Shopify Q4 2024 Earnings: The Age of Efficiency Comes to Shopify

Shopify had a great earnings, but what is going on under the covers is more interesting.

Revenue: Shopify grew 26% y/y to almost $9B. Subscription revenue grew 28%, and Merchant Services grew 25%. Subscription growing faster than merchant services is good news for Shopify cash flow. Merchant services is now 73% of Shopify revenue, slightly down from 75% last year. Still a big number.

Gross margins: Holding steady. Subscriptions ~81% GM, and Merchant Solutions ~39% GM. Largely unchanged y/y.

Shopify is not producing more gross profit on a % basis. Yet Free Cash Flow is exploding. How?

The expense lines are where things get interesting.

R&D: Reduced 21% year over year. Now only 15% revenue. Wow. AI, removing management layers/layoffs.

Sales: Grew only 13.9% y/y. On double revenue growth. High word of mouth is likely a key component of this.

G&A: Down 16.4% y/y. Support likely a key component of this.

Free Cash Flow improved from $905M to $1.6B, a 78% gain. Mostly with expense management, and the benefits of their marketing flywheel (great word of mouth, merchants people look to, etc.). This is a good formula.

E-F-F-I-C-I-E-N-C-Y

But they can only do it due to coming from a large base of R&D, as well as a pre-existing marketing and word of mouth. Other platforms must fight to be on an RFP evaluation list. Shopify is kind of beyond that, even in segments where their win rate is lower than their traditional B2C SMB to mid-market core.

Regarding Enterprise:

Lots of wins and progress, but it's not a geyser. More like a faucet. Definitely making progress in Enterprise, though not as fast as they might like (my feeling not theirs). Patience will still continue to be the watchword. My personal experience is, even if the client wants to move, it's a risk, and there are costs involved. And time. Enterprise 6-9 months if the brand is of any size. Much faster for the "experimental brands". So the likelihood to move goes down as an inverse function to the size of the revenue moved.

My read is Magento and other "end of life" custom platforms are more likely to be moving because they have to. The Salesforce folks are still moving, but at a slower pace, and it is more often a "want to" move than a "have to" move from the point of view of the CEO. This reduces the conversion rate slightly or delays the project.

The fact that Shopify is in every deal allows this conversion rate not to matter as much. Harley is correct the business is coming to them as a rule, over time, rather than the other way around. The numbers reflect this. At least in Direct to Consumer. Industrial B2B still nascent, and POS is kind of in-between the two of these - but of the group POS is the huge grower.

Other tidbits:

* Shopify now 12% of eCommerce marketshare.

* International 2 years at 30% growth

* Shop Pay now 41% of GPV