Shopify surprised the market by losing less money than expected in Q3 although the Canadian eCommerce platform still has work ahead if it is to convince investors that it can turn topline growth into cash.
Shopify’s software is used by over 1m merchants spread across 175 countries. Gross merchandise volume grew 11% in Q3 to $46.2bn. Of this figure, Shopify Payments processed 54% or $25bn. Shopify is a payment facilitator for Stripe and is steadily squeezing out 3rd party processors. Its success underlines the need for merchant acquirers to secure their own ISV distribution as Shopify merchants are increasingly off limits.
Total revenue from all products grew 22% in Q3 to $1.37bn. Shopify reports two segments, Subscriptions and Merchant Solutions. Merchant Solutions (which includes Shopify Payments) was up 26% to $990m “driven by GMV growth and by merchants utilizing our solutions to run greater parts of their business in this inflationary environment.”
Cost of sales outpaced revenue growth and was up 37%. This slowed gross profit growth to just 9%. Merchant Solutions reported “lower margins in Shopify Payments due to merchant and card mix shifts and industry-wide network cost increases,” according to Amy Shapero, the outgoing CFO. This sounds like Shopify has been unable to pass on increases in scheme fees to merchants. Also, its fixed price model is vulnerable to increased usage of higher cost cards.
Operational expenses, notably R&D and general administration, grew 64% to $1bn, consuming a chunky 74% of Q3 revenue. Shopify has a new CFO who is likely to be looking carefully at cost control in 2023.
Loss from operations $345m compared to a deficit of just $4m in the same quarter of 2021.
Shopify was first to report signs of a reversal in the Covid eCommerce boom and has been keen to reassure on its omnichannel credentials. This should help it capture some value from the rebound in store-based shopping.
The nascent POS business grew GPV 35%. Harley Finkelstein, CEO, explained that “over half of the rapid adoption of point-of-sale is being driven by new SMB retailers coming to Shopify to get their start as a new omnichannel business. Additionally, over 1/3 are from established offline retailers who are entirely new to e-commerce or selling only on point of sale.”
POS Go – an mPOS device running Shopify software – “has seen enthusiastic adoption among new and existing merchants with strong performance right out of the gates.”
The addition of POS capability has helped Shopify attract larger merchants that trade across multiple channels. Finkelstein spoke about “8 new merchants with over 20 locations each and 1 with over 175 locations” including “including department store, Schoffields; and designer apparel, Totima.” The push to enterprise is backed by new heavyweight SI partnerships with KMPG and EY. The latter promises to train 500 consultants in Shopify implementations which should begin to worry the established enterprise players such as Oracle and Salesforce.