U.S. Markets open in 1 hr 2 mins

Shopify (SHOP) Beats on Q3 Earnings & Revenues, Ups '18 View

Zacks Equity Research
1 / 1

Is a Surprise Coming for Scripps (SSP) This Earnings Season?

Scripps (SSP) is seeing favorable earnings estimate revision activity and has a positive Zacks Earnings ESP heading into earnings season.

Shopify Inc. SHOP delivered third-quarter 2018 adjusted earnings of 4 cents per share comparing favorably with the Zacks Consensus Estimate loss of 4 cents. However, the figure was down 20% year over year.

Total revenues surged 58% from the year-ago quarter to $270.1 million, comfortably outpacing the Zacks Consensus Estimate of $257 million. The figure also fared better than the guided range of $253-$257 million.

The top line 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, in turn bolstering its merchant base.

Notably, shares of Shopify have gained 31.6% year to date, against the industry’s decline of 21.3%.

Quarter Details

Subscription Solutions revenues (44.6% of total revenues) surged 46% to $120.5 million driven by persistent growth in Monthly Recurring Revenue (“MRR”) aided by the addition of several new merchants.

As of Sep 30, 2018, MRR was $37.9 million, up 41% from the year-ago quarter figure of $26.8 million. Shopify Plus accounted for $9.2 million representing 24% of MRR compared with 20% in the quarter ended Sep 30, 2017.

Merchant Solutions revenues (55.4%) advanced 68% to $149.5 million, primarily driven by growth in GMV which gained 55% from the year-ago quarter to $10 billion.

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

However, it is to be noted that GMV growth is declining. In the first and second quarter, GMV registered a year-over-year increase of 64% and 56%, respectively.

Shopify Capital advanced $76.4 million cash to merchants in the quarter under review, registering growth of 73% compared with $44.1 million in the year-ago quarter. Notably, since the launch of Shopify Capital, cumulative merchant cash advances have grown to almost $375 million, out of which $100 million was outstanding as on Sep 30, 2018.

Shopify Shipping witnessed robust adoption in the third 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 $4.1 billion, accounting for 41% of GMV processed in the third quarter, up from $2.4 billion (37%) in the prior-year quarter.

Purchases from merchants’ stores from mobile devices witnessed 77% of traffic and garnered 67% of orders for the quarter ended Sep 30, 2018, up from 74% and 62%, respectively, reported in the year-ago quarter.

Management remains positive about the company’s expanding partner ecosystem that aids it to identify and reach merchants who are otherwise inaccessible. The total number of apps registered in the App store amount to more than 2,200. More than 16,500 partners referred merchants to Shopify in the past 12 months.

Operating Details

Non-GAAP gross profit climbed 49.8% to $154.4 million primarily on the back of robust performance of Shipping and Capital. 

Non-GAAP gross margin contracted 300 basis points (bps) to 56%. The margins were impacted by the risk posed by strained Subscription Solutions margins due to transition to cloud.

 Non-GAAP operating expenses surged 56.1% year over year to $154 million. Non-GAAP operating expenses as a percentage of revenues contracted 100 bps to 57%.

Shopify reported adjusted operating loss of $3.6 million against the year-ago quarter’s operating income of $1.7 million.

Balance Sheet & Cash Flow

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

The company provided cash from operations of 67k for the nine months period ended Sep 30, 2018, compared with $11.1 million used in the year-ago period. The negative cash flow can primarily be attributed to robust growth in merchant cash advances.

Developments in Q3

The company unveiled various enhancements and new technologies aimed at improving selling experience of merchants.

Shopify recently introduced Shopify AR in a bid to enhance engagement. For instance, the mobile shoppers will be able to view 3D models for assessing whether the purchase of cycles, furniture, among others, will fit in the physical space appropriately.

Recently, it also revamped its Shopify App Store, in order to provide an enhanced experience on mobile and desktop.

Further, Shopify rolled out a new feature, named Locations, enabling customers to track orders seamlessly. Notably, Shopify Advanced retailers with select locations plan, among others, can benefit from the enhanced inventory management solution.

In the reported quarter, the company introduced Shopify Payments in Germany.

Guidance

For fourth-quarter 2018, Shopify projects revenues in the range of $315-$325 million (mid-point at $320 million). The Zacks Consensus Estimate is currently pegged at $313.9 million.

Adjusted operating income is anticipated to be in the range of $16-$18 million.

For full-year 2018, Shopify raised outlook. Management now projects revenues in the range of $1.045-$1.055 billion, better than the previous guided range of $1.015-$1.025 billion. The Zacks Consensus Estimate is pegged at $1.03 billion.

Management now expects adjusted operating income for fiscal 2018 to be in the range of $8-$10 million compared with the previous range between break even and $5 million.

Conclusion

In an effort to make the platform more merchant friendly, Shopify is working on extending language capabilities beyond English. The focus on local languages is aiding bolstering 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.

Moreover, sales channels like Google Pay, Facebook Messenger, Instagram, Pinterest, eBay EBAY and Amazon AMZN continue to attract new merchants. The availability of Apple Pay, Google Pay and the addition of Canada Post as sales channels are expected to be other positives.

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

Zacks Rank & Key Pick

Shopify carries a Zacks Rank #3 (Hold). 

NetApp, Inc. NTAP 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.

The projected earnings growth rate (3-5 years) for NetApp is 14.1%.

More Stock News: This Is Bigger than the iPhone!       

It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.

Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.

Click here for the 6 trades >>


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
NetApp, Inc. (NTAP) : Free Stock Analysis Report
 
Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
eBay Inc. (EBAY) : Free Stock Analysis Report
 
Shopify Inc. (SHOP) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research