OTTAWA — Shopify’s pandemic growth spurt is at an end, the commerce company warned Wednesday as it reported US$1.38 billion in revenue for the fourth quarter. But the Ottawa-headquartered firm is chugging forward with an expanded set of services designed to help merchants manage more parts of their business—and to keep them on its platform.

Here’s a breakdown of the storylines that matter in Shopify’s fourth-quarter and full-year earnings:

In the market: ​​Despite exceeding analysts’ expectations, Shopify’s shares were down nearly 18 per cent in early Wednesday trading on the New York Stock Exchange, continuing a fall from November 2021 highs. The firm posted adjusted net income of US$172.8 million, or US$1.36 per diluted share, beating the consensus estimate of US$1.21, as compiled by FactSet. But its expanding portfolio of equity stakes in other commerce-enabling companies dragged down overall profitability.

The key number: Shopify’s merchant-solutions business was up 47 per cent year over year, bringing in nearly US$1.03 billion between October and December 2021—its first 10-figure quarter, accounting for nearly three-quarters of the firm’s total revenue. It earns that revenue by charging fees for extra services like payment processing, fulfillment and banking and its cut of third-party developers’ sales through its app store.

Why it matters: These add-ons to the core software that Shopify offers merchants are its business. Its merchant solutions revenue is closely tied to its clients’ sales; gross merchandise volume, a collective measure of transactions via the platform, was US$54.1 billion in the fourth quarter, up 31 per cent year over year. The cut it takes of sales is slowly increasing as it rolls out new services like small-business banking, installment payments for shoppers and fulfillment. 

Payment processing via Stripe brings in much of the cash, but Shopify reported promising growth for other offerings last year. The firm’s Capital arm made US$323.7 million in loans and merchant cash advances in the fourth quarter, up 43 per cent year over year. And Shop Pay Installments—a buy-now, pay-later (BNPL) service launched in the U.S. in June 2021—overtook all third-party providers for market share among Shopify merchants, president Harley Finkelstein said on Wednesday’s earnings call. 

Shopify’s array of merchant-solutions tools also informs its portfolio of investments. Its equity stakes have buoyed its profits in past quarters, as the value rose of shares Shopify owns in partners whose tech it whitelabels, like Affirm, the San Francisco-based BNPL provider that underlies Shop Pay Installments. That bet turned on Shopify in the fourth quarter, amid routs of BNPL stocks specifically, and tech more broadly. The company’s net loss of US$371.3 million for the period included a US$509.7-million net unrealized loss on equity and other investments. But that’s unlikely to deter Shopify’s dealmaking, which last year included participating in VC rounds for private companies that offer services to its merchants like Swyft and Yotpo, as well as an expanded stake in Stripe.

Seeking fulfillment: Shopify signalled it won’t start counting its profits anytime soon. “The road in front of us is teeming with opportunities that we must act on now to add more momentum to our flywheel,” said CFO Amy Shapero on an earnings call Wednesday. 

Most eagerly awaited was an update on the Shopify Fulfillment Network (SFN), which the firm first announced in June 2019. Its stock tumbled last month on reports it was cancelling contracts with some third-party logistics providers and reducing the fulfillment features it offers. On Wednesday, the company said it is bringing more of the work in-house. “We are shifting the network model to larger capacity hubs, and we want to operate more of them ourselves for things like better control [of] quality, but also cost,” said Finkelstein. 

Shopify had originally set an SFN budget of US$1 billion over five years. By the end of last year, about the halfway mark, it had spent US$170 million, mostly on subsidizing the cost of the service for merchants. But the figures won’t stay that low much longer. The firm is projecting US$1 billion in capital expenditures across 2023 and 2024 “for self-operated, leased warehouse hubs in key U.S. geographies,” Shapero said. That should allow SFN to offer more merchants an Amazon-matching one-day delivery time and easy handling of order returns.

Any new business?: Shopify also plans to keep connecting its platform to more places on the internet that can act as storefronts for its merchants. It expanded links to Spotify and TikTok last year, and on Wednesday’s call, Finkelstein cited the growing challenge for retailers to find new shoppers “as customer-acquisition costs rise and new privacy restrictions reduce the efficacy of advertising.”  

And Shopify is continuing to look abroad for growth. Last year, the firm’s U.S.-derived revenue dipped below two-thirds of its total for the first time since the firm went public, at US$2.9 billion, a 52 per cent year-over-year increase. While the company now issues its press releases from “Internet, Everywhere” rather than a specific geographic location, its effective home market of Canada came good last year, bringing in nearly US$316.7 million, up 64 per cent. Shopify’s less explored regions delivered more growth. The firm made US$799.6 million in Europe, the Middle East and Africa, up 76 per cent, and US$467 million from the Asia-Pacific area, up 59.8 per cent. Those boosts came as it rolled out its updated point-of-sale terminal in Australia, Germany and other overseas markets, and took its shipping-label service to the U.K. 

Shopify said Wednesday it will continue adapting its offering to local markets. “Since the dawn of humankind, the greatest hurdles and opportunities for commerce have come down to geography,” said Finkelstein, who tends to take a sweeping view of the act of buying and selling stuff.

The human factor: Shopify closed the year with more than 10,000 employees and contractors on its payroll, an increase of more than a third from the 7,000-plus at the end of 2020. It plans to keep recruiting, with a goal of hiring more engineers this year than last, when its target was 2,021 new technical staff. “Planet Earth has not made enough engineers to deal with the rapid digitalization that we’ve gone through with COVID and so on,” CEO Tobi Lütke observed on the earnings call. 

Both salary and stock are significant components of hiring, “and Shopify is amongst the best-paying companies in the world,” he said. But he also touted more intangible attractions, like personal growth for developers and designers. “The product has been super well established,” said Lütke, who retook control of that area in September 2020. “There’s me playing a very active role and teaching what I’ve learned over the last 17 years.”

Next up: Shopify said it expects revenue growth in 2022 will be lower than the 57 per cent it saw last year, as the pandemic online-shopping boom slows.