Shopify Inc. — Fiscal 2015 Form 20-F Summary
Business context and reporting period
Shopify is a Canadian foreign private issuer providing a cloud-based, multi-channel commerce platform primarily for small and medium-sized businesses. Merchants use the platform for online and mobile storefronts, social commerce, physical retail, payments, shipping, analytics and related services. This filing is an annual report for the year ended December 31, 2015, rather than a standalone quarterly filing; the filing text does not provide separate Q4 financial statements.
- Reporting currency: U.S. dollars; accounting basis: U.S. GAAP.
- Merchants at December 31, 2015: 243,468 across approximately 150 countries, up 68.3% from 144,670 at December 31, 2014.
- 2015 gross merchandise volume: $7.7 billion, up 104.8% year over year.
- Employees and contractors: 1,048 at year-end, compared with 535 in 2014.
- The company completed its initial public offering in May 2015, issuing 8.855 million Class A subordinate voting shares at $17.00 per share and receiving net proceeds of approximately $136.3 million.
Financial performance and key metrics
| US$ millions, except per-share data | 2015 | 2014 | Change |
|---|---|---|---|
| Subscription solutions revenue | $112.0 | $66.7 | +68.0% |
| Merchant solutions revenue | $93.3 | $38.4 | +143.1% |
| Total revenue | $205.2 | $105.0 | +95.4% |
| Gross profit | $111.1 | $61.8 | +79.7% |
| Gross margin | 54.1% | 58.8% | -4.7 percentage points |
| Loss from operations | $(17.8) | $(21.6) | Improved $3.9 million |
| Net loss | $(18.8) | $(22.3) | Improved $3.5 million |
| Net loss per share | $(0.30) | $(0.57) | Improved $0.27 |
| Net loss margin | -9.2% | -21.2% | Improved 12.0 percentage points |
| Operating cash flow | $15.8 | $(0.8) | Improved $16.6 million |
- Operating expenses were $128.8 million, including sales and marketing of $70.4 million, research and development of $39.7 million and general and administrative expense of $18.7 million.
- Stock-based compensation and related payroll taxes totaled approximately $10.5 million in the selected financial data; the financial statement note separately reports stock-based compensation expense of $8.2 million.
- Advertising expense was $45.4 million in 2015, compared with $31.1 million in 2014.
- Foreign exchange loss increased to $1.2 million from $0.7 million, principally reflecting the company’s exposure to Canadian-dollar operating costs.
- Cash and cash equivalents were $110.1 million and marketable securities were $80.1 million at December 31, 2015, for combined cash, cash equivalents and marketable securities of $190.2 million.
- Working capital was $165.2 million, total assets were $243.7 million, total liabilities were $48.4 million and shareholders’ equity was $195.3 million.
- The company had no borrowings drawn under either its C$1.5 million Royal Bank of Canada facility or its $25.0 million Silicon Valley Bank revolving facility at year-end. The Silicon Valley Bank facility was scheduled to mature on March 11, 2016 and was secured by substantially all assets other than intellectual property, which was subject to a negative pledge.
- Capital expenditures included $16.5 million for property and equipment and $4.5 million for intangible assets. Net cash used in investing activities was $83.8 million, while financing activities provided $137.9 million, primarily from the IPO.
Material changes versus the prior comparable period
- Revenue growth remained strong, with merchant solutions growing substantially faster than subscription solutions as payments and other transaction-based offerings expanded.
- Gross margin declined from 58.8% to 54.1%, reflecting the increasing mix of merchant solutions, which carry higher payment-processing and hardware-related costs.
- The operating loss narrowed despite substantial investment in sales and marketing, research and development, infrastructure and personnel.
- The net loss narrowed by $3.5 million, while operating cash flow turned positive from negative $0.8 million in 2014.
- Cash, cash equivalents and marketable securities increased by $130.5 million, primarily because of the IPO proceeds, partially offset by investing expenditures and operating losses.
- The company transitioned from a private-company capital structure to a dual-class public-company structure. Class B multiple voting shares carry 10 votes per share; holders of Class B shares collectively held approximately 80% of voting power as of February 9, 2016.
Outlook, management commentary, risks and unusual items
Management’s strategy is to continue investing in merchant acquisition, Shopify Plus, product development, payment and shipping solutions, infrastructure, international expansion, strategic partnerships and the third-party ecosystem. Management expects growth-related expenditures to continue increasing and states that the company may not achieve profitability in the near term or at all. The filing does not provide quantitative revenue, margin or earnings guidance.
- Key operating risks include sustaining rapid merchant growth, retaining small and medium-sized business customers, increasing revenue from existing merchants and managing operating scale.
- Merchant solutions expose the company to payment-processing costs, chargebacks, fraud, reserves, regulatory requirements and dependence on Stripe as a payment-service provider.
- Cybersecurity, privacy, denial-of-service attacks, software defects, service interruptions and dependence on a limited number of data centers could affect merchant retention, reputation and financial results.
- Competition, pricing pressure, changing technology, mobile-platform dependence, third-party apps and partner relationships may adversely affect demand or margins.
- Results are subject to seasonality, with merchant solutions revenue historically higher in the fourth quarter because of holiday-related gross merchandise volume.
- The company had an accumulated deficit of $47.9 million at December 31, 2015 and expects continued investment in sales, research and development, support, infrastructure and public-company compliance.
- Future minimum operating lease payments totaled $80.1 million, including $5.8 million due in 2016 and $42.6 million due thereafter.
- The company reported no material pending litigation, no material off-balance-sheet arrangements and no significant changes after the audited financial statements’ date. It has received intellectual-property infringement notices and may incur defense, licensing or settlement costs.
- Internal control reporting was subject to the transition relief available to newly public and emerging growth companies; the filing does not include management’s assessment or an auditor attestation on internal control over financial reporting.
Important facts for investors to verify
- Confirm the annual results and do not treat the filing as a standalone 2015 fourth-quarter filing; Q4-specific revenue, profit and cash-flow values are not clearly provided in the filing text.
- Assess whether merchant solutions growth can continue without further deterioration in gross margin.
- Review the company’s path to profitability, including customer-acquisition costs, sales and marketing intensity, stock-based compensation and infrastructure spending.
- Verify the status, renewal and covenant terms of the Silicon Valley Bank credit facility after its March 11, 2016 maturity date.
- Evaluate liquidity after considering operating losses, capital expenditures, lease commitments, payment-processing reserves and potential additional financing needs.
- Review the dual-class voting structure, outstanding options and potential dilution; 10.5 million legacy options were outstanding at year-end and were exercisable for Class B multiple voting shares.
- Monitor payment, privacy, cybersecurity, tax, intellectual-property and regulatory contingencies, including the company’s Canadian tax losses, SR&ED pools and investment tax credits.