Shopify CEO Says He Doesn't Manage to Financial Statements

Investors who listened to the most recent earnings call from the e-commerce platform company Shopify (NYSE: SHOP) were in for a treat. Tobi Lutke, Shopify's CEO, was particularly pointed in answering one analyst's question on an off-the-books financial ratio. Lutke went on to explain that the company uses its financial statements to "check in" on the company's progress.

Read on to see how an analyst's question got the CEO to admit he doesn't manage the company by its financial statements.

An interesting response to an analyst's question

On the most recent quarterly call, an analyst noted that total gross profit as a percentage of gross merchandise value (GMV) was around 1.5%, and asked management what was the long-term opportunity for that number?

If you are not sure what was being asked, you aren't the only one. Unpacking this, basically, the analyst was trying to understand if there was additional operating leverage as GMV, the amount sold through the platform, grows. While it makes sense to understand if the company can scale its costs as the business grows, the ratio the analyst mentioned isn't a number that's reported in financial statements. Lutke responded to the question with a little bit of appropriate ribbing:

Investors should be pleased that Shopify's CEO is more focused on building the business than one particular ratio that's not part of standard generally accepted accounting principles (GAAP). On the question of scale, it's clear that the gross profit of merchant solutions business is improving as the business grows. I cover this topic in more detail in this article.

Lutke's comments got me thinking about my recent conversation with Shopify's director of investor relations.

Non-value-added numbers and "bad math"

Back in May, I spoke with Katie Keita, Shopify's director of investor relations, after the first-quarter earnings call because management didn't share the number of merchants on its platform. I had come to depend this number as I was using the number of merchants to compare overall trends for the company on a per merchant basis. Keita explained that one of the reasons behind the company not releasing the number was that analysts were doing "bad math" by dividing various company reported numbers by a "milestone" merchant count. When I mentioned that I was one of those people, she responded: "Oh, you aren't the only one!"

Given my discussion, I wasn't surprised when Lutke responded to the analyst's question the way he did. Lutke has been consistent in his approach to reporting numbers that don't add value. Going back to the first-quarter call, Lutke emphasized why the company didn't release the milestone merchant count, "And so what we've really done is stop talking about quarterly milestones which in some respects were causing confusion versus adding value to the people trying to understand Shopify."

Lutke and the Shopify management team are focused on building a great product for entrepreneurs to build their e-commerce business, which in turn sets the company up for the long term.

Focus on long term, not financials

Back to the CEO's answer to the analyst on the "creative ratio" question. Lutke added additional commentary on how the company is focused on the long term (emphasis added by author):

If a CEO of another company indicated he wasn't focused on the financials, I'd be concerned, but this is not really new for Shopify. As part of Lutke's letter to shareholders in its filing to go public, he states that "We have always prioritized long-term value over short-term revenue opportunities." When you read this letter on the investor relations website, there's a hyperlink to a page dedicated to how the company is building long-term value for the "next 100 years." I would say that's certainly a long-term focus!

This long-term mindset is one of the ways that Shopify is like Amazon. This approach has paid off for Shopify, and investors, as the company has grown from one e-commerce store in 2004 to serving over 500,000 merchants today.

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Brian Withers owns shares of Shopify. The Motley Fool owns shares of and recommends Shopify. The Motley Fool has a disclosure policy.