Update 2: Shopify CEO Tobi Lütke defends against ‘preposterous claims’ during Q3 earnings call


Even though it was Halloween, Shopify CEO Tobi Lütke was not spooked by a “short-selling troll” as he defended the firm against what he called “preposterous claims” during its quarterly earnings call on Tuesday morning.

In fact, Mr. Lütke seemed eager to tackle claims from Citron Research’s Andrew Left, who released a video earlier this month alleging that Shopify violates Federal Trade Commission guidelines by overpromising merchant success.

“This is going to be a fun one,” Shopify’s CEO said to open the call.

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Mr. Lütke went on to say that the firm had been targeted by a “short-selling troll,” referring to Mr. Left, whom he accused of making “preposterous claims.”

Mr. Lütke reiterated that Shopify complies with FTC rules and told analysts the firm had not been in any recent discussions with the organization about its compliance in light of the allegations.

He added that Shopify (TSX:SHOP)(NYSE:SHOP) does not sell a business opportunity, it sells a commerce platform. To that end, he says the company does not glorify entrepreneurship.

“Most of our content is about how hard being an entrepreneur is, because it is hard, and we are here to help those willing to try it.”

Mr. Lütke went on to say that the company does not solely benefit from onboarding new merchants, but rather from those merchants succeeding and facilitating their payments and product shipping.

Shopify chief operating officer Harley Finkelstein later defended the firm’s affiliate partners program, whereby bloggers, business coaches and influencers can refer new merchants to Shopify for commission. He explained the rigorous standards Shopify applies to each individual partner, including compliance with FTC guidelines and disclosure responsibilities, as well as fit for brand.

“Our partners ecosystem continues to grow, and the tremendous value it brings to merchants is unmatched in our industry,” Mr. Finkelstein said.

Even if the claims were inaccurate, Mr. Left’s comments were enough to sink Shopify’s share price more than 11 per cent. Mr. Lütke responded to criticisms that Shopify did not fight back against the claims quickly enough, saying that he does not believe in short-term stock price management.

“Some days the stock’s higher and some days the stock’s lower, but over the years, it will approximate to how well the company’s doing,” he said.

Lutke’s remarks failed to reassure investors, who were looking for information on acquisition costs and “churn rate” that would contradict Left’s hypothesis that the company is overvalued. Shares plunged C$11.96 or 8.53 per cent to close at C$128.26.

Revenues continue to climb

Shopify says it lost US$9.4 million in its latest quarter as its revenue grew 72 per cent compared with the same period last year.

The company, which keeps its books in U.S. dollars, says its loss for the quarter amounted to nine cents per share compared with a loss of $9.1 million or 11 cents per share a year ago when it had fewer shares outstanding.

On an adjusted basis, Shopify says it earned $5.0 million or five cents per share for the quarter compared with an adjusted loss of $1.8 million or two cents per share, for the third quarter of 2016.

Chief financial officer Russ Jones told analysts on Tuesday morning’s earnings call that the firm is not focused on achieving profitability but rather on continuing to grow revenues. Third-quarter revenue totalled $171.5 million, up from $99.6 million a year earlier.

The increase came as its subscription solutions revenue grew to $82.4 million compared with $49.8 million a year ago, while merchant solutions revenue climbed to $89 million, up from $49.7 million.

Citron Research is “unimpressed” by the company’s response, it said in a statement, adding that it has forwarded a comprehensive folder of its allegations to the FTC.

“It’s impossible to understand the real strength of Shopify’s core business without getting specifics of their true customer acquisition cost.”

The company needs to release its churn figures – which indicate how many entrepreneurs stop using the platform – Citron Research claims, “so investors can discount or strip out the dirty/illegal part of their business that will inevitably be curbed by regulators.”

Shopify did not immediately respond to a request for comment on Citron’s assertion.

The stock is likely to experience about 90 to 100 days of choppy price action until the company provides 2018 guidance in about three months, wrote Richard Davis, an analyst with Canaccord Genuity Inc.

Until then, Shopify shares “will likely drift with the winds of the overall market and whatever nonsense the shorts can conjure,” he said.

With files from Canadian Press.

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