Etsy (ETSY 46.18, +3.75, +8.84%) is trading nicely higher today (+10%) after
reporting Q2 earnings last night.
The company, which is based in Brooklyn, operates on online/mobile marketplace where people buy and sell unique goods -- in particular, handmade goods. Its marketplace boasts a large assortment of handmade, vintage, custom, and crafted products from all over the world.
Typical items offered on the platform include clothing and accessories, home décor, living wares, jewelry, craft supplies, art and collectibles, and paper and party supplies. Over 80% of Etsy sellers are women, and about 95% of sellers run their Etsy shops from home. Its platform connects creative entrepreneurs with consumers looking for items made by real individuals rather than corporations. Via Etsy, buyers can find an attractively diverse array of items not offered for sale anywhere else to suit their personal tastes and unique interests.
Etsy sees its sellers as the heart and soul of the company and dedicates its platform to allowing sellers to turn their creative passions into economic opportunity. Etsy has a seller-aligned business model: Etsy makes money when its sellers make money. Etsy generates revenue by 1) earning a transaction fee on each sale (marketplace revenue) and 2) offering services to sellers such as payment processing, promoted listings, and shipping labels.
Much excitement surrounded Etsy's IPO debut in April 2015; it priced at $16 and traded at $35 on its first day. However, by early 2016, shares had drifted down to the mid-single digits as the company struggled. A new CEO, Josh Silverman, was brought on board in May 2017, and the stock has been in turnaround mode since then. Silverman has an impressive background as the former CEO of Skype and CEO of shopping.com. He also held various executive roles at eBay and, earlier in his career, co-founded Evite. He has focused the company on driving sales and on improving transparency with customers.
In June 2018, Etsy announced a major change in its pricing strategy for the first time in its history. Basically, it bumped up the transaction fee it charges sellers to 5% from 3.5%, starting in mid-July. That noteworthy increase should lead to a nice bump in revenue for Etsy. Also, that Etsy can push through what amounts to a robust 43% increase in the transaction fee demonstrates the company’s confidence in the quality and resilience of its platform. The company also introduced new pricing tiers: Etsy Standard, Etsy Plus, and Etsy Premium.
Turning to the Q2 results, EPS declined to $0.03, which was a good bit below market expectations, but the decline appears to be due mostly to FX impact. Revenue rose 30.2% year/year to $132.4 mln, which was above market expectations. Adjusted EBITDA margin is a key metric for Etsy, and, on that front, Etsy saw improvement to 20.9%, up 840 bps year/year, driven primarily by revenue growth and increased efficiencies. In terms of guidance, Etsy bumped up its 2018 revenue forecast to +33-35% from +32-34%. Adjusted EBITDA margin for the full year was reaffirmed at 21-23%.
On the call, management talked quite a bit about the impact of its higher transaction fees. Etsy said it believes that the new pricing model will further expand its marketplace. The 5% fee is still an excellent value. It also started applying the higher fee to shipping costs. How have sellers reacted to the higher fees? The company is pleased with how the change has been implemented and received; though there have been pockets of discontent, sellers on the whole have understood the rationale for the change. They report seeing little impact on churn or product pricing.
Furthermore, Etsy sees a great deal of opportunity to improve its search capabilities (to filter by a buyer's location, for example) to provide more refined search results. Trends are regional, so location has an impact on search results. Early results from changes made to search engine optimization have reportedly had a good impact on conversion rates. Improving shipping is currently a key focus as well; Etsy recently introduced estimated delivery dates and has continued to make progress on shipping label developments.
Etsy is also focusing more on international growth, particularly in the U.K., France, Canada, and Australia. The company recently announced a referral agreement with DaWanda, a privately held Germany-based marketplace for gifts and handmade items. DaWanda will encourage its community of buyers and sellers to migrate to the Etsy platform. DaWanda plans to wind down its operations and shut down its site on August 30; the plan is to shift all of DaWanda’s online traffic to Etsy at that time.
Investors do not appear to be too worried about the EPS miss, given that it's mostly FX-related. They seem to be focusing on today's revenue upside. Also, investors were likely happy to hear that the higher transaction fee is being accepted by sellers with little blowback. The stock has been steadily climbing higher since early February, when it was trading below $20. Today, it has traded north of $47, so it has clearly succeeded in making a big move in recent months. Longer term, it's a name to keep on the radar as its turnaround continues. It seems that the new CEO's strategy is working well, and the higher transaction fee looks like it'll be a nice tailwind in 2H18 and beyond.
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