SHOP Quarterly Results Summary - Wow

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My key takewaways from their earnings report:

Pulling forward what retail would look like in 2030 in 2020

Total rev for the quarter was 714.3mm, up 97% yoy

Gross profit dollars grew 83% to $375.0 million in the second quarter of 2020, compared with $204.8 million for the second quarter of 2019.

Adjusted gross profit4 grew 84% to $381.4 million in the second quarter of 2020, compared with $207.3 million for the second quarter of 2019.

Operating income for the second quarter of 2020 was $0.3 million, or 0% of revenue, versus a loss of $39.6 million, or 11% of revenue, for the comparable period a year ago.

Adjusted operating income for the second quarter of 2020 was $113.7 million, or 16% of revenue, compared with adjusted operating income of $6.4 million or 2% of revenue in the second quarter of 2019.

Net income for the second quarter of 2020 was $36.0 million, or $0.29 per diluted share, compared with a net loss of $28.7 million, or $0.26 per basic and diluted share, for the second quarter of 2019.

Adjusted net income for the second quarter of 2020 was $129.4 million, or $1.05 per diluted share, compared with adjusted net income of $10.7 million, or $0.10 per basic and diluted share, for the second quarter of 2019.

At June 30, 2020, Shopify had $4.00 billion in cash, cash equivalents and marketable securities, compared with $2.46 billion on December 31, 2019. The increase reflects $1.46 billion of net proceeds from Shopify’s offering of Class A subordinate voting shares in the second quarter of 2020.

Subscription Solutions revenue was $196.4 million, up 28% year over year, primarily due to more merchants joining the platform.

Merchant Solutions revenue growth accelerated for the third consecutive quarter, up 148%, to $517.9 million, driven primarily by the growth of GMV.

• GMV for the second quarter was $30.1 billion, an increase of $16.3 billion, or 119%, over the second quarter of 2019. Gross Payments Volume3 (“GPV”) grew to $13.4 billion, which accounted for 45% of GMV processed in the quarter, versus $5.8 billion, or 42%, for the second quarter of 2019

Monthly Recurring Revenue2 (“MRR”) as of June 30, 2020 was $57.0 million, up 21% compared with $47.1 million as of June 30, 2019. Shopify Plus contributed $16.6 million, or 29%, of MRR compared with 26% of MRR as of June 30, 2019

GMV grew 119%, with GMV accerlating in April and May and decelerating in June and July

New stores created on the Shopify platform grew 71% in Q2 2020 compared with Q1 2020, driven by the shift of commerce to online as well as by the extension of the free trial period on standard plans from 14 days to 90 days. The 90-day free trial offer ended on May 31, 2020, with users that created stores in April and May expected to continue converting into paid merchants through the end of August 2020.

A lot of the merchants who joined earlier in the pandemic had a greater than typical proportion of established businesses that were urgently transitioning to online commerce during the initial weeks of the pandemic.

While GMV through the point-of-sale (POS) channel declined by 29% in Q2 2020 compared to Q1 2020, as many of Shopify’s Retail merchants suspended their in-store operations in April and May, POS GMV started to recover in June as COVID-19 restrictions eased and stores began to reopen, approaching February levels by the end of the month and continuing to grow into July

Retail merchants continued to adapt to socially distanced selling through Q2 2020, as 39% of our brick-and-mortar merchants in English-speaking geographies are now using some form of local in-store/curbside pickup and delivery solution, up from 26% in early May 2020 and 2% at the end of February 2020. Additionally, Retail merchants grew online store GMV by 73% in Q2 2020 over Q1 2020.

The migration to Shopify Plus of larger sellers continued in Q2 2020, resulting in a record quarter for new merchant adds to Shopify Plus

Certain categories of GMV grew faster in Q2 2020, including Food, Beverages, and Tobacco, which doubled during this period relative to Q1 2020.

Like many companies have been doing this year, the company is not doing guidance for next quarter or for this year.

Vinegar101: My jaw nearly hit the floor after seeing the numbers. I didn’t get to listen to the Q&A segment yet (gotta go to work now lol) but will hopefully be able to post about it later. PaulWBryant already made a very good point that SHOP’s outstanding quarter might mean it’s time to buy FSLY, because SHOP is a key customer to FSLY, which has a usage based pricing system.

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Nice report! You beat me to it!

I will just add the color part I had planned from my notes from the recent quarter…

Shopify’s results post here has a great summary of details, so I’ll skip many of these: https://investors.shopify.com/news-and-events/press-releases…

ABOUT SHOPIFY
Shopify is a leading global commerce company, providing trusted tools to start, grow, market, and manage a retail business of any size. Shopify makes commerce better for everyone with a platform and services that are engineered for reliability, while delivering a better shopping experience for consumers everywhere. Headquartered in Ottawa, Canada, Shopify powers over one million businesses in more than 175 countries and is trusted by brands such as Allbirds, Gymshark, PepsiCo, Staples and many more. For more information, visit www.shopify.com.

THE ZOOM OF ONLINE BUSINESS
Shopify has some parallels with Zoom for investors. Both were largely unknown and at the right time and place for the pandemic. One satisfies the need to communicate and collaborate remotely, the other satisfies the need to do business remotely. Note I didn’t use the word “shop” here. That is too superficial. Shopify makes it fast and easy to move a business online:

  • Inventory and shipping management, but if you sell digital goods this is a single check-box to skip and that one option changes how the whole store backend works without you having to think about it, from reporting to checkout experience.

  • Multi-channel sales. A few clicks to be extended in to Facebook (even before FB’s new Shop-thing just starting up), “Shoppable” Instagram posts, and recently added: Pinterest and Walmart.

  • Analytics - Proprietary, Google, 3rd party

  • Feature add-ons via their app store (which is a secondary form of subscription expansion since they take a cut and while there are free options for many add-ons, in my experience they tend to average $20-$60 per month each and having 3-6 of these isn’t crazy or expensive when you consider the thousands of dollars they would cost if someone wanted to develop these solutions themselves.

  • They pay merchants daily! No wait for the end of the month. Think about the advantage this provides small shops who need to roll their revenue in to inventory or pay for other things at this time of crisis. You can have your first revenue the day after you open shop!

  • Network effect. Maybe this is a stretch but from Shopify’s results: “Approximately 30,300 partners referred a merchant to Shopify over the past 12 months.”

A LITTLE AMAZON.com

  • Shopify is getting deeper in to inventory management, not just routing, with their recent acquisition of warehouse automation and fulfillment provider 6 River Systems.

  • Launched “Shop” app (https://techcrunch.com/2020/04/28/shopify-launches-shop-a-ne…). This is an app that aggregates all Shopify stores in to a combined marketplace for searchability and exploration. This a pure value-adding funnel for all Shopify-based stores. Shopify does NOT plan on monetizing this app/effort as a platform (like Amazon does) but instead profits indirectly by driving more people to their merchant’s stores, aligning them with the interests of their customers. If there is anything that stands out as an example of Shopify’s overall strategy to help businesses succeed, and so succeed themselves, it is this.

  • It isn’t just brick-and-morter that Shopify is attractive to. Amazon sellers exist at the pleasure of the all mighty Amazon.com, who can turn off a store without warning or explanation. Amazon sellers play a whole different e-commerce game to try and stay ahead of knock-offs and competition in the Amazon marketplace. Shopify allows merchants to control their destiny and play in the global e-commerce game and access all those other sales channels. This is more of a footnote right now as the move isn’t required for continuity of business during the pandemic since they were already online. I just wanted to include this as many people are not aware of this dynamic which is partly displacing and definitely complimenting Amazon.

OTHER POINTS OF INTEREST

  • Basically no debt and $1.88B in cash and cash equivalents, up from $0.41B a year ago!! (I don’t know where the $4B number came from above. This is from their “Condensed Consolidated Statements of Cash Flows” table)

  • To-be-substantiated…

  • A video report stated that Shopify has just 2% of its TAM. Shopify said in a recent results deck that the tam is over $70B. Does that math work?
  • I also heard that international is still pretty small and accelerating but I haven’t found where this data is broken out yet. They say they are in 175 countries. There has to be some overheard in setting up new countries, though I have seen first-hand that in some places they just require you figure out your own taxes, for example, while in others they can provide everything, even boilerplate legal templates and return policy with a couple of clicks.
  • A rare point from an analyst for me: Goldman Sachs admits it missed this one (https://www.thestreet.com/investing/shopify-shop-stock-upgra…) siting Shopify as “a unique customer acquisition funnel that has not only found unmatched success in small and medium-size businesses but increasingly the enterprise segment as well, we believe SHOP should be able to sustain hyper-growth for longer than the market expects.” This is too narrow in my opinion so I think they are STILL missing it. This little macro trend was an interesting side-nugget: “…U.S. e-commerce penetration went from 16% of retail spending in the first quarter to 40% in May…” So the US is shopping more online, duh, BUT more than everyone else too. Canada is probably the same.

A BRIEF SUMMARY
…I’m sure I’m leaving some important things out but hopefully the very first link above saves me from 99.9% of them!

I really love everything about this company. From their optionality to how management supports businesses as an absolute priority in their mission. They have SO much room to grow. While there are some competitors, technically, none really do it like Shopify and the moat just keeps expanding.

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Second-Quarter Financial Highlights

If any one was wondering about the disconnect between GMV and revenue growth…

Total revenue in the second quarter was $714.3 million, a 97% increase from the comparable quarter in 2019.

and subscription growth…

Subscription Solutions revenue was $196.4 million, up 28% year over year, primarily due to more merchants joining the platform.

They explain that with what they were doing with their 90 day free trial offer, which also re-assures on the concerns that existed over the customer churn…

Monthly Recurring Revenue2 (“MRR”) as of June 30, 2020 was $57.0 million, up 21% compared with $47.1 million as of June 30, 2019. Shopify Plus contributed $16.6 million, or 29%, of MRR compared with 26% of MRR as of June 30, 2019. While growth in the quarter was impacted by the 90-day free trial on standard plans offered from March 21 through May 31, MRR ended the quarter higher than on March 31, benefiting from strong merchant adds in June, driven by the highest-ever number of merchants joining Shopify Plus in a single month, and standard merchants converting in the latter half of June from the 90-day extended free trial March cohorts and regular 14-day free trial June cohorts.

New stores created on the Shopify platform grew 71% in Q2 2020 compared with Q1 2020, driven by the shift of commerce to online as well as by the extension of the free trial period on standard plans from 14 days to 90 days. The 90-day free trial offer ended on May 31, 2020, with users that created stores in April and May expected to continue converting into paid merchants through the end of August 2020. New store creations are those that have provided their billing information so they can start selling, but for which we do not collect a subscription fee while on a free trial.

While data from June 15 to July 19 indicates that new stores created during the extended 90-day free trial are converting into paid subscribers at a slightly lower rate than merchant cohorts that joined Shopify prior to the pandemic, we expect stronger retention rates for these early 90-day trial cohorts as they tend to be longer-tenured at the time of conversion and bring higher Gross Merchandise Volume1 (“GMV”). This may not be indicative of go-forward cohorts, however, as a greater-than-typical proportion of new stores created early on in this free trial period represent established businesses that were urgently transitioning to online commerce during the initial weeks of the COVID-19 pandemic.

All in all very encouraging with the top line Zoom like gain, progress on Shopify capital, Shopify fulfilment and Shopify plus penetration; there’s a concern around to what degree the net inc profit levels have been boosted by a one time tax recovery item and where that leaves the bottom line, although clearly the bottom line was to a degree surrendered temporarily with the 90 day free trial period.

Ant

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I wasn’t going to make another shopify post, because there have already been excellent shopify posts made by various board members. However, I just finished the rest of SHOP’s earnings transcript, and honestly it was that good of a quarter that I need to let the board know some of the other highlights.

SHOP is particularly fascinating to me, because its recent success puts it clearly above lower conviction board stocks such as Coupa and Okta, and, if SHOP had better margins, it could truly be in the same peer group as CRWD and DDOG. However, there are some ways that SHOP is better than even CRWD and DDOG. Namely, its Total Addressable Market should be much larger than either of theirs.

Anyway, on to the rest of the quarterly highlights:

-Cumulative GMV (gross merchandise volume) is over $200b
-SHOP stores sold 1.5x what they did in Q4 19, which is seasonally the strongest quarter
vinegar101: remember when SHOP said they were seeing black Friday traffic on a daily basis? They weren’t lyin :wink:
-many retailers are reimagining their stores to serve as order fulfillment centers to meet digital demand

  • enhanced our curbside pickup and our local delivery capabilities to give merchants more control of their retail operations by driving last-mile execution
  • Shop Pay Installments will let merchants give buyers more options by paying in installments with no interest and no fees
    -Shopify Balance to further level the playing field, giving our merchants access to their cash faster and providing critical money management tools to effectively manage their business.
    –Shop Pay Installments will be integrated into our accelerated checkout Shop Pay, which offers four times faster checkout and close to two times higher conversion than regular checkout options, providing a frictionless experience for merchants and their buyers. Since its launch, Shop Pay has facilitated cumulative GMV of more than $11 billion.
    –more merchants are leveraging merchant solutions as they seek to reduce friction while growing their businesses
    –More brands joined Shopify Plus this quarter than ever before as merchants from lower-level plans grow their sales and upgrade and more large brands seek to scale their businesses in an Agile cost-effective manner

–In our second quarter, brands from different verticals launched stores on Shopify Plus, including the legendary by company found in 1895, Schwinn; beachwear company, Hurley; and Wester apparel brand, Stefan; Canadian grocery store, Farm Boy; U.K. food and drink CPG, Princes; chocolate bar company, Snickers; chipotle, and the major beer company, Molson Coors

from Harley FinkelStein, COO: responding to an analyst question regarding the benefit shopify gets from partnering with Walmart and Facebook: we need to be the retail operating system, which means we need to make it easy for them to sell anywhere where potential customers may be, whether that’s on a place like Pinterest or a social media platform or in a marketplace like Walmart. before Shopify, you had to have 20 different tabs open to manage a multi-channel, omni-channel business. Now you don’t. You can do everything from Shopify, which makes us further being the heart of their business,
Vinegar101: The retail operating system is an excellent analogy that sums up where their business is heading, if not where it already is. Very clear vision here from leadership.

Amy Shapero – Chief Financial Officer: Yeah. Let me just start by saying that the GMV growth overall was really driven by the sudden shift to consumer spend from offline to online driven by COVID. And so what we saw was GMV per merchant increased significantly quarter over quarter and year over year as our merchants benefited from that tailwind. But we also saw more merchants and new stores joining the platform during Q2.

26% of our brick-and-mortar merchants in English-speaking countries are now using some form of local in-store or curbside pickup and delivery options.
That’s compared to like 2% at the end of February. So we are seeing this new – as physical retail reopens up, the business model for those physical retailers are also contemplating, a new type of resilient model, which allows them to sell online and off-line.
Vinegar101: More evidence Shopify is leading a huge business paradigm shift.

Merchant solutions revenue grew 148% to $517.9 million in Q2 compared to the same period in 2019
This is the third quarter in a row of acceleration and a growth rate we have not seen since before our IPO driven primarily by Shopify payments followed by growth of other merchant solutions revenue like capital, shipping and transaction fees. All of these were driven by the spike in GMV, which increased 119% year over year to $30.1 billion, as well as by increased adoption of these solutions by merchants and growth in partner referral revenue.

Adjusted net income for the second quarter of 2020 was $129.4 million, or $1.05 per diluted share, compared with adjusted net income of $10.7 million, or $0.10 per basic and diluted share, for the second quarter of 2019.
Vinegar101: This is huge! This really points to the scalability of shop’s business, a key criterion for any stock to succeed on saul’s board. As revenues soared 97% yoy, the business swung to a profit.

I don’t want to act like everything is perfect at Shopify. They did mention that GMV decelerated in June and July, and they would not comment on how much. That said, I think it is generally a given that companies with high flying revenues decelerate over time, especially if you are experiencing a business spike due to covid. The question is, how much deceleration and how quickly? If revenues decelerate next quarter to 70%, then this is still an excellent business by my standards. They had previously stabilized their growth (pre-covid) in the mid 40’s, which is still quite good considering the market/industry they are in. I would posit mid 40’s is probably the floor, but I’d truly be shocked if their yoy revenue growth suddenly dipped back to the 40’s.

A lot of these new customers are going to get used to SHOP’s ecosystem, keep using it, and use it even more. This will translate to revenues growing, even next year, probably over 50% every quarter if not higher in my opinion. In the near term, I wouldn’t be surprised to see Q3 and Q4 grow revenues over 65%, conservatively speaking.

Last thing about SHOP I will mention is that there was a Barrons article talking about how, after this earnings release, a lot of analysts have upped their price targets for SHOP. But a lot of them are not recommending to buy it, because of its valuation! Even though they upped the price target. Does that sound familiar to you? This is exactly what Saul and David/Tom Gardner talk about, about how the best companies are always expensive. Pretty sure the mainstream talking heads asserting a stock is over valued is a criterion to be considered a Motley fool rule breaker.

These same analysts telling you not to buy SHOP due to its valuation are the same people who would complain about ZM, LVGO, DDOG, CRWD and on and on and on. This is another big time buy signal to me. SHOP earned its valuation because it is just that good. The best companies become “over valued” and basically stay that way as they continually outperform the S&P.

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I don’t want to act like everything is perfect at Shopify. They did mention that GMV decelerated in June and July, and they would not comment on how much. That said, I think it is generally a given that companies with high flying revenues decelerate over time, especially if you are experiencing a business spike due to covid.

I think it is pretty clear, many stores opened up or increased use of their Shopify account in April and May as stores were completely closed. I’ve become very familiar with the default Shopify web pages and email formats because I bought a lot of stuff online for pickup or shipping when I couldn’t just stop by a store anymore. I’d consider it more of a transient acceleration rather than deceleration. Some of these stores will continue to use their web presence, probably to a lesser extent now that most places have opened up retail, but also some will simply go out of business. In the long run, the trend is going to be that having an online presence is almost mandatory for even small businesses (and I presume that these services will offer more services like retail POS, inventory, maybe shipping). Little moves up and down month to month as the pandemic moves along are just noise.

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Some odds and ends worth mentioning…

If you haven’t skimmed the presentation “deck” yet, have a glance: https://s23.q4cdn.com/550512644/files/doc_downloads/2020/Sho…

  • Shopify reports it has 5.9% of US retail e-commerce sales, second only to Amazon (according to the deck) at 37.3%. Ebay is 5.7%, Walmart 4.7% ← explains why Walmart signed on for the partnership!

  • Operating leverage: Expenses down from 56% to 37% as a percentage of revenue!

How “Land and Expand” applies to SHOP
Maybe I am trying too hard to fit the numbers in to this simple concept, so let me know what you think! I could have used numbers like new store growth, but I wanted to keep it revenue oriented for an apples-to-apples comparison (I hope). I did this because I’ve posted a few times about how Shopify has a lot of ways to make money and I think this shows it very clearly. If they were only about the monthly subscription to host stores, look what would be missing! Percentages are revenue growth


 **LAND**  = Normal subs          (+24%) -> "Core" (+21%) + "Shopify Plus" (+34%)
  &
**EXPAND** = Usage & add-on subs (+143%) -> Merchant Solutions (+148%) + Apps (+80%)

**Percentage of Total Revenue**
"Land"    38% 
"Expand"  62% 

REF: **My Revenue Breakdown Based on Deck**
(From my own spreadsheet calculation)

        	       Q2'19   Q2'20  YoY Growth
Total Sub Solutions	153	196	 28%
     Apps    	         15	 27	 80%
     ShopifyPlus     	 35	 47	 34%
     Core            	101	122	 21%
------------------------------------------------			
Merchant Solutions	209	518	148%
------------------------------------------------
Total Revenue       	362	714	 97%

What is GMV?
GMV = Gross Merchandise Value, which is sales of goods minus returns. This last part is really important since a lot of e-commerce retail averages 20%-30% returns or even higher.

Funny (from the deck linked above:
"Total Addressable Market
Anyone who wants to make more money from their site than they pay for it"

…I think I need to adjust my TAM expectations higher :wink:

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- Shopify reports it has 5.9% of US retail e-commerce sales, second only to Amazon (according to the deck) at 37.3%. Ebay is 5.7%, Walmart 4.7% ← explains why Walmart signed on for the partnership!

- Operating leverage: Expenses down from 56% to 37% as a percentage of revenue!

…Merchant Solutions (+148%)

Great points to bring out, Rafe. Merchant Solutions just leveled up big time.


Year     Q1    Q2    Q3    Q4
2019    180   209   225   322
2020    282   518

148% growth is incredible. Even though we all know that won’t be the run rate in 2021, we can probably assume that this is the new “level,” which seems to be $2b+ for Merchant Solutions. And then there is the subscription side, so Shopify is likely now at $3b+ revenue per year. Wow.

And yet, they’re a $130 billion company. CRM is a $175 billion company, and they have $20b+ annual revenue. Can SHOP get there? Sure, but I believe it will take 5 or 10 years. Maybe they’ll be worth more than CRM when they do (better margins or something) – perhaps they’ll be worth 260 billion (a double). It’s hard to see more than that, but heck, in 20 years maybe they could be one of the largest companies in the world.

But it will take time. SHOP is a behemoth now, which means the low hanging fruit is gone, unless they have a second act (like AWS for AMZN). I wouldn’t put it past them (I think SHOP is trying to get into content production or something and I’m sure they have other ideas). In fact, if I held 30 companies, SHOP would be among them. I think they’ll beat the market handily. But I’m not selling a company I believe could double or triple in the next couple years to buy SHOP.

Bear

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Thanks for bringing some context to their size.

“…But it will take time. SHOP is a behemoth now, which means the low hanging fruit is gone, unless they have a second act (like AWS for AMZN). …”

I think that may be premature to say the low-hanging fruit is gone. I think there is plenty of room for them to demonstrate more growth over the next several quarters, for sure, and probably years.
- They can grow on so many fronts and also find more operating leverage.
- The value proposition is so good to merchants. Think about some of those big-ticket customers in the ShopifyPlus program. They have lots of money and people but still choose to let Shopify create, host and manage their e-commerce solution/presence. They have really been expanding from a company that helps little shops get online. The feedback loop in their Deck is real. As this continues more companies will look at their self-hosted and maintained solution and decide to opt for the SaaS option with all of its bells and whistles and partners and data and speed, etc.

I don’t see a reason to get off the train just yet. Only time (3 more months) will tell.

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