Shopify’s first outdoor location in Los Angeles.HO/The Canadian Press
Shopify Inc. SHOP-T posted a huge second-quarter loss and warned of more operating losses as the Ottawa-based technology provider grapples with an e-commerce slowdown that prompted it to cut 10 percent of its global workforce this week.
The company, which provides tools for businesses and creators to run their stores and sell their products and services online, reported a net loss of $1.2 billion on Wednesday, or 95 cents a share, compared with a profit of 879.1 million US dollars a year earlier, or 69 US cents per share. But the net loss included a $1 billion net unrealized loss on equity and other investments, Shopify explained.
On an adjusted basis, Shopify reported an operating loss of $41.8 million, or 3 cents per share, while analysts expected a profit of 2 cents. The company said so too expects adjusted operating losses in the third and fourth quarters of this year to exceed those of the second quarter.
Amy Shapero, Shopify’s chief financial officer, said on a conference call with analysts on Wednesday that operating income has grown over the past five years, but she now believes that 2022 “will end up being a different, more of a year of a transition in which e-commerce has largely returned to the pre-COVID trend line.”
Gross merchandise volume, a figure that shows the value of sales through the Shopify platform, rose 11 percent from a year ago to $46.9 billion in the quarter, but that also fell short of estimates of $48.6 billion. Revenue rose 16 percent year over year to $1.3 billion, also slightly below estimates of $1.33 billion.
Wednesday’s financial results underscore the struggles Shopify has faced with growth in its core e-commerce business slowing sharply recently. It’s the second quarter in a row that the Canadian tech leader missed analysts’ estimates. In the first quarter, Shopify underperformed for the first time since going public in 2015.
On Tuesday, Shopify internally announced it is cutting about 1,000 jobs, as CEO Tobias Lüttke acknowledged and apologized for overestimating e-commerce growth, which caused Shopify to hire too many people to meet expected demand. “I got this wrong,” Mr. Lüttke said in a memo to nearly 10,000 employees worldwide.
On Wednesday’s conference call, Mr. Luttke tried to further justify what led to the layoffs. He explained that founder-driven and innovation-focused companies like Shopify consciously do big bets, but said the layoffs taught him a “valuable lesson” for future decisions related to the company’s growth.
“I know there’s usually not a huge appetite for risk-taking, but I think our company is particularly defined by not following any orthodox play,” Mr. Lüttke said. “There’s no ‘This is pre-baked Shopify’ on the shelves at Barnes & Noble, and we have to make up for it on the fly.”
Samad Samana, managing director and analyst at Jefferies Group LLC, told clients in a note that Shopify’s second-quarter financial results showed that e-commerce trends were “deteriorating even faster than expected.” Meanwhile, Royal Bank of Canada analysts Paul Treiber and Daniel Perlin changed their long-term sentiments on Shopify from “positive” to “negative” following the earnings report.
Online spending surged at the start of the COVID-19 pandemic as consumers stayed home due to public health restrictions and were flush with money they weren’t spending on vacations or entertainment. These trends gave e-commerce leaders like Shopify a big boost, but they’ve largely reversed since then.
Consumers are now gradually returning to more physical in-store shopping. They are also tightening discretionary spending amid rising inflation and economic uncertainty stemming from the war in Ukraine and rising interest rates.
Ms. Shapero told analysts that the “macro environment” and the sudden reversal of pandemic trends forced the company to “hardly evaluate and adjust our spending priorities.” It also led to unexpected losses this quarter, she said.
Shopify’s $2.1 billion acquisition of San Francisco startup Deliverr Inc., the company’s biggest deal to date, and its ambitious compensation overhaul that will give employees more choice in their pay is another cause of those losses, she said.
Shopify will slow hiring until the end of 2022 and end the year with a “modest” number of employees, Ms. Shapero said. “The company is not interested in a linear increase in the number of employees,” added Mr. Luttke. Neither said whether more layoffs are expected if the company’s profit margins continue to shrink.
Shares of Shopify rose on Wednesday after falling nearly 14 percent on the Toronto Stock Exchange on Tuesday to close at $40.69. The stock recovered much of those losses and closed at $45.17.
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