Shares of Shopify Inc. surged Thursday after the company posted a surprise first-quarter profit and said it would reduce its headcount by 23 per cent.
The Ottawa-based e-commerce company’s shares closed the day up 23 per cent on the Toronto Stock Exchange, the same day it reported earnings for the first quarter of the year topped analyst expectations.
Layoffs smack of 'big tech arrogance': expert
Separately, Shopify said in corporate filings Thursday that that its workforce would shrink by roughly a quarter through layoffs and the sale of its logistics business.
The company had a headcount of 11,600 at the end of 2022; a 23 per cent reduction would result in a shedding of almost 2,700 jobs.
“All geographies and all levels within the organization” were impacted by the cuts, Shopify’s chief financial officer Jeff Hoffmeister said in a call with analysts Thursday, but he declined to say how any of the affected jobs were part of the logistics business.
Global News asked Shopify how many of the layoffs would affect workers in Canada, but a spokesperson did not provide a figure in their response Thursday.
Shopify laid off about 1,000 staff last summer, saying at that time that the company had misjudged growth in the e-commerce market during the pandemic.
Shopify President Harley Finkelstein told The Canadian Press in February that there were “no job cuts coming” for the company.
“We’re in a really good place,” he said at the time.
Daniel Tsai, a business, law and tech lecturer at the University of Toronto, says that with another round of layoffs, morale is likely to take a hit for remaining Shopify employees.
The company going back on its word that it was done with layoffs is a sign of “erratic management and “old fashioned big tech arrogance,” Tsai says.
“They overspent and overinvested, thinking that they were making brilliant business decisions. In fact, the reality is they were just lucky,” he tells Global News.
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Tsai says that Shopify “miscalculated” the trajectory of growth for e-commerce during its hot streak in the pandemic, which saw business boom while consumers were stuck at home and businesses were forced to open online shops to survive.
CEO Tobi Lutke conceded in a letter announcing the first round of layoffs in July that Shopify’s bet on sustained e-commerce growth during the pandemic “didn’t pay off.” He took the blame for the need to cut jobs at the time.
More recently, the company has underestimated the downside for its business amid an economic slowdown, Tsai argues.
Specifically, he says consumers are likely to rein in spending and avoid making more online purchases as a possible recession looms on the horizon — and that’s bad news for Shopify.
“The circumstances have changed. They are proving that they misjudged the situation and they have to prove that they’re adaptable and have to quickly, rapidly evolve if they want to stay in business,” he says.
Analysts cheer sale of logistics business
In an open letter Thursday announcing the cuts, Lutke said the company “is changing the shape of Shopify significantly today to pay unshared attention to our mission.”
“I recognize the crushing impact this decision has on some of you, and did not make this decision lightly,” Lutke wrote.
The chief executive said Shopify had a number of “side quests” that had begun to “split focus,” and so the company has been “subtracting everything” over the past year to make sure it was as focused as possible on its primary mission.
In that vein, Lutke said the company has also decided to sell Shopify Logistics to Flexport, a supply chain management company, to help the business become more ambitious and global in nature.
Flexport will also become the official logistics partner for Shopify.
The transaction is expected to close in the second quarter of 2023, but is subject to certain conditions and regulatory approval.
The sale, a reversal of its strategy of aggressively investing in fulfillment networks, was well-received by analysts.
“Over the course of one earnings release, Shopify completely shifted its investor positioning to be a balanced-growth and profitable company,” William Blair analyst Matthew Pfau said.
“They can have the best of both worlds – a logistics business that makes them competitive with Amazon without having to manage a business that is not core to Shopify and had been losing money,” said Gil Luria, analyst at D.A. Davidson & Co.
“Combined with the reduction in force, management is showing its commitment to profitability which investors had been concerned about.”
While the headcount reductions and divestiture of the logistics business might boost Shopify’s share price and investor confidence in the company’s profitability, Tsai says the latest quick pivot in the business means the ups and downs might not be over yet for Shopify.
“I think we just have to keep an eye on this roller coaster. If things could get worse before they get better for this company,” he says.
Shopify's next big bet
Lutke also hinted that the company will lean further into artificial intelligence in the future, calling AI a possible “copilot for entrepreneurship.”
“We are at the dawn of the AI era and the new capabilities that are unlocked by that are unprecedented. Shopify has the privilege of being amongst the companies with the best chances of using AI to help our customers,” he wrote.
Finkelstein talked on the earnings call Thursday about some of the customer-facing uses the company has already rolled out with artificial intelligence, including an AI shopping assistant launched in March to help consumers search the internet for the products they’re interested in and buy them right in the app.
He also said AI tools to help merchants write product descriptions will allow business owners to spend less time on the minutiae of the business and more time refining their products.
“We believe that we are in the early innings of unlocking the true power of AI,” Finkelstein said.
But Tsai says leaning into AI — a tempting step for tech companies looking to save money on human labour — can be a difficult balance to strike when it comes to customer service. Other tech giants have already replaced human reps with artificial intelligence, which he says has resulted in a more frustrating interface for many customers.
Shopify having real people to answer questions was a “differentiator” for them, Tsai says, and they may now lose that edge to competitors who keep a human touch for their services.
Though he said Thursday marked a “hard day” for Shopify, Finkelstein nonetheless expressed confidence in the leaner company moving forward.
The changes will leave Shopify with “incredible talent density” and the ability to executive on its goals at a “much, much better speed, better pace and with better results,” he told analysts Thursday.
“I’m more optimistic now than I think ever before about the future of this company,” he said.
— With files from The Canadian Press, Reuters
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