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Shopify tops consensus forecasts for 17th consecutive quarter

 Shopify will begin developing, producing and financing projects for both streaming platforms and traditional networks.
Shopify will begin developing, producing and financing projects for both streaming platforms and traditional networks.

Ottawa’s e-commerce technology giant Shopify announced Tuesday it had exceeded third-quarter revenue forecasts by a significant margin while operating losses were smaller than expected.

It’s the 17th consecutive quarter in which Shopify has beat consensus estimates for revenues.

Revenues came in at $390.6 million (all figures U.S.) for the quarter ended Sept. 30, up 45 per cent year over year. The consensus forecast by independent analysts had called for a tally of $384 million. Shopify had led them to expect it would be in the range of $377 million to $382 million.

The company also upped its revenue forecast for the year. Shopify now expects revenues in the range of $1.545 billion to $1.555 billion compared to the previous guidance of $1.51 billion to $1.53 billion.

“More than a million merchants are now building their businesses on Shopify , ” said CEO and co-founder Tobi Lütke, “This is kind of blowing my mind right now,” he added during a Tuesday morning conference call.

Typical of companies pursuing rapid growth, Shopify continues to post significant losses, which was a factor in the weakness of company share values, which tumbled 3.2 per cent Tuesday on the TSX to close at C$409.36.

Shopify’s operating loss in the third quarter was $35.7 million. The company had previously suggested it would be in the range of $44 million to $47 million. Even with the improvement, however, the second quarter loss was wider than the $31.4-million operating loss registered in the same quarter of 2018.

Shopify said Thursday it expected the bleeding to continue, reflecting the company’s wide-ranging strategy of investing in new applications, products and markets, especially overseas.

Shopify makes its money by charging online merchants a monthly fee for its dashboard technology. It also earns revenue by helping merchants with various aspects of running an online business, including payments, shipping and financing and analytics.

Two months ago, the company announced it would invest $1 billion over five or so years in a new fulfilment network — staging areas that will allow Shopify to store and ship products on behalf of smaller businesses that want to offer their customers two-day delivery.

Shopify’s chief financial officer Amy Shapero said in July there’s been “an incredible amount of interest” in the network, prompting Shopify to accelerate its investment in this area.

Accordingly, Shopify revised its spending forecast Tuesday, indicating it now expected its operating loss for the year to be in the range of $158 million to $168 million , up significantly from its previous guidance of $145 million to $155 million.

Another factor in driving up losses has been the superlative performance of Shopify’s shares, at least until last August. The company’s compensation costs are rising as employees exercise their stock options at ever-higher prices. It closed at $414.58 per share Friday on the TSX and $317.45 per share on the New York Stock Exchange.

Shopify’s detailed financial filings Thursday revealed the company recorded $123.4 in stock-based compensation costs in the first nine months of 2019, up from $74.3 million during the same period last year.

The company now forecasts stock-based compensation will reach $180 million for the year compared to the earlier estimate of $175 million.

Stock options, which vest over three years, are considered crucial for enticing talent. CEO Tobi Lütke told analysts that while hiring engineers has been difficult, Shopify is better placed than many software companies. “People are moving from all parts of the world for jobs at Shopify,” he said in July. The company employs more than 4,000 globally, with about one-quarter of the workforce based in the Ottawa headquarters.

It’s largely because Shopify has managed hypergrowth so smoothly that investors have been willing to accept what for normal companies would be stratospheric share values. Shopify’s market value last Friday $36 billion, or roughly 18 times forecast revenues for 2020.

Even if Shopify continues to manage its growth flawlessly, it faces a separate danger that is market-wide. An increasingly large percentage of the company’s revenues depends on how well Shopify’s customers are actually doing, on how much they pay for applications such as shipping, point-of-sale technology and business analysis. This is in contrast with Shopify’s base revenue stream, generated by charging monthly subscription fees for the e-commerce platform.

In an economic recession, the merchant-based fees would likely weaken, perhaps considerably, while the subscription fees would be steadier.

In the third quarter, Shopify generated nearly 57.6 per cent of its total revenues from merchant fees (up from 55.4 per cent a year earlier), and just 42.4 per cent from subscription fees.

The trend is significant because Shopify’s gross profit margins on its merchant-related business are less than 40 per cent of revenues, compared to more than 80 per cent for subscriptions. Which means the fastest-growing parts of the company are the least profitable.

For the moment, that doesn’t really matter because even the slowest growing pieces of the business are growing rapidly. Shopify is also preparing itself for any future storm by raising plenty of cash through share sales.

Shopify finished the third-quarter with $2.67 billion in its coffers, up sharply from roughly $2 billion at year-end 2018.


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