level of confidence that the current platform as it's structured with rails and containers will continue to scale efficiently at such a high level of growth and volume and performance. Or do you foresee the need maybe to step back and reinvest in the platform over the next couple of years?

Tobias Lutke -- Chief Executive Officer

Yes. So an old mentor of mine once told me that -- when I was in my apprentice as a programmer in -- back in Germany, that when you start a software project, you have about two years of making changes to it, afterwards, it's like someone put cement into the coat base and you're never going to change a thing anymore. And that was true back then in the '90s. So I've been terrified of that ever happening.

And the industry has matured significantly. We know a lot more about software craftsmanship than we did in the '90s. And one thing Shopify has done from the beginning and has really, really difficult and like very scrappy start-up trying to just sort of survive, once we figured out a better way to do it, a certain thing, or a better way to archetype certain things, we actually went back and made those changes instead of accumulating technical debt that, of course, you end up having to pay a lot of interest on over the years. And the -- Shopify's held itself to these standards, and we've been working hard on just making sure that the platform is able to adapt to new realities as quickly as the people in the company want to do it and as the market dictates that we do.

And I think we are in very, very, very good shape given like sort of a vintage of a coat base. And the technologies that we chose have all proven to stand the test of time. I know there tends to be per technology with all this bull stories and bear stories on -- it's worked well for some people and worked not well for some folks. The technology we chose, we held as a foundation for the main business logic of Shopify, has looked exceptionally well and works exceptionally well to this date.

Now Shopify's platform of enormous scale at this point. We are using a lot of different technologies that are specialized for certain instances, especially around things like storefront, traffic. This is a significant percentage of internet traffic at this point on our storefronts. And -- so there -- we are -- we have the foundation to change out some piece of technology just with something that's more customarily designed for these kind of cases.

And these are the kind of changes we do and we take the time to do them and we want to keep the platform fresh. I really don't think we will have to be one of those companies which has, at some point, engage in a big rewrite. That's usually -- is a sort of last resort kind of situation that is to be avoided. And I think we have done a good job keeping the technical debt low enough to be able to deal this a little bit of interest that we have to do and go back and pay down whenever we have a chance.

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

Thank you.

Katie Keita -- Director of Investor Relations

Thank you, Colin. Next question please.

Operator

Our next question comes from the line of Monika Garg from KeyBanc. Your line is open.

Monika Garg -- KeyBanc Capital Markets -- Analyst

Thanks for taking my question. Amy, one question is on operating margins. You are guiding almost flattish, like 1.2-ish percent for 2019. Given you are guiding to a strong growth in '19, could you walk through like how -- why we are not seeing more leverage? And at what time do you think we can see more leverage?

Amy Shapero -- Chief Financial Officer

Yes. We still see continued strong growth, a huge opportunity out in front of us. And so we're going to continue to invest on OPEX areas. With respect to sales and marketing, we will see some slight operating leverage in 2019.

But we see opportunities to continue to invest in international and plus. We talked a little bit in my earlier remarks about the $30 million for brand spend. And so not all of those investments will necessarily pay off in 2019, but will help us continue to grow at strong rates well into the future. With respect to R&D, we likely will not see any operating leverage as we continue to invest in the areas where we have been investing, plus, international, on some newer capabilities to be announced later, and so we're adding technical talent there.

And then with respect to G&A, might see some slight operating leverage, but we'll continue to invest there as well for the future. It's too early to talk about when we might see more operating leverage. While we see opportunities for growth, we're going to continue to invest for the long time -- long term as we have in the past.

Monika Garg -- KeyBanc Capital Markets -- Analyst

Thank you.

Katie Keita -- Director of Investor Relations

Thank you, Monika. Next question, please.

Operator

Our next question comes from the line of Tom Forte from D.A. Davidson. Your line is open.

Tom Forte -- D.A. Davidson -- Analyst

Good morning. Thanks for taking my question. So the question I had was, what are the keys to success in highly regulated markets such as cannabis? And then stated differently, what are the keys to your skill set that enable you to help merchants exploit highly regulated markets?

Harley Finkelstein -- Chief Operating Officer

It's Harley. I'll take that question. So part of -- just to be clear, the reason that we were sort of aggressive in going after the Canadian cannabis market was we felt that what the Canadian government was legislating was very clear and it made it easy for us to understand what was required. But what it also did was, it also positioned us, if we did this right, to be a global leader and be the first phone call that any other country thinks about when they're thinking about regulating or allowing cannabis sales to the consumer to be allowed.

So a couple of things that had to happen. One was, we were able to work with very tight timelines because effectively, we were given only a couple of months to know all the legislation and how it would be implemented. The second was, we also had to abide by very specific legislative requirements, so things like age verifications for example. Or in the case of licensed producers, the need to do, what they call seed-to-sale applications.

And so we felt that it was a good challenge for us, not only as a business, but also as on engineering side, that if we were able to secure most of the major provinces and most of the major licensed producers, which we did, and then be highly successful at that that it would open the doors for us for a really good future as cannabis sales increase internationally. I mean, actually, funny enough, the provinces that didn't use Shopify did have some problems. And the ones that did use Shopify had no problems whatsoever. So we're quite proud of that.

But really the Canadian cannabis push was really not only just to get a foothold in the Canadian market, but also ensure that we have a really good position in globally as things begin to decriminalize.

Tom Forte -- D.A. Davidson -- Analyst

Great. Thank you very much.

Katie Keita -- Director of Investor Relations

Thank you, Tom. Next question please.

Operator

Our next question comes from the line of Richard Tse from National Bank Financial. Your line is open.

Richard Tse -- National Bank Financial -- Analyst

Yes, thank you. From a capital allocation perspective, I was wondering if you could provide some color on sort of the thought process around how you make those decisions? And where you might be focused more today?

Amy Shapero -- Chief Financial Officer

Yes, sure. I'll start with that one. We obviously start with our merchants and what their needs are. And as I said, we look at three merchant segments, aspirational, core and plus, and our investments are largely geared toward better serving them and continuing to grow our capabilities there, also to increase our TAM.

We talked a little bit about international in my earlier remarks, which I think is typical of how we invest. We'll typically start where we're testing somewhere, as we did in international, we talked about blogs and how we saw early success with translating blogs. And then in 2018, we started investing in Earnest in international, where we picked four key markets to focus on localizing, and we saw that localizing actually produced significant results, three of our four focus countries actually more than doubled their GMV year over year. And so we saw success there, so we learned.

And so we're taking those learnings and now taking that to the next level. And in 2019, we'll continue to localize in the markets we're at. We'll continue to translate into new languages. And we'll continue to look at new markets, but we'll do it in a very focused and concerted way.

So we've been smart allocators of capital in the past, and we'll continue to invest in that sort of way and allocate capital in a smart way.

Richard Tse -- National Bank Financial -- Analyst

That's helpful. Thank you.

Katie Keita -- Director of Investor Relations

OK. Thank you, Richard. Next question please.

Operator

Our next question comes from the line of Darren Aftahi from Roth Capital Partners. Your line is open.

Darren Aftahi -- ROTH Capital Partners -- Analyst

Good morning. Thanks for taking my question and congrats as well. Just on the rest of the world growth. Two things there, one, any geographies you kind of call out that overindex growth? I know there was one country you said through the four did well? And then two, as it pertains to international investment, any additional kind of regions, countries, languages you'd kind of call out where that investment is directed to?

Harley Finkelstein -- Chief Operating Officer

Darren, it's Harley. I'll take that call. So as you sort of called out, last year, there were a couple of priority countries that we focused on. The reason we focus on those four countries to start was, we felt that we had the closest product market fit in those countries, yet we weren't necessarily translated from a language perspective.

We didn't have the right payment methods in place. We certainly had very small, if any, partner ecosystem. And so we thought that's where we can get the most leverage from with the least amount of work. That being said, there's still quite a bit of work and do in those countries.

And as Amy just mentioned, the results sort of speak for themselves. The fact that GMV doubled three out of those four was incredibly -- we thought that was really great. Now we will also look to some new countries in the future, we're not going to call those out right now. But we will continue to expand and figure out where else we can find product market fit.

That being said, as Amy mentioned in her prepared remarks, we really -- I mean, we were accidentally international in the early days. We were -- merchants beat a path to our door. We really weren't doing very much. Now we're really beginning to focus on it.

We have the right team, the right leadership. And I think you'll see a lot more from international as indicated by our merchant going from 21% of total merchants on our platform being rest of the world to now 24%. So I think you'll continue to see good growth in international.

Katie Keita -- Director of Investor Relations

Great. Thank you, Darren. Next question please.

Operator

Our next question comes from the line of Samad Samana from Jefferies. Your line is open.

Samad Samana -- Jefferies -- Analyst

Hi, good morning. Thanks for taking my question. So net merchant adds on a full-year basis for 2018, looks like they're plus 211,000, down slightly from plus 232,000 in 2017. But sales and marketing expense is still up about 50% year over year.

So I'm just wondering if -- how we reconcile maybe how net merchants adds trended in 2018? And how you think that investment dollars in sales and marketing should translate into merchant growth in 2019? That would be helpful.

Amy Shapero -- Chief Financial Officer

Yes. We're happy with our merchant adds in 2018. We feel like we have a strong and healthy and growing TAM, which is evidenced from the plus growth that we saw in 2018 as well as international growth. One of the things I'd encourage you is -- this isn't just about merchant adds.

We feel very confident that we'll continue to add merchants well into the future. But this is also about GMV growth, share of wallet growth and overall revenue growth. So that's how we look at it. In terms of sales and marketing, some of that spend in 2018 was absolutely geared toward adding merchants in-year, but some of that is longer-term investment in international and plus.

And we also invest in areas like product marketing that don't necessarily show up in merchant acquisition, but show up in product adoption and take rate. And so I think you have to look at it little bit more holistically. And then just lastly, I'd say that we keep a very close eye on our LTV to CAC ratio and that continues to be healthy and strong. And while that's continuing to be strong, we're going to invest healthily for sales and marketing.

Samad Samana -- Jefferies -- Analyst

Great. Thanks I appreciate [Inaudible]

Katie Keita -- Director of Investor Relations

Thanks, Samad. Next question, please.

Operator

Our next question comes from the line of Ross MacMillan from RBC Capital Markets. Your line is open.

Ross MacMillan -- RBC Capital Markets -- Analyst

Hi, thanks so much and my congrats as well. Amy, just on take rate. When we think about merchant solutions revenue relative to GMV, that's been growing nicely, but it was a little flat in Q4 versus Q3. I was just curious as to why that was given Gross payments Volumes as a percentage of GMV were higher.

And then maybe just bigger picture, as we think about adding more merchant solutions, do you have a kind of view on what you'd like to target in terms of that increase in that take rate relative to GMV over time?

Amy Shapero -- Chief Financial Officer

Sure. With respect to take rate in the fourth quarter, our overall take rate quarter-over-quarter was flat. But if you dissect take rate by merchant segment, aspirational, core, plus and international, take rate actually increased quarter-over-quarter for every merchant segment. What you saw in the fourth quarter was a GMV mix change.

We saw very significant growth in GMV from plus and international, and those are our lower take rate segments. They're earlier stage in terms of the introduction of merchant solutions. And so I would actually view that as a significant opportunity for us going forward. It shows that our investments in those areas are paying off.

Merchants are successful, their GMV is growing, and we have an opportunity to go more fully monetize that GMV over time. There could be some headwind, a little bit near term because of the strength of plus and International GMV growth, but we fully expect our take rate will increase over the course of 2019 and beyond. We don't have a target rate. We tend to focus mostly on what we believe merchants need, and we feel like the take rate will sort of take care of itself over time.

But we are focused on increasing our share of wallet and we'll continue to do so into the future.

Ross MacMillan -- RBC Capital Markets -- Analyst

Thank you so much.

Katie Keita -- Director of Investor Relations

Thank you, Ross. All right, next question, please.

Operator

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

Gus Papageorgiou -- Macquarie Capital Partners -- Analyst

Hi, thanks for taking the question. So in the quarter, you -- or sorry, in the year you paid $100 million to your partners and app developers, and I think that's up from $50 million last year. Can you kind of help us characterize, what do you think your competition is paying out? And when you look at your platform and its differentiation, could you kind of quantify how important is that application ecosystem versus your competition? I mean, does this count for half the differentiation or a third? Or any way you could quantify that would be helpful.

Harley Finkelstein -- Chief Operating Officer

It's Harley. I'll take that. I mean, look, from the early days of Shopify, we've always had this really great relationship with our partners. In fact, we don't have a merchant conference, we actually have a partner conference called Unite that many of you have attended.

They're an important part of what we offer. What the partner app ecosystem allows Shopify to do is, it means that every single merchant on Shopify gets exactly what they need from us. We are able to provide what most of the merchants need most of the time. But every merchant's business is really unique and, we can't necessarily anticipate every single need of every individual use case.

A partner ecosystem allows us to ensure that every merchant's business, no matter what they require, they're able to get a solution for the exact complexity of their particular business. That's really important. To your other point, which is how do we ensure that compensation for our partners. We've always been generous with our partners.

If you look at our registered structure, it's an 80-20 split, which is -- has always been quite generous. Beyond that, rather than giving a bounty for a referral, we pay a rev share in perpetuity. What we really try to do is not only get partners to build on Shopify and refer merchants to Shopify, but over the long run, become exclusive to Shopify. And now that we have more merchants than any of our competitors do, certainly, in the SMB side, it means that most of these partners are only building and only referring business to Shopify.

We really like that. The other thing we're also seeing is that some of these partners are growing so large in just supporting Shopify that they themselves have built multimillion-dollar companies, building apps and themes and doing services for our merchants. So we're really happy with our positioning with our partners. The relationship we have with them is very, very strong.

And that will continue long into the future, it's an important part of our business.

Gus Papageorgiou -- Macquarie Capital Partners -- Analyst

Great. Thank you.

Katie Keita -- Director of Investor Relations

Thank you, Gus. Next question, please.

Operator

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

David Hynes -- Canaccord Genuity Inc. -- Analyst

Thanks, guys. I wanted to ask about some of the marketing automation enhancements you've made to the platform, right? We have Marketing Dashboard, Ping, Kit. I'm sure I'm missing some. But where are we in terms of the build out of that suite versus your vision? And what are you seeing in terms of early customer adoption?

Tobias Lutke -- Chief Executive Officer

I mean, early customer adoption is really good because that -- again, Shopify is an interface that people spends most of the time there than thinking about their business. So that's a nice situation we got ourselves into from a perpetuity standpoint. On where we are at with this, it's really early. We just sort of declared intention as well with this.

So there's a lot more work to be done. This is a very big space. And we are mostly interested in marketing simplification, increasing the approachability of marketing rather than the actual industry of marketing automation, which is massive and would be too much for us to support. Although, we would like both tools to feed back into Shopify.

And so to -- again, give the merchants all the data they need and in one place. So there's a couple of different things going on, but it's definitely an area that we are spending a good deal of time just looking at to see how we can make -- how can we get people to competently run their first couple of campaigns, just to get into the mind space of this is how growth works on the internet. How to -- again, once they allocate some capital, we would like to help them use it as wisely as possible based on all the data that's available and we help them interpret the results, learn from them, take a next step and so on. And that's the main focus right now, and we'll have to see where this road leads us.

We don't have -- I -- this is one of those areas where we do not have like a world domination ambition. We just want to -- we kind of have to do it because it seems like this -- the marketing world and industry seems a little bit like what e-commerce was like before Shopify came around as in, everyone focused on the people who already had a lot of money because obviously, they are better customers. But what everyone then tends to forget is, you have to help the new guys too because otherwise, you eventually run out of people who already have money. You need new ones to come into the market.

And they need a route there. So we are picking up the slack that I think the industry is leaving at the bottom of the market because we just for -- we just have better business model alignment with that segment. So that's the main area for us.

David Hynes -- Canaccord Genuity Inc. -- Analyst

Yes, make sense. Thank you.

Katie Keita -- Director of Investor Relations

Great. Thank you. Next question, please.

Operator

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

Deepak Mathivanan -- Barclays Capital -- Analyst

Hey, guys. Thanks for taking the question. Just somewhat related to Ross' question from before. One of the strong bullish strengths that you're seeing is actually payments adoption by the plus merchants.

Can you give some color on where payments penetration is currently on plus, either as a percentage of merchants or as GMV? Just trying to get some sense of which inning we're at.

Harley Finkelstein -- Chief Operating Officer

Yes. In terms of, if you recall, in the early days of plus, obviously, we had mostly upgrades to the plus platform for the plus plan. So a lot of those merchants headed to already beyond payments. Obviously, now more than half of the new plus merchants that came in the quarter are new to the platform.

We're seeing some incredible brands. And because we are able to offer competitive rates, some of them are coming over. Obviously, they are getting much better pricing because of their volume. We will continue to push that of course.

Now keep in mind, also, there are some additional benefits using Shopify payments. For example, things like Capital and Fraud Protection. And these sort of products are only available if you use Shopify payments. And so there's been an inherent incentive beyond the financial incentive because we do have a 15 basis point fee, if you don't use Shopify payments, and it's available in your geography.

So I think that that will continue to go, again, merchants are adopting it for a bunch of different reasons. But over time, I think you'll see continued adoption there as we add more products around payments that will continue.

Katie Keita -- Director of Investor Relations

Great. Thank you, Deepak. Next question, please.

Operator

Our next question comes from the line of Nikhil Thadani from Mackie Research Capital. Your line is open.

Nikhil Thadani -- Mackie Research Capital -- Analyst

Great. Thanks, guys. I just wanted to go back to some of the previous merchant questions as it seems like you're getting a lot of traction for merchant growth outside your core geos. So maybe if you could just give us some nuances of how that works in those new markets, perhaps, with regards to the merchant acquisition funnel, the life cycle or maybe even your product road map? What's different in these new geographies from -- for these new merchants versus your existing merchant base out there?

Harley Finkelstein -- Chief Operating Officer

Thanks for the question. What we're learning is, every geography is a little bit different. In some of the geographies, we're leaning very heavily on our partner ecosystem. And that's why it's an important part of strategy internationally.

In other places, the strategy for getting new merchants in reflects some of the things you've seen in North America. So there is a bit of a mix. On the product side, every geography needs something different, something like compliant certificates, which are incredibly important to German merchants are not nearly as important to let's say, merchants in a place like Japan. So what we're trying to do is try to understand the nuances of what each country really needs and building around that.

The idea of creating this sort of one-size-fits-all or feature parity model, it just doesn't work if you're going to do a really good job and increasing Shopify's reach around the world. So we're being very thoughtful about that. But I would say from a merchant acquisition perspective, those are all different on a per share basis.

Katie Keita -- Director of Investor Relations

Great. Thank you, Nikhil. Next question, please.

Operator

Our next question comes from Ygal Arounian from Wedbush Securities. Your line is open.

Ygal Arounian -- Wedbush Securities -- Analyst

Yes, thanks for taking the question. I just want to dig in a little bit on plus merchants a little bit more. So Harley, I think -- did you mention -- I just want to make sure I heard it correctly, that over 50% of your net new plus merchants are coming organically up the funnel from lower tiers? And the ones that are coming or replatforming from other tiers, are they replatforming from other platforms? Are they new to e-commerce? And what are you seeing as kind of the key drivers of why they chose Shopify plus over another platform?

Harley Finkelstein -- Chief Operating Officer

Yes. So to be clear, more than half of the new plus merchants in the quarter are brand new to Shopify. So less than 50% are upgrades. So we're a lot more merchants that are coming to us for the first time and joining plus.

I think one of the most interesting parts of where plus is at right now is all these different verticals. Initially, again, it was really just an upgrade path for our most successful merchants. Now what we're seeing is, we're seeing, like I mentioned in my prepared remarks, PPG is coming about -- coming on. We're seeing more traditional retailers that traditionally only existed in shopping malls that are coming on.

And so we're seeing all these different verticals, the sort of celebrity brand vertical is really heating up and we seem to be the platform of choice for them. So that is really exciting to us. And some of these verticals, we never anticipated would be verticals that we would be able to attract in the early days and being very successful with that today. In terms of where they're coming from, certainly, some of them are migrating to us from more traditional enterprise e-commerce platforms.

Usually, they're coming to us for one of three reasons, either ease of use, pricing or flexibility. When they hear that Apple's releasing Apple Pay, they want be able to use it right away and not have to wait six months and have a bunch of meetings to talk about that, or augmented reality for that, as Tobi had mentioned early on. So we're actually seeing a bunch of different ways they're coming to us. Some of them, for the first time ever, are selling direct-to-consumer, and that seems to be a really important piece of retail and the future retail.

And for a lot of these direct-to-consumer brands, whether it's Rebecca Minkoff or Steve Madden-type brands, Shopify plus is becoming the ones that they're choosing. So I would say that for the most part, they're coming to us from a wide variety of different types of migration paths. Again, some are brand-new to market, some are migrating from more enterprise platforms. And I think that will continue long into the future.

But Shopify plus has really cemented itself as the go-to for the DTC, big brands that want major flexibility and they want to be able to scale very quickly.

Ygal Arounian -- Wedbush Securities -- Analyst

Great. Thank you so much.

Katie Keita -- Director of Investor Relations

Thank you, Ygal. Next question please.

Operator

Our final question today will come from the line of Brian Peterson from Raymond James. Your line is open.

Brian Peterson -- Raymond James -- Analyst

Hi and thanks for the question. So just with the $2 billion on the balance sheet, could you just give us an update on how you're thinking about build versus buy? I know there's been some M&A activity which is probably more tuck-in in nature. I'm just curious to your appetite for anything from an M&A perspective may have changed given the capital raising?

Amy Shapero -- Chief Financial Officer

Yes. I'll take that one. We fully expect the cash on the balance sheet from the capital raises to be used to achieve our business strategies, which will likely include M&A. If we see an attractive opportunity to accelerate our product road map, we will certainly pursue it.

And so it's really just a -- maintain optimal flexibility and optionality.

Katie Keita -- Director of Investor Relations

All right. Thank you, Brian. Thanks, everybody, for dialing in. And we will talk to you soon.

Operator

[Operator signoff]

Duration: 58 minutes

Call Participants:

Katie Keita -- Director of Investor Relations

Harley Finkelstein -- Chief Operating Officer

Amy Shapero -- Chief Financial Officer

Brad Zelnick -- Credit Suisse -- Analyst

Tobias Lutke -- Chief Executive Officer

Ken Wong -- Guggenheim Securities -- Analyst

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

Monika Garg -- KeyBanc Capital Markets -- Analyst

Tom Forte -- D.A. Davidson -- Analyst

Richard Tse -- National Bank Financial -- Analyst

Darren Aftahi -- ROTH Capital Partners -- Analyst

Samad Samana -- Jefferies -- Analyst

Ross MacMillan -- RBC Capital Markets -- Analyst

Gus Papageorgiou -- Macquarie Capital Partners -- Analyst

David Hynes -- Canaccord Genuity Inc. -- Analyst

Deepak Mathivanan -- Barclays Capital -- Analyst

Nikhil Thadani -- Mackie Research Capital -- Analyst

Ygal Arounian -- Wedbush Securities -- Analyst

Brian Peterson -- Raymond James -- Analyst

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