February 17th, 2025: Shopify Q4 2024 earnings: The age of efficiency comes to Shopify, it’s not just you- age of efficiency accelerating, Amazon Q4 earnings wins the Grammy for free cash flow and more
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It’s February 17, 2025 and this is the Watson Weekly - your essential eCommerce Digest!
Today on our show:
Shopify Q4 2024 Earnings: The Age of Efficiency Comes to Shopify
It’s Not Just You - Age of Efficiency Accelerating
Amazon Q4 Earnings Wins the Grammy for Free Cash Flow
Amazon Ad Engine Getting Hungry: Look Out Google Shopping
- and finally, The Investor Minute which contains 5 items this week from the world of venture capital, acquisitions, and IPOs.
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BUT FIRST in our shopping cart full of news….
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 Gross Payments Volume
All told, you see Shopify growing but also you see them shrinking - expenses that is. Expect headcount to level off for the next 2 years from what I can see here.
Our Second Story
It’s Not Just You - Age of Efficiency Accelerating
Our last story talked about how the age of efficiency is coming for Shopify. But it’s not just Shopify, it seems to be all of us.
I’ve spoken with over a dozen business owners across platforms, brands, retailers and agencies. And the consensus view seems to be simple.
2025 is already not the growth oriented year we thought it could be.
In 2024 Nick Kaplan and I talked about the dawn of the Age of Efficiency. You could see it everywhere but I always pointed back to Walmart and Amazon leading the brigade — prioritizing margin dollar growth over revenue.
Then last year a lot of growth taken up by Amazon, Walmart, Shein and Temu. It leaves little for the rest of us.
Well the 2024 ship has come in and CFOs everywhere are asserting themselves even more.
In short - the Age of Efficiency has kicked into overdrive.
In many ways I’m not surprised this is how early 2025 looks. Many companies missed 2024 growth numbers which unless they were aggressively cutting means they missed profit forecasts by a wide margin.
I still see big projects starting but fewer. The replatforms in flight seem more like “have to” than “want to”. Which is tough news in the platform and system integrator world. The ones that are starting were many times supposed to start last year.
For brand builders this means it could also be a challenging year. CFOs demanding a pound of flesh from every department. “Brand-based” advertising starts to sound like a hope and a prayer in the Board room.
Cuts are certain, growth is uncertain. A new mindset is needed to focus those with the purse strings. Not one based on hope but one based on the company’s long term strategic plan.
First question: Why does this brand exist and how will it exist without investment and then growth?
Second question: what are our growth consumer segments?
Third question: How do we prioritize our resources to serve them?
Not that cuts will not happen - they will - but if there is no growth story there is no brand story.
Any monkey can cut costs indiscriminately. And if we let them, any monkey will. It’s up to change agents to make the case.
[References:]
Our Third Story
Amazon Q4 Earnings Wins the Grammy for Free Cash Flow
Many of us watched the Grammys this week, and if I had to award a Grammy for cash flow this earnings season, it would go to Amazon. They are indeed not like the rest of us.
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- Q4 NA Segment revenue grew 10% y/y, but operating income was up 43%. (Globally up 60%). NA Operating margin jumped to 8% in Q4 (from 6% last year on average)
- Q4 INTL Operating income y/y went from -$400M to +$1.3B.
- Q4 Net Income doubled. Doubled. DOUBLED.
- 2024 NA operating income up 68% y/y (net sales up 10%)
- Intl operating income went from -$2.6B to +$3.8B. wow. Wow. WOW. (net sales up 8%)
- AWS operating income up 62% (net sales up 19%)
- AWS now $115B annual run rate / Ads business now $69B run rate
Growing cash flow faster than revenue. International profitable for the first time ever.
Odds and ends:
* Online stores up 8%
* Physical stores up 8% (at this point, they should sell it off? 6th times the charm?)
* Advertising up 18%
* Will spend $100B+ on capex in 2025, mostly on AWS (say 80% = my number). rest on logistics, tech, etc.
* Third-party unit % = 62% (highest ever)
* Overall sales and marketing expenses went down by 1%, yet sales went up 8%. Who does that?
* Unit sales up 11% (ahead of revenue)
* Redesigned inbound inventory network ("big architectural change") in Q4. Of course it shit the bed. But they will fix. Give them 2 quarters. Why they redesigned this in Q4 I don't understand.
* We've got about 1,000 different generative AI applications we've either built or in the process of building right now.
Overall, financial types didn't love guidance reduced because of AWS server useful life decreasing, currency headwinds, and they also don't love Capex so much. But still, a lot to like here and 9-10% growth is a good baseline for the leader in eCommerce.
[References:]
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And Our Last Story
Amazon Ad Engine Getting Hungry: Look Out Google Shopping
Will Amazon add a comparison shopping engine on top of its marketplace results? We may soon find out.
This week, Amazon made an announcement that it was starting to experiment in its mobile app to send users off Amazon. Seems crazy right? What about all the money Amazon spends to get users in the app? Well, let's be clear about the backdrop.
1 - Google continues to be under threat from AI, particularly ChatGPT and others. So we are in a particularly turbulent period of disruption that a leading edge set of consumers are working through new behaviors, which over the next 10+ years will ripple through the larger population.
2 - Amazon's own AI ambitions need more user intent data. A lot of that data is going to Google and ChatGPT today. Amazon is on the outside looking in.
3 - Amazon's needs more ad inventory. Prime Video and live sports have been huge unlocks for Amazon, and video ads are getting much smarter/interactive. But online, people go to Amazon to shop for things with a guarantee to shop quickly, not to find any product across the world. Above the fold of most Amazon searches are 60%+ or more populated with ads. There is only so much more to "add". More search terms creates more ad inventory. Google has been the best at this for almost a generation now.
So what is Amazon's experiment? Amazon says:
"we’ll show select products in our search results even if we don’t sell them in our store, and link to the brand’s website to make it easy for customers to purchase them there"
Notably, the quote is from Amazon's VP of search and "conversational shopping". Amazon recognizes that consumer purchase experiences can increasingly become a conversation and the destination inventory may not be in an Amazon-affiliated warehouse.
How does Amazon get information from a brand?
Right now, you have to request to get into the experience via an e-mail address. Soon, you may see Amazon become more like a comparison shopping engine. Perhaps the engine that Google Shopping could have been if Google knew what it was doing.
The fact that the experience is in Amazon's mobile app means that Amazon has a pretty good idea where you are as well which could increase the localized experience.
The fact that a lot of this messaging around this announcement is for "brands" and not "sellers" gives you some idea where their priorities lie. I expect this will could tied to Brand Registry even. More information to display means users can ask Amazon more questions and get better answers. It also ultimately gives Amazon more ad surface to display.
Amazon is also targeting Google "second search" behavior which is also common. After Amazon, Google Shopping is many times my second search. Amazon is asking a simple question: "Why not us?"
We might soon know the answer.
[References:]
It’s That Time Friends, for our Investor Minute. We have 5 items on the menu today.
First
Sporting-Goods Maker Vista Outdoor Gets $2.9 Billion Takeover Offer
Outdoor recreation platform Vista Outdoor received a $2.9 billion takeover offer from PE firm MNC Capital Partners at $35 per share, which it reviewed and ultimately turned down. Vista Outdoor would agree to a deal in which it divided itself in two, selling its ammunition business, The Kinetic Group, to Czechoslovak Group (CSG) for $2.2 billion. Its performance gear brand, Revelyst, was sold to Strategic Value Partners for a reported $1.1 billion.
Second
The Race to Build the Generative AI Platform for Fashion Design
Raspberry AI raised $4.5 million in Seed Funding and announced $24 million in Series A funding. The funding will be invested in the company's technology and hiring talent. Why is this important? The fashion design and creative sector is amid startup competition, and they want to offer generative AI solutions to accelerate the design of goods. This is another sector in which technology will accelerate the design of multiple versions of a single item.
Third
Groupe Dynamite Launches Canadian IPO
Canadian women’s clothing retailer Groupe Dynamite closed it initial public offering and raised C$300 million. Groupe Dynamite had revenue of C$888 million and net income of C$128 million for the year ended August 3, 2024, and total debt of C$469 million. A dual brand business with retail locations in Canada and the US that was once family-owned that evolved and offers profitable e-commerce is not often seen. A business to follow.
Fourth
Walmart Completes $2.3B Acquisition of VIZIO
Walmart announced the closure of its $2.3 billion Vizio acquisition. This acquisition of VIZIO and its SmartCast Operating System allows Walmart to offer its customers new customer purchase journeys. It also enables Walmart to offer brands a new opportunity to reach customers and provides further real estate that it can offer via Walmart Connect, its omnichannel retail media property.
Link: https://talkbusiness.net/2024/12/walmart-completes-2-3-billion-acquisition-of-vizio/
AND FINALLY …
Vooma Raises Over $16M in Seed and Series A Funding
Freight booking automation platform Vooma has raised $16 million in Seed and Series A funding that will be invested in hiring talent, go-to-market, and customer success. As part of the funding announcement, the company unveiled its AI-agents platform that will enable the automation of processes and the use of AI agents' voices to automate monotonous tasks without needing a human. The freight and carrier broker sector will likely see a significant degree of automation via AI in the future.
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That’s all for this week! Till next time Watsonians.....
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Hi, I’m Rick Watson, CEO and Founder of RMW Commerce Consulting and host of the Watson Weekly podcast - your essential eCommerce Digest.
Our production partner for the series is CitizenRacecar. The show is produced by Jose Baez; Production Manager, Gabriela Montequin.
To hear new episodes of the show every Monday morning, subscribe now at rmwcommerce.com/watsonweekly and wherever you get your podcasts.
