Shopify merchants sold $119 billion. How much cash reached Shopify?

For every $100 of merchandise its merchants sold in the September quarter, Shopify recorded about $3.14 of revenue and generated about 68 cents of free cash flow. A year earlier the same $100 corresponded to $3.09 of revenue and 55 cents of free cash flow. Those few extra cents mattered across $119 billion of transactions.

These are ratios of company-wide totals, not the fee on an individual merchant’s bill. Shopify earns subscription income as well as revenue from merchant services, including payments. A shop can pay a subscription in a month when it sells nothing. The ratios show how much economic activity Shopify captured across the platform as a whole. Quarterly financial statements

Where the extra revenue came from

Merchants sold $119.15 billion of goods through Shopify, up from $92.01 billion. Shopify’s own revenue increased by $898 million to $3.742 billion. Subscription solutions contributed $137 million of that increase, rising from $699 million to $836 million. The remaining $761 million, or roughly 85% of the increase, came from merchant solutions.

That distinction matters in a retail slowdown. Subscription income can continue while a merchant’s sales fluctuate. The merchant-services business is more exposed to how much merchants sell and which services they use. Growth in that business can produce more gross profit dollars even if each revenue dollar carries a lower margin.

Why gross margin fell while operating margin rose

Shopify earned $1.781 billion of gross profit, up from $1.391 billion. On the reported figures, gross margin fell from 48.9% to 47.6%. Yet operating income rose from $343 million to $568 million, taking operating margin from 12.1% to 15.2%. Shopify spent about $165 million more on operations while generating $390 million more in gross profit. The difference accounts for the $225 million increase in operating income.

Free cash flow, Shopify’s non-GAAP measure, rose from $507 million to $816 million. The company puts its cash-flow margin at 22%, up from 18%. Payment timing can influence any one quarter, but this result also has an increase in operating profit behind it.

What the holiday quarter needs to show

Shopify expects fourth-quarter revenue growth in the low thirties and gross profit growth in the high twenties, both year on year. That outlook implies further pressure on gross margin. Management also expects free cash flow margin to be consistent with last year’s holiday quarter. Shopify’s outlook

The useful question when the holiday figures arrive is how many cents of cash Shopify captures per $100 sold by merchants, compared with the same holiday period a year earlier. Looking at merchant sales, gross profit and operating expenses together will show whether Shopify is getting more profitable as retailers put more business through the platform. More company analysis from Compound

Archival cover: Bench Accounting, published 4 December 2015. Original photograph · Unsplash Licence.