SHOP and the MRR

Investment Analysis Clubs Saul’s Investing Discussions
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I will be reading the earnings report later tonight but just an initial post and responding to Volfan’s question on MRR.

As you recall, several of us have been discontent that SHOP has declined to parse out the merchant types…this because we fully understand that not all merchants are created equal and not all provide the same value to SHOP investors.

Here is the detail post here:

http://discussion.fool.com/shop-investment-thesis-part-2-3295848…

To extend from the above Q3 numbers, using the growth assumptions as I estimated above AND assuming the concerns about lower class merchant churn/attrition is correct (that these lower class numbers may not be durable), we should expect:

2017 MRR = $27 million or annualized $322 million (of which 56% was lower class revenue or $180 million)
2018 MRR = $35 million or annualized $414 million (of which $180 million is lower class)
2019 MRR = $59 million or annualized $708 million (of which $180 million in lower class)
2020 MRR = $103 million or annualized $1,236 million (of which $180 million is lower class)

Essentially, this “model” assumes churn of lower quality merchants (hence no growth in revenue projections) but growth of latter 2.

I think the present MRR has come in a little light and implies to me that they may not be signing up as many Plus and Advanced merchant types as we had hoped. MRR came in at $32.5 million vs expected $35 million + and continuing to grow going into 2019. Last quarter MRR was $29.9 million and the quarter before was $26.8 million.

So while we are getting sequential MRR growth…I was modeling $59 million MRR into 2019 which would be a 15% sequential growth each quarter from here…you can see the assumptions and why the MRR is believed to be most important as regards to contribution to revenue and risk to market downturns…SHOP acknowledges it as such.

SHOP is growing MRR more in the range of 8% and a slight deceleration from the 3rd to 4th quarter.

But one thing we can appreciate about SHOP, the stock, is that it has similar characteristics to TSLA…many investors don’t want to see it fail…so despite costs rising and missing some MRR targets…the stock has recovered nicely…still at a P/S of “just” 20.

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Looking at Shopify Plus numbers for MRR

Q1 2017

MRR as of March 31, 2017 was $20.7 million, up 62% compared with $12.8 million as of March 31, 2016. Shopify Plus contributed $3.5 million, or 17%, of MRR compared with 11% of MRR as of March 31, 2016.

$3.5M MRR Attributal To Plus. At $2,000/Plus Customer that is 1750 Plus Customers.

Q1 2018
Monthly recurring revenue grew 57% and ended the quarter at $32.5 million. Shopify Plus a share of this ticked up in the quarter to 22% of MRR, compared to 17% in Q1 of last year.

22% of 32.5M is $7.15M. 103% Rev growth within Plus
3575 Shopify Plus Customers

That seems pretty stellar to me.

But the other thing that impressed me is Merchant solutions grew at 75%, greater than total revenue. And that Merchant Solutions exceeds the other revenue categories. This tells me that the customers are selling products and are using Shopify’s services (shipping, payments, etc) to do so. In other words they are succeeding(as a whole).

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Darthtaco: Q1 2018
Monthly recurring revenue grew 57% and ended the quarter at $32.5 million. Shopify Plus a share of this ticked up in the quarter to 22% of MRR, compared to 17% in Q1 of last year.

22% of 32.5M is $7.15M. 103% Rev growth within Plus
3575 Shopify Plus Customers

That seems pretty stellar to me.

Did you mean Shopify Plus Merchants instead of customers? Where did you find the 3575 number?

Here’s what Finkelstein said on the conference call today: “Turning to Shopify Plus, while the first quarter of the calendar year is seasonally a slow one for buyers in the enterprise, we still added far more new merchants in the quarter versus the same period last year. Some of the more recognizable names launched in Shopify Plus in the quarter include Marrine. The Ugg company out of Australia the Sport Sack, Monster Electronics, HarperCollins UK, Vega, Colgate-Palmolive and some great new shops from the likes of Nestle and PepsiCo, including the Smile With Lay’s shop, where consumers can customize a bag of Lay’s potato chips and put their own face on it.”

Darthtaco: But the other thing that impressed me is Merchant solutions grew at 75%, greater than total revenue. And that Merchant Solutions exceeds the other revenue categories. This tells me that the customers are selling products and are using Shopify’s services (shipping, payments, etc) to do so. In other words they are succeeding(as a whole).

Merchant solutions also includes Shopify Capital which is also contributing to the merchant revenue line. Merchants mostly borrow for inventory and marketing spend and most loans are repaid within a year. At the end of Q1 2017, there were $17.3M in outstanding Shopify Capital loans. At the end of Q1 2018, there were $63.5M in outstanding Shopify Capital loans.

Chris

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Did you mean Shopify Plus Merchants instead of customers? Where did you find the 3575 number?

Yes, the Merchants would be Shopify Plus customers. Merchants is the more appropriate word.

$7.15M is 22% of Monthly Recurring attributed to Shopify Plus from the quote from the earnings call. $7.15M divided by $2,000/month for the cost of a Plus subscription yields 3575 Shopify Plus Merchants.

With the help of Tinker on NPI I later found this link.

https://www.shopify.com/plus

3600+ which validates the arithmetic.
126% Year-over-year average growth for Shopify Plus merchants

That’s good for Shopify on Capital loans. Much like Square, Shopify obviously acquires a lot of data on their customers(merchants) and can make hopefully wise financial decisions. Wonder what kind of revenue and margins that produces. It all adds up in the totals though, which at 75% growth is really good. With their platform they should find many revenue streams to help businesses succeed.

Darth

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$7.15M is 22% of Monthly Recurring attributed to Shopify Plus from the quote from the earnings call. $7.15M divided by $2,000/month for the cost of a Plus subscription yields 3575 Shopify Plus Merchants.

Thanks Darthtaco. That’s good info! But the number of Shopify Plus merchants will be a bit higher because those that joined during the last quarter will have paid less than an average of $2000 per month during Q1.

Chris

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But the number of Shopify Plus merchants will be a bit higher because those that joined during the last quarter will have paid less than an average of $2000 per month during Q1.

Good point. Which probably explains why in the other link they call it 3600+.

Plus is doing great it seems, and each of those merchants do $1M to $500M+ in annual sales according to Shopify. Here’s the link again

https://www.shopify.com/plus

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$7.15M is 22% of Monthly Recurring attributed to Shopify Plus from the quote from the earnings call. $7.15M divided by $2,000/month for the cost of a Plus subscription yields 3575 Shopify Plus Merchants.

Thanks Darthtaco. That’s good info! But the number of Shopify Plus merchants will be a bit higher because those that joined during the last quarter will have paid less than an average of $2000 per month during Q1.

And isn’t $2000 a “minimum”. If there are some companies that pay more, the average will be more, and that implies the same $7.15 million, but fewer companies producing it.
Saul

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Quite honestly, I find the whole “cat and mouse game” they play with the Shop Plus numbers rather disingenuous. They were directly asked the number and growth rates in the conference call and they punted and said they don’t provide that data until year-end and yet…its on their friggin web site???

They stress all throughout the past several earnings calls how important Shop Plus is to their business model and yet they play these games with investors??

The MRR is a bit behind where they should have been but not by much…but how did they grow their Shop Plus in sequential quarters by 38% but only be up 126% YoY?? Obviously this was Xmas time and maybe this is just their big merchant sign on timeframe. Maybe the previous quarters don’t show that growth rate so they fear the stock implications until they get through Xmas?

And what of attrition rates?

I think Gary has it best:

https://seekingalpha.com/article/4168396-shopify-buy-earning…

Cautiously optimistic…but at this high valuation…they should immediately stop this Shop Plus game they are playing IMO.

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Hi Everybody,

Here is a tabular presentation for the various important metrics one can attain from the releases:


Quarter	MRR	S+	Ratio	GMV	GPV	SCap	Hi	Lo	Close	WAS	P/S/S	P/EV
Mar-15										39.3		
Jun-15							$42.13	$24.11	$33.95	53.0		
Sep-15							$41.11	$22.70	$35.20	75.9		
Dec-15							$39.29	$24.06	$25.80	78.0	9.8	8.9
Mar-16	12.8	1.4	11%	2.7	1.0		$28.78	$18.48	$28.21	80.5	9.4	8.7
Jun-16	14.4	1.9	13%	3.3	1.3		$32.39	$24.96	$30.76	81.3	8.9	8.3
Sep-16	16.3	2.4	15%	3.8	1.5	9.2	$45.20	$30.00	$42.92	84.9	11.1	9.9
Dec-16	18.5	3.1	17%	5.5	2.2	14.7	$45.45	$37.74	$42.87	89.1	9.8	8.8
Mar-17	20.7	3.5	17%	4.8	1.8	19.0	$73.00	$42.14	$68.09	90.2	13.8	13.0
Jun-17	23.7	4.3	18%	5.8	2.2	37.2	$100.80	$67.22	$86.90	94.3	16.1	14.3
Sep-17	26.8	5.3	20%	6.4	2.4	44.1	$123.94	$84.80	$116.49	98.8	19.8	18.2
Dec-17	29.9	6.3	21%	9.1	3.5	39.7	$120.69	$89.35	$116.49	99.5	17.2	13.6
Mar-18	32.5	7.0	22%	8.0	3.0	60.4	$154.82	$101.02	$124.59	102.3	16.8	13.5

MRR: Monthly Recurring Revenue (millions)
S+: Shopify Plus MRR (millions)
GMV: Gross Merchandise Volume (billions)
GPV: Gross Payments Volume (billions)
SCap: Shopify Capital Issued (millions)
WAS: Weighted Average Shares (millions)
*P/S/S: Price to Sales per Share
*P/EV: Price to Enterprise Value

*The quarter close price is used for these calculations.

Also, regarding the revenue mix, the relatively higher growth of Merchant Solutions compared to Subscription Solutions could have been a negative due to the lower margins of Merchant Solutions. However, Merchant Solutions margins show constant improvement, more than compensating for the dip in Subscription Solution margins:


Mer	Mar	Jun	Sep	Dec
2015	15.0	19.5	23.2	35.7
2016	34.0	43.0	49.7	74.0
2017	65.3	80.1	89.0	128.9
2018	114.1			
				
Grth	Mar	Jun	Sep	Dec			
2015
2016	126.8%	120.7%	114.2%	107.5%
2017	92.0%	86.3%	79.0%	74.2%
2018	74.8%

MerGP	Mar	Jun	Sep	Dec
2015	4.2	5.2	5.6	9.6
2016	8.8	11.6	13.2	23.3
2017	22.4	28.9	33.1	47.1
2018	46.8			
				
GP%	Mar	Jun	Sep	Dec
2015	28.3%	26.8%	24.1%	27.0%
2016	25.9%	27.0%	26.5%	31.5%
2017	34.3%	36.1%	37.1%	36.5%
2018	**41.0%**
======================================
Sub	Mar	Jun	Sep	Dec
2015	22.4	25.5	29.6	34.6
2016	38.7	43.7	49.8	56.4
2017	62.1	71.6	82.4	93.9
2018	100.2		
				
Grth	Mar	Jun	Sep	Dec	
2015
2016	73.2%	71.5%	68.6%	62.9%
2017	60.4%	63.9%	65.4%	66.6%
2018	61.4%

SubGP	Mar	Jun	Sep	Dec
2015	17.3	20.0	23.1	26.9
2016	30.5	34.6	39.3	44.4
2017	49.8	57.9	67.0	74.1
2018	77.0	
				
GP%	Mar	Jun	Sep	Dec
2015	77.5%	78.7%	78.3%	77.9%
2016	78.7%	79.2%	78.8%	78.8%
2017	80.3%	80.9%	81.2%	78.8%
2018	**76.9%**

On the call, Shopify mentioned that Merchant Solutions margins got a bump by one-time adjustments, which won’t occur going forward. However, they said that margins will improve over their year to year comps. They mentioned that their Subscription Solution margins were impacted by their move to the cloud, which will have run its way through by the 4th quarter when we’ll see improvements.

With their investments in the business at the expense of profitability now, I wonder what kind of leverage they’ll get when they don’t need to invest as much. In light of this, it’s even more impressive that they continue to improve margins.

The company is growing revenues really fast. Here is a look at the total revenues and gross margins:


Rev	Mar	Jun	Sep	Dec		GrPr	Mar	Jun	Sep	Dec
2015	37.3	44.9	52.8	70.2		2015	21.6	25.3	28.7	35.5
2016	72.7	86.6	99.6	130.4		2016	39.3	46.2	52.5	68.1
2017	127.4	151.7	171.5	222.8		2017	72.2	86.8	100.0	121.1
2018	214.3					2018	123.8			
										
Grth	Mar	Jun	Sep	Dec		GrPr%	Mar	Jun	Sep	Dec
2015						2015				
2016	94.7%	92.9%	88.6%	85.8%		2016	54.0%	53.3%	52.7%	52.3%
2017	75.2%	75.0%	72.2%	70.9%		2017	56.7%	57.3%	58.3%	54.4%
2018	68.3%					2018	**57.8%**

Regarding the guidance, I just listened to the call and had the feeling that they are setting an easily attainable figure that they’ll blow past. And on the analysts’ desired breakout of metrics for Shopify Plus, management stopped any detailed discussions. I’m not concerned with this as I feel like this is changing so much that they don’t want to nail down metrics that will inevitably change going forward (perhaps this is confirmation bias).

The business is executing really well, and I am okay paying up for future growth. At 60% annual growth, they’ll double their revenue in less than 1.5 years and, which would take their P/EV ratio lower than at any time since they’ve been a public company.

DJ

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Hi Everybody,

I didn’t properly paste the margins table. Here it is in bold:


Rev	Mar	Jun	Sep	Dec		GrPr	Mar	Jun	Sep	Dec
2015	37.3	44.9	52.8	70.2		2015	21.6	25.3	28.7	35.5
2016	72.7	86.6	99.6	130.4		2016	39.3	46.2	52.5	68.1
2017	127.4	151.7	171.5	222.8		2017	72.2	86.8	100.0	121.1
2018	214.3					2018	123.8				
										
Grth	Mar	Jun	Sep	Dec		**GrPr%	Mar	Jun	Sep	Dec**
2015						**2015**		
2016	94.7%	92.9%	88.6%	85.8%		**2016	54.0%	53.3%	52.7%	52.3%**
2017	75.2%	75.0%	72.2%	70.9%		**2017	56.7%	57.3%	58.3%	54.4%**
2018	68.3%					**2018	57.8%**

DJ

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One more time. Apparently, on a mobile phone, the tables get screwed up. On a computer, they don’t.

So I didn’t need to post a correction. The original tables as well as the corrected table are correct.

Sorry for this. :frowning: