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Shopify reports strong profit amid lower head count, strategy shift

Shopify Inc.'s net income soared to US$718 million in its third quarter as the company benefited from a lower head count and a more careful approach to expenses. "We've been very disciplined in the back office.
Shopify Inc. headquarters signage in Ottawa on Tuesday, May 3, 2022.THE CANADIAN PRESS/Sean Kilpatrick

Shopify Inc.'s net income soared to US$718 million in its third quarter as the company benefited from a lower head count and a more careful approach to expenses.

"We've been very disciplined in the back office. We've been very disciplined on the marketing front," said Jeff Hoffmeister, chief financial officer of the Ottawa-based e-commerce software giant, on a Thursday call with analysts.

"What we're doing is we're being really disciplined across all the different markets, products, channels, geographies."

The discipline is a product of Shopify's ongoing efforts to streamline its business and rebound from duo layoffs.

Earlier in the year, Shopify cut 20 per cent or roughly 2,300 people from its staff in an effort to reduce distracting "side quests" that chief executive Tobi Lutke said diverted attention away from the company's main goals. At the same time, it sold its logistics business — once poised to be Shopify's next crown jewel — to Flexport.

By the time, the moves were made, the company had cut 10 per cent of workers in 2022 as its stock fell and Lutke admitted Shopify had misjudged how entrenched pandemic shopping habits would be.

Shopify's third-quarter results indicate Shopify is having some success with its attempt to move forward.

"We are faster, we are leaner, we are more focused on our mission and becoming this global leader in commerce," Harley Finkelstein, Shopify's president, said on the same call as Hoffmeister.

"We laid out a very deliberate vision in the last couple of quarters to balance both operational ambition and financial discipline and the results speak for themselves."

Those results boosted Shopify's stock price. It rose by 19 per cent or $13.08 to reach $80.74 in mid-morning trading.

The results released Thursday show Shopify's net income of US$718 million compared with a loss of US$159 million a year ago.

The company, which keeps its books in U.S. dollars, said the profit amounted to 55 cents per diluted share for the quarter ended Sept. 30 compared with a loss of 12 cents per diluted share in the same quarter last year.

Revenue totalled US$1.71 billion for the quarter, up from US$1.37 billion a year earlier.

The results were helped along by lower operating expenses driven mostly by lower compensation expenses from the company's smaller head count.

But the company also spent much of the quarter focused on marketing and artificial intelligence.

Its biggest marketing coup came in August, when it shared that rival Amazon will release an app within Shopify's ecosystem, letting U.S. merchants that use Amazon's network to add Buy with Prime to their Shopify checkout process.

Buy with Prime is an Amazon program that helps merchants offer speedy shipping on orders made through their own sites by leveraging the Seattle-based business's behemoth fulfilment network.

It also boosted its brand awareness with a partnership with Toronto rapper Drake, who projected giant QR codes outside his concerts that gave fans the chance to win limited edition Nike shows, Nocta outfits and For All the Dogs tees through the Shop app.

French fashion house Pucci, cosmetics brand Anastasia Beverley Hills and singer Jennifer Lopez's beauty company were attracted to the brand around the same time as Drake's partnership got underway.

Those clients got their hands on Shopify Magic, a suite of AI tools that can write product descriptions, email subject lines and headings for online stores. In recent months, the suite grew to include Sidekick, a chatbot merchant customers can use to ask questions about business.

Shopify has said it will continue to build on its AI tools and offerings for clients using its services plans. It raised prices on those plans in January after they remained "largely unchanged" for 12 years.

"I think the success of the standard price change earlier this year proved to us that we can still incrementally change our pricing in the future without creating any major shift in that price to value ratio," Finkelstein said.

Shopify's subscription solutions revenue rose to US$486 million in the third quarter from US$377 million a year ago, while merchant solutions revenue totalled US$1.23 billion, up from US$989 million.

On an adjusted basis, Shopify says it earned 24 cents per diluted share for its most recent quarter compared with an adjusted loss of two per cents per diluted share a year ago.

Analysts on average had expected an adjusted profit of 14 cents per share and US$1.67 billion in revenue, according to estimates compiled by financial markets data firm Refinitiv.

This report by The Canadian Press was first published Nov. 2, 2023.

Companies in this story: (TSX:SHOP)

Tara Deschamps, The Canadian Press