Before the US stock market opened on the evening of August 7th Beijing time, the leading independent e-commerce platform in the United States, Shopify, released its financial report for the second quarter of 2024. Overall, the core operating indicators for payment and subscription services exceeded expectations. The subscription business performed particularly well, and aggressive cost control measures helped the company achieve profits significantly higher than expected. It can be described as an outstanding performance, with detailed key points as follows:

1. In terms of core operating indicators, this quarter, the total Gross Merchandise Volume (GMV) of the Shopify ecosystem was $67.2 billion, with a year-on-year growth of 22.2%, maintaining a steady growth rate, exceeding expectations by approximately $1.5 billion (2.2%). The total processed payments amounted to $41.1 billion, exceeding expectations by $1.1 billion (+2.9%), with a year-on-year growth of 29.7%. The penetration rate of Shopify's own payment channels increased from 59.5% to 61.2% compared to the previous quarter, slightly higher than the expected 60.8%.

Reflecting the subscription business situation, the Monthly Recurring Revenue (MRR) for this quarter was $169 million, with a year-on-year growth of 21.6%, significantly higher than the expected $159 million, making it the most exceeding point in this quarter's financial report. The MRR contributed by Plus merchants grew by 29% year-on-year, while the growth rate of non-Plus merchants' MRR was only 18.6%. In other words, the strong growth in subscription services was driven by Plus merchants.

2. In terms of revenue, the revenue from merchant services this quarter was $1.48 billion, with a year-on-year growth of 18.6%, slightly lower than GMV and GPV, and did not outperform market expectations. This was mainly due to a 7bps decrease in the monetization rate of merchant services (as a percentage of GMV) year-on-year. We believe that the decrease in the monetization rate of merchant services is a reasonable consequence of the increased proportion of Plus merchants.

The revenue from subscription services, consistent with the strong growth in MRR, increased by 26.8% year-on-year, exceeding expectations by 5.6%.

3. From a gross profit perspective, the gross profit margin of subscription services also increased by 1.4 percentage points to 82.8%, not only with stronger revenue growth but also with an increase in gross profit margin. The extent to which gross profit exceeded expectations expanded to 6.4%. On the other hand, due to a slight decline in the monetization rate, the gross profit margin of merchant services decreased by 0.3 percentage points compared to the previous quarter. This resulted in a gross profit of $579 million for merchant services, slightly lower than expected by 1.4%.

4. In terms of expenses, Shopify's significantly lower-than-expected expenses this quarter made a significant contribution to profit. The total operating expenses were approximately $800 million, a full $100 million lower than market expectations (-11.9%). Marketing expenses were $30 million lower than expected, and administrative expenses were halved year-on-year, with only $60 million spent, which was approximately $70 million lower than expected

5. The total gross profit exceeded expectations by about 200 million, and excellent expense control squeezed out about 1 billion in profit. This resulted in a nearly 1.4 billion increase in the core operating profit for the quarter, doubling it. The company's focus on free cash flow profit also saw an increase this quarter to 3.3 billion, up by about 1 billion compared to the previous quarter, exceeding expectations by about 900 million.

Dolphin Research Viewpoint:

Looking at the performance of this quarter, both subscription and merchant services businesses outperformed their operating targets. Although the impact of a decline in monetization rates led to a slight narrowing of revenue exceeding expectations, overall revenue and gross profit indicators were still impressive, mainly driven by stronger subscription business. With exaggerated expense reductions, the incremental profit squeezed out doubled the operating profit under GAAP (although there are also reasons related to the low profit base). Clearly, achieving growth, cost control, and profit release in performance is impressive.

Looking ahead to the next quarter, the company is guiding for around 20% to 25% revenue growth (20.7% this quarter), while expecting expense-to-revenue ratio to be only 41% to 42%, significantly lower than the market's expectation of 44.4%. In other words, high growth and profit margin improvement are expected to continue in the next quarter.

From a valuation perspective, due to the company's current high single-digit P/S valuation and high double-digit P/E valuation, it is in a difficult position to objectively judge whether it is undervalued or overvalued. Judging the future stock price trend will indeed rely more on the trend of marginal changes in performance.

Below is a detailed interpretation of this quarter's financial report:

I. Subscription and Payment Operating Indicators Both Outperform Expectations

As usual, starting with the most reflective operating indicators, this quarter's Shopify ecosystem's total Gross Merchandise Volume (GMV) was $67.2 billion, a year-on-year growth of 22.2%, with a stable growth rate. The actual GMV exceeded expectations by about $1.5 billion (2.2%).

The total payment amount completed through Shopify Payments was $41.1 billion, higher than expected by $1.1 billion (+2.9%), with a year-on-year growth of 29.7%. The payment amount growth rate exceeded the sales growth rate, indicating that the proportion of payments completed through Shopify out of total GMV is increasing, rising from 59.5% to 61.2% compared to the previous quarter, slightly higher than the expected 60.8%. As Shopify can generate more revenue through payments, the increase in payment penetration rate is beneficial for the growth of the company's merchant services revenue.

The Monthly Recurring Revenue (MRR) indicator reflecting the subscription business situation for this quarter is $169 million per month, a year-on-year increase of 21.6%, significantly higher than the expected $159 million. It can be said that subscription revenue is the most exceeding expectation point for this quarter. Among them, the MRR contributed by Plus merchants increased by 29% year-on-year, while the growth rate of non-Plus merchant MRR was only 18.6%, lagging behind the overall growth. In other words, the strong growth of subscription services is driven by Plus merchants.

II. The monetization rate slightly decreased, slightly dragging down merchant service revenue, while subscription services became stronger.

On the revenue side, the revenue from merchant services this quarter was 1.48 billion, an 18.6% year-on-year increase, with growth rate not outperforming GMV and GPV, and not significantly exceeding market expectations. The reason behind this is that the monetization rate of merchant service revenue (as a percentage of GMV) decreased by 7bps year-on-year to 2.21%. Combined with Plus merchant MRR outperforming overall growth, we believe that the decrease in the monetization rate of merchant services is a reasonable consequence of the increased proportion of large merchants with stronger pricing power.

The trend of subscription service revenue and the MRR indicator are closely aligned, with revenue growing by 26.8% year-on-year, exceeding expectations by 5.6%. From a revenue perspective, the performance of subscription revenue is stronger.

Thanks to strong subscription revenue, Shopify's total revenue for this quarter was 2.045 billion, a 20.7% year-on-year increase, slightly higher than expected by 1.7%.

III. The gross profit margin of merchant services slightly decreased, while the gross profit margin of subscription services increased.

From a gross profit perspective, not only did the revenue of subscription services exceed expectations, but the gross profit margin also increased by 1.4pct to 82.8% on a month-on-month basis. After the amplification of the profit margin increase, the gross profit exceeded expectations by 6.4%.

In contrast, as the monetization rate of merchant service business declined on both year-on-year and quarter-on-quarter basis, the gross profit margin of merchant services this quarter decreased slightly by 0.3pct. As a result, the gross profit of merchant services was $579 million, slightly lower than the expected 1.4%.

By emphasizing these two businesses, the total gross profit still exceeded expectations by 2.1%, with nearly $10.5 billion, approximately $0.2 billion more than expected. Year-on-year growth of 25.1% outpaced the 20.7% growth rate of total revenue.

IV. Slashing management expenses, the biggest contributor to incremental profit

From an expense perspective, this quarter, Shopify's significantly lower-than-expected expense contribution to profit release is more substantial. Specifically, this quarter's total operating expenses were about $800 million, a full $1 billion less than market expectations (-11.9%). All four operating expenses were lower than expected, with marketing expenses being $30 million lower than expected, and management expenses more than halved year-on-year, at only $60 million, a full $70 million less than expected. Even without considering the expectation gap, the proportion of the four operating expenses to revenue all decreased compared to the previous period.

However, the performance disclosure did not explain why management expenses saw such a drastic decline. It is worth paying attention to whether there will be an explanation during the conference call.

V. Doubling operating profit through increased revenue and cost control

Mainly due to stronger-than-expected subscription revenue, the company's total gross profit this quarter exceeded expectations by approximately $0.2 billion, and by controlling operating expenses, an additional $1 billion in profit was squeezed out compared to expectations. As a result, the company's core operating profit increased by nearly $140 million quarter-on-quarter, doubling compared to the previous period.

In terms of the company's focus on free cash flow profit, this quarter's profit was $330 million, an increase of approximately $100 million from the previous quarter, exceeding the market's expected $245 million by about $90 million. Although the outperformance was not as significant as GAAP operating profit, it undoubtedly significantly outperformed expectations.