Why did Shopify’s transaction growth disappoint investors?

  • Third-quarter gross merchandise volume (GMV) was 119.1 billion dollars, up 29.5% year over year, below the market expectation of 120 billion dollars and the 121.9 billion to 122.8 billion dollars expected by some investors.
  • GMV growth slowed consecutively from 34.8% in the first quarter and 31.6% in the second, while some bulls had expected it to rebound to around 33%. However, the third quarter faced a higher year-ago comparison base, and cumulative two-year growth was 61.5%, down slightly from 62.2% in the second quarter.
  • Third-quarter revenue was 3.742 billion dollars, up 31.6% year over year and roughly in line with market expectations, but it ended a streak of at least 12 consecutive quarters of beats.

What happened to profit and cash flow as Shopify’s revenue grew?

  • Third-quarter merchant solutions revenue grew 35.5%, bringing total revenue growth to about 2 percentage points above GMV growth; revenue as a share of GMV rose to 3.14% from 3.09% a year earlier.
  • Gross profit grew 28%, slower than revenue; the overall gross margin fell about 1.32 percentage points year over year to 47.6%. Subscription revenue costs grew 37%, faster than subscription revenue growth of about 20%, and the subscription gross margin fell to 79.1%.
  • Cost control supported profitability: operating expenses were 32.4% of revenue, below the company’s guidance of 33% to 34%; the free cash flow margin was 21.8%, above the market expectation of 19.9%. From April, cash flows related to merchant cash advances moved into investing activities. Under the previous methodology, the free cash flow margin was about 21.0%, still above market expectations.

What does Shopify’s fourth-quarter guidance mean for profit?

  • The company expects fourth-quarter revenue to grow in the low 30% range year over year, above the market expectation of 29.8%. Gross profit is expected to grow in the high 20% range, roughly in line with market expectations but below the approximately 30% to 31% threshold of some investors.
  • The company expects operating expenses to be 29% to 30% of revenue, above 28.9% a year earlier. Based on the report’s calculation using the midpoints of revenue and gross profit guidance, the fourth-quarter GAAP operating margin is approximately 15% to 16%, below 17.2% a year earlier; free cash flow margin guidance is level with the year-ago figure of 19.5%.

Dynatrace beat expectations, so why did its growth guidance still disappoint some investors?

  • Second fiscal-quarter subscription revenue was 553.1 million dollars, up 17% year over year at constant currency and above the market expectation of 543.9 million dollars; the non-GAAP operating margin was 31.8%, also above the market expectation of 29.6%.
  • But annual recurring revenue (ARR) grew 16% at constant currency, slowing from 17% in the first fiscal quarter. The report estimates from the growth rate that quarterly net new ARR at constant currency was at or below the market expectation of approximately 73 million dollars, below the 80 million to 85 million dollars expected by some investors.
  • The company raised the midpoint of its fiscal year-end 2027 ARR guidance by 34 million dollars to a range of 2.393 billion to 2.413 billion dollars; the increase came from the acquisition of Arize. Excluding that contribution, organic ARR growth guidance remained at 15.5% to 16.5%, while some bulls had expected an additional increase of 0.5 to 1 percentage points.
  • Earnings-per-share guidance was also below market expectations: 1.88 to 1.90 dollars for the full year, versus a market expectation of 1.96 dollars; and 0.44 to 0.45 dollars for the third fiscal quarter, versus 0.50 dollars. The report attributed the gap to dilution from Arize and a higher share count.