Shopify (SHOP +2.12%), the fast growing e-commerce platform, released earnings on May 2. Since its initial public offering, the company has put together a string of eight great quarters in a row and the stock is up over 250%, handily beating the S&P 500:
In my earnings preview article on April 30, I listed five metrics to watch for when Shopify reported first-quarter earnings.
Spoiler alert: The company hit on 5 out of 5. Shopify is attracting new merchants, and those merchants are both paying more to use the platform and selling more product. The company is on track to have a profitable quarter on a non-GAAP (generally accepted accounting principles) basis. And management continues to invest to improve the platform. Here are the details.
Shopify's new credit card chip and swipe reader for in-person transactions. Image source: Shopify.
1. Shopify is attracting new merchants
Shopify continues to be a great place for entrepreneurs to build an e-commerce business, as management indicated the company added a "record" number of merchants last quarter. While it didn't announce the actual number of merchants this quarter in the press release or on its earnings call, it did update its press page on May 2, indicating 400,000+ merchants.
Data source: Shopify earnings reports. Chart by author.
I reached out to Shopify's investor relations department to find out why the number wasn't discussed. The reason is that the number was considered a "milestone" reached at some point in the quarter, and viewed as less important than monthly recurring revenue. While my calculation on the year-over-year "milestone" merchants may not be exact, growth of around 45% is still quite healthy.
2. More merchants are selling more products
One of the most telling metrics for Shopify is how successful its merchants are on the platform; the company reports this quarterly as gross merchandise volume (GMV). Not only has overall GMV been growing, but the GMV per merchant is growing as well. In the chart below, you can see that on average merchants sold $12,000 worth of products in the first quarter of 2017, a 23% gain from the prior year.
Data source: Shopify earnings reports. Chart by author.
Once merchants get up and running on the Shopify platform, the switching costs to move to another platform are significant. Shopify is focused on the success of its merchants, and this is a great way to measure that. I would go so far as to say that Shopify is obsessed with its customers, just like the e-commerce giant Amazon. The fact that merchants on average are selling more is proof that the platform works, and works well for its customers.
3. Merchants are paying more to use the platform
Shopify has a range of monthly subscription fees, ranging from the Shopify Lite subscription for nine dollars per month up to Shopify Plus for "enterprise-grade solutions for high volume merchants, and large businesses," starting at $2,000 per month. As merchants move up in subscription costs and capabilities, the company gets more monthly revenue per merchant. This trend has been fairly flat for the last couple of years, but with recent growth in the Shopify Plus program, the number has seen a slight uptick in the most recent quarter:
Data source: Shopify earnings reports. Chart by author.
Management indicated that the Shopify Plus program now makes up 17% of monthly recurring revenue, or $3.5 million, up from 11% the prior year. The success Shopify has with enterprise customers shows the platform is robust, and is able to handle a wide variety of customers both large and small. This should be exciting for investors, as e-commerce still only makes up 8.5% of U.S. retail spend, so Shopify has a long runway of growth ahead.
4. Getting closer to (non-GAAP) profitability
Shopify has indicated on the previous two earnings calls that the company would show a non-GAAP profit in the fourth quarter of this year. While management didn't confirm the company was on track, the results show that it is close. Shopify reported $4.3 million operating loss this quarter, which represented negative 3% of revenue. Management also gave guidance for its second-quarter and full-year operating loss:
| Q1 2017 Actual | Q2 2017 Guidance | Full-Year 2017 Guidance | |
|---|---|---|---|
| Operating loss | ($4.3 million) | ($6 million) to ($8 million) | ($14 million) to ($18 million) |
Doing some subtraction on the guidance numbers, the third-quarter loss could be as much as $7.7 million and still give room for a fourth-quarter profit. This is well within range of what the company has shown to be possible. Last year's fourth-quarter loss was less than $1 million, so a fourth-quarter profit should be an easy layup for Shopify.
5. Investing in the long-term success of the platform
In my earnings preview, I said I wanted management to discuss progress on improvements to Shopify's platform. I was not disappointed, as they brought up three substantial improvements that are now available or will soon be available:
- A point-of-sale card reader: a hardware product that allows merchants to take a physical credit card as payment in an in-person transaction.
- Shopify Pay: speeds up the checkout process by allowing customers to save checkout information for any Shopify Pay-enabled selling channel.
- Wholesale channel for Shopify Plus: gives merchants the ability to offer a separate view for commercial buyers to buy in bulk from a current Shopify storefront.
These improvements show that the company is committed to its merchants for the long term. This long-term mind-set enhances customer loyalty, and will keep entrepreneurs on the Shopify platform as they grow their businesses.
CEO Tobi Lutke closed the earnings call with the statement that the company "is firing on all cylinders, and the financial results are really good." I couldn't have said it any better.
