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Etsy, Inc. Reports Third Quarter 2018 Financial Results
[November 06, 2018]

Etsy, Inc. Reports Third Quarter 2018 Financial Results


BROOKLYN, N.Y., Nov. 6, 2018 /PRNewswire/ -- Etsy, Inc. (NASDAQ: ETSY), the global marketplace for unique and creative goods, today announced financial results for its third quarter ended September 30, 2018.

"Etsy's growth accelerated again in Q3, on a currency neutral basis, and we achieved several key milestones," said Josh Silverman, Etsy, Inc. Chief Executive Officer. "We put our new pricing structure to work by increasing investments in marketing and product initiatives to fuel growth. We also completed a major step in our migration to the Cloud, a key foundational investment as we scale for future growth."

Third Quarter 2018 Highlights

  • GMS was $922.5 million in the third quarter of 2018. On a currency-neutral basis (excluding the direct impact of currency translation on GMS from goods sold that are listed in non-U.S. dollar currencies), GMS growth accelerated to 20.8% from 19.3% in the second quarter of 2018. On an as-reported basis, GMS growth was up 20.4% compared with the third quarter of 2017.
  • Year-over-year aggregate conversion rate increased for the fourth consecutive quarter led by strong performance across all three devices: desktop, mobile web, and the mobile app.
  • We made changes to our pricing model which enabled us to increase the level of investment in product, marketing, and customer support.
  • We fully migrated DaWanda sellers to Etsy's platform and now redirect all traffic to Etsy.com. As of the end of the quarter, Germany is our second largest international market by domestic activity after the United Kingdom.
  • We successfully migrated the Etsy marketplace and our mobile applications to Google Cloud, a significant step in our two-year migration plan.
  • We made progress executing against each of our four key initiatives, including:
    • Improved landing page experiences, including more recommendations to enhance the entry experience on Etsy;
    • Highlighted the personalization and customization features available on so many products and streamlined the purchase flow;
    • Enhanced search algorithms to promote items with competitive shipping;
    • Transformed our customer support experience which now includes live chat for sellers, dedicated inbound phones, and 24x7 service levels; and
    • Invested in new marketing channels such as television.

"Third quarter GMS and revenue increased 20.4% and 41.3% respectively from the prior year, as our financial results demonstrate continued operational execution and business momentum," said Rachel Glaser, Etsy, Inc. Chief Financial Officer. "We are focused on leverage and return on investment as we have increased our marketing spend in the back-half of 2018."

Etsy Announces $200 Million Stock Repurchase Program

Etsy's Board of Directors has approved a stock repurchase program that will enable the Company to repurchase up to $200 million of its common stock. Under the stock repurchase program, Etsy may purchase shares of its common stock through various means, including open market transactions, privately negotiated transactions, tender offers or any combination thereof. In addition, open market repurchases of common stock may be made pursuant to trading plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended, which would permit common stock to be repurchased at a time that Etsy might otherwise be precluded from doing so under insider trading laws or self-imposed trading restrictions. The number of shares repurchased and the timing of repurchases will depend on a number of factors, including, but not limited to, stock price, trading volume and general market conditions, along with Etsy's working capital requirements, general business conditions and other factors. The stock repurchase program has no time limit and may be modified, suspended or terminated at any time by the Board of Directors. Repurchases under the stock repurchase program will be funded from Etsy's existing cash and cash equivalents or future cash flow.  As of September 30, 2018, Etsy had cash and cash equivalents of approximately $362.7 million. Etsy had approximately 120.5 million shares of common stock outstanding as of November 2, 2018.

 





Third Quarter 2018 Financial Summary

(in thousands except percentages; unaudited)



Three Months Ended
 September 30,


% Growth (Decline)
Y/Y


Nine Months Ended
 September 30,


% Growth (Decline)
Y/Y


2018


2017



2018


2017


GMS

$

922,513



$

766,354



20.4

%


$

2,685,273



$

2,234,157



20.2

%

Revenue

$

150,366



$

106,380



41.3

%


$

403,665



$

304,963



32.4

%

Marketplace revenue

$

110,927



$

77,808



42.6

%


$

290,200



$

223,815



29.7

%

Services revenue

$

38,194



$

27,976



36.5

%


$

110,306



$

77,560



42.2

%

Net income

$

19,894



$

25,802



(22.9)

%


$

36,240



$

37,050



(2.2)

%

Adjusted EBITDA

$

34,035



$

22,769



49.5

%


$

88,151



$

45,187



95.1

%













Active sellers

2,043



1,891



8.0

%


2,043



1,891



8.0

%

Active buyers

37,134



31,680



17.2

%


37,134



31,680



17.2

%

Percent mobile GMS

56

%


52

%


400

bps


55

%


51

%


400

bps

Percent international GMS

35

%


34

%


100

bps


35

%


33

%


200

bps


For information about how we define our metrics, see our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, except for Marketplace revenue and Services revenue, which are described below.

Third Quarter 2018 Financial Results

  • Total revenue was $150.4 million for the third quarter of 2018, up 41.3% year-over-year, driven by growth in both Marketplace and Services revenue.
  • Gross profit for the third quarter of 2018 was $103.4 million, up 47.7% year-over-year, and gross margin was 68.8%, up 300 basis points compared with 65.8% in the third quarter of 2017.
  • Total operating expenses were $84.7 million in the third quarter of 2018, up 35.3% year-over-year. The increase in operating expenses was driven primarily by digital acquisition marketing focused on driving GMS growth.
  • Net income for the third quarter of 2018 was $19.9 million, with diluted earnings per share of $0.15 primarily impacted by the non-cash interest expense and amortization related to the Company's convertible senior notes, and partially offset by a tax benefit due to employee stock-option exercises.
  • Non-GAAP Adjusted EBITDA for the third quarter of 2018 was $34.0 million and grew 49.5% year-over-year. Non-GAAP Adjusted EBITDA margin (i.e., Adjusted EBITDA divided by revenue) was 22.6%, up 120 bps year-over-year. Adjusted EBITDA performance was driven primarily by revenue growth related to changes in the Company's pricing model.
  • Net cash provided by operating activities was $97.1 million for the nine months ended September 30, 2018 compared with $32.3 million in the prior year. The increase in net cash provided by operating activities for the nine months ended September 30, 2018 was mainly driven by revenue growth.
  • Cash, cash equivalents, and short-term investments were $584.1 million as of September 30, 2018.

2018 Financial Guidance

Etsy is raising its 2018 guidance for GMS, revenue growth, and Adjusted EBITDA margin.



2018 Guidance
August 6, 2018


2018 Revised Guidance
November 6, 2018

GMS Year-Over-Year Growth


18-20%


19-20%



~$3.84B - $3.90B


~$3.87B - $3.90B

Revenue Year-Over-Year Growth


33-35%


35-36%



~$587M - $596M


~$596M - $600M

Adjusted EBITDA Margin*


21-23%


22-23%



~$124M - $136M


~$132M - $138M

*        Assumes the midpoint of our revenue guidance.

For a summary of the key items that we expect to impact our updated guidance, please read our Q3 investor presentation that is available on Etsy's investor relations website, investors.etsy.com.

Etsy is not able, at this time, to provide GAAP targets for net income margin for 2018 or for the fourth quarter of 2018 because of the unreasonable effort of estimating certain items that are excluded from non-GAAP Adjusted EBITDA margin, including, for example, provision or benefit for income taxes and foreign exchange gain or loss, the effect of which may be significant.

Webcast and Conference Call Information

Etsy will host a webcast to discuss these results at 5:00 p.m. ET today. To access the live webcast and accompanying slide deck, please visit the Etsy Investor Relations website, investors.etsy.com, and go to the Investor Events section. To join the call by phone, please dial 1-855-852-1946 (toll free) or 1-720-634-2903 (toll) and use the passcode 4156409. A replay will be available through the same link following the conference call, or by dialing (toll free) 1-855-859-2056 or 1-404-537-3406 (toll) with the passcode 4156409 starting at 8:00 p.m. ET tonight through November 20, 2018.

Etsy to Host Investor Day

Etsy also announced today that it will host an Investor Day on March 7, 2019 at its Brooklyn, NY headquarters. More details, including webcast information, will follow in the coming months.

About Etsy

Etsy, Inc. is the global marketplace for unique and creative goods. Our mission is to keep commerce human, and we're committed to using the power of business to strengthen communities and empower people. We connect millions of buyers and sellers from nearly every country in the world. Buyers come to Etsy to be inspired and delighted by items that are crafted and curated by creative entrepreneurs. For sellers, we offer a range of tools and services that address key business needs.

Etsy was founded in 2005 and is headquartered in Brooklyn, New York.

Etsy has used, and intends to continue using, its investor relations website and the Etsy News Blog (blog.etsy.com/news) to disclose material non-public information and to comply with its disclosure obligations under Regulation FD. Accordingly, you should monitor our investor relations website and the Etsy News Blog in addition to following our press releases, SEC filings and public conference calls and webcasts.

Investor Relations Contact:

Deb Wasser, Vice President, Investor Relations
ir@etsy.com

Gabriel Ratcliff, Sr. Manager, Investor Relations
ir@etsy.com

Media Relations Contact:

Kelly Clausen, Director, Corporate Communications
press@etsy.com

Cautionary Statement Regarding Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include statements relating to the impact of our new pricing model, our investments in marketing and product initiatives, our migration to the Cloud, and our financial guidance and key drivers thereof. Forward-looking statements include all statements that are not historical facts. In some cases, forward-looking statements can be identified by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "will," or similar expressions and the negatives of those words.

Forward-looking statements involve substantial risks and uncertainties that may cause actual results to differ materially from those that we expect. These risks and uncertainties include: (1) our history of operating losses; (2) the fluctuation of our quarterly operating results; (3) our ability to implement our business strategy; (4) our ability to attract and retain an active and engaged community of Etsy sellers and Etsy buyers; (5) macroeconomic events that are outside of our control; (6) our ability to recruit and retain employees; (7) the importance to our success of the trustworthiness of our marketplace and the connections within our community; (8) our ability to enhance our current offerings and develop new offerings to respond to the changing needs of Etsy sellers and Etsy buyers; (9) the effectiveness of our marketing efforts; (10) the success of our new pricing model and the impact of that model on our sellers; (11) the effectiveness of our mobile solutions for Etsy sellers and Etsy buyers; (12) our ability to expand our business in our core geographic markets; (13) regulation in the area of privacy and protection of user data; (14) our dependence on third-party payment providers; and (15) the potential misuse or disclosure of sensitive information about members of our community and the potential for cyber-attacks. These risks and uncertainties are more fully described in our filings with the Securities and Exchange Commission, including in the section entitled "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, and subsequent reports that we file with the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, we cannot guarantee future results, levels of activity, performance, achievements or events and circumstances reflected in the forward-looking statements will occur.

Forward-looking statements represent our beliefs and assumptions only as of the date of this press release. We disclaim any obligation to update forward-looking statements.


 

Etsy, Inc.

Condensed Consolidated Balance Sheets

(in thousands; unaudited)



As of
September 30, 
 2018


As of
December 31, 
 2017

ASSETS




Current assets:




Cash and cash equivalents

$

362,727



$

315,442


Short-term investments

221,409



25,108


Accounts receivable, net

36,385



33,677


Prepaid and other current assets

23,958



20,379


Funds receivable and seller accounts

63,470



44,658


Total current assets

707,949



439,264


Restricted cash

5,341



5,341


Property and equipment, net

119,243



117,617


Goodwill

37,802



38,541


Intangible assets, net

36,360



4,100


Other assets

673



720


Total assets

$

907,368



$

605,583


LIABILITIES AND STOCKHOLDERS' EQUITY




Current liabilities:




Accounts payable

$

14,130



$

13,622


Accrued expenses

37,191



28,743


Capital lease obligations—current

4,284



5,798


Funds payable and amounts due to sellers

63,470



44,658


Deferred revenue

7,180



6,262


Other current liabilities

2,676



3,394


Total current liabilities

128,931



102,477


Capital lease obligations—net of current portion

2,791



4,115


Deferred tax liabilities

30,851



23,786


Facility financing obligation

60,008



60,049


Long-term debt, net

272,790




Other liabilities

17,378



18,262


Total liabilities

512,749



208,689


Total stockholders' equity

394,619



396,894


Total liabilities and stockholders' equity

$

907,368



$

605,583


 

 

Etsy, Inc.

Condensed Consolidated Statements of Operations

(in thousands except share and per share amounts; unaudited)



Three Months Ended
 September 30,


Nine Months Ended
 September 30,


2018


2017


2018


2017

Revenue

$

150,366



$

106,380



$

403,665



$

304,963


Cost of revenue

46,947



36,383



133,651



106,766


Gross profit

103,419



69,997



270,014



198,197


Operating expenses:








Marketing

39,516



23,520



94,651



74,495


Product development

24,418



16,958



68,707



56,828


General and administrative

20,748



22,094



61,359



73,268


Total operating expenses

84,682



62,572



224,717



204,591


Income (loss) from operations

18,737



7,425



45,297



(6,394)


Other (expense) income, net

(4,141)



5,815



(13,095)



20,393


Income before income taxes

14,596



13,240



32,202



13,999


Benefit for income taxes

5,298



12,562



4,038



23,051


Net income

$

19,894



$

25,802



$

36,240



$

37,050


Net income per share attributable to common stockholders:








Basic

$

0.17



$

0.22



$

0.30



$

0.32


Diluted

$

0.15



$

0.21



$

0.29



$

0.31


Weighted-average common shares outstanding:








Basic

119,870,711



119,592,191



120,469,066



117,387,714


Diluted

129,086,137



123,224,559



126,497,281



121,346,921


 

 

Etsy, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands; unaudited)



Nine Months Ended
 September 30,


2018


2017

Cash flows from operating activities




Net income

$

36,240



$

37,050


Adjustments to reconcile net income to net cash provided by operating activities:




Stock-based compensation expense

21,829



17,389


Stock-based compensation expense—acquisitions

2,158



3,179


Depreciation and amortization expense

19,116



20,620


Bad debt expense

3,617



2,059


Foreign exchange loss (gain)

2,973



(26,952)


Amortization of debt issuance costs

831



164


Non-cash interest expense

7,632



6,752


Interest on marketable securities

(1,575)



384


Loss on disposal of assets

26



395


Deferred income taxes

(4,038)



(23,051)


Changes in operating assets and liabilities

8,323



(5,667)


Net cash provided by operating activities

97,132



32,322


Cash flows from investing activities




Cash paid for asset acquisition

(35,323)




Purchases of property and equipment

(442)



(3,872)


Development of internal-use software

(13,674)



(8,042)


Purchases of marketable securities

(359,182)



(46,808)


Sales of marketable securities

164,443



96,540


Net cash (used in) provided by investing activities

(244,178)



37,818


Cash flows from financing activities




Repurchase of stock for tax on RSU vesting

(17,136)



(4,897)


Repurchase of stock

(89,661)




Proceeds from exercise of stock options

15,573



21,936


Proceeds from issuance of convertible senior notes

345,000




Payment of debt issuance costs

(9,962)




Purchase of capped call

(34,224)




Payments on capital lease obligations

(4,748)



(5,838)


Payments on facility financing obligation

(7,817)



(4,330)


Net cash provided by financing activities

197,025



6,871


Effect of exchange rate changes on cash

(2,694)



1,685


Net increase in cash, cash equivalents, and restricted cash

47,285



78,696


Cash, cash equivalents, and restricted cash at beginning of period

320,783



186,933


Cash, cash equivalents, and restricted cash at end of period

$

368,068



$

265,629


 


Revenue Categories

In connection with the adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers, we renamed our revenue categories Marketplace and Services revenue. Marketplace revenue represents the fees we charge sellers to list items in the marketplace, the fees we charge for transactions between buyers and sellers, and the use of Etsy Payments by our sellers to process payments. Services revenue, formerly called Seller Services revenue, is derived from the optional services we provide to our sellers, which include Promoted Listings, Etsy Shipping Labels, Pattern by Etsy, Etsy Plus, and Targeted Offers. Revenue from Etsy Payments, our payments processing product, formerly included in Services revenue, is now included in Marketplace revenue because Etsy Payments is required to be used by Etsy sellers in the countries where it is available. All numbers presented in this press release reflect this reclassification.

The following table provides our Marketplace and Services revenue under our previous and current presentation:


Quarter-to-Date Period Ended


Year-to-Date Period Ended


Previous Presentation


Updated Presentation


Previous Presentation


Updated Presentation


Marketplace Revenue


Services Revenue


Marketplace Revenue


Services Revenue


Marketplace Revenue


Services Revenue


Marketplace Revenue


Services Revenue


















(in thousands)

December 31, 2017

$

54,251



$

82,319



$

102,261



$

34,309



$

179,492



$

258,453



$

326,076



$

111,869


September 30, 2017

42,413



63,371



77,808



27,976



125,241



176,134



223,815



77,560


June 30, 2017

42,069



58,816



75,445



25,440



82,828



112,763



146,007



49,584


March 31, 2017

40,759



53,947



70,562



24,144



40,759



53,947



70,562



24,144


 


Currency-Neutral GMS Growth

We calculate currency-neutral GMS growth by translating current period GMS for goods sold that were listed in non-U.S. dollar currencies into U.S. dollars using prior year foreign currency exchange rates.

As reported and currency-neutral GMS growth for the periods presented below is as follows:


Quarter-to-Date Period Ended


Year-to-Date Period Ended


As Reported


Currency Neutral


FX Impact


As Reported


Currency Neutral


FX Impact

September 30, 2018

20.4

%


20.8

%


(0.4)

%


20.2

%


19.2

%


1.0

%

June 30, 2018

20.4

%


19.3

%


1.1

%


20.1

%


18.5

%


1.6

%

March 31, 2018

19.8

%


17.6

%


2.2

%


19.8

%


17.6

%


2.2

%

December 31, 2017

17.8

%


16.5

%


1.3

%


14.5

%


14.3

%


0.2

%

September 30, 2017

13.2

%


12.6

%


0.6

%


13.0

%


13.4

%


(0.4)

%

 


Non-GAAP Financial Measures

Adjusted EBITDA

In this press release, we provide Adjusted EBITDA, a non-GAAP financial measure that represents our net income adjusted to exclude: interest and other non-operating expense, net; benefit for income taxes; depreciation and amortization; stock-based compensation expense; foreign exchange loss (gain); and restructuring and other exit costs (income). Below is a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA in this press release because it is a key measure used by our management and Board of Directors to evaluate our operating performance and trends, allocate internal resources, prepare and approve our annual budget, develop short- and long-term operating plans, determine incentive compensation, and assess the health of our business. As our Adjusted EBITDA increases, we are able to invest more in our platform.

We believe that Adjusted EBITDA can provide a useful measure for period-to-period comparisons of our business as it removes the impact of certain non-cash items and certain variable charges.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

  • Adjusted EBITDA does not reflect other non-operating expenses, net of other non-operating income, including net interest expense;
  • Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
  • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
  • Adjusted EBITDA does not consider the impact of stock-based compensation expense;
  • Adjusted EBITDA does not consider the impact of foreign exchange loss (gain);
  • Adjusted EBITDA does not consider the impact of restructuring and other exit costs (income); and
  • other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including net income and our other GAAP results.

 

Reconciliation of Net Income to Adjusted EBITDA

(Unaudited)



Three Months Ended
 September 30,


Nine Months Ended
 September 30,


2018


2017


2018


2017










(in thousands)

Net income

$

19,894



$

25,802



$

36,240



$

37,050


Excluding:








Interest and other non-operating expense, net (1)

3,768



2,254



10,122



6,559


Benefit for income taxes

(5,298)



(12,562)



(4,038)



(23,051)


Depreciation and amortization (1)

6,439



7,022



19,116



20,620


Stock-based compensation expense (2)

8,191



5,832



21,829



14,756


Stock-based compensation expense—acquisitions (2)

725



724



2,158



3,179


Foreign exchange loss (gain) (3)

373



(8,069)



2,973



(26,952)


Restructuring and other exit costs (income) (4)

(57)



1,766



(249)



13,026


Adjusted EBITDA

$

34,035



$

22,769



$

88,151



$

45,187


(1)        Included in interest and depreciation expense amounts above, are interest and depreciation expense related to our headquarters under build-to-suit accounting requirements, which commenced in May 2016. In the three and nine months ended September 30, 2018 and 2017, those amounts are as follows:


Three Months Ended
 September 30,


Nine Months Ended
 September 30,


2018


2017


2018


2017










(in thousands)

Interest expense

$

2,249



$

2,384



$

6,748



$

6,752


Depreciation

819



819



2,457



2,457


 

(2)   $1.0 million and $2.6 million of restructuring-related stock-based compensation expense has been excluded from the three and nine months ended September 30, 2017, respectively, and is included in total restructuring and other exit costs (income) below. See note (4). Total stock-based compensation expense included in the Consolidated Statements of Operations is as follows:


Three Months Ended
 September 30,


Nine Months Ended
 September 30,


2018


2017


2018


2017










(in thousands)

Cost of revenue

$

894



$

469



$

2,367



$

1,231


Marketing

642



447



1,819



1,419


Product development

4,697



2,180



11,361



6,253


General and administrative

2,683



4,425



8,440



11,665


Total stock-based compensation expense

$

8,916



$

7,521



$

23,987



$

20,568


 

(3)    Foreign exchange loss (gain) is primarily driven by the decrease in non-functional currency intercompany balances and U.S. Dollar to Euro exchange rate fluctuations on our intercompany and other non-functional currency balances.

(4)    Total restructuring and other exit costs (income) included in the Consolidated Statements of Operations are as follows:


Three Months Ended
 September 30,


Nine Months Ended
 September 30,


2018


2017


2018


2017










(in thousands)

Cost of revenue

$

(6)



$

5



$

(19)



$

699


Marketing

(12)



337



(82)



2,686


Product development

(14)



79



(110)



3,180


General and administrative

(25)



1,345



(38)



6,461


Total restructuring and other exit costs (income)

$

(57)



$

1,766



$

(249)



$

13,026


 

Cision View original content:http://www.prnewswire.com/news-releases/etsy-inc-reports-third-quarter-2018-financial-results-300745125.html

SOURCE Etsy


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