Shopify(SHOP) - 2024 Q3 - Quarterly Report

Management's Discussion and Analysis This section provides an overview of the company's financial performance, operational highlights, and future outlook, including forward-looking statements and associated risks Forward-looking Statements This section outlines forward-looking statements within the MD&A, which are based on management's current estimates, beliefs, and assumptions - Key forward-looking expectations include continued investment for growth, expansion of merchant solutions, international growth, and the belief that merchant solutions will become an increasing component of total revenues[9] - The company's assumptions for these statements include normalized e-commerce growth, the ability to develop new solutions, enhance the partner ecosystem, and effectively manage growth and costs[12] - Significant risks that could affect future results include the ability to sustain rapid growth, competition, cybersecurity threats, reliance on third-party suppliers and cloud providers, and changes in economic conditions or regulations[15] Business Overview This section details Shopify's global commerce platform, business model, revenue streams, and commitment to sustainability Company Profile and Strategy Shopify provides a global commerce platform with tools for businesses of any size, emphasizing multi-channel sales, mobile commerce, global reach, and scalable infrastructure - Shopify offers a multi-channel front-end allowing merchants to sell via web, mobile, retail, social media, and B2B, with over 90% of merchants using two or more channels[21] - The platform provides a single, integrated back-end available in over 20 languages for managing products, payments, shipping, and customer relationships[22] - The company focuses on mobile commerce, as mobile transactions represent the majority of sales on the platform. It offers mobile-optimized checkout and the Shop app to enhance the mobile experience[27] - For larger merchants, Shopify offers the Shopify Plus plan and Commerce Components, a modular stack allowing retailers to integrate over 30 Shopify components with their existing systems[31] Sustainability and Ecosystem Shopify has been a carbon-neutral company since 2019 and operates a Sustainability Fund to combat climate change, supported by a rich ecosystem of over 13,000 apps - Shopify launched its Sustainability Fund in 2019, committing at least $5 million annually to climate technologies. It is also a founding partner of Frontier, an advance market commitment to purchase over $1 billion of carbon removal by 2030[33] - As of September 30, 2024, the Shopify App Store featured over 13,000 apps, supported by a large ecosystem of developers, designers, and other partners that contribute to the growth of the merchant base[34] Business Model and Revenue Streams Shopify's business model is based on two revenue streams: Subscription Solutions and Merchant Solutions, with total revenue growing 23% to $6.1 billion for the nine months ended September 30, 2024 Revenue Breakdown (Nine Months Ended Sep 30, 2024 vs 2023) | Revenue Stream | 2024 (Nine Months, in billions) | 2023 (Nine Months, in billions) | Growth | % of Total Revenue (2024) | | :--- | :--- | :--- | :--- | :--- | | Subscription Solutions | $1.7 | $1.3 | 28% | 28% | | Merchant Solutions | $4.4 | $3.6 | 22% | 72% | | Total Revenue | $6.1 | $4.9 | 23% | 100% | - The platform facilitated $197.8 billion in Gross Merchandise Volume (GMV) in the first nine months of 2024, a 23% increase from the same period in 2023[35] - Monthly Recurring Revenue (MRR) reached $175 million as of September 30, 2024, a 28% increase from the prior year, driven by a higher number of merchants[39] Key Performance Indicators This section analyzes key metrics like Monthly Recurring Revenue and Gross Merchandise Volume, highlighting their growth and significance to the business Monthly Recurring Revenue (MRR) Monthly Recurring Revenue (MRR) is a key indicator used to track the value of merchant relationships and forecast subscription revenue, reaching $175 million as of September 30, 2024 MRR as of September 30 | Metric | Sep 30, 2024 (in millions) | Sep 30, 2023 (in millions) | YoY Growth | | :--- | :--- | :--- | :--- | | MRR | $175 | $137 | 28% | - The MRR growth rate for the nine months ended September 30, 2024 was lower than the same period in 2023, which had benefited from a subscription plan price increase in Q2 2023[48] Gross Merchandise Volume (GMV) Gross Merchandise Volume (GMV) represents the total dollar value of orders facilitated through the Shopify platform, growing 24% year-over-year for the third quarter of 2024 GMV Comparison (in millions) | Period | 2024 (in millions) | 2023 (in millions) | YoY Growth | | :--- | :--- | :--- | :--- | | Three months ended Sep 30 | $69,715 | $56,205 | 24% | | Nine months ended Sep 30 | $197,815 | $160,785 | 23% | - On a constant currency basis, GMV growth was 24% for the third quarter and 23% for the nine-month period, indicating minimal impact from currency fluctuations[50] [Factors Affecting Comparability](index=10&type=section&id=Factors%20Affe cting%20the%20Comparability%20of%20Our%20Results) This section details key factors affecting financial comparability, including revenue mix shifts, logistics business sale impact, increasing seasonality, and foreign currency fluctuations - The continued growth of Merchant Solutions, particularly Shopify Payments, may cause a decline in the overall gross margin percentage, as these solutions have lower margins than Subscription Solutions[51] - The sale of the logistics businesses in Q2 2023 impacts the comparability of results[52] - The business is expected to become more seasonal, with higher Merchant Solutions revenues in the fourth quarter due to holiday shopping, making historical patterns less reliable for future performance[53] - As international operations expand, foreign currency fluctuations (particularly in EUR, GBP, and CAD) are expected to have a greater impact on reported results. The company uses a hedging program to mitigate some of this risk[54] Results of Operations This section provides a detailed analysis of the company's quarterly and year-to-date financial performance, including revenue, gross profit, and operating expenses Comparison of Three and Nine Months Ended September 30, 2024 and 2023 For the third quarter of 2024, Shopify reported a 26% increase in total revenues to $2.16 billion and net income of $828 million, with nine-month revenues growing 23% to $6.07 billion Financial Highlights (Q3 2024 vs Q3 2023, in millions) | Metric | Q3 2024 (in millions) | Q3 2023 (in millions) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $2,162 | $1,714 | 26% | | Gross Profit | $1,118 | $901 | 24% | | Income from Operations | $283 | $122 | 132% | | Net Income | $828 | $718 | 15% | Financial Highlights (Nine Months 2024 vs 2023, in millions) | Metric | Nine Months 2024 (in millions) | Nine Months 2023 (in millions) | Change | | :--- | :--- | :--- | :--- | | Total Revenues | $6,068 | $4,916 | 23% | | Gross Profit | $3,120 | $2,453 | 27% | | Income from Operations | $610 | $(1,707) | N/A | | Net Income (Loss) | $726 | $(525) | N/A | Revenues Total revenues grew 26% in Q3 and 23% YTD, driven by increases in both Subscription Solutions and Merchant Solutions, with Shopify Payments penetration rising to 62% Revenue by Type (Q3 2024 vs Q3 2023, in millions) | Revenue Type | Q3 2024 (in millions) | Q3 2023 (in millions) | Growth | | :--- | :--- | :--- | :--- | | Subscription Solutions | $610 | $486 | 26% | | Merchant Solutions | $1,552 | $1,228 | 26% | | Total Revenues | $2,162 | $1,714 | 26% | - Shopify Payments penetration rate increased to 62% in Q3 2024, processing $42.9 billion in GMV, up from 58% and $32.8 billion in Q3 2023[64] Cost of Revenues and Gross Profit Gross profit increased 24% in Q3 and 27% YTD, while the gross margin percentage slightly decreased in Q3 to 52% due to a higher proportion of lower-margin Merchant Solutions revenue Gross Profit and Margin (Q3 2024 vs Q3 2023) | Metric | Q3 2024 (in millions) | Q3 2023 (in millions) | | :--- | :--- | :--- | | Gross Profit | $1,118 | $901 | | Gross Margin % | 52% | 53% | - Cost of Merchant Solutions for the nine months ended Sep 30, 2024, decreased as a percentage of revenue compared to 2023, primarily due to the absence of costs from the divested logistics businesses[71] Operating Expenses Total operating expenses increased 7% in Q3 but decreased 40% YTD, primarily due to the absence of a $1.34 billion impairment charge from the 2023 logistics business sale - Sales and marketing expenses increased by $16 million in partner payouts and $16 million in employee costs in Q3 2024 vs Q3 2023[74] - Research and development expenses for the nine months of 2024 decreased 28% YoY, mainly due to the absence of accelerated stock-based compensation and severance costs related to the 2023 logistics sale and workforce reduction[77][78] - General and administrative expenses for the nine months of 2024 decreased 24% YoY, driven by a $55 million reversal of a legal liability and the non-recurrence of prior-year impairment and severance costs[79][80] - Transaction and loan losses increased 71% in Q3 2024 to $58 million, driven by expansion in lending services and higher losses related to increased Shopify Payments volume[82] Other Income, net and Income Taxes Other income was $577 million in Q3 2024, primarily from net unrealized gains on equity investments, while income tax provision increased to $32 million due to higher foreign earnings - In Q3 2024, other income included a $512 million net unrealized gain on equity and other investments and $77 million in interest income[85] - In Q3 2023, other income included a $555 million unrealized gain, largely from the Klaviyo IPO and share price changes in Affirm and Global-E investments[87] - The provision for income taxes increased to $81 million for the nine months of 2024 from $28 million in the prior year period, reflecting higher foreign earnings[91] Summary of Quarterly Results (8-Quarter Trend) The eight-quarter summary highlights seasonal trends, a shifting revenue mix, stabilized operating expenses, and volatile other income due to equity investment fair value changes - Revenues have shown a consistent sequential growth pattern outside of a seasonal dip in Q1, with Q4 being the strongest quarter due to holiday sales driving Merchant Solutions revenue[101] - Gross margin percentage is highest when Subscription Solutions revenue mix is higher and tends to decrease in Q4 as lower-margin Merchant Solutions revenue increases[102] - Operating expenses as a percentage of revenue have decreased significantly from a peak in Q2 2023 (146%, including impairment/restructuring) to 39% in Q3 2024, reflecting improved operational discipline[98][104] - Other income (expense) has been highly volatile, ranging from an expense of ($342 million) to income of $606 million over the last eight quarters, primarily due to fair value changes in equity investments[95][108] Liquidity and Capital Resources This section reviews the company's cash position, cash flow activities, and financial commitments, assessing its ability to meet short-term and long-term obligations Liquidity Overview and Cash Flow As of September 30, 2024, Shopify held $4.9 billion in cash, cash equivalents, and marketable securities, generating $1.0 billion in cash from operating activities for the first nine months of 2024 - The company expects to file a new short-form base shelf prospectus, enabling it to offer an unlimited amount of various securities over a 25-month period[110] - Working capital as of September 30, 2024 was $5.9 billion (excluding current deferred revenue)[111] Cash Flow Summary (Nine Months Ended Sep 30, in millions) | Activity | 2024 (in millions) | 2023 (in millions) | | :--- | :--- | :--- | | Net cash from Operating | $1,001 | $496 | | Net cash used in Investing | $(925) | $(898) | | Net cash from Financing | $12 | $43 | Commitments and Contingencies The company's principal commitments consist of convertible senior notes and operating leases, with a $55 million legal liability reversed in Q2 2024 after a court vacated a jury verdict - There have been no significant changes to principal commitments, which primarily consist of convertible notes and operating leases[122] - In Q2 2024, the company reversed a $55 million legal liability related to a patent infringement case after a court granted its motion for judgment as a matter of law, vacating the jury verdict[124][125] Risks and Uncertainties This section identifies and discusses various market and financial risks, including foreign currency, investment volatility, interest rate, credit, and inflation risks Market and Financial Risks Shopify is exposed to foreign currency exchange risk, market volatility from its $4.3 billion in equity and other investments, interest rate risk, credit risk, and inflation risk - A significant portion of revenues and expenses are denominated in foreign currencies (EUR, GBP, CAD), exposing the company to exchange rate fluctuations. The company uses derivatives to hedge some of this risk[127] - As of September 30, 2024, the company held $4.3 billion in equity and other investments, including $2.2 billion in publicly traded companies (Affirm, Global-E, Klaviyo) and $664 million in its equity method investment in Flexport, which are subject to significant value fluctuations[132] - The company mitigates credit risk from its Shopify Capital lending activities by holding insurance policies with an AAA-rated provider, which cover the majority of the outstanding balance of loans and merchant cash advances[139] - Inflation poses a risk by potentially increasing operating costs and negatively impacting merchant GMV if economic growth slows[140] Internal Control Over Financial Reporting Management, under the supervision of the CEO and CFO, is responsible for maintaining adequate internal control over financial reporting, with no material changes reported during the quarter - No material changes to the company's internal control over financial reporting were identified during the period ended September 30, 2024[144] Shares Outstanding This section provides a snapshot of Shopify's capital structure as of November 6, 2024, detailing issued and outstanding Class A and Class B shares, stock options, RSUs, and DSUs Share Capital as of November 6, 2024 | Share Class | Issued and Outstanding | | :--- | :--- | | Class A Subordinate Voting Shares | 1,212,830,392 | | Class B Restricted Voting Shares | 79,267,906 | | Founder Share | 1 | - As of November 6, 2024, there were over 15.7 million options outstanding to acquire Class A shares and over 175,000 options to acquire Class B shares[146] - There were 5,675,195 Restricted Share Units (RSUs) and 14,803 Deferred Share Units (DSUs) outstanding as of November 6, 2024, each of which will vest as one Class A share[147]