SHOP gross margins

SHOP reports 2 business lines: Subscription revenue and Merchant revenue.

I looked at the revenue and cost of revenue for each business line going back to 2012.


	Subscription Revenue in $M			
	            2012	2013	2014	2015
Revenue	           19200	38339	66668	111979
Cost of Rev	    4291	 8504	16790	 24531
Gross Profit	   14909	29835	49878	 87448
GM	             78%	  78%	  75%	   78%

The Subscription business line is growing nicely and margins are stable.


	Merchant Revenue in $M			
	            2012	2013	2014	2015
Revenue	            4513	11913	38350	93254
Cost of Rev	     485	 5009	26433	69631
Gross Profit	    4028	 6904	11917	23623
GM	             89%	58%	  31%	  25%

Merchant business has been growing by leaps and bounds but gross margins have been steadily declining.

I haven’t examined this business enough to understand what might be happening to the Merchant business line.

Chris

26 Likes

Chris,

What great info on Shopify and the revenue growth vs margins of their 2 different business lines, subscription revenue and merchant revenue.

This is the stuff that I just don’t find on my own (or anywhere else, for that matter), that makes this board so valuable to me!

I hope to someday be able to add as valuable info as many of the regular posters here do. But in the meantime I’ll continue to use their knowledge in helping me make better decisions on buying, holding, or selling companies I’m considering taking an ownership position in.

Thanks, all!

8 Likes

Merchant business has been growing by leaps and bounds but gross margins have been steadily declining.

Hi Chris, Here’s how it goes. The subscription business is pure recurring income, naturally, with very low start up costs and very high margins as you’ve pointed out. Their customers pay a monthly subscription fee and a transaction fee for each sale. The subscription business revenue is growing at about 70% per year.

The merchant solutions is helping the merchant handle his or her business: Collecting payment, shipping out merchandise, printing out UPS labels, the whole works. This business is growing at 140% per year - but this is currently putting margin pressure on Shopify because of all the start-up cost associated with starting up all these businesses and with 140% growth. Increasing operating efficiency hopefully means the operating margin will start to improve with time.

Hope this helps.

Saul

9 Likes

The merchant solutions is helping the merchant handle his or her business: Collecting payment, shipping out merchandise, printing out UPS labels, the whole works. This business is growing at 140% per year - but this is currently putting margin pressure on Shopify because of all the start-up cost associated with starting up all these businesses and with 140% growth. Increasing operating efficiency hopefully means the operating margin will start to improve with time.

Saul, I’m not sure it makes sense to me. I was referring only to gross margin (i.e. business overhead is not figured) so OpEx has not yet considered in the numbers that I posted. Also, the merchant business has been growing rapidly since 2012 so should their cost have been roughly consistent from year to year? Unless they have decided to lower pricing to grab market share. Is this what happened?

Also, are the subscription revenues and the merchant revenues from the same customer categories or not? By this I mean, does a merchant customer pay just for start-up but them also pay for a higher margin subscription?

BTW, regarding operational efficiency, yes, the business is leveraging as it scales. For example, in 2012 R&D was 27% of revenue and in 2015 it had dropped to 19%. Over the same period, sales and marketing dropped from 52% to 34% of revenue.

Chris

6 Likes

Saul, I’m not sure it makes sense to me.

I’m not sure I understand it completely myself, but here’s what I do understand:

They first become a subscriber. With that they can set up a business online anywhere (independent website, sell on amazon, Facebook, twitter pinderest(sp?)). That of course is very high margin and revenues are growing 70% a year.

Then, the merchant can say to himself, I need help also in collecting the money and sending out the merchandise. Can you help me set that up too? That is merchant solutions and revenue is growing 140% - I think because of a cut on the money coming in and the shipments going out. But, it takes setting it up for the merchant, which Shopify apparently takes in its gross margin costs. The problem is that you have 100 merchants that are happily selling things and bringing in money for you, and 140 new ones who have just set up and are just building up their shipments, so Shopify’s margins are lower. That’s the way I think of it at least.

Saul

5 Likes

And they could be adding a lot more services with the initial startup now than they did in 2012, which costs more, but will bring in more in the future.