Shopify Inc. SHOP-T posted double-digit revenue growth for its first fiscal quarter but shares sank nearly 19 per cent Wednesday on the company’s lower-than-expected estimates for revenue and margins in the next quarter.
Shopify forecasted revenue growth in the high teens for the next quarter, in comparison with growth in the mid-20s for the past four quarters. The company also expects its gross profit margin to fall by 50 basis points and operating expenses to rise slightly, partly because of higher spending on marketing.
The margin drop and deceleration in revenue growth caught investors off guard, as they were expecting price increases for Shopify e-commerce services to help buoy strong growth this year.
Jeff Hoffmeister, Shopify’s chief financial officer, told analysts Wednesday morning that while the spinoff of its logistics business helped to boost the company’s margins over the past year, the growth in its lower-margin payment business is contributing to a slimmer overall margin in the short term.
Charlie Miner, analyst at equity research firm Third Bridge, said in an e-mail the lower margin forecast is “a major concern for a company that came into earnings with one of the weakest gross margin profile among any company in its valuation range.”
Regarding the revenue outlook, Mr. Hoffmeister said the company will also benefit less in the second quarter from the impact of pricing changes to its subscription plans for e-commerce businesses than it did in the first quarter. The company increased the cost of its standard plan by one-third more than a year ago, so that boost to revenue compared with year-earlier quarters has now run out.
Earlier this year, Shopify also raised prices by one-quarter for its Plus plan for larger customers with more complex needs, but gave users the option to maintain their existing prices by committing to a three-year contract, which many chose to do. Consequently, the gains from that price hike will be modest in the second quarter, Mr. Hoffmeister said.
“Given the fact that the majority of the Plus merchants have opted into three-year contracts, I don’t think it will have as big of an impact as Standard did for us last year,” he said.
The e-commerce software company, which reports in U.S. dollars, had a net loss of US$273-million in the quarter, largely accountable to the fluctuating value of its equity holdings in three other companies. Shopify has a combined stake of more than US$2-billion in Global-E Online Ltd., Affirm Holdings, Inc and Klaviyo, Inc., all of whose share prices slid over the past quarter, ended March 31.
Factoring out net losses of US$373-million from those equity investments, along with other expenses, Shopify said it had adjusted net income of US$256-million for the quarter, compared with US$12-million last year.
The company’s revenue slightly beat analyst consensus, climbing 23 per cent to US$1.9-billion, or 29 per cent when adjusting for the impact of the 2023 sale of its logistics business to Flexport. Gross merchandise volume, the value of the sales made over Shopify’s platform, was also up by 23 per cent.
“We see consumer spend in North America remaining resilient and we have factored in headwinds related to foreign exchange from the strong U.S. dollar, and some softness in European consumer spending in our Q2 outlook,” Mr. Hoffmeister said. “We otherwise assume that the macroeconomic environment remains consistent with current conditions.”
Shopify’s stock plunge Wednesday is another example of how frothy expectations are causing companies’ share prices to plummet if their forecasts fall even modestly short of expectations. The TSX price drop Wednesday represents the largest one-day decline in the company’s history.
“Given the robust valuation, expectations were high going into results – particularly for their [second-quarter] outlook,” said National Bank of Canada analyst Richard Tse in an e-mail, adding the preresults valuation left “little leeway for any blemishes.”
In a note to investors Wednesday afternoon, Mr. Tse called the company’s focus in its enterprise segment “an important growth driver,” with monthly recurring revenue from its Plus plans up 23 per cent over last year.
“We see the push to service larger merchants as an important growth driver with a relatively stronger customer lifetime value to customer acquisition cost ratio,” he said.
In order to reach new clients, Shopify has been increasing its marketing spend, which has caused some hesitation among analysts and investors in past quarters. In this quarter, the company spent 25 per cent more on marketing compared with last year.
Shopify president Harley Finkelstein defended the added ad costs, telling analysts Wednesday they were paying off. Since rolling out more efficient marketing strategy with “tighter payback guardrails” 18 months ago, he said, the company’s customer acquisition cost has improved by 60 per cent.
“We intend to continue spending when market opportunities are within an average 18-month payback period,” he said.
Subscription software companies are typically considered top of class if they achieve the “rule of 40″ – a combined revenue growth rate plus operating profit margin equal to or higher than 40. Factoring out the logistics sale, Shopify met that rule this quarter, with adjusted operating income of 14 per cent of revenue and 29 per cent adjusted revenue growth.
With a report from David Milstead
Irene Galea