Gross margin and adjusted EBITDA rise
In 4Q17, Etsy (ETSY) reported a 110-basis-point improvement in gross margin to 67.5% due to lower net fees from third-party payment processors. Operating expenses were up 5.7% to $73.8 million. However, the operating expense rate fell to 54.1% of total revenue in 4Q17 compared with 63.3% of total revenue in 4Q16.
Marketing expenses were up 14% in 4Q17 while product development expenses were up 10%. General and administrative expenses were down 19% mainly due to headcount reduction. Adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) was up 127.9% to $34.8 million in 4Q17 driven by increases in revenue and operational effectiveness achieved across the entire operation.
Overall, Etsy reported a gross margin of 65.8% in 2017 compared with 66.2% in 2016. The contraction was due to increases in the cost of revenue, which offset the benefit from higher revenue.
For 2018, the management expects the adjusted EBITDA margin to be in the range of 20% to 22%. The company expects annualized cost savings of nearly $35 million in 2018. The company is also cutting down $4 million to $5 million in capital expenditure related to data center maintenance by migrating to cloud. The cloud migration is estimated to cost the company around $10 million to $15 million in 2018. Analysts expect adjusted EBITDA for 2018 to be 20.8%.
In 4Q17, Shopify (SHOP) reported adjusted operating income of $11.6 million compared with an adjusted loss of $0.8 million in 4Q16. In 4Q17, eBay (EBAY) reported an adjusted operating margin of 31%, a decline of 100 basis points on a YoY basis. The margin was marred primarily by unfavorable foreign exchange rates.
For 4Q17, Wayfair (W) reported an operating loss of $67.7 million compared with a loss of $43.8 million in 4Q16. Higher operating expenses offset the benefit from increases in the top line.
In the next article, we’ll take a look at Etsy’s bottom-line performance.