Etsy Inc (NASDAQ:ETSY), a marketplace where people around the world connect, both online and offline, to make, sell and buy unique goods, announced financial results for its first quarter 2016, ended March 31, 2016.
“Our financial results in the first quarter were driven by our strong execution,” said Chad Dickerson,Etsy, Inc. CEO and Chair. “We supported 1.6 million active sellers and 25.0 million active buyers, who together generated nearly $630 million in GMS. The second quarter is also off to an exciting start with the launch of our newest high-impact seller service, Pattern by Etsy, and a host of other products and seller tools that we believe will build long-term value for our community. We are as committed as ever to our vision of reimagining commerce and are looking forward to a productive year.”
First Quarter 2016 Operational Highlights
GMS was $629.9 million, up 18.4% compared with the first quarter of 2015. On a currency-neutral basis (excluding the direct impact of currency translation on GMS from goods that are not listed in U.S. dollars) GMS growth in the first quarter of 2016 would have been 19.1% or approximately 0.7 percentage points higher than the as-reported 18.4% growth. We believe that weaker local currencies in key international markets continued to have an indirect impact on international buyer behavior and GMS growth by dampening the demand for U.S. dollar-denominated goods. As we begin to anniversary the major gains of the U.S. dollar against global currencies it is increasingly difficult to estimate the indirect impact of currency exchange rates on international buyer behavior and GMS growth. We believe, however, that the continued year-over-year decline of GMS between international buyers and U.S. sellers, which was down approximately 11% year-over-year in the first quarter, is indicative of the ongoing impact of currency valuation. In contrast, excluding our French marketplace ALM, GMS from international buyers making purchases from sellers in their own country grew approximately 56% year-over-year during the first quarter of 2016.
Growth in GMS was supported by 12.3% year-over-year growth in active sellers and 20.1% year-over-year growth in active buyers. Percent mobile visits was approximately 63% compared with approximately 59% in the first quarter of 2015 and approximately 61% in the fourth quarter of 2015. Percent mobile GMS was slightly more than 47% compared with approximately 43% in the first quarter of 2015 and approximately 44% in the fourth quarter of 2015. Continuing the trend we’ve seen for multiple quarters, mobile visits once again grew faster than desktop visits and, once again we narrowed the gap between mobile visits and mobile GMS. Further supporting this trend was our strong year-over-year growth in mobile app and mobile web GMS, which each grew faster than desktop GMS during the first quarter.
We saw percent international GMS begin to stabilize in the first quarter of 2016 and we continue to believe that we can grow international GMS, over time, to represent 50% of our total GMS. We believe currency exchange rates contributed to the slight year-over-year decline in percent international GMS, which was 30.3% in the first quarter of 2016. Percent international GMS was 30.5% in the first quarter of last year and 29.2% in the fourth quarter of 2015.
Recent Launch Highlights
During the first quarter and the month of April we launched a new seller service as well as several new products and seller tools. Highlights include:
- Pattern by Etsy, our newest paid seller service that we launched in April. Pattern enables Etsy sellers to create their own custom websites in minutes and leverage all the hard work they’ve already put into their Etsy shops. Pattern will help Etsy sellers address a fundamental pain point, the need to market and promote their businesses, and allow them to spend more time on the creative aspects of their shops.
- Shop Home, a product we launched in April that brings a new modern look and feel to Etsy on each shop’s landing page. We’ve redesigned shops on Etsy, making them more customizable and mobile friendly, providing a consistent shop experience to Etsy buyers regardless of what device they use. This new product gives Etsy sellers more creative control over the look and feel of their shops and allows them to highlight their brands within the Etsy marketplace.
- Shop Videos, a new seller tool launched in January that enables Etsy sellers to record, edit and upload videos about themselves and their shops directly from the Etsy app. We believe this tool will encourage Etsy sellers to share their inspirational stories with Etsy buyers and allow our community to connect and engage in new ways.
First Quarter 2016 Financial Highlights
Total revenue was $81.8 million, up 39.8% year-over-year, driven by growth in both Marketplace and Seller Services revenue. Marketplace revenue grew 18.5%, primarily due to growth in transaction fee revenue and, to a lesser extent, growth in listing fee revenue. Seller Services revenue grew 59.6% year-over-year and was driven primarily by revenue growth in Direct Checkout, which continued to benefit from the integration of PayPal. Seller Services revenue also benefited from robust growth in revenue from Promoted Listings and Shipping Labels. All three of our Seller Services continued to grow faster than Marketplace revenue in the first quarter. We also recognized $1.7 million of gift card funds from our third-party service provider in Other revenue during the first quarter, reflecting a portion of accumulated unused gift cards.
Gross profit for the first quarter was $53.9 million, up 42.6% year-over-year, and gross margin was 65.9%, up 130 bps compared with 64.6% in the first quarter of 2015. Gross profit grew faster than revenue in the first quarter because of the leverage we achieved in technology infrastructure and employee-related costs and because of the gift card revenue, which carries a high incremental margin.
Total operating expenses were $47.2 million in the first quarter, up 10.5% year-over-year, and represented 57.6% of revenue, down from 72.9% of revenue in the first quarter of 2015. The favorable year-over-year comparison was partially driven by the $3.2 million one-time charitable contribution that we made to Etsy.org in the first quarter of 2015. Excluding this expense, total operating expenses would have grown 19.4%, a significantly slower pace of growth than our revenue growth.
During the first quarter, we began to gain leverage in our marketing expenses, which grew more slowly than revenue. Marketing expenses grew 29.8% year-over-year and were primarily driven by growth in digital marketing expenses focused on product listing ads and affiliate marketing campaigns and employee-related expenses.
Product development expenses grew 22.2% year-over-year, primarily due to higher employee-related expenses. G&A expenses decreased 6.8% year-over-year. Excluding the $3.2 million one-time charitable contribution to Etsy.org in the first quarter of 2015, G&A expense growth would have been 10.5% in the first quarter of 2016, driven by increased professional services spend and rent expense related to new office locations. Finally regarding G&A expenses, we also benefited from a mark-to-market adjustment that lowered our stock-based compensation expense (related to the acquisition of ALM) compared with the first quarter of 2015.
Non-GAAP Adjusted EBITDA for the first quarter was $14.8 million and grew 121.1% year-over-year. Non-GAAP Adjusted EBITDA margin was 18.0%, up 660 bps year-over-year. Non-GAAP Adjusted EBITDA performance was impacted by leverage in employee related costs, the previously mentioned high incremental margin gift card revenue and leverage in marketing spend. In the second quarter, we expect to accelerate the pace of hiring and do not expect to realize a significant gift card revenue benefit; both of these factors will impact our Adjusted EBITDA performance.
Net income for the first quarter of 2016 was $1.2 million, compared with a $36.6 million net loss in the first quarter of 2015. Etsy’s net income in the first quarter of 2016 was impacted by a foreign exchange gain and our income tax provision. We recorded $8.1 million of foreign exchange gain in the first quarter of 2016 largely made up of a non-cash currency gain. We also recorded a $13.6 million tax provision in the first quarter of 2016 primarily driven by non-cash charges.
Net cash provided by operating activities was $1.8 million in the first quarter of 2016 compared with$8.9 million in the first quarter of 2015. The decrease in net cash provided by operating activities for the quarter was mainly due to the timing of payments to certain vendors. During the first quarter of 2016, we invested approximately $10 million in the build-out of our new Brooklyn headquarters. As planned, we intend to invest up to a total of $50 million in build-out costs.
Cash, marketable securities and short- and long-term investments were $281.7 million as of March 31, 2016.
We are reiterating the 2016 and 3-year guidance we previously provided as well as the key drivers of our expected performance during these time periods. We continue to believe that over the next three years we can deliver solid revenue growth and achieve leverage in our cost structure to expand our margins:
|2016-2018 CAGR Range||2016 Guidance|
|GMS Growth||13-17%||Mid-point of range|
|Revenue Growth||20-25%||High end of the range|
(by end of 2018)
|Mid 60s (%)||64-65%|
|Adjusted EBITDA Margin
(by end of 2018)
|High teens (%)||10-11%|
- We anticipate that the key factors impacting revenue and GMS growth over the next three years will include:
- Further narrowing of the gap between mobile visits and mobile GMS
- Stable percent international GMS, assuming that currency remains stable compared to average levels in December 2015
- Continued revenue growth in our existing seller services, driven by both adoption and product enhancements
- Modest contributions from new product launches and seller services, including recently developed products and tools, and Pattern by Etsy, which we launched early in the second quarter of this year
- We anticipate that the key factors impacting our gross margin forecast over the next three years will include:
- Continued revenue growth from our existing seller services, driven by both adoption and product enhancements
- The impact from new seller services, including Pattern by Etsy
- We also expect to gain leverage in our operating cost structure over the next three years, particularly within marketing spend:
- In 2016, we expect marketing expense as a percent of revenue to decline, but that overall operating expenses as a percent of revenue will increase driven by expenses associated with our new headquarters and with Sarbanes-Oxley compliance.
- As planned, we expect to complete construction and move into our new Brooklyn headquarters in the second quarter of 2016. Our headquarters is subject to build-to-suit accounting and, therefore, we will not recognize rent expense once we move. Instead, we expect to recognize incremental depreciation and interest expense of between $1 and $2 million in the second quarter. After the second quarter, we expect to record an average of $3 million in depreciation and interest expense per quarter for the duration of our lease.
- Finally, from an Adjusted EBITDA margin perspective, we expect to reach a high teens range by the end of 2018.
- During the second quarter we expect to accelerate our pace of hiring and marketing spend compared with the first quarter of 2016 and do not expect to benefit from a significant amount of gift card revenue, which carries a high incremental margin.
- Based upon these factors, we anticipate second quarter Adjusted EBITDA margins to be in the 6-7% range. In recent years, we have recorded the lowest level Adjusted EBITDA margins in the second and third quarters of the year. (Original Source)
Shares of Etsy are rising nearly 10% to $9.20 in after-hours trading. ETSY has a 1-year high of $25.42 and a 1-year low of $6.04. The stock’s 50-day moving average is $8.79 and its 200-day moving average is $8.70.
On the ratings front, Etsy has been the subject of a number of recent research reports. In a report issued on April 6, Roth Capital analyst Darren Aftahi reiterated a Sell rating on ETSY, with a price target of $6, which represents a potential downside of 28.6% from where the stock is currently trading. Separately, on February 24, Brean Murray Carret’s Tom Forte reiterated a Buy rating on the stock and has a price target of $20.
According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Darren Aftahi and Tom Forte have a total average return of -3.5% and -27.4% respectively. Aftahi has a success rate of 50.5% and is ranked #3318 out of 3838 analysts, while Forte has a success rate of 18.9% and is ranked #3830.
Etsy, Inc. operates a marketplace where people around the world connect, both online and offline, to make, sell and buy unique goods. The company offers handmade goods and craft supplies. Etsy was founded by Haim Schoppik, Robert Kalin, Jared Tarbell, and Christopher Maguires in 2005 and is headquartered in Brooklyn, NY.