Ottawa-based Shopify shares drop as CEO addresses allegations

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VANCOUVER — Shopify Inc. reported a solid revenue increase, reached a crucial milestone a quarter earlier than anticipated and mounted a defence against “preposterous claims” by a “short-selling troll”, but failed to ease investor concerns Thursday as shares lost as much as a tenth of their worth.

The Ottawa-based online store platform (TSX:SHOP) posted its first adjusted operating profit as a public company in its third quarter ended Sept. 30 as its revenue grew 72 per cent compared with the same period last year.

CEO Tobias Lutke publicly addressed allegations made earlier this month by high-profile short-seller Andrew Left of Citron Research that sent shares falling more than 10 per cent on the Toronto Stock Exchange on the day his report was released. The shares have since regained some of the ground, but then shed $14.33 or 10.22 per cent to $125.89 in Tuesday afternoon trading.

Lutke attempted to ease concerns on a call with analysts that he used to address Left’s criticism of the company’s business model in a video published earlier this month.

“This is going to be a fun one,” Lutke said at the start of the call, explaining the company waited nearly a month to address the allegations because it does not engage in short-term stock management. Rather, he said, Shopify reserves time each quarter to update analysts on any news.

However, the company stopped short of providing information on acquisition costs and “churn rate” that Left suggested would prove his hypothesis that the company is overvalued.

On Oct. 4, Left published a video alleging the company, which provides businesses with online checkout services, doesn’t comply with Federal Trade Commission guidelines and suggesting the stock’s value is closer to US$60 before any potential FTC involvement.

He compared the company’s practices, which he called a “good ol’ get-rich-quick scheme,” to Herbalife, a direct-marketing company that a short-seller alleged was a pyramid scheme. The FTC investigated Herbalife and the company recently had to pay a US$200-million settlement and make structural changes.

Left alleged Shopify’s partners recruit merchants by wooing them with promises of self-employment and million-dollar incomes.

During the call, the CEO asserted the company sells an ecommerce platform — not business opportunities — and complies with FTC regulations.

Much of their content shows how hard — rather than easy — entrepreneurship is, he said.

“Implying that these businesses are somehow illegitimate is an insult to their hard work,” said Lutke.

Lutke said that Shopify consulted with outside legal counsel, who also believe the claims are unsubstantiated, and has not been contacted by the FTC.

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 company, which keeps its books in U.S. dollars, said it lost $9.4 million in its third quarter, amounting to nine cents per share. That 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 said it earned $5 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.

Revenue totalled $171.5 million, up from $99.6 million.

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.

Aleksandra Sagan, The Canadian Press