when is shopify earning 2017

everyone if you're a shopify shareholder,like myself it has been an absolute,roller coaster over the past well five,years and the last two days are no,exception with the stock falling as much,as 15 yesterday and then climbing today,why is that we'll get to that in a,minute as we review the company's,earnings report my name is brian stoefel,and thanks as we review this to simply,wall street for sponsoring today's video,so let's look at how the company did on,the top line revenue came in at about,1.3 billion dollars that was 16 percent,growth over the same time last year this,missed by a medium margin wall street's,expectations and in terms of guidance,all management offered last quarter was,to say that merchant solutions one of,its revenue streams would grow twice as,fast as subscription solutions its other,revenue stream in reality it grew at,about 1.9 times so missed by a little,bit there now earnings per share which,don't mean a whole lot on an on gap,basis they lost 3 cents versus gaining,22 cents last year that came in again,behind wall street's expectations,if we look at the company's margins,these are non-gaap margins uh gross,margins came in at about 51 while,operating and net margins were both,negative now,free cash flow went from slightly,positive to losing about 200 million,dollars net income and this is on a,non-gaap basis went from a gain of 285,million to a loss of 38 million so that,backs out stock-based compensation and,depreciation and amortization now all of,that is okay though because the,company's balance sheet supports 7,billion in cash and less than 1 billion,in debt but let's dig into what happened,now subscription solutions are just like,they seem a subscription,form of revenue merchant solutions is,based on usage it's based on people,going on and buying things from the,merchants that use shopify let's break,down the growth during the quarter,so subscriptions saw revenue grow 9.6,percent but gross profit just grew 3.6,percent that's not a good thing it means,that there's not leverage taking place,here that was however expected,same story uh with merchant solutions,revenue grew 18.3 percent however gross,profit just grew 7.1 percent reverse,leverage it should it should go back to,a positive direction but right now it's,not heading in a great direction,moving down the income statement let's,then go to operating expenses now it,doesn't do us a whole lot of good,if we want to back out stock based,compensation to look at this instead we,can look at adjusted,operating expenses which backs out those,stock based compensation now,over time from 2017 to last year we see,this moving in the right direction,eating up less and less and less and,less revenue and since revenue was,growing so much that was a great thing,however in the second quarter that,reversed itself and it reversed itself,big time this is the theme we're going,to get to for the quarter let's dig into,it,even after you back out that stock based,compensation um growth in gna general,administrative was up 85,again this is against 16 growth in,revenue 85 growth in a,100 growth in r d,and 63 growth in sales and marketing the,company is already taking steps to,correct for this which we'll get to in,just a second the important thing here,is that because of all that extra,spending their in their uh operating,income went from a gain of 140 million,to a loss of 190 million um,let's move on though and just say that,you will see that there is this other,income expense don't pay any attention,to this line this has to do with equity,investing that the company owns shares,in a firm and if you follow firm you,know stock is down so that really skews,things on net income i wouldn't worry,too much about that,excuse me looking at the company's gross,merchandise volume what you see is it,was growing the amount of stuff sold on,shopify was growing at about a 50,percent rate before the pandemic,it jumped to about doubling during the,pandemic and then it went back to about,50 percent growth last year,well didn't continue in that in that,realm here just 11 percent growth in,gross merchandise volume things slowed,down a ton now one positive i'll throw,in there is that this 11,is a lot less than 18 growth in merchant,solutions that means that shopify is,making a little bit more on each,purchase than it was in the past but,overall this isn't great to see gmv,growth of just 11,what's the company going to do about,that well they said that they announced,yesterday that they were cutting 10,percent of their workforce which is no,small thing given the fact that they uh,employ thousands of people how did that,happen well when the company announced,it yesterday uh toby lewkey the,company's founder and ceo said look here,is what e-commerce as a percentage of,all retail in the u.s look like heading,into and then at the start of the,pandemic and this is where the company,found itself so put yourself in that,place and they say was this surge,temporary,or was it accelerating a new normal,was we going to go back to where we were,before the growth rate or had we jumped,ahead,they made a bold bet they said we,believe that the share of dollars that,go through e-commerce was permanently,leaping ahead five to ten years they,didn't know for sure but they had to,take the chance because if it was true,they wanted to capture that opportunity,well,here's where it was,and here's what it did it is still,growing that's important it's still,growing um but it's not going to be,jumping ahead five to ten years like the,company thought it might,it's clear lucky said that the bet,didn't pay off and he took full,responsibility saying it was my call and,i got this wrong that's why those,operating expenses were so much higher,during the second quarter this year than,they were last year even though revenue,only grew 16 percent,now there's two more things i want to,talk about that they covered in their,conference call this morning the first,thing has to do with the shopify,fulfillment network look this is a huge,expensive,difficult project that shopify is taking,on they want to be able to offer,everything that amazon does and let,merchants use shopify instead of having,to use amazon to do their business,they have they announced an agreement,with flexport where flexport can help,take care of the freight sending stuff,to wherever it needs to go around the,world from where it is manufactured they,closed on their,acquisition of deliver and they can use,that now to help with distribution,and they have their fulfillment some of,their fulfillment centers coming online,now importantly what they talked about,on the call is that as this scales,they want to be able to offer what's,called the shop promise which is two day,guaranteed delivery to as many of their,merchants as they can and on the,conference call they said as this scales,it should be available to as many,merchants as possible accounting for as,much gmv as the company processes,now the important part of that is me,saying as this scales because it has to,scale and it's really hard to do it to,be able to do that um one other note,that's just worth pointing out is while,shopify's online growth in gmv was just,eight percent its offline growth was,really high at 47 now this is a very,very small part of the company's overall,gmv but their point of sale devices are,being used offline in stores and that,could become a meaningful driver in the,future,so let's look ahead what the company,sees moving forward there's a bunch of,things first of all they said gmv growth,is going to continue to be impacted by,inflation but it should grow faster than,the broader retail market second thing,that i want to point out is they said,that the number of new merchants joining,in the second half of this year will be,larger than those who joined in the,first half that's a good sign,next they said that merchant solutions,should grow more than twice as fast as,subscriptions they just missed that this,quarter we'll see if they can hit on,that in the current quarter now this is,an important one,the company said that gross merchandise,and revenue growth will be evenly,distributed across all four quarters why,is that so important because the fourth,quarter is typically the biggest by far,for the company and if they're saying,it's going to be evenly distributed,they're saying that they believe the,fourth quarter is really not going to,show the type of growth sequentially,that it normally does,why,because of inflation the pressure on,consumer spending and currency headwinds,that's important to remember,they but they also said that while they,see that coming they're going to adjust,by really decelerating their operating,expenses,they're still probably going to have,negative operating margins but,them cutting 10 percent of their staff,is a clear sign that they are,decelerating that spending because they,got that bet wrong,so now this is just me the company did,not say that they are going to grow 15,to 20 percent but if we take their first,and second quarter growth and try and,spread that out over four quarters like,they said let's put it in the ballpark,of 15 to 20 percent growth for the,current quarter that would come in,behind wall street's estimates of 24,percent growth the bottom line doesn't,even really matter that much right now,uh because they're not focused on that,for the full year it would be about in,line with what wall street is hoping for,or expecting again the rest we don't,care about quite so much but now let's,head on over to simply wall street,because they actually have a very,interesting way of looking about the,valuation of this company so i'm heading,over to simply wall street,and i'm going down and i'm going to,click right here on valuation and what,we can see here is that the company,trades on a trailing basis about 8.2,times sales,simply wall street says that's probably,the best metric we've got for this on a,forward basis 6.4 times sales that's not,cheap that's pretty expensive,how expensive well relative to its peers,you see about twice as much as etsy a,lot more than big commerce,but it is also expected to grow faster,than those players,definitely expensive relative to the,rest of the industry however if i keep,going down what you see here is that the,company using its own algorithm for what,a fair price to sales ratio is says that,it's actually somewhat undervalued um in,fact when they use a discounted cash,flow model they peg the fair value at,around forty dollars per share which is,a lot less than today's price although,it's up of about 33 cents per share now,going down the other thing i just want,to point out about how this company,works is that over its history,this is the company's this is shopify's,revenue growth you see it exploding here,they always intended for this free cash,flow to be about even,it wasn't until they had so much more,sales than they than they were ready for,that the free cash flow went so positive,i wouldn't be surprised to see this,trend back down because they always,wanted to reinvest that back in the,business they just couldn't spend fast,enough uh during the onset of the,pandemic to do that that's going to come,down obviously,their operating expenses they finally,did uh start spending more but when they,did it uh it did not the timing just,wasn't right for it so heading back over,one thing i just want to say about,simply wall street exclusively for our,audience,they're offering an extended 14-day free,trial and a 30 discount if you just,register using the link below i find it,helpful,i don't worry as much about valuation as,others but they've got a lot more than,just valuation on the site but if we,just finish up what am i going to watch,moving forward well first gross,merchandise volume growth they said it's,going to be even across so,hopefully they hit that if they don't,that would be a problem second i want to,hear more updates on that fulfillment,centers it's expensive it's hard but if,they get it right it can be a meaningful,moat and growth driver moving forward,third operating margins they're cutting,back on spending they still expect to be,losing money on an operating basis i,just hope it's not as much,and fourth free castle we know that's,going to be negative at least i expect,it to be negative hopefully not that,negative they've got a huge cash cushion,so it's not a huge problem,overall i'd say that the moat is stable,if they can get the fulfillment part,right i would say that it's expanding,the thesis overall i would say right now,it has a yellow flag so what am i doing,as a shareholder this was once my,largest holding by far,i am not selling any of my shares but,i'm also not adding at this point for me,that's because i filled out a full,position,what i will say is this i still believe,that there's a wide mode around this if,you build your business on shopify's,platform you don't want to change unless,you've got a really good reason to if,they can get this fulfillment right not,only does that add to that moat but it,proves that the company has optionality,they've hit hiccups but i believe that,they can fix them moving forward or at,least i'm willing to give them the,chance to do that so hopefully this,helps i'll be continuing to hold my,shares let us know what you think about,this in the comments section below,brian out

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