Two and a half months ago, Shopify Inc. president Harley Finkelstein said the company wasn’t planning any more layoffs after slashing 10 per cent of its workforce the previous summer. Yet, following first-quarter earnings on May 4, Shopify announced it was cutting 20 per cent, or more than 2,000, staffers as it sheds a strategic part of the business once meant to expand the company beyond digital e-commerce products.

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Here’s what you need to know.

What happened?

On May 4, Shopify released first-quarter financials that showed the company earned $1.5 billion in revenue for the period ending March 31. The company beat analyst consensus on its revenue by 5.1 per cent, ATB Capital Markets Inc. analyst Martin Toner said in a note to clients.

In a separate letter, linked to the financials report, Shopify chief executive Tobias Lütke announced more layoffs and the sale of its logistics unit to Flexport Inc., a supply chain management and logistics company based in San Francisco. “After today Shopify will be smaller by about 20 per cent and Flexport will buy Shopify Logistics; this means some of you will leave Shopify today,” he said.

As of Dec. 31 last year, Shopify had more than 11,600 employees, according to its website. A 20 per cent reduction in staff equates to around 2,300 positions, based on the latest headcount. The company said it would not disclose exact numbers.

Lütke’s letter said those affected by the layoffs would receive a minimum of 16 weeks severance plus an additional week for every year worked at the company. Shopify will also extend medical benefits “through this same period.” Laid-off employees will be allowed to keep any office furniture the company provided, but work laptops must be returned for legal reasons. But Lütke said Shopify will “help pay” for a new laptop if needed. Former staffers will also have “continued” free access to a top-tier Shopify subscription.

Some Shopify employees took to social media to share their observations of the layoff process. Samuel Path, a senior software developer at the company based in France according to his LinkedIn, said on Twitter that the layoffs were the first he’s experienced firsthand.

“It’s really weird,” he said. “The main reason I’m still there is randomness, not merit.”

Shopify’s e-commerce focus

Shopify leadership said following the first-round of layoffs last summer that the reductions would help the company refocus on e-commerce. In a July 2022 letter, Lütke conceded that leadership misjudged a bet it placed at the height of the pandemic on e-commerce. Leadership presumed consumers would continue buying products online.

“It’s now clear that bet didn’t pay off,” he wrote at the time.

Since those cuts, Shopify has announced new partnerships, a flurry of product and software updates for customers and a significantly higher pricing plan. It also purchased a logistics company, Deliverr Inc., for US$2.1 billion last July, in a bid to build a fulfilment business internally and pursue a strategic plan to get into the delivery space, much like Amazon.com Inc. The deal came just weeks before Shopify announced it would lay off around 1,000 staffers.

On May 4, Shopify said it sold Deliverr to freight forwarder Flexport in an all-stock deal in exchange for a 13 per cent stake in the startup, which it has previously invested in. Flexport was last valued at US$8 billion in a US$935-million funding round led by Andreessen Horowitz and MSD Partners in February 2022.

Morningstar Inc. analyst Dan Romanoff said in a client note that the sale and a resulting impairment charge could possibly cost Shopify around US$2.1 billion.

“While this is painful for management, we have held that competing head on with Amazon and its enormous scale would be challenging. We therefore believe this is the strategically correct decision,” Romanoff said.

Lütke, in his May 4 letter, said the pursuit of building logistics infrastructure was a “side quest” for the company and that its main mission is “to make commerce simpler, easier, more democratized, more participatory, and more common.”

Shopify began building its logistics business in 2019, calling it Shopify Fulfillment Network (SFN). In the company’s management discussion and analysis (MD&A) for its fourth quarter, ended Dec. 31, Shopify said it expected to continue investing in the logistics arm of the business, but it identified its ability to “successfully scale, optimize and operate Shopify Fulfillment Network” as a risk factor.

In the most recent MD&A, Shopify Fulfillment Network was no longer listed as a risk factor and the business overview section stated the company sold the “majority” of its logistics business.

“They’re basically admitting that it’s better to partner on fulfilment than do it themselves,” Toner, the analyst, said by phone.

Shopify’s performance

Shopify is one of the biggest technology companies to come out of Canada. In its latest earnings, the company reported gross merchandise volume (GMV) was up 15 per cent year over year at $49.6 billion. In other words, it handled more than $49-billion worth of goods on its online platform, which allows business owners and companies to host their e-commerce business. New products and tools the company added has helped contribute to positive GMV growth, Scotia Capital Inc. analyst Kevin Krishnaratne told clients in a note.

In 2020, Shopify became Canada’s most valuable company by market cap, overtaking Royal Bank of Canada. In November 2021, its share price peaked about $200, before bottoming out in October 2022 around $35 as it became evident e-commerce was losing its lustre.

“We believe some key questions investors have had on SHOP revolved around the rationale behind SFN, related capex/opex, and the timing of the network’s path to profitability,” Krishnaratne said.

“With one of the larger concerns now out of the way (SFN), … we’re getting more positive on SHOP. However, we continue to maintain our sector perform rating, mainly due to valuation and with the stock (up) 28 per cent on yesterday’s news.”

Investors happy

Investors have responded positively to Shopify’s news, Toner said.

Shares climbed 23 per cent on May 4, closing at $77.65.

“The headcount reductions have positive implications for their path to profitability,” he said. “(In) the fulfilment effort, there was a lot of opportunity but there was a lot of risk. And I suspect investors would prefer that Shopify pursue delivering fulfilment solutions to their merchants in this lower risk way.”

On May 5, shares of Shopify were trading up another five per cent during late morning in Toronto at $81.36.

With additional reporting from Bloomberg and Reuters

• Email: bbharti@postmedia.com | Twitter: biancabharti