Shopify headquarters in Ottawa, September 28, 2018.CHRIS WATTIE/Reuters
Shopify Inc. SHOP-T exceeded revenue expectations as it returned to a profitable third quarter ahead of the holiday shopping season, buoyed by cost-cutting measures, bets on artificial intelligence and a divestiture of the e-commerce company’s delivery and warehousing operations.
Shares of Shopify jumped by 21.3 per cent on Thursday, closing at $82.08 on the Toronto Stock Exchange.
The Ottawa-based company reported total revenue of US$1.7-billion for the quarter ended Sept. 30, whereas analysts on average had anticipated US$1.67-billion. Net income reached US$718-million, which includes a net gain of US$555-million from investments. That’s compared to a loss of US$159-million in the same period last year.
“We laid out a very deliberate vision in the last couple of quarters to balance both operational ambition and financial discipline,” said Harley Finkelstein, the company’s president, in a conference call with analysts on Thursday. “We had talked about this new shape of Shopify that we are building. When you fast forward to today, what I hope all of you see is that it’s working as expected.”
Over the past few months, Shopify has been undergoing a period of transition, striving to gain back the momentum that had made it Canada’s most valuable company early in the COVID-19 pandemic.
Shopify launched a suite of AI tools this year for the businesses that pay for its services, while the company also continues to automate its own labour force by reducing the workload where possible. Dubbed Shopify Magic, the new features allow the company’s merchants to perform administrative tasks and tackle creative challenges, such as responding to customer inquiries or marketing their products.
“We interact at the intersection of humans and technology, and that’s exactly what AI is uniquely good at,” Mr. Finkelstein said, positioning innovations with AI as an important part of the company’s future.
In the latest quarter, Shopify also finalized the sale of its fulfilment network. The company had spent billions of dollars building up its freight and logistics capabilities as part of a long-term strategy to compete with tech giant Amazon.com Inc. But it abandoned those ambitions in May, selling off its entire warehousing expansions to Silicon Valley-based Flexport Inc. for an undisclosed equity stake.
And after years of rivalry, in early September, Shopify announced a partnership with Amazon to integrate the Seattle-based company’s Buy With Prime services into its own e-commerce platform. “All we want is to give our merchants the greatest choice possible,” Mr. Finkelstein said.
Shopify’s operating expenses fell by nearly 23 per cent year-over-year to US$779-million in the third quarter. Jeff Hoffmeister, the company’s chief financial officer, said the reduction in expenses was “primarily driven by our lower head count.”
This summer, Shopify slashed nearly 20 per cent of its entire work force, which was its second round of layoffs in less than a year. Mr. Hoffmeister told investors on Thursday that these cuts were consequential in bringing financial discipline to the company, pointing out that stock-based compensation charges fell to US$102-million in the third quarter this year, compared to $150-million last year.
“We are selectively hiring in key areas. But we decided to restart that process in a slower pace, so compensation expense was lower than planned,” he said.
The expenses that beset Shopify with its logistics operations were a “burden,” Mr. Hoffmeister said, and the agreement to sell those capabilities to Flexport brought down some costs, too. He added, however, that the agreement is “still very early days,” and that any material impact will not be known until next year. He declined to divulge financial details related to the commercial agreement when asked by analysts.
National Bank of Canada analyst Richard Tse said the operating leverage found by Shopify through recent cost-cutting measures is reflected in the quarter’s profitability. In particular, the numbers showed “how much fulfilment had been dragging their business financially and why the stock has recovered since divesting that segment,” he said.
Shopify’s share price has recuperated markedly this year, having risen over 43 per cent in the past 52 weeks, after enduring major turbulence since the start of 2022.
In the forthcoming holiday shopping season, which is when retailers often make the bulk of their money each year, Shopify is predicting a resilient economic environment for consumers, particularly in the United States, where about half of the company’s nearly 1.75 million merchants are based.
“It’s too soon to tell, obviously. But we expect to see a lot of success in the season this year,” Mr. Finkelstein said, “especially as more sellers need to become geographically agnostic, making our services the perfect fit.”