Vinegar101 summary of Shopify's Q3 Transcrip

Firstly, after 15 years as vinegar101, I have changed my name to ExponentialDave. Also, sadly I haven’t posted in a while - because I have been absolutely swamped at work.

Regarding this post, the things that I’ve highlighted here highlight not just how good of a quarter it was, but also what the business really is. I think many people oversimplify shopify as just a little website builder for SMB’s, but the reality is they do so much more than that and also serve large businesses such as Dior, Paramount Pictures, and on and on.

Before I get into the highlights, here are two key terms that get thrown around a lot in shopify world:

  1. Gross Merchandise Volume, or GMV, represents the total dollar value of orders facilitated through the Shopify platform including certain apps and channels for which a revenue-sharing arrangement is in place in the period, net of refunds, and inclusive of shipping and handling, duty and value-added taxes.

  2. Monthly Recurring Revenue, or MRR, is calculated by multiplying the number of merchants by the average monthly subscription plan fee in effect on the last day of that period and is used by management as a directional indicator of subscription solutions revenue going forward assuming merchants maintain their subscription plan the following month.

Key Quotes from the Earnings Transcript

We believe these changes (covid shopping behaviors )in the landscape will endure as consumers’ new shopping behaviors stick and become the new normal.

In Q3, a record number of merchants became paid subscribers to Shopify, even excluding merchants who converted following the end of their 90-day extended free trial. The extended free trial made it easier for new stores to get online fast and make sales, enabling many of these entrepreneurs to generate cash while their physical stores were shut down at the onset of the pandemic.

Not only did we help merchants get up and running quickly. We gave them more tools to get them discovered by new buyers, shipping native sales channels through integrations like Facebook shops, Walmart and Pinterest.

Sales channels will continue to expand as TikTok will be testing with a limited number of Shopify merchants, features that make it easy for them to sell organically directly from their videos and their profile pages.

Merchants are increasingly leveraging how easy we make it for them to remarket by using tools like Shopify email through which merchants have sent 500 million emails through email campaigns since launching the product in the first quarter this year.

Providing an amazing shopping experience through fast and easy checkout is exactly what Shop Pay, our accelerated checkout does. Shop Pay has experienced phenomenal growth since its launch three years ago, facilitating over $14 billion in GMV, with more than 60 million buyers opted in at the end of Q3, facilitating more Shopify GMV than Apple Pay, Google Pay and Amazon Pay combined.

We started rolling out our ‘buy now pay later’ product, Shop Pay Installments in the U.S. in Q3. Shop Pay Installments lets merchants give buyers more options by paying in installments with no interest and no fees.

In addition to improving sales conversion, businesses offering ‘buy now pay later’ options have seen higher card sizes and an increase in repeat customers.

Shop Pay is also integrated into the Shop App, a personal shopping app that helps merchants deepen their relationships with existing buyers through a fantastic shopping experience that includes a smooth faster checkout, product recommendations from the merchants they love and order tracking so buyers can keep up-to-date on delivery status. The Shop App has reached nearly 10 million monthly active users, with thousands of merchants leveraging the built-in features

Getting goods to buyers also means delivering a great post-sale experience through fast and affordable fulfillments. More than half of eligible merchants in the U.S. and Canada adopted Shopify Shipping in our third quarter, up from 45% in the same period last year

We added a record number of (shopify plus) merchants for the second quarter in a row and Shopify Plus merchants use more merchant solutions, including Shopify Payments and Shopify Capital as they scale their businesses. Enterprise brands are realizing that the center of gravity is shifting from digital commerce being an add-on to now being the control center, or as I like to say, their retail operating system for their business.

These large merchants are realizing that having a modern, agile and flexible commerce solution is paramount and that Shopify Plus represents this on multiple fronts, offering multichannel commerce, flexibility and partner integrations, a fast and reliable tech stack and constant innovation. Considering its low-cost of ownership, Shopify Plus is becoming the obvious choice. More notable brands across a variety of verticals launched stores at Shopify Plus in our third quarter, including the following: the global luxury brand, Dior; women’s fashion brand, BCBGMAXAZRIA; motion picture production house, Paramount Pictures; sustainable fashion brand, MATT & NAT; meat alternative food producer, Beyond Meat; nutrition bar company, Clif Bar; multinational telecommunications company, Telefonica; and weight loss brand, Jenny Craig.

As of Q3, more than 37,000 partners referred merchants to Shopify over the past 12 months

The majority of respondents to a recent merchant survey conducted by Shopify anticipate more online than in-store purchasing during this year’s Black Friday Cyber Monday weekend.


Revenue nearly doubled once again in our third quarter to $767.4 million, up 96% over the same period last year, driven by strong performance from both our merchant solutions and subscription solutions segments.
ExponentialDave: 96% yoy growth is obviously great. But what is less great, is that quarter over quarter growth was roughly 7%. This is seasonally very normal for Shopify, in fact in the comparable quarters in 2019 and 2018, they grew 8% and 11%, respectively. This kind of reminds me of how Zoom’s quarter went, in the sense that, quarterly growth was very similar to pre-covid levels.

Subscription solutions revenue increased 48% year over year to $245.3 million, largely due to exceptional growth in monthly recurring revenue.

MRR growth accelerated to 47% year over year to $74.4 million as merchants from both a 90-day free trial offered from March 21 through May 31 and standard 14-day free trial offered from June 1 onwards converted into paying merchants in the quarter, creating a double cohort effect.

While demand remains higher for subscriptions compared to pre-COVID levels, we do not expect a year-on-year MRR growth rate in Q4 to match what we saw in Q3, given the benefit to third-quarter results from this double cohort effect.

Shopify Plus contributed $18.7 million to MRR or 25% compared with 27% of MRR in Q3 of 2019 as the strong growth of standard MRR outstripped that of Shopify Plus, primarily due to the double cohort effect just discussed as Shopify Plus was excluded from the 90-day free trial.

Merchant solutions revenue grew 132% to $522.1 million in Q3 compared to the same period in 2019. This tremendous growth was driven primarily by merchants’ strong sales with GMV increasing 109% year over year to $30.9 billion, and increased adoption of Shopify payments, capital and shipping, driving revenue from these products higher.

$14 billion of GMV was processed on Shopify Payments in Q3, an increase of 124% versus the comparable quarter last year. Payments penetration of GMV was 45% versus 42% in Q3 2019 and up more than 0.5 percentage point over Q2 this year.

Demand for Shopify Capital increased in Q3, with merchants receiving $252.1 million in funding across the U.S., the U.K. and Canada in preparation for the holiday selling season. This record quarter for Capital represents a 79% increase in funding over the third quarter of 2019, while maintaining loss ratios in line with historical periods.

Adjusted gross profit dollars grew 88% over last year’s third quarter to $412.6 million, which reflects the significantly greater mix of Merchant solutions revenue versus last year. The acquisition of Six River Systems in Q4 of last year and our ramp-up of investment in Shopify Fulfillment Network.

Adjusted operating income was $130.9 million in the third quarter, compared to adjusted operating income of $10.5 million in the third quarter of 2019, reflecting our strong revenue performance in the quarter.

Adjusted net income for the quarter was $140.8 million or $1.13 per diluted share compared with adjusted net loss of $33.6 million or $0.29 per diluted share in last year’s third quarter.

Adjusted net income in this year’s third quarter excludes an unrealized gain on an equity investment of $133.2 million or $1.07 per share, stock-based compensation and related payroll taxes of $75.4 million or $0.60 per share and other adjustments totaling $7.5 million or $0.06 per share.

Finally, our cash, cash equivalents and marketable securities balance was $6.1 billion on September 30, strengthened by the capital we raised in our third quarter, which provides us more flexibility to pursue our growth strategies

Our merchant admin, partner admin and theme store are now available in 20 languages.

Retail merchants are increasingly adopting our all-new POS (point of sale) software and tap-and-ship hardware for a seamless omnichannel experience. POS pro features and, in particular, smart inventory management are especially resonating with retail merchants as they face capital constraints due to limitations relating to social distancing measures. Our smart inventory management capabilities enable merchants to effectively create and manage purchase orders, accurately transfer, receive and track inventory across locations and perform demand forecasting, so merchants can proactively stock up with the right products, helping to reduce errors and optimize inventory decision-making.

Turning to our ambition initiatives, first, addressing Shopify Fulfillment Network. We made solid progress in Q3 as we continue to develop the foundation of our fulfillment network software infrastructure, activated more partner nodes in the U.S. added Six River Systems technology and more partner nodes, expanded our set of transportation partners and enhanced the merchant-facing app and merchant-support functions. We continue to enroll merchants and fulfill volumes at a rate where we can maintain high-quality standards.

…Along with increasing labor shortages and rising labor costs associated with the pandemic. As a result, Six River Systems automated fulfillment technology is resonating more than ever, as these businesses seek a flexible, scalable and cost-effective solution.

This translated into Six River Systems’ strongest quarter ever for bookings as new customers signed on and existing customers added to their orders in preparation for the peak holiday shopping season.

What is clear is that the spirit of entrepreneurship is strong and access to entrepreneurship needs to be in the hands of the many, not the few. Shopify remains committed to lowering the barriers to entry to entrepreneurship so that anyone with an idea and a desire is able to reach for their independence.
(exponentialdave: what a clear and well defined mission!)

Analyst Q&A

Harley Finkelstein – President: Yes. Thanks for the question, Ken. A couple of things. First of all, I think the Black Friday Cyber Monday weekend is now becoming an entire season.
So we’re certainly seeing merchants start much faster. We also know that more consumers have already decided to do the majority of their holiday shopping online. And so, obviously, that’s going to provide some good tailwinds to our merchants. In terms of GMV, as Amy mentioned, plus merchants certainly continue to grow their share of GMV.
And we’re (they’re) one of the biggest contributors to GMV in absolute terms. International merchants also maintained their share of GMV and continue to grow quickly year over year. This is mostly coming from apparel, accessories and cosmetics and are sort of the largest ranking categories and verticals for us. That said, with the onset of COVID and the pandemic, we are seeing food beverage and tobacco continue to experience strong growth in Q3 as well. .

Amy shapero: So I want to just highlight that we did have a record quarter in Q3 for merchant growth due to the double cohort effect that I talked about in my opening remarks. But I think it’s really important to emphasize that even excluding the 90-day free trialists who converted in Q3, we still would have seen an acceleration in our merchant growth over pre-COVID levels, which tells you that there are more merchants coming to the platform with this shift to online commerce and COVID.

Analyst: You mentioned 71% increase in new store creation in Q2 and mostly they are on 90-day free trial. So how was the conversion rate from that free trial, considering subscription revenue grew 48%? And how is the new shop creation trend again in this quarter?
Amy Shapero – Chief Financial Officer
Yes. So the new store creation in Q2 or the new stores coming on the platform associated with a 90-day free trial, so we were not able to count them as merchants in Q2. We saw many of them convert to paying merchants in Q3. The conversion rates that we’ve seen on the 90-day free trialists is slightly lower than cohorts historically on 14-day free trials, but we think that’s OK because they’re more intentional when they convert because they’ve had a longer time period.
The data that we have in the three months in some of the earliest 90-day free trial cohorts and converted suggest that those merchants have a higher retention than 14-day free trialists. We know many of them coming online in Q2 were established businesses looking for a multichannel platform. And so we believe that those 90-day free trialists will be more sticky than the 14-day free trialist cohorts historically.

Analyst: Hi. I’m wondering if you could update us on how you’re thinking about the marketing channel, your email product that’s been out there and the partnerships you have and sort of what impact that’s having driving the front end. Obviously, the demand is very strong generally, so may be hard to tell. But just curious how the current environment, and what you’re seeing there may impact your views?
Harley: Thanks for that. It’s Harley here. So a couple of things. On email, as you heard earlier, we’ve now – merchants have now sent out more than $500 million emails in Q3. And we’ve now also – there’s now a monetization model around email. So 500 emails or free and then it’s $1 per 1,000 emails after that…
But finding customers is something that remains a challenge. So anything we can do that further levels of playing field so they can have a single dashboard where they can see where their traffic is coming from, what’s converting better than other traffic sources, and therefore, they can go and invest further in those channels.

Tobi mentioned earlier that retail in itself is not overly complicated, but bringing it all together into that centralized retail operating system, that really is the value of Shopify

So Plus had its second consecutive record quarter of net new merchants in Q3. It wasn’t just upgrades.
It was also a lot of strong new brands are in the platform coming online. In some cases for the very first time, we also continue to see these replatforming from other providers. And they’re coming to us because of flexibility, cost effectiveness of the platform. What seems to be happening is that the world is refactoring off of old legacy systems to modern platforms.