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Could Etsy’s 4Q17 Margins Impress?

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Margin expectations

Etsy (ETSY) remains focused on driving its margin growth through cost cutting and improving the efficiency of its operations. In 4Q17, analysts expect the company to report a gross margin of 66.1%, compared with 66.4% in 4Q16. The company’s adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) are expected to be $22.8 million, a significant improvement over the $15.3 million reported in 4Q16. Etsy’s revenue growth and cost cutting (due to headcount reduction) are likely to boost its EBITDA.

Etsy expects its adjusted EBITDA margin to widen to 16.0%–18.0% in 2017, while analysts expect it to have an adjusted EBITDA margin of ~17%. Its adjusted EBITDA margin in 2016 was 15.7%.

The company expects a $20 million reduction in operating expenses in 2017 (more in the latter half) due to higher operational efficiency. In 2018, the company expects a $35 million reduction in operating expenses.

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Etsy’s 3Q17 margins

In 3Q17, Etsy’s gross margin narrowed 70 basis points to 65.8%, impacted by higher fees related to Etsy’s payment platform. Nevertheless, its efforts to improve operational effectiveness and streamline its cost structure led to its operating expenses increasing 12.6%, compared with 28.7% in 3Q16. The company’s operating margin was ~7.0%, up from the 3.1% it reported in 3Q16. Its adjusted EBITDA margin expanded 650 basis points to 21.4%.

Peer performance

In 4Q17, Shopify (SHOP) had adjusted operating income of $11.6 million, compared with -$0.8 million in 4Q16. In 4Q17, eBay (EBAY) had an adjusted operating margin of 31%, marking a 100-basis-point contraction YoY. Its margin was impacted primarily by foreign exchange rates. In the next article, we’ll discuss what analysts have to say about Etsy.

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