Shopify reported US$977.7 million in revenue in the fourth quarter of 2020, a 94 per cent boost year over year, goosed by a record holiday shopping season as well as retailers and consumers’ pandemic-induced shift online.
The Ottawa-based firm exceeded analyst expectations with Wednesday’s earnings, with adjusted net income per share of $1.58, compared to the $1.28 consensus estimate compiled by FactSet. But the stock dropped in early trading Wednesday, after the company declined to provide forecasts for this year. It instead said it would increase spending on engineering hiring and international uptake, suggesting a strategy for continued growth beyond this last pandemic-driven year.
Here’s a breakdown of the metrics that matter in Wednesday’s earnings:
Talking Point
Shopify posted revenues of US$2.9 billion in 2020, as the pandemic pushed retailers to sell and consumers to shop online. Markets outside the core of the U.S., Canada, U.K., and Australia accounted for an increasing share of the Ottawa-based firm’s business last year, a contribution that’s likely to grow as the company invests in sales and marketing and rolls out popular features in new countries.
The big number: Shopify made US$1.95 billion from merchants based in the U.S., and another US$192.7 million from Canadian users last year—66.7 per cent and 6.6 per cent, respectively, of nearly US$2.93 billion in total. That’s down 1.2 percentage points from a collective 74.5 per cent in 2019, as markets outside its core of North America, the U.K. and Australia grew as a share of the business. Shopify broke out its international revenue regionally for the first time in Wednesday’s results. It grew most in Europe, the Middle East and Africa (minus the U.K.), up in those markets 110 per cent year over year to just over US$254 million, while Asia-Pacific markets excluding Australia grew nearly 92 per cent to US$170.2 million.
Why it matters: International growth is all the more significant because Shopify has fewer ways to earn from its overseas users. The Canadian firm made just over two-thirds of its revenues by charging store owners fees to use merchant solutions like payment processing, shipping, and fulfillment. Shopify typically debuts new products and services in its largest market, the U.S., then gradually opens up access to merchants in other countries. For example, only U.S. merchants can currently offer buyers the option of checking out on Facebook and Instagram through Shop Pay, its consumer-facing payment and order-tracking service. Similarly, it launched a cash-advance feature in April 2016 in the U.S., expanding it to the U.K. and Canada in March and April 2020, respectively. And Shopify Payments, processing fees for which account for the bulk of its merchant-solutions business, is now available in 17 countries, up from 13 in mid-2019. The company often localizes its features for new markets, such as launching regionally popular transaction methods like direct debit and bank transfers in Europe. As Shopify starts to advertise itself more aggressively and roll out these money-spinning features in other markets, the international share of its revenues should grow, both by adding new merchants and selling them more services.
What they said: Last year “demonstrated just how big our addressable market is,” said CFO Amy Shapero on Wednesday’s earnings call, citing the relatively faster growth of international users’ gross merchandise volume (GMV), a measure of the value of goods and services that Shopify merchants sell through the platform, including shipping and taxes. In 2021, the company will “localize our solutions in countries where we have established a foothold and increase investments in sales and marketing to bring Shopify to more merchants around the globe,” Shapero said. The company still plans to pick its spots—president Harley Finkelstein said it will focus on countries where its product is already finding traction, including by hiring local sales teams. He didn’t specify what those markets would be.
A note of caution: The company warned that 2021 won’t be quite as spectacular as last year, when “the unprecedented acceleration of e-commerce by COVID” pushed new merchants to sign up for the platform and drove GMV increases. “Some consumer spending will likely rotate back to offline retail and services, and the ongoing shift to e-commerce—which accelerated in 2020—will likely resume a more normalized pace of growth,” Shapero said on the call.
Also noteworthy: Shopify hired more than 2,000 people in 2020, and plans to add at least that many again this year in just its engineering operation.
What’s next: Shopify declined to provide numerical guidance on where it expects revenues and earnings to land this year. Instead, it mapped out broad trends. The growth rates of its merchant-solutions and software-subscriptions business lines are likely to converge, after the former exceeded the latter by at least 15 percentage points in nine of the last 10 quarters. And the last quarter’s revenue will likely be the largest and the first the smallest, another longstanding trend.
How the market reacted: The stock was down more than seven per cent in early trading Wednesday. The lack of investor guidance is likely to “weigh on investor sentiment,” Eight Capital analyst Suthan Sukumar wrote in a note Wednesday.
