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Shopify’s Fulfillment Roadmap Sounds a Lot Like Amazon

Shopify generated $1.38 billion in revenue in its 2021 holiday quarter, a 41 percent increase from $977.8 million a year prior, and beating initial Wall Street estimates calling for $1.33 billion, according to Refinitiv data. And despite a net loss of $371.3 million, adjusted earnings per share were $1.36, beating Wall Street’s expectations of $1.24 per share.

However, Shopify’s stock fell more than 18 percent in morning trading Wednesday amid a more tepid outlook for 2022, particularly early in the year.

In a Nutshell: Shopify president Harvey Finkelstein highlighted four key investment themes for 2022 in the company’s earnings call, including building buyer relationships, going global, growing from “first sale to full scale” and simplifying fulfillment.

But as these investments kick in, the e-commerce player anticipates a revenue slowdown versus 2021’s 57 percent revenue growth. The company expects first-quarter year-over-year revenue growth to be the year’s lowest and the fourth quarter to be strongest.

Shopify expects subscriptions solutions revenue growth to be driven by a larger increase in merchants using the platform in 2022, which the company says will be higher in 2021. Merchant solutions revenue growth is expected to be more than twice the rate of subscription solutions revenue growth year-over-year.

The Canadian company intends to reinvest aggressively throughout 2022, deploying all of its gross profit dollars back into the business. The e-commerce services and technology provider, which powers online experiences for Allbirds, Gymshark and Figs, anticipates capital expenditures of $200 million in 2022, as well as stock-based compensation expenses and related payroll taxes of $800 million and amortization of acquired intangibles of $28 million.

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And in 2023 and 2024, Shopify is expected to spend approximately $1 billion on more self-operated warehouse hubs to further expand the Fulfillment Network it has steadily developed since 2019. Finkelstein said the company was moving “out of the prototype phase and into the build phase” of the network.

“We are consolidating our network to larger facilities, we’ll operate more of them ourselves, and we’ll unify the warehouse management software that we’ve been building and testing over the past 18 months,” Finkelstein said. “We expect that these changes will enable us to deliver packages in two days or less to more than 90 percent of the U.S. population while minimizing the inventory investment for SFN merchants.”

Amy Shapero, Shopify’s chief financial officer, noted that the company still uses partner warehouse management software in some cases to integrate with Shopify’s back office and checkout functionalities so merchants can seamlessly offer and achieve their delivery promises. Shapero said the e-commerce giant is looking to expand its merchant value proposition even more by increasing one-day delivery coverage in the U.S. and building out an increasingly enhanced returns functionality.

For the 2021 fourth quarter, gross merchandise value (GMV) sold across Shopify’s merchants was $54.1 billion, an increase of $12.9 billion or 31 percent over the fourth quarter of 2020.

From Black Friday through the end of Cyber Monday, sales on Shopify’s platform reached more than $6.3 billion. This compares with more than $5.1 billion in GMV for the global Black Friday Cyber Monday period in 2020.

Over the holiday weekend, Shopify purchased enough carbon removal to completely eliminate the impact of carbon emissions from shipping on every single order on its platform, resulting in nearly 60,000 metric tons of carbon emissions offset.

As more sellers leverage the Shop Pay solution, gross payments volume (GPV) grew 45 percent to $27.7 billion, which accounted for 51 percent of GMV processed in the quarter, versus $19.1 billion, or 46 percent, for the fourth quarter of 2020.

Gross profit grew 37 percent to $692.7 million in the fourth quarter of 2021, compared with $504.4 million for the fourth quarter of 2020. Gross margin declined to 50.2 percent in the quarter from 51.6 percent in the year-ago period, an approximately 140-basis-point (1.4-percentage-point) decrease.

As of Dec. 31, 2021, Shopify had $7.77 billion in cash, cash equivalents and marketable securities, compared with $6.39 billion at Dec. 31, 2020.

Net Sales: Total revenue in the fourth quarter was $1.38 billion, a 41 percent increase from the $977.8 million in the comparable quarter in 2020.

Subscription Solutions revenue was $351.2 million, up 26 percent year over year from $279.4 million, primarily due to more merchants joining the platform.

Merchant Solutions revenue was $1.03 billion, up 47 percent year over year from $698.3 million, driven primarily by the growth of GMV, exceeding $1 billion of revenue for the first time in a single quarter.

Monthly Recurring Revenue (MRR) as of Dec. 31, 2021 was $102 million, surpassing $100 million for the first time. MRR increased 23 percent year over year, up from $82.6 million as of Dec. 31, 2020 as more merchants joined the platform and the number of retail locations using POS Pro increased. Shopify Plus contributed $29.8 million, or 29 percent, of MRR compared with 25 percent of MRR as of Dec. 31, 2020.

Total revenue for the full year 2021 was $4.61 billion, a 57 percent increase over 2020. Subscription Solutions revenue grew 48 percent to $1.34 billion, while Merchant Solutions revenue grew 62 percent to $3.27 million.

Net Earnings: Net loss for the fourth quarter of 2021 was $371.3 million, or $2.95 per basic and diluted share loss, compared with net income of $123.9 million, or 99 cents per diluted share, for the fourth quarter of 2020.

The holiday quarter’s net income includes a $509.7 million net unrealized loss on the company’s equity and other investments, largely tied to recent stock selloffs of buy now, pay later provider Affirm and cross-border commerce platform Global-E.

Adjusted net income for the quarter was $172.8 million, or $1.36 per diluted share, compared with adjusted net income of $198.8 million, or $1.58 per diluted share, for the 2020 period.

Operating income for the fourth quarter of 2021 was $14.4 million, or 1 percent of revenue, versus income of $112.5 million, or 12 percent of revenue, for the comparable period a year ago. Adjusted operating income was $130.2 million, or 9 percent of revenue.

CEO’s Take: “In the last two years we’ve really focused on not getting in too many adjacencies and being clear with our partners what it is we want to accomplish,” Shopify CEO Tobi Lutke told Wall Street analysts. “We’re just really sweating the details of the core parts of the business. If you’re trying to predict the direction we’re going…I think we told everyone roughly which parts of the space we want to solve, and we are going to get better and better in those parts.”