Ottawa Citizen

Shopify’s strong Q2 results wow analysts

- JAMES BAGNALL jbagnall@postmedia.com

Shopify’s second-quarter financial results handily beat consensus forecasts, triggering a string of superlativ­es during a Tuesday morning conference call.

Here are a few of the choice descriptio­ns offered by independen­t analysts: “stunning,” “striking,” “one of the cleanest, most impressive growth stories I’ve seen.”

This is what they liked: Shopify reported second-quarter revenues climbed 75 per cent year over year to $151.7 million, compared to analysts’ estimates of $143.6 million (all figures U.S.). The company also reported a $15.9-million operating loss that came in below the company’s guidance of $18 million to $20 million.

Investors responded by bidding up the value of Shopify shares, which surged 13.7 per cent Tuesday to close at $130.61 on the TSX.

The tone of the conference call was also interestin­g for what it revealed about the confidence of Shopify’s executives in their company’s momentum.

“The best way to think about Shopify,” said CEO Tobias Lütke, “is that we’ve put the train on the right track and now we’re going to pick up speed.”

By this, he meant that his team has spent more than a decade building a software platform that allows merchants to sell their goods and services online. Equally important, Shopify has embedded a multitude of applicatio­ns in the platform to make e-commerce easier to do, and aligned itself with thousands of business partners. More than half a million customers rely on Shopify’s technology.

The e-commerce company earns two main streams of revenue — one from subscripti­on fees generated by the use of its platform, the second through customers’ use of the applicatio­ns, which range from checkout software to inventory management and shipping services.

The company’s second-quarter results confirmed strong growth on both fronts. Subscripti­on revenues were up 64 per cent year over year while revenue generated through applicatio­ns was up 86 per cent.

Analysts also liked the fact that Shopify, which traditiona­lly targets small to medium-sized businesses, is breaking into larger accounts such as Nestlé, GE, Red Bull and Canadian Tire.

Not surprising­ly, Shopify upped its expectatio­ns for the year as a whole. It is now forecastin­g revenues for the year will be $642 million to $648 million, compared to analysts’ consensus estimates of $628.4 million.

Shopify chief financial officer Russell Jones attributed the better-than-expected results to the firm’s ability to anticipate the online retail industry’s shifts into multiple channels using mobile technology, along with the addition of larger customers.

“We feel we are exceptiona­lly well-positioned for the next several years,” Jones said.

Shopify said Tuesday that Jones had informed the board of directors of his intention to retire in 2018. Jones, a former manager at Newbridge Networks and chief financial officer at Watchfire, joined Shopify in 2011. On his watch, the company has beat analysts’ estimates all nine times it has reported since it first issued shares to the public in 2015.

Thanks in large part to a pair of share offerings during the past year, Shopify now has nearly $1 billion in cash on its books, giving the company a significan­t ly stronger balance sheet.

When queried about whether Shopify was planning a large acquisitio­n, Jones responded: “There is nothing currently contemplat­ed but the option is now available to us.”

Some question marks remain about the company’s performanc­e, including when it plans finally to turn a profit. Jones predicted it would break even during the coming fourth quarter using a metric he called adjusted operating earnings, which doesn’t include the $16 million cost of compensati­on related to stock options and other similar incentives.

Shopify is also clearly keeping its foot on the pedal when it comes to investing in R&D (up 96 per cent year over year in the second quarter) and marketing (up 87 per cent). Administra­tive expenses were up a comparativ­ely modest 51 per cent. For the moment, the priority is to enrich the Shopify technology and make sure the world knows about it.

The company employs about 2,000 globally including about 800 in the Ottawa area. Other offices are in Montreal, Toronto, Waterloo and San Francisco.

The best way to think about Shopify is that we’ve put the train on the right track and now we’re going to pick up speed.

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