I finally had some time to analyze the Q4 results and listen to the earnings call.
Wow. Amazing.
Here are some important takeaways:
- Revenue growth continued at a blistering pace.
Q y/y 1yr growth
Q216 92.9%
Q316 88.6%
Q416 85.8%
Q117 75.2% 85%
Q217 75.2% 80%
Q317 72.1% 77%
Q417 70.9% 73%
No issues here.
- Margins on subscription revenue are stable and margins on merchant revenue are expanding:
Subscription Revenue in $000
2012 2013 2014 2015 2016 2017
Revenue 19200 38339 66668 111979 188606 310031
Cost of Rev 4291 8504 16790 24531 39478 61267
Gross Profit 14909 29835 49878 87448 149128 248764
GM 78% 78% 75% 78% 79% 80%
Merchant Revenue in $000
2012 2013 2014 2015 2016 2017
Revenue 4513 11913 38350 93254 200724 363273
Cost of Rev 485 5009 26433 69631 140357 231784
Gross Profit 4028 6904 11917 23623 60367 131489
GM 89% 58% 31% **25% 30% 36%**
As the merchant base continues to increase, we can expect revenue to continue to grow while the development costs of adding new functionality should decline as a percentage of revenue. I expect SHOP to be hugely profitable.
- Merchants continue to flock to SHOP in huge numbers. Pay close attention here Fools! In the Q3 results, SHOP stopped reporting merchant additions and stopped providing details on the composition of merchants. Some on this board were worried about churn. I argued that it is a non-issue. I think the latest results put this debate to rest!
SHOP reported more than 609,000 merchants at the end of Q4. Holy moly! This means that in 2017, SHOP had net additions of 231,500 merchants or 61.3% y/y growth in total merchants. The churn is factored in. Why does it matter? SHOP gives people an easy way to try out a business and during this period, merchants are paying the monthly subscription fees. The important things is that the total number is growing. Yes, some will shut down their businesses after they decide that they don’t want to continue. There are failed businesses in there. But now, look at the GMV: it was $9.1B during Q4 which is up from $5.5B in Q4 2016; that’s an increase of 65%. Note: the increase in GMV is higher than the percentage increase in total merchant number which tells is that on average each merchant is increasing business volume; yes, it’s slightly higher but remember that since churn is factored in the business volume of the remaining merchants and the new ones outweighs any negative effect from churn. Another important point to note is that SHOP does not need to spend great effort to acquire new merchants. There is a lot of self-onboarding and more than 16,000 of Shopify’s partners referred merchants to the Shopify platform. Thus, since the customer acquisition costs are low, churn is not much of an issue at all.
Shopify Plus merchants were also reported at more than 3600, up from 2500 in the prior year; that’s a 44% increase. But note that Shopify Plus merchants contribution of MRR was 21%, up from 17% from the prior year. This is in spite of the fact that total merchant number increased at 61.3% and Shopify Plus merchants increased at only 44.0%. SHOP started Shopify Plus to give the highly successful merchants a clear path to increased service and functionality which is important to keep them at Shopify rather than changing platforms. Interestingly, though, most of the new Shopify Plus additions were not graduates of the basic Shopify platform; most were not Shopify merchants/customers before; they migrated from other platforms; the COO said that SHOP has seen migrations from all of the competing enterprise platforms. They are migrating because SHOP not only gives the necessary functionality but also because SHOP Plus enables them to behave more like entrepreneurs by allowing them to hit easily and seamlessly hit all of the channels (FB, Instagram, etc.) that SMBs have typically only used. SHOP only really started putting a serious effort into Shopify Plus in 2017. SHOP will continue this effort in 2018 and beyond by adding 500 people to sales, support, and development (to add functionality) to Shopify Plus.
In summary, it was an absolutely amazing report and I think that the future for SHOP looks very bright indeed. I’m not selling any shares because I continue to believe that the stock can increase 10x; in fact, this report makes me more confident that SHOP will get there eventually.
Chris
sorry, brain not working. Just had problem with Windows that screwed my night…hate Windows, but still that is the ultimate in goodwill that is not recognized on the balance sheet.