How Was Etsy’s 4Q17 Margin Performance?



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.

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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%.

Peer performance

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.


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