Shopify is leaving the logistics business, announcing Thursday that it would sell the technology and warehouse operations it spent billions to build and buy to San Francisco-based Flexport. The Ottawa-headquartered commerce giant also said it will cut 20 per cent of its workers via the divestiture and layoffs, as its first-quarter results exceeded analyst expectations. Shopify’s stock jumped as much as 29 per cent on the Toronto Stock Exchange after markets opened. Here’s what you need to know:

The order of the day: Flexport will take over Shopify’s logistics division, including its technology and some of its workers. In exchange, Shopify will get a 13 per cent stake in Flexport and the right to name a director to its board. Shopify, which had previously invested in Flexport, said it will now have a total stake in the high teens. Neither company disclosed the financial terms of the deal, which they expect to close in the second quarter. Flexport was last publicly valued at US$8 billion in February 2022, when it raised US$935 million from investors.

It’s a significant strategic shift for Shopify, which has spent big in the last few years assembling a real-world fulfillment network for its merchants. 

“Building logistics infrastructure is a side quest every e-commerce entrepreneur is eventually pulled into,” Shopify CEO Tobi Lütke wrote in a memo to staff that the firm also published Thursday. 

In June 2019, Shopify announced it would embark on that mission on its merchants’ behalf. The Shopify Fulfillment Network (SFN) would team the company’s software for stock and distribution with a network of third-party warehouses across the U.S. Analysts projected it would grow the firm’s market opportunity and boost its take rate, the cut of its clients’ orders that Shopify collects. But they also warned that fulfillment was a lower-margin business than selling software subscriptions and add-on services.

In February 2022, the firm revised its approach to SFN, switching to fewer, larger-capacity warehouses it planned to operate itself. Shopify budgeted US$1 billion for capital expenditures in 2023 and 2024.

In addition to leases, equipment and staff, Shopify has spent heavily to acquire technology for its logistics play. In September 2019, it bought Waltham, Mass.-based 6 River Systems, a maker of warehouse robots, for US$450 million. 

In May 2022, Shopify announced by far its biggest acquisition to date, taking over San Francisco-based Deliverr in a US$2.1-billion deal. The move “accelerates what we’ve been planning to do with this end-to-end logistics network—it gets there faster,” Shopify president Harley Finkelstein said at the time.

But a year later, Shopify is breaking up the business. 6 River is being sold to Hatfield, U.K.-based Ocado, a firm that runs automated warehouses for grocers like Sobeys. Deliverr and the rest of Shopify’s fulfillment arm will go to Flexport, which will become the commerce platform’s designated logistics partner.

“When we can build something better than anyone else, we do it,” Finkelstein said on an earnings call Thursday. “But when there’s a partner that we can deeply integrate with that can get us further faster, and more efficiently, we will do that, too.” 

He cited Shopify’s past tie-ups with Stripe for payment processing, Affirm for buy now, pay later, and Global-e for cross-border sale services. In each of those instances, the company has white-labelled the other firm’s technology, but continued to let merchants use services from competing firms via its app store. Under the deal announced Thursday, Flexport will become the default package handler for Shop Promise, a program via which merchants using Deliverr can offer three-to-five-day delivery. 

The sale is a significant change in Shopify’s growth strategy and a surprising one, said Ken Wong, a managing director at investment bank Oppenheimer. Shopify only acquired Deliverr a year ago, “so I think most assumed that they would give it a little time to digest before taking such a sharp reverse course,” he said. When Shopify unveiled SFN in mid-2019 it included a five-year roadmap for the fulfillment network. Analysts expected it would see through that five-year plan, “and then if they needed to re-evaluate, then they would do it at that time.”

Wong points to the broader market to determine what may have caused the change in course. “Investors are no longer rewarding growth,” he said. Shopify management likely recognized it would take a long time to execute its plans and knew long-term investments aren’t a market favourite at the moment, he said.

It’s also likely Shopify “wanted to return to their roots,” Wong said, as Finkelstein indicated. “Logistics was perhaps one step too far removed from their core competency.”

Analysts may debate whether Shopify extracted enough value from the deal, which Wong estimates is likely under US$1 billion. But the sale removes “one overhang from the stock narrative,” he said, as some viewed the logistics business as a distraction for management and a margin-diluter. 

The top (and bottom) line: Also on Thursday, Shopify reported just under US$1.51 billion in revenue in the first quarter, up 25.2 per cent year over year. That beat analysts’ consensus estimate of US$1.43 billion, as compiled by FactSet. The firm also exceeded earnings expectations, posting net income of five cents per share.

In addition to the staff moving to Flexport, Shopify is making layoffs. Lütke wrote that the overall impact will leave the firm “smaller by about 20 per cent.” He said Shopify is offering laid-off workers a minimum of 16 weeks of severance pay and will maintain their medical benefits through that period.

(Lütke missed the earnings call; Finkelstein said he’d “insisted on focusing his time and attention on our team.”)

Shopify ended last year with 11,600 employees and contractors, per its annual report. The layoffs will affect workers across the company’s teams and divisions, said spokesperson Alex Lyons. 

Aaron Brown, named CEO of Shopify Logistics last May, is also departing; the former BlackBerry executive had previously led Shopify’s international-expansion and platform-building efforts, after joining from Amazon in August 2017.

Wong attributed the layoffs to “an aim to be more balanced from a growth perspective,” and said they fit with the company’s decision to refocus and narrow its scope. Many tech firms have done multiple rounds of layoffs, he added; typically, the first is a reaction to over-hiring and the second is a recalibration of the business’s priorities. Shopify’s first major round of layoffs came in July 2022, when it let go of about 10 per cent of staff.

What’s next: In his memo, Lütke framed the sale and layoffs as moves that get Shopify back to its main mission of evangelizing and enabling commerce. And he pointed to a shiny bit of kit that the firm is packing: “Shopify has the privilege of being amongst the companies with the best chances of using AI to help our customers,” he said, noting that it makes “a co-pilot for entrepreneurship” possible.  

The company’s Capital service has long used algorithms to determine the size of its cash-advance offers to merchants. But in recent months, Shopify has rolled out AI closer to its merchants’ shoppers. In February, it launched Magic, a tool that auto-writes product descriptions. The following month, it added a chatbot assistant to its consumer-facing Shop App, built off the technology of San Francisco-based OpenAI.

Shopify expects to maintain its first-quarter growth rate in the second quarter, with expenses dropping after accounting for severance charges and sale costs. And it projected cash-flow profitability through the rest of the year.  The financial guidance was much better than expected. “There’s a very clear sign that we’re now at break-even or better.”