Shopify's merchant services drive 32% growth, and the gross margin slips as its mix shifts

Shopify (Nasdaq: SHOP) said revenue for the quarter ended September 30 rose 32% to $3,742 million and operating income rose to $568 million from $343 million, in its third-quarter results release on Tuesday, November 3.

Merchant services grew faster than software

Shopify reports two revenue lines. Subscription solutions, the software merchants pay monthly for, brought in $836 million against $699 million a year earlier, up 19.6% (computed). Merchant solutions, the line that sits on top of merchants' sales, brought in $2,906 million against $2,145 million, up 35.5% (computed).

Merchant solutions therefore made up 77.7% of revenue, up from 75.4% a year earlier (computed). Gross merchandise volume, the total value of goods sold through Shopify merchants, reached $119,145 million against $92,013 million. Monthly recurring revenue was $230 million against $193 million.

Why gross profit grew more slowly than revenue

Gross profit rose to $1,781 million from $1,391 million, up 28.0% (computed), slower than the 32% revenue growth. The gross margin was 47.6% against 48.9% (computed from the release).

The release's income statement shows why. Subscription gross profit was $661 million against $571 million, a margin of 79.1% against 81.7% (computed), and merchant solutions gross profit was $1,120 million against $820 million, a margin of 38.5% against 38.2% (computed). Merchant solutions earns a much lower margin, so a larger share of revenue from that line lowers the blended margin even though its own margin was stable.

Costs grew more slowly than revenue

Total operating expenses were $1,213 million against $1,048 million, up 15.8% (computed), or 32.4% of revenue against 36.8% (computed). Research and development rose to $497 million from $375 million. Transaction and loan losses fell to $120 million from $148 million. Operating income was 15.2% of revenue against 12.1% (computed).

Free cash flow was $816 million, a 22% margin against 18% a year earlier. Net income was $462 million against $264 million; Shopify said that excluding equity investments marked to market it was $584 million against $367 million.

Harley Finkelstein, Shopify's president, said the company powered $119 billion in gross merchandise volume "while continuing to build commerce into every surface, every agent, and increasingly, everywhere."

Guidance for the fourth quarter

For the fourth quarter of 2026, Shopify expects revenue to grow at a low-thirties percentage rate from a year earlier and gross profit dollars to grow at a high-twenties rate. It expects operating expenses of 29% to 30% of revenue and a free cash flow margin consistent with the fourth quarter of 2025.

A faster-growing, thinner-margin business still pays through operating leverage

Our reading is that Shopify is becoming more of a merchant-services business than a software one, and the filing shows the cost and the benefit side by side: gross margin down 1.3 percentage points, operating margin up 3.1 percentage points (both computed). In technology, we weigh revenue and cash generation over announcements, and here the cash is visible in a 22% free cash flow margin.

The threat we watch is that the growth rests on merchant solutions, whose margin is lower and whose revenue follows consumer spending. The opportunity is that expenses are growing at half the pace of revenue. We expect gross profit growth to stay a few points below revenue growth in the next quarter if the mix keeps shifting, as the company's own guidance implies, and we would change that view if subscription growth accelerated.

The view in this final section is FinanceInTime's editorial opinion, for information only. It is not investment, tax, legal or other advice, and it does not take your circumstances into account. Forecasts are uncertain and past results do not guarantee future ones.