Etsy just released its financial results for 2019's third quarter (July to September) - here are the highlights:
and here are the slides that go with the presentation: https://s22.q4cdn.com/941741262/files/doc_financials/2019/q3/Etsy-3Q-2019-Earnings-Presentation.pdf (I haven't looked at them yet)
The stock is down because Etsy lowered its guidance: https://www.marketwatch.com/story/etsy-stock-down-10-after-company-lowers-guidance-2019-10-30 although I am seeing the usual rise, then drop, then rise happening: https://www.google.com/search?q=Etsy+stock&pws=0&gl=us&gws_rd=cr As always, it will take a while for everyone to digest the full report and call.
The investor phone call starts at 5 pm ET; I will try to listen in & post highlights afterwards. A transcript of that call will eventually be posted here: https://seekingalpha.com/symbol/ETSY?news=transcripts and usually elsewhere, within the next 48 hours.
I will mark any key updates as "solutions" so the posts will be highlighted, and will add to this OP in the next hour for as long as I can edit it.
My previous threads on quarterly results, for comparison:
Okay, here is my summary of the conference call, with the usual qualifying statement that exact quotes & some of the numbers won't come until I read the transcripts, as it is easy to get those wrong when taking notes. The first transcript will likely come out late tonight, & Etsy may release public statements for sellers tomorrow.
I've organized the comments by topic & not by the order of the call, as many things get covered in more detail after the questions. My editorial comments are in square brackets. For ease of reading, here are the slides again [pdf]: https://s22.q4cdn.com/941741262/files/doc_financials/2019/q3/Etsy-3Q-2019-Earnings-Presentation.pdf
overall site sales & Etsy's revenue: all strong, despite some impact from things such as larger states adopting internet sales taxes on out of state purchases.
Free shipping: has gone well for Etsy. Slide 11 shows the progression of items that ship free to the US, now at over 60%. 74% of views on items that that ship to the US are on free shipping items. Buyer surveys say buyers are happy, & habitual buyer conversion rate is up. Sellers who offer free shipping have more sales than those who do not.
However, Etsy is surprised that sellers have moved only about 60% of the shipping cost to the item cost (slide 19). In particular, sellers with most listings under $35, sellers with expensive items, and non-US sellers do this the most. They will be working on educating us more on this point, and introduced the tool for items under $35 this month to help us with that. They wont be releasing tools for non-US sellers until 2020. [rant warning - #!%*#$! why didn't you give us some tools before you rolled this out? Non-US sellers didn't get the over $35 tool until August! Releasing a new tool for adjusting low-priced items during the holiday rush isn't going to help many of us, especially since they explained it so poorly that most sellers took it as an insult. Furthermore, you can't do proper adjustments on listings with price variations since shipping profiles do not attach to price variations. And since non-US sellers generally have higher shipping costs but didn't get any timely tools, what the heck did you expect us to do? Miss an entire holiday season, or absorb some costs while we painstakingly edit each listing? The answer is pretty obvious here. End rant.]
Interestingly, they admit that the move to make page 1 of US results all free shipping items led to lower conversion rates because many relevant items were pushed to page 2, but they accept that because free shipping is more important to their long-term business model than some extra sales. Search was one of the few "incentives" they had to get sellers to comply.
Etsy Ads: have gone as expected, with very few sellers dropping out, or even dropping their budgets. There was "no material churn in aggregate budgets." They describe sellers as waiting to see how this will work. They are working with Google on improving the returns on the Google Shopping portion, and increasing the ROAS (return on ad spend) for the PL portion as well. [They are still calling the ads on Etsy PLs, at least in this call.]
Some sellers are not doing as well as they could be because they have set their budgets too low, so they will work on pushing us to increase the budgets to make more sales. [hard to say if they actually missed that some sellers can't handle more sales; I think they forget that some people are still doing everything by hand, without employees.] Their next push will be getting more sellers to use ads; they have identified a group of small to medium sized sellers who they feel will benefit. This will be a slow push over 2020 and beyond.
They did decrease the amount they are spending on product ads as a way of pushing us to opt in to Etsy Ads, so lost some sales due to that. They are planning on using some of that saved money for more higher level brand advertising. [odd, because my views from Google Shopping ads are increasing, since EA rolled out.] The new stats are due to the new Ads, as they think they show us more info on ad success. [So, Etsy Ads will not be going away. Etsy is happy with the current rate of use and will be pushing them more over time.]
Tests/experiments: they've gone from doing 100 a month in 2016 to around 500 a month, & they are very proud of it.
Reviews: items with more reviews sell more often, so they changed the layout to show more reviews, & to show more useful reviews, such as those with text and/or photos. They are now working on encouraging buyers to write more reviews.
Making It: the new season of the TV show debuts December 2nd.
Reverb: is responsible for some losses & some gains. It increased total revenue and buyer/seller totals, but cost more because they moved the company to Etsy's benefit model, and because they are more affected by the state sales tax issue, having higher priced items & more US-based buyers.
Habitual buyers (people who make at least 6 purchases and spend more than $200 a year here) are the fastest growing group of buyers.
search: they changed context specific search ranking (CSR) from linear to non linear in August. (slide 7) They did not go into more details on how this is working specifically on Etsy, but indicated that this development was continuing, and they expect to add this change to other areas of the site, such as PLs, in the future. Conversion rates improved with this change. [I will be doing more research/asking more questions in the coming days.]
Expect a final update from me tomorrow, & media coverage over the next 48 hours.
Thank you everyone!
I will go over the transcript one last time & post another summary in a few hours, but in the meantime, a few helpful folks have posted some other interesting snippets from the call: https://community.etsy.com/t5/Pricing-and-Finance/Etsy-3rd-Quarter-2019-Financial-Results-Sales-Up-3...
Here is a public (no login required) version of the transcript: https://www.fool.com/earnings/call-transcripts/2019/10/31/etsy-inc-etsy-q3-2019-earnings-call-transc...
For those who missed it, there is a post here: https://community.etsy.com/t5/Pricing-and-Finance/Etsy-3rd-Quarter-2019-Financial-Results-Sales-Up-3... on what the search algorithm change was (I will discuss that more in my final summary)
As others have noted, the stock dropped a lot & is currently down 15%, but seems to be stabilizing at the moment. It's been on a downward slide for a while, so this isn't a surprise. It's not easy to predict what will happen next, and that might be at least partly determined by the expected big swings in the stock market.
Here is some of the news coverage:
https://www.retaildive.com/news/etsy-margins-take-a-hit-amid-solid-revenue-growth/566315/ (probably the best short summary of why the guidance was adjusted downward and the stock tanked)
https://www.crainsnewyork.com/markets/etsys-stock-sinks-merchants-balk-free-shipping (blames free shipping entirely, which will make some of you happy 😉. Also notes that "the retailer reported $78 million in net income last year, and its $5 billion market value is larger than Macy's.")
https://www.schaeffersresearch.com/content/news/2019/10/31/analysts-bash-etsy-with-post-earnings-bea... (explains that some market analysts have changed their recommendations on Etsy)
I'll be back later with a final run through the transcript!
This is my updated summary of the conference call, with a bit more detail on topics people have asked about, as well as some quotes.
Search: I was hoping there would be questions on search at the end, but there were not. The main quote on search was (from CEO Josh Silverman) "We've upgraded our context-specific search ranking algorithms from linear to non-linear models, which now leverage a deeper understanding of the relationship between items, attributes and users." They intend to use this change to continue to work on search personalization, which I have seen a few more signs of recently. This change only applies to search at the moment, but they would like to add it to other areas including Promoted Listings in the future.
Etsy Ads: in addition to what I wrote yesterday, I think this quote covers a lot (Silverman again): "Our data indicates that many sellers are already earning very strong returns for each dollar invested and yet their budgets are too low. We see opportunities for them to invest more with attractive results and our goal is to help them understand this and raise their budgets as a result. The third phase is to add new sellers to Etsy Ads. Our research indicates that a lot of sellers are at a stage of maturity, where they are ready for Etsy Ads but have not yet adopted it, which in turn is limiting their growth. We'll look to communicate the Etsy Ads value proposition for this population and expected option to grow over time. These last 2 phases could take the better part of 2020 and beyond." [There was no mention of the very poor interface & lack of tools, which are going to have to improve if they expect to get a lot more sellers to try Etsy Ads. Also, they really do not grasp that not everyone who sells here wants "growth" out of their business.]
Also, Etsy's income from Promoted Listings grew by 30%, with the move to include Google Shopping contributing $3.7 million to Etsy's seller services income.
Etsy's own marketing budget: they spent $46.2 million on marketing Etsy in the third quarter; so the rest of the marketing budget mentioned in the press release, nearly $4 million, must be from Reverb.
Free shipping: An exact quote on sellers not rolling enough of the shipping cost into the item price (Silverman): "Because they seem to be absorbing more of the shipping cost than we think buyers value. Meaning that there wasn't an indication before the buyers thought that things on Etsy were too expensive."
If there is any more media coverage of note, I will post it. Thank you again to everyone who commented!
Ok, first a correction pointed out by @MouseGarden (thank you!) - tests ("experiments") are about 100 a month now, not 500. It was a five-fold increase from 2016, up to around 100 a month right now in 2019. I apologize for my error (and this is why I often don't report numbers until I have the written transcripts LOL)
Second, some more media coverage: some analysts are arguing that the stock plunge means this is a great time to buy: https://investorplace.com/2019/11/3-big-reasons-why-etsy-stock-looks-good-on-the-dip/
"ETSY stock is getting killed because: 1) the pace of revenue rate expansion is slowing, causing a material slowdown in revenue growth despite steady 20%-plus gross merchandise sales growth, and 2) margin expansion is similarly slowing, and adjusted EBITDA margins are expected to drop this year. Both of these negative developments are almost exclusively the result of Etsy acquiring Reverb, an online music gear marketplace. ...In 2020, the company will likely do all it can to improve Reverb’s take rates and margins. As they do that, Etsy’s overall take rates and margins should improve."
If you search for recent news stories, several companies have confirmed that they still consider Etsy a stock worth buying. (None of them have more detail than that, so I will spare you the links).
Final update - Etsy took their time in releasing the amped up and dumbed down version for sellers, but it is now available here: https://www.etsy.com/seller-handbook/article/etsy-update-increased-marketing-means/653373088424
Side note - when did they start deleting most of the comments on Seller Handbook articles? I noticed last week that one comment section had essentially been gutted, and it seems that is becoming the norm now.
Thank you. The street certainly doesn’t seem happy with the results. Stock down $6+
I know and it has nothing to do with the October 30th (today's) guidance.
Thanks Cindy :) I really appreciate the work you put in to these updates.
Interesting that they saw limited ad budget churn from sellers. I expect some of that is due to a lot of sellers "trying" Etsy ads, as Etsy suggested (I wasn't in that camp). It'll be interesting to see whether that continues this quarter :) I wonder if the figures are per seller, or per seller who actually advertises (i.e. would a load of sellers shutting off advertising change this figure at all)?
It's surprising how much they spend on advertising ($50m) compared with their net income for the quarter ($14.8m). That seems excessive, but maybe it's the norm in big business. In ROI terms that seems dreadful... 64.8(adjusting for net income)/50= 1.296. Hope I've calculated that correctly.
How is it that sales are up, but Etsy payments fees are down? Maybe that will become clearer this afternoon.
@FuzzyFoxDesigns I think the TV ads are responsible for some of the ad spend for the quarter - they don't run year round, & are much more extensive than last year's. At least some of the production costs as well as the first cost of airing the commercials would be included now. They find those are working well, but have a positive effect over a longer period of time than product ads. So spending now can produce new customers in February.
No one asked why there were more fees for Etsy Payments this quarter, so that is a mystery.
$50m, it's 25% of their revenue (cc 200). This % is above those on previous quarters. 20% is rather fair, 25% is "weird", all the more that this higher % did not lead to an accelerated revenue growth. Further, when also considering the free shipping in US ... the growth of revenue should have been significantly higher with the expected results of free shipping and this increased Adv. spend.
Please, let us know what was the average amount spent by the buyers if Etsy mentions it during the conference call. I bet it'll be skewed by free shipping but still important to know. It's critical for my purchase decisions. Thank you so much.
Bummer. If Etsy shared this data with the sellers, they could easily convince sellers to increase the prices. I am paid more on e-Bay for the same items that I sell on Etsy even with their Make Offer option and paid shipping. I can't price my items way more than my competitors here on Etsy.
Want to point out for those not up on marketing jargon, "budget churn" means people cancelling a service, ie sellers abandoning Etsy Ads. Reallllly curious if they mention a specific percentage in the conference call
I took it as a change in the budget sellers had set for advertising. If "budget churn" refers only to sellers turning on/off, I wonder where any change in the budgets sellers set for advertising services would be captured? That would be interesting to know.
@FuzzyFoxDesigns churn only means "turn off". It's apparently negligible though the 3rd quarter ended 9/30. I wonder if after this month the churn rate is still "negligible". Since this is only for Q3, we'll likely not know until Q4 how many sellers bailed.
New sellers (and sales) include those pointed here by Printful, Printify, etc., as the best platform for merchandise (sometimes) designed by the company owner. I see it pushed in various forums. T shirts especially.
Handmade at Amazon forbids it, and Ebay isn't found in google search, so etsy is a preferred place to maximize sales.
As a result of migrating our search efforts to Google Cloud, we made a foundational upgrade to our ranking algorithms, which will enable Etsy to provide more relevant search results to buyers on Etsy.com.
Where’s the translate button........
I think it means lower views/visits but more relevant views/visits resulting in higher sales. therefore higher conversion rate.
@cindylouwho2 I know you're listening to the call and haven't had a chance to go over the slides but slide 19 appears to show that Etsy is concerned that sellers as a whole are eating WAY more of the shipping cost than they originally expected. Meaning not building all of the shipping cost into the item price. I'm assuming they see this as a bad thing in terms of their 5% take on every sale? I'll read the transcript of the call later (while enjoying a beer or three) but hoping you can touch on that in your update if it's brought up in the questions.
Also for what it's worth, slide 20 is, uh, really optimistic with the current state of Etsy Ad issues lol.
If people followed Etsy’s own advice then I can see where the total was less. Etsy was advising sellers to simply raise your price by 34 cents or some other ridiculously low amount. If sellers used the FSG tool with the pricing tool then everyone will be disappointed. It was absurd
@FenderMinerals Their advice was rather confusing but I sort of get why. I'm sure they wanted to come out and say "listen, just tack the total shipping cost directly to your item cost and call it "free shipping" ok?" But for obvious reasons they had to be a bit more vague.
I'm wondering what they based their original expectations off of. For example, if you're selling something that's generally purchased in bulk, you would have charged $6 in shipping for the first item and $1 for each additional quantity purchased. I did that for my brackets, this way if someone orders 1 set, my shipping is mostly covered (I'd eat $1.55) and if someone orders two or three sets, I'd break even or profit a tiny bit. With "free shipping" I based my price on the average quantity to break even so instead of just tacking $6 onto every set, I added $3 so my price is still attractive and I'm mostly breaking even on shipping at the end of the month.
If Etsy just saw my brackets with $6 and assumed the price would go up $6 with free shipping, that might be why they were so off. Maybe it was just me but I'd think a lot of sellers who sell in bulk did something similar.