Etsy on Wednesday reported that total third quarter revenue rose 31.6% year over year to $197.9 million, driven by growth in both Marketplace and Services revenue. The results included a $6 million contribution from its newly acquired Reverb musical instrument marketplace, according to a company press release.
In the quarter, the company added about 4.2 million new buyers, with its active buyers base growing 19.1% and active sellers growing 19.3% year-over-year. Gross merchandise sales per active buyer (on a trailing 12-month basis) rose for the sixth straight quarter, and on a 2-year basis rose nearly 4%, the company said.
Gross profit rose 24.7% to $129 million, though gross margin contracted by 360 basis points to 65.2%. The margin decline was mostly driven by expenses related to Etsy Payments, the Reverb acquisition and consolidated ad platform Etsy Ads, the last seen by the company as "a tailwind to revenue growth and GMS.” Net income dropped 25.6% to $14.8 million from $19.9 million a year ago.
Etsy is in the midst of several new initiatives, including television advertising in the U.S. and a new free shipping offer, that both hit margins in the quarter.
Another drag, the company's new Reverb marketplace, will continue to compress margins for a while as the company works to bring it into the fold, CFO Rachel Glaser told analysts on Wednesday. At the moment, while Reverb is much like Etsy, it doesn't yet benefit from Etsy's more advanced programming, executives said, according to a Seeking Alpha transcript. Reverb spent just 45 days of the third quarter as an Etsy business, and in that time contributed $77 million in GMS and $6 million in revenue, with nearly 600,000 active buyers and 155,000 active sellers, according to Glaser.
"We think this is a great early-stage business, significant competitive advantages and a similar business model to Etsy," she said.
The artisans marketplace is learning and adjusting to its new programming, including a push for free shipping that is having mixed results. Frequent Etsy buyers and new ones are reacting well and driving good results, while the offer doesn't seem to be affecting the habits of occasional buyers, executives said. Another challenge is that some sellers are encountering difficulty incorporating free shipping into their pricing.
On average, as of the end of the quarter, sellers shifted about 60% of the shipping cost into their item prices, while tests had shown them shifting closer to about 84%, according to Glaser. "We thought more of the shipping cost is going to transfer into the item price than we're seeing today," Glaser said. "Which means from the original forecast we gave that GMS is a little softer because that transfer isn't happening."
The ongoing challenges to margins were reflected in changes to the company's guidance, and in the stock tumble late Wednesday after market close. Etsy boosted its forecast for full-year GMS growth to 25% to 26% (from its previous 20% to 22% forecast) and for revenue growth of 34% to 35% to $809 million to $815 million (from $797 million to $809 million). But the company narrowed its EBITDA margin forecast to $179 million to $187 million (from $177 million to $193 million).