Etsy, Inc. today announced financial results for its third quarter ended September 30, 2019.
“During the third quarter we launched several transformative initiatives to serve as the building blocks for long-term, sustainable growth. The core Etsy marketplace continued to perform well, with third quarter GMS and revenue growth of approximately 22% and 28% respectively.”
“Through innovative solutions such as Etsy Ads and our new free shipping initiative, we are continuing to improve the core marketplace for buyers, while enhancing value for sellers and helping them grow. We are just beginning to see the impact of these initiatives, which we believe further our competitive advantages and will have a more meaningful contribution to our results in 2020 and beyond.”Josh Silverman, Etsy, Inc. Chief Executive Officer
Third Quarter 2019 Highlights
The following operational highlights include results related to the Etsy.com marketplace and do not include Reverb results:
- In July, the company began providing Etsy.com sellers with tools and support that enable them to offer free shipping on orders of $35 or more to U.S. buyers. In September, Etsy launched a campaign to notify buyers of the new program, highlighting shops that are offering free shipping on their orders. As of the end of the third quarter, 62% of items on the Etsy marketplace offered free shipping to U.S. buyers, and 74% of U.S. listing views were eligible to ship for free.
- Etsy migrated sellers who previously used Promoted Listings and/or Google Shopping to Etsy Ads in the third quarter. The company continues to optimize between channels targeting a return on their ad spend and to-date, it has seen negligible budget churn from sellers.
- As a result of migrating search efforts to Google Cloud, Etsy made a foundational upgrade to the ranking algorithms, which will enable Etsy to provide more relevant search results to buyers on Etsy.com. Also, the company continued to improve the mobile app, began highlighting items that are similar to items buyers have made a favorite in the past, launched variation photos, and integrated several shipping solutions, all geared to help improve the overall shopping experience. Etsy also launched a regional sales feature, which allows sellers to set a country-specific sale, with a focus on their domestic listings.
- During the third quarter, the company launched a new national television campaign for Etsy, which features holiday gifting experiences and will be tested, with a localized version, in the United Kingdom as well during the holiday season. Leveraging learnings from previous campaigns, Etsy will optimize for reach, frequency, and return heading into the busiest shopping period of the year.
- In the third quarter, active buyers and active sellers increased by 19.1% and 19.3% year-over-year, respectively. Etsy acquired approximately 4.2 million new buyers in the third quarter.
- For the Etsy marketplace, GMS from paid channels was approximately 14% of overall GMS in the third quarter, contracting approximately 250 basis points compared to the third quarter of 2018, and about 40 basis points compared to last quarter as the company resumed their television campaign which drives more organic traffic.
- As Etsy continues to shift marketing spend up-funnel to drive frequency, organic GMS as a percentage of overall GMS for the Etsy marketplace has expanded from 80% in the fourth quarter of 2018 to 86% in the third quarter.
- Etsy’s GMS per active buyer on a trailing 12-month basis grew for the sixth consecutive quarter and on a 2-year basis, increased nearly 4%, evidence of their continued progress improving frequency.
- International GMS grew approximately 31% year over year and was 38% of total GMS. U.S. domestic GMS growth accelerated for the second consecutive quarter to nearly 17%. U.S. buyer GMS, a metric that includes a U.S. buyer who purchased from an international seller, grew 21% in the third quarter, reflecting the positive impact Etsy’s U.S. marketing campaigns have on U.S. buyer demand.
- On August 15, 2019, Etsy completed the acquisition of Reverb, a privately held marketplace for new, used, and vintage music gear for approximately $271.4 million in cash, net of cash acquired. From the acquisition date through the end of the third quarter, Reverb generated $76.9 million in GMS. Percent of international GMS was approximately 17%. These operational metrics drove $6.0 million in revenue resulting in a take rate of 7.8%. At the end of the third quarter, Reverb active buyers and active sellers totaled 594 thousand and 155 thousand, respectively.
Third Quarter 2019 Consolidated Financial Results
- Total revenue was $197.9 million for the third quarter of 2019, which included $6.0 million related to the results of Reverb, up 31.6% year-over-year, driven by growth in both Marketplace and Services revenue.
- Gross profit for the third quarter of 2019 was $129.0 million, up 24.7% year-over-year, and gross margin was 65.2%, down 360 basis points compared with 68.8% in the third quarter of 2018. The contraction in gross margin was primarily driven by fees related to Etsy Payments, amortization related to the recent acquisition of Reverb, and their consolidated ad platform, Etsy Ads, which they believe is a tailwind to revenue growth and GMS.
- Total operating expenses were $114.8 million in the third quarter of 2019, up 35.5% year-over-year, and represented 58% of revenue. The increase in operating expenses was driven primarily by marketing expenses, specifically the investment in the TV campaign. Marketing expense as a percentage of revenue was 25.3% compared to 26.3% in the third quarter of 2018, a contraction year-over-year and sequentially as Etsy gained leverage driving efficiencies in marketing spend.
- Net income for the third quarter of 2019 was $14.8 million, with diluted earnings per share of $0.12.
- Non-GAAP Adjusted EBITDA for the third quarter of 2019 was $42.1 million and grew 23.6% year-over-year. Non-GAAP Adjusted EBITDA margin (i.e., Adjusted EBITDA divided by revenue) was 21.3% in the third quarter of 2019, down 130 basis points year-over-year. Adjusted EBITDA performance was driven primarily by year-over-year revenue growth and cost efficiencies in operating expenses.
- Cash, cash equivalents, short- and long-term investments were $856.7 million as of September 30, 2019. Under the stock repurchase program approved in November 2018, Etsy repurchased an aggregate of approximately $2.8 million, or 50,721 shares of its common stock in the third quarter of 2019.
- During the third quarter, Etsy completed a convertible debt offering issuing $650.0 million aggregate principal amount of 0.125% Convertible Senior Notes due 2026 (the “2019 Notes”) in a private placement to qualified institutional buyers according to Rule 144A under the Securities Act of 1933, as amended. The initial conversion price of the 2019 Notes represented a premium of approximately 47.5% over the price of Etsy’s common stock as of September 18, 2019 (the date the offering closed). Also, Etsy initiated a concurrent share repurchase of approximately $124.5 million, or nearly 2.1 million shares, and entered into capped call transactions at a 150% premium over the price of Etsy’s stock as of September 18, 2019. The capped call transactions are generally expected to reduce potential dilution. The net proceeds of these transactions were approximately $438.7 million after deducting the initial purchaser discount, offering expenses, share repurchase, and capped call transaction costs.
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