Shopify Inc.’s SHOP-T shares leapt 21 per cent on the Toronto Stock Exchange after the company reported third-quarter earnings that topped analysts’ forecasts and projected better-than-expected results for the year’s final three months, the busiest shopping season.
The Ottawa-based company, which provides e-commerce tools for businesses and is used in 175 countries, generated US$2.16-billion in revenue in its third quarter, up 26 per cent from last year and exceeding analyst consensus estimates for the seventh quarter in a row. Net income, excluding the impact of equity investments, nearly doubled to US$344-million, up from US$173-million, Shopify announced Tuesday.
The company is on a roll, with a recent string of strong quarters that contrast with an earlier period of uneven results and strategic setbacks.
Last December, Shopify told investors that it had made extensive changes to its business to regain momentum. On top of the steps it had already taken, including selling its logistics division and sharply reducing head count, the company said it would flatten its organizational structure and management style, capitalize on artificial intelligence and focus on new markets: international, enterprise and point-of-sale businesses.
The company’s plans appear to be working, despite a fluctuating broader economy that has seen tepid discretionary spending, according to research by the Royal Bank of Canada.
Shopify seems to be outpacing investor expectations on their ability to take more share of all three segments, said Scotiabank analyst Kevin Krishnaratne in an e-mail. It’s still “early for monetization” in these areas, he said, “suggesting more upside to come.”
At the same time, he said, the company has shown it can efficiently leverage data and AI for the purposes of both research and development, and in sales and marketing – another key behind recent growth, which the company expects to continue in the current quarter.
Profitability was also “firmly” ahead of expectations, said National Bank of Canada analyst Richard Tse, reflecting the commitment made last year to use capital with discipline.
Meanwhile, the company generated substantial liquidity with US$421-million in free cash flow, up from US$276-million last year.
For its fourth quarter, Shopify is expecting revenue growth in the mid- to high- 20-per-cent range. And the company’s forecast for double-digit free cash flow margin would mark the sixth quarter in a row at that level, according to Martin Toner, analyst at ATB Capital Markets. FCF margin is a metric of free cash flow as a percentage of revenue, and a measure of how efficiently the company turns sales into cash to spend on expanding.
“The Q3 results and guidance should give investors confidence that Shopify’s growth story is intact,” said Mr. Toner, calling the company’s revenue, free cash flow and guidance “impressive.”
Shares of Shopify on Tuesday closed at $152.26 on the TSX, up $26.89. That’s on top of a 15-per-cent share price gain in the five days leading up to the earnings, reflecting hopes the company was once again reaching the momentum that propelled it to pandemic highs.
In a Tuesday morning call with analysts, chief financial officer Jeff Hoffmeister said revenue was boosted by larger-than-expected gross merchandise value (GMV), or the value of the sales made by merchants over the company’s various platforms. Third quarter GMV rose 24 per cent to US$69.7-billion, up from US$56-billion last year and beating analyst consensus by US$2-billion.
When asked if the company expects any headwinds following a new U.S. administration, Mr. Hoffmeister said the company did not hear anything in president-elect Donald Trump’s campaign that would “impact the overall state of new business formation and entrepreneurship.”
The fourth quarter is typically a busy one for the company, given the high volume of sales during Black Friday, Cyber Monday and over the holidays.
The company’s revenue was also helped by growth from subscriptions revenue and the number of merchants on the platform. Monthly recurring revenue, which the company earns from subscriptions and contracts, was up 28 per cent, meeting analyst expectations, according to RBC analyst Paul Treiber.
Shopify president Harley Finkelstein told analysts the company’s merchants benefited from new AI tools that helped merchants find new audiences and automate customer service, as well as the company’s rollout of tax-filing tools. This quarter, the company rolled out new financial tools for merchants, including trials of new loan structures in the U.S.
When asked by an analyst how the company was preparing for changes to online shopping behaviour, given the rise of commerce through social media, Mr. Finkelstein said the company was ready to meet customers where they are, referencing e-commerce partnerships with YouTube, TikTok, Instagram and Spotify.
The company’s operating expenses were US$835-million, up 7 per cent from last year, driven by higher employee compensation, and higher marketing spend than last year, although the company said it spent less on advertising than initially expected. Mr. Hoffmeister said the company was maintaining a flat head count and “discipline” in its internal systems to keep costs down.