Shopify Operating Income Jumps 66%: Rapid Earnings Reaction
Shopify grew sales faster than profit, and its spending discipline closed the gap.
Shopify reported a remarkable 66% increase in operating income for the third quarter, driven by a 32% jump in revenue to $3.74 billion. This surge was primarily fueled by payments, not recurring subscriptions, which caused a slight dip in gross margins. However, stringent cost-cutting measures managed to offset this challenge. The company's monthly recurring revenue from subscriptions rose to $230 million from $193 million.
Merchant solutions, which mainly involve payments and grow with merchants' sales volume, saw a faster rise and now constitute 78% of revenue, up from 75% last year. Despite payments having narrower profit margins than software, Shopify's gross profit still grew by 28%, a rate slower than revenue growth. Shopify managed to keep its operating expenses up by only 16%, which was roughly half the growth rate of revenue.
Management expects this trend to continue into the fourth quarter, with revenue growth anticipated at a low-thirties pace and gross profit growth at a high-twenties pace. The key to maintaining this profit momentum will be managing costs effectively. Investors should keep an eye on the gap between revenue growth and gross profit growth in the upcoming quarter.
If this gap widens, Shopify will need to rely even more on disciplined spending to boost profits. For those looking to invest wisely, The Motley Fool offers premium services for stock recommendations and portfolio guidance.
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