Etsy, Inc. Reports Third Quarter 2015 Financial Results

NEW YORK, Nov. 3, 2015 /PRNewswire/ -- Etsy, Inc. (NASDAQ: ETSY), a marketplace where people around the world connect, both online and offline, to make, sell and buy unique goods, today announced financial results for its third quarter 2015, ended September 30, 2015.

"During the third quarter the growth in the Etsy Economy continued, and we generated more than $1.6 billion in GMS year-to-date and supported more than 1.5 million active sellers and 22.6 million active buyers," said Chad Dickerson, Etsy, Inc. CEO and Chairman. "We are looking forward to a great holiday season and are continuing to innovate and build new products and services on our platform that empower Etsy's creative entrepreneurs to succeed on their own terms. Our commitment to reimagining commerce, our understanding of the needs of artisans and our dedication to our vibrant community will continue to differentiate the Etsy marketplace from all others."

For information about how we define these metrics, see our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015 filed with the SEC on August 6, 2015.

Third Quarter 2015 Operational Highlights

GMS was $568.8 million, up 21.7% compared with the third quarter of 2014. Growth in GMS was driven by 19.4% year-over-year growth in active sellers and 24.9% year-over-year growth in active buyers. During the third quarter, Etsy continued to strengthen its mobile footprint and mobile visits continued to grow faster than desktop visits. Percent mobile visits was approximately 60% compared with approximately 55% in the third quarter of 2014 and percent mobile GMS was approximately 44% compared with approximately 38% in the third quarter of 2014. This compares with percent mobile visits of approximately 60% and percent mobile GMS of approximately 43% in the second quarter of 2015. As a result of our strong year-over-year GMS growth on our buyer mobile app, we continued to make progress in narrowing the gap between mobile visits and mobile GMS.

We continue to believe that we can grow international GMS, over time, to represent 50% of our total GMS and that the impact of currency exchange rates contributed to the year-over-year decline in percent international GMS, which was 29.3% in the third quarter of 2015. Percent international GMS was 30.2% in the second quarter of this year.  

We believe our GMS growth and percent international GMS are impacted by currency exchange rates in two ways. First, approximately 9% of our GMS comes from goods that are not listed in U.S. dollars and as a result is subject to the impact of currency exchange fluctuations. The percentage of GMS from goods that are not listed in U.S. dollars is consistent with what we reported in the second quarter of 2015. Excluding this direct impact, on a currency-neutral basis, GMS growth in the third quarter of 2015 would have been 23.5% or approximately 1.8 percentage points higher than the as-reported 21.7% growth.

Second, we believe weaker local currencies in key international markets continued to dampen the demand for U.S. dollar-denominated goods during the third quarter of 2015. For example, during the third quarter of 2015, GMS from international buyers purchasing from U.S. sellers declined approximately 12.5% year-over-year, compared with an approximate 6% year-over-year decline in the second quarter of 2015 and approximately 0.3%, 23% and 43% year-over-year growth in the first quarter of 2015, and the fourth and third quarters of 2014 respectively. In contrast, excluding our French marketplace ALM, GMS from international buyers making purchases from sellers in their own country grew approximately 45% year-over-year during the third quarter of 2015.

Taken together, we estimate that the impact of currency translation on goods not listed in U.S. dollars and the impact of currency exchange rates on international buyer behavior reduced our year-over-year GMS growth rate by approximately three to five percentage points in the third quarter.

Third Quarter 2015 Financial Highlights

Total revenue was $65.7 million, up 37.9% year-over-year, driven by growth in both Marketplace and Seller Services revenue. Marketplace revenue grew 19.7%, primarily due to growth in transaction fee revenue and, to a lesser extent, growth in listing fee revenue. Seller Services revenue grew 66.7% year-over-year, primarily due to growth in revenue from Promoted Listings, which continued to benefit from the re-launch of the product at the end of the third quarter of 2014. Seller Services revenue also benefited from growth in revenue from Direct Checkout and Shipping Labels, which both grew faster than GMS in the third quarter.

Gross profit for the third quarter was $41.5 million, up 40.7% year-over-year, and gross margin was 63.2%, up 120 bps compared with 62.0% in the third quarter of 2014. Similar to the first and second quarters of 2015, gross profit grew faster than revenue in the third quarter because of leverage in the cost of revenue for employee-related costs. In addition, growth of a higher-margin revenue stream, Promoted Listings, outpaced growth of lower-margin Direct Checkout revenue. 

Total operating expenses were $43.2 million in the third quarter, up 32.6% year-over-year. Total operating expenses as a percent of revenue declined to 65.8% in the third quarter of 2015 compared with 68.4% in the third quarter of 2014, as revenue growth continued to outpace operating expense growth.

The overall increase in operating expenses was primarily driven by the planned increase in reported marketing expenses, which grew 87.8% year-over-year mostly due to increased spending on product listing ads and employee-related expenses within our seller development and brand design cost centers. Year-over-year growth in reported marketing expenses in the third quarter of 2015, as well as in the first and second quarters of 2015, was also impacted by business changes and reorganizations that occurred in September 2014, when we moved certain expenses, such as brand design, brand research and seller development, into marketing expenses, most of which had previously been recorded in product development. Excluding the impact of these changes, comparable marketing expenses in the third quarter of 2015 grew 74.0% year-over-year.  For reference, excluding the impact of the business changes and reorganizations, year-over-year comparable marketing expenses grew approximately 45% in the first quarter of 2015 and approximately 57% in the second quarter of 2015.

Reported product development expenses grew 13.2% year-over-year, primarily due to higher employee-related expenses. Similar to reported marketing expenses growth, year-over-year growth in reported product development expenses in the third quarter of 2015, as well as the first and second quarters of 2015, was also impacted by the previously mentioned business changes and reorganizations made in September 2014. Excluding the impact of these changes, comparable product development expenses grew 18.3% year-over-year compared with the third quarter of 2014. For reference, excluding the impact of business changes and reorganizations, year-over-year comparable product development expenses grew approximately 34% in the first quarter of 2015 and approximately 25% in the second quarter of 2015.

G&A expenses grew 11.4% year-over-year, mostly driven by higher employee-related expenses and consulting fees.

Non-GAAP Adjusted EBITDA for the third quarter was $6.2 million and grew 46.5% year-over-year. Adjusted EBITDA margin was 9.5%, up 60 bps year-over-year.

Net loss for the third quarter of 2015 was $6.9 million, compared with a $6.3 million net loss in the third quarter of 2014. Etsy's net loss in the third quarter of 2015 was impacted by an increase to our tax provision. We recorded a $4.1 million tax provision in the third quarter of 2015 that included non-cash charges related to the revised global corporate structure that we implemented on January 1, 2015 and forecasted pre-tax income that were partially offset by the benefit from a research and development tax credit.

Net cash provided by operating activities was $5.4 million in the third quarter of 2015 compared with $5.1 million in the third quarter of 2014.

Cash, marketable securities and short-term investments were $286.8 million as of September 30, 2015 and included $194.4 million in net proceeds from our initial public offering.

Fourth Quarter 2015 Outlook: Factors to Consider

We'd like to highlight a few factors that we believe will impact Etsy's fourth quarter 2015 results.

• First, from an overall business perspective, we're excited about our competitive position as we head into the fourth quarter - our biggest quarter of the year - and the holiday season. We have launched a holiday campaign that we believe is our strongest holiday effort to date.
• Even so, just as we conveyed in the first and second quarters of 2015, if currency exchange rates remain at current levels, then currency translation will continue to negatively affect reported GMS growth for goods that are not listed in U.S. dollars and will also continue to dampen the demand for U.S. dollar-denominated goods from buyers outside of the United States.
• The second qualitative factor we'd like to highlight is that from a modeling perspective, the operating leverage that we achieved in the third quarter will not repeat in the fourth quarter for a few reasons:
  • First, although Etsy's gross margin has expanded year-over-year during each of the first three quarters of 2015, we do not expect that to continue in the fourth quarter for two reasons. The first is that the fourth quarter of 2015, as we have discussed previously, will be the first full quarter following the anniversary of the re-launch of Promoted Listings. We expect the year-over-year revenue growth rate for Promoted Listings to decelerate significantly compared with the first three quarters of 2015 to a level that is below that of Direct Checkout, which is a lower-margin revenue stream. The second reason is that we expect Direct Checkout to benefit from our recent integration of PayPal. This shift in Seller Services revenue growth drivers is expected to be a drag on our gross margin.
  • Second, as in the first three quarters of the year, we plan to spend more on marketing in absolute dollars in the fourth quarter compared with both the third quarter of 2015 and the fourth quarter of 2014. Therefore, we expect marketing expenses to continue to grow faster than our revenue in the fourth quarter. Despite this, we expect the year-over-year growth rates for overall marketing expenses to decelerate in the fourth quarter compared with both the third quarter of 2015 and the fourth quarter of 2014. We also expect digital marketing expenses to grow more slowly year-over-year in the fourth quarter of 2015 compared to year-over-year growth in the third quarter of 2015.
  • Finally, we expect our number of net hires in the fourth quarter of 2015 to be comparable to the third quarter of 2015 but to be higher than the fourth quarter of 2014.

Webcast and Conference Call Replay Information

Etsy will host a webcast to discuss these results at 5:30 p.m. ET today. To access the live webcast, please visit the Etsy Investor Relations website, investors.etsy.com and go to the Investor Events section.

A replay will be available following the live webcast and may be accessed on the same website. A telephonic replay will also be available through midnight ET on November 17, 2015 at (855) 859-2056 or (404) 537-3406; conference ID 58447367.

About Etsy

Etsy is a marketplace where millions of people around the world connect, both online and offline, to make, sell and buy unique goods. The Etsy ecosystem includes creative entrepreneurs who sell on our platform, thoughtful consumers looking to buy unique goods in our marketplace, responsible manufacturers who help Etsy sellers grow their businesses and Etsy employees who maintain our platform and nurture our community. Our mission is to reimagine commerce in ways that build a more fulfilling and lasting world, and we're committed to using the power of business to strengthen communities and empower people.

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

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements include information related to our possible or assumed future results of operations and expenses, our fourth quarter outlook, our mission, business strategies and plans, business environment and future growth. Forward-looking statements include all statements that are not historical facts. In some cases, forward-looking statements can be identified by terms such as "believes," "expects," "may," "plans," "should," "will," or similar expressions and the negatives of those terms. 

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 (i) our history of operating losses; (ii) the fluctuation of our quarterly operating results; (iii) adherence to our values and our focus on long-term sustainability, which may negatively influence our short- or medium-term financial performance; (iv) the importance to our success of the authenticity of our marketplace and the connections within our community; (v) further expansion into markets outside of the United States; (vi) increases in our marketing efforts to help grow our business, which may not be effective at attracting new members and retaining existing members; (vii) our payments system, which depends on third-party providers and is subject to evolving laws and regulations; (viii) our ability to expand our ecosystem to add new constituents and open new sales channels; (ix) our ability to develop new offerings to respond to our members' changing needs; (x) the effectiveness of our mobile solutions for Etsy sellers and Etsy buyers; and (xi) our ability to compete effectively. 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, 2015.

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

Use of Non-GAAP Financial Measures

In this press release, we provide Adjusted EBITDA, a non-GAAP financial measure that represents our net loss before interest expense, net, (benefit) provision for income taxes and depreciation and amortization, adjusted to eliminate stock-based compensation expense, net unrealized loss (gain) on warrant and other liabilities, foreign exchange loss (gain), contributions to Etsy.org and acquisition-related expenses. Following is a reconciliation of Adjusted EBITDA to net loss, 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 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:

• 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 or changes in the fair value of warrants;
• Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
• Adjusted EBITDA does not reflect acquisition-related expenses;
• Adjusted EBITDA does not consider the impact of foreign exchange loss (gain);
• Adjusted EBITDA does not reflect the impact of our contributions to Etsy.org; 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 loss and our other GAAP results.

SOURCE Etsy, Inc.