Shopify's Strong Q1 - CC Notes

I have previously mentioned that, since Q3 of 2020, Shopify has returned to “seasonally normal” quarters. Well, this quarter was abnormal in a very good way. Shopify revenues usually contract sequentially by 6% or 7% in Q1, but this time revenue actually accelerated sequentially! (if only by 1%, but still it a big deal considering how the quarter usually goes.)

Before diving into the rest of the quarter, I want to point out how well Shopify’s business is scaling:
–Adjusted Operating Expenses as a percent of revenue (2017-2020): 56%, 55%, 53%, 39%
–As of Q1 2021, adjusting operating expenses as a percent of revenue is now 36%.

On the “things to watch out for” list, Shopify admitted the stimulus played some part in their big quarter. But they also downplayed its role by explaining that growth was accelerating in January and February, before the stimulus hit in March. More details are towards the bottom of this post.

–Overall, revenue growth accelerated from last quarter, up 110% year-over-year to $988.6 million in our first quarter.

–Subscription solutions revenue growth accelerated to 71% year-on-year in Q1 to $320.7 million

–MRR (Monthly Recurring Revenue) growth accelerated to 62% year-over-year to $89.9 million

–Shopify Plus contributed $23.1 million or 26% of MRR compared with 28% in Q1 of 2020.
–ExponentialDave: Would be a lot more interesting if they also told us what percentage of merchant solutions revenue comes from Shopify Plus - my guess is that it’s much higher than 26%.

–While Shopify Plus MRR grew significantly, non-Plus MRR grew faster benefitting from a significantly higher number of merchants on standard plans joining the platform in 2020 and the first quarter as well as from our first full quarter of Shopify POS Pro subscription revenue.

–Merchant solutions revenue growth accelerated to 137% over the same period in 2020 to $668 million. (driven by sales)

–GMV (Gross Merchandise Volume) growth also accelerating to 114% to $37.3 billion in the first quarter alone.
–Caused by “greater share of retail spend going to online purchases, higher GMV per merchant, and an injection from the latest round of stimulus in the U.S. in March”

–Payments penetration of GMV was 46% versus 42% in Q1 2020.
ExponentialDave: Still a lot of room for improvement there, which is a good thing.

–Adjusted gross profit dollar growth accelerated to 114% over last year’s first quarter to $565.1 million, and outpaced revenue growth largely due to stronger Shopify Payments margins

–Adjusted net income for the quarter was $254.1 million, or $2.01 per diluted share, compared with adjusted net income of $22.3 million, or $0.19 per diluted share in last year’s first quarter.

–Cash, cash equivalents and marketable securities balance was $7.87 billion on March 31

–Guidance: Shopify stopped providing hard guidance numbers last quarter permanently. What they are telling us is that there is a possibility that revenue for 2021 is more evenly distributed across all 4 quarters, in particular if a strong vaccination campaign mutes the threat of covid and sends people back to offline shopping.

–Areas of investment: Shopify Fulfillment Network, 6 River Systems, the Shop app, and International Expansion.

–Quadrupled shops actively selling on Facebook Shops

–Added 14 more countries to TikTok marketing partnership

–Added Pinterest channel into 27 additional markets

–Online shopping assistant named “Shop” increases likelihood customers reorder by 11%

–Accelerated wallet, Shop Pay, Shopify’s buy now, pay later product, Shop Pay Installments and end-to-end order tracking all contributed to help merchants increase the lifetime value of their customers

–The Shop app had more than 107 million registered users in Q1, 24 million of which were monthly active users

–Shop pay had facilitated over $24 billion in cumulative GMV since its launch in 2017.

–Half of all eligible merchants use Shopify Shipping

–Shopify Capital lended $300 million to merchants in Q1, up 90% year-over-year

–Big customer lands for Shopify Plus: Mizuno, Lego, Kraft Heinz Direct, Lord & Taylor, WWE, Tinder

–45,000 partners referred at least one merchant to Shopify over the last 12 months, up to 73% year-over-year

–6,600 apps that extend Shopify’s product capabilities

–Non GAAP GM of 57% compared to 56% in Q1 2020.

Key Q & A’s:

Trevor Young: You flagged some impact from the stimulus payments in March which I think you indicated robust in early April. One, could you help us quantify that impact? And then how should we think about how that impacted the growth differential you mentioned between international and domestic GMV? Thanks.

Amy Shapero: Yes. So, the U.S. stimulus did have a noticeable impact to our GMV in the quarter, but GMV was strong even without it. And let me give you a couple of data points. So looking at total GMV, we started to see the acceleration in growth in January and February before U.S. stimulus was even a factor in March. And in addition, for the quarter, our GMV outside of the U.S. accelerated at a faster pace than the U.S. So this isn’t just a U.S. stimulus story. It was strength across the board in GMV. Across every merchant type, standard and plus, there was an acceleration in every geography, so strength across the board.

On whether or not Shopify’s elevated GMV will wane once covid ends:
"In terms of the pandemic and what that’s caused, if you actually look at Australia and New Zealand, which is not an exact proxy for the rest of the world, but certainly provides some interesting insights. In those places where things have really opened up post-pandemic, we’re actually not seeing any slowdown whatsoever in terms of consumers buying from our merchants. In fact, online GMV remains in elevated levels beyond in those places. So I don’t think the consumer preference shift that happened through COVID was a temporary thing."

Darren Aftahi: Maybe just to piggyback on what you said, Harley, I’m curious with the rollout in North America of more vaccines in April, and this is maybe more of a real-time question, I’m curious if you guys have seen any change in terms of the cadence of your merchants business, say, versus the early months of the year?

Harley Finkelstein: Yes. So as I mentioned, we have not seen that at all. We have not seen a slowdown. We mentioned merchant growth remained elevated in Q1. We’ve seen digital increasingly become the center of gravity. Growth is strong across all our regions.


Nice write up Dave

A couple of things to add…

1) Take up of Shopify Fulfilment Network - complimentary revenues to Shopify Shipping to start with but a complete solution offering for the future

Ken Wong

Hi. Thanks for taking my questions. Harley, earlier you mentioned seeing higher attach of shipping and how potentially fulfillment could kind of follow in that path? Is that 50% attach the right level to think about what fulfillment demand could look like? And as merchants’ adoption increases, how are you thinking about the need to supplement the partner model with your own distribution?

Harley Finkelstein

Hi, Ken. Thanks for the question. A couple of things. So on the Shopify Shipping in particular, as I said, yes, adoption has grown significantly since we launched five years ago. Now more than half of eligible merchants in the U.S. and Canada are adopting it. And I think Shopify Shipping has really proven its relevance. Now self shipping is a phase that some merchants will continue to do and others will kind of grow through, which is why things like SSN is really important. In terms of the updated SSN, I alluded to this in the opening remarks, but more merchants joined us in Q1 and volumes fulfilled in Q1 were actually similar to Q4, which, of course, is very strong holiday season. What we really want to do with SSN is we want to continue to build the foundation of the network itself, we want to focus on optimizing the software and the network, we want to keep introducing new features that give merchants better insights. Now you may have a merchant who may use Shopify Shipping for certain products and SSN for other products, you may have certain merchants that decide SSN is exactly where I need to be. But the SSN – we are targeting customers in this product market phase who are self shippers right now, who are fulfilling anywhere from 10 to 10,000 orders a day, durable goods is really important and also brand experience is really key for their business. And so we really are narrowing down exactly who is the right customer for SSN, because we want to have the best – we want them to have the best experience possible. But I don’t think it’s going to be SSN or Shipping. I think that the idea of Shopify becoming the global retail operating system is that merchants get different choices, depending on what they need for their particular business.

2) Another positive explanation on why Shopify Plus reduced as a % of MRR from 28% to 26% - due to out performance of the strength of new subscription solutions (even so Shopify Plus itself still had a record Q)

Shopify Plus had another fantastic quarter, signing on a record number of high volume brands looking to adapt to the fast changing retail landscape…

Strong app and Shopify Plus platform fee revenues contributed to the 9 percentage point difference between the growth of subscription revenue and MRR. Shopify Plus contributed $23.1 million or 26% of MRR compared with 28% in Q1 of 2020.

While Shopify Plus MRR grew significantly, non-Plus MRR grew faster benefitting from a significantly higher number of merchants on standard plans joining the platform in 2020 and the first quarter as well as from our first full quarter of Shopify POS Pro subscription revenue.

Merchant solutions revenue growth accelerated to 137% over the same period in 2020 to $668 million. This outstanding growth was driven primarily by merchant strong sales, with GMV growth also accelerating to 114% to $37.3 billion in the first quarter alone.

3) Roll out and take-up of Shopify Balance - another near term growth lever going forwards

Shopify Balance is really built for independent businesses. We want to act as our merchants’ financial partner. When a merchant signs up for Balance, they get immediate access to an integrated account to build their funds, they get a card to access cash fast and be able to spend their money, they get monthly cash back rewards that are relevant to their actual business… And so in terms of the rollout of it, we’ve added more merchants to the early access program in Q1. We are on track for general availability to eligible merchants later this year.

As we hit the tougher compares from Q2-Q4 from 2020 let’s remind ourselves of the Q1 to Q2 sequential growth pattern in pre pandemic years, which was 12.9% in 2019, 14.3% in 2018 and 19.1% in 2018. Anything like this would comfortably take us through the $1bn revenue per quarter mark once and forever.