Saul’s recent post on SQ and SHOP got my attention as SHOP is my largest stock holding at ~15% of my portfolio (SQ is 2nd largest at ~12%).
I took the SHOP drop in price to add to my holdings (which is why it is now the largest). After reading Saul’s post, I decided to do some deeper digging in my understanding of how SHOP makes money and what is going on with the company.
I want to start by saying I am no expert so if I misstate something please correct me. Let’s start with Annual Revenues. I got these numbers from a previous Saul post (2012-2016 and a press release 2017).
Year Revenue in Millions Percent increase in Annual Revenue
2012 24
2013 50 108%
2014 105 110%
2015 205 95%
2016 390 90%
2017 673 73%
2018 1025 52%
*2018 is projected revenue for year
Percent increase in revenue is definitely decreasing. However Bert Hochfield recently wrote an article saying there are only two companies with above 1 billion in revenue growing at ~60% (revenue this Q grew 62%) SHOP and SQ (I am paid subscriber to Ticker Target-btw I feel it is worth the investment). SHOP is definitely hitting the law of big numbers to a degree. We all know that any company as it becomes larger has a harder time acheiving high revenue percentage increases. However one thing concerning about was Saul’s post was the mentioning of moving away from a Saas type business and the effect that has on margins going forward.
I did some researching on SHOP’s revenue and where they come from and where the growth is projected to come from in the future. My brain hurts a bit as the company is diversified and it makes tracking the revenue and future potential growth a bit difficult. This is what I understand from my efforts. Again if I got something incorrect please correct me so that I can understand better.
Revenue in 2nd Q was 245 million (62% increase). Merchant solutions was 134.2 million (68% yoy) and subscription solutions was 110.7 (55% yoy). Definition of merchant solutions revenue from Shopify highlighted in italics.
We principally generate merchant solutions revenues from payment processing fees from Shopify Payments. Shopify Payments is a fully integrated payment processing service that allows our merchants to accept and process payment cards online and offline. In addition to payment processing fees from Shopify Payments, we also generate merchant solutions revenue from transaction fees, Shopify Capital, Shopify Shipping, referral fees from partners, and sales of point-of-sale (“POS”) hardware. Our merchant solutions revenues are directionally correlated with the level of GMV that our merchants process through our platform.
https://www.sec.gov/Archives/edgar/data/1594805/000159480518…
Definition of subscription solutions from same source.
Revenue from subscription solutions is generated through the sale of subscriptions to our platform as well as from the sale of themes, apps and the registration of domain names. Our merchants typically enter into monthly subscription agreements
According to the earnings report the MRR (montly recurring revenue) side of solutions was 35.3 million (49% increase yoy). The MRR in subscription solutions would be considered the Saas business. Shopify Plus merchants accounted for 23% of this revenue or 8.1 million dollars, this was up from 18% last year.
According to this website https://liquify.design/all/ecommerce/shopify/shopify-plus-pr…
There are 3 subscription levels Basic Shopify, Shopify, Advanced Shopify. They are priced at $29, $79, $299 monthly. Out of the 245 million in quarterly revenues, this is MRR portion or 35.3 million under subscription solutions (which had a total 110.7m this Q) minus the shopify plus portion, so if my math and understanding are correct 27.2 million (35.3m-8.1m) quarterly revenues from MMR subscriptions. Now this is the portion of revenue that Saul seemed concerned about? If so we are talking about 11.1% of quarterly revenues. Credit card rates and transition fees vary by plan (you can look at chart in link). The credit card rate fees and external payment gateway fees would go into merchant solutions revenue if my understanding is correct.
So what makes up the other 75.4 million in subscription revenues? (110.7-35.3m). Seems like Shopify Plus platform revenue and apps revenue. From the c.c. https://www.fool.com/earnings/call-transcripts/2018/08/01/sh…
Shopify Plus platform revenue, which is the subscription revenue above what we can consider to be recurring, because it is linked to GMV, contributed slightly. The bigger contributor to the difference between recurring revenue and subscription revenue was apps revenue, which more than doubled over last year’s second quarter.
So how does Shopify make money from Shopify Plus? It has a floor fee of $2000 monthly and a cap of $40,000 monthly, but based on your montly store sales (GMV) 0.25% or if using Shopify Payments 0.15% of monthly sales. The reduced rate only applies to transactions using Payments, other gateways will be at the higher rate. Additional revenue is payment gateway fees? (Does this go to Paypal and others directly or does SHOP benefit?) App fees, the website above said their average spend per customer was 200 a month.
The monthly cap of $40,000.00 is what they are getting rid of going forward. So they will have even greater subscription revenues from that move in the future with just current customer base. However that will have no effect on the MRR. The MRR (according to my understanding of c.c.) is only the subscription revenue that they can count which is the floor of $2,000 monthly because anything greater is dependent/linked on GMV/sales.
GMV (Gross Merchandizing Volume) was reported at 9.1 billion (up 56%). This is important meteric for growth in merchant solutions revenue and for Shopify Plus as just explained. Our merchant solutions revenues are directionally correlated with the level of GMV that our merchants process through our platform. The amount of these sales that utilized Shopify Payments was 3.6 billion (increase of 66% yoy) or 39.5% of overall GMV for the quarter.
Gross profit margins on Shopify Payments, the biggest driver of merchant solutions revenue, are typically lower than on subscription solutions due to the associated third-party costs of providing these solutions. We view this revenue stream as beneficial to our operating margins, as Shopify Payments requires significantly less sales and marketing and research and development expense than Shopify’s core subscription business.
This important to understand as it effects the rate of subscription revenue from Shopify Plus. The increased growth rate of Payments, has had a drag effect on % revenue growth of subscription solutions. Getting rid of the cap on Plus should excellerate revenues in the future. GMV in future will be increasly important, which is seasonal due to nature of this business.
Our merchant solutions revenues are directionally correlated with the level of GMV that our merchants facilitated through our platform. Our merchants typically process additional GMV during the fourth quarter holiday season. As a result, we have historically generated higher merchant solutions revenues in our fourth quarter than in other quarters. While we believe that this seasonality has affected and will continue to affect our quarterly results, our rapid growth has largely masked seasonal trends to date. As a result of the continued growth of our merchant solutions offerings, we believe that our business may become more seasonal in the future and that historical patterns in our business may not be a reliable indicator of our future performance.
On earnings call it was reported revenue from capital and shipping grew over 100% from last year. It was mentioned that these are both higher margin, anyone know what % margin?
This is getting to be a long post. However after spending a considerable amount of time researching this issue. I do not plan on adjusting my SHOP stock holdings. It will remain #1 position in my portfolio. I believe I will be rewarded in the future for this decision.