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Growing Merchant Base Drives Shopify's (SHOP) Q3 Earnings

Shopify Inc. SHOP reported non-GAAP earnings of 5 cents per share in third-quarter 2017, comparing favourably with the loss of 2 cents per share incurred in the year-ago quarter and the Zacks Consensus Estimate of a loss of 2 cents per share.

Revenues jumped 72% from the year-ago quarter to $171.5 million, comfortably surpassing the Zacks Consensus Estimate of $166 million. The figure was also better than the management’s guided range of $164-$166 million.

Shopify continues to launch a number of merchant-friendly applications to meet the requirements of a dynamic retail environment, thereby adding to its merchant base which gets reflected in the year-over-year top-line growth.

Notably, shares of Shopify have gained 132.1% on a year-to-date basis, substantially outperforming the 29.8% rally of the industry it belongs to.

Quarter Details

Subscription Solutions revenues surged 65% to $82.4 million. This upside was driven by the continued rapid growth in Monthly Recurring Revenue (“MRR”) with the addition of many new merchants.

As of Sep 30, 2017, MRR was $26.8 million, up 65% from $16.3 million as of Sep 30, 2016. Shopify Plus accounted for $5.3 million or 20% of MRR compared with 15% of MRR in the year-ago quarter.

Merchant Solutions revenues grew 79% to $89 million, backed primarily by the growth of Gross Merchandise Volume (“GMV”), which soared 69% from the year-ago quarter to $6.4 billion. Gross Payments Volume (“GPV”) grew to $2.4 billion, which accounted for 37% of GMV processed in the quarter compared with $1.5 billion or 39% in third-quarter 2016.

Notably, Shopify’s Instagram channel was unveiled in the quarter, connecting merchants with a huge base of monthly active users. Additionally, the global fashion search engine giant, Lyst, was also added as a channel for merchants, helping the sellers reach new markets in turn. Management expects the newly launched eBay Inc. EBAY sales channel to be beneficial to the merchants, going forward.

Tthe company also enhanced its shipping capabilities by incorporating bulk label printing to Shopify Shipping. In addition, it integrated DHL express as its shipping partner.

Shopify has also unveiled an augmented reality (“AR”) based application for the home and lifestyle brand of Chip and Joanna Gaines called Magnolia. The first-of-its-kind merchant product on the Shopify platform has been built on Shopify Mobile Buy SDK and Apple Inc.'s AAPL ARKit, enabling users to check out how the goods look in real life surroundings.

Management was particularly positive about the company’s partner ecosystem that helps it identify and reach out to the merchants, otherwise unreachable. The company added quite a few prominent brands having the likes of Phoenix Suns, RBS, Josie Maran and Rebecca Minkoff during the quarter. Consumer packaged goods providers like Gurmay, Mai, Blue Diamond Growers and Beer Nuts also enriched the merchant base.

Shopify Inc. Price, Consensus and EPS Surprise

Shopify Inc. Price, Consensus and EPS Surprise | Shopify Inc. Quote

Operating Details

Gross profit climbed 86% to $100 million, primarily driven by a robust performance across Subscription Solutions and Merchant Solutions segments.

Adjusted operating income was $1.7 million against the loss of $2.2 million, reported in the year-ago quarter.

Balance Sheet

Shopify ended the quarter with cash, cash equivalents and marketable securities balance of $926.6 million compared with $932.4 million as of Jun 30, 2017.

Guidance

For fourth-quarter 2017, Shopify projects revenues in the range of $206-$208 million. Adjusted operating income is expected to be in the range of $2-$4 million.

For full-year 2017, management projects revenues in the range of $656-$658 million (up from $642-$648 million).

The adjusted operating loss guidance was narrowed to $1.5-$3.5 million from a range of $7-$11 million.

Zacks Rank & Key Pick

Shopify carries a Zacks Rank #3 (Hold). A better-ranked stock in the broader technology sector is Applied Materials, Inc. AMAT with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The long-term earnings growth rate for Applied Materials is projected to be 17.1%.

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