Shopify Announces Second-Quarter 2020 Financial Results

Shopify Inc. (NYSE:SHOP)(TSX:SHOP), a leading global commerce company, announced today strong financial results for the second quarter ended June 30, 2020.

“The world is changing fast,” said Tobi Lütke, Shopify’s CEO. “With the rapid shift to online commerce, massive disruption to conventional employment, and growing conviction that opportunity needs to be more evenly distributed, entrepreneurship has never been more important. With all of these changes, our core principles remain the same: everything we ship is designed to lower barriers to entrepreneurship and reduce friction wherever we can.”

“The strength of Shopify’s value proposition was on full display in our second quarter,” said Amy Shapero, Shopify’s CFO. “We are committed to transferring the benefits of scale to our merchants, helping them sell more and sell more efficiently, which is especially critical in this rapidly changing environment. With our strong balance sheet and through prudent capital allocation, we remain well positioned to continue solving critical pain points for our merchants and contribute to their success for years to come.”

Impact of COVID-19
The ongoing effect of the COVID-19 pandemic has been to accelerate the shift of purchase habits to ecommerce. Based on data patterns monitored on Shopify’s platform, the following includes some key changes we have observed and potential implications for Shopify’s business:

• New stores created on the Shopify platform grew 71% in Q2 2020 compared with Q1 2020, driven by the shift of commerce to online as well as by the extension of the free trial period on standard plans from 14 days to 90 days. The 90-day free trial offer ended on May 31, 2020, with users that created stores in April and May expected to continue converting into paid merchants through the end of August 2020. New store creations are those that have provided their billing information so they can start selling, but for which we do not collect a subscription fee while on a free trial.
• While data from June 15 to July 19 indicates that new stores created during the extended 90-day free trial are converting into paid subscribers at a slightly lower rate than merchant cohorts that joined Shopify prior to the pandemic, we expect stronger retention rates for these early 90-day trial cohorts as they tend to be longer-tenured at the time of conversion and bring higher Gross Merchandise Volume¹ (“GMV”). This may not be indicative of go-forward cohorts, however, as a greater-than-typical proportion of new stores created early on in this free trial period represent established businesses that were urgently transitioning to online commerce during the initial weeks of the COVID-19 pandemic.
• Q2 2020 GMV grew 119% compared to Q2 2019 with year-on-year GMV growth accelerating in April and May and decelerating in June and thus far in July.
• While GMV through the point-of-sale (POS) channel declined by 29% in Q2 2020 compared to Q1 2020, as many of Shopify’s Retail merchants suspended their in-store operations in April and May, POS GMV started to recover in June as COVID-19 restrictions eased and stores began to reopen, approaching February levels by the end of the month and continuing to grow into July. Whether this trend will continue is unknown given the reintroduction of lockdown measures in certain geographies as well as the uncertain macroeconomic environment. Retail merchants continued to adapt to socially distanced selling through Q2 2020, as 39% of our brick-and-mortar merchants in English-speaking geographies are now using some form of local in-store/curbside pickup and delivery solution, up from 26% in early May 2020 and 2% at the end of February 2020. Additionally, Retail merchants grew online store GMV by 73% in Q2 2020 over Q1 2020.
• The migration to Shopify Plus of larger sellers continued in Q2 2020, resulting in a record quarter for new merchant adds to Shopify Plus. A large number of merchant upgrades to Shopify Plus in Q2 2020 outpaced the number of downgrades, which peaked in April before returning to pre-COVID levels by quarter end.
• Certain categories of GMV grew faster in Q2 2020, including Food, Beverages, and Tobacco, which doubled during this period relative to Q1 2020.
• Shops continue to see more local customers: in English-speaking geographies, the percentage of customers per shop coming from within 25 kilometres of the shop’s registered address increased in Q2 2020 over Q1 2020, as did the number of shops with at least one local customer, while GMV associated with ‘buy online, pickup in store’ in these geographies more than doubled in Q2 2020 compared to the previous quarter.

Second-Quarter Financial Highlights

• Total revenue in the second quarter was $714.3 million, a 97% increase from the comparable quarter in 2019.
• Subscription Solutions revenue was $196.4 million, up 28% year over year, primarily due to more merchants joining the platform.
• Merchant Solutions revenue growth accelerated for the third consecutive quarter, up 148%, to $517.9 million, driven primarily by the growth of GMV.
• Monthly Recurring Revenue² (“MRR”) as of June 30, 2020 was $57.0 million, up 21% compared with $47.1 million as of June 30, 2019. Shopify Plus contributed $16.6 million, or 29%, of MRR compared with 26% of MRR as of June 30, 2019. While growth in the quarter was impacted by the 90-day free trial on standard plans offered from March 21 through May 31, MRR ended the quarter higher than on March 31, benefiting from strong merchant adds in June, driven by the highest-ever number of merchants joining Shopify Plus in a single month, and standard merchants converting in the latter half of June from the 90-day extended free trial March cohorts and regular 14-day free trial June cohorts.
• GMV for the second quarter was $30.1 billion, an increase of $16.3 billion, or 119%, over the second quarter of 2019. Gross Payments Volume³ (“GPV”) grew to $13.4 billion, which accounted for 45% of GMV processed in the quarter, versus $5.8 billion, or 42%, for the second quarter of 2019.
• Gross profit dollars grew 83% to $375.0 million in the second quarter of 2020, compared with $204.8 million for the second quarter of 2019.
• Adjusted gross profit⁴ grew 84% to $381.4 million in the second quarter of 2020, compared with $207.3 million for the second quarter of 2019.
• Operating income for the second quarter of 2020 was $0.3 million, or 0% of revenue, versus a loss of $39.6 million, or 11% of revenue, for the comparable period a year ago.
• Adjusted operating income⁴ for the second quarter of 2020 was $113.7 million, or 16% of revenue, compared with adjusted operating income of $6.4 million or 2% of revenue in the second quarter of 2019. Adjusted operating income excludes an impairment charge of $31.6 million dollars resulting from our decision, announced in May 2020, to work remotely permanently. We believe the near-term costs of reducing our leased footprint and transitioning remaining space from offices to workspace for office hoteling and events will yield longer-term benefits, including leveling the playing field for employees who already work from home, helping our employees stay healthy and safe, opening a diverse global talent pool, eliminating unnecessary commutes and fast-tracking new and better ways to work together that are more productive and rewarding.
• Net income for the second quarter of 2020 was $36.0 million, or $0.29 per diluted share, compared with a net loss of $28.7 million, or $0.26 per basic and diluted share, for the second quarter of 2019.
• Adjusted net income⁴ for the second quarter of 2020 was $129.4 million, or $1.05 per diluted share, compared with adjusted net income of $10.7 million, or $0.10 per basic and diluted share, for the second quarter of 2019.
• At June 30, 2020, Shopify had $4.00 billion in cash, cash equivalents and marketable securities, compared with $2.46 billion on December 31, 2019. The increase reflects $1.46 billion of net proceeds from Shopify’s offering of Class A subordinate voting shares in the second quarter of 2020.

Second-Quarter Business Highlights

• Shopify held its first virtual company event, Shopify Reunite, where we announced new products and features to help our merchants adapt to the future of commerce, including:
  • Shopify Balance, which will give merchants access to critical financial products to start, run, and grow their business, including the Shopify Balance Account, Shopify Balance Card, and rewards such as cashback and discounts on everyday business spending like shipping and marketing. Shopify Balance is expected to be available for early access later this year in the U.S.
  • Shop Pay Installments, a ‘buy now, pay later’ product that will let merchants offer their customers more payment choice and flexibility at checkout, helping merchants boost sales through increased cart size and higher conversion. Shopify has partnered with fintech company, Affirm, to offer Shop Pay Installments, which is expected to be available to eligible U.S. merchants starting later this year.
  • Enhanced local delivery capabilities in the Shopify Admin to allow merchants to define a local delivery area, set local delivery fees and minimum order prices, and fulfill orders through Shopify, Shopify POS, and mobile, and a local delivery app to create optimized delivery routes and send customer notifications.
• Shopify continued to develop the product-market fit of Shopify Fulfillment Network, our solution to provide merchants and their buyers with fast and affordable fulfillment. Shopify automated aspects of merchant onboarding and order management, and continued to grow fulfillment volumes and the number of merchants enrolled in the program relative to the first quarter of 2020.
• Shopify made the new Shopify Plus Admin generally available to all Shopify Plus merchants, enabling them to operate their business as an organization by managing multiple stores, analytics, staff accounts, user permissions, and automation tools like Shopify Flow in one place.
• Shopify introduced the Facebook Shops channel, enabling Shopify merchants to customize and merchandise their storefronts within Facebook and Instagram through Facebook Shops, while managing their products, inventory orders, and fulfillment directly within Shopify.
• Shopify launched the Walmart channel, enabling Shopify merchants to sell their products on Walmart.com. Qualifying merchants are now able to connect their Shopify store to their Walmart Seller Account, enabling them to quickly and easily sync their product catalog and create product listings on Walmart.com.
• Shopify launched the Shopify Tap & Chip Card Reader in Canada, bringing contactless payments hardware to Canadian retailers using Shopify POS. The Tap & Chip Card Reader hardware device allows businesses to offer “tap” payment options like credit and debit cards, Apple Pay, and Google Pay. Connecting with the all-new Shopify POS software introduced in April, Shopify POS offers Canadian retailers a unified commerce experience bridging online and offline.
• Shopify launched Shopify Shipping in Australia partnering with courier services company, Sendle. Australian merchants can save time and money by printing Sendle labels and booking free parcel pick up within the Shopify admin, with the benefits of affordable shipping rates, package tracking, and 100% carbon-neutral shipping.
• Shopify Shipping adoption continued to rise, with 49% of eligible merchants in the United States and Canada utilizing Shopify Shipping in the second quarter of 2020, versus more than 42% in the second quarter of 2019. Shopify Shipping label adoption continued to grow in Q2 2020 as more merchants fulfilled a greater volume of orders, as commerce shifted online.
• Merchants in the U.S., Canada, and the U.K. received $153 million in merchant cash advances and loans from Shopify Capital in the second quarter of 2020, an increase of 65% versus the $93 million received by U.S. merchants in the second quarter of last year. Shopify Capital has grown to approximately $1.2 billion in cumulative capital advanced since its launch in April 2016, with approximately $166 million of which was outstanding on June 30, 2020.
• Approximately 30,300 partners referred a merchant to Shopify over the past 12 months.
• Shopify published our 2019 Sustainability Report and the 2019 Economic Impact Report, which together showcase the economic, environmental, and social impact of Shopify and our global ecosystem. Between 2016 and 2019, businesses built on Shopify generated $319 billion in global economic activity, with $136 billion in 2019 alone compared to $91 billion 2018. To help address the environmental costs associated with this economic activity, in 2019, Shopify became carbon-neutral by offsetting our own CO2 emissions generated since we started operations. Starting in 2020, Shopify also began mitigating emissions from ecommerce shipments through Shop Pay and our Offset app.

Subsequent to Second-Quarter 2020

• Shopify announced a partnership with the Government of Canada through the ‘Go Digital Canada’ program to bring thousands of small Canadian businesses online and help them adapt to a digital economy. Launched July 15, the program includes equipping businesses with the guidance, tools and resources they need to bring their business online, and initially offering eligible Canadian small businesses free email marketing, a free Tap and Chip reader and access to POS Pro, and a 90-day extended free trial.
• Shopify announced that Shopify Payments will be available to Shopify’s U.S. merchants through Buy on Google, the search engine’s native checkout option. Combining the best in search with the best in commerce enables Shopify merchants to benefit from the speed, transparency, and reliability of Shopify Payments when their shoppers Buy on Google, while retaining the ability to view, manage, and track orders and payments all in one place.
• Shopify Studios is expected to debut its first series with a major television network. Premiering in August on Discovery and streaming on DiscoveryGO is I Quit, a premium docuseries featuring real-life entrepreneurs who give up their “9-5” jobs to focus 100% on launching their own businesses. With mentors who will advise them along the way – including Shopify’s Harley Finkelstein – these risk-takers will engage in a year-long inspirational journey, living out the thrills, hurdles and hard work of authentic business ownership.

Financial Outlook
The COVID-19 pandemic has accelerated the growth of ecommerce, shifting a larger share of retail spending to online commerce, a trend we believe will persist. While COVID-19 has significantly influenced online store creation and consumer spending behaviour, the magnitude and duration of its future impact remain uncertain in view of the greater likelihood of an extended global recession. As a result, Shopify is not providing a financial outlook for Q3 2020 or for full year 2020.

Shopify expects entrepreneurs to continue to recognize the importance of multi-channel selling and direct-to-consumer fulfillment, and for consumer concerns about COVID-19 to drive further adoption of digital commerce while reinforcing the behaviour of buyers already shopping online. We are therefore closely monitoring the following external factors:

• The impact rising unemployment has on new shop creation on our platform and consumer spending.
• Consumer spending habits and trends for both discretionary and non-discretionary goods as shelter-in-place directives remain in a state of flux.
• The rate at which brick-and-mortar merchants adopt and retain a multichannel sales approach.

Shopify remains uniquely positioned to level the playing field for entrepreneurs during this period of rapid change in the retail landscape. Our merchant-first business model and strong balance sheet enable us to continue building a leading global commerce operating system that allows merchants to act nimbly and adapt their businesses to this new reality.