Shopify’s first outdoor brick-and-mortar location in Los Angeles.HO/The Canadian Press
Shopify Inc. SHOP-T posted a massive second-quarter loss and warned of more operating losses ahead as the Ottawa-based technology provider grapples with an e-commerce slowdown that led it to cut 10% of its global workforce this week.
The company, which provides tools for businesses and creators to manage their stores and sell their products and services online, reported a net loss of $1.2 billion, or 95 cents per share, on Wednesday, compared with a profit of $879.1 million. a year earlier, or 69 cents per share. But the net loss includes a net unrealized loss of US$1 billion in equity and other investments, Shopify explained.
On an adjusted basis, Shopify reported an operating loss of $41.8 million, or 3 cents a 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 2022 “will end up being different, more of a transition year, where e – Trade has largely returned to the pre-Covid trend line.”
Gross merchandise volume, a figure that shows the value of sales through the Shopify platform, grew 11 percent from a year ago to $46.9 billion this quarter, but that also missed estimates for 48.6 billion dollars. Revenue rose 16 percent year over year to $1.3 billion, which was also slightly below projections of $1.33 billion.
Wednesday’s financial results underscore the difficulties Shopify is facing as growth in its core e-commerce business has slowed sharply of late. It’s the second quarter in a row that Canada’s tech leader has missed analysts’ forecasts. In the first quarter, Shopify came up short for the first time since going public in 2015.
On Tuesday, Shopify announced this internally is cutting about 1,000 jobs, as CEO Tobias Lutke acknowledged and apologized for overestimating e-commerce growth, leading Shopify to hire too many people to meet that expected demand. “I was wrong,” said Mr. Lutke in a memo to nearly 10,000 employees worldwide.
In Wednesday’s conference call, Mr. Lutke tried to further justify what led to the layoffs. He explained that founder-led, innovation-focused companies like Shopify do this deliberately high stakes, but said the layoffs taught him a “valuable lesson” about future decisions related to the company’s growth.
“I know in general there’s not a lot of appetite for taking risks, but I think our company in particular is defined by the fact that we don’t follow any kind of orthodox playbook,” said Mr. Lutke. “There’s no ‘This is prepackaged Shopify’ on the shelves at Barnes & Noble, and we have to make it up 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 show that e-commerce trends “are deteriorating even faster than expected.” Meanwhile, Royal Bank of Canada analysts Paul Treiber and Daniel Perlin moved their long-term sentiment on Shopify from “positive” to “negative” after the earnings report.
Online spending took off at the start of the COVID-19 pandemic, when consumers were stuck at home due to public health restrictions and loaded up with cash they weren’t spending on vacations or entertainment These trends gave e-commerce leaders like Shopify a big boost, but they’ve largely reversed themselves since then.
Now, consumers are gradually returning to more physical shopping in stores. They are also curbing their discretionary spending amid rising inflation and economic uncertainty as a result of the war in Ukraine and rising interest rates.
Ms Shapero told analysts that the “macro environment” and the sudden reversal of pandemic trends is forcing the company to “rigorously assess and adjust our spending priorities”. It also led to unexpected losses this quarter, he said.
Shopify’s $2.1 billion acquisition of startup Deliverr Inc. of San Francisco, the company’s biggest deal to date, and its ambitious compensation overhaul that would give employees more choices about how they’re paid is another reason for those losses, he said.
Shopify will delay hiring for the rest of 2022 and end the year with a “modest” headcount, Ms. Shapero said. “The company is not interested in having linear headcount growth,” Lutke added. Neither would say whether or not more layoffs are expected if the company’s profit margins continue to shrink.
Shares of Shopify rallied 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 to close at $45.17.
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