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Shopify Operating Income Jumps 66%: Rapid Earnings Reaction
Key Points
Revenue grew 32% to $3.74 billion, with merchant solutions doing most of the work.
Operating income grew roughly twice as fast as gross profit, helped by tight spending.
Fourth-quarter guidance points to the same pattern continuing.
Shopify (NASDAQ: SHOP) grew third-quarter revenue 32% to $3.74 billion, and operating income jumped about 66% to $568 million. The growth leans on payments rather than subscriptions, which trims gross margin, but tighter spending more than covered the squeeze.
Key numbers
- Revenue: $3.74 billion, up from $2.84 billion a year earlier.
- Gross profit: $1.78 billion, up from $1.39 billion.
- Operating income: $568 million, up from $343 million.
- Net income: $462 million, up from $264 million.
- Free cash flow: $816 million, up from $507 million.
What it means
Revenue is outrunning subscriptions. Monthly recurring revenue, a gauge of subscription sales, rose to $230 million from $193 million. Merchant solutions, mainly payments that rise with the dollar volume merchants sell, grew faster and now make up 78% of revenue, versus 75% a year ago. Payments earn thinner margins than software, so gross profit grew only 28%, slower than revenue.
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Cost control more than covered that squeeze. Operating expenses grew about 16%, half the pace of revenue.
Image source: Getty Images.
Guidance says the pattern holds. Management expects fourth-quarter revenue to grow at a low-thirties rate, with gross profit dollars growing at a high-twenties rate. Keeping profit climbing will depend on holding costs down.
What to watch next
Watch the gap between revenue growth and gross profit growth next quarter. If it widens, spending discipline will have to carry even more of the profit story.
Savannah Maxwell has positions in Shopify. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.