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Shopify’s global expansion efforts pay off as overseas markets boost revenue growth

Shopify CEO Tobi Lütke speaks during a technology conference in New York in October 2019.
Shopify CEO Tobi Lütke speaks during a technology conference in New York in October 2019. Cate Dingley/Bloomberg via Getty Images
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For the first time since it went public nearly five years ago, Shopify did more than a quarter of its annual business outside the U.S. and Canada. The Ottawa-based e-commerce company has made a concerted effort to expand its international merchant base, a strategy that appears to be paying off even as it works to drive domestic revenue with a focus on fulfillment. 

The Canadian e-commerce company reported 2019 revenue of US$1.58 billion on Wednesday, up 47 per cent year-over-year. Its annual report also showed continued growth outside North America, with newer markets making up a growing share of its international business. 

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Talking Point

Shopify’s business outside North America contributed 25.5 per cent of its US$1.58 billion in revenue in 2019, crossing the quarter mark for the first time since the e-commerce firm went public nearly five years ago. The company is growing particularly rapidly outside its four core countries, as it localizes its products and services and adds on-the-ground staff in new markets. Shopify’s stock rose nearly eight per cent in Wednesday trading after its 2019 fourth-quarter financials and 2020 forecast beat analysts’ estimates.

Shopify’s stock was up almost eight per cent at close Wednesday on the New York Stock Exchange after both its fourth-quarter results and 2020 revenue forecast beat analysts’ estimates, and it reported its first-ever quarterly net profit, at $0.01 per share. “This past year has proven out the massive opportunities still available outside our core geographies,” CFO Amy Shapero said on the company’s conference call. “The good news is that we are still in the early stages of problem-solving for international merchants, with true product market fit in focused international regions yet to come.”

Ottawa-based Shopify has historically made two-thirds or more of its revenue from U.S.-based merchants, whose subscriptions and transaction fees brought in US$1.08 billion in 2019.   

But the company’s latest financial results suggest its international bets are starting to pay off. Markets other than its four core—the U.S., Canada, U.K. and Australia—made up 14.6 per cent of revenues last year, up from 12 per cent in 2018. They’re also growing faster, collectively increasing 78 per cent year-over-year to US$230.4 million in 2019.

Shopify has focused on localizing its technology and services for overseas merchants, offering the platform in 13 additional languages last year for a total of 20, extending its lucrative payments-processing feature to four new countries and allowing stores to sell in an increasing number of currencies. Those moves have been backed up with on-the-ground staff in many markets, including a push into China, the world’s largest e-commerce market, and European growth efforts, supported by an engineering hub in Berlin, the company’s first outside Canada.

The firm still makes more per customer in its core countries than in those farther afield—the U.S., Canada, U.K. and Australia accounted for 85.4 per cent of revenue in 2019, but 71 per cent of its million-plus merchant base that year. “You would have to spend more on acquiring merchants in terms of the revenue upside you get internationally,” Mackie Research equity analyst Nikhil Thadani told The Logic. For example, average revenue per user in the ad space tends to be “a lot” lower outside North America, he said, though he added it’s not an exact comparison. 

On the conference call, Shapero noted that gross merchandise value (GMV)—a common measure of the value of products and services sold through an e-commerce platform—is growing faster internationally than in core markets. 

But that could change as the company fully rolls out its biggest undertaking to date, a US$1-billion, five-year plan for a fulfillment network that will use warehouses and artificial intelligence forecasting to manage logistics on merchants’ behalf. 

The program is set to be a “massively influential component of incremental revenue growth over the next few years,” Ross MacMillan, a stock analyst at asset management firm T. Rowe Price, told The Logic earlier this month. The service is likely to have a “take rate”—the percentage of a merchant’s transaction that goes to Shopify—in the low teens, compared to the 2.44 per cent represented by the firm’s US$505 million in fourth-quarter revenue from GMV of US$20.6 billion.

Shopify’s fulfillment efforts are currently focused on its biggest market, with a goal of offering two-day delivery for consumers living in the continental U.S; while it’s opening an Ottawa R&D centre—“so our product teams can learn fulfillment firsthand, including trialing new warehousing and fulfillment technology,” according to Shapero—the company said the U.S. facility will handle a “limited” number of Canadian orders.

In August 2019, Shapero said demand for early access to the fulfillment program had been “much stronger than anticipated,” and that it would speed up the rollout accordingly. But on Wednesday, she said that while enrolled merchants have provided positive feedback, the company is still “working to ensure performance and merchant experience before we start to scale.” It hasn’t indicated whether it will consider launching the service outside the U.S.

Shopify has also proceeded slowly in deploying other major initiatives to international markets. Its Plus business—which services its largest merchants, including multinational consumer packaged goods staples like Lay’s and direct-to-consumer brands like Kylie Cosmetics—represents a growing share of the firm’s monthly recurring revenue, accounting for US$14.6 million or 27 per cent for the fourth quarter of 2019.

Most of its recently added international customers still slot into the company’s “core” merchant base of mid-sized and smaller firms, COO Harley Finkelstein said on Wednesday’s conference call. “The opportunity remains for Plus internationally … in the future, and that’s something that we’ve been thinking quite a bit about,” he said.

Shopify’s investments in localizing its platform for new markets will continue to drive adoption among smaller merchants, Thadani said. “It’s much more than just translating what some buttons and screens look like,” he said, citing as an example the growing “patchwork” of privacy standards in different jurisdictions. “Once you’ve laid the foundation, then you can go out and actually market it and grow [the merchant base] much faster.”

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Thadani said Wednesday morning’s stock jump—shares rose nearly 18 per cent in early trading—appears to be driven by the company’s 2020 forecast. Shopify projected revenues between US$2.13 billion and US$2.16 billion this year, more than analysts’ US$2.11-billion average estimate, as collated by Refinitiv. 

Company executives were asked on the conference call about the potential for the novel coronavirus to disrupt merchants’ supply chains in China, Thadani noted; Shapero said there’d been no material impact to date. “The guidance at least helps people overcome that in the near term,” Thadani said.

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