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Shopify (SHOP) Q2 Earnings & Revenues Top, Raises '18 View

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Shopify Inc. (SHOP - Free Report) delivered second-quarter 2018 adjusted earnings of 2 cents per share, surpassing the Zacks Consensus Estimate by 4 cents. The figure also compared favorably with the year-ago quarter’s loss of 1 cent.

Total revenues surged 61.5% from the year-ago quarter to $244.96 million, comfortably outpacing the Zacks Consensus Estimate of $235 million. The figure also fared better than the guided range of $230-$235 million.

Top-line growth benefited from a diversified expanding merchant base.The company continues to launch a number of merchant-friendly applications to meet the requirements of a dynamic retail environment, consequently bolstering its merchant base.

Shares were down 6.7% following the earnings announcement primarily owing to a declining growth rate recorded in Gross Merchandise Volume (“GMV”). Notably, shares of Shopify have gained 37.2% year to date, against the industry’s decline of 3.8%.



Quarter Details

Subscription Solutions revenues (45.2% of total revenues) surged 54.6% to $110.72 million driven by the persistent solid growth in Monthly Recurring Revenue (“MRR”) aided by the addition of several new merchants.

As of Jun 30, 2018, MRR was $35.3 million, up 49% from the year-ago quarter figure of $23.7 million. Shopify Plus accounted for $8.1 million representing 23% of MRR compared with 18% in the quarter ended Jun 30, 2017.

Merchant Solutions revenues (54.8%) advanced 67.7% to $134.2 million, primarily driven by growth in GMV which soared 56% from the year-ago quarter to $9.1 billion.

Robust performance of Shopify Shipping and Shopify Capital also aided growth. Markedly, revenues of both Shopify Shipping and Shopify Capital have recorded year-over-year growth which “more than doubled”.

However, it is to be noted that GMV growth is declining. In the first quarter, GMV registered a year-over-year increase of 64%, for instance.

Shopify Capital advanced $68.5 million cash to merchants in the quarter, registering growth 84% compared with $37.2 million in the year-ago quarter. Notably, since the launch of Shopify Capital, cumulative merchant cash advances have grown to almost $300 million, out of which $80 million was outstanding as on Jun 30, 2018.

Shopify Shipping witnessed robust adoption in the quarter. The offering is being leveraged by more than a third of total eligible merchants across the United States and Canada.

Gross Payments Volume (“GPV”) came in at $3.6 billion, accounting for 40% of GMV processed in the second quarter, up from $2.2 billion (38%) in the prior-year quarter.

Purchases from merchants’ stores from mobile devices witnessed 76% of traffic and garnered 66% of orders for the quarter ended Jun 30, 2018, up from 72% and 60%, respectively, reported in the year-ago quarter.

Management remains positive about the company’s expanding partner ecosystem that aids it to identify and reach out to merchants who are otherwise inaccessible. The total number of apps registered in the App store amount to 2,500. Greater than 16,000 partners referred merchants to Shopify in the past 12 months.

Operating Details

Non-GAAP gross profit climbed 57.9% to $137.6 million primarily on the back of robust performance of Shipping and Capital.

Non-GAAP gross margin contracted 130 basis points (bps) to 56.2%. The margins were impacted by the risk posed by strained Subscription Solutions margins due to transition to cloud.

Non-GAAP General and Administrative ("G&A") expenses surged 67.2% year over year to $21.5 million. Non-GAAP Research and development "(R&D") expenses advanced 58.6% to $39.1 million. Non-GAAP Sales and Marketing (“S&M”) expenses rose 54.4% to $81.2 million.

Non-GAAP G&A expenses as a percentage of revenues expanded 30 bps to 8.8%. Non-GAAP R&D expenses as a percentage of revenues contracted 30 bps to almost 16%. Non-GAAP S&M expenses as a percentage of revenues contracted 150 bps to 33.2%.  

Shopify reported a wider adjusted operating loss of $4.3 million compared with the year-ago quarter’s loss of $2.9 million.

Balance Sheet & Cash Flow

Shopify ended the reported quarter with cash, cash equivalents and marketable securities balance of $1.57 billion compared with $1.58 billion recorded at the end of the first quarter.

Shopify used net cash from operations of $2.8 million for the six months period ended Jun 30, 2018, compared with $4.9 million used in the year-ago period. The negative cash flow can be primarily attributed to robust growth in merchant cash advances.

Shopify Inc. Price, Consensus and EPS Surprise

Shopify Inc. Price, Consensus and EPS Surprise | Shopify Inc. Quote

Developments in the Quarter

At Unite, Shopify’s annual conference, the company unveiled various enhancements and unveiled new technologies aimed at improving selling experience of merchants.

In a bid to make transactions easier for its merchants, Shopify is continuously focusing on the development of mobile applications. In this regard, the company released a free mobile app for Apple’s (AAPL - Free Report) iOS devices. It has been made accessible to Shopify merchants in the App Store. The latest offering called Shopify Ping will be of extreme convenience to customers as the demand for mobile internet continues to rise.

The launch of Shopify Ping has made it easier for merchants to process payments, ship products along with securing financing through messaging for their working capital needs. Moreover, the new Shopify Ping will be compatible with Facebook (FB - Free Report) and Instagram ads helping merchants connect to a wide customer base, consequently increasing the number of active users on the platform.

In the quarter, the company introduced Shopify Payments in Japan. Consequently, the total countries where the solution is launched now accounts to eight.

Guidance

For third-quarter 2018, Shopify projects revenues in the range of $253-$257 million (mid-point at $255 million). The Zacks Consensus Estimate is currently pegged at $251.8 million, lower than the mid-point of the guided range.

Adjusted operating loss is anticipated to be in the range of $9-$11 million.

For full-year 2018, Shopify raised outlook. Management now projects revenues in the range of $1.015-$1.025 billion (mid-point at $1.02 billion) better than the previous guided range of $1-$1.01 billion. The Zacks Consensus Estimate is currently pegged at $1.02 billion, almost in line with the mid-point of the guidance.

However, management reiterated the guidance for adjusted operating income for fiscal 2018 between break even and $5 million.

Conclusion

With an aim to make the platform more merchant friendly, Shopify is working on extending language capabilities beyond English. The focus on local languages is acting as a tailwind to bolster international presence. We believe this inclusive move will boost engagement and consequently increase adoption going forward.

Moreover, the company will reap benefits from investments in latest technological developments such as virtual reality (“VR”) and augmented reality (“AR”), going forward.

Shopify has been developing various apps, including various AR based applications to streamline customer experience.

Recently, the company partnered with Google to empower physical stores with enhanced security. The company provides Google Wi-Fi routers and Nest cam hardware across its Hardware Stores, to around 70,000 point-of-sale merchants. This aids businesses to monitor their physical outlets leveraging the Shopify dashboard, consequently streamlining management processes.

These innovative initiatives to enhance visibility across physical outlets, explore new markets are expected to significantly expand merchant base, going ahead.

Zacks Rank & Key Pick

Shopify carries a Zacks Rank #3 (Hold).

Mellanox (MLNX - Free Report) sporting a Zacks Rank #1 (Strong Buy) is worth considering in the broader technology sector. You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Mellanox is pegged at 15%.

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