SHOP Q3 Results

Investment Analysis Clubs Saul’s Investing Discussions
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Third Quarter Revenues Grow 58% (compared to 62% Q2)

Q3 Total Revenue: $270M (guide was $253-$257 for a 5% beat)
Q3 Subscription Solutions: $120M up 46% (compared to 55% Q2)
Q3 Merchant Solutions: $150M up 68% (compared to 68% Q2)
Note: Shopify Capital and Shopify Shipping “doubled” over last year’s quarter
Q3 MRR: $38M up 41% (compared to 49% Q2)
Q3 GMV: $10B up 55% (compared to 56% Q2)
Q3 Gross Profit: $150M up 50% (compared to 58% Q2)
Q3 Operating Loss: $31M or 12% of revenue compared to 7.4% Q317 (compared to 12.6% Q2)
Note: Guide was loss of $40M to $42M

Guidance
Q4 Revenue: $315M-$325M (46% growth on High End)
Q4 Operating Loss: $15-$17M (compared to $6M loss in Q417)

Shopify Highlights
Shopify launched Locations, a multi-location inventory-platform that enables merchants to update and track inventory quantities across multiple locations from their Shopify account

Shopify introduced the new App Store, redesigned to make it easier for merchants to search for, evaluate, and install apps that help them grow their business. It also benefits partner ecosystem by offering faster discovery of apps by the right merchants

Shopify launched Shopify AR, making selling with Augmented Reality accessible for small
businesses. Shopify believes this may revolutionize how merchants advertise and market to customers by allowing them to visualize products where they’d like it go to

Purchases from merchants’ stores coming from mobile devices continued to climb in the quarter, accounting for 77% of traffic and 67% of orders for the Quarter compared to 74% and 62% respectively.

Shopify Capital issued $76M in merchant cash advances - a 73% YOY increase (down from 84% Q2)

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Third Quarter Revenues Grow 58% (compared to 62% Q2)
Q3 Subscription Solutions: $120M up 46% (compared to 55% Q2)
Q3 Merchant Solutions: $150M up 68% (compared to 68% Q2)
Q3 MRR: $38M up 41% (compared to 49% Q2)
Q3 GMV: $10B up 55% (compared to 56% Q2)

Shopify always gave year-over-year comparisons in the past. They are cheating here and giving comparisons to the June quarter instead so the drops won’t be as obvious and glaring. For example,

2017’s third quarter revenue was up 72%. This year is up 58%, so instead of comparing to that 72% they are comparing it to 62%.
2017’s third quarter MRR was up 65%. This year is up 41%. That’s an enormous difference, so they hide it by comparing to the second quarter which was up 49%.

Just saying…

etc

Saul

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Shopify guided for growth of 49% in Q3 and came up with 58%, they also are claiming that they will grow 55% this year. That is a huge beat compared to what they guided for. They also have 2 of the provinces in Canada using them to sell Marijuana, and they are helping business’s navigate the requlations so that when other countries finally legalize Marijuana they will look for Shopify to help them. Shopify plus also grew 4% YoY and they launched a number of new products making Shopify even more sticky.

Just saying.

Andy

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Saul,

I believe those are the thread posters notes giving a comparison of how the growth results compared to the last quarter, not the company. Typically companies don’t compare growth rates in press releases, most compare current growth for the quarter of revenue and/or earnings compared to relevant quarter.

Maintaining a high growth rate for as long as SHOP has is pretty impressive. I’m happy with 58%, with the law of compounding numbers that gets increasingly hard to do and they’re doing it.

SHOP Plus is working. MRR for PLUS grew 74% yoy. And because these are higher dollar businesses they have an outsized impact on helping gross merchandise volume sustain growth and subsequently growth in Merchant Solutions which was huge. Merchant solutions growth is exceeding GMV growth. SHOP is gaining a higher percentage of sale through its platform.

After all they are an ecommerce platform not a website building platform. Investors want SHOP merchants selling and being successful and delivering more revenue to SHOP.

That is working and producing stellar results. Comparibles are getting tougher and growth rate numbers will inevitably contract as they will for all companies. They are now a $1B revenue a year company it took 14 years to get there. Two years ago they were growing close to 100%. To maintain that growth rate they’d have to add the first 14 years of business growth in one year.

No they are not as good an investment as they were 2 years ago, but that doesn’t mean they are not a really good investment.

It’s where the contraction slows and levels out. That’s why 58% this quarter is a good number. They are not falling over a cliff by any definition.

Here’s to what should be a stellar ecommerce holiday corner to all the SHOP Longs.

Darth

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Darth - I agree, they did very well but then if Shopify had come anywhere close to the 48% guidance it would have been a disastrous drop in growth just as it will be if they don’t completely smash the guidance of 44% for Q4. I like how they are executing and holding up in the current rout but I absolutely do not like how they are setting up guidance for massive levels of deceleration even with the benefits of uncapping the Shopify PLUS terms and the introduction of the cannabis business.

Regarding the numbers they put up in the release - in tables they compared 3 month and 9 month with YoY figures and in the description again mostly referenced YoY numbers. I didn’t see sequential QoQ % comparisons.

This is a profitable ecommerce player, growing more than twice the rate of either Amazon or the market, from a low enough base to offer meaningful growth multiples in valuation compounding and is successfully stretching its services and value proposition to its customers all the time.

Shopify still has the top line boost of cannabis and bottom line boost of AWS to come.

I continue to hold.

Ant

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Darth, I don’t totally agree with you nor totally disagree with you :). If you look at sequential MMR adds compared to last year quarters they go like this,
$ 10.54
$ 11.40
$ 11.80
$ 11.60
$ 11.16 Current quarter

Sequential quarters tells the same story.

$ 3.00
$ 3.14
$ 3.06
$ 2.60
$ 2.80
$ 2.70 current quarter

The trend of that number isn’t very pretty. Each quarter they are adding a few number of customers. I agree that 58% growth is pretty good, but I’d still like to see them growing more on an absolute level. Of course their percentage will slow down but their absolute growth is slowing too. Notice this quarter they grew their MMR 14% less 2.7 million vs 3.14 to their peak growth 5 quarters ago. I sold out when I noticed that (last quarter) and this quarter just reinforces my decision.

-e

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“Each quarter they are adding a few number of customers.”

Their con call transcript explains why looking at MRR in isolation is misleading.

https://finance.yahoo.com/news/edited-transcript-shop-earnin…

Meanwhile their Gross Merchandise Volume increased 71% year over year. When Shopify is criticized for being an MLM scheme on one hand with a bunch of dormant accounts paying the base monthly payment, the numbers tell a different story. Then you have others who are on the opposite end of the spectrum who seem focused on new members and MMR. We should be looking at the company numbers as a whole.

I continue to hold SHOP and while their growth is slowing, they continue to put out growth virtually no other company is capable of. Their revenue growth is tapering off at a very slow pace. Until I can find another company better suited for my Dollars I will continue to hold SHOP.

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Darth - I agree, they did very well but then if Shopify had come anywhere close to the 48% guidance it would have been a disastrous drop in growth just as it will be if they don’t completely smash the guidance of 44% for Q4. I like how they are executing and holding up in the current rout but I absolutely do not like how they are setting up guidance for massive levels of deceleration even with the benefits of uncapping the Shopify PLUS terms and the introduction of the cannabis business.

Your right Ant, I misunderstood that. While they are guiding for 55% Growth for the year they are only guiding for 44% growth for Q4. Not very inspirational. Here is how they have guided for the previous quarters. Couldn’t go back very far because I can’t pull up the Transcripts of previous quarters on SeekingAlpha. Does anyone know where I can get them?

 
Mean
                  Q218    Q318   Q418
Guided            54%     49%    44%
Actual            62%     58%

Andy

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Here is how they have guided for the previous quarters. Couldn’t go back very far because I can’t pull up the Transcripts of previous quarters on SeekingAlpha. Does anyone know where I can get them?

 
Mean
                  Q218    Q318   Q418
Guided            54%     49%    44%
Actual            62%     58%

It looks like you can get the next Q’s guidance in each earnings press release. Here’s Q417:

https://s2.q4cdn.com/024715446/files/doc_financials/2017/q4/…

In it they guide for $198-$202M in Q118. $202 would have been 58.6% YoY. They came in at $214.34, which was 68.3% So your Q118 Guided would be 59% and Actual 68%. So a roughly 8-9% gap each of the last 3 Q’s assuming you also used the top end of the guidance for your Guided figures.

I can’t dig further myself right now, but releases for Q317 and earlier are here: https://investors.shopify.com/events/Events-Presentations/de…

Hope that helps.

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Hope that helps.

Thanks Stocknovice that is very helpful. I didn’t think of that.

Andy
I appreciate it.

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I did sell off about a quarter off my holdings during the last spike up, but holding the rest. It will likely be a year before the cannabis numbers are really known. Being a new industry producing something previously illegal, we are facing massive shortages only 1 week in. It will take a long time to iron out the necessary supply and demand.

The sales (and thus SHOP cut) will be bigger than expected so coupling this with a company I already was happy with works for me to hold it for longer.

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Andy,
You can quickly see the ACTUAL Quarterly growth rate SHOP here - see plot at the bottom

https://www.macrotrends.net/stocks/charts/SHOP/shopify/reven…

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Hi Texmex,

You can quickly see the ACTUAL Quarterly growth rate SHOP here - see plot at the bottom

That is a really nice site, thanks for the link. I track those numbers in a spreadsheet for all my stocks but I haven’t found a site that has all the old transcripts yet. Seekingalpha has them if you want to pay for the site. Do you know of a free site that carries the old transcripts?

Andy

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I may be reconsidering my statement about it being a better investment 2 years ago than now. It may be just about as good. There was some info in the call that I found interesting and it’s very much related to what Ant was talking about with the Plus caps.

Again, SHOP is an e-commerce platform, their reason for being is not to sell a subscription as a service so you can have a website. There are other companies that exist for that purpose. MRR is cool, but it has been a small part of their business for a while and will continue to be shrinking in importance. The subscription fees are small potatoes compared to other subscription and services. What do I mean?

First the most important is that GMV growth is pretty stable. 56% in Q2 and virtually unchanged at 55% in Q3. It was 67% growth in year ago, so no real steep drop off. GMV impacts both subscription services and merchant solutions.

Subscription services was $120M. Of that $38M or 32% of total subscription revenue was MRR for your monthly SHOP fee. So what is the other $82M(68%). Subscriptions to the various apps that let you do things like push advertisements or list products on other channels like Instagram. It is also the portion of Plus subscription that is above the standard monthly fee and is based on PLUS merchant’s GMV. That is what Ant is talking about. Subscription services grew at 46% while MRR grew at 41%. That tells us that the bigger portion of subscription services is growing faster than the smaller MRR portion. Because SHOP merchants are succeeding and selling!

Q3 2017 non MRR subscription solutions revenue was $55M. So $82M this quarter is about 50% growth. This is likely to accelerate to higher than 50% as PLUS merchants come on line to the non-Capped plan. Here’s why I say that.

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.

Small base sure, but not for long. They are also expanding the apps and redid their App Store. Things like augmented reality are an app, so I think subscription services growth has a lot of legs in it left.

Final thoughts. Merchant solutions stabilized at 68% growth, the same as last quarter. The greatly outpaces the 55% GMV growth, so SHOP is capturing revenue from sales. They are succeeding at being an e-commerce platform.

This segment is now a much larger portion of SHOP total revenue and pulling away. And the bigger portion is growing at 68%!!. The difference in gross margins between the two segments is not that substantial.

This tells me that the way the company is performing high total growth of >50% is a probability for quite some time.

Darth

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Yes that is a useful site.
Company investor relations typically keep all their press releases going back several years. Each quarterly E press release should have info about next quarter guidance.

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Saul, I believe those are the thread posters notes giving a comparison of how the growth results compared to the last quarter, not the company. Typically companies don’t compare growth rates in press releases, most compare current growth for the quarter of revenue and/or earnings compared to relevant quarter.

Hi Darth, you are correct. That was my error. It wasn’t the company’s press release which compared the growth rates with the previous quarter. They just gave the growth rate. It was the person who posted the results initially on our board who gave that comparison with the growth rates of the previous quarter. As I was the second poster on the thread, I was responding to that. He must have gotten it from his news source, as it was italicized, so it wasn’t his fault.

My numbers were correct though: In 2017’s third quarter MRR was up 65%. This year, in the third quarter MRR is up 41%. That seems to me, at least, to be an enormous slowdown in growth. What isn’t true though is my thought that Shopify was trying to disguise the rate of the decline in growth by comparing it with the sequentially previous quarter.

Saul

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I think Saul, Duma and others are correct in focusing on MRR. I did a small analysis below and would like to know your thoughts. BTW, I still have a small SHOP position and this discussion will help make up my mind.

Q3 2017 MRR was $27M
Q3 2018 MRR was $38M

Since MRR is a reflection of the number/quality of shop merchants you could simply say that merchants with MRR of $27M contributed $144M (171-27) of non MRR rev. in Q3 2017. This means for every $1M of MRR we got $5.33M of non MRR rev.

Similarly for Q3 2018 merchants with MRR of $38M contributed $232M (270-38) of non MRR rev. For every $1M of MRR we got $6.1M of non MRR. Remember this non MRR includes every other rev including the one paid by Shop+ members based on their GMV. Clearly there is a slight improvement in non MRR rev now (5.33 to 6.1). But is it enough?

If SHOP had not grown MRR at all between Q 17 and Q18 its non MRR rev. in Q3 2018 would have been 27x6.1 = $165M. So total rev of $192M which is just a 12% rev growth rate. This suggests that rev growth rate is still strongly dependent on MRR growth rate.

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don’t you want to get back in SHOP?

it has not dropped as much as most of the stocks discussed in here which are down >20% to 30% or more.

tj

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You don’t invest in SHOP because of subscription revenue.

For some that is the point and if you only want MRR subscription software look elsewhere. This is an e-commerce platform play. The best choice by a billion miles.

MRR for the quarter was $32M on total revenues of $270M.

Shopify MRR is 14% of revenues and getting dwarfed by the merchant solutions which is 56% of revenue and growing at 68%. Merchant solutions growth is naturally slowing but at a slow rate. 68% two quarters in a row. This is because they are gaining high dollar merchants.

MRR again is only 14% of revenues and getting smaller as GMV on the platform goes up. This will always be the case.

Now take a look at this. This is net dollar gain from MRR year over year(MRR rev in quarter minus rev in year ago quarter) . Is SHOP having problems attracting new merchant subscribers?

Q1 2017 $8M
Q2 2017 $10M
Q3 2017 $11M
Q4 2017 $11M
Q1 2018 $11.5M
Q2 2018 $11M
Q3 2018 $11M

No they are not. You can set a watch by how much revenue SHOP will add to MRR. Even better news is that more and more of that add is going to the higher rollers in Plus.

So recap smallest segment at 14% is slowest growing this quarter at 41%. Largest segment is 56% and growing the fastest at 68% and same growth rate as previous quarter.

Yeah they are doing pretty awesome.

Darth

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I carried out my analysis for all of the past 4 years and then estimated the next 4 years. First column is rev growth for that Q (yoy) (I used the date on which the Q report comes out typically so subtract 1 month). 2nd column is MRR each Q. 3rd col. is rev for each Q. 4th column is all rev that is non MRR. 5th column is ratio of non MRR to MRR. 6th column is growth of that ratio (yoy). You can see that it has been growing steadily at 10% (yoy), it was higher back in 2016. There has been a small spike this Q from 1.1 to 1.13 most likely due to the shopify plus contributions. But I doubt it will be long lasting, after the initial burst should settle back to 1.1 yoy. Nevertheless it is interesting to watch this. Last 2 columns just show the MRR and non MRR growth thus far. They are both slowing as expected no surprises.

Now for the future growth estimates. I have assumed in future every quarter we will add 11M in MRR (yoy). This has been the case in recent times and seems reasonable. I have assumed an averaged “ratio” growth for each Q based on the last 2 year’s corresponding Q. This is column 6. You can simply assume 1.1 too. From this you can calculate the non MRR growth since you already estimated MRR. Then you can estimate Q Rev and finally Rev growth rate. It shows overall rev. growth slowing over the next 5y, it is an average of 31% over the 5y so not too slow. If MRR growth is faster or if the ratio growth is faster then the rev growth will be faster too. The converse is also true. But can it grow faster? That is the question. IMO it is doubtful and this #s may be reasonable. We have to wait and see.

quarter rev grow MRR Rev Non MRR rev Ratio Ratio growth MRR growth Non MRR growth
2/1/2015 6.6 35.2 28.6 4.33
5/3/2015 95 7.4 37.3 29.9 4.04
8/2/2015 88 8.5 44.9 36.4 4.28
11/1/2015 96 9.8 52.8 43 4.39
2/1/2016 99 11.3 70.2 58.9 5.21 1.20 71.2% 105.9%
5/2/2016 95 12.8 72.7 59.9 4.68 1.16 73.0% 100.3%
8/1/2016 93 14.4 86.7 72.3 5.02 1.17 69.4% 98.6%
11/1/2016 89 16.3 99.6 83.3 5.11 1.16 66.3% 93.7%
1/31/2017 86 18.5 130.4 111.9 6.05 1.16 63.7% 90.0%
5/2/2017 75 20.7 127.4 106.7 5.15 1.10 61.7% 78.1%
8/2/2017 75 23.7 151.7 128 5.40 1.08 64.6% 77.0%
11/1/2017 72 26.8 171.5 144.7 5.40 1.06 64.4% 73.7%
1/31/2018 71 29.9 222.8 192.9 6.45 1.07 61.6% 72.4%
5/2/2018 68 32.5 214.3 181.8 5.59 1.09 57.0% 70.4%
8/2/2018 62 35.3 245 209.7 5.94 1.10 48.9% 63.8%
11/1/2018 57 37.9 270.1 232.2 6.13 1.13 41.4% 60.5%
1/31/2019 45 40.9 322.3 281.4 6.88 1.11
5/3/2019 44 43.5 307.6 264.1 6.07 1.09
8/2/2019 42 46.3 348.8 302.5 6.53 1.09
11/1/2019 44 48.9 388.9 340.0 6.95 1.10
2/1/2020 39 51.9 449.6 397.7 7.66 1.09
5/2/2020 35 54.5 416.2 361.7 6.64 1.09
8/1/2020 33 57.3 464.6 407.3 7.11 1.09
10/31/2020 33 59.9 516.1 456.2 7.62 1.10
1/31/2021 31 62.9 588.3 525.4 8.35 1.10
5/2/2021 30 65.5 539.1 473.6 7.23 1.09
8/1/2021 29 68.3 599.3 531.0 7.77 1.09
11/1/2021 29 70.9 664.9 594.0 8.38 1.10
1/31/2022 28 73.9 754.0 680.1 9.20 1.10
5/2/2022 26 76.5 680.1 603.6 7.89 1.09
8/2/2022 25 79.3 751.9 672.6 8.48 1.09
11/1/2022 26 81.9 835.2 753.3 9.20 1.10
1/31/2023 25 84.9 941.1 856.2 10.09 1.10
5/2/2023 24 87.5 840.2 752.7 8.60 1.09

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