Gazelle Gets Profitable as Consumers Unlock Own Phones, Buy Direct

Xconomy Boston — 

Some companies are like soap operas. You check in every year or so, and nothing seems to change—same characters, same plotlines. Gazelle isn’t one of those companies.

The Boston consumer-tech firm looks a bit different every time we look. Keep in mind, Xconomy has been reporting on Gazelle since early 2008, when it was still known as Second Rotation (the rebranding was later that year). The startup built its business around buying used electronics and reselling them to wholesale buyers and retailers on the international market. With the global rise of smartphones and tablets, Gazelle’s business boomed.

Which is not to say the firm hasn’t had its share of drama. In fact, it serves as a case study on how a mid-stage company can navigate major twists and turns and become profitable in a tough market.

Gazelle had to drop its big retail partnerships a few years ago because they weren’t working; instead the company focused on its consumer trade-in business. Then in 2013, Apple started its own buyback program, whereby people could trade in their old iPhones at retail stores. The competitive landscape for “recommerce” had become crowded with big players like AT&T, Verizon, and Best Buy jumping in. And one wireless carrier in particular hurt Gazelle’s business (read on for details).

I got the rundown from CEO Chris Sullivan (pictured), who took over from co-founder and longtime chief Israel Ganot in August 2014. (Ganot now runs MassChallenge Israel.) Sullivan had previously served as Gazelle’s chief financial officer for four years, and before that he was CFO at Fidelity and Pegasystems.

In late 2013, AT&T shut down bulk “unlocking” of its iPhones—meaning it stopped third parties from mass-opening used phones for consumers on other carrier systems. Phones could still be unlocked individually through AT&T, but that added $80 to the unit cost instead of the couple of dollars it used to be. The move “disrupted the entire marketplace” for resellers, Sullivan says. “We had to address that if we were going to survive.”

So Gazelle worked to get most of its customers to unlock their devices before trading them in. The process took six to nine months in 2014, Sullivan says, and in the meantime the company slashed its marketing budget by half and put more effort into user experience—by inserting a step in the trade-in process for customers to click on a link to AT&T and unlock their phone (and get paid $50 more by Gazelle for the trouble).

Gazelle made another move last October, which ultimately could prove to be more important: it started selling used devices directly to consumers online, instead of mainly to wholesale buyers. That strategy is closer to a used-goods marketplace model like eBay’s or Amazon’s, but Gazelle does extensive customer service and, crucially, puts the devices it receives through a 30-point checklist to make sure they work before approving them for resale.

The new business has been growing fast, with more than $13 million in revenue so far: the direct-to-consumer store made up 33 percent of the company’s total revenue in June, and could approach 50 percent by year’s end, Sullivan says.

Meanwhile, the company’s financials have been on the upswing. Gazelle lost $13 million in 2013, lost $6 million in 2014, and should be profitable in 2015 for the first time in its history. Its annual revenue is on pace to hit $100 million after a dip below $90 million last year, Sullivan says.

It has taken longer than expected, perhaps, but Gazelle seems to be back on track as one of Boston’s leading consumer-tech companies. Sullivan says an IPO is “still very viable,” but isn’t a primary concern. It sounds like a big strategic investor or private equity round would be more likely. For now, the company’s goal is to show it can be profitable and still grow revenues by a double-digit percentage annually, he says.

Sullivan notes that the used phone market in the U.S. is expected to hit $14 billion in 2017. “We can be a billion-dollar business and still have less than 10 percent of the market,” he says. The key to reaching that level of success will be getting customers to come back again and again to buy and sell devices. “This is a business that has legs for a good long time,” he says.

Gazelle has raised about $55 million in total funding from investors that include Venrock, RockPort Capital Partners, Physic Ventures, and Craton Equity Partners. The company now has about 110 employees, split between its Boston headquarters and its Louisville, KY, device processing center.