Shopify's cash flow

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I have no position in Shopify (SHOP) – long or short – plus I have
NO opinion whether Shopify is a good or bad investment. My interest
in Shopify is purely as a spectator.

Shopify’s cash flow is different compared to many of its peers. That’s
because Shopify’s change in deferred revenue is only a minor source of cash.
For most of its peers, the change in deferred revenue is the MAJOR contributor
to cash flow.

I’ve tried to show the difference using the table below. It shows the change
in deferred revenue from the cash flow statement as a percent of revenue. I
used salesforce (CRM) as it was back a few years after its IPO when it was then
about the size that Shopify is now. I also show salesforce today. In addition,
I’ve included some other SaaS companies of different sizes to give another
perspective. Note: these figures are as of the most recent fiscal year-end.


                                          Change in    
                                           Deferred    As a pct
                               Revenue      Revenue    of Rev
                            ----------    ---------    -----
Shopify (SHOP)                 673,304       10,960       2%
salesforce (CRM) 2007          748,700      196,831      26%
salesforce (CRM) 2017       10,480,012    1,551,904      15%

Box (BOX)                      506,142       78,939      16%
Coupa Software (COUP)          186,780       36,072      19%
Everbridge (EVBG)              104,352       16,378      16%
Okta (OKTA)                    259,990       54,945      21%
ServiceNow (NOW)             1,933,026      381,562      20%
Veeva ( VEEV)                  685,571       61,773       9%
Wix (WIX)                      425,636       58,353      14%
Workday (WDAY)               2,143,050      315,584      15%
Zendesk (ZEN)                  430,492       51,204      12%

What does this mean? If you think about SaaS firms and their major
sources of cash, it’s typically a three legged stool. The first leg
is depreciation, usually the smallest leg for these firms. The other two
much bigger legs are stock compensation and change in deferred
revenue. Shopify is missing a leg.

Not only that, but the Shopify Capital progam is going to be an
increasing drain on cash. Fortunately, the capital raises in the last
few years give them some flexibility here.

Although…the new CFO said “stay tuned” about deployment of that cash.

Ears

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Hi Ears,
That is interesting. Maybe it is because they are a Canadian company and they are recognizing it as Revenue right away? I think the only way to know for sure is to ask the company.

https://www.gilmour.ca/faqs-for-tax-savvy-clients/canadian-f…

Andy
Long Shop

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Hi Ears,

What does this mean? If you think about SaaS firms and their major
sources of cash, it’s typically a three legged stool. The first leg
is depreciation, usually the smallest leg for these firms. The other two
much bigger legs are stock compensation and change in deferred
revenue. Shopify is missing a leg.

Ok I couldn’t stand it so I had to contact Shopify. :slight_smile:

This was the question I asked:

To whom it may concern, I was looking at your Cash Flow statement. I noticed that your deferred revenue was around 2% of Revenue. Most of the SaaS companies that I look at have deferred revenues in the double digits. IE CRM, Box, OKTA, SMAR. Could you please explain why your deferred Revenue is at 2% of Revenue?

Here is their answer:

I’m not familiar with the deferred revenue numbers of other companies, but I’ll do my best to answer your question. Our deferred revenue is largely associated with subscriptions to our platform, which accounts for less than half of Shopify’s total revenue. Also, most of Shopify’s merchants are entrepreneurs and SMBs. Merchants of this size typically enter into monthly subscription agreements. The companies to which you refer in your email service larger enterprise clients who generally enter into annual agreements and may record deferred revenue based on larger contract sizes.

For additional context, we do not consider the deferred revenue balance to be a good indicator of future revenue. Instead, we believe Monthly Recurring Revenue (MRR) is most closely correlated with the long-term value of our merchant relationships. You can find MRR in our quarterly and annual filings.

Ok Ears so they are looking at subscriptions monthly which in my opinion makes them more risky but that subscription is less then half of Revenue. The majority of their Revenue is made from Merchant solutions Revenue. Which I found in this transcript.

https://www.fool.com/earnings/call-transcripts/2017/11/01/sh…

Merchant Solutions revenue grew 79% to $89 million. Merchant Solutions revenue is directionally tied to merchant success, as this is the part of our business where we deliver back-office capabilities that save merchants both time and money, thus allowing them to focus on sales activities.

So Merchant Solutions revenue is growing even faster then subscription revenue, which is growing at 65%. That makes me feel even better about this company because once they get the subscription revenue they are upselling to the customer even more services.

Thanks for the question, it helped me to better understand Shopify and what I am investing in.

Andy
If you see anything wrong with my logic or have better insights feel free to state them.

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The IR response makes a lot of sense.
Also, remember, in enterprise SW sale, there is substantial efforts involved in setting things up… and you have to pay sales commission and other expenses… so enterprise SW companies look for contract lock-in for first two or three years… and then make it periodic (another 2 or 3 years) or annual extension of the contract…
In case of SMB like for SHOP, a monthly subscription is the way…

BTW - merchant solutions revenue scale with customer’s business… so if the customers on SHOP platform grow, merchant solutions grow… and thats better than just fixed recurring subscription revenue! Ofcourse with caveat that at some point, either because of economy or law of large numbers, merchant solutions will stop growing… it seems like that point is quite fat for SHOP.

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Thanks Nilvest,

BTW - merchant solutions revenue scale with customer’s business… so if the customers on SHOP platform grow, merchant solutions grow… and thats better than just fixed recurring subscription revenue! Ofcourse with caveat that at some point, either because of economy or law of large numbers, merchant solutions will stop growing… it seems like that point is quite fat for SHOP.

Their Shop plus program is for larger companies (Enterprise) and it grew 22% last quarter. It has steadily been going up. In Q117 it was 17% and in Q317 it was 20% of MRR.

https://seekingalpha.com/article/4168162-shopifys-shop-ceo-t…

Andy

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Hi Andy,

I wasn’t posing a question. That wasn’t the purpose of my post. I assumed – mistakenly, it turns
out – that people here already knew that most of Shopify’s customers are on monthly subscriptions
and that a majority of their revenue now comes from Merchant Solutions. In retrospect, I should have
started with a section that explained this so it would have been clear that I wasn’t asking a
question. By the way, their IR person didn’t mention that another reason deferred revenue is low is
that Shopify Plus customers are billed monthly at the end of the month.

Anyway, the point of my post was about the impact of lower deferred revenue on cash flow. For
most SaaS companies deferred revenue is the major source of cash. That, and stock based compensation.
That’s why Shopify is different from most other SaaS firms – it’s missing deferred revenue as
the major source of cash. Therefore it’s not surprising that they’ve done the major capital raises
in the last few years while their stock has been hot.

This is NOT a knock against Shopify. Just an observation as to one way they differ from most other
SaaS firms.

Ears

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Their Shop plus program is for larger companies (Enterprise) and it grew 22% last quarter.

Hi Andy,

Shopify Plus revenue grew in dollars by 103% yoy last quarter, not 22%.

Here’s the calculation. To simplify it let’s alum a nice round $100 to start with:

In last year’s quarter let’s say total MRR = $100
Shopify Plus was 17% of that = $17

This year’s quarter total MRR was up 57% from last year’s quarter, so total revenue = $157
Shopify Plus was 22% of that = $34.54
$34.54 is up 103% from $17.

Best,

Saul

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Shopify Plus revenue grew in dollars by 103% yoy last quarter, not 22%.

Thanks Saul, I misstated that. I should have said it was 22% of MRR going up from 17% of MRR. So as a percentage of MRR it is growing.

Andy